Business context and reporting period
Novatel Wireless, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2015. The company sells mobile broadband and machine-to-machine (M2M) wireless products and services. It consolidated its Mobile Computing and M2M divisions into one reportable segment. The filing identifies the registrant as Novatel Wireless, Inc.; it does not identify Inseego Corp. as the filer.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Revenue | $53.5 million | $48.3 million |
| Gross profit and margin | $12.6 million; 23.6% | $10.1 million; 20.9% |
| Operating loss | $7.7 million | $8.9 million |
| Net loss | $7.8 million; $0.17 per share | $9.0 million; $0.26 per share |
| Operating cash flow | $(7.1) million | $5.4 million |
| Cash and cash equivalents | $9.4 million | $17.9 million at Dec. 31, 2014 |
| Working capital | $26.4 million | $29.4 million at Dec. 31, 2014 |
| Revolver borrowings | $7.2 million | $5.2 million at Dec. 31, 2014 |
Revenue rose 10.8% year over year. Mobile Computing revenue increased 23.1% to $44.6 million, while M2M revenue decreased 26.1% to $8.9 million. Cost of revenue was 76.4% of sales versus 79.1%, reflecting improved product mix and costing. Research and development expense was $10.8 million; sales and marketing was $4.2 million; general and administrative was $5.4 million. The quarter included $5.5 million of retention bonus expense, as well as acquisition-related costs.
Cash declined $8.5 million during the quarter. Investing cash outflow was $9.4 million, principally related to the Feeney Wireless (FW) acquisition; financing cash inflow was $8.1 million, including $8.6 million from warrant exercise and $2.0 million of revolver borrowings. The five-year, $25 million secured revolver had approximately $14.3 million of additional borrowing availability based on eligible receivables; the company was compliant with its financial covenants at quarter-end. The company said available cash, revolver capacity, and anticipated operating cash flows were expected to meet working capital needs for the next 12 months.
Material changes, outlook, and risks
On March 27, 2015, Novatel acquired FW for preliminary consideration of approximately $24.8 million: about $9.3 million cash, $0.5 million of assumed transaction expenses, and $15 million in shares to be issued after the 2015 Form 10-K filing. An additional earn-out of up to $25 million may be payable based on FW performance through 2017; approximately $0.1 million was accrued as earned at quarter-end. FW contributed $0.3 million of revenue and a $0.4 million net loss after acquisition during the quarter. Purchase-price allocation remained preliminary. The acquisition expanded M2M offerings and added more than 3,000 customers.
Management expected Mobile Computing revenue to increase and M2M revenue to grow sequentially and year over year during the remainder of 2015. It also expected gross margin to improve and planned additional R&D investment and selected sales, marketing, and administrative spending. These are expectations, not guarantees; the filing provides no numeric full-year revenue or earnings guidance.
Key risks include customer concentration (the largest customer represented 47.5% of quarterly revenue, versus 39.0% a year earlier), dependence on third-party and sole-source suppliers and manufacturers, competitive and product-development risks, and the company’s ability to reach profitability. The company reported a three-year cumulative loss position and a $94.3 million valuation allowance against deferred tax assets; it was completing an analysis of potential limits on tax-loss carryforwards under Sections 382 and 383. Patent litigation and customer intellectual-property indemnification obligations were disclosed, although management did not believe existing matters would materially affect results or financial condition. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the intended issuer: this filing is for Novatel Wireless, Inc., rather than an entity named Inseego Corp.
- Assess whether operating cash use, declining cash and working capital, and ongoing losses are consistent with the stated 12-month liquidity outlook.
- Track customer concentration and the sustainability of mobile broadband growth alongside the M2M revenue decline.
- Monitor FW integration, the final purchase-price allocation, the $15 million stock issuance, and any earn-out expense or payment.
- Review the retention bonus accrual and tax-loss carryforward analysis for potential future cash or tax effects.