SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-QSB
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31,
2006
Commission
File Number 0-25356
WAVE
WIRELESS CORPORATION
(Exact
name of Registrant as specified in its charter)
DELAWARE
|
77-0289371
|
(State
or other jurisdiction of
|
(IRS
Employer Identification No.)
|
incorporation
or organization)
|
|
255
Consumers Road, Toronto, Ontario M2J 1R4
(Address
of principal executive offices and Zip (Postal) code)
416-502-3200
(Issuer’s
telephone number)
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
As
of
March 31, 2006, there were 70,524,516 shares of the Registrant's common stock
outstanding, par value $0.0001 per share.
Transitional
Small Business Disclosure Format (Check one): Yes o; No x
This
Quarterly Report on Form 10-QSB consists of 26 pages of which this is Page
1. The Exhibit Index appears on Page 21.
WAVE
WIRELESS CORPORATION
TABLE
OF CONTENTS
|
|
Page
Number
|
|
|
|
PART
I. FINANCIAL STATEMENTS
|
3
|
|
|
|
Item
1
|
Condensed
Consolidated Financial Statements (unaudited)
|
|
|
|
|
|
Condensed
Consolidated Balance Sheet
|
3
|
|
|
|
|
Condensed
Consolidated Statements of Operations
|
4
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows
|
5-6
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
7
|
|
|
|
Item
2
|
Management's
Discussion and Analysis
|
16
|
|
|
|
Item
3
|
Controls
and Procedures
|
20
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
Item
1
|
Legal
Proceedings
|
20
|
|
|
|
Item
2
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
20
|
|
|
|
Item
3
|
Defaults
Upon Senior Securities
|
21
|
|
|
|
Item
4
|
Submission
of Matters to a Vote of Securities Holders
|
21
|
|
|
|
Item
5
|
Other
Information
|
21
|
|
|
|
Item
6
|
Exhibits
and Reports on Form 8-K
|
21
|
|
|
|
Signatures
|
23
|
|
|
|
Certifications
|
24-26
|
You
should carefully consider all of the risk factors discussed in our Annual Report
on Form 10-KSB, and other documents filed by us with the Securities and Exchange
Commission before purchasing our common stock. The risks described in those
documents are not all of the risks facing us. Additional risks, including those
that are currently not known to us or that we currently deem immaterial, may
also impair our business operations.
WAVE
WIRELESS CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands)
|
|
March
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
626
|
|
$
|
380
|
|
Accounts
receivable, net of allowances of $756
|
|
|
1,351
|
|
|
1,152
|
|
Inventory
|
|
|
1,190
|
|
|
197
|
|
Prepaid
expenses and notes receivable
|
|
|
346
|
|
|
447
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
3,513
|
|
|
2,176
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
757
|
|
|
622
|
|
WaveRider
note receivable
|
|
|
—
|
|
|
250
|
|
Excess
of purchase price and goodwill
|
|
|
26,738
|
|
|
11,990
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
31,008
|
|
$
|
15,038
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Bank
loan
|
|
$
|
41
|
|
$
|
759
|
|
Accounts
payable
|
|
|
3,295
|
|
|
1,683
|
|
Other
accrued liabilities
|
|
|
3,677
|
|
|
2,521
|
|
Deferred
revenue
|
|
|
1,376
|
|
|
862
|
|
Liabilities
of discontinued operations
|
|
|
184
|
|
|
184
|
|
Notes
payable
|
|
|
878
|
|
|
898
|
|
Current
maturities of long-term debt
|
|
|
966
|
|
|
2,379
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
10,417
|
|
|
9,286
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current maturities
|
|
|
1,515
|
|
|
1,544
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
11,932
|
|
|
10,830
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Series
E Preferred Stock
|
|
|
332
|
|
|
332
|
|
Series
F Preferred Stock
|
|
|
661
|
|
|
661
|
|
Series
G Preferred Stock
|
|
|
3,344
|
|
|
3,344
|
|
Series
H Preferred Stock
|
|
|
1,882
|
|
|
—
|
|
Series
I Preferred Stock
|
|
|
2,823
|
|
|
—
|
|
Series
J Preferred Stock
|
|
|
9,612
|
|
|
—
|
|
Common
stock, par value $0.0001 per share
|
|
|
|
|
|
|
|
250
million shares authorized; 70,525 shares issued; 70,525 shares
outstanding
|
|
|
7
|
|
|
2
|
|
Treasury
stock, at cost; 30 shares
|
|
|
(74
|
)
|
|
(74
|
)
|
Additional
paid-in capital
|
|
|
395,124
|
|
|
383,778
|
|
Accumulated
deficit
|
|
|
(394,635
|
)
|
|
(383,835
|
)
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
19,076
|
|
|
4,208
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
31,008
|
|
$
|
15,038
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
WAVE
WIRELESS CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
|
|
FOR
THE THREE MONTHS
|
|
|
|
ENDED
MARCH 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Sales
|
|
$
|
1,989
|
|
$
|
2,497
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
1,588
|
|
|
2,545
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
401
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
Operating
expense:
|
|
|
|
|
|
|
|
Research
and development
|
|
|
540
|
|
|
1,197
|
|
Selling
and marketing
|
|
|
518
|
|
|
1,235
|
|
General
and administrative
|
|
|
636
|
|
|
924
|
|
Restructuring
charges
|
|
|
—
|
|
|
5,362
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
1,694
|
|
|
8,718
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(1,293
|
)
|
|
(8,766
|
)
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(9,507
|
)
|
|
(219
|
)
|
Other
income, net
|
|
|
—
|
|
|
187
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(10,800
|
)
|
|
(8,798
|
)
|
|
|
|
|
|
|
|
|
Preferred
stock accretions
|
|
|
—
|
|
|
(580
|
)
|
|
|
|
|
|
|
|
|
Net
loss attributable to common stockholders
|
|
$
|
(10,800
|
)
|
$
|
(9,378
|
)
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per common share
|
|
$
|
(0.45
|
)
|
$
|
(0.79
|
)
|
|
|
|
|
|
|
|
|
Shares
used in basic and diluted per share computation
|
|
|
23,774
|
|
|
11,816
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands, unaudited)
|
|
March
31,
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
loss
|
|
$
|
(10,800
|
)
|
$
|
(8,798
|
)
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
65
|
|
|
244
|
|
Loss
on conversion of promissory notes
|
|
|
7,643
|
|
|
—
|
|
Amortization
of discounts on promissory notes and warrants
|
|
|
870
|
|
|
23
|
|
Securities
issued to consultants
|
|
|
733
|
|
|
—
|
|
Gain
on disposal of property and equipment
|
|
|
(30
|
)
|
|
(242
|
)
|
Gain
on vendor settlements
|
|
|
(26
|
)
|
|
(92
|
)
|
Loss
on restructuring
|
|
|
—
|
|
|
5,362
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
519
|
|
|
(651
|
)
|
Inventory
|
|
|
263
|
|
|
(727
|
)
|
Prepaid
expenses and other assets
|
|
|
132
|
|
|
(116
|
)
|
Accounts
payable
|
|
|
310
|
|
|
552
|
|
Other
accrued liabilities
|
|
|
108
|
|
|
1,744
|
|
|
|
|
|
|
|
|
|
Net
cash provided (used) in operating activities
|
|
|
(213
|
)
|
|
(2,701
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
|
—
|
|
|
(2
|
)
|
Proceeds
from sale of patents
|
|
|
30
|
|
|
—
|
|
Net
cash received on acquisition of WaveRider
|
|
|
169
|
|
|
—
|
|
Proceeds
from sale of property and equipment
|
|
|
—
|
|
|
192
|
|
|
|
|
|
|
|
|
|
Net
cash used in vesting activities
|
|
|
199
|
|
|
190
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
(payments) on bank loan
|
|
|
|
|
|
|
|
Proceeds
from debt financing (net of cash fees of $101)
|
|
|
|
|
|
|
|
Payments
under capital lease obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
260
|
|
|
1,497
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
—
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
246
|
|
|
(1,016
|
)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of the period
|
|
|
380
|
|
|
2,280
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of the period
|
|
$
|
626
|
|
$
|
1,264
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements
WAVE
WIRELESS CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(In
thousands, unaudited)
Supplemental
cash flow disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
140
|
|
$
|
25
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued in connection with convertible promissory notes
|
|
$
|
261
|
|
$
|
19
|
|
Warrants
issued in connection with lease termination
|
|
$
|
—
|
|
$
|
233
|
|
Conversion
of Series C Preferred stock into Common stock
|
|
$
|
—
|
|
$
|
10
|
|
Conversion
of debt into Series J Preferred stock
|
|
$
|
2,869
|
|
$
|
—
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
WAVE
WIRELESS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2006
1.
