unaudited interim consolidated financial · pdf filethese unaudited interim consolidated...

DDS WIRELESS INTERNATIONAL INC.

Unaudited Interim

Consolidated Financial Statements For the three and six month periods ended June 30, 2010

NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS

Under National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that financial statements have not been reviewed by an auditor.

The accompanying unaudited interim consolidated financial statements of the Company have been prepared by and are the responsibility of the Company’s management. The Company’s independent auditors have not performed a review of these consolidated financial statements in accordance with the standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity’s auditors.

Jim Zadra Chief Financial Officer August 3, 2010

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DDS WIRELESS INTERNATIONAL INC. Consolidated Balance Sheets

Commitments and contingencies (note 18) See accompanying notes to unaudited consolidated financial statements.

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DDS WIRELESS INTERNATIONAL INC. Consolidated Statements of Operations (Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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DDS WIRELESS INTERNATIONAL INC. Consolidated Statements of Comprehensive Loss (Unaudited)

See accompanying notes to unaudited consolidated financial statements. Consolidated Statements of Changes in Retained Earnings (Deficit) and Accumulated Other Comprehensive Income (Loss) (Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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DDS WIRELESS INTERNATIONAL INC. Consolidated Statements of Cash Flows (Unaudited)

See note on supplementary cash flow information (note 16). See accompanying notes to unaudited consolidated financial statements.

DDS WIRELESS INTERNATIONAL INC. Notes to Unaudited Interim Consolidated Financial Statements For the three and six month periods ended June 30, 2010 and 2009 ______________________________________________________________________________________

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1. Nature of operations: DDS Wireless International Inc. (the “Company”) operates in the wireless mobile data industry and is engaged in the design, development and deployment of turnkey solutions including application software, mobile devices, infrastructure products, project implementation services and maintenance. The Company is incorporated under the laws of the Province of British Columbia and is listed on the Toronto Stock Exchange under the symbol DD.

2. Consolidated financial statement presentation: The interim consolidated financial statements are stated in Canadian dollars. These interim financial statements do not include all disclosures required by Canadian generally accepted accounting principles for annual financial statements, and accordingly, these interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements as at and for the year ended December 31, 2009.

3. Significant accounting policies: These unaudited interim consolidated financial statements follow the same accounting policies and methods of their application as the Company’s audited consolidated financial statements as at and for the year ended December 31, 2009.

New accounting pronouncement: Multiple Deliverable Revenue Arrangements In December 2009, the Emerging Issues Committee issued a new abstract concerning multiple

deliverables revenue contracts EIC 175, Multiple Deliverable Revenue Arrangements, which amended EIC 142, Revenue Arrangements with Multiple Deliverables “EIC 142”. The purpose of the interpretations is to keep Canadian GAAP and US GAAP the same when recognizing revenue on a contract when the contract contains more than one product or service. The new Abstract requires a seller to allocate the contract price to all deliverables using the stand-alone selling prices of the individual deliverables. It also changes the level of evidence necessary to separate deliverables when more objective evidence of the selling price is not available. The Abstract may be applied prospectively and should be applied to revenue arrangements with multiple deliverables entered into or materially modified in the first annual fiscal period beginning on or after January 1, 2011, with early adoption permitted. EIC142 continues to be effective until that date. The Company is in the process of evaluating the impact of adopting this standard on the Company’s consolidated financial statements.


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4. Accounts receivable:

Aging of accounts receivable are as follows:

Changes in the allowance for doubtful accounts and charges to bad debt expenses during the three and

six month periods ended June 30, 2010 and 2009, respectively, are as follows:


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5. Inventory: Details of inventory are as follows:

During the three and six months ended June 30, 2010 the Company charged $737,145 (2009 - $1,120,099) and $1,526,253 ($1,741,582), respectively, of inventory related amounts to cost of sales. During the three and six months ended June 30, 2010 the Company charged $nil (2009 - $75,000) and $nil ($314,000), respectively, of inventory write downs. No inventory was pledged as security for liabilities other than under the line of credit (refer to note 11).

6. Lease receivables: Lease receivables relates to equipment leased to customers. Details are as follows:


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7. Plant and equipment:

8. Investment: During the year ended December 31, 2008, the Company purchased shares in a third party, private company for total consideration of $102,565, made up of $77,290 in services and $25,275 in cash. This investment is carried at cost as there is no quoted market price in an active market. See note 13.

