Business context and reporting period
Novatel Wireless, Inc. (the registrant named in the filing) reported unaudited results for the quarter and nine months ended September 30, 2014. It sells mobile broadband devices and machine-to-machine (M2M) products and solutions. The supplied metadata names Inseego Corp.; verify the entity and filing attribution, as the filing identifies Novatel Wireless, Inc.
Financial performance and position
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $44.3 | $92.7 | $129.9 | $269.7 |
| Gross profit / margin | $10.5 / 23.7% | $20.4 / 22.0% | $24.5 / 18.9% | $56.3 / 20.9% |
| Operating loss | $(3.9) | $(4.9) | $(30.2) | $(21.8) |
| Net loss | $(8.8) | $(5.1) | $(35.2) | $(22.1) |
| Basic and diluted loss per share | $(0.23) | $(0.15) | $(0.99) | $(0.65) |
- Q3 revenue fell 52%; Mobile Computing revenue declined 59% to $34.8 million, while M2M revenue rose 11% to $9.5 million. For the nine-month period, revenue fell 52%, with Mobile Computing down 59% and M2M up 8%.
- Q3 gross margin improved 1.7 percentage points year over year, but nine-month margin fell 2.0 points. Management attributed the quarterly improvement to product mix, lower inventory obsolescence as a share of revenue, and lower labor costs.
- Operating expenses were $14.4 million in Q3, down 43% year over year. Nine-month restructuring charges were $7.5 million, versus $2.4 million a year earlier.
- Q3 net loss included a $4.8 million non-cash warrant fair-value expense. Excluding that item, the reported net loss was still higher than in Q3 2013; the filing does not provide an adjusted net-loss measure.
- Nine-month operating cash outflow was $9.5 million, versus $4.2 million in 2013. Investing activities provided $15.6 million, largely from marketable securities sales; financing activities provided $11.2 million, including proceeds from the September stock and preferred-stock financing.
- At September 30, cash and cash equivalents were $20.2 million and marketable securities were $5.4 million, totaling $25.5 million. Working capital was $34.2 million, down from $40.9 million at year-end 2013. Current assets were $84.8 million and current liabilities $50.6 million.
- No margin-facility borrowing was outstanding at quarter-end. The company had a $5.0 million secured litigation-settlement note, included in non-current liabilities, with 5% interest and a 30-month maturity. Total liabilities were $66.9 million; the filing reports no other conventional long-term borrowing balance at quarter-end.
Material changes, outlook, and risks
- Management said Mobile Computing revenue increased 27% sequentially in Q3 and anticipated another sequential increase in Q4, citing the MiFi 6620L launch. It expected no significant sequential change in M2M revenue in Q4 and expected full-year 2014 M2M revenue to exceed 2013. These are qualitative expectations; the filing gives no numerical revenue or earnings guidance.
- Management linked the steep Mobile Computing decline to legacy products reaching end of life, a narrower product focus, and component shortages in the first half. It said the component shortages were not expected to recur. Restructuring and reduced headcount were intended to lower costs; headcount was 234 at September 30, versus 328 a year earlier.
- On September 8, the company received approximately $14.4 million gross from HC2 Holdings 2 through issuance of common stock, Series C preferred stock, and a warrant. The warrant covers 4.1 million shares at $2.26 and was recorded as a derivative liability of $9.7 million at quarter-end. Stockholder approval was required for specified share authorization and issuance matters. Preferred shares generally convert into common shares after approval; a 12.5% cumulative annual dividend begins after December 31, 2014 while shares remain outstanding.
- On October 31, after quarter-end, the company entered a five-year senior secured revolving facility of up to $25 million, subject to a receivables-based borrowing base, with interest at three-month LIBOR plus 2.50%–3.00%. It is secured by substantially all company and certain subsidiary assets and includes customary covenants.
- The shareholder class-action settlement was funded through $6 million cash, $5 million of common stock, and a $5 million secured note. The company disputed a plaintiffs’ claim for an additional approximately $725,000 and had not accrued it; a hearing was scheduled for November 14, 2014. The filing says the company believed other existing patent matters would not materially affect results or financial condition, but outcomes remain uncertain.
- Customer concentration is substantial: in Q3, two customers represented 54% and 12% of revenue; the largest customer accounted for 44% of nine-month revenue. Other stated risks include competition and pricing pressure, product-launch execution, reliance on contract manufacturers and some sole-source components, and uncertain demand.
- The company had a three-year cumulative loss position and a $91.8 million valuation allowance against $91.9 million of net deferred tax assets. It was updating its tax ownership-change analysis; a potential Section 382/383 limitation on tax attributes had not yet been determined.
- Management stated cash, securities, and anticipated operating cash flows were expected to meet working-capital needs for the next 12 months, while warning liquidity could be impaired by operating disruption, weak product revenue, launch delays, litigation judgments, or supplier restrictions. Planned discretionary capital expenditures for the next 12 months were approximately $2.5 million.
Important facts for investors to verify
- Confirm the issuer identity: the filing names Novatel Wireless, Inc., whereas the request metadata names Inseego Corp.
- Track customer demand and concentration, Mobile Computing recovery, M2M growth, product launches, and whether margins improve as management anticipated.
- Review cash burn, working-capital trends, borrowing availability and covenants under the new secured revolver, and the effects of any further financing or dilution.
- Monitor stockholder approval conditions, potential conversion and dividends on Series C preferred stock, and warrant valuation and share dilution.
- Check the outcome of the disputed $725,000 settlement claim, the company’s tax ownership-change analysis, and any material litigation or supplier-related developments.