HPL TECHNOLOGIES INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

o	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 000-32967

HPL TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)

Delaware		77-0550714
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

2033 Gateway Place, Suite 400
San Jose, California 95110
(Address of Principal Executive Offices)

(408) 437-1466
(Registrant's Telephone Number, Including Area Code)

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 o NO ý

As of September 30, 2002, there were 31,084,167 shares of Common Stock outstanding.

HPL Technologies, Inc.
Table of Contents

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited):
	Condensed Consolidated Statements of Operations for the three months ended June 30, 2002 and June 30, 2001 (as restated)	2
	Condensed Consolidated Balance Sheets as of June 30, 2002 and March 31, 2002	3
	Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2002 and June 30, 2001 (as restated)	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 2.	Changes in Securities and Use of Proceeds	33
Item 5.	Other Information	33
Item 6.	Exhibits and Reports on Form 8-K	33
	Signatures	34

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

HPL Technologies, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(unaudited)

			Three months ended June 30,
			2002			2001
						(As restated)
Revenues:
	Software licenses		$	57		$	272
	Consulting services, maintenance and other			2,222			319

Total revenues				2,279			591

Cost of revenues:
	Software licenses			—			139
	Consulting services, maintenance and other(1)			610			59

Total cost of revenues				610			198

Gross profit				1,669			393

Operating expenses:
	Research and development(1)			3,619			1,158
	Sales, general and administrative(1)			4,726			2,082
	Stock-based compensation			706			1,005
	Amortization of intangible assets			463			7

		Total operating expenses		9,514			4,252

Loss from operations				(7,845	)		(3,859	)
Interest income (expense) and other, net				195			(52	)

Net loss			$	(7,650	)	$	(3,911	)

Net loss per share—basic and diluted			$	(0.25	)	$	(0.22	)

Shares used in per share calculations—basic and diluted				30,410			17,836

(1): Excludes the following stock-based compensation charges:


Cost of revenues	$	12	$	14
Research and development		142		290
Sales, general and administrative		552		701

	$	706	$	1,005

The accompanying notes are an integral part of these condensed consolidated financial statements.

HPL Technologies, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

(unaudited)

			June 30, 2002			March 31, 2002
ASSETS
*Current assets:*
	Cash and cash equivalents		$	17,767		$	32,798
	Short-term investments			19,625			14,311
	Accounts receivable, net			625			1,212
	Unbilled accounts receivable			1,124			783
	Prepaid expenses and other current assets			5,405			3,870

Total current assets				44,546			52,974
Property and equipment, net				3,050			3,147
Goodwill				58,585			42,040
Other intangible assets, net				3,538			2,701
Other assets				851			446

Total assets			$	110,570		$	101,308

LIABILITIES AND STOCKHOLDERS' EQUITY
*Current liabilities:*
	Accounts payable		$	1,584		$	2,570
	Accrued liabilities			7,561			5,755
	Deferred revenue			8,584			7,893
	Capital lease obligations—current portion			233			194
	Convertible debenture			1,500			1,500

Total current liabilities				19,462			17,912
Capital lease obligations—net of current portion				288			280
Deferred revenue				256			—
Other liabilities				716			800

Total liabilities				20,722			18,992

Contingencies and Commitments (Note 3)
*Stockholders' equity:*
	Preferred stock, $0.001 par value, 10,000 shares authorized, no shares issued and outstanding at June 30, 2002 and March 31, 2002			—			—
	Common stock, $0.001 par value; 75,000 shares authorized; 30,723 and 29,400 shares issued and outstanding at June 30, 2002 and March 31, 2002			31			29
	Additional paid-in capital			126,686			112,369
	Deferred stock-based compensation			(3,349	)		(4,017	)
	Accumulated deficit			(33,536	)		(25,886	)
	Accumulated other comprehensive income (loss)			16			(179	)

		Total stockholders' equity		89,848			82,316

Total liabilities and stockholders' equity			$	110,570		$	101,308

The accompanying notes are an integral part of these condensed consolidated financial statements.