9. Intangibles:


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Intangible assets relate to amounts acquired as part of the MobiSoft and StrataGen acquisitions in 2007. The cost of the intangible assets includes translation adjustments related to MobiSoft, which is considered a self-sustaining subsidiary, for the six months ended June 30, 2010, amounting to $218,887 (2009 - $413,374).

10. Goodwill:

Goodwill arose as a result of the acquisitions of MobiSoft and StrataGen in 2007. Goodwill consists of

the following amounts:

11. Lines of credit: The Company signed an amendment to its $4.0 million line of credit that bears interest at prime plus 0.5% during the first quarter in 2009. The line of credit is guaranteed by Viksun Enterprise Inc., a company controlled by the Company’s Chief Executive Officer, for the amount of $2.0 million. The assets of the Company are provided as collateral for the line of credit. As at June 30, 2010, the Company has not drawn on this line of credit (December 31, 2009 - $158,389). Pursuant to the line of credit facility agreement, the Company is required to maintain a net tangible net worth of not less than $6.5 million, a ratio between net liabilities to net tangible net worth of not greater than 2:1 and a ratio between funded debt to earnings before interest, income tax, depreciation and amortization of not greater than 2.5 times.

The Company’s subsidiary, MobiSoft, has a $196,000 (€150,000) operating line of credit available as at June 30, 2010, which bears interest at one month Euribor rate plus 1%. As at June 30, 2010, the Company has not drawn on this line of credit (December 31, 2009 - $nil). It is secured by way of a General Security Agreement of MobiSoft. The Company is in compliance with financial covenants as of June 30, 2010.

12. Long-term debt: The Company assumed long-term debt through its acquisition of MobiSoft as follows:

(a) A loan from Nordea Bank bearing an interest rate of 4.86% and has a term of four years expiring March 15, 2010. The loan was fully repaid as at March 31, 2010.

(b) The Company has unsecured government loans with the State Treasury of Finland for the

development of specific products totaling $196,384 (€150,666) as at June 30, 2010 as follows:

(i) Loan for software product application service provider (“ASP”) development payable in the amount of $102,536 (€78,666) as at June 30, 2010 with an interest rate of 1% and repayment


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commencing November 24, 2009 and ending November 29, 2011 with annual payments on each anniversary date of $51,268 (€39,333) excluding interest.

(ii) Loan for payment related software product development for $93,848 (€72,000) as at June 30,

2010 with an interest rate of 1% with payment commencing December 12, 2009 and ending December 20, 2011 with annual payments on each anniversary date of $46,924 (€36,000) excluding interest.

The Company determined the fair value of the loans with the State Treasury of Finland using an estimated cost of capital of 8% resulting in the related interest benefit for these low interest loans. The amount of this benefit as of June 30, 2010 is $27,987 (€21,472) and is reflected in the balance of the loan set out above.

The Company paid a total of $4,857 (€3,566) in interest for the six months ended June 30, 2010 (2009 - $9,134 (€5.751)) and the balances of long-term debt as at June 30, 2010 are as follows:

13. Financial instruments: The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, leases receivable, investment, accounts payable and accrued liabilities, line of credit and long-term debt. Cash and cash equivalents is designated as “held-for-trading” and measured at fair value. Investment is designated as “available for sale” and measured at fair value. Accounts receivables, and lease receivables are designated as “loans and receivables” and measured at amortized cost. Accounts payable and accrued liabilities, line of credit, and long-term debt, are designated as “other financial liabilities” and are measured at amortized cost. The carrying value of the trade receivables, accounts payable, line of credit and accrued liabilities approximate their fair values due to their immediate or short-term maturity. The investment is recorded at cost as it is in a private company and there is no quoted market price. The carrying values and fair values of financial assets and liabilities as at June 30, 2010 and December 31, 2009 are as follows:


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All derivative instruments are recorded on the balance sheets at fair value. The Company periodically enters into foreign exchange contracts to manage foreign exchange risk. The Company uses derivative financial instruments only in connection with managing related risk positions and does not use them for trading or speculative purposes. As at June 30, 2010, the Company had the following cash swap contract outstanding:

