Business context and reporting period
Novatel Wireless, Inc. filed this Form 10-K for the fiscal year ended December 31, 2015; the filing also reports fourth-quarter results. The company sold mobile hotspots and wireless modems and provided M2M, fleet-telematics and SaaS solutions. The 2015 results include Feeney Wireless from March 27 and Ctrack from October 5, so the year-over-year comparison includes acquired businesses for only part of 2015.
Key financial metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $220.9 million | $185.2 million |
| Gross profit; gross margin | $59.0 million; 26.7% | $37.0 million; 20.0% |
| Operating loss | $(37.8) million | $(35.6) million |
| Net loss attributable to common shareholders | $(52.3) million; $(0.99) per share | $(39.7) million; $(1.05) per share |
| Cash used in operating activities | $(26.9) million | $(16.3) million |
| Cash and cash equivalents at year-end | $12.6 million | $17.9 million |
| Working capital at year-end | $46.8 million | $29.4 million |
| Total assets; total liabilities | $198.8 million; $168.3 million | $95.0 million; $64.5 million |
In Q4 2015, revenue was $61.5 million versus $55.4 million in Q4 2014; gross profit was $16.5 million versus $12.5 million; and net loss attributable to common shareholders was $14.4 million versus $4.4 million. Q4 loss per share was $0.26 versus $0.10.
At year-end, the company had $120.0 million principal amount of 5.50% convertible senior notes due 2020, recorded at a net carrying value of $82.5 million. DigiCore bank facilities totaled $3.3 million; a mortgage bond had $0.7 million outstanding. The $48.0 million secured revolving facility had no balance outstanding, with approximately $17.4 million available based on eligible receivables.
Material changes versus prior periods
- Revenue increased 19.3% year over year, principally due to M2M revenue growth of 87.6%, including $36.8 million contributed by Ctrack and Feeney Wireless after acquisition. Mobile Computing revenue was nearly flat, up 0.6%.
- Gross margin improved to 26.7% from 20.0%, which management attributed to product mix, a greater M2M revenue contribution and no substantial inventory-obsolescence provision comparable to 2014.
- Net loss widened despite higher revenue, chiefly reflecting an $8.3 million non-cash acquisition-escrow loss and higher interest expense associated with the convertible notes. Operating loss also increased modestly.
- Cash used in operations rose to $26.9 million from $16.3 million. Investing cash outflow was $97.1 million, largely from the acquisitions; financing provided $119.2 million, principally from the notes and warrant exercise.
Outlook, commentary, risks and unusual items
- Management said cash, revolving-facility availability and anticipated operating cash flows were expected to fund working-capital needs for the next 12 months. It also said profitability depends on generating revenue sufficient to support the cost structure; no quantified revenue or earnings guidance was provided.
- The company expected to introduce additional broadband-access products, M2M solutions and software applications, and expected continued investment in research and development.
- On February 18, 2016, the company agreed to sell certain telematics hardware assets to Micronet for $24 million: $12 million cash at closing and a $12 million note payable in two annual installments. The proposed closing was subject to conditions, including a manufacturing and supply agreement; completion was not assured.
- Other notable items included $3.8 million of restructuring charges and $6.1 million of Feeney Wireless contingent earn-out compensation expense. The company reported a cumulative three-year loss position and a $95.0 million deferred-tax valuation allowance.
- Key risks include dependence on Verizon Wireless, which represented 53.6% of 2015 revenue; continuing operating losses and cash use; integration of recent acquisitions; note servicing and potential dilution; foreign-exchange exposure, particularly the South African rand; competition, supply-chain reliance and litigation. The 2015 financial-statement audit opinion was unqualified. Management and the auditor concluded internal control over financial reporting was effective, but their assessments excluded the acquired Ctrack and Feeney Wireless controls.
Important facts for investors to verify
- Whether Micronet completed the asset purchase on the planned terms and whether anticipated cost savings were achieved.
- Whether operating cash use and losses improved, and whether liquidity remained adequate after acquisition and debt-related payments.
- The performance and integration of Ctrack and Feeney Wireless, including their contribution to revenue, margins and cash flow.
- Verizon Wireless concentration, the status of customer demand and the sustainability of the improved gross margin.
- The outstanding convertible-note obligations, conversion and dilution exposure, and availability under the borrowing-base revolver.
- Whether acquired-company controls were integrated and whether any material changes to acquisition valuations, contingencies or goodwill were recorded.