Inseego Corp. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Inseego develops mobile broadband, IoT hardware, and cloud and telematics software. Financial statements are unaudited.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $55.9M | $49.1M | $104.4M | $95.8M |
| Gross profit / margin | $15.6M / 27.8% | $17.7M / 36.0% | $30.3M / 29.0% | $33.2M / 34.7% |
| Operating loss | $(5.2)M | $(0.8)M | $(7.6)M | $(3.4)M |
| Net loss attributable to Inseego | $(10.8)M | $(6.7)M | $(18.3)M | $(14.7)M |
| Net loss per share, basic and diluted | $(0.14) | $(0.11) | $(0.24) | $(0.24) |
Q2 revenue grew 13.9%, driven by IoT & Mobile Solutions, up 26.0% to $40.0M. Enterprise SaaS Solutions declined 8.1% to $15.9M. For the first half, the segments grew 20.0% and declined 9.9%, respectively. Management cited stronger LTE gigabit hotspot sales, partly offset by lower IoT sales; SaaS weakness primarily reflected South African rand exchange-rate movements, partly offset by Device Management System growth.
Gross margin contracted year over year in both periods. Management attributed Q2 pressure to lower MiFi margins, lower IoT volumes and currency movements; first-half pressure mainly reflected a higher mix of lower-margin products. Q2 cost of IoT & Mobile Solutions also rose with hotspot sales, freight, royalties and higher unit costs. Operating expenses increased in Q2, including sales and marketing and general and administrative costs; higher share-based compensation contributed.
Cash flow, balance sheet and debt
- First-half operating cash flow was $(10.1)M, versus $0.9M generated a year earlier. Investing cash outflow was $(11.3)M, versus $(1.7)M, including increased property and software development spending. Financing provided $10.3M, principally from warrant exercises. Cash, cash equivalents and restricted cash fell $10.7M to $20.3M.
- At June 30, cash and cash equivalents were $20.3M; working capital deficit was $117.3M. Current assets were $76.6M against current liabilities of $194.0M.
- Debt included $105.1M principal of 5.5% convertible notes and $47.5M principal on a secured term loan; carrying amounts were $97.2M and $45.8M, respectively. Approximately $0.2M of Novatel Wireless notes also remained outstanding. The term loan bears interest at three-month LIBOR, subject to a 1% floor, plus 7.625%, and matures August 2020.
- The Inseego notes give holders a cash repurchase right on June 15, 2020; the remaining Novatel Wireless notes mature that date. The filing classifies the convertible notes and term loan as current, explaining that note payment obligations can trigger acceleration under the credit agreement. Management said it intends to restructure debt before the put date but cannot assure financing or restructuring will be available.
Outlook, risks and unusual items
- Going concern and liquidity: Management stated available cash and anticipated operating cash flows are insufficient to meet working capital needs and potential debt repurchases and repayments without additional funding. The filing says these conditions raise substantial doubt about the company’s ability to continue as a going concern. Plans include debt restructuring or raising debt or equity; success is not assured.
- Subsequent financing: On August 9, 2019, Inseego raised $10.0M through perpetual Series E preferred stock. It carries cumulative 9% annual cash dividends, payable quarterly when declared, and ranks ahead of common stock in liquidation. The company may redeem it from July 2022 at 110% of its base amount plus accrued dividends.
- Other subsequent debt activity: Related parties acquired an additional $29.2M of term loans on July 10 and $25.4M of Inseego notes on July 23. These followed related-party holdings of approximately $10.3M of term loans and $19.4M of Inseego notes at quarter-end.
- Customer concentration: One customer generated 56.0% of Q2 revenue and 54.7% of first-half revenue. Two customers represented 38.3% of accounts receivable at quarter-end.
- Other items and risks: First-half share-based compensation rose to $4.7M from $1.9M. A settlement with former RER stockholders left approximately $2.0M of liabilities at June 30. The company disclosed patent litigation and customer indemnification obligations, while stating it did not expect existing matters to have a material adverse effect. Risks highlighted include customer concentration, competition and 5G execution, supply and tariffs, and the ability to refinance debt and achieve positive cash flow. No quantified revenue or earnings guidance is provided in the filing.
Key investor verification points
- Progress and terms of any debt recapitalization before the June 2020 note repurchase date and Novatel maturity, including potential credit-agreement acceleration.
- Cash burn, working-capital needs and whether the $10.0M preferred financing is sufficient; monitor its cumulative 9% dividend burden and any further capital raising.
- Whether IoT & Mobile growth can translate into improved margins, and whether SaaS revenue stabilizes despite foreign-exchange effects.
- Exposure to the major customer and progress diversifying revenue and receivables concentration.
- Potential financial impact of patent matters, indemnification claims and remaining RER settlement obligations.