Inseego (INSG) - 2019 Q2 - Quarterly Report

markdown PART I—FINANCIAL INFORMATION [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) The company's financial statements as of June 30, 2019, show a working capital deficit of **$117.3 million** and a **net loss** of **$10.7 million** for the quarter. Total assets were **$164.7 million**, while total liabilities stood at **$202.0 million**, resulting in a total stockholders' deficit of **$37.3 million**. A significant portion of debt, including the **Term Loan** and **Convertible Senior Notes**, has been reclassified as **current liabilities** due to a potential repurchase event in **June 2020**. The notes to the financial statements highlight a **substantial doubt** about the company's ability to continue as a going concern without restructuring its debt or raising additional capital [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) As of **June 30, 2019**, the company had total assets of **$164.7 million** and total liabilities of **$202.0 million**, resulting in a stockholders' deficit of **$37.3 million**. Compared to **December 31, 2018**, cash and cash equivalents **decreased** from **$31.0 million** to **$20.3 million**. A significant change is the reclassification of the **Convertible Senior Notes** (**$97.2 million**) and **Term Loan** (**$45.8 million**) from long-term to **current liabilities**, leading to a **substantial working capital deficit** Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2019 (Unaudited) | December 31, 2018 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $20,268 | $31,015 | | Total current assets | $76,636 | $84,352 | | Total assets | $164,654 | $162,256 | | **Liabilities & Stockholders' Deficit** | | | | Total current liabilities | $193,976 | $53,681 | | Total liabilities | $201,982 | $198,781 | | Total stockholders' deficit | ($37,328) | ($36,525) | [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) For the three months ended **June 30, 2019**, total net revenues **increased** to **$55.9 million** from **$49.1 million** year-over-year, driven by **IoT & Mobile Solutions**. However, gross profit **decreased** to **$15.6 million** from **$17.7 million**, and the operating **loss widened** to **$5.2 million** from **$0.8 million**. The **net loss** attributable to Inseego Corp. **increased** to **$10.8 million**, or (**$0.14**) per share, compared to a **net loss** of **$6.7 million**, or (**$0.11**) per share, in the prior-year period Q2 2019 vs Q2 2018 Statement of Operations (in thousands, except per share data) | Metric | Q2 2019 | Q2 2018 | | :--- | :--- | :--- | | Total net revenues | $55,891 | $49,057 | | Gross profit | $15,555 | $17,657 | | Operating loss | ($5,183) | ($822) | | Net loss attributable to Inseego Corp. | ($10,779) | ($6,660) | | Net loss per share (Basic and diluted) | ($0.14) | ($0.11) | Six Months Ended June 30, 2019 vs 2018 Statement of Operations (in thousands, except per share data) | Metric | 6M 2019 | 6M 2018 | | :--- | :--- | :--- | | Total net revenues | $104,447 | $95,790 | | Gross profit | $30,315 | $33,200 | | Operating loss | ($7,644) | ($3,406) | | Net loss attributable to Inseego Corp. | ($18,264) | ($14,710) | | Net loss per share (Basic and diluted) | ($0.24) | ($0.24) | [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For the six months ended **June 30, 2019**, net cash used in operating activities was **$10.1 million**, a significant **decline** from **$0.9 million** provided by operations in the same period of **2018**. Net cash used in investing activities **increased** to **$11.3 million**. Net cash provided by financing activities was **$10.3 million**, primarily due to proceeds from a warrant exercise. Overall, cash, cash equivalents, and restricted cash **decreased** by **$10.7 million** during the period Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | ($10,055) | $903 | | Net cash used in investing activities | ($11,320) | ($1,722) | | Net cash provided by (used in) financing activities | $10,311 | ($175) | | **Net decrease in cash, cash equivalents and restricted cash** | **($10,747)** | **($2,362)** | [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) The notes detail significant accounting policies and events. Key disclosures include a going concern warning due to a **working capital deficit** and upcoming debt obligations. The company's debt, including a **$48.0 million Term Loan** and **$105.1 million** in **Convertible Notes**, is now classified as current. One customer accounted for **56%** of revenue in **Q2 2019**. Subsequent to the quarter's end, the company raised **$10.0 million** through the issuance of **Series E Preferred Stock** - Management has concluded that the company's current cash and anticipated cash flows will be **insufficient** to meet its **working capital deficit** needs and potential debt repurchases in **June 2020**. These circumstances raise **substantial doubt** about the Company's ability to continue as a going concern[21](index=21&type=chunk) - The company's plan to mitigate the going concern risk is through restructuring its existing debt or issuing additional debt or equity securities[21](index=21&type=chunk) - The **Term Loan** and **Convertible Senior Notes** are classified as **current liabilities** because holders of the **Inseego Notes** have an option to require repurchase on **June 15, 2020**, which would also trigger a default under the Credit Agreement[20](index=20&type=chunk)[77](index=77&type=chunk)[90](index=90&type=chunk) - For **Q2 2019**, one customer accounted for **56.0%** of net revenues. As of **June 30, 2019**, two customers accounted for **27.3%** and **11.0%** of accounts receivable[106](index=106&type=chunk) - On **August 9, 2019**, the company completed a private placement of **10,000** shares of **Series E Preferred Stock** for an aggregate purchase price of **$10.0 million**[125](index=125&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=33&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses a **13.9%** year-over-year revenue **increase** for **Q2 2019**, driven by strong sales of LTE gigabit hotspots in the **IoT & Mobile Solutions** segment. However, this was offset by a **decline** in gross margin from **36.0%** to **27.8%** due to a less favorable product mix and foreign exchange impacts. The company's liquidity position is **critical**, with a **working capital deficit** of **$117.3 million** and cash of **$20.3 million**. Management explicitly states that current cash is **insufficient** to cover potential debt repurchases