Inseego Corp. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Inseego develops wireless 4G/5G, IoT and cloud solutions. The company reports two revenue categories: IoT & Mobile Solutions and Enterprise SaaS Solutions. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $65.7 million | $80.7 million | $123.3 million | $137.5 million |
| Gross profit / margin | $20.3 million / 31.0% | $22.0 million / 27.3% | $38.8 million / 31.5% | $39.2 million / 28.5% |
| Operating loss | $10.5 million | $5.3 million | $26.7 million | $13.1 million |
| Net loss | $13.0 million | $74.8 million | $30.0 million | $93.0 million |
| Net loss per common share | $(0.14) | $(0.78) | $(0.31) | $(1.01) |
- Revenue mix: Q2 IoT & Mobile Solutions revenue fell 25.2% to $51.8 million; Enterprise SaaS Solutions rose 21.8% to $13.9 million. For the first half, the categories declined 15.2% to $94.8 million and grew 10.4% to $28.5 million, respectively.
- Profitability: Gross margin improved year over year, which management attributed to product mix and favorable Inseego Subscribe margins. Operating loss widened as research and development and sales and marketing costs increased; Q2 also included a $1.2 million software impairment.
- Cash flow: First-half operating cash flow was negative $12.0 million, versus positive $4.7 million a year earlier. Investing cash outflow was $17.4 million; financing provided $29.5 million, principally including $29.4 million of net ATM offering proceeds. Cash, cash equivalents and restricted cash totaled $40.4 million at June 30.
- Liquidity and debt: Management reported available cash and cash equivalents of $36.7 million, including $5.8 million classified as held for sale and excluding $3.7 million restricted cash. Working capital was $32.4 million excluding held-for-sale balances. The company had $161.9 million principal amount of 3.25% convertible senior notes due 2025 ($159.1 million net carrying amount); $80.4 million principal was held by related parties.
- Balance sheet: Total assets were $224.7 million and total liabilities $233.6 million; stockholders’ deficit was $8.9 million. Common shares outstanding were 103.1 million at June 30.
Material changes and unusual items
- Revenue declined 18.6% in Q2 and 10.4% in the first half. Management cited weaker enterprise and carrier sales and lower LTE gigabit hotspot sales as pandemic-related demand eased. Second-generation 5G hotspot sales and subscriber growth in Inseego Subscribe partly offset the decline.
- Enterprise SaaS growth reflected the lifting of pandemic-related installation restrictions and favorable currency effects. Ctrack South Africa revenue will no longer be generated following the subsequent divestiture.
- Q2 2020 net loss included a $67.2 million debt conversion and extinguishment loss; first-half 2020 included $75.2 million of such losses. These prior-period charges help explain the lower reported net loss in 2021, despite the higher operating loss.
- In January 2021, the company sold 1.5 million shares through its ATM program for $29.4 million net proceeds. The 2025 Notes conversion feature also resulted in approximately $5.0 million principal converted to common shares in the first half.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management said cash and expected operating cash flows should meet needs for the 12 months from the filing date, while noting that sustained profitability and positive cash flow depend on revenue levels and mix supporting the cost structure.
- On July 30, 2021, after quarter-end, Inseego completed the sale of Ctrack South Africa for initial cash proceeds of approximately $36.6 million. Final proceeds remain subject to foreign-exchange and working-capital adjustments. Management estimated a gain of approximately $4.4 million, to be recorded in Q3 2021; the final amount could differ.
- Risks include customer concentration (two customers represented 68.0% of Q2 revenue), reliance on third-party manufacturers and key components, the global semiconductor shortage, uncertain COVID-19 effects, competition and execution of 5G products, currency fluctuations, and dependence on raising capital or improving cash generation. Management said the semiconductor shortage had not materially affected the company to date but could become material if it persists.
- The company is a defendant or co-defendant in patent litigation and has customer indemnification obligations; management did not expect the existing matters to materially affect results or financial condition. The filing reports no material change in previously disclosed risk factors and no material change in contractual obligations during Q2.
Important facts for investors to verify
- Whether IoT & Mobile revenue stabilizes as pandemic-related hotspot demand eases, and whether 5G and subscription growth can offset declines.
- Whether improving gross margin can translate into narrower operating losses given higher development and marketing spending.
- Actual post-closing Ctrack proceeds and gain after working-capital, transaction-cost and foreign-exchange adjustments.
- Cash burn, liquidity after the divestiture, and the company’s ability to service or refinance the 2025 Notes without further dilution.
- Customer concentration and any material supply-chain or semiconductor constraints.