BASIS OF PRESENTATION
The
financial statements for the three months ended March 31, 2006 include, in
the
opinion of management, all adjustments (which consist only of normal recurring
adjustments) necessary to present fairly the results of operations for such
periods. Operating results for the three-month period ended March 31, 2006
are
not necessarily indicative of the operating results that may be expected for
the
year ending December 31, 2006. The
financial statements should be read in conjunction with the Company's Form
10-KSB for the year ended December 31, 2005.
On
March
28, 2006, the Company merged a wholly-owned subsidiary of the Company with
and
into WaveRider Communications Inc. (the “WaveRider Merger”). As a result of the
WaveRider Merger, the financial statements for the three months ended March
31,
2006 reflect the financial condition of the consolidated companies at March
31,
2006. The results of operations reflect WaveRider’s operating results for the
last four days during the quarter ended March 31, 2006. As a result, the results
of operations reflected in the financial statements for the three months ended
March 31, 2006 are not necessary indicative of the operating results that may
be
expected for future periods.
Liquidity
and Management’s Plan
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
As reflected in the financial statements, for the three-month period ended
March
31, 2006, the Company incurred a net loss attributable to common stockholders
of
$10.8 million. As of March 31, 2006, the Company had a surplus in stockholders'
equity of $19.1 million and accumulated deficit of $394.6 million. Also, as
of
March 31, 2006, the Company had approximately $626 thousand in cash and cash
equivalents, and a working capital deficiency of approximately $6.9 million.
In
addition, the requirements to continue investing in research and development
activities to meet the Company’s growth objectives, without assurance of broad
commercial acceptance of the Company’s products, create significant doubt as to
the ability of the Company to continue normal business operations. These
conditions raise substantial doubt about the Company's ability to continue
as a
going concern.
The
Company's current working capital requirements are being met principally from
the private placement of equity securities, and available borrowings under
a
credit facility ("Credit Facility") with Silicon Valley Bank (the "Bank"),
discussed below, and cash from operations. The amount outstanding under the
Credit Facility was $41,470 at March 31, 2006.
The
Company's plan of restructuring announced in April 2005 ("Restructuring Plan"),
together with the operating and other cost reduction initiatives resulting
from
the WaveRider Merger, is intended to eliminate the Company's dependence on
external sources of financing. While the Restructuring Plan has resulted in
substantial reductions in operating losses, and cash used in operations, the
Company currently remains dependent on external sources of financing to continue
operations. As a result, the Company privately placed equity securities to
address its liquidity needs, and has issued and continues to intend to issue
additional equity and/or debt securities during the quarter ending June 30,
2006
to meet its short-term working capital requirements.
There
can
be no assurance that the Company will be successful in issuing additional equity
or debt securities on acceptable terms, if at all. If the Company is unable
to
obtain additional financing and achieve its planned cash flow positive
operations and profitability, it will, in all likelihood, be obliged to seek
protection under the bankruptcy laws; in which event the Company believes it
is
unlikely that its common stock will have any value. The financial statements
do
not include any adjustments relating to the recoverability and classification
of
recorded asset amounts or to amounts and classification of liabilities that
may
be necessary if the Company is unable to continue as a going concern.
Critical
Accounting Estimates
In
preparing the financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expense during
the
reporting period. Actual results could differ from those estimates.
New
Accounting Pronouncements
Effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123R, “Share-Based Payment,” (“FAS 123R”) using the
modified-prospective-transition method. Under this transition method,
compensation costs subsequent to December 31, 2005 will include, as the options
vest, costs for options granted prior to but not vested as of December 31,
2005.
The
adoption of FAS 123R had no material affect on the financial results for the
three months ended March 31, 2006. As of March 31, 2006, there is no material
liability related to unvested share-based compensation awards
granted.
2.
ACQUISITION OF SUBSIDIARY
Effective
March 28, 2006, the Company acquired WaveRider Communications Inc.(“WaveRider”),
a Nevada corporation, . The Company undertook this acquisition to bring together
complementary business lines, engineering skills, sales and marketing
capabilities and innovative technology. The combination of Wave Wireless’
SPEEDLAN family of mesh networking products and WaveRider’s Last Mile Solution®
non-line-of-sight, fixed and mobile wireless 900 MHz products will provide
customers with a wide range of line-of-sight and non-line-of-sight products
and
services, and position the combined company as a worldwide provider of robust,
wireless broadband applications and solutions. The combined company will offer
wireless broadband solutions capable of delivering high-speed connectivity
to a
variety of large and rapidly growing market segments, including public safety,
and security and surveillance for a broad range of public and private sector
customers.
Under
the
terms of the acquisition, the Company issued 48,362,446 shares of common stock,
1,326.446 shares of Series H preferred stock, 132.6446 shares of Series I
preferred stock and 8,842,089 common stock purchase warrants in exchange for
all
of the issued and outstanding shares of WaveRider and all outstanding long
term
debt. The warrants are exercisable at $0.20 per share for a five year period
and
include a net share settlement feature. In addition, the Company issued to
the
employees of WaveRider 2,125,545 employee stock options, with an average
exercise price of $1.02 and to the warrant holders of WaveRider 2,125,613 common
share purchase warrants, with an average exercise price of $1.84.
