XNAS:NVTL Novatel Wireless, Inc. Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             .

Commission file number: 000-31659

 

 

NOVATEL WIRELESS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   86-0824673

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

9645 Scranton Road, San Diego, CA   92121
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s Telephone Number, Including Area Code: (858) 812-3400

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of the registrant’s common stock outstanding as of August 6, 2012 was 33,075,856.

 

 

 


As used in this report on Form 10-Q, unless the context otherwise requires, the terms “we,” “us,” “our,” the “Company” and “Novatel Wireless” refer to Novatel Wireless, Inc., a Delaware corporation, and its wholly owned subsidiaries.

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You should not place undue reliance on these statements. These forward-looking statements include statements that reflect the views of our senior management with respect to our current expectations, assumptions, estimates and projections about Novatel Wireless and our industry. Statements that include the words “may,” “could,” “should,” “would,” “estimate,” “anticipate,” “believe,” “expect,” “preliminary,” “intend,” “plan,” “project,” “outlook,” “will” and similar words and phrases identify forward-looking statements. Forward-looking statements address matters that involve risks and uncertainties that could cause actual results to differ materially from those anticipated in these forward-looking statements as of the date of this report. We believe that these factors include the following:

 

   

our ability to compete in the market for wireless broadband data access products;

 

   

our ability to develop and timely introduce new products successfully;

 

   

our ability to successfully integrate the operations of Enfora, Inc., or Enfora, and any other business, products, technologies or personnel that we may acquire or retain in the future;

 

   

the continuing impact of uncertain global economic conditions on the demand for our products;

 

   

our ability to introduce and sell new products that comply with current and evolving industry standards, including 3G and 4G standards, and government regulations;

 

   

our ability to develop and maintain strategic relationships to expand into new markets;

 

   

our dependence on a small number of customers for a substantial portion of our revenues;

 

   

demand for broadband wireless access to enterprise networks and the Internet;

 

   

the marketability of our products given their dependence on wireless telecommunication operators continuing to deliver acceptable wireless services;

 

   

our ability to properly manage the development of our business to avoid significant strains on our management and operations and disruptions to our business;

 

   

our reliance on third parties to procure components and manufacture our products;

 

   

our ability to accurately forecast customer demand and order the manufacture and timely delivery of sufficient product quantities;

 

   

our reliance on sole source suppliers for some components used in our products;

 

   

the outcome of pending or future litigation, including our current class action securities litigation and intellectual property litigation;

 

   

infringement claims with respect to intellectual property contained in our products;

 

   

our continued ability to license third-party technology necessary for the development and sale of our products;

 

   

risks associated with doing business abroad, including foreign currency risks;

 

   

the risks of introducing new products that could contain errors or defects; and

 

   

our ability to hire, retain and manage additional qualified personnel to maintain and expand our business.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this and other reports we file with or furnish to the Securities and Exchange Commission, including the information in “Item 1A. Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2011. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate.

Trademarks

“Novatel Wireless”, the Novatel Wireless logo, “MiFi”, “MiFi Intelligent Mobile Hotspot”, “MiFi OS”, “MiFi Home”, “MobiLink”, “Ovation,” “Expedite”, “MiFi.Freedom. My Way”, “Conversa”, “NovaSpeed”, “NovaCore” and “NovaDrive” are trademarks of Novatel Wireless, Inc. “Enfora”, the Enfora logo, “Spider”, “Enabling Information Anywhere”, “Enabler”, “eWide” and “N4A” are trademarks of Enfora, Inc. Other trademarks, trade names or service marks used in this report are the property of their respective owners.

 

2


PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

NOVATEL WIRELESS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

 

     June 30,
2012
    December 31,
2011
 
     Unaudited        
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 15,197      $ 47,069   

Marketable securities

     36,391        28,267   

Accounts receivable, net of allowance for doubtful accounts of $297 at June 30, 2012 and $245 at December 31, 2011

     48,033        36,849   

Inventories

     39,565        42,279   

Deferred tax assets, net

     2,005        2,011   

Prepaid expenses and other

     5,835        3,712   
  

 

 

   

 

 

 

Total current assets

     147,026        160,187   

Property and equipment, net of accumulated depreciation of $63,786 at June 30, 2012 and $59,217 at December 31, 2011

     16,886        18,496   

Marketable securities

     10,820        13,495   

Intangible assets, net of accumulated amortization of $11,072 at June 30, 2012 and $10,899 at December 31, 2011

     10,896        35,702   

Goodwill

     13,225        19,772   

Deferred tax assets, net

     937        1,023   

Other assets

     631        504   
  

 

 

   

 

 

 

Total assets

   $ 200,421      $ 249,179   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 43,168      $ 54,030   

Accrued expenses

     25,375        25,044   
  

 

 

   

 

 

 

Total current liabilities

     68,543        79,074   

Other long-term liabilities

     3,866        4,080   
  

 

 

   

 

 

 

Total liabilities

     72,409        83,154   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Preferred stock, par value $0.001; 2,000 shares authorized and none outstanding

     —          —     

Common stock, par value $0.001; 50,000 shares authorized, 32,950 and 32,262 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively

     33        32   

Additional paid-in capital

     434,203        429,813   

Accumulated other comprehensive income (loss)

     9        (8

Accumulated deficit

     (281,233     (238,812
  

 

 

   

 

 

 
     153,012        191,025   

Treasury stock at cost; 2,436 common shares at June 30, 2012 and December 31, 2011, respectively

     (25,000     (25,000
  

 

 

   

 

 

 

Total stockholders’ equity

     128,012        166,025   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 200,421      $ 249,179   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

3


NOVATEL WIRELESS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

Net revenues

   $ 102,446      $ 118,021      $ 202,596      $ 179,805   

Cost of net revenues

     79,195        91,839        158,357        147,629   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     23,251        26,182        44,239        32,176   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses:

        

Research and development

     14,457        14,832        30,286        30,391   

Sales and marketing

     7,310        8,210        14,988        15,594   

General and administrative

     5,702        5,714        11,236        10,307   

Goodwill and intangible assets impairment losses

     —          —          29,337        —     

Amortization of purchased intangible assets

     227        527        664        1,055   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     27,696        29,283        86,511        57,347   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (4,445     (3,101     (42,272     (25,171

Other income (expense):

        

Interest income, net

     83        85        166        243   

Other expense, net

     (153     (607     (146     (485
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (4,515     (3,623     (42,252     (25,413

Income tax (benefit) provision

     (15     275        169        573   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (4,500   $ (3,898   $ (42,421   $ (25,986
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share data:

        

Net loss per share:

        

Basic

   $ (0.14   $ (0.12   $ (1.31   $ (0.81
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.14   $ (0.12   $ (1.31   $ (0.81
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used in computation of basic and diluted net loss per share:

        

Basic

     32,674        32,048        32,485        31,979   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     32,674        32,048        32,485        31,979   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (4,507   $ (3,794   $ (42,404   $ (25,980
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

4


NOVATEL WIRELESS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

     Six Months Ended
June 30,
 
     2012     2011  

Cash flows from operating activities:

    

Net loss

   $ (42,421   $ (25,986

Adjustments to reconcile net loss to net cash used in operating activities:

    

Loss on sale/disposal of fixed asset

     28        —     

Depreciation and amortization

     6,972        9,686   

Loss on goodwill and intangible assets impairment

     29,337        75   

Provision for bad debts

     88        123   

Net impairment loss on marketable securities

     39        154   

Inventory provision

     316        320   

Share-based compensation expense

     3,657        2,486   

Non-cash income tax expense (benefit)

     97        (401

Changes in assets and liabilities:

    

Accounts receivable

     (11,271     21,925   

Inventories

     2,398        (7,371

Prepaid expenses and other assets

     (2,250     3,010   

Accounts payable

     (10,869     (20,965

Accrued expenses, income taxes, and other

     425        (575
  

 

 

   

 

 

 

Net cash used in operating activities

     (23,454     (17,519
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property and equipment

     (3,588     (3,835

Purchases of intangible assets

     —          (100

Purchases of marketable securities

     (17,530     (10,959

Marketable securities maturities/sales

     12,059        47,674   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (9,059     32,780   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Principal payments under capital lease obligations

     (46     (55

Proceeds from stock option exercises and ESPP net of taxes paid on vested restricted stock units

     734        (622
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     688        (677

Effect of exchange rates on cash and cash equivalents

     (47     54   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (31,872     14,638   

Cash and cash equivalents, beginning of period

     47,069        17,375   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 15,197      $ 32,013   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Cash paid during the year for:

    

Interest

   $ 1      $ 3   

Income taxes

   $ 39      $ 152   

Supplemental disclosures of non-cash financing activities:

    

Marketable equity securities received in settlement of note receivable

   $ —        $ 384   

See accompanying notes to unaudited consolidated financial statements.

