Business context and reporting period
Inseego Corp. filed this unaudited Form 10-Q for the quarter ended March 31, 2017; comparisons are with the three months ended March 31, 2016 unless noted. The company provides IoT and connectivity products and services, including Ctrack telematics, SaaS and device-management services, and hardware. The MiFi hotspot and modem business remained in operation pending a proposed sale. Inseego reported one operating segment.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Net revenue | $55.4 million | $66.9 million |
| Gross profit and margin | $16.2 million; 29.2% | $21.2 million; 31.6% |
| Operating loss | $11.0 million | $6.3 million |
| Net loss attributable to Inseego | $16.1 million; $0.28 per diluted share | $11.9 million; $0.22 per diluted share |
| Cash used in operating activities | $3.2 million | $6.3 million |
| Cash and cash equivalents | $6.4 million at March 31, 2017 | $9.9 million at December 31, 2016 |
| Working capital | Deficit of $8.9 million at March 31, 2017 | — |
| Total assets / liabilities | $165.6 million / $191.8 million at March 31, 2017 | $158.7 million / $176.4 million at December 31, 2016 |
| Convertible notes | $120.0 million principal; $89.7 million net carrying amount | $120.0 million principal; $90.9 million net carrying amount at December 31, 2016 |
Investing activities used $1.7 million; financing activities provided $1.6 million. The quarter-end balance sheet showed $2.8 million outstanding on the revolving facility. On May 8, 2017, after quarter-end, the company obtained a $20.0 million term loan, paid a $2.0 million commitment fee, received $18.0 million net proceeds, and used part of the proceeds to repay and terminate the revolver. The new loan bears interest at three-month LIBOR, subject to a 1% floor, plus 10%, and matures May 8, 2018.
Material changes versus the prior comparable period
- Revenue fell 17.3% to $55.4 million. Hardware revenue decreased 23.5%, primarily reflecting lower MiFi sales and the 2016 Modules Business divestiture. SaaS, software and services revenue grew 9.2%, which management attributed to its focus on recurring revenue.
- Gross margin declined 2.4 percentage points to 29.2%; management cited lower MiFi gross margins. Gross profit fell $5.0 million.
- Operating expenses were nearly flat overall, but general and administrative expense rose to $12.0 million from $10.2 million, mainly due to legal and professional fees related to the MiFi sale and litigation. Research and development expense decreased to $6.3 million from $8.0 million, primarily due to reduced headcount and portfolio rationalization.
- Net loss widened to $16.1 million from $11.9 million. Interest expense increased to $4.2 million from $3.9 million, primarily due to amortization of additional debt discount associated with the January 2017 notes exchange.
- Cash used in operations improved year over year, but cash on hand declined by $3.5 million during the quarter. Receivables and prepaid assets used cash, partly offset by higher accounts payable.
Outlook, risks, contingencies and unusual items
- Going concern and liquidity: Management stated that cash, the subsequent loan proceeds and anticipated operating cash flows may not cover working capital needs for the 12 months following the filing without additional funding. The filing says this raises substantial doubt about the company’s ability to continue as a going concern. The financial statements contain no adjustments for the outcome of this uncertainty.
- Pending MiFi sale: The proposed $50.0 million cash sale, subject to working-capital adjustment, required CFIUS approval. CFIUS raised national-security concerns; the parties re-filed their notice in February and again in April 2017 while discussing possible mitigation. The sale was not assured. Loan proceeds from any sale must be used to repay the term loan.
- Debt and financing risk: The company had $120.0 million principal amount of convertible notes outstanding, in addition to the subsequent secured term loan. The filing warns that inability to generate cash or obtain financing could impair debt service and operations; the term loan is secured by substantially all company assets.
- Customer concentration: One customer represented 53.9% of Q1 2017 revenue, compared with 52.7% in Q1 2016. MiFi sales were predominantly to Verizon Wireless.
- RER acquisition dispute: The company had $11.3 million of deferred purchase price and $9.8 million of earn-out liabilities recorded at March 31. It disputed payment obligations, suspended payments, and filed suit against former RER stockholders in May 2017.
- Legal matters: A jury found in April 2017 that MiFi products did not infringe Carucel patents; Carucel indicated it would appeal. The filing cautions that an adverse outcome could be material. Inseego also described other patent matters and customer indemnification exposures.
- Controls and restructuring: Disclosure controls were deemed ineffective at March 31 because of a material weakness involving insufficient accounting and financial-reporting resources. Management was evaluating remediation. Q1 restructuring charges were $0.8 million; the 2017 initiative was expected to cost about $0.8 million in total and conclude by September 2017.
- Outlook: No quantified revenue, earnings or margin guidance was provided. Management anticipated introducing additional SaaS telematics solutions and service offerings over the next 12 months, while noting that profitability depends on generating revenue sufficient to support the cost structure.
Most important facts for investors to verify
- Whether the MiFi sale received CFIUS clearance, closed, and generated proceeds sufficient to repay the term loan.
- Liquidity runway, cash generation and access to additional financing before the May 8, 2018 loan maturity.
- Progress in remediating the material weakness in internal control over financial reporting.
- Revenue dependence on the largest customer and the sustainability of SaaS growth and gross margins.
- Outcomes of the RER payment litigation and any Carucel appeal or other material intellectual-property claims.