The
transaction was accounted for as a purchase and is summarized as follows (in
thousands $):
Cash
on hand
|
|
$
|
413
|
|
Other
current assets
|
|
|
2,241
|
|
Fixed
assets
|
|
|
200
|
|
Current
liabilities
|
|
|
(2,787
|
)
|
|
|
|
|
|
Net
assets received
|
|
|
67
|
|
Expenses
incurred on acquisition
|
|
|
(1,650
|
)
|
Goodwill
|
|
|
14,745
|
|
|
|
|
|
|
Total
consideration received
|
|
$
|
13.161
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued on closing
|
|
$
|
6,432
|
|
Preferred
stock issued on closing
|
|
|
4,705
|
|
Warrants
issued on closing at fair value
|
|
|
1,492
|
|
WaveRider
shares forfeited on merger
|
|
|
450
|
|
Employee
stock options issued on closing at fair value
|
|
|
82
|
|
|
|
|
|
|
Total
consideration given
|
|
$
|
13,161
|
|
|
|
|
|
|
The
cash effect of this transaction is summarized as follows:
|
|
|
|
|
|
|
|
|
|
Cash
acquired on closing
|
|
$
|
413
|
|
The
following unaudited pro forma financial information gives effect to the
WaveRider acquisition, as if it had occurred at the beginning of the respective
period. Unaudited pro forma financial information is not necessarily indicative
of the results of operations that would have occurred had the acquisition taken
place at the beginning of those periods:
|
|
Three
months ended March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Pro
forma consolidated revenue
|
|
$
|
4,094
|
|
$
|
4,637
|
|
Pro
forma consolidated net loss
|
|
$
|
(13,146
|
)
|
$
|
(10,105
|
)
|
Pro
forma consolidated basic and diluted loss per share
|
|
$
|
(0.19
|
)
|
$
|
(0.17
|
)
|
3.
NET LOSS PER SHARE
For
purposes of computing basic and diluted net loss per common share in the three
months ended March 31, 2006, the weighted average common share equivalents
do
not include stock options with an exercise price that exceeds the average fair
market of the Company's common stock for the period because the effect would
be
anti-dilutive. Because losses were incurred in the three months ended March
31,
2006 and 2005, all options, warrants, and convertible notes are excluded from
the computations of diluted net loss per share because they are anti-dilutive.
4.
BORROWING AND OTHER OBLIGATIONS
Credit
Facility.
On
March
27, 2006, we renewed our credit facility (the "Credit Facility") with Silicon
Valley Bank (the "Bank") through March 27, 2007. The Credit Facility consists
of
a Loan and Security Agreement for a $2.5 million borrowing line based on
domestic receivables, and a Loan and Security Agreement under the Export-Import
("EXIM") program for a $1.5 million borrowing line based on export related
inventories and receivables. The Credit Facility provides for cash advances
equal to 75% of eligible accounts receivable balances for both the EXIM program
and domestic lines. Advances under the Credit Facility bear interest at the
Bank's prime rate plus 3.5% per annum. The Credit Facility is secured by all
of
our receivables, deposit accounts, general intangibles, investment properties,
inventories, cash, property, plant and equipment. We also issued a $4.0 million
secured promissory note underlying the Credit Facility to the Bank. As of March
31, 2006, $41,470 was outstanding under the Credit Facility.
As
of
March 31, 2006, we were not in compliance with the loan covenants established
in
the Credit Facility.
Debenture
Financing. On
November 10, 2005, Wave Wireless entered into an agreement with a Purchaser
of
notes issued under an existing Debenture Agreement which exchanged all issued
and outstanding notes for and in consideration for the issuance to the Purchaser
of a new promissory note, in the principal amount of $4,153,649 (the “New
Note”), which amount represented unpaid principal and accrued interest due under
the terms of the old Notes as of the date of the New Note, October 1, 2005.
Under the terms of the New Note, interest accrued on such debt at an annual
interest rate of 8%, and this rate increased to 10% on April 1, 2006 through
the
maturity date of the loan, December 31, 2007. Payments of principal and accrued
interest under the New Note are amortized and paid by Wave Wireless over a
period of eight quarters in either cash or shares of Wave Wireless’ common
stock, with the first amortization payment being made on December 31,
2005.
On
March
27, 2006, Wave Wireless and the Purchaser entered into an Exchange Agreement,
pursuant to which the Purchaser agreed to convert $1,230,475 of principal and
accrued interest due to Purchaser on the date thereof into 260.3183 shares
of
our Series J Convertible Preferred Stock and warrants to purchase 7,809,548
shares of our common stock, at an exercise price of $0.12 per share, (the “Note
Exchange”). Such conversion is in lieu of the quarterly payments due March 31,
2006 and June 30, 2006. The Series J Convertible Preferred Stock is convertible
into 26,031,827 shares of our common stock. As a result of the Note Exchange,
the total amount due Purchaser on March 31, 2006 is $2,476,657.
Convertible
Notes. During
2005, Wave Wireless issued convertible promissory notes to certain purchasers
in
the principal amount of $850,000, payable on or before March 31, 2006 (the
“Convertible Notes”). Interest accrued on the Convertible Notes at an annual
interest rate of 10%. As additional consideration for the loans evidenced by
the
Convertible Notes, the holders were issued warrants for the issuance of
2,125,000 shares of common stock of Wave Wireless, exercisable for 5 years,
at
an exercise price of $0.20 per share. The notes were discounted for the relative
fair value of the warrants issued and the intrinsic value of the beneficial
conversion features associated with the notes.
From
January 1, 2006 through March 31, 2006, Wave Wireless issued additional
Convertible Notes to certain purchasers in the principal amount of $1.09
million. As additional consideration for the loans evidenced by the Convertible
Notes, the holders were issued warrants for the issuance of 2,725,000 shares
of
common stock of Wave Wireless, exercisable for 5 years, at an exercise price
of
$0.20 per share.
Under
the
terms of the Convertible Notes, as amended by the terms of the Amendment to
Promissory Note dated as of March 27, 2006 (the “Amendment Agreement”), the
outstanding principal amounts and all accrued but unpaid interest under the
terms of all issued and outstanding Convertible Notes automatically converted
into shares of Series J Convertible Preferred Stock and warrants to purchase
shares of common stock, at an exercise price of $0.12 per share, on March 31,
2006 (the “Series J Equity Securities”). For purposes of determining the number
of Series J Equity Securities that each holder received upon conversion, the
holders were deemed to have tendered 120% of the outstanding balance of the
Convertible Notes as payment of the purchase price for the Series J Equity
Securities. As consideration for entering into the Amendment Agreement the
Company reduced the exercise price of the Warrants issued in conjunction with
Convertible Notes from $0.20 to $0.12 per share.
The
Series J Convertible Preferred Stock and warrants issued in connection with
the
conversion of all outstanding Convertible Notes is convertible or exercisable,
as the case may be, into 31,728,719 and 9,518,616 shares of common stock,
respectively.