 

5


NOVATEL WIRELESS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The information contained herein has been prepared by Novatel Wireless, Inc. (the “Company”) in accordance with the rules of the Securities and Exchange Commission. The information at June 30, 2012 and the results of the Company’s operations for the three and six months ended June 30, 2012 and 2011 are unaudited. The condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring accruals, which are, in the opinion of management, necessary for a fair statement of the results of the interim periods presented. These condensed consolidated financial statements and notes hereto should be read in conjunction with the audited financial statements from which they were derived and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The accounting policies used in preparing these condensed consolidated financial statements are the same as those described in the Company’s Form 10-K with the exception of new accounting pronouncements adopted in 2012. The results of operations for the interim periods presented are not necessarily indicative of results to be expected for any other interim period or for the year as a whole.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues, expenses and disclosures of contingent assets and liabilities. Actual results could differ materially from these estimates. Significant estimates include allowance for doubtful accounts receivable, provision for excess and obsolete inventory, valuation of intangible and long-lived assets, valuation of goodwill, litigation, provision for warranty costs, income taxes and share-based compensation expense.

Difficult global economic conditions, tight credit markets, volatile equity, foreign currency and energy markets and declines in consumer spending have combined to increase the uncertainty inherent in these estimates and assumptions. As future events and their effects cannot be determined with precision, particularly those related to the condition of the economy, actual results could differ significantly from these estimates.

New Accounting Pronouncements

 

In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08 “Intangibles-Goodwill and Other (Topic 350) — Testing Goodwill for Impairment.” ASU 2011-08 amends the previous guidance under Topic 350 which required an entity to test goodwill for impairment, on at least an annual basis, by performing the two-step goodwill impairment test described in Topic 350. The amendments in ASU 2011-08 permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more likely than not threshold is defined as having likelihood of more than 50 percent. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company has adopted ASU 2011-08 for our financial statement results beginning January 1, 2012 and there was no material impact on the consolidated financial statements upon adoption.

 

In June 2011, the FASB issued ASU No. 2011-05 “Comprehensive Income (Topic 220) — Presentation of Comprehensive Income.” ASU 2011-05 requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company has adopted ASU 2011-05 and for the 2012 interim periods we elected to present comprehensive income (loss) along with our condensed consolidated statements of operations in a single continuous statement.

 

6


2. Balance Sheet Details

Marketable Securities

The Company’s portfolio of available-for-sale securities by contractual maturity consists of the following (in thousands):

 

June 30, 2012

   Maturity in
Years
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
 

Available-for-sale:

             

Government agency securities

     1 or less       $ 2,181       $ —         $ (1   $ 2,180   

Municipal bonds

     1 or less         11,730         2         —          11,732   

Certificates of deposit

     1 or less         5,040         1         —          5,041   

Corporate debentures / bonds

     1 or less         17,447         1         (10     17,438   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total short-term marketable securities

        36,398         4         (11     36,391   
     

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-sale:

             

Government agency securities

     1 to 2         3,733         5         —          3,738   

Muncipal bonds

     1 to 2         4,714         2         —          4,716   

Certificates of deposit

     1 to 2         2,357         9         —          2,366   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total long-term marketable securities

        10,804         16         —          10,820   
     

 

 

    

 

 

    

 

 

   

 

 

 
      $ 47,202       $ 20       $ (11   $ 47,211   
     

 

 

    

 

 

    

 

 

   

 

 

 

 

December 31, 2011

   Maturity in
Years
   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
 

Available-for-sale:

             

Government agency securities

   1 or less    $ 6,913       $ —         $ (1   $ 6,912   

Municipal bonds

   1 or less      8,390         —           (6     8,384   

Certificates of deposit

   1 or less      4,319         2         —          4,321   

Corporate debentures/bonds

   1 or less      8,615         —           (3     8,612   

Marketable equity securities

   1 or less      38         —           —          38   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total short-term marketable securities

        28,275         2         (10     28,267   
     

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-sale:

             

Government agency securities

   1 to 2      3,734         4         —          3,738   

Municipal bonds

   1 to 2      5,967         2         —          5,969   

Certificates of deposit

   1 to 2      3,797         —           (9     3,788   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total long-term marketable securities

        13,498         6         (9     13,495   
     

 

 

    

 

 

    

 

 

   

 

 

 
      $ 41,773       $ 8       $ (19   $ 41,762   
     

 

 

    

 

 

    

 

 

   

 

 

 

The Company’s available-for-sale securities are carried on the condensed consolidated balance sheet at fair market value with the related unrealized gains and losses included in accumulated other comprehensive income (loss) on the condensed consolidated balance sheet, which is a separate component of stockholders’ equity. Realized gains and losses on the sale of available-for-sale marketable securities are determined using the specific-identification method.

As of June 30, 2012, the Company recorded a net unrealized gain of $9,000. The Company’s net unrealized gain is the result of market conditions affecting its fixed-income, debt and equity securities, which are included in accumulated other comprehensive income (loss) in the condensed consolidated balance sheet for the period then ended.

 

7


Inventories

Inventories consist of the following (in thousands):

 

     June 30,
2012
     December 31,
2011
 

Finished goods

   $ 32,751       $ 35,211   

Raw materials and components

     6,814         7,068   
  

 

 

    

 

 

 
   $ 39,565       $ 42,279   
  

 

 

    

 

 

 

Accrued Expenses

Accrued expenses consist of the following (in thousands):

 

     June 30,
2012
     December 31,
2011
 

Royalties

   $ 5,716       $ 5,861   

Payroll and related expenses

     6,979         8,706   

Product warranty

     2,674         1,525   

Market development fund and price protection

     1,787         1,750   

Deferred rent

     1,253         1,135   

Professional fees

     1,416         1,213   

Other

     5,550         4,854   
  

 

 

    

 

 

 
   $ 25,375       $ 25,044   
  

 

 

    

 

 

 

Accrued Warranty Obligations

Accrued warranty obligations consist of the following (in thousands):

 

     Three Months Ended
June  30,

2012
    Three Months Ended
June  30,

2011
    Six Months Ended
June  30,

2012
    Six Months Ended
June  30,

2011
 

Warranty liability at beginning of period

   $ 1,738      $ 2,349      $ 1,525      $ 2,279   

Additions charged to operations

     1,845        334        2,730        1,197   

Deductions from liability

     (909     (974     (1,581     (1,767
  

 

 

   

 

 

   

 

 

   

 

 

 

Warranty liability at end of period

   $ 2,674      $ 1,709      $ 2,674      $ 1,709   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company accrues warranty costs based on estimates of future warranty-related replacement, repairs or rework of products. The Company generally provides one to three years of coverage for products following the date of purchase and the Company accrues the estimated cost of warranty coverage as a component of cost of net revenues in the condensed consolidated statements of operations and comprehensive income (loss) at the time revenue is recognized. In estimating our future warranty obligations, we consider various relevant factors, including the historical frequency and volume of claims, and the cost to replace or repair products under warranty.

 

8


3. Intangible Assets

The Company’s amortizable purchased intangible assets resulting from its acquisition of Enfora are composed of (in thousands):

 

     June 30, 2012      December 31, 2011  
     Gross      Accumulated
Amortization
    Impairment     Net      Gross      Accumulated
Amortization
    Net  

Developed technologies

   $ 26,000       $ (5,413   $ (15,477   $ 5,110       $ 26,000       $ (4,163   $ 21,837   

Trade name

     12,800         (1,862     (5,693     5,245         12,800         (1,387     11,413   

Other

     3,720         (1,798     (1,620     302         3,720         (1,609     2,111   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total amortizable purchased intangible assets

   $ 42,520       $ (9,073   $ (22,790   $ 10,657       $ 42,520       $ (7,159   $ 35,361   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

The following table presents details of the amortization of purchased intangible assets included in the cost of net revenues and general and administrative expense categories (in thousands):

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  

Cost of net revenues

   $ 289       $ 1,120       $ 1,250       $ 2,439   

General and administrative expenses

     227         527         664         1,055   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total amortization expense

   $ 516       $ 1,647       $ 1,914       $ 3,494   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the quarter ended March 31, 2012, the Company recorded an impairment loss of $22.8 million related to a decrease in the estimated fair values of the purchased intangible assets fair values. See Note 4.

