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, 2003
OR
| o | 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.) |
|
| 9255 Towne Centre Drive, Suite 225, San Diego, CA (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 o.
The number of shares of the Registrant’s common stock outstanding as of August 4, 2003 was 7,959,821.
As used in this report on Form 10-Q, unless the context otherwise requires, the terms “we,” “us,” “our,” “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, 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,” 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
| (Unaudited) | ||||||||||
| June 30, | ||||||||||
| 2003 | December 31, 2002 | |||||||||
ASSETS |
||||||||||
Current assets: |
||||||||||
Cash and cash equivalents |
$ | 2,408,000 | $ | 1,571,000 | ||||||
Restricted cash |
115,000 | 105,000 | ||||||||
Accounts receivable, net of allowance for doubtful accounts of $425,000
(2003) and $333,000 (2002) |
5,229,000 | 6,937,000 | ||||||||
Accounts receivable — related party |
276,000 | 276,000 | ||||||||
Inventories |
1,657,000 | 4,250,000 | ||||||||
Prepaid expenses and other |
616,000 | 1,561,000 | ||||||||
Total current assets |
10,301,000 | 14,700,000 | ||||||||
Property and equipment, net |
2,674,000 | 4,101,000 | ||||||||
Intangible assets, net |
4,852,000 | 5,054,000 | ||||||||
Other assets |
188,000 | 192,000 | ||||||||
| $ | 18,015,000 | $ | 24,047,000 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||
Current liabilities: |
||||||||||
Accounts payable |
$ | 6,976,000 | $ | 6,919,000 | ||||||
Convertible notes payable |
1,328,000 | — | ||||||||
Accrued expenses |
1,150,000 | 1,266,000 | ||||||||
Inventory purchase commitments (Note 2) |
— | 3,983,000 | ||||||||
Borrowings under line of credit |
178,000 | 2,234,000 | ||||||||
Restructuring accrual |
855,000 | 1,331,000 | ||||||||
Deferred revenues |
250,000 | 977,000 | ||||||||
Current portion of capital lease obligations |
85,000 | 133,000 | ||||||||
Total current liabilities |
10,822,000 | 16,843,000 | ||||||||
Capital lease obligations, net of current portion |
4,000 | 38,000 | ||||||||
Convertible and redeemable Series A preferred stock, 2,175 (2003) and
3,675 (2002) shares issued and outstanding (Note 2) |
570,000 | 665,000 | ||||||||
Commitments and contingencies (Note 6) |
||||||||||
Stockholders’ equity: |
||||||||||
Convertible Series B preferred stock, par value $.001, 3,267 (2003) and
0 (2002) shares issued and outstanding (Note 2) |
2,834,000 | — | ||||||||
Common stock, par value $.001, 50,000,000 shares authorized, 7,706,889
(2003) and 6,984,823 (2002) shares issued and outstanding (Note 2) |
8,000 | 7,000 | ||||||||
Additional paid-in capital |
245,668,000 | 238,640,000 | ||||||||
Deferred stock compensation |
(299,000 | ) | (1,729,000 | ) | ||||||
Accumulated deficit |
(241,592,000 | ) | (230,417,000 | ) | ||||||
Total stockholders’ equity |
6,619,000 | 6,501,000 | ||||||||
| $ | 18,015,000 | $ | 24,047,000 | |||||||
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, | |||||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||||
Revenue |
$ | 7,659,000 | $ | 7,731,000 | $ | 15,148,000 | $ | 15,004,000 | ||||||||||||
Cost of Revenue |
7,972,000 | 7,311,000 | 14,238,000 | 14,031,000 | ||||||||||||||||
Gross Margin |
(313,000 | ) | 420,000 | 910,000 | 973,000 | |||||||||||||||
Operating costs and expenses: |
||||||||||||||||||||
Research and development |
1,446,000 | 3,860,000 | 3,181,000 | 8,008,000 | ||||||||||||||||
Sales and marketing |
612,000 | 1,277,000 | 1,289,000 | 2,696,000 | ||||||||||||||||
General and administrative |
1,040,000 | 2,106,000 | 2,019,000 | 3,416,000 | ||||||||||||||||
Restructuring charges |
(175,000 | ) | 360,000 | 238,000 | 609,000 | |||||||||||||||
Amortization of deferred stock
compensation(*) |
130,000 | 1,102,000 | 581,000 | 2,445,000 | ||||||||||||||||
Total operating costs and expenses |
3,053,000 | 8,705,000 | 7,308,000 | 17,174,000 | ||||||||||||||||
Operating loss |
(3,366,000 | ) | (8,285,000 | ) | (6,398,000 | ) | (16,201,000 | ) | ||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
— | 69,000 | 1,000 | 172,000 | ||||||||||||||||
