Inseego Corp. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed March 15, 2018. The company designs and sells mobile, IoT and telematics hardware, SaaS, software and services, including MiFi products and Ctrack fleet and asset management solutions.
Financial results and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $219.3 million | $243.6 million |
| Gross profit / margin | $67.3 million / 30.7% | $76.3 million / 31.3% |
| Operating loss | $22.2 million | $45.0 million |
| Net loss attributable to Inseego | $45.7 million | $60.6 million |
| Basic and diluted loss per share | $0.78 | $1.12 |
| Cash used in operating activities | $14.6 million | $6.6 million |
Revenue fell 10.0% year over year: hardware declined 14.1% to $161.0 million, while SaaS, software and services increased 3.8% to $58.3 million. The company attributed the hardware decline mainly to the Modules Business divestiture, discontinued legacy product lines and lower MiFi sales. Lower operating expenses helped narrow operating and net losses, but gross margin slipped, reflecting lower margins on new MiFi products and a one-time sale of legacy MiFi products at cost.
Fourth-quarter 2017 revenue was $46.5 million, compared with $52.9 million in fourth-quarter 2016. Fourth-quarter net loss attributable to Inseego was $3.8 million ($0.06 per share), versus $27.4 million ($0.50 per share) a year earlier; gross profit was $17.5 million versus $9.0 million.
At year-end, cash and cash equivalents were $21.2 million, working capital was $6.5 million, total assets were $158.2 million and stockholders’ deficit was $45.6 million. Net cash from financing was $30.4 million, largely reflecting the new term loan; investing activities used $4.4 million. The filing reports no off-balance-sheet arrangements.
Debt included $48.0 million principal on a secured term loan, $105.1 million principal of convertible notes and approximately $3.1 million of DigiCore bank facilities, plus a $0.3 million mortgage bond. The term loan matures in August 2020 and bears interest at three-month LIBOR, subject to a 1.0% floor, plus 7.625%; the notes bear 5.5% coupon interest, with the principal of the main Inseego notes due in 2022 and holder repurchase rights in June 2020. The term loan is secured by substantially all company and guarantor assets. Debt carrying values differ from principal because of discounts and issuance costs.
Changes, outlook and material matters
- In June 2017, Inseego terminated the proposed $50 million sale of the MiFi Business after delays and uncertainty in obtaining CFIUS approval. It retained the business and announced leadership changes and a company-wide restructuring.
- FY 2017 restructuring charges were $5.2 million. Management reported lower other operating expenses following cost initiatives and expected the 2017 restructuring program, estimated at about $4.3 million in total, to be completed by May 2018.
- Management said cash, together with anticipated operating cash flows, should meet working-capital needs for the 12 months after filing. This is a forward-looking assessment: the company had recurring losses, negative operating cash flow and substantial debt service needs, and said adequate revenue is necessary to support its cost structure.
- Strategy centers on growing recurring SaaS and IoT offerings, expanding telematics into aviation and developing 5G products. In late 2017, Inseego announced a 5G technology and device co-development relationship with Qualcomm and Verizon Wireless. No quantified revenue or earnings guidance is provided.
- Verizon Wireless accounted for 51.2% of FY 2017 revenue (53.9% in 2016). Management intends to diversify, but expects continued substantial dependence on this customer.
- Inseego is suing former RER stockholders over the FW acquisition and has suspended disputed earn-out and deferred purchase payments pending the case. The filing describes potential adverse financial consequences; the amounts and obligations should be checked against the detailed agreement and litigation disclosures.
- Carucel sought approximately $43 million in damages and royalties over MiFi patents. A 2017 jury verdict favored Novatel Wireless; Carucel appealed, and the outcome remained uncertain.
- Other significant risks include execution and timing of 5G commercialization, intense competition and low MiFi margins, reliance on contract manufacturers and certain sole-source suppliers, foreign-exchange exposure, litigation and the ability to service debt. The company reported that its previously identified material weakness in financial-reporting controls had been remediated; management and the auditor concluded controls were effective at year-end.
Most important facts for investors to verify
- Whether operating cash flow improves and the company can meet debt service and other contractual payments without additional financing.
- Current debt balances, loan covenants, collateral, conversion and repurchase terms, and potential dilution from convertible notes, warrants and equity awards.
- Verizon Wireless sales forecasts and the pace of customer diversification, alongside MiFi profitability and SaaS recurring-revenue growth.
- Progress, customer commitments and commercialization timing for 5G products and the Qualcomm-Verizon relationship.
- Developments and potential payment exposure in the RER earn-out dispute and Carucel appeal; also confirm the amounts and timing of disputed RER obligations.
- Execution of restructuring plans, supplier transition and inventory requirements, and the effects of foreign exchange and customer concentration.