UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 March 31, 2004
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.
(exact name of registrant as specified in its charter)
| Delaware | 86-0824673 | |
| (State or other jurisdiction or incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| 9255 Towne Centre Drive, Suite 225, San Diego, CA | 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 ¨.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ¨ or No x
The number of shares of the Registrant’s common stock outstanding as of May 5, 2004 was 27,721,129.
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. These forward-looking statements include, but are not limited to, statements regarding: increasing demand for access to wireless data and factors affecting that demand; the future growth of wireless wide area networking and factors affecting that growth; changes in wireless transmission standards and technologies; growth in 3G infrastructure spending; the sufficiency of our capital resources; the effect of changes in accounting standards and in aspects of our critical accounting policies; and our general business and strategy, including plans and expectations relating to technology, product development, strategic relationships, customers, manufacturing, service activities and international expansion. The words “anticipate,” “believe,” “expect,” “intend,” “plan,” “project,” “will” and similar words and phrases are also intended to identify forward-looking statements.
Forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors, as more fully described elsewhere in this report. For a detailed discussion of these risks and uncertainties, see the “Business — Risks Related to Our Business” section of this Form 10-Q. We undertake 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 our on-going reporting obligations under the Securities Exchange Act of 1934, as amended.
Trademarks
The Novatel Wireless logo, “Merlin,” “MobiLink” “Freedom Box” and “Expedite” are U.S. trademarks of Novatel Wireless, Inc. Other trademarks, trade names or service marks used in this report are the property of their respective owners.
1
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
NOVATEL WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| March 31, 2004 |
December 31, 2003 |
|||||||
| ASSETS | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 10,675,000 | $ | 3,942,000 | ||||
| Restricted cash |
745,000 | 635,000 | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $311,000 in 2004 and 2003 |
12,617,000 | 8,986,000 | ||||||
| Accounts receivable — related parties (Note 8) |
— | 399,000 | ||||||
| Inventories |
3,580,000 | 2,349,000 | ||||||
| Prepaid expenses and other |
1,383,000 | 1,378,000 | ||||||
| Total current assets |
29,000,000 | 17,689,000 | ||||||
| Property and equipment, net |
1,703,000 | 1,915,000 | ||||||
| Intangible assets, net |
5,670,000 | 4,629,000 | ||||||
| Other assets |
186,000 | 188,000 | ||||||
| $ | 36,559,000 | $ | 24,421,000 | |||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 6,814,000 | $ | 6,730,000 | ||||
| Accrued expenses |
2,727,000 | 1,179,000 | ||||||
| Restructuring accrual |
1,112,000 | 1,222,000 | ||||||
| Deferred revenues |
5,463,000 | 6,218,000 | ||||||
| Current portion of capital lease obligations |
88,000 | 82,000 | ||||||
| Total current liabilities |
16,204,000 | 15,431,000 | ||||||
| Commitments and contingencies (Note 6) |
||||||||
| Stockholders’ equity: |
||||||||
| Preferred stock, par value $.001, 2,000,000 shares authorized: |
||||||||
| Convertible Series A preferred stock amended in 2003, 0 and 1,025 shares issued and outstanding at March 31, 2004 and December 31, 2003 (Note 4) |
— | — | ||||||
| Convertible Series B preferred stock, 4,516 and 4,703 shares issued and outstanding at March 31, 2004 and December 31, 2003, respectively (Note 4) |
— | — | ||||||
| Common stock, par value $.001, 50,000,000 shares authorized, 16,678,943 and 12,737,640 shares issued and outstanding at March 31, 2004 and December 31, 2003, respectively |
17,000 | 13,000 | ||||||
| Additional paid-in capital |
267,133,000 | 256,253,000 | ||||||
| Deferred stock compensation |
(74,000 | ) | (142,000 | ) | ||||
| Accumulated deficit |
(246,721,000 | ) | (247,134,000 | ) | ||||
| Total stockholders’ equity |
20,355,000 | 8,990,000 | ||||||
| $ | 36,559,000 | $ | 24,421,000 | |||||
See accompanying notes to unaudited consolidated financial statements.
