Inseego (INSG) - 2020 Q2 - Quarterly Report

PART I—FINANCIAL INFORMATION Item 1. Financial Statements Q2 2020 financials show significant revenue growth, but a major debt restructuring led to a substantial net loss and reshaped the balance sheet Condensed Consolidated Balance Sheets Total assets grew to $211.9 million and liabilities to $253.8 million by June 30, 2020, driven by new convertible notes and increased cash Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $42,100 | $12,074 | | Total current assets | $114,705 | $64,137 | | Total assets | $211,912 | $161,373 | | Liabilities & Stockholders' Deficit | | | | Total current liabilities | $67,936 | $44,530 | | Convertible 3.25% senior notes, net | $176,171 | $— | | Convertible 5.5% senior notes, net | $— | $101,334 | | Term loan, net | $— | $46,538 | | Total liabilities | $253,840 | $198,731 | | Total stockholders' deficit | $(41,928) | $(37,358) | Condensed Consolidated Statements of Operations Q2 2020 net revenues grew 44.4% to $80.7 million, but a $67.2 million debt extinguishment loss led to a $75.7 million net loss Q2 2020 vs Q2 2019 Statement of Operations (in thousands, except per share data) | Metric | Q2 2020 | Q2 2019 | | :--- | :--- | :--- | | Total net revenues | $80,689 | $55,891 | | - IoT & Mobile Solutions | $66,243 | $39,983 | | - Enterprise SaaS Solutions | $14,446 | $15,908 | | Gross profit | $22,000 | $15,555 | | Operating loss | $(5,337) | $(5,183) | | Loss on debt conversion and extinguishment, net | $(67,241) | $— | | Net loss attributable to common shareholders | $(75,665) | $(10,779) | | Net loss per common share (Basic and diluted) | $(0.78) | $(0.14) | Condensed Consolidated Statements of Cash Flows Operating activities generated $4.7 million cash in H1 2020, with financing providing $41.1 million from new notes, increasing cash to $42.1 million Six Months Ended June 30 Cash Flow Summary (in thousands) | Cash Flow Category | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $4,662 | $(10,055) | | Net cash used in investing activities | $(13,233) | $(11,320) | | Net cash provided by financing activities | $41,144 | $10,311 | | Net increase (decrease) in cash | $30,026 | $(10,747) | | Cash, cash equivalents and restricted cash, end of period | $42,100 | $20,329 | Notes to Condensed Consolidated Financial Statements Notes detail COVID-19 impact, a $100 million debt restructuring in May 2020, revenue recognition, and significant customer concentration - In May 2020, the company restructured its debt by issuing $100.0 million of 3.25% senior notes due 2025, exchanging $45.0 million of existing 5.5% notes for cash and new notes, and using proceeds to repay its $47.5 million term loan[28][36][90] - The debt restructuring resulted in a loss on debt conversion and extinguishment of $67.2 million in Q2 2020[99][192] - For Q2 2020, one customer accounted for 55.6% of net revenues. As of June 30, 2020, three customers accounted for 44.3%, 6.0%, and 5.3% of net accounts receivable[135] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 44.4% Q2 2020 revenue growth, the impact of May 2020 debt restructuring on liquidity, and future outlook including 5G and COVID-19 Results of Operations Q2 2020 net revenues rose 44.4% to $80.7 million from IoT & Mobile Solutions, while R&D doubled and a $67.2 million debt conversion loss impacted net loss Net Revenues by Product Category - Q2 2020 vs Q2 2019 (in thousands) | Product Category | Q2 2020 | Q2 2019 | Change $ | Change % | | :--- | :--- | :--- | :--- | :--- | | IoT & Mobile Solutions | $66,243 | $39,983 | $26,260 | 65.7% | | Enterprise SaaS Solutions | $14,446 | $15,908 | $(1,462) | (9.2)% | | Total | $80,689 | $55,891 | $24,798 | 44.4% | - Research and development expenses increased to $10.5 million (13.1% of net revenues) in Q2 2020 from $5.2 million (9.3% of net revenues) in Q2 2019, primarily due to increased staffing and development spending on 5G product programs[188] - A loss on debt conversion and extinguishment of $67.2 million was recorded in Q2 2020 related to the 2022 Notes, with no comparable expense in 2019[192] Liquidity and Capital Resources Liquidity significantly improved in Q2 2020, with cash rising to $42.1 million due to a $100 million convertible note offering and debt restructuring - Cash and cash equivalents increased to $42.1 million as of June 30, 2020, compared to $12.1 million as of December 31, 2019[212] - In May 2020, the company completed a $100.0 million offering of 3.25% convertible senior notes due 2025 and used proceeds to repay its Term Loan and exchange its 2022 Notes[216][221] - Management believes that current cash and anticipated cash flows from operations will be sufficient to meet working capital needs for the next twelve months[246] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section is not applicable for the current reporting period - Not applicable[251] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[253] - No changes in internal control over financial reporting occurred during the three months ended June 30, 2020, that have materially affected, or are reasonably likely to materially affect, internal controls[254] PART II—OTHER INFORMATION Item 1. Legal Proceedings The company is involved in ordinary course legal proceedings, not expected to materially impact financials, with details in Note 9 - The company is involved in various legal actions from the ordinary course of business but does not expect them to have a material adverse effect[256] - Disclosure regarding legal proceedings, including a settlement agreement, is detailed in Note 9 of the financial statements[255] Item 1A. Risk Factors Updated risk factors include significant debt service for $180.4 million in 2025 Notes, potential dilution, and concentrated ownership by affiliated investors - The company faces significant debt service requirements from the $180.4 million of 2025 Notes issued in Q2 2020[258] - Conversion of the 2025 Notes could cause significant dilution to existing stockholders and adversely affect the stock's market price[260] - As of June 30, 2020, two affiliated investors (North Sound Trading, L.P. and Golden Harbor Ltd.) and their affiliates own approximately 29.2% of outstanding common stock and 44.3% of the 2025 Notes, resulting in concentrated ownership and significant influence[262] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds On May 12, 2020, the company privately exchanged $375,000 of new 2025 Notes for $150,000 of existing 2022 Notes, exempt from registration - On May 12, 2020, the company conducted a private exchange, issuing $375,000 of new 2025 Notes for $150,000 of existing 2022 Notes. This transaction was exempt from registration[266] Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported during the period - None[267] Item 4. Mine Safety Disclosures This section is not applicable to the company - Not applicable[268] Item 5. Other Information No other information was reported for this period - None[269] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including the underwriting agreement, indenture for 2025 notes, and officer certifications - Lists key legal and financial documents filed with the report, including: - Underwriting Agreement for the May 2020 note offering - Base Indenture and First Supplemental Indenture for the 3.25% convertible senior notes due 2025 - Officer certifications pursuant to the Sarbanes-Oxley Act[270]