The following table presents details of the amortization of existing purchased intangible assets that is currently estimated to be expensed in the remainder of 2012 and thereafter (in thousands):

 

Fiscal year:

   Amount  

2012 (remaining 6 months)

   $ 1,011   

2013

     1,805   

2014

     1,805   

2015

     1,741   

2016

     1,041   

2017

     1,039   

Thereafter

     2,215   
  

 

 

 

Total

   $ 10,657   
  

 

 

 

Additionally, at June 30, 2012 and December 31, 2011, the Company had $239,000 and $341,000, respectively, of acquired software licenses, net of accumulated amortization of $2.0 million and $3.7 million, respectively. The acquired software licenses represent rights to use certain software necessary for commercial sale of the Company’s products.

4. Goodwill

The changes in the carrying amount of goodwill for the six month periods ended June 30, 2012 and 2011 are as follows (in thousands):

 

     M2M Products and
Solutions
 
     2012     2011  

Balance at January 1,

   $ 19,772      $ 22,258   

Goodwill impairment during the period

     (6,547     —     
  

 

 

   

 

 

 

Balance at June 30,

   $ 13,225      $ 22,258   
  

 

 

   

 

 

 

 

9


During the first quarter of 2012, based on actual operating results, and reductions in management’s estimates of forecasted operating results of the M2M Products and Solutions reporting unit principally due to an updated view of competitive pressures impacting average selling prices, customer product and technology selections, and the loss of certain customers, the Company determined there were sufficient indicators of impairment present to require an interim impairment analysis.

Based upon fair value tests performed with the assistance of a third party independent appraisal, the Company recorded a preliminary pre-tax goodwill impairment charge of approximately $6.5 million and a preliminary purchased intangible asset charge of approximately $22.8 million during the first quarter of 2012. During the second quarter of 2012, the Company finalized its review of these impairments analyses, which resulted in no adjustments to the pre-tax impairment losses recognized in the first quarter of 2012.

5. Fair Value Measurement of Assets and Liabilities

The Company’s fair value measurements relate to its cash equivalents, marketable debt securities, and marketable equity securities, which are classified pursuant to authoritative guidance for fair value measurements. The Company places its cash equivalents and marketable debt securities in instruments that meet credit quality standards, as specified in its investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issue, issuer or type of instrument.

Our financial instruments consist principally of cash and cash equivalents, short-term and long-term marketable securities, and short-term and long-term debt securities. The Company’s cash and cash equivalents consist of its investment in money market securities and treasury bills. The Company’s marketable securities consist primarily of government agency securities, municipal bonds, time deposits and investment-grade corporate bonds. From time to time, the Company may utilize foreign exchange forward contracts. These contracts are valued using pricing models that take into account the currency rates as of the balance sheet date (Level 2 of the fair value hierarchy).

Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree to which the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:

Level 1: Pricing inputs are based on quoted market prices for identical assets or liabilities in active markets (e.g., NYSE). Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2: Pricing inputs include benchmark yields, trade data, reported trades and broker dealer quotes, two-sided markets and industry & economic events, yield to maturity, Municipal Securities Rule Making Board reported trades and vendor trading platform data. Level 2 includes those financial instruments that are valued using various pricing services and broker pricing information including Electronic Communication Networks and broker feeds.

Level 3: Pricing inputs include significant inputs that are generally less observable from objective sources, including the Company’s own assumptions.

The fair value of the majority of our cash and cash equivalents and marketable equity securities were determined based on Level 1 inputs. The fair value of our marketable debt securities was determined based on Level 2 inputs. We do not have any securities in the Level 3 category. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.

 

10


The following table summarizes the Company’s financial instruments measured at fair value on a recurring basis in accordance with the authoritative guidance for fair value measurements as of June 30, 2012 (in thousands):

 

Description

   June 30, 2012      Level 1      Level 2  

Assets:

        

Cash equivalents

        

Money market funds

   $ 5,645       $ 5,645       $ —     

US Treasury securities

     284         —           284   
  

 

 

    

 

 

    

 

 

 

Total cash equivalents

     5,929         5,645         284   
  

 

 

    

 

 

    

 

 

 

Short-term marketable securities:

        

Available-for-sale:

        

Government agency securities

     2,180         —           2,180   

Municipal bonds

     11,732         —           11,732   

Certificates of deposit

     5,041         —           5,041   

Corporate debentures / bonds

     17,438         —           17,438   
  

 

 

    

 

 

    

 

 

 

Total short-term marketable securities

     36,391         —           36,391   
  

 

 

    

 

 

    

 

 

 

Long-term marketable securities:

        

Available-for-sale:

        

Government agency securities

     3,738         —           3,738   

Municipal bonds

     4,716         —           4,716   

Certificates of deposit

     2,366         —           2,366   
  

 

 

    

 

 

    

 

 

 

Total long-term marketable securities

     10,820         —           10,820   
  

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 53,140       $ 5,645       $ 47,495   
  

 

 

    

 

 

    

 

 

 

There were no transfers between Level 1 and Level 2 securities during the six months ended June 30, 2012. All of our long-term marketable debt securities had maturities of between one and two years in duration at June 30, 2012.

 

11


The following table summarizes the Company’s financial instruments measured at fair value on a recurring basis in accordance with the authoritative guidance for fair value measurements as of December 31, 2011 (in thousands):

 

Description

   December 31,
2011
     Level 1      Level 2  

Assets:

        

Cash equivalents

        

Money market funds

   $ 25,137       $ 25,137       $ —     

US Treasury securities

     5,784         —           5,784   
  

 

 

    

 

 

    

 

 

 

Total cash equivalents

     30,921         25,137         5,784   
  

 

 

    

 

 

    

 

 

 

Short-term marketable securities:

        

Available-for-sale:

        

Government agency securities

     6,912         —           6,912   

Municipal bonds

     8,384         —           8,384   

Certificates of deposit

     4,321         —           4,321   

Corporate debentures / bonds

     8,612         —           8,612   

Marketable equity securities

     38         38         —     
  

 

 

    

 

 

    

 

 

 

Total short-term marketable securities

     28,267         38         28,229   
  

 

 

    

 

 

    

 

 

 

Long-term marketable securities:

        

Available-for-sale:

        

Government agency securities

     3,738         —           3,738   

Municipal bonds

     5,969         —           5,969   

Certificates of deposit

     3,788         —           3,788   
  

 

 

    

 

 

    

 

 

 

Total long-term marketable securities

     13,495         —           13,495   
  

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 72,683       $ 25,175       $ 47,508   
  

 

 

    

 

 

    

 

 

 

6. Share-Based Compensation

The Company included the following amounts for share-based compensation awards in the accompanying unaudited condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2012 and 2011 (in thousands):

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  

Cost of net revenues

   $ 182       $ 108       $ 376       $ 234   

Research and development

     693         383         1,388         808   

Sales and marketing

     371         284         733         563   

General and administrative

     577         416         1,160         881   
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 1,823       $ 1,191       $ 3,657       $ 2,486   
  

 

 

    

 

 

    

 

 

    

 

 

 

7. Segment Information and Concentrations of Risk

Segment Information

The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by senior management for making decisions and assessing performance as the source of the Company’s reportable segments.

The Company operates in the wireless broadband technology industry and senior management makes decisions about allocating resources based on the following reportable segments:

 

   

Mobile Computing Products segment—includes our MiFi products, USB and PC-card modems and Embedded Modules that enable data transmission and services via cellular wireless networks.

 

   

The M2M Products and Solutions segment was established as a result of our acquisition of Enfora in 2010. It includes our intelligent asset-management solutions utilizing cellular wireless technology, and M2M communication devices, and embedded modules that enable M2M data transmission and services via cellular wireless networks.

 

12


Segment revenues and segment operating income (loss) represent the primary financial measures used by senior management to assess performance and include the net revenues, cost of net revenues, sales and other operating expenses for which management is held accountable. Segment expenses include sales and marketing, research and development, administration, and amortization expenses that are directly related to individual segments. Segment earnings (loss) also includes acquisition-related costs, purchase price amortization, restructuring, impairment and integration costs. The table below presents net revenues from external customers, operating income (loss) and identifiable assets for our reportable segments (in thousands):

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  

Net revenues by operating segment:

        

Mobile Computing Products

   $ 92,552      $ 105,781      $ 183,431      $ 155,577   

M2M Products and Solutions

     9,894        12,240        19,165        24,228   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 102,446      $ 118,021      $ 202,596      $ 179,805   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss) :

        

Mobile Computing Products

   $ (718   $ 1,010      $ (4,188   $ (15,670

M2M Products and Solutions

     (3,727     (4,111     (38,084     (9,501
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (4,445   $ (3,101   $ (42,272   $ (25,171
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     June 30,
2012
     December 31,
2011
 

Identifiable assets by reportable segment:

     

Mobile Computing Products

   $ 160,784       $ 181,180   

M2M Products and Solutions

     39,637         67,999   
  

 

 

    

 

 

 

Total

   $ 200,421       $ 249,179   
  

 

 

    

 

 

 

 

13


The Company has operations in the United States, Canada, Europe, Latin America and Asia. The following table details the geographic concentration of the Company’s assets in the United States, Canada, Europe, Latin America and Asia (in thousands):

 

     June 30,
2012
     December 31,
2011
 

United States

   $ 194,200       $ 243,030   

Canada

     4,717         4,764   

Europe, Latin America and Asia

     1,504         1,385   
  

 

 

    

 

 

 
   $ 200,421       $ 249,179   
  

 

 

    

 

 

 

The following table details the concentration of the Company’s net revenues by geographic region:

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2012     2011     2012     2011  

United States and Canada

     92.7     95.2     92.2     93.3

Latin America

     1.5        —          3.0        —     

Europe, Middle East and Africa

     5.5        3.3        4.4        4.2   

Asia and Australia

     0.3        1.5        0.4        2.5   
  

 

 

   

 

 

   

 

 

   

 

 

 
     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Concentrations of Risk

Substantially all of the Company’s net revenues are derived from sales of cellular wireless access products. Any significant decline in market acceptance of the Company’s products or in the financial condition of the Company’s existing customers would have an adverse effect on the Company’s results of operations and financial condition.

