Inseego Corp. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited consolidated results. Inseego sells mobile broadband hardware, IoT connectivity and device-management services, and Ctrack telematics and fleet-management solutions.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net revenue | $57.5 million | $60.9 million | $172.8 million | $190.6 million |
| Gross profit / margin | $16.4 million / 28.5% | $22.9 million / 37.7% | $49.8 million / 28.8% | $67.3 million / 35.3% |
| Operating loss | $6.4 million | $11.9 million | $23.0 million | $22.9 million |
| Net loss attributable to Inseego | $13.8 million | $18.6 million | $41.9 million | $33.2 million |
| Net loss per share | $0.23 | $0.34 | $0.72 | $0.62 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $(15.2) million | $0.1 million |
- Q3 revenue declined 5.6% year over year, driven by a 7.1% decrease in hardware; SaaS, software and services revenue was nearly flat. For the nine-month period, revenue fell 9.4%: hardware declined 13.5%, while SaaS, software and services grew 5.6%.
- Gross margin contracted substantially in both comparisons. Management cited lower MiFi margins and Q3 sales of legacy MiFi products at cost to improve liquidity; the nine-month comparison also included a $1.5 million abandoned-product inventory impairment.
- Q3 operating loss narrowed as research and development, sales and marketing, and general and administrative costs fell. The nine-month operating loss was approximately unchanged, with lower operating expenses offset by lower gross profit and higher restructuring charges.
- Interest expense was $5.2 million in Q3 and $14.3 million for nine months, up from $3.9 million and $11.7 million, respectively. The company attributed the increases principally to debt-discount amortization and the new term loan.
Liquidity, debt and balance sheet
- At September 30, cash and cash equivalents were $19.6 million; working capital was $6.4 million. Current assets were $72.7 million and current liabilities $66.3 million.
- Nine-month cash use was $15.2 million in operations and $3.8 million in investing. Financing provided $29.9 million, primarily through the new term loan; cash increased $9.7 million from year-end 2016.
- The August 2017 term loan has $48.0 million principal, matures August 23, 2020, bears interest at three-month LIBOR (minimum 1.00%) plus 7.625%, and is secured by a first-priority lien on substantially all company and guarantor assets. Its effective interest rate through September 30 was 12.50%.
- Convertible notes had $105.1 million aggregate principal outstanding at September 30, with a 5.50% coupon and a June 2022 maturity; the notes are convertible at an initial $4.70 per share. The filing reports a 19.09% effective interest rate on the liability component for the nine months.
- Total liabilities were $207.8 million, exceeding total assets of $158.9 million; stockholders’ deficit was $48.9 million. Management said cash and anticipated operating cash flows should cover working-capital needs for the 12 months following filing, but noted liquidity depends on meeting its operating plan.
Material changes, outlook and risks
- The proposed $50 million sale of the MiFi Business was terminated in June 2017 because of delays and uncertainty in obtaining CFIUS approval. Inseego retained the business and said it had no plans to sell it to another party. Management expects challenges in making the relatively low-margin business profitable.
- Management is shifting toward recurring revenue and expects future revenue to depend substantially on telematics SaaS demand, business-connectivity and device-management demand, and acceptance of new products. It anticipated additional SaaS telematics and service offerings over the next 12 months, but gave no quantified revenue or earnings guidance.
- Restructuring initiatives are intended to reduce costs and focus on more profitable businesses. The company recorded $5.7 million of restructuring charges in the first nine months of 2017; expected total costs for the 2017 initiatives were approximately $5.2 million. Failure or delay in achieving savings could impair results.
- Customer concentration is significant: Verizon Wireless accounted for 48.0% of Q3 revenue, and two customers together represented 62.9%. One customer represented 37.9% of accounts receivable at quarter-end.
- Inseego was disputing approximately $5.3 million of scheduled March 2017 cash payments to former RER shareholders and had suspended payments pending litigation. An adverse outcome could materially affect results or financial condition. Carucel patent litigation was on appeal after a jury found no infringement; the filing notes a potential adverse outcome could be material.
- Disclosure controls were not effective at quarter-end because a previously identified material weakness in financial reporting resources remained unremediated. Remediation actions were underway.
- Other risks include substantial debt-service obligations, restrictive covenants and potential cross-defaults; dependence on Verizon; competition and low MiFi margins; product and supply-chain execution; foreign exchange; and litigation. The filing identifies no defaults upon senior securities.
Key facts for investors to verify
- Whether recurring-revenue growth and restructuring deliver improved gross margin and positive operating cash flow.
- Cash needs, debt covenant compliance, interest burden, and the terms and collateral of the term loan and convertible notes.
- Verizon’s ongoing revenue contribution and customer concentration, as well as MiFi profitability following the terminated sale.
- Outcome and potential cash impact of the RER dispute and Carucel appeal.
- Progress in remediating the material weakness in internal controls and in adopting the new revenue-recognition standard in 2018.