Inseego: Shares Rise on Good Outlook, But Debt Problems Remain (NASDAQ:INSG)

Six months in the past, I made some first rate cash on shares of cellular broadband and stuck wi-fi entry (“FWA”) options supplier Inseego Corp. or “Inseego” (NASDAQ: INSG) after the corporate reported mediocre outcomes for Q3 2023 and focused a really a weak end to the yr that noticed the inventory fall from over $5.00 in early November to under $2 reverse inventory break up adjusted base within the following weeks:

Including insult to harm, CEO Ashish Sharma unexpectedly resigned in February in “pursue different pursuitsThe corporate has not but named a successor.

Nevertheless, Inseego shares are up greater than 150% up to now three weeks following better-than-expected first-quarter outcomes and an excellent outlook for the second quarter:

The corporate’s first-quarter outcomes have been boosted by higher-than-expected service demand for cellular hotspots and FWA merchandise, in addition to higher-than-expected service revenues because of development within the telematics enterprise and Inseego’s SaaS subscription choices.

The corporate generated about $4 million in free money move and ended the quarter with money and money equivalents of $12.3 million and debt of $166.6 million.

After the top of the quarter, Inseego terminated its high-cost credit score facility with Siena Lending Group LLC. and paid a complete of $3.4 million in debt and termination charges:

Below the phrases of the ABL Program, the Firm should make month-to-month principal and curiosity funds of $8.5 million, whatever the quantity of funds truly borrowed by the Firm below the ABL Program. For instance, throughout 2023, the Firm incurred curiosity expense and charges associated to the ABL fund of $1.9 million.

Upon compensation and termination of the ABL Mortgage, the Firm shall haven’t any excellent stability on the Mortgage and shall incur no curiosity expense on the Mortgage going ahead; as well as, the lien on all firm belongings associated to the ABL facility will likely be launched.

On account of the corporate’s improved income development and monetary efficiency, in addition to the favorable pattern in money administration, the corporate believes that it has the mandatory liquidity to fulfill its working capital wants sooner or later.

As administration famous in the course of the first quarter convention name, the corporate additionally obtained a $15 million upfront fee from a serious Tier 1 service buyer in reference to an improve to its subscriber administration platform, which, mixed with anticipated enhancements in money move, might lead to money and cash. equal to shut to $30 million by the top of the 2nd quarter.

For the second quarter, administration forecast income within the vary of $52 million to $56 million and adjusted EBITDA of $6.5 million to $7.5 million:

By way of product income, there are two components that contributed to the rise in income in Q2 in comparison with Q1. First, we’re seeing robust service demand for our cellular merchandise because of a mix of elevated structural demand in addition to some extra perishable shares at one in every of our service prospects. Second, we proceed to see development in FWA in Q2 because of early traction from the relaunch in Q1 and the rebranding of Inseego’s Inseego Ignite channel program.

Providers and different income additionally noticed sequential income development in Q2, pushed by elevated subscription renewal income added by a mix of SaaS subscription enlargement and extra skilled providers income.

Taken collectively, the non-GAAP gross margin share is anticipated to say no barely throughout the product combine within the second quarter as increased subscription income is offset by an excellent bigger enhance in decrease cellular gross income. Second quarter non-GAAP working bills are anticipated to be comparatively flat in comparison with the primary quarter in greenback phrases.

With the enterprise apparently turning round and shares buying and selling close to 52-week highs, Inseego’s probabilities of returning $161.9 million in excellent 3.25% senior convertible notes due 2025 with out important dilution to current shareholders elevated dramatically.

After accounting for exchanges and redemptions that occurred in prior intervals, the excellent principal quantity of the Firm’s 3.5% convertible senior notes due Might 2025 (the “2025 Notes”) was $161.9 million as of December 31 March 2024 and December 31, 2023. Supplied that the 2025 Notes usually are not redeemed or transformed by Might 1, 2025, the complete principal stability of $161.9 million is due on Might 1, 2025. The 2025 Notes. are senior unsecured obligations of the Firm and bear curiosity at an annual price. 3.25% payable semi-annually when due on Might 1st and November 1st of every yr.