Agilent
Note. On
November 30, 2004, Agilent Financial Services ("Agilent") entered into an
agreement with us to restructure the $1,725,000 due Agilent on December 31,
2004. Under the terms of the agreement, we paid Agilent an initial payment
of
$250,000 on December 1, 2004; with the balance payable in sixteen monthly
payments of $92,187 beginning January 1, 2005, up to and including April 1,
2006. In addition, we issued Agilent a warrant to purchase 178,571 shares of
our
common stock. The warrant has an initial exercise price of $0.56 and a term
of
five years. On March 31, 2005, the Company and Agilent entered into an agreement
whereby one half of the remaining debt of $1,111,599 will be paid in equal
payments over eighteen months beginning April 1, 2005, with the other half
paid
in the form of 555.799 shares of Series E Convertible Preferred Stock,
convertible at any time at the option of the holder into common stock equal
to
the quotient obtained by dividing the liquidation preference amount of the
shares to be converted by the conversion price. The Series E Preferred Stock
was
authorized and issued in the quarter ending June 30, 2005, and the Company
recorded a gain on the conversion of $355,712.
At
March
31, 2006, the remaining amount due Agilent was $182,595, which amount is paid
monthly in $30,000 installments, with the final installment due in September
2006.
5.
BALANCE SHEET COMPONENTS
Other
accrued liabilities consist of the following (in thousands, unaudited):
Purchase
commitment
|
|
$
|
826
|
|
Accrued
warranty (a, b)
|
|
|
445
|
|
Accrued
compensation and employee benefits
|
|
|
1,493
|
|
Accrued
legal and accounting
|
|
|
262
|
|
Value
added tax payable
|
|
|
240
|
|
Other
|
|
|
411
|
|
|
|
|
|
|
Balance
at March 31, 2006
|
|
$
|
3,677
|
|
a) |
A
summary of product warranty reserve activity for the three-month
period
ended March 31, 2006 is as follows:
|
Balance
at January 1, 2006
|
|
$
|
341
|
|
Additions
with acquisition of WaveRider
|
|
|
104
|
|
Additions
relating to products sold
|
|
|
40
|
|
Payments
|
|
|
(40
|
)
|
|
|
|
|
|
Balance
at March 31, 2006
|
|
$
|
445
|
|
6.
STOCKHOLDERS' EQUITY
The
authorized capital stock of Wave Wireless consists of 250 million shares of
common stock, $0.0001 par value, and 2.0 million shares of preferred stock,
$0.0001 par value, including 500,000 shares of which have been designated Series
A Junior Participating Preferred Stock (the "Series A Preferred Stock") pursuant
to the Stockholder Rights Agreement (see discussion below), 2,000 shares of
Series E Preferred Convertible Preferred Stock (the "Series E Preferred Stock"),
250 shares of Series F Convertible Preferred Stock (the "Series F Preferred
Stock"), 10,000 shares of Series G Convertible Preferred Stock (the "Series
G
Preferred Stock"), 2,000 shares of Series H Convertible Preferred Stock (the
“Series H Preferred Stock”), 200 shares of Series I Convertible Preferred Stock
(the “Series I Preferred Stock”), and 1,250 shares of Series J Convertible
Preferred Stock (the “Series J Preferred Stock”).
PREFERRED
STOCK
The
Board
of Directors is authorized to issue shares of preferred stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each series,
including the dividend rights, dividend rates, conversion rights, voting rights,
term of redemption, including sinking fund provisions, redemption price or
prices, liquidation preferences and the number of shares constituting any series
or designations of any series, without further action by the holders of common
stock.
Series
H and I Convertible Preferred Stock
Wave
Wireless has designated 2,000 shares of its Preferred Stock as Series H
Convertible Preferred Stock (the "Series H Preferred Stock") and 200 shares
of
its Preferred Stock as Series I Convertible Preferred Stock (the “Series I
Preferred Stock”). In conjunction with the WaveRider Merger, Wave Wireless
issued 1326.446 shares of Series H Preferred Stock and 132.6446 shares of Series
I Preferred Stock, along with warrants to purchase 8,842,089 shares of Common
Stock, at an exercise price of $0.20, to a holder of WaveRider convertible
debentures.
The
Series H Preferred Stock has a liquidation preference amount equal to $1,000
per
share. Each share of Series H Preferred Stock is convertible into a number
of
shares of common stock equal to the liquidation preference amount divided by
the
conversion price of $0.15. The Series I Preferred Stock has a liquidation
preference amount equal to $1,000 per share. Each share of Series I Preferred
Stock is convertible into a number of shares of common stock equal to the
liquidation preference amount divided by the conversion price of
$0.01.
Subsequent
to March 31, 2006, and in conjunction with the Company’s new financing, the
Series H and I Convertible Preferred Shares and the related warrants were
exchanged for Series J Convertible Preferred Stock (see Subsequent Events,
Note
11). The Company, after consideration of several valuation models, determined
the fair value of the preferred stock as an amount equal to the fair value
of
the number of common shares into which the resulting Series J Preferred Stock
is
convertible into using the trading market price on the date the WaveRider
Merger.
Series
J Convertible Preferred Stock
Wave
Wireless has designated 1,250,000 shares of its Preferred Stock as Series J
Convertible Preferred Stock (the "Series J Preferred Stock"), of which
620.3074
shares
were issued and outstanding as of March 31, 2006. The Series J Preferred Stock
has a liquidation preference amount equal to $7,500 per share. Each share of
Series J Preferred Stock is convertible into a number of shares of common stock
equal to the liquidation preference amount divided by the conversion price
of
$0.075.
The
Company, after consideration of several valuation models, determined the fair
value of the preferred stock as an amount equal to the fair value of the number
of common shares into which the Series J Preferred Stock is convertible into
using the trading market price on the date the Series J Preferred Stock was
issued.
Stockholder
Rights Agreement
On
September 26, 1997, the Board of Directors of Wave Wireless adopted a
Stockholder Rights Agreement (the "Rights Agreement"). Pursuant to the Rights
Agreement, Rights (the "Rights") were distributed as a dividend on each
outstanding share of its common stock held by stockholders of record as of
the
close of business on November 3, 1997. Each Right will entitle stockholders
to
buy Series A Preferred at an exercise price of $18,750.00 upon certain events.
The Rights will expire ten years from the date of the Rights Agreement.
In
general, the Rights will be exercisable only if a person or group acquires
15%
or more of Wave Wireless common stock or announces a tender offer, the
consummation of which would result in ownership by a person or group of 15%
or
more of Wave Wireless common stock. In the case of certain specified
stockholders the threshold figure is 20% rather than 15%. If, after the Rights
become exercisable, Wave Wireless is acquired in a merger or other business
combination transaction, or sells 50% or more of its assets or earning power,
each unexercised Right will entitle its holder to purchase, at the Right's
then-current exercise price, a number of the acquiring company's common shares
having a market value at the time of twice the Right's exercise price. At any
time within ten days after the public announcement that a person or group has
acquired beneficial ownership of 15% or more of Wave Wireless common stock,
the
Board of Directors, in its sole discretion, may redeem the Rights for $0.015
per
Right.
7.
ASSET IMPAIRMENT AND OTHER RESTRUCTURING CHARGES
The
Company continually monitors the carrying value of its inventory, especially
with regard to an assessment of future demand for its legacy product lines.
