Inseego (INSG) - 2018 Q4 - Annual Report

Part I Item 1. Business Inseego Corp. provides 4G/5G mobile, IoT, and cloud solutions, focusing on 5G transition, IoT expansion, and SaaS growth, with significant revenue from Verizon Wireless and outsourced manufacturing - Inseego operates in the mobile (4G/5G), IoT, and cloud solutions markets, targeting enterprise, service providers, and small to medium-sized businesses[18] - The company's strategy is centered on leveraging the 5G transition, expanding its IoT and SaaS portfolios, and capitalizing on long-standing relationships with wireless operators[29][30][35] Fiscal Year 2018 vs 2017 Net Revenues | Year | Total Net Revenues | | :--- | :--- | | 2018 | $202.5 million | | 2017 | $219.3 million | - The business is divided into two main areas: IoT & Mobile Business (MiFi and Skyus brands) and Telematics & Asset Tracking Business (Ctrack brand)[36][37][38] - A significant customer concentration risk exists, with Verizon Wireless accounting for approximately 49% of total revenues for the year ended December 31, 2018[55] - Hardware manufacturing is outsourced to contract manufacturers, including a recent transition to Foxconn to increase capacity and move production of U.S.-bound products out of mainland China[56] Item 1A. Risk Factors Inseego faces material risks including a history of net losses, significant debt, high dependence on Verizon Wireless, supply chain vulnerabilities, intense competition, and international operational exposures including currency fluctuations and trade tariffs - The company has a history of net losses and an accumulated deficit, and it may not achieve or sustain profitability[63] - The emerging 5G market presents risks, as it may materialize slower than expected or the company may fail to meet aggressive development schedules and technical specifications[65] - Significant debt service requirements for the Term Loan and Convertible Notes pose a risk, as future cash flow may be insufficient to cover payments[79] - Heavy reliance on Verizon Wireless, which accounted for 49% of consolidated net revenues in 2018, presents a major customer concentration risk[104] - The company relies on third-party contract manufacturers (e.g., Foxconn) and sole-source suppliers for critical components (e.g., Qualcomm chipsets), exposing it to supply chain disruptions[114][118] - Global operations, especially the Ctrack subsidiary in South Africa, create exposure to foreign currency exchange rate fluctuations (particularly the South African Rand vs. the U.S. Dollar), political risks, and local regulations like Broad-Based Black Economic Empowerment (BBBEE)[131][136][144] - The business is exposed to U.S. tariffs on goods imported from China. While mitigation efforts like moving manufacturing are underway, adverse impacts on costs and operations remain a risk[154][155] Item 1B. Unresolved Staff Comments The company has no unresolved staff comments to report - None[169] Item 2. Properties Inseego maintains corporate headquarters in San Diego, a principal executive office in Alpharetta, and leases various global office spaces, alongside owning a property in Centurion, South Africa - The company's corporate headquarters are located in San Diego, California, under lease agreements. It also owns a facility in Centurion, South Africa[170] Item 3. Legal Proceedings The company is involved in ordinary course legal actions not expected to materially adversely affect its business - The company is engaged in ordinary course legal actions and does not expect them to have a material adverse effect on its business[171] Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - None[173] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Inseego's common stock trades on Nasdaq under 'INSG', with no history or current plans for cash dividends, as earnings are retained for business development - The company's common stock is traded on The Nasdaq Global Select Market under the ticker symbol 'INSG'[175] - Inseego has never paid cash dividends and does not plan to in the foreseeable future, as funds will be retained for business operations and development. Debt covenants also limit the ability to pay dividends[177] Item 6. Selected Financial Data This item is not applicable - Not applicable[180] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Net revenues decreased by 7.7% to $202.5 million in 2018, yet gross margin improved to 34.9%, and operating income reached $14.0 million due to cost containment and a $17.2 million gain, with liquidity strengthened by a $19.7 million private placement Results of Operations Net revenues decreased by 7.7% to $202.5 million in 2018, primarily from an 11.5% decline in IoT & Mobile Solutions, while gross profit increased to $70.6 million (34.9% margin) and operating income reached $14.0 million due to cost containment and a $17.2 million gain Net Revenues by Product Category (in thousands) | Product Category | 2018 | 2017 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | IoT & Mobile Solutions | $135,349 | $152,851 | $(17,502) | (11.5)% | | Enterprise SaaS Solutions | $67,114 | $66,446 | $668 | 1.0% | | Total | $202,463 | $219,297 | $(16,834) | (7.7)% | - Gross profit for 2018 was $70.6 million, representing a gross margin of 34.9%, an improvement from $67.3 million and a 30.7% margin in 2017. The increase was primarily due to changing contract manufacturers and higher-margin services revenue[205] - Operating expenses decreased in 2018 compared to 2017: R&D expenses were $20.6M (vs. $21.4M), Sales & Marketing was $23.0M (vs. $25.0M), and General & Administrative was $25.3M (vs. $34.4M), all reflecting cost containment initiatives[206][207][208] - A gain of $17.2 million was recorded in 2018 related to the extinguishment of certain acquisition-related liabilities from a settlement agreement[211] Liquidity and Capital Resources Cash and cash equivalents increased to $31.0 million by December 31, 2018, supported by a $19.7 million private placement, while net cash used in operating activities improved to $1.8 million, despite significant debt obligations