The Company is exposed to risks of varying degrees of significance which could affect its ability to achieve strategic objectives for growth and shareholder returns. The principal financial risks to which the Company is exposed are described below: Credit risk The Company’s maximum exposure to credit risk consists in the carrying value of its cash and cash equivalents, short-term investments, accounts receivables, contract work-in-progress and leases receivable. The Company’s exposure to credit risk associated with its accounts receivable, contract work-in-progress and leases receivable is the risk that a client will be unable to pay amounts due to the Company. Allowances are provided for potential losses that have been incurred at the balance sheet date. The Company takes into consideration the customer’s payment history, credit worthiness and the current economic environment in which the customer operates to assess impairment. The Company accounts for a specific bad debt provision when management considers that the expected recovery is less than the actual accounts receivable. All bad debt write-offs are charged to general and administration expenses. The following factors affect the credit risk of the Company’s accounts receivable: (a) A broad customer base dispersed across various geographic locations. However, the customer

base is somewhat concentrated in the taxi segment of the market and may be affected by any downturns due to prevailing economic conditions in any given geography.


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(b) Over 73% of accounts receivables at June 30, 2010 (85% at December 31, 2009) are outstanding

for less than 90 days. The Company retains security interests on certain products that are shipped until these are paid for by the customer and that credit is extended to customers following an evaluation of credit worthiness. In addition, the Company performs periodic credit reviews of its customers.

(c) There is no customer that accounts for over 10% of the total revenue of the Company.

All of the Company’s accounts receivable has been reviewed for collectability. Allowances are provided for potential losses that have been incurred at the balance sheet date. Please see note 4 for details of accounts receivables, contract work-in-progress and allowance for doubtful accounts. The credit risk on cash and cash equivalents, short-term investments, forward exchange and swap contracts is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies.

Currency risk

The Company is exposed to foreign currency fluctuations through its operations because a substantial amount of its revenues and operating expenditures are incurred in US Dollars, Euros, Great Britain Pounds, and Swedish Krona. The Company partly mitigates this risk by matching the denomination of its revenues and expenditures. The Company translates monetary assets and liabilities into Canadian dollars using the rates of exchange prevailing at the balance sheet date and records the resulting exchange gains and losses in the statement of operations.

At June 30, 2010, the Company is exposed to translation foreign currency risk through the following

financial assets and liabilities denominated in Euro and US Dollars:

At June 30, 2010 with other variables unchanged, a +/-10% change in the USD/CAD and Euro/CAD

exchange rates would result in net decrease/increase pre-tax translation loss for the six month period by

+/- $195,254 (USD 145K and Euro 32K).

The impact of fluctuation in Great Britain Pound, and Swedish Krona is immaterial.


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Interest rate risk

The Company is exposed to interest rate risk on cash balances earning interest income and to the extent that it draws on its operating lines of credit which calculate interest as a function of variable interest rates. Based on no amount being drawn on the Company’s line of credit facilities at June 30, 2010, a hypothetical 100 basis point change in interest rates would have no material impact on net income for the reporting periods.

Liquidity risk

Liquidity risk is the risk that the Company is not able to meet its financial obligations as they become due or can do so only at excessive cost. The Company’s growth is financed through a combination of the cash flows from operations, borrowing under the existing credit facilities and the issuance of equity. One of management’s primary goals is to maintain an optimal level of liquidity through the active management of the assets and liabilities as well as the cash flows. The Company has in place a planning and budgeting process to help determine the funds required to ensure the Company has the appropriate liquidity to meet its operating and growth objectives. The Company ensures that there are sufficient committed loan facilities to meet its short-term business requirements, taking into account its anticipated cash flows from operations and its holdings of cash.

All financial liabilities are current and due in the current fiscal year with the exception of long-term debt (see note 12).