In
the quarter ended June 30, 2005, the Company decided to discontinue selling
certain licensed products, which resulted in a charge to restructuring of $3.0
million in licensed inventory.
A
summary
of inventory reserve activities is as follows:
|
|
Inventory
|
|
|
|
Reserve
|
|
|
|
|
|
Balance
at January 1, 2006
|
|
$
|
13,947
|
|
Additions
charged to Statement of Operations
|
|
|
113
|
|
|
|
|
|
|
Balance
at March 31, 2006
|
|
$
|
14,060
|
|
The
breakdown of product sales by geographic region is as follows (in thousands):
|
|
Three
months ended March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
North
America
|
|
$
|
679
|
|
$
|
198
|
|
United
Kingdom
|
|
|
787
|
|
|
1,018
|
|
Europe
|
|
|
96
|
|
|
420
|
|
Asia
|
|
|
20
|
|
|
233
|
|
Latin
America
|
|
|
113
|
|
|
152
|
|
Other
regions
|
|
|
294
|
|
|
476
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,989
|
|
$
|
2,497
|
|
During
the three-month period ended March 31, 2006 and 2005, one and four customers
accounted for a total of 33% and 49% of our total sales, respectively. As a
result of the WaveRider Merger, it is anticipated that product sales will
substantially increase in North America relative to other geographic regions,
and that customer concentration will decrease.
9.
COMMITMENTS AND CONTINGENCIES
Contract
Manufacturer
The
Company provides its primary contract manufacturer with ongoing production
forecasts to enable them to forecast and procure required parts. Under the
terms
of the Agreements with the contract manufacturers, the Company has committed
to
assume liability for all parts required to manufacture the Company’s forecast
products for the next 13 weeks and all final assembly costs for the forecast
products for the next 4 weeks, on a rolling basis. Management believes that,
should it be necessary, they could find alternative contract manufacturers
without significant disruption to the business.
On
August
31, 2005, the Company’s wholly owned subsidiary, WaveRider Communications
(Canada) Inc., entered into a General Security Agreement with our primary
contract manufacturer. Under the terms of the Agreement, WaveRider
Communications (Canada) Inc. granted a security interest over all of its
properties and assets, as additional security for the repayment and performance
of its obligations under the ongoing supply agreement.
Settlement
Agreements
On
October 17, 2005, the Company and Lakewood Ranch Properties, LLC, entered into
a
Termination Agreement, as amended, pursuant to which the parties have agreed
to
terminate the Lease Agreement by and between the Company and Lakewood Ranch
for
and in consideration for the payment to Lakewood Ranch of $10,000 in attorney's
fees, and $300,000 in liquidated damages. As of March 31, 2006, $150,000 plus
accrued interest remained to be paid under the terms of the Termination
Agreement, as amended, which amount is due and payable in two installments
on
April 30, 2006 and May 31, 2006. The April 30, 2006 payment was made and the
Company intends to make the final payment on or before May 31, 2006. In the
event the required payment is made, Lakewood Ranch has agreed to dismiss a
Complaint filed by Lakewood Ranch against the Company seeking damages in the
amount of $3,533,828.70.
The
Company entered into a Settlement Agreement and Release (“Settlement Agreement”)
on September 15, 2004 with Seimans
Aktiengesellchaft ("Siemens")
with
respect to certain claims between Siemens and the Company arising under a Joint
Development and License Agreement and Original Equipment Manufacturer Agreement
entered into between the parties. Under the terms of the Settlement Agreement,
the Company agreed to pay Siemens $500,000, of which it paid $100,000 on October
1, 2004. The Company was obligated to pay an additional $100,000 upon the
earlier of the receipt of financing by the Company equal to at least $100,000
or
December 31, 2004, and $300,000 in twelve monthly installments of $25,000 per
month beginning January 1, 2005. The Company did not make the December 31,
2004
$100,000 payment but did make the first two monthly payments of $25,000 each
in
January and February 2005. The Company has made no other payments to Siemens.
The
amount due Siemens as of March 31, 2006, $300,000, is reflected as a short-term
liability on the Company's balance sheet. In
the
event of a default, all amounts due Siemens are immediately payable and interest
is accrued at 7%.
Contingencies
In
June
2000, two former consultants to P-Com Italia S.p.A. filed a complaint against
P-Com Italia in the Civil Court of Rome, Italy seeking payment of certain
consulting fees allegedly due the consultants totaling approximately $615,000.
The Civil Court of Rome has appointed a technical consultant in order to
determine the merit of certain claims made by the consultants. On April 20,
2005, the Civil Court of Rome issued judgment dismissing the case, and ordered
the consultants to pay P-Com Italia's legal fees. The Court's order has been
appealed by the consultants to the Court of Appeal of Rome.
10.
GOODWILL
Goodwill
at March 31, 2006 represents the excess of the purchase price over the fair
values of net assets acquired in connection with the acquisition of WaveRider
Communications Inc. on March 28, 2006 and substantially all of the operating
assets and certain liabilities of SPEEDCOM Wireless Corporation, on December
10,
2003. In accordance with Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets ("SFAS 142"), goodwill resulting from
the
purchase will not be amortized into operations. Rather, such amounts will be
tested for impairment at least annually. This impairment test is calculated
at
the reporting unit level, which, for Wave Wireless is at the enterprise level.
The annual goodwill impairment test has two steps. The first identifies
potential impairments by comparing the fair value of Wave Wireless, as
determined using its trading market prices and other valuation methodologies,
with its carrying value, including goodwill. If the fair value exceeds the
carrying amount, goodwill is not impaired and the second step is not necessary.
If the carrying value exceeds the fair value, the second step calculates the
possible impairment loss by comparing the implied fair value of goodwill with
the carrying amount. If the implied goodwill is less than the carrying amount,
a
write-down will be recorded. In the event that Wave Wireless’ management
determines that the value of goodwill has become impaired using this approach,
Wave Wireless will record a charge for the amount of the impairment. Wave
Wireless will perform this test annually, on the first day of the fourth quarter
of each year.
No
impairment of goodwill was recorded in 2005 because the fair value of the
combined business units exceeded the goodwill-carrying amount. Our determination
in 2005 was based on a valuation completed by an outside consulting firm using
estimates and assumptions provided by management, which we believe to be
reasonable but that are unpredictable and inherently uncertain. Actual results
may differ from those estimates.
11.
