INSEEGO CORP. (Registrant named in filing: Novatel Wireless, Inc.) — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Financial statements are unaudited. The company reported one operating segment and described its business as IoT hardware and cloud-based software-as-a-service (SaaS), including telematics and fleet-management solutions.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net revenue | $62.8 million | $51.7 million | $129.8 million | $105.2 million |
| Gross profit / margin | $23.2 million / 37.0% | $15.3 million / 29.7% | $44.4 million / 34.2% | $28.0 million / 26.6% |
| Operating loss | $4.6 million | $8.2 million | $11.0 million | $16.0 million |
| Net loss attributable to Novatel | $2.7 million | $9.2 million | $14.6 million | $17.0 million |
| Basic and diluted loss per share | $0.05 | $0.17 | $0.27 | $0.34 |
| Operating cash flow | Not separately stated for Q2 | $(0.8) million | $(19.2) million |
- Q2 hardware revenue was $49.1 million, essentially flat year over year; SaaS, software and services revenue rose to $13.7 million from $2.4 million. For the first half, those categories were $103.3 million and $26.4 million, respectively. Management attributed the SaaS increase principally to the Ctrack and Feeney Wireless acquisitions.
- Cash and cash equivalents were $18.5 million at June 30, up from $12.6 million at year-end. Working capital was $35.4 million. Six-month investing cash flow was positive $6.9 million, chiefly reflecting Telit divestiture proceeds.
- Convertible notes had $120.0 million principal and an $86.7 million net carrying amount; they bear 5.50% stated interest, mature in June 2020, and have a $5.00 initial conversion price. The reported effective interest rate was 17.36%. No borrowings were outstanding under the revolving facility; borrowing availability was approximately $7.8 million, subject to the borrowing base. DigiCore bank facilities were $3.5 million.
Material changes and unusual items
- Revenue increased 21.6% in Q2 and 23.4% for the first half, but comparisons reflect acquisitions; they should not be read as organic growth. Gross margin improved, which management attributed mainly to a greater contribution from higher-margin SaaS, software and services.
- Operating losses narrowed, while interest expense increased materially because of the convertible notes and related discount and issuance-cost amortization.
- The April 2016 sale of certain hardware modules and related assets to Telit generated approximately $9.3 million cash received in Q2 and a $6.9 million gain recognized in other income. Additional consideration and transition-service obligations remained conditional or outstanding; the company recorded a $5.4 million receivable and a $3.7 million liability at quarter-end.
- First-half net loss included a $6.9 million divestiture gain, $0.9 million restructuring charges, and acquisition-related inventory step-up amortization. The filing also reported $2.1 million of unrealized foreign-currency transaction losses for the first half.
- Accrued expenses and other current liabilities rose to $35.4 million from $25.6 million at year-end, including acquisition-related and divestiture-related liabilities. Inventory fell to $34.3 million from $55.8 million.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management said cash, revolver availability and anticipated operating cash flows were expected to meet working-capital needs for the next 12 months. It cautioned that profitability depends on reaching revenue levels sufficient to support the cost structure; shortfalls could prompt cuts to R&D or other expenses and further restructuring.
- In July 2016, after quarter-end, the company began additional restructuring to focus on more profitable business lines and de-prioritize certain hardware-only products sold to non-carrier customers. Together with the Ctrack manufacturing-site closure, these initiatives were expected to cost approximately $0.7 million and be completed in September 2016.
- Customer concentration was significant: the largest customer represented 56.1% of Q2 revenue and 54.3% of first-half revenue. The filing identifies dependence on a small customer base, competition, product execution, acquisition integration, foreign currency exposure and reliance on third-party manufacturers and sole-source suppliers as risks. Telit became a supplier of modules important to some telematics devices.
- The company disclosed U.S. patent-infringement matters and related customer indemnification obligations; management did not expect existing matters to have a material adverse effect, but indemnification exposure could not be estimated. The company was completing an analysis of possible ownership-change limits on tax-loss and credit carryforwards.
- A new San Diego headquarters lease begins December 15, 2016, for approximately 36 months, at about $0.1 million monthly rent. Management reported disclosure controls were effective at June 30, 2016.
Important facts for investors to verify
- Confirm the filing entity and its relationship to the requested company name: the 10-Q identifies the registrant as Novatel Wireless, Inc.
- Assess how much reported growth and margin improvement came from acquisitions versus continuing operations, and whether SaaS growth and profitability can persist.
- Review customer concentration, supply continuity and terms following the Telit asset sale, including remaining contingent consideration and transition obligations.
- Evaluate cash burn, the availability-based revolver, the $120 million convertible-note principal and scheduled Feeney Wireless payments against the company’s 12-month liquidity outlook.
- Track restructuring execution, acquisition-related liabilities, tax-carryforward limitations and the outcome of litigation and indemnification matters.