The Company’s overall liquidity risk has not changed significantly since December 31, 2009. The following table summarizes the relative maturities of the financial liabilities of the Company:

14. Capital management: The Company considers its share capital and contributed surplus as capital, the total book value of which is $25,883,112 as at June 30, 2010. The Company manages its capital structure with the objective of providing sufficient resources to meet day-to-day operating requirements; to allow it to enhance existing product offerings as well as develop new ones; and to have the financial ability to expand the size of its operations by taking on new customers. In managing its capital structure, the Company takes into consideration various factors, including the growth of its business and related infrastructure and the up-front cost of taking on new customers. The Company’s officers and senior management are responsible for managing the Company’s capital and do so through quarterly meetings and regular review of financial information. The Company’s Board of Directors is responsible for overseeing this process. The Company manages its capital to ensure that there are adequate capital resources while maximizing the return to shareholders through the optimization of the debt and equity balance. The Company is not subject to any externally imposed capital requirements.


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15. Share capital:

(a) Authorized:

200,000,000 common shares, without par value

50,000,000 preferred shares, without par value

(b) Issued and outstanding:

(c) Stock options: The Company has granted stock options to a wide group of management, directors and employees. Under the approved stock option plan, options may be granted for up to 2,000,000 shares of common stock in aggregate. Options generally vest over a three-year term, and have a 37 month life with one-sixth of the option grant vesting at the end of each six-month interval. Stock option activity since December 31, 2009 is presented below:

The following table summarizes the stock options outstanding and exercisable at June 30, 2010:

The options outstanding at June 30, 2010 expire between July 2010 and March 2013. During the three and six months ended June 30, 2010, there were no options granted to non-employees. The stock option expenses in the three and six months ended June 30, 2010, respectively, was $71,843 (2009 – 188,344) and $156,476 (2009 - $188,334) respectively. The weighted average fair value of options granted in the three and six months ended June 30, 2010 was $1.09 (2009 - $1.20) and $1.06 (2009 - $0.78) respectively, determined using the Black-Scholes option-pricing model at the date of each grant with the following assumptions:


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(d) Contributed surplus:

16. Supplementary cash flow information:


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17. Related party transactions: The Company is party to an operating lease agreement with and a beneficiary of a guarantee provided by a company controlled by the Company’s Chief Executive Officer, as detailed in Note 11. Rental paid under the agreement for the six months ended June 30, 2010 amounted to $331,143 (2009 - $318,934). The Company provides sales and services to customers that are related to two directors of the Company. In the three and six months ended June 30, 2010, respectively, the total sales and services provided to these customers were $196,018 (2009 - $87,374) and $614,908 (2009 - $421,717). As at June 30, 2010, trade receivables owed by the two customers to the Company amounted to $133,101. These transactions are in the normal course of operations and are measured at the exchange amount of consideration established and agreed to by the respective parties. During the three and six months ended June 30, 2010, consultancy fees of $7,488 and $16,487 were paid to a director of the Company pursuant to a consultancy agreement.

18. Commitments and contingencies:

(a) Operating leases:

The Company has entered into various operating lease agreements for leased premises, with remaining terms of up to four years. Of the total lease obligations, approximately 87% relates to a lease agreement with a company controlled by the Company’s majority shareholder for the land and building occupied by the Company expiring September 2013. The consolidated minimum lease payments for all lease agreements in each of the next four years are as follows:

(b) Legal proceedings:

In 2009, a claim was filed against the Company in the Ontario Superior Court of Justice for damages against the Company for breach of contract and damages resulting from such alleged breach. The total amount of the claim is approximately $850,000. The Company has filed a statement of defense and counterclaim denying all allegations and counterclaiming against the plaintiff for non-payment of services rendered and goods delivered. The Company is of the view that there are no grounds for such claim against the Company and no amount has been recorded for this claim.

(c) Performance bonds: For certain contracts, the Company was required to post performance bonds totalling $1,588,085 (USD$1,497,405). The Company arranged the bonds with Canada Export Development Corporation (“EDC”) and has agreed to indemnify EDC.

(d) Purchase obligations:

The Company has outstanding purchase obligations at June 30, 2010 as follows:


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19. Segmented information: The Company operates in the wireless mobile data industry and all sales of its products and services are made in this industry. The revenues of the geographic segments based on the location of the customer are as follows:


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Effective January 1, 2008, the Company reorganized itself into four distinct business units; Taxi, Transit, eFleet and Digital Wireless as a result of the MobiSoft and StrataGen acquisitions in late 2007.


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The Company does not allocate interest revenue and expenses and non-cash stock based compensation to individual segments, which are presented as part of Digital Wireless business unit.

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