SUBSEQUENT EVENTS
a) |
Conversion
of Series H and I Convertible Preferred Shares - Subsequent
to March 31, 2006, and in conjunction with the Company’s new financing,
all of the issued and outstanding shares of the Series H and I Convertible
Preferred Stock and the related warrants were exchanged for 353.7333
shares of Series J Convertible Preferred Stock and Series J Warrants
to
purchase 10,612,000 shares of Common
Stock.
|
b) |
Sale
of Series J Convertible Preferred Stock - Subsequent
to March 31, 2006, and up to May 19, 2006, the Company sold 198.533
shares
of Series J Convertible Preferred Stock and Series J Warrants to
purchase
5,956,000 shares of Common Stock for cash proceeds of $1,489,000,
less
cash fees of $176,900.
|
c) |
Designation
of Series J-1 Convertible Preferred Stock - Subsequent
to March 31, 2006, the Company designed 300 shares of its preferred
stock
as Series J-1 Convertible Preferred Stock. The Series J-1 Preferred
Stock
has a liquidation preference amount equal to $7,500 per share. Each
share
of Series J-1 Preferred Stock is convertible into a number of shares
of
common stock equal to the liquidation preference amount divided by
the
conversion price of $0.075.
|
This
Quarterly Report on Form 10-QSB contains forward-looking statements, which
involve numerous risks and uncertainties. The statements contained in this
Quarterly Report on Form 10-QSB that are not purely historical may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, and Section 21E of the Securities Exchange Act of 1934, including
without limitation, statements regarding the Company's expectations, beliefs,
intentions or strategies regarding the future. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Certain Factors
Affecting the Company" contained in our Annual Report on Form 10-KSB, and other
documents filed by us with the Securities and Exchange Commission.
OVERVIEW.
We are a developer of wireless broadband solutions, offering a comprehensive
portfolio of wireless mesh routers, and fixed and mobile non-line-of-sight
(NLOS) products that can be deployed rapidly and cost-effectively in all types
of environments. Our products are used for applications ranging from mission
critical public safety communications, video surveillance, municipal networks,
and private enterprise networks to last mile broadband access. First responders,
telecom carriers, municipalities, wireless Internet service providers,
utilities, security companies and the military have deployed Wave Wireless
solutions. We also provide repair, maintenance and other services to our
licensed and other customers worldwide.
On
March
28, 2006, a wholly owed subsidiary of the Company was merged with and into
WaveRider Communications Inc. (the “WaveRider Merger”). The WaveRider Merger is
a strategic fit that brings together complementary business lines, engineering,
sales and marketing compatibilities and innovative technology. The combination
of Wave Wireless’ SPEEDLAN family of mesh networking products and WaveRider’s
Last Mile Solutionâ
non-line-of-sight, fixed and mobile wireless 900 MHz products provides customers
with a wide range of line-of-sight fixed and non-line-of-sight products and
services, and positions the combined company as a worldwide provider of robust
wireless broadband applications and solutions.
In
order
to provide for its immediate working capital needs in connection with the
WaveRider Merger, and to provide for its ongoing working capital requirements,
Wave Wireless has obtained, and will be required to obtain additional financing.
See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources.”
Critical
Accounting Policies
MANAGEMENT'S
USE OF ESTIMATES AND ASSUMPTIONS. The preparation of financial statements in
accordance with accounting principles generally accepted in the U.S. requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities and disclosures of contingent assets and liabilities
at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates, and such differences could be material and affect the results of
operations reported in future periods.
REVENUE
RECOGNITION. Revenue from product sales is recognized upon transfer of title
and
risk of loss, which is upon shipment of the product, provided no significant
obligations remain and collection is probable. Provisions for estimated warranty
repairs, returns and other allowances are recorded at the time revenue is
recognized.
ALLOWANCE
FOR DOUBTFUL ACCOUNTS. We maintain an allowance for doubtful accounts for
estimated losses from the inability of our customers to make required payments.
We evaluate our allowance for doubtful accounts based on the aging of our
accounts receivable, the financial condition of our customers and their payment
history, our historical write-off experience and other assumptions. In order
to
limit our credit exposure, we require irrevocable letters of credit and even
prepayment from certain of our customers before commencing production.
INVENTORY.
Inventory is stated at the lower of cost or market, cost being determined on
a
first-in, first-out basis. We assess our inventory carrying value and reduce
it
if necessary, to its net realizable value based on customer orders on hand,
and
internal demand forecasts using management's best estimate given the information
currently available. Our customers' demand is highly unpredictable, and can
fluctuate significantly, caused by factors beyond the control of the Company.
Our inventories include parts and components that are specialized in nature
or
subject to rapid technological obsolescence. We maintain an allowance for
inventories for potentially excess and obsolete inventories and gross inventory
levels that are carried at costs that are higher than their market values.
If we
determine that market conditions are less favorable that those projected by
management, such as an unanticipated decline in demand not meeting our
expectations, additional inventory write-downs may be required.
PROPERTY
AND EQUIPMENT. Property and equipment are stated at cost and include tooling
and
test equipment, computer equipment, furniture, land and buildings, and
construction-in-progress. Depreciation is computed using the straight-line
method based upon the useful lives of the assets ranging from three to seven
years, and in the case of buildings, 33 years. Leasehold improvements are
amortized using the straight-line method based upon the shorter of the estimated
useful lives or the lease term of the respective assets.
IMPAIRMENT
OF LONG-LIVED ASSETS, OTHER THAN GOODWILL. In the event that facts and
circumstances indicate that the long-lived assets may be impaired, an evaluation
of recoverability would be performed. If an evaluation were required, the
estimated future undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine if a write-down is
required.
CONCENTRATION
OF CREDIT RISK. Financial instruments that potentially subject the Company
to
significant concentrations of credit risk consist principally of cash
equivalents and trade accounts receivable. The Company places its cash
equivalents in a variety of financial instruments such as market rate accounts
and U.S. Government agency debt securities. The Company, by policy, limits
the
amount of credit exposure to any one financial institution or commercial issuer.
The
Company performs on-going credit evaluations of its customers' financial
condition to determine the customer's credit worthiness. Sales are then
generally made either on 30 to 60 day payment terms, COD or letters of credit.
The Company extends credit terms to international customers for up to 90 days,
which is consistent with prevailing business practices.
At
March
31, 2006 and 2005, approximately 35% and 84%, respectively, of trade accounts
receivable represent amounts due from two and five customers, respectively.
RESULTS
OF OPERATIONS
SALES.
For the three months ended March 31, 2006, sales were approximately $2.0 million
as compared to $2.5 million in the comparable period in the prior year. The
decrease in revenue as compared to the comparable period last year is
attributable to substantially lower revenue in certain end-of-life licensed
and
unlicensed product lines and lower refurbished licensed product revenue
associated with our RMA Business, offset by the recognition of $448 thousand
in
sales attributable to the sale of non-line-of-sight and other WaveRider products
following the consummation of the WaveRider Merger. The lower revenue
attributable to our licensed and certain unlicensed product lines principally
reflects the discontinuation of unprofitable licensed product lines and the
exiting of certain licensed product lines contemplated in our Restructuring
Plan.
The
decrease in sales attributable to our RMA Business in the three month period
ending March 31, 2006 is principally caused by lower sales volume attributable
to the loss of a single customer in Europe, as well as by the decommissioning
of
certain of our licensed radio products from another customer's network.
Management anticipates that, as our customers' networks age, and the cost to
replace these networks decrease, our customers may similarly elect to
decommission our licensed radio products installed in their networks. In
addition, competition from other repair and maintenance service providers may
negatively affect sales attributable to our RMA Business. The Company recently
entered into an agreement with one of its customers to secure the sale of
refurbished licensed radio products to this customer through December 31, 2006,
and is negotiating to extend the contract for another significant customer.