A significant portion of the Company’s net revenues are derived from a small number of customers. For the three months ended June 30, 2012, sales to our three largest customers accounted for 63%, 9%, and 5% of net revenues. In the same period in 2011, sales to our three largest customers accounted for 47%, 19%, and 12% of net revenues. For the six months ended June 30, 2012, sales to our three largest customers accounted for 60%, 11%, and 6% of net revenues. In the same period in 2011, sales to our three largest customers accounted for 43%, 20%, and 12% of net revenues. The Company outsources its manufacturing to four third-party contract manufacturers. If one or more of these manufacturers were to experience delays, disruptions, capacity constraints or quality control problems in manufacturing operations, product shipments to the Company’s customers could be delayed or its customers could consequently elect to cancel the underlying product purchase order, which would negatively impact the Company’s revenues and results of operations.

8. Earnings Per Share

Basic earnings per share (“EPS”) excludes dilution and is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock using the treasury stock method. Potentially dilutive securities (consisting of options and restricted stock units (“RSUs”) and employee stock purchase plan (“ESPP”) withholdings using the treasury stock method) are excluded from the diluted EPS computation in loss periods and when the applicable exercise price is greater than the market price on the period end date as their effect would be anti-dilutive.

 

14


For the three and six months ended June 30, 2012, basic and diluted weighted-average common shares outstanding were 32,674,404 and 32,485,173, respectively. During these same periods, weighted-average options, RSUs, and ESPP shares to acquire a total of 6,425,869 and 6,213,505 shares of common stock, respectively, were outstanding but not included in the computation of diluted earnings per share as their effect was anti-dilutive.

For the three and six months ended June 30, 2011, basic and diluted weighted-average common shares outstanding were 32,048,141 and 31,978,771, respectively. During these same periods, weighted-average options RSUs, and ESPP shares to acquire a total of 4,792,540 and 3,953,808 shares of common stock, respectively, were outstanding but not included in the computation of diluted earnings per share as their effect was anti-dilutive.

9. Commitments and Contingencies

Legal Matters

The Company is, from time to time, party to various legal proceedings arising in the ordinary course of business. For example, the Company is currently named as a defendant or co-defendant in a number of patent infringement lawsuits in the U.S. and is indirectly participating in other U.S. patent infringement actions pursuant to its contractual indemnification obligations to certain customers. Based on evaluation of these matters and discussions with Company’s intellectual property litigation counsel, the Company believes that liabilities arising from or sums paid in settlement of these existing matters would not have a material adverse effect on its consolidated results of operations or financial condition.

On September 15, 2008 and September 18, 2008, two putative securities class action lawsuits were filed in the United States District Court for the Southern District of California on behalf of persons who allegedly purchased our stock between February 5, 2007 and August 19, 2008. On December 11, 2008, these lawsuits were consolidated into a single action entitled Backe v. Novatel Wireless, Inc., et al., Case No. 08-CV-01689-H (RBB) (Consolidated with Case No. 08-CV-01714-H (RBB)) (U.S.D.C., S.D. Cal.). In May 2010, the district court re-captioned the case In re Novatel Wireless Securities Litigation. The plaintiffs filed the consolidated complaint on behalf of persons who allegedly purchased our stock between February 27, 2007 and November 10, 2008. The consolidated complaint names the Company and certain of our current and former officers as defendants. The consolidated complaint alleges generally that we issued materially false and misleading statements during the relevant time period regarding the strength of our products and market share, our financial results and our internal controls. The plaintiffs are seeking an unspecified amount of damages and costs. The court has denied defendants’ motions to dismiss. In May 2010, the court entered an order granting the plaintiffs’ motion for class certification and certified a class of purchasers of Company common stock between February 27, 2007 and September 15, 2008. On February 14, 2011, following extensive discovery, the Company filed a motion for summary judgment on all of plaintiffs’ claims. A trial date had been set for May 10, 2011. On March 15, 2011, the case was reassigned to a new district judge, the Honorable Anthony J. Battaglia. Following the reassignment, the court vacated the trial date pending the court’s consideration of dispositive motions. Oral argument on the motion for summary judgment was heard by the court on June 17, 2011. On November 23, 2011, the court issued an order granting in part and denying in part the motion for summary judgment. On July 9, 2012, the court vacated the final pretrial conference date. Dates for the pretrial conference and trial have not yet been scheduled. The Company intends to defend this litigation vigorously. At this time, there can be no assurance as to the ultimate outcome of this litigation. We have not recorded any significant accruals for contingent liabilities associated with this matter based on our belief that a liability, while possible, is not probable. Further, any possible range of loss cannot be estimated at this time.

On October 8, 2008, a purported shareholder, Jerry Rosenbaum, filed a derivative action in the Superior Court for the State of California, County of San Diego, against the Company, as nominal defendant, and certain of our current and former officers and directors, as defendants. Two other purported shareholders, Mark Campos and Chris Arnsdorf, separately filed substantially similar lawsuits in the same court on October 20, 2008 and November 5, 2008, respectively. On October 16, 2009, the plaintiffs filed a consolidated complaint. The consolidated complaint, Case No. 37-2008-00093576-CU-NP-CTL, alleges claims for breaches of fiduciary duties, violations of certain provisions of the California Corporations Code, unjust enrichment, and gross mismanagement. In February 2010, the court granted the defendants’ motion to stay the action pending the resolution of the federal securities class action described above. In July 2010, the parties executed a memorandum of understanding setting forth the terms to be included in a contemplated settlement. Any settlement would be subject to court approval. The memorandum of understanding did not contemplate any restitution from the defendants. Following execution of the memorandum of understanding, plaintiffs conducted certain confirmatory discovery and sought to negotiate an award of legal fees as part of the terms to be included in a stipulation of settlement. Plaintiffs have since purported to terminate the memorandum of understanding. On January 28, 2011, the court held an informal status conference, at which plaintiffs requested that the court lift the stay of action. The court declined plaintiffs’ request. Following certain additional confirmatory discovery and negotiations, on March 2, 2012, the parties executed a Stipulation of Settlement, which settlement was submitted to the court for approval. The court preliminarily approved the settlement pursuant to an order dated March 15, 2012. The settlement requires the Company to maintain and/or implement certain corporate governance measures and provides for the payment of fees and expenses to the plaintiffs’ counsel of an amount not to exceed $900,000, $500,000 of which is to be paid out of insurance proceeds, and $400,000 to be paid by the Company. These fees have been paid in accordance with the March 15th order and on May 4, 2012, the court granted final approval of the settlement. The Company recorded the $400,000 in fees in its 2011 financial results.

 

15


Indemnification

In the normal course of business, the Company periodically enters into agreements that require the Company to indemnify and defend its customers for, among other things, claims alleging that the Company’s products infringe third-party patents or other intellectual property rights. The Company’s maximum exposure under these indemnification provisions cannot be estimated but the Company does not believe that there are any matters individually or collectively that would have a material adverse effect on its financial condition, results of operation or cash flows.

Credit Facility

The Company has a credit facility with a bank to allow margin borrowings based on the Company’s investments in cash equivalents and marketable securities held with the bank. This facility is collateralized by the Company’s cash equivalents and marketable securities held with the bank. Borrowings under the facility incur an interest rate at the bank’s base rate plus 1%. This margin account facility provides the Company with the flexibility to access cash for short periods of time and avoids the need to sell marketable securities for these short-term requirements. At June 30, 2012, the Company had approximately $25.2 million in cash equivalents and marketable securities held at this bank. Any monies borrowed and interest incurred are payable on demand, and there is no express expiration date to the credit facility. During August 2012, the Company borrowed $5.0 million against the facility, which remained outstanding as of the date of this report.