Nevertheless, with lower than twelve months to maturity, the corporate was required to incorporate a going concern warning in its quarterly report on Kind 10-Q:

(…) The Firm intends to restructure or refinance the 2025 Notes, and the Firm is actively negotiating to take action, however there will be no assurance that the mandatory or desired restructuring or financing will likely be obtainable on phrases favorable to the Firm, or in any respect. As a result of refinancing of the 2025 bonds can’t be assured, accounting requirements require disclosure that it casts substantial doubt on the corporate’s means to proceed as a going concern for one yr after the issuance of those monetary statements.

Given this problem and the stellar efficiency of the corporate’s widespread inventory, I would not be shocked to see administration actually take the bull by the horns and switch to convertible notes forward of Inseego’s Q2 report in early August.

In keeping with statements made by administration in the course of the convention name, many of the notes are stored shut:

As famous within the press launch, the termination of the ABL considerably reduces our curiosity expense. Importantly, this now additionally permits us to make use of different capital buildings, resembling secured debt, which is able to give us flexibility when it comes to our final capital construction and the way we search to restructure our current convertible notes.

Many of the convertible notes are in tight storage and we’re working to develop a suitable resolution. The Board takes a considerate, methodical method and we have interaction our authorized and monetary advisors. We’ll preserve buyers up to date over the approaching quarters as additional progress is made.

Trying intently at Inseego’s newest annual report on Kind 10-Okay, the 2 largest shareholders (Golden Harbor Ltd. and North Sound Buying and selling, LP) presently personal a mixed 21.7% of the corporate’s widespread inventory and almost 50% of the excellent convertible notes.

Since these events have been concerned within the earlier notice alternate, Inseego shouldn’t have any drawback reaching a decision with them.

Even different massive holders could conform to alternate their convertible notes for brand new ones with a better coupon and a a lot decrease conversion worth.

Assuming a 6% coupon on $150 million in new convertible notes, the corporate must tackle $9 million in annual curiosity funds, which appears to be like fairly manageable, a minimum of assuming no sur’ critical operational failures.

If somebody had introduced this state of affairs to me simply 4 weeks in the past, I’d probably have shook my head in disbelief, however with the enterprise again in development mode and the share worth rising, a non-dilutive decision of the corporate’s debt issues is now an actual chance.

If Inseego does handle to keep away from materials dilution and develop gross sales and income subsequent yr, the inventory might rise additional.

Assuming Inseego’s adjusted EBITDA of $35 million subsequent yr, the corporate’s 2025 EV/adjusted EBITDA ratio can be 8, in comparison with the US telecom tools trade common of 14.

After I began writing this text on Might 10, the working title was “Inseego: A dangerous alternative for speculative buyers“.

Nevertheless, maybe with simple cash, I’d keep away from chasing the inventory at present ranges and somewhat search for potential draw back.

So I begin my protection of Inseego with “Maintain on” and we apologize to readers for not declaring this chance shortly after the Q1 earnings launch three weeks in the past.

Backside line

Inseego’s enterprise seems to be turning round, as evidenced by the corporate’s better-than-expected Q1 report and superb Q2 outlook.

Nevertheless, the corporate nonetheless has $161.9 million in convertible notes due Might 1, 2025.

With improved fundamentals and a considerably elevated market cap, Inseego might keep away from important dilution to current widespread shareholders, however that is not at all a given.

A minimum of for my part, administration will probably look to take the chance to barter a decision forward of the corporate’s Q2 report in August to resolve the problem behind the corporate and take away the going concern language for the subsequent 10Q.

Assuming a non-dilutive debt restructuring and continued execution, there may very well be additional upside to Inseego’s share worth, however I would not chase the inventory after a multi-week rally and would somewhat anticipate a pullback earlier than beginning or including to current positions.

So I begin my protection of Inseego with “Maintain on” score.