Inseego Corp. (Registrant: Novatel Wireless, Inc.) — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless otherwise noted. The filing identifies the registrant as Novatel Wireless, Inc., not Inseego Corp.; verify the issuer identity associated with this request.
Business context and financial performance
Novatel Wireless sold mobile hotspots, modems, embedded wireless modules, and machine-to-machine (M2M) products and solutions. Its two reportable segments were Mobile Computing Products and M2M Products and Solutions.
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $85.9 million | $100.2 million |
| Gross profit / gross margin | $16.8 million / 19.6% | $21.0 million / 21.0% |
| Operating loss | $9.2 million | $37.8 million |
| Net loss | $9.1 million | $37.9 million |
| Basic and diluted loss per share | $0.27 | $1.17 |
| Cash from (used in) operations | $1.9 million | ($18.2 million) |
Revenue declined 14.2%. Mobile Computing revenue fell 16.8% to $75.6 million, primarily from lower mobile broadband device sales amid increased competition at two major customers. M2M revenue rose to $10.3 million from $9.3 million, attributed mainly to HS3001 sales. By product category, mobile broadband devices generated $70.2 million, embedded solutions $9.4 million, and asset management solutions and services $6.4 million.
Cost of revenue was 80.4% of revenue versus 79.0%; higher warranty costs contributed to the deterioration. R&D expense was $13.8 million, sales and marketing $5.8 million, and general and administrative expense $6.3 million. The operating and net losses improved substantially year over year chiefly because Q1 2012 included $29.3 million of goodwill and intangible impairment charges; Q1 2013 recorded none. The filing reports no clear standalone EBITDA or free-cash-flow measure.
Liquidity, balance sheet, and cash flow
- At March 31, 2013, cash and cash equivalents were $18.3 million; marketable securities were $25.8 million current and $9.9 million long-term. The company reported $54.0 million of cash, cash equivalents, and marketable securities in total, excluding restricted amounts.
- Working capital was $51.3 million, down from $67.2 million at December 31, 2012. Total assets were $155.7 million and stockholders’ equity was $77.0 million.
- Current liabilities were $76.3 million, including $43.2 million accounts payable and $28.2 million accrued expenses. The company had $4.8 million outstanding under a short-term margin facility, versus none at year-end.
- The margin facility is payable on demand and secured by cash and securities; the bank may liquidate collateral. Restricted cash of $0.7 million and restricted securities of $4.2 million were associated with the borrowing. The borrowing limit was $5.9 million.
- Operating cash flow was positive $1.9 million, helped substantially by an $8.8 million inventory reduction. Investing used $3.4 million, including $2.9 million of property and equipment purchases. Financing provided $3.9 million, principally from margin-facility borrowing. Cash increased $2.2 million to $18.3 million.
Material changes, outlook, and risks
- Management expected to introduce additional 4G broadband, M2M, software, and platform products over the next 12 months. No quantified revenue or earnings guidance was provided.
- Management stated that cash, cash equivalents, marketable securities, and anticipated operating cash flows should cover working-capital needs for the next 12 months. It planned approximately $5.0 million of discretionary capital expenditures during that period.
- Management cited continuing competitive pressure on selling prices and expected gross margins to fluctuate with revenue, mix, pricing, product costs, and volumes. It expected continued R&D investment and selected sales and marketing spending.
- One customer represented 60% of Q1 2013 revenue, a significant concentration risk. The company also relied on third-party manufacturers and some sole-source components; delays, quality issues, or demand-forecasting errors could disrupt shipments.
- Management identified a three-year cumulative loss position and recorded a $4.4 million increase in the deferred-tax valuation allowance; the reported Q1 tax benefit was $83,000. The valuation allowance was $68.3 million against net deferred tax assets of $68.9 million.
- A securities class action remained pending, with trial set for January 6, 2014. The company had not recorded a significant accrual because it considered a loss possible but not probable, and said the possible loss range could not be estimated. Patent litigation and related indemnification obligations were also disclosed; management did not expect existing patent matters to materially affect results or financial condition.
- The company said it might need additional financing for product development, competitive responses, or acquisitions; availability and terms were uncertain. It reported no material change in risk factors from its 2012 Form 10-K and no material change in market-risk profile.
Key facts for investors to verify
- Whether the filing is correctly attributed to Inseego Corp.; the 10-Q itself names Novatel Wireless, Inc.
- The sustainability of revenue and margin trends, particularly mobile broadband demand, pricing pressure, and the recent M2M growth.
- Customer concentration and the company’s ability to retain or diversify its largest customer.
- Available liquidity after considering restricted collateral, the on-demand secured margin borrowing, and planned capital expenditures.
- Cash-flow quality, including the extent to which positive operating cash flow depended on inventory reduction.
- Developments and potential costs in the securities class action, patent disputes, and tax examinations.