 

16


10. Comprehensive Loss

Comprehensive loss consists of the following (in thousands):

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2012     2011     2012     2011  

Net loss

   $ (4,500   $ (3,898   $ (42,421   $ (25,986

Unrealized gain (loss) on cash equivalents and marketable securities, net of tax

     (7     104        17        6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (4,507   $ (3,794   $ (42,404   $ (25,980
  

 

 

   

 

 

   

 

 

   

 

 

 

11. Income Taxes

The Company recognizes federal, state and foreign current tax liabilities or assets based on its estimate of taxes payable to or refundable by tax authorities in the current fiscal year. The Company also recognizes federal, state and foreign deferred tax liabilities or assets based on the Company’s estimate of future tax effects attributable to temporary differences and carry forwards. The Company records a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized.

The Company assesses whether a valuation allowance should be recorded against its deferred tax assets based on the consideration of all available evidence, using a “more-likely-than-not” realization standard. The four sources of taxable income that must be considered in determining whether deferred tax assets will be realized are: (1) future reversals of existing taxable temporary differences (i.e., offset of gross deferred tax assets against gross deferred tax liabilities); (2) taxable income in prior carryback years, if carryback is permitted under the applicable tax law; (3) tax planning strategies and (4) future taxable income exclusive of reversing temporary differences and carryforwards.

In assessing whether a valuation allowance is required, significant weight is to be given to evidence that can be objectively verified. A significant factor in the Company’s assessment is that the Company is in a three-year historical cumulative loss position. This fact, combined with uncertain near-term market and economic conditions, reduced the Company’s ability to rely on projections of future taxable income in assessing the realizability of its deferred tax assets.

After a review of the four sources of taxable income as of June 30, 2012 (as described above), the Company recognized increases in the valuation allowance primarily related to its U.S.-based deferred tax amounts, resulting from carryforward net operating losses, and Canadian-based deferred tax amounts, resulting from research and development tax credits, generated during the three and six months ended June 30, 2012. These deferred tax benefits, combined with a corresponding charge to income tax expense related to the increased valuation allowance of $1.1 million and $14.4 million for the three and six months ended June 30, 2012, respectively, resulted in an insignificant effective income tax rate for those respective periods. The Company’s valuation allowance was $51.0 million on net deferred tax assets of $52.0 million at June 30, 2012. The net unreserved portion of the Company’s remaining deferred tax assets at June 30, 2012 primarily related to research and development tax credits associated with the Company’s Canadian subsidiary.

For the three and six months ended June 30, 2012, the Company recorded an income tax benefit and income tax expense, including discrete items, of $15,000 and $169,000, respectively. These amounts vary from the income tax benefit that would be computed at the U.S. statutory rate resulting from its operating losses during those same periods primarily due to the aforementioned offsetting increase in the Company’s deferred tax assets valuation allowance. Additionally, for the three months ended June 30, 2012, the Company recorded a $111,000 tax benefit related to the finalization of its intangible assets and goodwill impairment. See Note 4.

The Company follows the accounting guidance related to financial statement recognition, measurement and disclosure of uncertain tax positions. The Company recognizes the impact of an uncertain income tax position on an income tax return at the largest amount that is “more-likely-than-not” to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. As of June 30, 2012 and December 31, 2011, the total liability for unrecognized tax benefits was $417,000 and $413,000, respectively, and is included in other long-term liabilities. For the three and six months ended June 30, 2012, the Company included $2,000 and $4,000 respectively, of interest expense related to uncertain tax positions in its condensed consolidated statements of operations and comprehensive income (loss).

In the third quarter of 2012, the Company expects to release $50,000 of its liability for unrecognized tax benefits due to the expiration of the statute of limitations applicable to the 2007 taxable year.

 

17


The Company and its subsidiaries file U.S., state, and foreign income tax returns in jurisdictions with various statutes of limitations. The California Franchise Tax Board is currently conducting an examination of the Company’s California income tax returns for 2006 and 2007. The Company is also subject to various Federal income tax examinations for the 2003 through 2010 calendar years due to the availability of net operating loss carryforwards. The Company believes appropriate provisions for all outstanding issues have been made for all jurisdictions and all open years. However, because audit outcomes and the timing of audit settlements are subject to significant uncertainty, the Company’s current estimate of the total amounts of unrecognized tax benefits could increase or decrease for all open years.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read in conjunction with the condensed consolidated financial statements and the accompanying notes included in Item 1 of this report, as well as the audited consolidated financial statements and accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2011 contained in our Annual Report on Form 10-K for the year ended December 31, 2011.

Overview and Background

We are a provider of intelligent wireless solutions for the worldwide mobile communications market. Our broad range of products principally includes intelligent mobile hotspots, USB modems, embedded PCI and wireless PC-card modems, and communications and applications software. In addition, our Enfora division provides asset-management solutions utilizing intelligent platforms, customized service-delivery software, and machine-to-machine, or M2M, communications devices.

Our products currently operate on every major cellular wireless technology platform. Our mobile hotspots, embedded modules, and modems provide subscribers with secure and convenient high-speed access to corporate, public and personal information through the Internet and enterprise networks. Our M2M products enable devices to communicate with each other and with server- or cloud-based application infrastructure.

Our mobile-hotspot and modem customer base is comprised of wireless operators, including AT&T, Bell Mobility, Sprint Nextel, Verizon Wireless, and Virgin Mobile; laptop PC and other original equipment manufacturers, or OEMs, including Dell and Hewlett-Packard; as well as distributors and various companies in other vertical markets. Our M2M customer base is comprised of transportation companies, industrial companies, manufacturers of medical devices and geographical-location devices and providers of security systems. We have strategic relationships with several of these customers for technology development and marketing.

We sell our wireless broadband solutions primarily to wireless operators either directly or through strategic relationships, as well as to OEM partners and distributors located worldwide. Most of our mobile-computing product sales to wireless operators and OEM partners are sold directly by our sales force, or to a lesser degree, through distributors. We sell our M2M solutions primarily to enterprises in the following industries: transportation; energy and industrial automation; security and safety; and medical monitoring. We sell our M2M solutions through our direct sales force and through distributors.

We intend to continue to identify and respond to our customers’ needs by introducing new product designs with an emphasis on supporting cutting-edge, wide area network, or WAN, technology; ease-of-use; performance; size; weight; cost; and power consumption. We manage our products through a structured life-cycle process, from identifying initial customer requirements through development and commercial introduction to eventual phase-out. During product development, emphasis is placed on innovation, time-to-market, performance, meeting industry standards and customer product specifications, ease of integration, cost reduction, manufacturability, quality and reliability.

The hardware used in our solutions is produced by contract manufacturers. Their services include component procurement, assembly, testing, quality control, and fulfillment. We have agreements with LG Innotek; Inventec Appliances Corporation, or IAC; Hon Hai Precision Industry Co., LTD; and Benchmark Electronics for the outsourced manufacturing of our products. In addition, we have an agreement with Mobiltron for certain distribution, fulfillment and repair services related to our business in Europe, the Middle East and Africa, or EMEA.

Factors Which May Influence Future Results of Operations

Net Revenues. We believe that our future net revenues will be influenced largely by the growth and breadth of the demand for wireless access to data through the use of next generation networks including demand for 3G and 4G products, 3G and 4G data access services, particularly in North America, Europe and Asia; customer acceptance for our new products that address these markets, including our MiFi line of Intelligent Mobile Hotspots; and our ability to meet customer demand. Factors that could potentially affect customer demand for our products include the following:

 

   

economic environment and related market conditions;

 

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increased competition from other wireless data modem suppliers as well as suppliers of emerging devices that contain a wireless data access feature;

 

   

demand for broadband access services and networks;

 

   

rate of change to new products;

 

   

timing of deployment of 4G networks by wireless operators;

 

   

decreased demand for EV-DO and HSPA products; and

 

   

changes in technologies.

We anticipate introducing additional products during the next 12 months, including 4G broadband-access products, M2M solutions and software applications and platforms. We continue to develop and maintain strategic relationships with wireless and computing industry leaders like, Dell, QUALCOMM, Sprint Nextel, Verizon Wireless, Virgin Mobile, Vodafone, Telefonica, Texas Instruments, Delta Mobile and major software vendors. Through strategic relationships, we have been able to increase market penetration by leveraging the resources of our channel partners, including their access to distribution resources, increased sales opportunities and market opportunities.

As a result of the extremely competitive market for wireless devices, we have experienced significant downward pressure on the average selling price of our products. This pressure has the potential to materially adversely affect our results of operations and financial condition in future periods and we cannot predict the magnitude or timing of future reductions in the average selling price of our products.

