Inseego Corp. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; filed May 10, 2018. Inseego sells IoT and mobile hardware and enterprise SaaS solutions, including telematics and device-management services. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $46.7 million | $55.4 million |
| Gross profit / margin | $15.5 million / 33.3% | $16.2 million / 29.2% |
| Operating loss | $2.6 million | $11.0 million |
| Net loss attributable to Inseego | $8.1 million | $16.1 million |
| Basic and diluted loss per share | $0.13 | $0.28 |
| Cash used in operating activities | $4.4 million | $3.2 million |
| Cash used in investing activities | $0.9 million | $1.7 million |
At March 31, 2018, cash and cash equivalents were $16.1 million (cash, cash equivalents and restricted cash totaled $16.2 million). Working capital was in deficit by $3.9 million. Total liabilities were $198.0 million, against total assets of $148.8 million, and stockholders’ deficit was $49.2 million.
Debt included $48.0 million principal under a secured term loan (net carrying amount $44.4 million) and $105.1 million principal of convertible notes (net carrying amount $86.8 million). The term loan matures in August 2020 and bears interest at three-month LIBOR, subject to a 1.00% floor, plus 7.625%; its reported effective rate was 13.21%. The convertible notes bear 5.50% stated interest and mature in June 2022; their reported effective rate was 16.19%. The filing reports $3.1 million of current DigiCore bank facilities.
Changes versus prior year
- Revenue declined 15.6% to $46.7 million. IoT & Mobile Solutions fell 25.5% to $28.9 million, primarily due to lower legacy MiFi sales; Enterprise SaaS Solutions rose 7.4% to $17.9 million, led by Ctrack.
- Gross margin improved to 33.3% from 29.2%, which management attributed to lower sales of lower-margin legacy MiFi products and improved Ctrack sales and margins. Gross profit still decreased by $0.6 million.
- Operating loss narrowed, reflecting lower R&D, sales and marketing, and general and administrative costs. Management cited cost reductions and lower non-recurring legal costs versus Q1 2017.
- Net loss improved, but net interest expense rose to $5.1 million from $4.2 million, primarily due to the term loan and related debt discount and issuance-cost amortization.
- Operating cash use increased by $1.2 million year over year. Cash and cash equivalents declined $5.1 million from year-end 2017.
Outlook, risks and unusual items
- Management expects cash and cash equivalents, together with anticipated operating cash flows, to meet working-capital needs for the 12 months following filing. This depends on achieving revenue levels sufficient to support the cost structure; the company has a history of operating and net losses and cash use.
- Restructuring initiatives begun in Q1 2018, including workforce reductions and facility consolidation, were expected to cost approximately $0.9 million and be completed in June 2018. The company also expected to complete its 2017 initiatives in May 2018. No numerical revenue or earnings guidance was provided.
- Management anticipated introducing additional SaaS telematics, industrial IoT and mobile/fixed wireless products targeting emerging 5G markets over the next 12 months. Results remain subject to competition, product development and adoption, customer demand, component availability, and the pace of wireless technology transitions and 5G deployment.
- One customer generated 48.9% of Q1 2018 revenue, and one customer represented 26.1% of accounts receivable at quarter-end.
- The company recorded a $0.6 million inventory impairment related to an abandoned product line. Restructuring expense was $0.3 million. These items are included in reported results.
- Inseego is disputing payments connected with its R.E.R. / Feeney Wireless acquisition and is suing former RER stockholders. It had suspended payments, including March 2017 and March 2018 cash installments of $5.3 million each, and disputes future amounts. Accrued acquisition-related liabilities were $21.1 million. An adverse outcome could materially affect results or financial condition.
- Other legal matters include patent litigation; the company described a Carucel appeal following a judgment in its favor and stated that it intends to defend it. The ultimate outcomes of litigation and contractual indemnification claims are uncertain.
- The secured term loan is collateralized by substantially all company and guarantor assets. The company cautioned that additional financing may not be available on favorable terms, or at all, and could dilute shareholders or impose operating restrictions.
Important facts for investors to verify
- Whether MiFi declines stabilize and growth in Ctrack, IoT and planned 5G products offsets hardware revenue weakness.
- Cash burn, working-capital needs and the assumptions behind management’s 12-month liquidity assessment.
- Debt service capacity, loan covenants and refinancing or repayment needs, including the convertible notes’ 2020 holder repurchase option.
- Developments in the RER acquisition dispute, the related accrued liability and any required payments or settlement.
- Customer concentration, receivable collectability and dependence on major wireless-operator relationships.