Novatel Wireless, Inc. — Q1 2016 Form 10-Q
Entity and period: The supplied filing identifies the registrant as Novatel Wireless, Inc. (the metadata names INSEEGO CORP.). This unaudited report covers the three months ended March 31, 2016, compared with Q1 2015, and presents one reportable segment.
Business context and financial performance
The company sells wireless hardware and IoT products, alongside SaaS, software and services that include fleet and vehicle telematics. Its reported results reflect the acquisitions of Feeney Wireless (FW) in March 2015 and DigiCore/Ctrack in October 2015; the company attributed much of the increase in SaaS and services revenue to those acquisitions.
- Revenue: $66.9 million, up 25.1% from $53.5 million. Hardware revenue was $54.2 million, up 2.2%; SaaS, software and services revenue was $12.8 million versus $0.5 million. Management said legacy Novatel hardware declined, partly offset by acquired businesses.
- Profitability: Gross profit was $21.2 million versus $12.6 million; gross margin increased to 31.6% from 23.6%. Operating loss narrowed to $6.3 million from $7.7 million. Net loss attributable to Novatel was $11.9 million, or $0.22 per share, versus $7.8 million, or $0.17 per share.
- Costs and unusual items: Research and development declined to $8.0 million from $10.8 million, while sales and marketing rose to $7.8 million from $4.2 million and general and administrative expense rose to $10.2 million from $5.4 million, mainly reflecting acquisitions. Restructuring charges were $0.6 million. Interest expense increased to $3.9 million, primarily due to the convertible notes, including debt discount and issuance-cost amortization. Other expense of $1.3 million mainly reflected foreign-currency effects.
- Cash flow: Operating cash use was $6.3 million versus $7.1 million; investing cash use was $1.0 million versus $9.4 million; financing provided $2.9 million versus $8.1 million. Cash decreased by $4.3 million during the quarter to $8.3 million.
- Liquidity and debt: Working capital was $38.0 million at quarter-end. The revolver had $3.4 million outstanding and approximately $12.1 million of additional borrowing availability, subject to its borrowing base. The company reported $120.0 million principal of 5.50% convertible notes due June 2020, carried net at $84.6 million. DigiCore bank facilities were $3.3 million. Management said available cash, revolver availability and anticipated operating cash flows were expected to cover working-capital needs for the next 12 months.
- Balance sheet: Total assets were $188.9 million and total liabilities were $166.9 million at March 31, 2016. Inventory was $48.3 million, down from $55.8 million at year-end 2015.
Material changes and developments
- Revenue mix and geographic reach shifted following acquisitions: U.S. and Canada accounted for 76.8% of revenue versus 96.1% a year earlier; Europe, Middle East, Africa and other regions accounted for 21.5% versus 0.7%.
- The largest customer represented 52.7% of Q1 2016 revenue, compared with 47.5% in Q1 2015, highlighting customer concentration.
- Under an amended FW acquisition agreement, $15.0 million previously payable in shares became cash installments over four years. A $6.1 million 2015 earn-out was also payable over four years; potential 2016–2017 earn-out payments were replaced with approximately 2.9 million shares in installments, contingent on retention of key personnel.
- After quarter-end, the company signed an agreement to sell certain hardware modules and related assets to Telit for an initial $11.0 million cash price, subject to adjustment, with potential additional inventory consideration of approximately $3.8 million. The filing reports that $9.0 million was received at closing and that a portion was used to repay the revolver.
- The company continued workforce and facility restructuring. It recorded $0.6 million of Q1 charges and reported a $1.6 million restructuring liability at quarter-end.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management expected cash and borrowing availability, together with anticipated operating cash flows, to meet working-capital needs for 12 months, but cautioned that liquidity could weaken if operations are interrupted, commitments are not met or revenues fall short.
- Management said failure to meet its operating plan could require reduced R&D, further restructuring or other expense reductions, potentially affecting business objectives. Additional financing might be needed; availability and terms were not assured and equity financing could dilute shareholders.
- Key disclosed risks include reliance on a small number of customers, competition and product execution, acquisition integration and divestiture execution, foreign-currency exposure, and dependence on contract manufacturers and sole-source suppliers. The company specifically noted increased reliance on Telit for modules used in some telematics devices.
- The company was involved in U.S. patent-infringement matters and related customer indemnification matters; management did not expect existing matters to have a material adverse effect. The maximum exposure under certain IP indemnities could not be estimated.
- The company recorded a $2.8 million increase in its deferred-tax valuation allowance during the quarter and was completing an analysis of potential limits on use of tax-loss and credit carryforwards under IRC Sections 382 and 383.
- Management concluded disclosure controls were effective as of March 31, 2016; it reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the correct issuer and security: this filing is for Novatel Wireless, Inc., despite the request metadata naming INSEEGO CORP.
- Assess how much of the revenue and gross-margin improvement is sustainable and attributable to acquired businesses versus legacy operations.
- Review cash burn, receivables-based revolver availability, repayment of the revolver after the Telit transaction, and the timing of FW installment and earn-out payments.
- Verify the completed Telit transaction’s final proceeds, adjustments, inventory payment and any earn-out, as well as the impact of divesting modules while relying on Telit for supply.
- Evaluate customer concentration, supplier and manufacturing dependencies, acquisition integration, foreign-currency exposure, and potential patent-litigation or indemnification costs.