Cost of Net Revenues. All costs associated with our contract manufacturers, as well as distribution, fulfillment and repair services are included in our cost of net revenues. Cost of net revenues also includes warranty costs, amortization of intangible assets, royalties, operations group expenses, costs associated with the Company’s cancellation of purchase orders, costs related to outside services and costs related to inventory adjustments, including write downs for excess and obsolete inventory. Inventory adjustments are impacted primarily by demand for our products, which is influenced by the factors discussed above.

Operating Costs and Expenses. Many of our products target wireless operators and other customers in North America, Europe, and Asia. We will likely develop new products to serve these markets, resulting in increased research and development expenses. We have in the past and expect to continue to incur these expenses in future periods prior to recognizing net revenues from sales of these products.

Our operating costs consist of four primary categories: research and development costs; sales and marketing expense; general and administrative costs; and amortization of purchased intangibles.

Research and development is at the core of our ability to produce innovative, leading-edge products. This category consists primarily of engineers and technicians who design and test our highly complex products. As we work to expand our portfolio of products and remain competitive, it may be necessary to increase our research and development costs in the future.

Sales and marketing expense consists primarily of our sales force and product-marketing professionals. In order to maintain strong sales relationships, we provide co-marketing, trade show support, product training and demo units for merchandising. We are also engaged in a wide variety of activities, such as awareness and lead generation programs as well as product marketing. Other marketing initiatives include public relations, seminars and co-branding with partners.

General and administrative expenses include primarily corporate functions such as accounting, human resources, legal, administrative support, and professional fees. This category also includes the expenses needed to operate as a publicly-traded company, including Sarbanes-Oxley compliance, Securities and Exchange Commission (“SEC”) filings, stock-exchange fees, and investor-relations expense. General and administrative expenses have been relatively stable and are not directly related to revenue levels.

Amortization of purchased intangibles includes the amortization of customer relationships, covenant-not-to-compete agreements and trade name intangible assets purchased through the acquisition of Enfora.

We also subject our intangible assets and goodwill to impairment assessments when required which can result in charges when impairment occurs.

As part of our business strategy, we review, and intend to continue to review, acquisition opportunities that we believe would be advantageous or complementary to the development of our business. If we make any acquisitions, we may incur substantial expenditures in conjunction with the acquisition process and the subsequent assimilation of any acquired business, products, technologies or personnel.

 

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Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues, expenses and disclosures of contingent assets and liabilities. Actual results could differ from these estimates. Critical accounting policies and significant estimates include revenue recognition, allowance for doubtful accounts receivable, provision for excess and obsolete inventory, valuation of intangible and long-lived assets, valuation of goodwill, litigation, provision for warranty costs, income taxes, and share-based compensation expense. The significant accounting policies used in preparation of these consolidated financial statements for the three and six months ended June 30, 2012 are consistent with those discussed in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011 in all material respects and in Note 1 to the consolidated financial statements included in this report. The critical accounting policies and the significant judgments and estimates used in the preparation of our condensed consolidated financial statements for the three and six months ended June 30, 2012 are consistent with those discussed in our Annual Report on Form 10-K for the year ended December 31, 2011 in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates.”

Results of Operations

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

Net revenues. Net revenues for the three months ended June 30, 2012 were $102.4 million, a decrease of $15.6 million or 13.2% compared to the same period in 2011.

The following table summarizes net revenues by operating segment and net revenues by product categories during the three months ended June 30, 2012 and June 30, 2011 (in thousands):

 

     Three Months Ended June 30,  
     2012      2011  

Net revenues by operating segment:

     

Mobile Computing Products

   $ 92,552       $ 105,781   

M2M Products and Solutions

     9,894         12,240   
  

 

 

    

 

 

 

Total

   $ 102,446       $ 118,021   
  

 

 

    

 

 

 

Net revenues by product categories:

     

Mobile Broadband Devices

   $ 87,142       $ 101,309   

Embedded Solutions

     9,102         11,818   

Asset Management Solutions & Services

     6,202         4,894   
  

 

 

    

 

 

 

Total

   $ 102,446       $ 118,021   
  

 

 

    

 

 

 

Mobile Computing Products. Net revenues from our Mobile Computing Products segment for the three months ended June 30, 2012 were $92.6 million, a decrease of $13.2 million or 12.5% compared to the same period in 2011. The decrease is primarily attributable to lower sales of Mobile Broadband devices caused by increased market competition for select customers.

M2M Products and Solutions. Net revenues from our M2M Products and Solutions segment for the three months ended June 30, 2012 were $9.9 million, compared with $12.2 million for the same period last year. The decrease is primarily due to the reduced sales volume and pricing of our 2G GPRS M2M modules in the North American market as it transitions away from 2G GSM networks. We are currently developing CDMA and 3G GSM modules and integrated solutions to address this market. These products are expected to launch later this year.

Product Categories. We have categorized the combined product portfolios of the mobile computing and M2M businesses into three categories (1) Mobile Broadband Devices, (2) Embedded Solutions and (3) Asset Management Solutions and Services. These categories were established due to the different markets and sales channels served. We believe this product categorization facilitates the analysis of our operating trends and enhances our segment disclosures.

The Mobile Broadband Devices category includes all external data modems including MiFi intelligent hotspots, USB modems and PC cards. These devices are sold primarily through wireless operator enterprise and retail channels, telecom equipment distributors and consumer retail chains.

 

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Embedded Solutions products include wireless-broadband modules and related software and services sold to manufacturers of laptop computers, tablets, and other wireless computer devices. This product category also includes M2M modules sold to manufacturers of various asset tracking and monitoring products. Our products are sold directly to OEMs or through distributor channels.

Asset Management Solutions and Services are mobile intelligent wireless broadband terminal devices and communication management software, or CMS, that transmit information about the assets into which these products are integrated. These hardware and software products can be bundled or sold separately. The CMS software activates the terminal device onto the wireless network and manages its functionality.

 

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Cost of net revenues. Cost of net revenues for the three months ended June 30, 2012 was $79.2 million, or 77.3% of net revenues, as compared to $91.8 million, or 77.8% of net revenues, for the same period in 2011. During the second quarter of 2012, the cost of net revenues as a percentage of net revenues benefitted from a favorable mix of 4G MiFi products sold, and from lower quarter over quarter purchased intangible amortization expense decreasing to $289,000 during the quarter ended June 30, 2012 as compared to $1.1 million in the comparable quarter of 2011. The cost of net revenues as a percentage of revenues is expected to fluctuate in future quarters depending on revenue levels, the mix of products sold, competitive pricing, new product introduction costs and other factors.

Increased competitive pressures may continue to negatively impact the average sales prices of our products. This may require us in future periods to record inventory write downs to reflect lower of cost or market adjustments and revalue certain assets that may become impaired.

Gross profit. Gross profit for the three months ended June 30, 2012 was $23.3 million, or a gross margin of 22.7% of net revenues, compared to $26.2 million, or a gross margin of 22.2% of net revenues for the same period in 2011. The gross margin increase was primarily attributable to the changes in net revenues and cost of net revenues as discussed above. We expect that our gross margin percentage will continue to fluctuate from quarter to quarter depending on revenue levels, product mix, competitive selling prices, our ability to reduce product costs and changes in unit volumes.

Research and development expenses. Research and development expenses for the three months ended June 30, 2012 were $14.5 million, or 14.1% of net revenues, compared to $14.8 million, or 12.6% of net revenues, for the same period in 2011. Research and development expenses for the three months ended June 30, 2012 remained flat as compared to the same period in 2011, as there was a focus to contain operational costs.

We expect to maintain our investment in research and development to continue to provide innovative products and services. Research and development expenses as a percentage of net revenues are expected to fluctuate in future quarters depending on the amount of net revenues recognized, and potential variation in the costs associated with the development of the Company’s products, including the number and complexity of the products under development and the progress of the development activities with respect to those products.

Sales and marketing expenses. Sales and marketing expenses for the three months ended June 30, 2012 were $7.3 million, or 7.1% of net revenues, compared to $8.2 million, or 7.0% of net revenues, for the same period in 2011. The $900,000 decrease for the three months ended June 30, 2012 compared to the same period in 2011 related to lower cooperative advertising and joint marketing expenses in our Mobile Computing Products segment.

While managing sales and marketing expenses relative to net revenues, we expect to continue to make selected investments in sales and marketing as we introduce new products, market existing products, expand our distribution channels and focus on key customers around the world.

