Inseego Corp. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 9, 2019. Interim financial statements are unaudited. Inseego develops mobile broadband, IoT hardware, telematics and cloud-based software solutions.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 / prior balance date |
|---|---|---|
| Revenue | $48.6 million | $46.7 million |
| Gross profit / margin | $14.8 million / 30.4% | $15.5 million / 33.3% |
| Operating loss | $2.5 million | $2.6 million |
| Net loss attributable to Inseego | $7.5 million; $0.10 per diluted share | $8.1 million; $0.13 per diluted share |
| Cash used in operations | $5.0 million | $4.4 million |
| Cash used in investing | $4.3 million | $0.9 million |
| Cash and cash equivalents | $31.9 million | $31.0 million at Dec. 31, 2018 |
| Working capital | $33.4 million | — |
- IoT & Mobile Solutions revenue was $32.8 million, up 13.5%; Enterprise SaaS Solutions revenue was $15.8 million, down 11.6%.
- Cost of revenue rose 8.4% to $33.8 million. Gross margin declined 2.9 percentage points, primarily due to a higher mix of lower-margin products.
- Research and development expense fell to $3.5 million from $5.0 million, primarily because certain additional R&D costs began to be capitalized in 2019. Sales and marketing expense increased to $6.4 million from $5.4 million, mainly due to higher headcount-related costs.
- Financing activities provided $10.6 million, principally from exercise of warrants. Cash, cash equivalents and restricted cash increased by $0.9 million during the quarter.
- At March 31, 2019, total debt carrying value was approximately $140.5 million: convertible notes of $95.1 million and term loan of $45.4 million. Their principal balances were approximately $105.1 million and $47.5 million, respectively. The term loan matures in August 2020; the convertible notes mature in June 2022 and holders may require repurchase in June 2020. Quarterly net interest expense was $5.1 million.
- Operating lease adoption added $3.1 million of right-of-use assets and $3.2 million of lease liabilities. Total liabilities were $210.2 million, exceeding total assets of $177.6 million; stockholders’ deficit was $32.6 million.
Material changes versus the prior comparable period
- Revenue increased 3.9%, reflecting higher MiFi sales, partly offset by lower IoT sales and lower Enterprise SaaS revenue. Management attributed the SaaS decline primarily to South African rand/U.S. dollar exchange-rate movements, partly offset by Device Management System growth.
- Net loss narrowed by about $0.6 million, while loss per share improved from $0.13 to $0.10. Weighted-average shares increased to 74.4 million from 60.7 million.
- Operating cash use increased by $0.7 million; investing cash use increased by $3.5 million, including higher capitalized software development and intangible asset spending.
- Q1 2019 financing cash flow included $10.6 million from exercise of 2018 warrants. In connection with that exercise, Inseego issued 2.5 million new warrants with a $7.00 initial exercise price, exercisable from September 28, 2019 through June 30, 2022.
Outlook, risks and unusual items
- Management stated that available cash and anticipated operating cash flows should cover cash needs for the 12 months following filing. The company has a history of operating and net losses and cash use; continued liquidity and improved profitability depend on sufficient revenue. No specific revenue or earnings guidance was provided.
- Management said a failure to meet its operating plan or unforeseen litigation expenditures could require additional capital, reduced R&D or other cost reductions. Additional financing may not be available on favorable terms, or at all; equity financing could dilute shareholders.
- Key disclosed risks include substantial customer concentration, competition and product execution, 5G deployment and adoption, component supply and contract manufacturing, tariffs, foreign currency movements, indebtedness and refinancing, and intellectual property litigation. One customer generated 53.3% of Q1 revenue and represented 38.6% of receivables at quarter end.
- Term-loan and convertible-note effective interest rates were 13.68% and 14.78%, respectively. The notes’ June 2020 holder repurchase option and the term loan’s August 2020 maturity are significant liquidity dates.
- The RER settlement left approximately $2.0 million of obligations: $1.0 million current and $1.0 million long-term. The company described existing legal matters as not expected to have a material adverse effect, while noting that indemnification exposure cannot be estimated.
- Operating cash flow was pressured by working capital, including a $7.9 million inventory cash outflow. Inventory increased to $33.3 million from $26.4 million at year-end.
- The filing reports adoption of lease accounting guidance effective January 1, 2019, with no cumulative retained-earnings adjustment. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether MiFi and IoT & Mobile growth can be sustained while restoring gross margin, and whether the SaaS revenue decline reverses.
- Whether the company’s cash-flow forecast supports its stated 12-month liquidity outlook given operating cash use, working-capital needs and upcoming debt repurchase and maturity dates.
- The implications of customer concentration and the extent to which customer demand, inventory levels and receivables remain dependent on a single customer.
- How much of the reported R&D expense reduction reflects capitalization rather than lower underlying development spending, and the future returns on capitalized software investment.
- The potential dilution from outstanding equity awards and warrants, including the 2.5 million new warrants, and the company’s remaining RER settlement and litigation exposures.