HPL Technologies, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

					Three months ended June 30,
					2002			2001
								(As restated)
*Cash flows from operating activities:*
	Net loss				$	(7,650	)	$	(3,911	)
		Adjustments to reconcile net loss to net cash used in operating activities:
			Depreciation and amortization			988			69
			Accreted interest expense			—			13
			Stock-based compensation			706			1,005
		Changes in assets and liabilities, net of effects from acquisitions:
			Accounts receivable			692			(146	)
			Unbilled accounts receivable			(341	)		—
			Prepaid expenses and other current assets			(1,512	)		(34	)
			Other assets			45			—
			Accounts payable			(1,156	)		221
			Accrued liabilities			(399	)		1,755
			Deferred revenue			11			(69	)

				Net cash used in operating activities		(8,616	)		(1,097	)

*Cash flows from investing activities:*
	Acquisition of property and equipment					(228	)		(31	)
	Issuance of notes receivable					(450	)		—
	Acquisitions, net of cash acquired					(2,012	)		—
	Purchase of short-term investments					(5,279	)		—

				Net cash used in investing activities		(7,969	)		(31	)

*Cash flows from financing activities:*
	Proceeds from issuance of notes payable					—			174
	Issuance of common stock					141			1
	Principal payments on capital lease obligations					(47	)		(27	)
	Amounts received from HPL's former Chief Executive Officer					1,300			—

				Net cash provided by financing activities		1,394			148

Effect of exchange rate changes on cash and cash equivalents						160			—

Net decrease in cash and cash equivalents						(15,031	)		(980	)
Cash and cash equivalents at beginning of period						32,798			989

Cash and cash equivalents at end of period					$	17,767		$	9

Supplemental disclosures of cash flow information:
	Acquisition of property and equipment under capital lease obligations				$	94		$	32
	Issuance of common stock and options assumed in connection with acquisition				$	14,178			—

The accompanying notes are an integral part of these condensed consolidated financial statements.

HPL Technologies, Inc.

Notes to the unaudited Condensed Consolidated Financial Statements

NOTE 1. GENERAL

The unaudited condensed consolidated financial statements have been prepared by HPL Technologies, Inc., a Delaware corporation (the "Company"), pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended March 31, 2002 included in the Company's Annual Report on Form 10-K/A filed with the SEC. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present a fair statement of financial position as of June 30, 2002 and 2001, and results of operations for the three months ended June 30, 2002 and 2001, and cash flows for the three-month period ended June 30, 2002 and 2001, have been made. The results of operations for the three months ended June 30, 2002 are not necessarily indicative of the operating results for the full fiscal year or any future periods. Certain amounts for prior periods have been restated and reclassified to conform to the current period presentation. See Note 2.

The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles in the United Stated States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements. These estimates may affect the amounts of assets and liabilities reported in the balance sheet, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the periods presented. Actual results may differ from those estimates.

The Company has funded its losses from operations principally through its July 2001 initial public offering and debt financing. Management believes the Company has sufficient cash, cash equivalents and short-term investments to fund its operations through at least March 31, 2003. Future capital requirements will be affected by slow or diminished revenue growth, additional research and development and sales and marketing costs, and higher general and administrative costs, including costs related to the litigation matters described in Note 3. In the event the Company needs to raise capital, there is no assurance that funds would be available to the Company or, if available, under terms that would be acceptable to the Company. The Company does not believe it will be able to raise additional capital until the litigation and other uncertainties described in Note 3 are resolved.

NOTE 2. RESTATEMENT

On July 19, 2002, the Company announced that the Audit Committee had initiated an investigation into a number of accounting irregularities involving revenue reported during prior periods. The purpose of this investigation was to determine the scope and magnitude of these accounting irregularities and identify any necessary corrections to be made to the Company's previously issued consolidated financial statements. The Company also announced a number of changes to its executive management team. As a result of the internal accounting investigation, the Company's consolidated balance sheets as of March 31, 2002 and 2001 and consolidated statements of operations, cash flows and stockholders' equity (deficit) for the years ended March 31, 2002 and 2001were presented on a restated basis in the Company's Annual Report on Form 10-K/A filed on November 8, 2002 with the restatement for the quarterly period ended June 30, 2001 contained herein.

The Audit Committee's investigation into financial and accounting irregularities involving revenue reported identified a number of fictitious transactions for which the Company previously recorded revenue in the years ended March 31, 2002 and 2001. In addition, the investigation uncovered that

documents initially considered by the Company in determining the appropriate accounting for transactions were altered from their original form to exclude certain terms and conditions. These terms and conditions provided customers with rights of return and commitments with respect to integration and installation of the Company's products and the delivery of future functionality. The Company has reviewed these transactions in light of these additional terms and conditions and the Company's revenue recognition policy, and either revised the periods for which revenue was recognized in these financial statements or deferred the recognition of revenue to future periods.