Interest expense |
(1,654,000 | ) | (146,000 | ) | (1,724,000 | ) | (287,000 | ) | ||||||||||||
Other, net |
— | — | 85,000 | — | ||||||||||||||||
Net loss |
$ | (5,020,000 | ) | $ | (8,362,000 | ) | $ | (8,036,000 | ) | $ | (16,316,000 | ) | ||||||||
Net loss applicable to
common stockholders (Note 4) |
$ | (7,966,000 | ) | $ | (15,633,000 | ) | $ | (11,175,000 | ) | $ | (31,742,000 | ) | ||||||||
Weighted average shares
used in computation of
basic and diluted net
loss per common share |
7,144,176 | 4,940,167 | 7,065,211 | 4,450,193 | ||||||||||||||||
Basic and diluted net
loss per common share |
$ | (1.12 | ) | $ | (3.16 | ) | $ | (1.58 | ) | $ | (7.13 | ) | ||||||||
(*) Amortization of deferred
stock compensation: |
||||||||||||||||||||
Cost of revenue |
$ | 13,000 | $ | 36,000 | $ | 32,000 | $ | 317,000 | ||||||||||||
Research and development |
35,000 | 97,000 | 86,000 | 194,000 | ||||||||||||||||
Sales and marketing |
34,000 | 94,000 | 84,000 | 188,000 | ||||||||||||||||
General and administrative |
48,000 | 875,000 | 379,000 | 1,746,000 | ||||||||||||||||
| $ | 130,000 | $ | 1,102,000 | $ | 581,000 | $ | 2,445,000 | |||||||||||||
See accompanying notes to unaudited consolidated financial statements.
3
NOVATEL WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Six Months Ended | ||||||||||||
| June 30, | ||||||||||||
| 2003 | 2002 | |||||||||||
Cash flows from operating activities: |
||||||||||||
Net loss |
$ | (8,036,000 | ) | $ | (16,316,000 | ) | ||||||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||||||
Depreciation and amortization |
1,983,000 | 2,589,000 | ||||||||||
Gain on sale of property and equipment |
(85,000 | ) | — | |||||||||
Accretion of interest expense on convertible notes |
1,539,000 | — | ||||||||||
Compensation for warrants issued in connection with convertible debt |
79,000 | — | ||||||||||
Inventory write down |
1,853,000 | — | ||||||||||
Provision for bad debt |
92,000 | 12,000 | ||||||||||
Compensation for stock options issued below market value |
580,000 | 2,446,000 | ||||||||||
Changes in assets and liabilities: |
||||||||||||
Restricted cash |
(10,000 | ) | — | |||||||||
Accounts receivable |
1,616,000 | (2,411,000 | ) | |||||||||
Accounts receivable — related party |
— | 277,000 | ||||||||||
Inventories |
740,000 | 548,000 | ||||||||||
Prepaid expenses and other |
554,000 | 993,000 | ||||||||||
Accounts payable |
57,000 | (4,619,000 | ) | |||||||||
Accrued expenses |
(116,000 | ) | (63,000 | ) | ||||||||
Inventory purchase commitments |
(432,000 | ) | (4,372,000 | ) | ||||||||
Restructuring accrual |
(476,000 | ) | (658,000 | ) | ||||||||
Deferred revenues |
(727,000 | ) | 250,000 | |||||||||
Net cash used in operating activities |
(789,000 | ) | (21,324,000 | ) | ||||||||
Cash flows from investing activities: |
||||||||||||
Purchases of property and equipment |
(25,000 | ) | (76,000 | ) | ||||||||
Proceeds from sale of property and equipment |
105,000 | — | ||||||||||
Capitalized software development costs |
— | (102,000 | ) | |||||||||
Net cash (used in) provided by investing activities |
80,000 | (178,000 | ) | |||||||||
Cash flows from financing activities: |
||||||||||||
Net proceeds from issuance of Series B convertible preferred stock |
1,617,000 | — | ||||||||||
Net proceeds from issuance of convertible notes payable |
1,095,000 | — | ||||||||||
Repurchase of common stock |
— | (1,600,000 | ) | |||||||||
Proceeds from exercise of stock options and warrants |
972,000 | 345,000 | ||||||||||
Offering costs for convertible and redeemable preferred stock |
— | (232,000 | ) | |||||||||
Proceeds from (payments on) line of credit borrowings |
(2,056,000 | ) | 1,734,000 | |||||||||
Payments under capital lease obligations |
(82,000 | ) | (79,000 | ) | ||||||||
Net cash provided by financing activities |
1,546,000 | 168,000 | ||||||||||
Net increase in cash and cash equivalents |
837,000 | (21,334,000 | ) | |||||||||
Cash and cash equivalents, beginning of period |
1,571,000 | 29,229,000 | ||||||||||
Cash and cash equivalents, end of period |
$ | 2,408,000 | $ | 7,895,000 | ||||||||
See accompanying notes to unaudited consolidated financial statements.