2
NOVATEL WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Revenue |
$ | 15,144,000 | $ | 7,489,000 | ||||
| Cost of revenue |
10,798,000 | 6,266,000 | ||||||
| Gross margin |
4,346,000 | 1,223,000 | ||||||
| Operating costs and expenses: |
||||||||
| Research and development |
1,960,000 | 1,735,000 | ||||||
| Sales and marketing |
828,000 | 677,000 | ||||||
| General and administrative |
925,000 | 979,000 | ||||||
| Restructuring charges |
— | 413,000 | ||||||
| Amortization of deferred stock compensation (*) |
67,000 | 451,000 | ||||||
| Total operating costs and expenses |
3,780,000 | 4,255,000 | ||||||
| Operating income (loss) |
566,000 | (3,032,000 | ) | |||||
| Other income (expense): |
||||||||
| Interest income |
15,000 | 1,000 | ||||||
| Interest expense |
(1,000 | ) | (70,000 | ) | ||||
| Other income (expense), net |
(56,000 | ) | 85,000 | |||||
| Net income (loss) |
$ | 524,000 | $ | (3,016,000 | ) | |||
| Accretion of dividends and beneficial conversion features pertaining to preferred stock |
(111,000 | ) | (193,000 | ) | ||||
| Net income (loss) applicable to common stockholders |
$ | 413,000 | $ | (3,209.000 | ) | |||
| Per share data : |
||||||||
| Net income (loss) per common share: |
||||||||
| Basic |
$ | 0.03 | $ | (0.46 | ) | |||
| Diluted |
$ | 0.02 | $ | (0.46 | ) | |||
| Weighted average shares used in computation of basic and diluted net income (loss) per common share: |
||||||||
| Basic |
15,275,822 | 6,985,369 | ||||||
| Diluted |
25,043,311 | 6,985,369 | ||||||
| (*) Amortization of deferred stock compensation: |
||||||||
| Cost of revenue |
$ | 8,000 | $ | 19,000 | ||||
| Research and development |
20,000 | 51,000 | ||||||
| Sales and marketing |
21,000 | 50,000 | ||||||
| General and administrative |
18,000 | 331,000 | ||||||
| $ | 67,000 | $ | 451,000 | |||||
See accompanying notes to unaudited consolidated financial statements.
3
NOVATEL WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months Ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net income (loss) |
$ | 524,000 | $ | (3,016,000 | ) | |||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: |
||||||||
| Depreciation and amortization |
889,000 | 1,030,000 | ||||||
| (Gain) loss on sale of property and equipment |
78,000 | (85,000 | ) | |||||
| Accretion of interest expense on convertible notes |
— | 26,000 | ||||||
| Provision for bad debt |
— | 37,000 | ||||||
| Compensation for stock options issued below fair value |
67,000 | 451,000 | ||||||
| Changes in assets and liabilities: |
||||||||
| Restricted cash |
(110,000 | ) | — | |||||
| Accounts receivable |
(3,631,000 | ) | 2,167,000 | |||||
| Accounts receivable — related parties |
399,000 | — | ||||||
| Inventories |
(1,231,000 | ) | 1,192,000 | |||||
| Prepaid expenses and other |
(5,000 | ) | (10,000 | ) | ||||
| Accounts payable |
84,000 | (844,000 | ) | |||||
| Accrued expenses |
1,548,000 | 70,000 | ||||||
| Inventory purchase commitments |
— | (935,000 | ) | |||||
| Restructuring accrual |
(110,000 | ) | 73,000 | |||||
| Deferred revenues |
(755,000 | ) | (569,000 | ) | ||||
| Net cash used in operating activities |
(2,253,000 | ) | (413,000 | ) | ||||
| Cash flows from investing activities: |
||||||||
| Purchases of property and equipment |
(150,000 | ) | (21,000 | ) | ||||
| Proceeds from sale of property and equipment |
— | 99,000 | ||||||
| Purchase of intangible assets |
(1,525,000 | ) | — | |||||
| Net cash (used in) provided by investing activities |
(1,675,000 | ) | 78,000 | |||||
| Cash flows from financing activities: |
||||||||
| Proceeds from exercise of stock options and warrants |
3,244,000 | 15,000 | ||||||
| Net proceeds from issuance of common stock |
7,530,000 | — | ||||||
| Payments on line of credit borrowings |
— | (1,275,000 | ) | |||||
| Net proceeds from issuance of convertible notes payable |