As a result of the items noted above, the Company has identified that the previously reported revenues for the three months ended June 30, 2001 were overstated by approximately $4.5 million related to fictitious transactions, and $468,000 related to improper revenue recognition due to altered supporting documents used to support the previous timing of revenue recognition. As a result of the adjustments necessary to correct the above irregularities, the Company has also deferred previously expensed costs of goods sold directly related to revenue deferred. The Company also revised the provisions for income taxes that were previously recorded in the consolidated financial statements. The tax related adjustments affected various asset and liability accounts.

During the three months ended June 30, 2002, the former Chief Executive Officer of the Company deposited approximately $1.3 million into the Company's bank accounts which was purported to have represented proceeds for the payment of accounts receivable related to a fictitious sales transaction which occurred in the year ended March 31, 2002. The revenue on this transaction has been eliminated in the appropriate periods and the amount received has been reflected in accrued liabilities.

During the year ended March 31, 2001, the Company sold certain software and maintenance to a related party for approximately $300,000 and recognized the revenue on this transaction. On or about the same time as agreeing to sell software to this company, HPL agreed to buy software from that company. During September 2001, the Company purchased $500,000 of software from this same company and capitalized the cost of this software. The Company believes the sale of software to the company, and the purchase of software in fiscal 2002 from the company were negotiated at approximately the same time. As such, the financial statements reflect no revenue on this transaction in the year ended March 31, 2001 and in the restated June 30, 2001 financial statements, the $300,000 is reflected in accrued liabilities.

The following are the reconciliations of the Company's results of operations, financial position and cash flows from financial statements previously filed to these restated and reclassified financial statements:

HPL TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(in thousands, except per share data)

Three Months Ended June 30, 2001

			As Previously Reported			Adjustments			As Restated
Revenues:
	Software licenses		$	4,986		$	(4,714	)	$	272
	Consulting services, maintenance and other			571			(252	)		319

Total revenues				5,557			(4,966	)		591

Cost of revenues:
	Software licenses			241			(102	)		139
	Consulting services, maintenance and other(1)			86			(27	)		59

Total cost of revenues				327			(129	)		198

Gross profit				5,230			(4,837	)		393

Operating expenses:
	Research and development(1)			1,158			—			1,158
	Selling, general and administrative(1)			2,082			—			2,082
	Stock-based compensation			1,005			—			1,005
	Amortization of intangible assets			7			—			7

		Total operating expenses		4,252			—			4,252

Income (loss) from operations				978			(4,837	)		(3,859	)
Interest income (expense) and other, net				(52	)		—			(52	)

Income (loss) before income taxes				926			(4,837	)		(3,911	)
Provision for income taxes				500			(500	)		—

Net income (loss)			$	426		$	(4,337	)	$	(3,911	)

Net income (loss) per share:
	Basic		$	0.02					$	(0.22	)

	Diluted		$	0.02					$	(0.22	)

Shares used in computing per share amounts:
	Basic			17,836						17,836

	Diluted			28,151						17,836

(1): Excludes the following stock-based compensation charges:

Cost of revenues	$	14	$	14
Research and development		290		290
Selling, general and administrative		701		701

	$	1,005	$	1,005

HPL TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(in thousands, except per share data)

June 30, 2001

		As Previously Reported			Adjustments			As Restated
ASSETS
*Current assets:*
	Cash and cash equivalents	$	9		$	—		$	9
	Accounts receivable, net		10,079			(7,461	)		2,618
	Prepaid expenses and other current assets		978			334			1,312

Total current assets			11,066			(7,127	)		3,939
Property and equipment, net			472			—			472
Intangible assets, net			25			—			25
Other assets			665			—			665

Total assets		$	12,228		$	(7,127	)	$	5,101

LIABILITIES AND STOCKHOLDERS' EQUITY DEFICIT
*Current liabilities:*
	Accounts payable	$	1,108		$	—		$	1,108
	Accrued liabilities		3,066			650			3,716
	Income tax payable		2,052			(2,052	)		—
	Deferred revenue		2,579			5,588			8,167
	Convertible debenture		1,500			—			1,500

Total current liabilities			10,305			4,186			14,491
Capital lease obligations—net of current portion			70			—			70
Other liabilities			200			—			200

Total liabilities			10,575			4,186			14,761

*Stockholders' equity (deficit):*
	Preferred stock, $0.001 par value, 10,000 shares authorized, no shares issued and outstanding		—			—			—
	Common stock, $0.001 par value; 75,000 shares authorized; 17,839 shares issued and outstanding		18			—			18
	Additional paid-in capital		9,741			—			9,741
	Deferred stock-based compensation		(4,539	)		—			(4,539	)
	Accumulated deficit		(3,567	)		(11,313	)		(14,880	)