Inseego Corp. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 13, 2020. The filing also reports unaudited fourth-quarter results. Inseego sells wireless and IoT hardware, telematics and asset-tracking solutions, and enterprise SaaS services.
Financial performance
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $219.5 million | $202.5 million |
| Gross profit / margin | $64.0 million / 29.2% | $70.6 million / 34.9% |
| Operating income (loss) | $(19.5) million | $14.0 million |
| Net loss | $(40.1) million | $(8.1) million |
| Net loss attributable to common stockholders / diluted EPS | $(40.5) million / $(0.52) | $(8.1) million / $(0.12) |
| Cash from operating activities | $(18.0) million | $(1.8) million |
| Cash from investing activities | $(28.2) million | $(4.2) million |
| Cash from financing activities | $27.5 million | $17.7 million |
Revenue increased 8.4%. IoT & Mobile Solutions revenue rose 13.9% to $154.2 million, driven mainly by LTE gigabit hotspot sales and the introduction of a 5G hotspot; Enterprise SaaS revenue declined 2.7% to $65.3 million, with subscription growth partly offset by foreign-exchange effects. Gross margin fell primarily because MiFi margins declined; the 5G hotspot also carried higher unit costs. Operating results were affected by higher research, sales and marketing spending and the absence of a $17.2 million acquisition-liability extinguishment gain recorded in 2018.
Fourth quarter: Revenue was $52.3 million versus $56.0 million in Q4 2018; gross profit was $15.0 million versus $19.8 million. Net loss attributable to common stockholders was $13.3 million, or $0.17 per share, compared with a $4.2 million loss, or $0.06 per share, a year earlier.
Liquidity, debt and capital
- Year-end cash and cash equivalents were $12.1 million, down from $31.0 million; working capital was $19.6 million. Cash use from operations and investing increased substantially, including investment in 5G and software development.
- At December 31, 2019, the term loan had $47.5 million principal outstanding and a $46.5 million net carrying value; it was secured by substantially all company assets, bore 9.535% interest, and was scheduled to mature August 23, 2020. The company reported covenant compliance after obtaining capital-expenditure waivers.
- Convertible notes had $105.1 million principal outstanding and a $101.3 million net carrying value at year-end, bearing 5.50% interest and maturing in 2022. The notes were convertible at year-end; holders also had an optional cash repurchase right scheduled for June 2020.
- After year-end, holders waived the notes’ June 2020 repurchase right, and $59.9 million principal was exchanged for common shares. The filing states $45.0 million of notes remained outstanding as of the filing date. In March 2020, Inseego also issued $25.0 million of additional Series E preferred stock, on top of the $10.0 million issued in 2019. The preferred stock carries a 9% cumulative dividend.
- Management stated that year-end cash and anticipated operating cash flows were expected to meet working-capital needs for the 12 months following filing, while noting that missed operating plans could require further financing or cost reductions.
Outlook, risks and unusual items
The company gave no specific quantified revenue or earnings guidance. Its strategy is to develop and sell 5G fixed and mobile wireless, industrial IoT, and SaaS solutions. Management identified 5G deployment and adoption, product launches, customer demand and international growth as important drivers. It also cautioned that 5G markets may develop more slowly than expected or that product schedules and technical requirements may be difficult to meet.
- Customer concentration: Verizon Wireless generated 52.5% of 2019 revenue, compared with 48.8% in 2018. A reduction in Verizon business could materially affect revenue, earnings and cash.
- Profitability and liquidity: Inseego reported losses in each of the last four fiscal years, negative operating cash flow, and substantial debt service requirements. Its ability to reach profitability depends on sufficient revenue and access to capital.
- Supply chain and COVID-19: The filing identified potential disruption from COVID-19 to suppliers, manufacturing, sales cycles and demand. Production depended on third-party manufacturers and certain sole-source components.
- Other exposures: Competitive pricing and product transitions, tariffs, foreign-exchange movements (particularly the South African rand), cybersecurity and service availability, intellectual-property disputes, and regulatory and data-privacy requirements could affect results.
- Post-year-end financing developments: In March 2020, the term-loan agreement was amended and the lender agreed to work toward an extension or refinancing; if no agreement was reached by August 23, 2020, the company could request an extension to at least March 15, 2021. These were subsequent events, not year-end terms.
- Contingencies: The company reported ordinary-course legal matters and customer intellectual-property indemnities, but stated it did not expect existing matters to have a material adverse effect. A $1.0 million current liability remained under the RER acquisition settlement.
Important facts for investors to verify
- Whether revenue growth can be sustained while gross margins recover from 29.2%, and whether 5G products generate profitable sales.
- How quickly Inseego can reduce its dependence on Verizon Wireless and grow SaaS and other customer revenue.
- Cash burn, working-capital needs, capitalized software spending, and the assumptions behind management’s 12-month liquidity assessment.
- The final status, maturity and payment terms of the term loan and convertible notes following the March 2020 amendments, waivers and debt-for-equity exchanges.
- The dilution and ongoing cost associated with preferred dividends, convertible debt, warrants, options and subsequent share issuances.