Inseego Corp. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited results; comparison is with Q1 2019 unless otherwise noted. Inseego develops wireless 4G/5G and Industrial IoT hardware and enterprise SaaS/telematics solutions. It reports one operating segment.
Key financial results
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net revenue | $56.8 million | $48.6 million; up 17.1% |
| IoT & Mobile Solutions revenue | $40.4 million | $32.8 million; up 23.2% |
| Enterprise SaaS Solutions revenue | $16.5 million | $15.8 million; up 4.3% |
| Gross profit / margin | $17.2 million / 30.3% | $14.8 million / 30.4% |
| Operating loss | $7.7 million | $2.5 million |
| Net loss attributable to Inseego | $18.2 million | $7.5 million |
| Net loss attributable to common shareholders / diluted and basic EPS | $18.6 million / $(0.20) | $7.5 million / $(0.10) |
| Operating cash flow | $0.3 million provided | $5.0 million used |
| Investing cash flow | $4.9 million used | $4.3 million used |
| Cash and cash equivalents at quarter-end | $30.5 million | $12.1 million at Dec. 31, 2019 |
| Working capital | $12.4 million deficit | — |
Balance sheet, debt and capital
- At March 31, total assets were $173.3 million and total liabilities were $145.5 million; stockholders’ equity was $27.8 million, compared with a $37.4 million deficit at year-end 2019.
- The term loan had $47.5 million principal outstanding and a $46.9 million net carrying value. It is secured by substantially all company and guarantor assets, bears interest at 9.238% at quarter-end, and matures August 23, 2020. A lender letter agreement provides for good-faith refinancing or amendment discussions; if no agreement is reached by maturity, the company may request an extension to no earlier than March 15, 2021.
- Convertible-note principal was $45.0 million ($44.2 million net carrying value), after $59.9 million principal was exchanged for 13.7 million common shares during the quarter. Holders of substantially all remaining notes waived their June 15, 2020 cash repurchase right. Notes mature June 15, 2022; they were not currently convertible at quarter-end.
- Inseego raised $25.0 million from a March Series E preferred-stock placement. Series E carries cumulative 9% annual dividends. The company also issued preferred shares to settle accrued term-loan interest.
- Common shares outstanding increased from 82.0 million at Dec. 31, 2019 to 96.2 million at March 31, 2020, principally reflecting the debt exchange and other issuances.
Material changes and unusual items
- Revenue growth reflected higher sales of LTE gigabit hotspots, USB modems, a 5G hotspot and IoT products; SaaS growth came from Device Management System and Ctrack, partly offset by currency effects.
- Operating expenses rose to $25.0 million from $17.2 million. Research and development increased to $8.2 million from $3.5 million, primarily for 5G staffing, test units and development; sales and marketing also increased with headcount.
- A $7.9 million noncash inducement expense arose from additional shares issued in the negotiated convertible-note exchange. Lower debt reduced net interest expense to $3.4 million from $5.1 million.
- Foreign-currency translation reduced other comprehensive income by $13.5 million, contributing to total comprehensive loss of $31.6 million.
- Financing provided $26.3 million, mainly from the preferred placement and warrant exercises. The company spent $4.5 million on capitalized software development and intangible assets and $0.6 million on property and equipment.
Outlook, risks and contingencies
- Going concern and liquidity: Management stated existing cash and anticipated operating cash flows are not expected to cover working-capital needs, including any required term-loan repayment, without additional funding. The filing says these conditions raise substantial doubt about the company’s ability to continue as a going concern. Plans include restructuring or refinancing debt and/or issuing debt or equity; success and terms are not assured.
- COVID-19: The duration and financial effects were uncertain. The filing cites supply-chain and manufacturing disruption, installation restrictions affecting South African Ctrack activity, possible customer-payment delays, slower product approvals and 5G rollouts, and weaker demand or longer sales cycles.
- Concentration: One customer generated 53.4% of Q1 revenue and represented 42.0% of accounts receivable at March 31, 2020.
- Other risks: Dependence on third-party manufacturers and some sole-source suppliers, competition and execution in 5G, foreign-exchange exposure, and intellectual-property litigation. Management did not expect existing legal matters to have a material adverse effect; approximately $1.0 million remained payable under an RER settlement.
- No numerical revenue or earnings guidance is provided in the supplied filing text. Management discussed planned product introductions, including additional 5G, IoT hardware and SaaS offerings.
Investor verification priorities
- Confirm the status and enforceability of the term-loan extension/refinancing arrangements and the lender’s repayment rights.
- Verify the scope of convertible-note holder waivers and the remaining note principal, including any subsequent conversions or repurchases.
- Assess funding needs, preferred-stock dividend burden, and potential dilution or senior claims from future financing.
- Track cash conversion and working-capital requirements, especially customer concentration and accounts-receivable collection.
- Monitor COVID-19 effects on supply, installations, customer demand and 5G deployment, and the effect of higher 5G development spending on margins and cash flow.