General and administrative expenses. General and administrative expenses for the three months ended June 30, 2012 were $5.7 million, or 5.6% of net revenues, compared to $5.7 million, or 4.8% of net revenues, for the same period in 2011. General and administrative expenses for the three months ended June 30, 2012 remained flat as compared to the same period in 2011. While we are closely monitoring and working to control general and administrative costs, we expect these costs to be negatively impacted by legal fees to defend the claims described in Note 9 to our consolidated financial statements included in this report. During the second quarter periods in 2012 and 2011, the Company incurred $1.7 and $1.5 million in legal expenses, respectively.

Goodwill and intangible assets impairments. During the first quarter of 2012, based on actual operating results, and reductions in management’s estimates of forecasted operating results of the M2M Products and Solutions reporting unit, principally due to an updated view of competitive pressures impacting average selling prices, customer product and technology selections, and the loss of certain customers, the Company determined there were sufficient indicators of impairment present to require an interim impairment analysis. Based on the fair value tests performed, the Company recorded a preliminary pre-tax goodwill impairment charge of $6.5 million and a preliminary purchased intangible asset charge of $22.8 million during the first quarter of 2012. See Note 4 in the condensed consolidated financial statements for the period ended March 31, 2012 included in this report. There were no pre-tax adjustments to the charge resulting from the finalization of the impairment review during the second quarter of 2012.

Amortization of purchased intangible assets. The amortization of purchased intangible assets for the three months ended June 30, 2012 was $227,000, compared to $527,000 for the same period 2011. The decrease in amortization expense for the three months ended June 30, 2012 was caused by the lower net asset value of the intangible assets resulting from the impairment charge in the first quarter of 2012.

 

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Interest income, net. Interest income, net, for the three months ended June 30, 2012 was $83,000 as compared to $85,000 for the same period in 2011. The weighted-average interest rate earned by the Company on its cash, cash equivalents and marketable securities was 0.13% and 0.13% in the second quarter of 2012 and 2011, respectively.

Other expense, net. Other expense, net, for the three months ended June 30, 2012 was $153,000 as compared to $607,000 for the same period in 2011. The other expense in 2011 predominantly related to foreign currency losses on South Korean won denominated trade payables.

Income tax expense (benefit). Income tax benefit for the three months ended June 30, 2012 was $15,000, as compared to an expense of $275,000 for the same period in 2011. During the first quarter of 2012, the Company recorded a preliminary pre-tax goodwill impairment charge of $6.5 million. For the three months ended June 30, 2012, the Company included $111,000 of income tax benefit in its condensed consolidated statements of operation related to the finalization of the impairment charge.

The effective tax rate for the three months ended June 30, 2012 is different than the U.S. statutory rate primarily due to a valuation allowance recorded against additional tax assets generated in the second quarter of 2012, and due to the aforementioned tax benefit related to the goodwill impairment.

Net loss. For the three months ended June 30, 2012, we reported a net loss of $4.5 million, as compared to a net loss of $3.9 million for the same period in 2011.

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

Net revenues. Net revenues for the six months ended June 30, 2012 were $202.6 million, an increase of $22.8 million or 12.7% compared to the same period in 2011.

The following table summarizes net revenues by operating segment and net revenues by product categories during the six months ended June 30, 2012 and June 30, 2011 (in thousands):

 

     Six Months Ended
June 30,
 
     2012      2011  

Net revenues by operating segment:

     

Mobile Computing Products

   $ 183,431       $ 155,577   

M2M Products and Solutions

     19,165         24,228   
  

 

 

    

 

 

 

Total

   $ 202,596       $ 179,805   
  

 

 

    

 

 

 

Net revenues by product categories:

     

Mobile Broadband Devices

   $ 172,758       $ 149,547   

Embedded Solutions

     14,952         18,201   

Asset Management Solutions & Services

     14,886         12,057   
  

 

 

    

 

 

 

Total

   $ 202,596       $ 179,805   
  

 

 

    

 

 

 

Mobile Computing Products. Net revenues from our Mobile Computing Products segment for the six months ended June 30, 2012 were $183.4 million, an increase of $27.9 million or 17.9% compared to the same period in 2011. The increase in net revenues of our Mobile Computing Products segment was attributable primarily to ongoing product rollouts of our next generation 4G products, including the MiFi Intelligent Mobile Hotspot.

M2M Products and Solutions. Net revenues from our M2M Products and Solutions segment for the six months ended June 30, 2012 were $19.2 million, compared with $24.2 million net revenues from the same period last year. The decrease is primarily due to the reduced sales volume and pricing of our 2G GPRS M2M modules in the North American market as it transitions away from 2G GSM networks. We are currently developing CDMA and 3G GSM modules and integrated solutions to address this market. These products are expected to launch later this year.

 

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Cost of net revenues. Cost of net revenues for the six months ended June 30, 2012 was $158.4 million, or 78.2% of net revenues, as compared to $147.6 million, or 82.1% of net revenues, for the same period in 2011. The improvement in cost of net revenues as a percentage of net revenues in 2012 resulted from higher sales of 4G products in our Mobile Computing Products segment during the first six months of 2012. The cost of net revenues as a percentage of revenues also benefitted from lower amortization costs associated with purchased intangible assets. Cost of net revenues as a percentage of net revenues is expected to fluctuate in future quarters depending on revenue levels, the mix of products sold, competitive pricing, new product introduction costs and other factors.

Increased competitive pressures may continue to negatively impact the average sales prices of our products. This may require us in future periods to record inventory write downs to reflect lower of cost or market adjustments and revalue certain assets that may become impaired.

Gross profit. Gross profit for the six months ended June 30, 2012 was $44.2 million, or a gross margin of 21.8% of net revenues, compared to $32.2 million, or a gross margin of 17.9% of net revenues, for the same period in 2011. The increase in gross margin was primarily attributable to the changes in net revenues and cost of net revenues as discussed above. We expect that our gross margin will continue to fluctuate from quarter to quarter depending on revenue levels, product mix, competitive selling prices, our ability to reduce product costs and changes in unit volumes.

Research and development expenses. Research and development expenses for the six months ended June 30, 2012 were $30.3 million, or 14.9% of net revenues, compared to $30.4 million, or 16.9% of net revenues, for the same period in 2011. Research and development expenses for the six months ended June 30, 2012 remained flat as compared to the same period in 2011, as there was a focus to contain operational costs.

We expect to maintain our investment in research and development to continue to provide innovative products and services. Research and development expenses as a percentage of net revenues are expected to fluctuate in future quarters depending on the amount of net revenues recognized, and potential variation in the costs associated with the development of the Company’s products, including the number and complexity of the products under development and the progress of the development activities with respect to those products.

Sales and marketing expenses. Sales and marketing expenses for the six months ended June 30, 2012 were $15.0 million, or 7.4% of net revenues, compared to $15.6 million, or 8.7% of net revenues, for the same period in 2011. The $606,000 decrease for the six months ended June 30, 2012 compared to the same period in 2011 was due primarily to lower cooperative advertising and joint marketing expenses.

While managing sales and marketing expenses relative to net revenues, we expect to continue to make selected investments in sales and marketing as we introduce new products, market existing products, expand our distribution channels and focus on key customers around the world.

General and administrative expenses. General and administrative expenses for the six months ended June 30, 2012 were $11.2 million, or 5.5% of net revenues, compared to $10.3 million, or 5.7% of net revenues, for the same period in 2011. The lower expense for the 2011 period was due to an $880,000 benefit recorded in 2011 related to the revision of estimated contingent consideration related to the acquisition of Enfora. While we are closely monitoring and working to control general and administrative costs, we expect these costs to be negatively impacted by legal fees to defend the claims described in Note 9 to our condensed consolidated financial statements included in this report. During the six months ended June 30, 2012 and 2011, the Company incurred $2.7 and $2.5 million in legal expenses, respectively.

Amortization of purchased intangible assets. The decrease in amortization expense for the six months ended June 30, 2012 was due to reduced amortization of purchased intangible assets from Enfora caused by the impairment charge recognized in the first quarter of 2012.

Interest income, net. Interest income, net, for the six months ended June 30, 2012 was $166,000 as compared to $243,000 for the same period in 2011. The weighted-average interest rate earned by the Company on its cash, cash equivalents and marketable securities was 0.22% and 0.28% in the first six months of 2012 and 2011, respectively.

 

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Other expense, net. Other expense, net, for the six months ended June 30, 2012 was $146,000 as compared to $485,000 for the same period in 2011. The other expense in 2011 related to foreign currency losses on South Korean won denominated trade payables.

Income tax expense (benefit). Income tax expense for the six months ended June 30, 2012 was $169,000, as compared to $573,000 of expense for the same period in 2011.

The effective tax rate for the six months ended June 30, 2012 is different than the U.S. statutory rate primarily due to a valuation allowance recorded against additional U.S.-based deferred tax assets generated in the first six months of 2012, and expenses attributable to foreign operations.