Nevertheless, it is anticipated that our RMA Business will continue to decline
over time. The expected decline in our RMA Business over time will be more
than
offset by anticipated increases in new product sales attributable to our
remaining product lines, and the sale of additional non-line-of-sight products
resulting from the consummation of the WaveRider Merger.
During
the three months ended March 31, 2006, approximately 40% of our sales were
to
the United Kingdom market, 34% in North America, 5% from Europe, 1% from Asia,6%
from Latin America and 15% of our sales were in other countries. During the
comparable period in 2005, we generated 41% of our sales to the United Kingdom
market, 8% from North America, 17% from Europe, 9% from Asia, 6% from Latin
America and 19% of our sales in other countries. As a result of the WaveRider
Merger, it is anticipated that sales to North America will substantially
increase relative to sales to other geographic regions.
GROSS
PROFIT (LOSS). Gross profit (loss) for the three months ended March 31, 2006
and
2005, was $401 thousand and (48) thousand, respectively, or 20% and (2)% of
sales in each of the respective quarters. Gross margins were impacted by
significant inventory reserves resulting from the Company’s decision to exit the
legacy licensed microwave products to concentrate on the Wave Wireless and
WaveRider products.
RESEARCH
AND DEVELOPMENT. For the three months ended March 31, 2006 and 2005, research
and development ("R&D") expenses were approximately $540 thousand and $1.2
million, respectively. As a percentage of sales, research and development
expenses were 27% for the three months ended March 31, 2006 and 48% for the
same
period in 2005. The decrease in R&D expenses is principally the result of
headcount reductions and other related expense reductions caused by the
implementation of the Restructuring Plan, and the resulting focus on unlicensed
product development. As a result of the WaveRider Merger, research and
development expenses in subsequent quarters are expected to decrease as a
percentage of sales.
SELLING
AND MARKETING. For the three months ended March 31, 2006 and 2005, sales and
marketing expenses were approximately $518 thousand and $1.2 million,
respectively. The substantial decrease in sales and marketing expenses in the
quarter ended March 31, 2006 is due to headcount reductions and other related
expense reductions, and lower commissions in light of decreased sales. As a
percentage of sales, selling and marketing expenses were 26% for the three
months ended March 31, 2006, compared to 49% for the three months ended March
31, 2005. As a result of the WaveRider Merger, sales and marketing expenses
in
subsequent quarters are expected to decrease as a percentage of
sales.
GENERAL
AND ADMINISTRATIVE. For the three months ended March 31, 2006 and 2005, general
and administrative expenses were approximately $636 thousand and $924 thousand,
respectively. As a percentage of sales, general and administrative expenses
were
32% for the three months ended March 31, 2006, compared to 37% for the three
months ended March 31, 2005. The decrease in general and administrative expenses
in the first three months of 2006 as compared to the comparable period in 2005
is principally attributable to a realization of savings from cost reduction
efforts caused by implementation of the Restructuring Plan, including reduced
consulting and legal expenses, and facilities consolidation. As a result of
the
WaveRider Merger, general and administrative expenses in subsequent quarters
are
expected to decrease as a percentage of sales.
ASSET
IMPAIRMENT AND RESTRUCTURING CHARGES. In the event that certain facts and
circumstances indicate that the long-lived assets may be impaired, an evaluation
of recoverability would be performed. When an evaluation occurs, management
conducts a probability analysis based on the weighted future undiscounted cash
flows associated with the asset. The results are then compared to the asset's
carrying amount to determine if impairment is necessary. The cash flow analysis
for the property and equipment is performed over the shorter of the expected
useful lives of the assets, or the expected life cycles of our product line.
An
impairment charge is recorded if the net cash flows derived from the analysis
are less than the asset's carrying value. We deem that the property and
equipment is fairly stated if the future undiscounted cash flows exceed its
carrying amount.
In
April
2005, Wave Wireless announced the adoption of the Restructuring Plan that
significantly curtailed current spending, and substantially reduced liabilities
and operating and other costs. The Restructuring Plan included the divestiture
of certain unprofitable product lines, workforce reductions, write-down of
certain inventory, and a loss associated with the divestiture of the Company's
research and development operations in Italy. A restructuring charge of nearly
$5.4 million was taken as of March 31, 2005, to cover the costs associated
with
the Restructuring Plan.
INTEREST
EXPENSE. For the three months ended March 31, 2006 and 2005, interest expense
was $9.5 million and $0.2 million, respectively. Included in interest expense
for the three months ended March 31, 2006 is $9,246 thousand (Q1 2005 - $23
thousand) of non-cash charges related to the conversion of promissory notes
and
debt to Series J Convertible Preferred Stock, the issue of Series J Stock to
consultants in connection with the Company’s promissory note financing, the
accretion to face value of the promissory notes and amortization of deferred
financing charges.
LIQUIDITY
AND CAPITAL RESOURCES
CASH
PROVIDED (USED) IN OPERATIONS. During the three month period ended March 31,
2006, the Company used approximately $213 thousand in operating activities,
primarily due to our net loss of $10.8 million, less non-cash items of $9.3
million, offset by decreases in accounts receivable of $519 thousand, inventory
of $263 thousand, prepaid and other assets of $132 thousand and increases in
accounts payable of $310 million and other accrued liabilities of $108 thousand
and depreciation expense of $65 thousand.
CASH
FROM
INVESTING ACTIVITIES. During the three-month period ended March 31, 2006, we
generated approximately $199 thousand in investing activities. We received
$30
thousand from the sale of patents and $169 thousand in net cash on the
acquisition of WaveRider Communications Inc..
CASH
FROM
FINANCING ACTIVITIES. During the three month period ended March 31, 2006, we
received approximately $260 thousand of cash from financing activities,
primarily from $989 thousand from the issuance of Convertible Notes, offset
by
$729 thousand in repayment of advances under the Credit Facility.
CURRENT
LIQUIDITY. As of March 31, 2006, our principal sources of liquidity consisted
of
borrowing availability under the Credit Facility, and approximately $626,000
of
cash and cash equivalents, compared to approximately $380,000 in cash and cash
equivalents at December 31, 2005. As of March 31, 2006, we were not in
compliance with the minimum tangible net worth covenant established in the
Credit Facility. The Company is currently dependent on the issuance of
additional equity securities and available borrowings under the Credit Facility
to satisfy its immediate liquidity needs, as described below.
At
March
31, 2006, our total liabilities were approximately $11.9 million, compared
to
$10.8 million at December 31, 2005. Our current assets of $3.5 million and
our
current liabilities of $10.4 million at March 31, 2006, resulted in negative
working capital of approximately $6.9 million, compared to negative working
capital of $7.1 million at December 31, 2005.
The
Company's Restructuring Plan, together with the operating and other cost
reduction initiatives resulting from the WaveRider Merger, is intended to
eliminate the Company's dependence on external sources of financing. While
the
Restructuring Plan and the WaveRider Merger have resulted in substantial
reductions in operating losses, and cash used in operations, the Company
currently remains dependent on external sources of financing to continue
operations. As a result, the Company has issued equity securities to address
its
immediate liquidity needs, and intends to issue additional debt and/or equity
securities to meet its short-term working capital requirements.