in **June 2020**, creating **substantial doubt** about its ability to continue as a going concern, and outlines plans to restructure debt or raise capital [Business Overview](index=36&type=section&id=Business%20Overview) Inseego is a provider of mobile (**4G/5G**), IoT, and cloud solutions. Its revenue is generated from two main categories: **IoT & Mobile Solutions**, which includes hotspots, gateways, and routers sold under brands like MiFi and Skyus, and **Enterprise SaaS Solutions**, which includes Ctrack telematics and Device Management System platforms - The company designs and develops mobile (**4G/5G NR**), IoT, and cloud solutions for service providers, enterprises, and small-to-medium businesses[137](index=137&type=chunk) - Key product lines include MiFi mobile hotspots, Skyus IoT routers, and Ctrack SaaS platforms for fleet and asset management[139](index=139&type=chunk)[143](index=143&type=chunk) [Results of Operations](index=41&type=section&id=Results%20of%20Operations) For **Q2 2019**, net revenues **increased 13.9%** to **$55.9 million** compared to **Q2 2018**, driven by a **26.0% rise** in **IoT & Mobile Solutions** revenue from new LTE gigabit hotspots. This was partially offset by an **8.1% decline** in **Enterprise SaaS** revenue, mainly due to unfavorable foreign exchange rates. Gross margin **fell** significantly to **27.8%** from **36.0%** due to the higher cost and lower margin of the new hotspots. Operating expenses **increased**, resulting in a **wider** operating **loss** of **$5.2 million** versus **$0.8 million** in the prior year Net Revenues by Product Category - Q2 2019 vs Q2 2018 (in thousands) | Product Category | Q2 2019 | Q2 2018 | Change $ | Change % | | :--- | :--- | :--- | :--- | :--- | | IoT & Mobile Solutions | $39,983 | $31,741 | $8,242 | 26.0% | | Enterprise SaaS Solutions | $15,908 | $17,316 | ($1,408) | (8.1)% | | **Total** | **$55,891** | **$49,057** | **$6,834** | **13.9%** | - The **increase** in **IoT & Mobile Solutions** revenue was primarily from **increased** sales of LTE gigabit hotspots[162](index=162&type=chunk) - Gross profit for **Q2 2019** was **$15.6 million** (**27.8%** margin), a **decrease** from **$17.7 million** (**36.0%** margin) in **Q2 2018**. The **decline** was attributed to lower MiFi gross margins, reduced IoT volumes, and unfavorable foreign exchange rates[167](index=167&type=chunk) - Operating expenses (R&D, S&M, G&A) **increased** in **Q2 2019** compared to **Q2 2018**, primarily due to higher employment costs from **increased** headcount and share-based compensation[168](index=168&type=chunk)[169](index=169&type=chunk)[170](index=170&type=chunk) [Liquidity and Capital Resources](index=46&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity is under significant pressure. As of **June 30, 2019**, it had **$20.3 million** in cash and a **working capital deficit** of **$117.3 million**. Management states that current cash and operational cash flow will not be **sufficient** to fund operations and cover potential debt repurchases on the **June 15, 2020** Optional Repurchase Date for its **Inseego Notes**. This situation raises **substantial doubt** about the company's ability to continue as a going concern. To address this, management plans to pursue a debt restructuring or raise additional capital. Subsequent to the quarter, the company raised **$10.0 million** via a preferred stock placement - As of **June 30, 2019**, the company had cash and cash equivalents of **$20.3 million** and a **working capital deficit** of **$117.3 million**[191](index=191&type=chunk)[210](index=210&type=chunk) - Management acknowledges that current cash and anticipated cash flows are **insufficient** to meet **working capital deficit** needs and potential debt repurchases on **June 15, 2020**, which would also trigger a default on its **Term Loan**[212](index=212&type=chunk) - The company plans to address its liquidity concerns through a recapitalization or restructuring transaction prior to the Optional Repurchase Date[212](index=212&type=chunk) - Net cash used in operating activities was **$10.1 million** for the first six months of **2019**, compared to **$0.9 million** provided in the same period of **2018**, primarily due to the **net loss** and use of cash in **working capital deficit**[207](index=207&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=50&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section is **not applicable** as per the report - **Not applicable**[215](index=215&type=chunk) [Controls and Procedures](index=50&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were **effective** as of **June 30, 2019**. There were no **material changes** in internal control over financial reporting during the quarter - Based on an evaluation as of **June 30, 2019**, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were **effective**[217](index=217&type=chunk) - There were no changes in the company's internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[218](index=218&type=chunk) PART II—OTHER INFORMATION [Legal Proceedings](index=51&type=section&id=Item%201.%20Legal%20Proceedings) The company is party to various legal proceedings arising in the ordinary course of business. The disclosure refers to Note 9, which details a settlement agreement with former stockholders of RER. Management believes the ultimate outcome of other legal actions will not have a material adverse effect - The disclosure regarding legal proceedings is incorporated by reference from Note 9, Commitments and Contingencies[219](index=219&type=chunk) [Risk Factors](index=51&type=section&id=Item%201A.%20Risk%20Factors) There have been no **material changes** in the company's risk factors from those disclosed in its **Annual Report on Form 10-K** - There have been no **material changes** in risk factors from those disclosed in the **Form 10-K**[221](index=221&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=51&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) On **May 24, 2019**, the company issued **45,871** shares of its common stock to a third party to resolve an intellectual property dispute. The shares were issued in a private transaction exempt from registration - On **May 24, 2019**, the Company issued **45,871** shares of common stock to a third party to resolve an intellectual property dispute[222](index=222&type=chunk) [Exhibits](index=52&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the **Form 10-Q**, including merger agreements, corporate governance documents, and officer certifications