Net loss. For the six months ended June 30, 2012, we reported a net loss of $42.4 million, as compared to a net loss of $26.0 million for the same period in 2011. Net income was negatively impacted due to the impairment charge recognized in the first quarter of 2012.

Liquidity and Capital Resources

Our principal sources of liquidity are our existing cash, cash equivalents and marketable securities and cash generated from operations.

To address short term liquidity requirements resulting from working capital changes the Company entered into a margin credit facility with a bank in 2011. The use of this margin credit facility allows the Company to meet short-term cash requirements and avoid selling cash equivalents and marketable securities. Borrowings under this facility are collateralized by Company cash equivalents and marketable securities on deposit at the bank. The Company borrowed $5.0 million against this facility during August 2012 which remained outstanding as of the date of this report.

In September 2009, we filed a shelf registration statement with the SEC that will allow us to sell up to $125 million of equity, debt or other securities described in the registration statement in one or more offerings by us from time to time. As set forth in the shelf registration statement, the net proceeds from the sale of our securities may be used for general corporate purposes, including working capital, capital expenditures and acquisitions. As of the date of this report, we have not issued any securities under this registration statement.

Working Capital, Cash and Cash Equivalents and Marketable Securities

The following table presents working capital, cash and cash equivalents and marketable securities (in thousands):

 

     June 30,
2012
(unaudited)
     December 31,
2011
 

Working capital(1)

   $ 78,483       $ 81,113   
  

 

 

    

 

 

 

Cash and cash equivalents (2)

   $ 15,197       $ 47,069   

Short-term marketable securities (2)

     36,391         28,267   

Long-term marketable securities

     10,820         13,495   
  

 

 

    

 

 

 

Total cash and cash equivalents and marketable securities

   $ 62,408       $ 88,831   
  

 

 

    

 

 

 

 

(1) Working capital is defined as the excess of current assets over current liabilities.
(2) Included in working capital.

Our working capital decreased $2.6 million from December 31, 2011 to June 30, 2012. The decrease was primarily due to the operating loss in the six months ended June 30, 2012, net of non cash related expenses.

As of June 30, 2012, cash and cash equivalents and marketable securities decreased by $26.4 million from December 31, 2011. The principal component of this net decrease was the cash used by our operating activities of $23.5 million, and cash used to pay for acquisition of property, plant and equipment of $3.6 million.

 

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Historical Cash Flows

The following table summarizes our condensed consolidated statements of cash flows for the periods indicated (in thousands):

 

     Six Months Ended  
     June 30,  
     2012     2011  

Net cash used in operating activities

   $ (23,454   $ (17,519

Net cash provided by (used in) investing activities

     (9,059     32,780   

Net cash provided by (used in) financing activities

     688        (677

Effect of exchange rates on cash and cash equivalents

     (47     54   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (31,872     14,638   

Cash and cash equivalents, beginning of period

     47,069        17,375   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 15,197      $ 32,013   
  

 

 

   

 

 

 

Operating activities. Net cash used in operating activities was $23.5 million for the six months ended June 30, 2012 as compared to net cash used by operating activities of $17.5 million for the same period in 2011. Net cash used for the six months ended June 30, 2012 was attributable to net losses in the period and a net decrease in cash caused by changes in working capital accounts, offset by non-cash charges for impairments of goodwill and intangibles, depreciation and amortization, and share based compensation expense. The net decrease in cash caused by changes in net working capital accounts primarily included increases in accounts receivable and prepaid expenses and other assets, as well as a decrease in accounts payable. For the second quarter 2011, net cash used by operating activities was primarily related to net losses for the period, along with decreases in cash caused by a reduction in accounts payable and an increase in inventory. These were partially offset by an increase in cash caused by a decrease in accounts receivable.

Investing activities. Net cash used in investing activities during the six months ended June 30, 2012 was $9.1 million compared to $32.8 million provided during the same period in 2011. Cash used in investing activities during the six months ended June 30, 2012 was related to net purchases of marketable securities of $5.5 million, and purchases of property, plant, and equipment for approximately $3.6 million. Cash provided by investing activities during the same period in 2011 was primarily related to net sales of marketable securities of $36.7 million.

Financing activities. Net cash provided by financing activities during the six months ended June 30, 2012 was $688,000, compared to cash used of $677,000 during the same period in 2011. Net cash provided by financing activities in 2012 was primarily related to cash received for ESPP purchases. Net cash used in financing activities in 2011 was primarily related to payroll taxes paid on behalf of employees for restricted stock units which vested during the period.

Other Liquidity Needs

We expect to incur ongoing professional fees and expenses to defend litigation filed against us or related to our products, which litigation is discussed in Note 9 to our condensed consolidated financial statements included in this report. These costs cannot be estimated at this time.

During the next twelve months, we currently plan to incur approximately $7.0 million for discretionary capital expenditures, including the acquisition of additional software licenses.

We believe our cash resources from cash and cash equivalents and marketable securities, together with anticipated cash flows from operations, will be sufficient to meet our working capital needs for the next twelve months.

Our liquidity could be impaired if there is any interruption in our business operations, a material failure to satisfy our contractual commitments or a failure to generate revenue from new or existing products.

We may raise additional funds to accelerate development of new and existing services and products, to respond to competitive pressures or to acquire complementary products, businesses or technologies. There can be no assurance that any required additional financing will be available on terms favorable to us, or at all. If additional funds are raised by the issuance of equity securities, our shareholders could experience dilution of their ownership interests and securities issued may have rights senior to those of the holders of our common stock. If additional funds are raised by the issuance of debt securities or from other borrowings, we may be subject to certain limitations on our operations. If adequate funds are not available or not available on acceptable terms, we may be unable to take advantage of acquisition opportunities, develop or enhance products or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market risk is the risk of potential economic loss principally arising from adverse changes in the fair value of financial instruments. The major components of market risk affecting us are interest rate risk, global credit risk and foreign currency exchange rate risk.

 

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Since December 31, 2011, there have been no material changes in the quantitative or qualitative aspect of our market risk profile. For additional information regarding the Company’s exposure to certain market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

The Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2012, the end of the period covered by this report. Based on the evaluation of these disclosure controls and procedures, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting.

There were no changes in the Company’s internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act, during the three months ended June 30, 2012, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings.

In Backe v. Novatel Wireless, Inc. et al., United States District Court for the Southern District of California (San Diego), Case No. 3:08-cv-01689-AJB-RBB (consolidated with Case No. 3:08-cv-01714-H-RBB (U.S.D.C., S.D. Cal.)), the court, on July 9, 2012, vacated the final pretrial conference date. Dates for the pretrial conference and trial have not yet been scheduled.

In Jerry Rosenbaum v. Peter Leparulo, et al., Superior Court of the State of California, County of San Diego, Case No. 37-2008-00093576-CU-NP-CTL, the parties executed a Stipulation of Settlement on March 2, 2012 which was submitted to the court for approval. The court preliminarily approved the settlement pursuant to an order dated March 15, 2012. The settlement required the Company to maintain and/or implement certain corporate governance measures and provided for the payment of fees and expenses to the plaintiffs’ counsel of an amount not to exceed $900,000, $500,000 of which was to be paid out of insurance proceeds and $400,000 to be paid by the Company. These fees have been paid in accordance with the March 15th order and on May 4, 2012, the court granted final approval of the settlement. The Company recorded the $400,000 in fees in its 2011 financial results.

For additional information regarding these matters, see Item 3, “Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

Item 1A. Risk Factors.

There have been no material changes in our risk factors from those disclosed in Item 1A of the Company’s Annual Report Form 10-K for the year ended December 31, 2011.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable.

 

Item 3. Defaults Upon Senior Securities.

Not applicable.

 

Item 4. Mine Safety Disclosures.

Not applicable.

 

Item 5. Other Information.

Not applicable

 

27


Item 6. Exhibits.

 

Exhibit

Number

  

Description

  31.1    Certification of our Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification of our Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1    Certification of our Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101    The following financial statements and footnotes from the Novatel Wireless, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Cash Flows; and (iv) the Notes to Condensed Consolidated Financial Statements.

 

28


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: August 8, 2012     Novatel Wireless, Inc.
    By:  

/S/ PETER LEPARULO

      Peter Leparulo
      Chairman and Chief Executive Officer
    By:  

/S/ KENNETH LEDDON

      Kenneth Leddon
      Senior Vice President and Chief Financial Officer

 

29

XNAS:NVTL Novatel Wireless, Inc. Quarterly Report 10-Q Filling

Novatel Wireless, Inc. XNAS:NVTL Stock - Get Quarterly Report SEC Filing of Novatel Wireless, Inc. XNAS:NVTL stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

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