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ATCH > SEC Filings for ATCH > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for AIRTOUCH COMMUNICATIONS, INC.

Form 10-Q for AIRTOUCH COMMUNICATIONS, INC.


14-Nov-2012

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

General

The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with, our unaudited condensed consolidated financial statements and related notes included elsewhere in this Report. Historical results and percentage relationships among any amounts in these financial statements are not necessarily indicative of trends in operating results for any future period. This report contains "forward-looking statements". The statements, which are not historical facts contained in this Report, including this Management's Discussion and Analysis of Financial Condition and Results of Operations, and notes to our unaudited condensed consolidated financial statements, particularly those that utilize terminology such as "may" "will," "should," "expects," "anticipates," "estimates," "believes," or "plans" or comparable terminology are forward-looking statements. Such statements are based on currently available operating, financial and competitive information, and are subject to various risks and uncertainties. Future events and our actual results may differ materially from the results reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, our ability to raise additional working capital , our ability to commence and maintain a significant amount of product sales, dependence on existing and future key strategic and strategic end-user customers, limited ability to establish new strategic relationships, ability to sustain and manage growth, variability of operating results, our expansion and development of new service lines, marketing and other business development initiatives, the commencement of new engagements, competition in the industry, general economic conditions, dependence on key personnel, the ability to attract, hire and retain personnel who possess the technical skills and experience necessary to meet the service requirements of our clients, the potential liability with respect to actions taken by our existing and past employees, risks associated with international sales, and other risks described in the "Risk Factor" section of our Annual Report on Form 10-K filed with the SEC on March 21, 2012 and in our subsequent filings with the SEC.

All forward-looking statements in this document are based on information currently available to us as of the date of this report, and we assume no obligation to update any forward-looking statements, except as may be required under applicable securities law. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

Company History

AirTouch Communications, Inc. ("we" or, the "Company") was incorporated as a Delaware corporation on April 2, 2007 for the purpose of developing a wholesale and distribution business that specializes in providing French and California sourced wines to the Chinese market. On February 3, 2011, we amended and restated our certificate of incorporation in order to, among other things, change our name to Waxess Holdings, Inc. and increase our authorized capital stock to 125,000,000 shares of which 100,000,000 are designated as common stock and 25,000,000 are designated as "blank check" preferred stock.

On February 4, 2011, we entered into an Agreement of Merger and Plan of Reorganization (the "Merger Agreement") with Waxess USA, Inc., a privately held California corporation ("Waxess USA"), and Waxess Acquisition Corp., our newly formed, wholly-owned Delaware subsidiary ("Acquisition Sub"). Upon closing of the transaction contemplated under the Merger Agreement (the "Merger"), Acquisition Sub merged with and into Waxess USA, and then Waxess USA, as the surviving corporation, became a wholly-owned subsidiary of the Company. On July 21, 2011, we amended our Certificate of Incorporation with the State of Delaware to change our name from "Waxess Holdings, Inc." to "AirTouch Communications, Inc."

Waxess USA began operations in 2004, and was incorporated in California in 2008. In August 2011, the State of California approved a name change from Waxess USA to AirTouch, Inc. The Company designs innovative and state-of-the-art wireless routers, stationary signal-enhanced cell phones, and 'Triple Play' (Voice/Data/Video over IP) portals.

(26)

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Company History (continued)

The Company offers its HomeConneX ® X1500 to non-US wireless carries and its SmartLinX TM products through various distributors in the US and Mexico. As a result of the Merger, AirTouch, Inc. became a wholly-owned subsidiary of the Company and the Company succeeded to the business of AirTouch, Inc. as its sole line of business.

Company Overview

We are a technology firm, located in Newport Beach, CA, that was incorporated in 2008 and designs innovative and state-of-the-art wireless routers, stationary signal-enhanced cell phones, and 'Triple Play' (Voice/Data/Video over IP) portals. The Company offers its HomeConneX ® X1500 to non-US wireless carries and its SmartLinX TM products through various distributors in the US and Mexico.

Comparison of Three Months Ended September 30, 2012 to September 30, 2011

Net revenue for the three months ended September 30, 2012 was $1,031,747 compared to no net revenues for the three months ended September 30, 2011. The increase of $1,031,747 or 100.0% reflects sales of the new SmartLinXTM product introduced in June 2012.

Cost of sales for the three months ended September 30, 2012 was $1,362,077, compared to no cost of sales for the three months ended September 30, 2011. The increase was primarily due to the increase in sales. The negative gross margin during the three months ended September 30, 2012 of 32.0% is primarily the result of noncash inventory write downs totaling $741,502. In October 2012, after internal discussions, meetings with customers and market analysis, management concluded that the inventory of the HomeConneX® X1500C and DM1000C should be written down to management's estimate of net realizable value. Management estimates at this time that there will be no future cash expenditure related to this impairment charge. The noncash inventory write down includes $437,502 of our first generation (DM1000C) product and $304,000 of our second generation HomeConneX® (X1500C) product. The decision to write down the HomeConneXTM product is the result of a strategic decision to exit the US market for this product and focus on emerging markets, especially Latin America. The gross margin for the three months ended September 30, 2012 before the inventory write down was 40%.

