Inseego Corp. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unaudited consolidated results; comparisons are with the three months ended March 31, 2021. Inseego develops fixed and mobile wireless, IoT, and cloud solutions. The company reports one segment.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net revenue | $61.4 million | $57.6 million |
| Gross profit / margin | $15.2 million / 24.8% | $18.5 million / 32.1% |
| Operating loss | $21.8 million | $16.2 million |
| Net loss attributable to Inseego | $25.2 million | $17.2 million |
| Net loss attributable to common stockholders | $25.9 million; $0.24 per share | $18.0 million; $0.18 per share |
| Operating cash flow | $(0.6) million | $1.0 million |
| Investing cash flow | $(3.9) million | $(9.4) million |
Q1 2022 revenue comprised $54.5 million of IoT & Mobile Solutions and $6.9 million of Enterprise SaaS Solutions. Research and development expense was $18.6 million, sales and marketing $9.8 million, and general and administrative expense $8.2 million. Share-based compensation was $11.2 million.
Liquidity, debt, and balance sheet
- At March 31, 2022, cash and cash equivalents were $41.5 million and restricted cash was $3.7 million. Cash, cash equivalents, and restricted cash totaled $45.2 million, down from $49.8 million at year-end 2021.
- Current assets were $115.3 million and current liabilities $72.6 million. Total liabilities were $238.4 million; stockholders’ deficit was $34.2 million.
- Outstanding 2025 Notes had $161.9 million principal, with a net carrying amount of $157.6 million. The senior unsecured notes bear 3.25% annual interest and mature May 1, 2025. $80.4 million principal was held by related parties.
- Cash used in investing included $3.1 million of capitalized software development costs and $0.8 million of property and equipment purchases. Financing cash use was $1.1 million.
Changes versus the prior period
- Revenue rose 6.6%, reflecting a 26.9% increase in IoT & Mobile Solutions, partly offset by a 53.0% decline in Enterprise SaaS Solutions. The SaaS decline primarily reflected the July 2021 sale of Ctrack South Africa; remaining geographic SaaS revenue was described as relatively flat.
- Management attributed IoT & Mobile growth mainly to $16.0 million of additional second-generation 5G hotspot sales and $0.7 million of Inseego Subscribe growth. Lower 4G product sales partly offset the increase.
- Gross margin declined to 24.8% from 32.1%. Management cited the loss of higher-margin Ctrack South Africa revenue and higher IoT & Mobile costs, including freight.
- Operating loss and net loss widened. Research and development expense increased 27.5%; net interest expense increased to $2.9 million from $1.8 million. Q1 2022 included a $0.5 million debt conversion/extinguishment loss, described as primarily related to prior-year 2022 Notes adjustments.
- Operating cash flow shifted from $1.0 million provided to $0.6 million used. The prior-year financing inflow included $29.4 million of net ATM offering proceeds; no comparable offering proceeds were reported in Q1 2022.
Outlook, risks, and unusual items
- Management said cash and cash equivalents plus anticipated operating cash flows should meet needs for the next 12 months from the filing date. The company has a history of operating and net losses and cash usage; management said profitability and positive cash flow depend on generating revenue adequate for its cost structure. No quantified revenue or earnings guidance was provided.
- Management expected to introduce additional SaaS and service offerings, industrial IoT products, and mobile and fixed wireless devices targeting 5G over the next 12 months. It said Q1 5G demand was consistent with expectations, while LTE gigabit hotspot sales had softened as pandemic-related demand eased.
- Potential risks include semiconductor and component availability, COVID-19 and macroeconomic uncertainty, competition and 5G adoption, reliance on third-party manufacturing, and substantial customer concentration. Two customers represented 37.3% and 39.9% of Q1 revenue; two customers represented 33.0% and 26.2% of accounts receivable at quarter-end.
- Noncancellable contract-manufacturer purchase obligations totaled approximately $169.1 million at March 31, 2022. Management warned that missed plans, litigation expenditures, or interruptions to operations could require additional financing or expense reductions; financing may not be available on favorable terms or at all.
- The company disclosed several U.S. patent infringement lawsuits and related potential indemnification obligations. Management did not expect existing matters to have a material adverse effect, while noting outcomes remain uncertain.
- Q1 included $8.8 million of immediately vested RSUs for fiscal 2021 annual bonuses. A $0.6 million favorable fair-value change in the notes’ embedded interest make-whole derivative partly offset other expense. Restricted cash was collateral for potential future divestiture-related warranty claims and was expected to become available in July 2022.
Important facts for investors to verify
- Whether 5G and subscription growth can offset lower legacy LTE demand and the continuing revenue impact of the Ctrack South Africa divestiture, while improving gross margin.
- Whether operating cash flow and liquidity remain adequate relative to the $169.1 million of purchase obligations, ongoing losses, and $161.9 million notes principal due in 2025.
- How customer concentration, semiconductor supply, freight costs, and product demand affect sales, margins, and working capital.
- The status and potential exposure of patent litigation and indemnification matters, and the timing or availability of restricted cash.
- Potential dilution from equity compensation and convertible notes; diluted EPS excluded approximately 27.1 million potentially dilutive shares because their effect was anti-dilutive.