There
can
be no assurance that the Company will be successful in issuing additional equity
or debt securities on acceptable terms, if at all. If management is unsuccessful
in its plans to raise additional capital, or otherwise improve its liquidity
position, the Company will no longer be able to continue as a going concern.
The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or to amounts and
classification of liabilities that may be necessary if the Company is unable
to
continue as a going concern.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
May
2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Correction
("SFAS 154"), which replaces Accounting Principles Board Opinions No. 20
"Accounting Changes" and SFAS No 3, "Reporting Accounting Changes in Interim
Financial Statements - An Amendment of APB Opinion No. 28." SFAS 154 provides
guidance on accounting for and reporting of accounting changes and error
corrections. It establishes retrospective application, or the latest practicable
date, as the required method for reporting a change in accounting principle
and
the reporting of a correction of an error. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005 and is required to be adopted by Wave Wireless in the first quarter
of
fiscal 2006.
ITEM
3. CONTROLS AND PROCEDURES
(a)
Evaluation of disclosure controls and procedures. As of the end of the quarter
ended March 31, 2006, the Company's management, including its chief
restructuring officer, has evaluated the effectiveness of the Company's
disclosure controls and procedures, as such term is defined in Rule 13a-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"). Based on that evaluation, the Company's chief restructuring
officer concluded that the Company's disclosure controls and procedures were
effective as of March 31, 2006 to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
PART
II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS.
A
description is included in footnote 9 of our financial
statements.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Issuance
of Convertible Notes --During
the quarter ended March 31, 2006, Wave Wireless issued secured convertible
promissory notes in the principal amount of approximately $1.09 million, payable
on or before March 31, 2006 (“Convertible Notes”). Interest accrued on the
Convertible Notes at an annual interest rate of 10%. As additional consideration
for the loans evidenced by the Convertible Notes, the holders were issued
warrants (the “Note Warrants”) to purchase a total of 2,725,000 shares of common
stock of Wave Wireless at an exercise price of $.20 per share. By agreement,
the
exercise price of all outstanding Note Warrants was amended to $0.12 per share
at March 27, 2006.
Conversion
of Promissory Notes -
On March
31, 2006, all outstanding Convertible Notes, with a principal amount of
$1,940,000, plus accrued but unpaid interest, automatically converted into
317.3
shares of Wave Wireless’ Series J Convertible Preferred Stock (“Series J
Preferred”), and warrants exercisable for 9,518,616 shares of common stock
(“Exchange Warrants”). For purposes of determining the number of Series J
Preferred and Exchange Warrants received by the holders upon such conversion,
each holder was entitled to convert 120% of the outstanding balance of the
Convertible Notes into the purchase price of the Series J Preferred proposed
to
be issued by Wave Wireless in connection with a future equity financing.
Conversion
of Debentures -- On
March
27, 2006, Wave Wireless entered into an Exchange Agreement with the holder
of
its Debentures, pursuant to which the holder agreed to convert $1,230,475 of
principal and accrued interest due to the holder on the date thereof into
260.3183 shares of our Series J Preferred (the “Debenture Exchange”). We also
agreed to issue the holder Exchange Warrants to purchase 7,809,548 shares of
our
common stock at an exercise price of $0.12 per share. The Series J Preferred
is
convertible into 26,031,827 shares of our common stock. As a result of the
Debenture Exchange, the total amount due the holder on March 31, 2006 is
$2,4796,658.
For
purposes of determining the number of Series J Preferred and Exchange Warrants
received by the holder in connection with the Debenture Exchange, the holder
was
entitled to convert 120% of the outstanding balance of the Debentures into
the
purchase price of the Series J Preferred proposed to be issued by Wave Wireless
in connection with a future equity financing.
No
underwriters were involved in the foregoing transactions. The securities issued
in connection with the Note Exchange and Debenture Exchange were issued in
reliance on Section 3(a)(9) of the Securities Act of 1933, as the securities
issued in connection with the Note Exchange and Debenture Exchange were
exchanged by the issuer with its existing security holders exclusively where
no
commission or other remuneration is paid or given directly or indirectly for
soliciting such exchange. The Note Warrants were issued in private transactions,
in reliance on an exemption from registration under Section 4(2) of the
Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder,
because each offering was a non-public offering to accredited
investors.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
None.
(a)
Exhibits
2.1 |
Agreement
and Plan of Merger between Wave Wireless Corporation, WaveRider
Communications Inc. and Wave Acquisition Inc., incorporated by reference
to Annex A-1 to the Registrant’s Registration Statement on Form S-4 (File
No. 333-131357), filed with the Securities and Exchange Commission
on
January 27, 2006.
|
2.2 |
Amendment
to the Agreement and Plan of Merger between Wave Wireless Corporation,
WaveRider Communications Inc. and Wave Acquisition Inc., incorporated
by
reference to Annex A-2 to the Registrant’s Registration Statement on Form
S-4 (File No. 333-131357), filed with the Securities and Exchange
Commission on January 27, 2006.
|
4.1 |
Certificate
of Designations of the Relative Rights and Preferences of the
Series J
Convertible Preferred Stock, incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed with the Securities and Exchange Commission on April
6,
2006.
|
31.1 |
Certification
of Principal Executive Officer Pursuant to Exchange Act Rule 13a-14(a).
|
31.2 |
Certification
of Principal Financial Officer Pursuant to Exchange Act Rule 13a-14(a).
|
32.1
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002.
|
(b)
Reports on Form 8-K
On
January 4, 2006, we filed a Form 8-K to announce that we had entered into a
definitive Agreement and Plan of Merger for the merger of Wave Wireless and
WaveRider Communications Inc. (“WaveRider”).
On
January 27, 2006, we filed a Form 8-K to announce that we had entered into
an
Amendment to Agreement and Plan of Merger, amending the terms of Wave Wireless’
announced merger with WaveRider. The Amendment revised the terms of the
Agreement and Plan of Merger as a result of WaveRider entering into an agreement
with Crescent International Ltd. (“Crescent”) to amend the agreements between
WaveRider and Crescent.
On
March
28, 2006, we filed a Form 8-K to announce the entry into an Exchange Agreement
with a note holder, pursuant to which the note holder agreed to convert
$1,230,475 in principal and accrued interest due under the terms of a promissory
note into shares of Wave Wireless’ Series J Convertible Preferred Stock with an
aggregate face value of $1,952,387, and warrants to purchase a total of
7,809,548 shares of common stock. We also announced the filing with the
Secretary of State of the State of Delaware, on March 24, 2006, of a the
Certificates
of Designations of the Relative Rights and Preferences of the Series H
Convertible Preferred Stock and the Series I Convertible Preferred Stock, which
became effective upon such date.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
WAVE
WIRELESS CORPORATION
|
|
|
Date:
May 22, 2006 |
|
/s/
Charles W. Brown |
|
Charles
W. Brown, Chief Executive Officer |
|
(Principal
Executive Officer) |