Inseego Corp. — FY 2016 Form 10-K
Reporting period: Year ended December 31, 2016; filed March 31, 2017. The company reports as one operating segment. In November 2016, an internal reorganization separated the MiFi business from the IoT and telematics businesses; the proposed MiFi sale was still pending at filing.
Business context
Inseego provides IoT and telematics products and services, including Ctrack fleet management and vehicle tracking, business connectivity, and device-management platforms. It reported approximately 620,000 global subscribers: 432,000 for Ctrack and 188,000 for connectivity and device management. The company was shifting toward recurring SaaS and services revenue while divesting hardware businesses. Verizon Wireless represented 53.9% of 2016 revenue.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $243.6 million | $220.9 million |
| Gross profit / margin | $76.3 million / 31.3% | $59.0 million / 26.7% |
| Operating loss | $(45.0) million | $(37.8) million |
| Net loss | $(60.6) million | $(52.3) million |
| Net loss per share | $(1.12) | $(0.99) |
| Cash used in operations | $6.6 million | $26.9 million |
- Revenue rose 10.2%, while hardware revenue declined 7.8% to $187.4 million and SaaS, software and services revenue increased 218.1% to $56.2 million. The filing attributes much of the services growth to the Ctrack acquisition and the strategic shift in mix.
- Annual gross margin improved, but FY 2016 included an $11.5 million inventory impairment for abandoned Enfora product lines and a $2.6 million impairment of purchased intangibles. General and administrative expense rose to $52.4 million; net interest expense was $15.6 million.
- Q4 2016: Revenue was $52.9 million, gross profit $9.0 million (approximately 17.0% margin), and net loss attributable to common shareholders $27.4 million, or $0.50 per share. Q4 2015 figures were $61.5 million, $16.5 million (approximately 26.9% margin), and a $14.4 million loss, or $0.26 per share.
- Cash and cash equivalents were $9.9 million at year-end, down from $12.6 million. Working capital was $6.1 million, versus $46.8 million a year earlier; stockholders’ deficit was $17.7 million. Total assets were $158.7 million and total liabilities $176.4 million.
- Year-end debt included $120.0 million principal of 5.50% convertible notes, with a $90.9 million net carrying amount, plus $3.2 million in DigiCore bank facilities and a $0.6 million mortgage bond. No Revolver borrowings were outstanding; reported available borrowing capacity was approximately $4.7 million.
- In January 2017, $119.8 million of the notes were exchanged for 5.50% Inseego convertible notes due 2022; approximately $0.2 million of the original notes remained. The Revolver was amended in March 2017: capacity fell from $48 million to $10 million, with revised covenants and higher pricing.
Changes, outlook, and material risks
- The Modules Business was sold to Telit for aggregate consideration of $11.7 million; Inseego recorded a gain of approximately $5.0 million. The MiFi Business sale was agreed at $50.0 million cash, subject to working-capital adjustment and closing conditions.
- CFIUS had raised national-security concerns about the MiFi transaction. After the parties refiled their notice, CFIUS provided a draft mitigation agreement in March 2017; final terms remained under negotiation. Management said it believed the sale was probable, but completion was not assured.
- Management expected the MiFi divestiture to reduce revenue but deliver material cost savings and higher gross profit, excluding one-time costs. It also expected most revenue to come from outside the United States after a successful sale. No specific numerical revenue or earnings guidance is provided.
- The company disclosed substantial doubt about its ability to continue as a going concern, based on historical operating losses and liquidity. Management believed the pending sale, operating cash flows and Revolver availability would meet needs for the 12 months after filing. If the sale failed, it might need alternative financing, another sale or restructuring; financing availability was uncertain.
- Carucel sought approximately $43 million in patent royalties and damages over MiFi products; trial was scheduled for April 2017. The company disputed infringement and damages and recorded no liability because it concluded a loss was neither probable nor estimable. An adverse outcome could materially affect results and cash flows; the company also had indemnification obligations to Verizon Wireless.
- Other notable items include a $2.8 million settlement of an Enfora royalty dispute, with $2.1 million outstanding at year-end, and $14.0 million earned under the amended Feeney Wireless earn-out, of which $12.5 million remained outstanding at year-end.
- Management and the auditor identified a material weakness in financial-reporting controls due to insufficient accounting and reporting resources; disclosure controls were also deemed ineffective. The auditor issued an adverse opinion on internal control, but an unqualified opinion on the financial statements. Management was evaluating additional staffing and consultant support to remediate the weakness.
- Other key risks include customer concentration, continued losses, competitive and technology pressures, reliance on contract manufacturers and certain suppliers, foreign-currency exposure, international regulatory requirements, and potential dilution or cash demands from convertible notes and equity awards.
Important facts for investors to verify
- Whether CFIUS approval and the $50 million MiFi sale closed, and the final proceeds after any working-capital adjustment.
- Post-divestiture revenue, recurring SaaS growth, gross margins, customer retention and the realization of projected cost savings.
- Liquidity and covenant compliance after the Revolver’s March 2017 amendment, including the availability of additional financing if the sale does not close.
- The outcome and financial exposure of the Carucel litigation, related indemnities, and remaining acquisition and settlement payments.
- Progress in remediating the material weakness and whether subsequent filings report effective financial controls.
- The conversion, repurchase and maturity terms of the 2022 notes, and their potential effects on dilution and cash requirements.