including a $48.0 million Term Loan and $105.1 million in convertible notes - Cash and cash equivalents increased to $31.0 million as of December 31, 2018, from $21.2 million at the end of 2017[217] - In August 2018, the company completed a private placement of common stock and warrants, raising gross proceeds of $19.7 million[218] Outstanding Debt Principal (as of filing date) | Debt Instrument | Principal Outstanding (in thousands) | | :--- | :--- | | Inseego Notes (due 2022) | $104,875 | | Novatel Wireless Notes (due 2020) | $250 | | Total Convertible Notes | $105,125 | | Term Loan (due 2020) | $47,500 (as of 12/31/18) | Historical Cash Flows (in thousands) | Cash Flow Activity | 2018 | 2017 | | :--- | :--- | :--- | | Net cash used in operating activities | $(1,765) | $(14,576) | | Net cash used in investing activities | $(4,234) | $(4,375) | | Net cash provided by financing activities | $17,667 | $30,366 | Critical Accounting Policies and Estimates Critical accounting policies requiring significant estimates include revenue recognition (ASC 606 adoption in 2018 with no material impact), valuation of goodwill and long-lived assets, and accounting for convertible debt - The company adopted the new revenue recognition standard, ASC 606, on January 1, 2018, using the modified retrospective method. The adoption did not have a material impact on the consolidated financial statements[253][271] - Valuation of goodwill, which resulted from the acquisitions of RER and DigiCore, is a critical estimate. Goodwill is tested for impairment at least annually[284] - Accounting for convertible debt requires separating the liability and equity components and estimating the fair value of similar debt without a conversion feature, which impacts non-cash interest expense[285] Item 7A. Quantitative and Qualitative Disclosures About Market Risk This item is not applicable - Not applicable[294] Item 8. Financial Statements and Supplementary Data Consolidated financial statements and independent auditor reports are referenced and included in Part IV of this report - The company's consolidated financial statements and auditor reports are included in Part IV of the Form 10-K[295] Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting and financial disclosure - None[296] Item 9A. Controls and Procedures Disclosure controls and internal control over financial reporting were deemed effective as of December 31, 2018, with an unqualified opinion from Marcum LLP and no material changes identified - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[298] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018, based on the COSO 2013 framework[300] - The independent auditor, Marcum LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2018[301][305] Item 9B. Other Information The company reports no other information - None[303] Part III Items 10-14. Directors, Executive Officers, Corporate Governance, Compensation, Security Ownership, and Accountant Fees Information for Items 10 through 14 is incorporated by reference from the forthcoming 2019 definitive proxy statement - Information regarding directors, executive compensation, security ownership, related transactions, and principal accountant fees is incorporated by reference from the forthcoming 2019 proxy statement[313] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including corporate governance, debt agreements, and material contracts - This section contains a list of all exhibits filed with the Form 10-K, including the company's articles of incorporation, bylaws, debt indentures, and material contracts[315] Item 16. Form 10-K Summary The company provides no summary for its Form 10-K - None[319] Consolidated Financial Statements Financial Statements As of December 31, 2018, total assets were $162.3 million, total liabilities $198.8 million, and stockholders' deficit $36.5 million, with $202.5 million in net revenues and a net loss of $8.1 million ($0.12 per share) Consolidated Balance Sheet Data (in thousands) | Account | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Cash and cash equivalents | $31,015 | $21,198 | | Total Current Assets | $84,352 | $66,437 | | Total Assets | $162,256 | $158,207 | | Total Current Liabilities | $53,681 | $59,965 | | Total Liabilities | $198,781 | $203,822 | | Total Stockholders' Deficit | $(36,525) | $(45,615) | Consolidated Statement of Operations Data (in thousands) | Account | 2018 | 2017 | | :--- | :--- | :--- | | Total Net Revenues | $202,463 | $219,297 | | Gross Profit | $70,597 | $67,335 | | Operating Income (Loss) | $14,011 | $(22,214) | | Net Loss Attributable to Inseego Corp. | $(8,058) | $(45,735) | | Basic and Diluted Net Loss Per Share | $(0.12) | $(0.78) | Consolidated Statement of Cash Flows Data (in thousands) | Account | 2018 | 2017 | | :--- | :--- | :--- | | Net cash used in operating activities | $(1,765) | $(14,576) | | Net cash used in investing activities | $(4,234) | $(4,375) | | Net cash provided by financing activities | $17,667 | $30,366 | Notes to Consolidated Financial Statements Notes detail accounting policies, financial components, debt structure (including $152.6 million long-term debt), income taxes (with a $93.8 million valuation allowance), and contingencies, including a $17.2 million gain from a lawsuit settlement - The company adopted the new revenue recognition standard (ASC 606) on January 1, 2018, which did not have a material impact on the financial statements[396][420] - As of December 31, 2018, total long-term debt principal payments due are $152.6 million, with $47.8 million due in 2020 and $104.9 million due in 2022[511] - The company maintains a valuation allowance of $93.8 million against its deferred tax assets as of December 31, 2018, as it is more likely than not that these assets will not be realized[515] - A lawsuit with former stockholders of RER was settled in July 2018, resulting in the company recognizing a gain of $17.2 million[568] - One customer accounted for 48.8% of net revenues in 2018, down slightly from 51.2% in 2017, highlighting significant customer concentration risk[573]