Inseego Corp. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The unaudited filing covers Inseego’s IoT and mobile hardware and enterprise SaaS businesses.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $49.1M | $59.9M | $95.8M | $115.3M |
| Gross profit / margin | $17.7M / 36.0% | $17.2M / 28.8% | $33.2M / 34.7% | $33.4M / 29.0% |
| Operating loss | $(0.8)M | $(5.6)M | $(3.4)M | $(16.6)M |
| Net loss attributable to Inseego | $(6.7)M | $(12.0)M | $(14.7)M | $(28.1)M |
| Loss per share, basic and diluted | $(0.11) | $(0.21) | $(0.24) | $(0.49) |
- Q2 IoT & Mobile Solutions revenue fell 26.6% to $31.7M; Enterprise SaaS Solutions revenue grew 4.0% to $17.3M. For the six months, the categories changed by -26.1% and +5.7%, respectively.
- Management attributed lower hardware revenue mainly to key customers focusing on upcoming 5G products. SaaS growth primarily reflected Ctrack, partly offset by DMS price concessions tied to multiyear deals.
- Gross margin improved, which management attributed largely to lower unit costs after changing contract manufacturers. Operating expenses also declined amid cost-containment efforts.
- Net interest expense was $5.1M in Q2 and $10.2M for the six months, compared with $4.9M and $9.0M, respectively, in 2017.
Cash, debt and liquidity
- Cash and cash equivalents were $18.8M at June 30, 2018, down from $21.2M at year-end 2017. Working capital was negative $5.8M.
- For the six months, operating cash flow was positive $0.9M versus negative $12.9M a year earlier; investing used $1.7M and financing used $0.2M. Cash, cash equivalents and restricted cash decreased $2.4M, including a $1.4M adverse effect from exchange rates.
- Debt included $48.0M principal under the term loan (net carrying amount $44.8M) and $105.1M principal of convertible notes (net carrying amount $88.9M). The term loan matures in August 2020, is secured by substantially all company and guarantor assets, and bears interest at three-month LIBOR subject to a 1.00% floor, plus 7.625%. Its effective rate was 13.45% for the first half. Convertible notes bear 5.50% coupon interest and mature in 2022; their reported effective rate was 15.82%.
- Management said cash plus anticipated operating cash flows should meet working-capital needs for the 12 months following the filing, while noting that this depends on achieving adequate revenue and executing its operating plan.
Material changes, outlook and risks
- On August 6, 2018, after quarter-end, Inseego raised $19.7M gross in a private placement of 12.062M common shares and warrants for up to 4.222M additional shares. The warrants have a $2.52 initial exercise price and are exercisable from February 6, 2019. The financing provides cash but is dilutive.
- A July 26, 2018 settlement with former RER stockholders resolved litigation. Consideration included $1.0M cash, 500,000 shares, and up to a further $2.0M in cash or stock over two years. The company reported that acquisition-related liabilities declined from $21.1M to approximately $4.0M.
- The 2018 restructuring is expected to cost approximately $1.0M and be completed in December 2018. The filing provides no quantified revenue or earnings guidance. Management anticipated introducing additional SaaS, industrial IoT and mobile/fixed wireless products, including products targeting the emerging 5G market.
- Key risks include sustained operating losses and cash needs, significant customer concentration (one customer represented 45.1% of Q2 revenue and 30.8% of receivables), debt service and refinancing capacity, dependence on third-party and sole-source suppliers, execution of restructuring and product launches, competition and litigation. Management noted that additional financing may be needed if results fall short or unforeseen expenditures arise; financing availability is not assured.
- The Carucel patent case judgment in Inseego’s favor was affirmed on appeal in July 2018. Other patent litigation and indemnification matters remain; management did not expect existing matters to have a material adverse effect, but outcomes are uncertain.
Investor verification priorities
- Track hardware demand and the timing and customer adoption of 5G products, alongside continued SaaS growth and DMS pricing effects.
- Reconcile operating cash generation with recurring losses, working-capital needs and debt interest; monitor the term loan’s covenants and 2020 maturity and the convertible notes’ terms.
- Verify the private placement proceeds, warrant terms and resulting share dilution, and confirm settlement payments, share issuance and liability reduction.
- Assess whether customer concentration, supplier dependencies and restructuring execution affect revenue, margins and liquidity.