Inseego Corp. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. Inseego develops mobile broadband, IoT hardware and cloud-based SaaS solutions, including MiFi, Skyus and Ctrack offerings.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $202.5 million | $219.3 million |
| Gross profit / margin | $70.6 million / 34.9% | $67.3 million / 30.7% |
| Operating income (loss) | $14.0 million | $(22.2) million |
| Net loss attributable to Inseego | $(8.1) million; $(0.12) per share | $(45.7) million; $(0.78) per share |
| Cash used in operating activities | $1.8 million | $14.6 million |
- FY revenue declined 7.7%. IoT & Mobile Solutions revenue fell 11.5% to $135.3 million, while Enterprise SaaS Solutions grew 1.0% to $67.1 million.
- Fourth-quarter revenue was $56.0 million, gross profit $19.8 million, and net loss attributable to Inseego $4.2 million. In Q4 2017, these were $46.5 million, $17.5 million, and a $3.8 million net loss, respectively.
- At year-end, cash and cash equivalents were $31.0 million and working capital was $30.7 million. Cash, cash equivalents and restricted cash totaled $31.1 million.
- Debt included $105.1 million principal of convertible notes and $47.5 million principal under the term loan, plus $1.4 million of current DigiCore bank and overdraft facilities. The term loan matures in August 2020 and carries interest at three-month LIBOR, subject to a 1% floor, plus 7.625%; the notes bear 5.50% coupon interest. FY net interest expense was $20.4 million.
- Stockholders’ deficit was $36.5 million. Financing activities provided $17.7 million, primarily reflecting $19.7 million gross proceeds from an August 2018 private placement.
Material changes and unusual items
- Revenue fell primarily because sales of mobile hotspots and home devices declined as key customers focused on upcoming 5G products. Management attributed improved gross margin to a change in contract manufacturers and a higher share of services revenue.
- Operating results included a $17.2 million gain from extinguishing acquisition-related liabilities under a settlement with former RER stockholders. This non-cash gain materially boosted reported operating income; the company still reported an annual net loss after interest and other expenses.
- General and administrative expense declined to $25.3 million from $34.4 million, and restructuring charges declined to $1.2 million from $5.2 million. Restructuring initiatives begun in 2018 were completed in December.
- The company adopted ASC 606 in 2018; it said adoption did not materially affect the year’s consolidated financial statements. Prior-year revenue was not recast.
Outlook, risks and contingencies
- No quantitative revenue or earnings guidance is provided. Inseego anticipated introducing additional SaaS telematics, industrial IoT, mobile and fixed wireless products over the following 12 months, including products targeting the emerging 5G market.
- Management said cash and expected operating cash flows should meet working-capital needs for the 12 months after filing. This outlook depends on achieving sufficient revenue and executing cost initiatives; the company warned that a shortfall could require further expense reductions or restructuring.
- Customer concentration is significant: Verizon Wireless represented 48.8% of FY 2018 revenue, versus 51.2% in FY 2017. Management intends to diversify the customer base.
- Tariff exposure remained unresolved. Inseego said it had taken steps to mitigate U.S. tariffs on China-origin products, including shifting manufacturing; if Customs did not rule favorably on its tariff-code position, the company estimated approximately $3.7 million in tariffs at the initial rate.
- Key risks include substantial debt service and refinancing needs, continuing losses, dependence on a major customer and third-party manufacturers and suppliers, execution and timing of 5G launches, competition, foreign-exchange exposure, and cybersecurity, product and intellectual-property risks. The term loan is secured by substantially all company and guarantor assets.
- The RER settlement released mutual claims and left approximately $2.0 million of recorded liabilities at year-end, with cash or stock settlement options for future installments. The filing also describes patent litigation and indemnification matters; management did not expect existing matters, apart from disclosed items, to materially affect results or financial condition.
Investor facts to verify
- Whether 5G product launches and customer demand translate into revenue growth, and whether the decline in IoT & Mobile Solutions stabilizes.
- Whether revenue diversification reduces reliance on Verizon Wireless.
- Cash generation, available liquidity, debt covenants, and the company’s ability to meet the 2020 term-loan maturity and convertible-note obligations.
- The outcome of the Customs tariff ruling and any resulting tariff costs.
- How much of the operating improvement reflects sustainable cost and margin gains versus the one-time $17.2 million settlement gain.
Audit note: The auditor issued an unqualified opinion on the FY 2018 financial statements and internal control over financial reporting; management also concluded controls were effective at December 31, 2018.