Inseego Corp. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The interim financial statements are unaudited. Inseego develops mobile, IoT and cloud solutions, reported in IoT & Mobile Solutions and Enterprise SaaS Solutions.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net revenue | $62.7m | $50.6m | $167.2m | $146.4m |
| Gross profit / margin | $18.6m / 29.7% | $17.6m / 34.8% | $48.9m / 29.3% | $50.8m / 34.7% |
| Operating income (loss) | ($3.2m) | $16.6m | ($10.8m) | $13.2m |
| Net income (loss) | ($8.8m) | $10.8m | ($27.0m) | ($3.9m) |
| Net cash used in operations | Not stated for quarter | Not stated for quarter | ($15.0m) | ($3.9m) |
- Q3 revenue grew 23.9% year over year. IoT & Mobile Solutions revenue rose 32.6% to $45.9m; Enterprise SaaS Solutions increased 5.0% to $16.8m.
- For the nine months, IoT & Mobile Solutions revenue increased 24.6% to $118.7m, while Enterprise SaaS Solutions fell 5.3% to $48.5m.
- Gross margin declined in both comparison periods, primarily due to a higher mix of lower-margin products; management also cited lower MiFi margins, higher 5G hotspot unit costs, freight and royalties.
- Reported 2018 operating income includes a $17.2m gain from extinguishing acquisition-related liabilities. This makes the year-over-year operating income comparison unusually favorable to 2018.
- At September 30, cash and cash equivalents were $13.9m, down from $31.0m at year-end 2018. Working capital deficit was $119.3m. Total liabilities were $197.0m and stockholders’ deficit was $38.3m.
- Nine-month investing cash use was $20.5m, including $16.8m for capitalized software development and intangible assets and $4.2m for property and equipment. Financing provided $18.9m, principally from a $10.0m preferred-stock placement and $10.6m warrant exercises.
Debt, funding and material changes
- Convertible notes had $105.1m principal and $99.3m net carrying value; the balance sheet classified them as current because holders may require cash repurchase on June 15, 2020. The remaining Novatel Wireless notes, approximately $0.2m, mature on that date.
- The term loan had $47.5m principal and $46.2m net carrying value, matures August 23, 2020, is secured by a first-priority lien on substantially all company and guarantor assets, and bore a 9.749% interest rate at quarter-end. The company obtained a waiver of its capital-expenditure restriction and reported covenant compliance at September 30.
- Management said available cash and expected operating cash flows would not meet working-capital needs and potential debt repayments without additional funding. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern.
- Management plans to pursue debt restructuring or recapitalization, extending or reducing debt obligations, and/or additional debt or equity financing. It said it did not believe noteholders would exercise the 2020 repurchase option, but there is no assurance financing or restructuring will be available on favorable terms or at all. If the put is exercised, the filing says it would also trigger a default under the credit agreement.
- In August, Inseego issued $10.0m of perpetual Series E preferred stock. It carries cumulative 9% annual cash dividends, is senior to common stock for distributions, and is redeemable at the company’s option beginning July 2022 at 110% of its base amount plus accrued dividends.
Management commentary, risks and unusual items
- Management attributed Q3 IoT & Mobile growth mainly to LTE gigabit hotspots, USB modems and the introduction of a 5G hotspot; IoT sales partly offset the increase. SaaS growth reflected Device Management System and Ctrack revenue.
- Management expects to introduce additional telematics, industrial IoT and mobile/fixed wireless products, including products targeting the emerging 5G market, over the next 12 months. The filing provides no quantified revenue, earnings or cash-flow guidance.
- One customer represented 57.7% of Q3 revenue and 55.8% of nine-month revenue; that customer also represented 33.5% of accounts receivable at quarter-end. This concentration creates material customer and collection exposure.
- Other disclosed risks include competition and execution challenges in 5G fixed wireless access, product development and adoption, reliance on third-party manufacturers and suppliers, tariffs, foreign-exchange movements, litigation and the ability to refinance debt. The company reported patent litigation and customer indemnification obligations but did not expect existing matters to have a material adverse effect.
- The company recorded $0.1m of Series E preferred dividends for the quarter and nine months. Common shares outstanding increased to approximately 79.8m from 74.0m at December 31, 2018.
Important facts for investors to verify
- Progress and terms of the planned debt restructuring or refinancing ahead of the June 2020 noteholder repurchase date and August 2020 term-loan maturity.
- Cash burn, working-capital requirements and access to funding, given the going-concern disclosure and $119.3m working-capital deficit.
- Whether revenue growth can be sustained while restoring gross margins, particularly as 5G product volumes and costs develop.
- Customer concentration, receivable collections and the performance of the largest customer.
- Preferred-stock dividend obligations, potential further financing and resulting dilution or priority claims over common stock.