Inseego Corp. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; unaudited. Inseego sells mobile broadband hardware, IoT connectivity and device-management services, and Ctrack telematics software and services. Management reported approximately 664,000 subscribers globally.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $59.9 | $62.8 | $115.3 | $129.8 |
| Gross profit / margin | $17.2 / 28.8% | $23.2 / 37.0% | $33.4 / 29.0% | $44.4 / 34.2% |
| Operating loss | $(5.6) | $(4.6) | $(16.6) | $(11.0) |
| Net loss attributable to Inseego | $(12.0) | $(2.7) | $(28.1) | $(14.6) |
| Basic and diluted loss per share | $(0.21) | $(0.05) | $(0.49) | $(0.27) |
- Revenue mix: Q2 hardware revenue fell 8.5% to $45.0 million, while SaaS, software and services rose 9.2% to $14.9 million. For the first half, hardware revenue declined 16.4% to $86.4 million and SaaS, software and services increased 9.2% to $28.9 million.
- Cash flow: Operating activities used $15.5 million in the first half, versus $0.8 million used in the prior-year period. Investing activities used $2.8 million; financing provided $16.8 million, mainly from the new term loan. Cash and cash equivalents ended the period at $8.9 million, down from $9.9 million at year-end 2016. A further $2.5 million was classified as restricted cash.
- Liquidity: The company disclosed an $18.9 million working-capital deficit. Management stated existing cash and anticipated operating cash flows would not cover working-capital needs and the May 2018 term-loan repayment without additional financing; the filing identifies substantial doubt about the company’s ability to continue as a going concern.
- Debt: In May, Inseego borrowed $20 million under a secured term loan maturing May 8, 2018, receiving $18 million before approximately $0.4 million of issuance costs. Its rate is three-month LIBOR, subject to a 1% floor, plus 10%; the reported effective rate was 25.79%. Convertible notes had $120 million principal outstanding and a $92.0 million net carrying amount at June 30, with 5.5% coupon and 2022 maturity. The term loan is secured by specified assets and subsidiary equity.
- Balance sheet: Total assets were $161.5 million and total liabilities $196.6 million; stockholders’ deficit was $35.1 million.
Material changes and unusual items
- Inseego terminated its proposed $50 million sale of the MiFi business in June after delays and uncertainty in obtaining CFIUS approval. It said it would retain the business and had no plans to sell it elsewhere.
- Revenue and gross margin weakened year over year. Management attributed lower hardware sales to the prior divestiture of the Modules Business, exiting legacy or lower-margin product lines, and reduced MiFi sales. SaaS growth reflected subscriber growth and emphasis on recurring revenue. Lower MiFi margins and a $1.4 million inventory impairment related to abandoned product lines also weighed on gross margin.
- The company recorded $2.3 million of restructuring charges in the first half; February and June initiatives were expected to cost approximately $3.3 million in total. It also announced further expense reductions intended to support profitability and positive cash flow.
- Other expense was $1.0 million in Q2 2017, compared with $5.8 million of other income in Q2 2016; management said the 2017 expense primarily related to termination of the former revolving facility, while the prior-year income primarily included a gain on the Modules Business sale.
- Inseego is disputing payments due to former RER owners under deferred purchase-price and earn-out arrangements and has suspended payments pending litigation. The filing reports related acquisition liabilities on the balance sheet.
Outlook, risks and controls
- No quantified revenue, earnings, or cash-flow guidance is provided. Management expects to introduce additional SaaS telematics solutions and services over the next twelve months and is targeting a cost structure and revenue mix that can support profitability and positive cash flow.
- Management said additional debt or equity financing is needed to meet working-capital requirements and repay or refinance the term loan by maturity. Availability and terms are uncertain; equity financing could dilute shareholders, and failure to refinance could lead to default.
- Revenue concentration is substantial: two customers represented 47.1% and 12.1% of Q2 revenue; one customer represented 50.4% of first-half revenue and 41.0% of receivables at June 30. The filing separately identifies Verizon Wireless as a major MiFi customer and says it accounted for 47% of Q2 consolidated revenue.
- The MiFi business faces low gross margins and strong competition. Other disclosed risks include dependence on contract manufacturers and suppliers, foreign-currency exposure, litigation and intellectual-property claims, and difficulty executing cost reductions and product plans.
- Carucel patent litigation resulted in a judgment for Novatel Wireless, but Carucel appealed; the filing notes a prior claim seeking approximately $43 million. Inseego also brought litigation against former RER stockholders. Outcomes remain uncertain.
- Disclosure controls were deemed ineffective as of June 30 because of an unremediated material weakness tied primarily to insufficient accounting and financial-reporting resources. Management reported remediation efforts underway and stated the financial statements fairly present the company’s results.
Important facts for investors to verify
- Whether Inseego obtained sufficient financing to meet operating needs and repay or refinance the secured term loan before its May 8, 2018 maturity.
- Whether operating cash use, working-capital needs, and gross margins improved after the June cost-cutting actions.
- Whether SaaS growth can offset hardware declines and customer concentration, especially dependence on Verizon Wireless.
- Developments in the RER payment dispute and the Carucel appeal, including any resulting cash or indemnification exposure.
- Whether management remediated the material weakness and restored effective disclosure controls.