Selling, general, and administrative costs for the three months ended September 30, 2012 were $1,158,186, compared to $1,604,519 for the three months ended September 30, 2011. The decrease of $446,333 or 28% was primarily due to a decrease of $262,372 in fees associated with capital raising efforts in 2011; a decrease of $180,105 in costs related to AirTouch Japan as a result of downsizing the operation; and a reduction of $62,609 in travel and related costs attributable to capital raising and initial business development efforts; a decrease in noncash stock option and warrant expense of $55,109 as no stock options or warrants were issued during the quarter; offset by an increase in personnel costs of $107,365 resulting from an increase in staff from 2011.

Research and development costs for the three months ended September 30, 2012 were $279,283, compared to $639,050 for the three months ended September 30, 2011. The decrease of $359,767 or 56.3% was primarily due to the completion and commercialization of both the HomeConneX® and SmartLinXTM products.

Other expenses, net for the three months ended September 30, 2012 were net expenses of $83,624, compared to net revenue of $16,366 for the three months ended September 30, 2011. The increase in net expense of $99,990 or 611 % was primarily attributable to an increase in interest expense of $54,318 associated with new debt incurred during 2012 and a decrease in gain of $30,333 from the change in derivative liability associated with warrants issued in 2011 in connection with convertible debt.

Comparison of Nine Months Ended September 30, 2012 to September 30, 2011

Net revenue for the nine months ended September 30, 2012 was $1,805,414 compared to net revenue of $477,217 for the nine months ended September 30, 2011. The increase of $1,328,197 or 278.3% is primarily attributable to sales of the new SmartLinXTM product introduced in June 2012.

Cost of sales for the nine months ended September 30, 2012 was $2,014,714, compared to $354,399 for the nine months ended September 30, 2011. The increase was primarily due to the increase in sales. The reduction in gross margin during the nine months ended September 30, 2012 of a negative 11.6% compared to 25.7% for the nine months ended September 30, 2011 is primarily the result of noncash inventory write downs totaling $741,502. The noncash inventory write down includes $437,502 of our first generation (DM1000C) product and $304,000 of our second generation HomeConneX® (X1500C) product. The decision to write down the HomeConneX® product is the result of a strategic decision to exit the US market for this product and focus on emerging markets, especially Latin America. The gross margin for the nine months ended September 30, 2012 before the inventory write down was 29.5%.

(27)

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Comparison of Nine Months Ended September 30, 2012 to September 30, 2011
(continued)

Selling, general, and administrative costs for the nine months ended September 30, 2012 were $4,843,851, compared to $3,151,855 for the nine months ended September 30, 2011. The increase of $1,691,996 or 53.7% was primarily due to higher personnel costs of $687,046 resulting from an increase in headcount; a noncash charge of $1,245,636 from the issuance of stock for professional services; offset by a reduction of $393,199 in costs and fees related to capital raising efforts.

Research and development costs for the nine months ended September 30, 2012 of $1,650,772, approximated the cost for the nine months ended September 30, 2011 of $1,679,259.

Other expenses, net for the nine months ended September 30, 2012 were $225,892, compared to $1,859,097 for the nine months ended September 30, 2011. The decrease of $1,633,205 or 87.8% was primarily attributable to $1,176,222 in noncash adjustments to the fair value of stock options and warrants issued during the nine months ended September 30, 2011 compared to none during the nine months ended September 30, 2012 and a decrease in interest expense of $557,365 resulting from the conversion of debt to equity during 2011.

Liquidity and Capital Resources

At September 30, 2012, we had cash and cash equivalents of $305,340 and working capital of $662,088. Since September 30, 2012, our cash position improved as a result of a $2,000,000 loan received by us in October 2012, offset against continuing losses from operations. At our current level of operations,we are experiencing negative cash flow from operations, which over the last nine months have averaged $771,110 per month. As of the date of this report, and assuming we are able to liquidate our inventory, we believe we have working capital on hand sufficient to fund our current level of operations through January 2013.

We believe that we require approximately $4,200,000 of additional working capital in order to fund our current level of operations over the next 12 months. While our priority is on generating cash from operations through the sale of our products, we are also seeking to raise additional working capital through various financing sources, including the sale of our equity and debt securities and, subject to our commencement of significant revenue producing operations, the procurement of commercial debt financing. However, there can be no guarantees that such funds will be available on commercially reasonable terms, if at all. If such financing is not available on satisfactory terms, we will be unable to continue our business as desired and operating results will be adversely affected. In addition, any financing arrangement may have potentially adverse effects on us or our stockholders. Debt financing (if available and undertaken) will increase expenses, must be repaid regardless of operating results and may involve restrictions limiting our operating flexibility. If we issue equity securities to raise additional funds, the percentage ownership of our existing stockholders will be reduced and the new equity securities may have rights, preferences or privileges senior to those of the holders of our common stock.

For the nine months ended September 30, 2012, net cash used from operations was $5,649,608. The use was primarily due to net operating losses of $6,950,050.

In October 2012, we borrowed $2,000,000 under a note purchase agreement. The note bears interest at a rate of 15% per annum and is due and payable in August 2013.

Off-balance Sheet Arrangements

We have no off-balance sheet arrangements.

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CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

Those material accounting policies that we believe are the most critical to an investor's understanding of our financial results and conditions are discussed in Notes 2 and 3 of the unaudited condensed consolidated financial statements.

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