— | 1,095,000 | ||||||
| Proceeds from (payments) under capital lease obligations, net |
(113,000 | ) | (41,000 | ) | ||||
| Net cash (used in) provided by financing activities |
10,661,000 | (206,000 | ) | |||||
| Net increase (decrease) in cash and cash equivalents |
6,733,000 | (541,000 | ) | |||||
| Cash and cash equivalents, beginning of period |
3,942,000 | 1,571,000 | ||||||
| Cash and cash equivalents, end of period |
$ | 10,675,000 | $ | 1,030,000 | ||||
See accompanying notes to unaudited consolidated financial statements.
4
| Three Months Ended March 31, | ||||||
| 2004 |
2003 | |||||
| Supplemental disclosures of non-cash investing and financing activities: |
||||||
| Accretion of dividends on Series A convertible and redeemable preferred stock |
$ | 63,000 | ||||
| Accretion of dividends on Series A preferred stock |
$ | 18,000 | ||||
| Accretion of dividends on Series B preferred stock |
93,000 | |||||
| Amortization of offering costs for convertible and redeemable preferred stock |
7,000 | |||||
| Accretion of imputed value assigned to the beneficial conversion feature on Series A convertible and redeemable preferred stock and related common stock warrants |
123,000 | |||||
| Imputed value assigned to beneficial conversion feature and warrants granted in connection with the issuance of convertible notes payable |
1,095,000 | |||||
| Capital lease obligations |
121,000 | |||||
| Supplemental disclosures of cash flow information: |
||||||
| Cash paid during the period for: |
||||||
| Interest |
$ | 1,000 | $ | 16,000 | ||
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 March 31, 2004 and for the three month periods ended March 31, 2004 and 2003 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/A for the year ended December 31, 2003. 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 March 31, 2004.
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. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues, expenses and disclosures of contingent assets and liabilities. Actual results could differ from these estimates. Significant estimates include inventory valuation, the use of option pricing models to establish values of equity instruments, the valuation of long – lived assets and restructuring accruals.
Stock-Based Compensation
The Company accounts for stock options 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 Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standard (“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 first quarter of 2004, the Company issued options to purchase an aggregate of 263,000 shares of the Company’s common stock to employees and a non-employee director. The vesting schedule for 202,500 of these options is 20% at 6 months from the grant date and 1/30th of the remaining balance of the grant each month thereafter. The remaining option grants vest 25% at 1 year from the grant date and monthly thereafter for a total of 4 years. The weighted average fair value of the options granted during the three months ended March 31, 2004 was estimated as $10.34 per share on the date of grant using the Black-Scholes option pricing model. The following assumptions with respect to first quarter 2004 option grants have been made: no dividend yield, volatility of 130% for the three months ending March 31, 2004 risk-free interest rate of 2.58% and expected lives of four years.
6
Had compensation expense been determined based on the fair value method at the dates of grant for the quarterly periods ended March 31, 2004 and 2003 consistent with the provisions of SFAS No. 123, as amended by SFAS No. 148, the Company’s net income (loss) per share would have been reported as the pro forma amounts indicated below:
| March 31, 2004 |
March 31, 2003 |
|||||||
| Net income (loss) applicable to common stockholders, as reported |
$ | 413,000 | $ | |||||