Business context and reporting period
The filing is a Form 10-Q for Novatel Wireless, Inc. (the registrant named in the filing; the request metadata says Inseego Corp.) for the quarter and six months ended June 30, 2014. Novatel sold mobile broadband devices and M2M products and solutions. Figures below are in millions of dollars unless noted.
Financial results and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $37.3 | $91.1 | $85.6 | $177.0 |
| Gross profit / margin | $4.0 / 10.7% | $19.0 / 20.9% | $14.1 / 16.4% | $35.9 / 20.3% |
| Operating loss | $(17.4) | $(7.7) | $(26.3) | $(16.9) |
| Net loss | $(17.4) | $(7.9) | $(26.4) | $(17.0) |
| Net loss per share | $(0.51) | $(0.23) | $(0.77) | $(0.50) |
- Operating cash flow was $1.0 million for the first six months, down from $6.5 million a year earlier. Investing provided $7.9 million, mainly from net marketable-security sales; financing used $2.9 million. Cash and equivalents ended June at $8.9 million.
- Cash, cash equivalents and marketable securities totaled $22.4 million at June 30, versus $23.0 million at December 31, 2013. Working capital was $23.0 million, down from $40.9 million. Current liabilities exceeded current assets by $31.3 million; the filing reports working capital based on current assets and liabilities as $23.0 million, which does not reconcile to the balance-sheet totals shown in the supplied text.
- No margin-facility borrowings were outstanding at June 30; unused capacity was $1.9 million. The company issued a $5.0 million secured litigation note in July, bearing 5% interest and payable quarterly. Total liabilities were $66.1 million and stockholders’ equity $20.8 million at June 30.
- Reported operating expenses were $21.4 million in Q2, including $5.3 million of restructuring charges; six-month expenses were $40.4 million, including $6.4 million of restructuring charges.
Material changes versus prior comparable periods
- Q2 revenue fell 59% year over year; first-half revenue fell 52%. Mobile Computing revenue declined 66% in Q2 and 59% for the half, principally from legacy products nearing end of life and pricing pressure at a major customer. First-half M2M revenue increased 6%, though Q2 M2M revenue declined 5%.
- Gross margin declined to 10.7% in Q2 and 16.4% for the half, from 20.9% and 20.3%, respectively. The company cited inventory obsolescence provisions and lower average selling prices. First-half inventory write-downs were $3.0 million.
- Net losses widened. Lower R&D, sales and marketing, and general and administrative costs were more than offset by reduced revenue, weaker gross margin and restructuring costs. Headcount was 235 at June 30, versus 403 a year earlier.
- Cash from operations fell year over year; cash increased during the half primarily due to investment-security maturities and sales, not operating performance.
Outlook, commentary, risks and unusual items
- Management expected to launch a new MiFi product in the second half of 2014, with potential to lift mobile-computing revenue from first-half levels. It nevertheless expected second-half mobile-computing revenue below the prior-year period and planned to exit the laptop business as current products reached end of life.
- Management expected M2M revenue to increase in the second half of 2014 versus the second half of 2013, citing new products and customer design wins; it noted that much of the impact from new customer opportunities might not arrive until the first half of 2015. These are expectations, not guaranteed results.
- Management said resources and costs were being reduced and focused R&D investment would continue. It expected second-half gross-margin improvement from the new MiFi launch and more normalized inventory provisions, while warning that pricing, product mix and demand could affect margins.
- The company stated existing liquidity and anticipated operating cash flows were expected to cover working-capital needs for 12 months, but warned of risks from delayed launches, revenue shortfalls, litigation judgments, business interruptions and supplier credit restrictions. It was seeking a revolving credit facility but gave no assurance it would obtain one on acceptable terms.
- A securities class-action settlement provides for $6.0 million cash, $5.0 million in shares and a $5.0 million secured note. The cash and share components and note were accrued at June 30; cash was paid and shares and note issued in July. Plaintiffs later asserted an additional $725,000 was due; the company disputed the claim and had not accrued it.
- In June the company terminated its former CEO and recorded $3.7 million in related restructuring charges, including $2.4 million estimated cash payments and $1.3 million accelerated share-based compensation. It expected approximately $0.8 million of additional restructuring charges in Q3 following a San Diego facility vacate.
- Other risks include customer concentration (two customers represented 37% and 12% of Q2 revenue), reliance on outsourced manufacturing and some sole-source components, competitive pricing, product development and execution, and patent litigation. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether the MiFi launch occurred on schedule and delivered the forecast revenue and gross-margin improvement.
- Whether M2M design wins converted into shipments and revenue, and when the anticipated growth materialized.
- Cash burn, working-capital movements, availability of new borrowing capacity, and ability to meet obligations following the $5.0 million settlement note.
- Resolution and potential financial impact of the disputed $725,000 settlement claim and any other litigation or indemnification matters.
- Further inventory write-downs, restructuring costs, and the pace and effect of planned product-line exits and cost reductions.