4
| Six Months Ended | ||||||||||||
| June 30, | ||||||||||||
| 2003 | 2002 | |||||||||||
Supplemental disclosures of non-cash investing and financing activities: |
||||||||||||
Issuance of convertible notes payable to settle the inventory purchase
commitments liability |
$ | 3,505,000 | $ | — | ||||||||
Deemed dividend for the imputed value assigned to the beneficial conversion
feature on conversion of the Convertible Notes to Series B preferred stock
and related common warrants |
1,581,000 | — | ||||||||||
Conversion of convertible and redeemable Series A preferred stock into shares of common stock |
1,654,000 | 13,984,000 | ||||||||||
Conversion of convertible notes payable into Series B preferred stock |
1,217,000 | — | ||||||||||
Accretion of dividends on convertible and redeemable Series A preferred
stock |
125,000 | 718,000 | ||||||||||
Amortization of offering costs for convertible and redeemable Series A
preferred stock |
81,000 | 842,000 | ||||||||||
Deferred compensation adjustment for stock options cancelled |
849,000 | 1,056,000 | ||||||||||
Accretion of imputed value assigned to the beneficial conversion feature
on Series A convertible and redeemable preferred stock and related common
stock warrants |
1,352,000 | 13,866,000 | ||||||||||
Imputed value assigned to beneficial conversion feature and warrants
granted in connection with the issuance of convertible notes payable |
3,594,000 | — | ||||||||||
Common stock issued for settlement of inventory purchase commitments |
— | 5,400,000 | ||||||||||
Fixed assets retired against restructuring accrual |
— | 365,000 | ||||||||||
Supplemental disclosures of cash flow information: |
||||||||||||
Cash paid during the period for: |
||||||||||||
Interest |
$ | 62,000 | $ | 27,000 | ||||||||
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 June 30, 2003 and for the three month and six month periods ended June 30, 2003 and June 30, 2002 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, 2002. 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 inter-company 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, 2003.
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. Actual results could differ from these estimates. Changes in these estimates may affect amounts reported in future periods.
Stock Based Compensation
The Company accounts for stock option plans in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations which recognizes compensation expense on the grant date if the then current market price of the stock exceeds the exercise price.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,” an amendment of FASB Statement No. 123, “Accounting for Stock-Based Compensation.” This Statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, the Statement amends the disclosure requirements of SFAS No. 123, to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.
In accordance with SFAS No. 123, the Company accounts for costs of stock-based employee compensation using the intrinsic value method prescribed in APB Opinion No. 25. Additionally, the Company discloses the pro forma effect on net loss and related per share amounts as if the fair-value method prescribed by SFAS No. 123 had been used to account for its stock-based employee compensation. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and related interpretations. During the second quarter of 2003, the Company issued options to purchase an aggregate of 3,497,013 shares of the Company’s common stock to employees and non-employee directors. The vesting schedule for these options is generally 20% at 6 months from the vesting commencement date and 1/30th each month thereafter. The vesting commencement date with respect to options granted to non-employee directors was November 20, 2002 and the vesting commencement date with respect to options granted to employees was June 26, 2003, and in the case of the Company’s CEO, was May 7, 2003. The weighted average fair value of the options granted during the three months and the six months ended June 30, 2003 was estimated as $2.30 per share on the date of grant using the Black-Scholes option pricing model. The weighted average fair value of the options granted during the three months and the six months ended June 30, 2002 was estimated as $6.14 and $16.62 per share, respectively, on the date of grant using the Black-Scholes option pricing model. The following assumptions with respect to 2003 and 2002 option grants have been
6
made: no dividend yield, volatility of 117%, for the six months ending June 30, 2003, risk-free interest rates between 3.0% and 6.45% and expected lives of four to five years.
Had compensation expense been determined based on the fair values at the dates of grant for the quarterly periods ended June 30, 2003 and 2002 consistent with the provisions of SFAS No. 123, as amended by SFAS No. 148, the Company’s net loss per share would have been reported as the pro forma amounts indicated below:
| (Unaudited) | (Unaudited) | |||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
Net loss applicable to common
stockholders, as reported |
$ | (7,966,000 | ) | $ | (15,633,000 | ) | $ | (11,175,000 | ) | $ | (31,742,000 | ) | ||||
Net loss applicable to common
stockholders, pro forma |
$ | (8,118,000 | ) | $ | (16,906,000 | ) | $ | (12,016,000 | ) | $ | (34,294,000 | ) | ||||
Net loss per share, as reported |
$ | (1.12 | ) | $ | (3.16 | ) | $ | (1.58 | ) | $ | (7.13 | ) | ||||
Net loss per share, pro forma |
$ | (1.14 | ) | $ | (3.42 | ) | $ | (1.70 | ) | $ | (7.71 | ) | ||||
Inventories
Inventories consist of the following: