Hello and welcome to Inseego Corp.'s Third Quarter 2023 Financial Results Conference Call. Please note that today's event is being recorded. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] On the call today are Ashish Sharma, CEO, Steven Gatoff, Chief Financial Officer. During this call, non-GAAP financial measures will be discussed. A reconciliation to the most directly comparable GAAP financial measures is included in the earnings release, which is available on the Investors section of the company's website. An audio replay of this call will also be archived there. Please also be advised that today's discussion will contain forward-looking statements. These forward-looking statements are not historical facts, but rather are based on the company's current expectations and beliefs. For a discussion on factors that could cause actual results to differ materially from the expectations, please refer to the risk factors described in our Form 10-K, 10-Q and other SEC filings which are available on our website. Please also refer to the cautionary note regarding forward-looking statements section contained in today's press release. I would now like to turn the call over to Ashish Sharma, CEO. Please go ahead.

Thank you, operator. Hello, everyone. Thanks for joining us today. Q3 was a mixed quarter for us. We continue to see the effects of our supply chain challenges in addition to legacy product declines, which impacted our revenue in Q3 and will extend into Q4. As you will see in our results, we are managing our operations tightly. We will continue to be laser-focused on profitability and cash, while continuing to invest in areas that will drive growth. During the past several weeks, we made three meaningful additions to the Inseego team. Philip Brace joined our Board of Directors and brings a terrific background as a seasoned CEO and wireless industry expert. Steven Gatoff joined us as CFO and brings a terrific profile and skill set of driving growth and managing operations and Steve Harmon joined this week in our newly created role of Chief Revenue Officer. I'm excited about the incremental leadership around the table and what it's helping us do as we finish out 2023. With that, I'd like to cover three topics with you today on the call. First, I'll give a quick summary of our Q3 business results. Second, I'd like to provide an update on the progress of our transformation to a full solution FWA company. And third, I'd like to provide some insights into the current Q4 as we close out the year. First, let's talk about our Q3 results. We reported Q3 revenue of $48.6 million and adjusted EBITDA of $4 million. The results were below our expectations, mainly due to supply chain challenges that impacted several large customers and the runoff of legacy 4G product revenues. This quarter, demand was better than expected for our new 5G products and worse than expected for our legacy products. Earlier in the year, we moved…

Thanks, Ashish. Good afternoon, everyone. I'd like to cover four things with you today. I'd like to start by sharing a brief perspective on my positive view of the opportunity here at Inseego and what I'm focused on to help ensure that we capitalize on it. I'll then cover three core aspects of the business; first, the financial details and insights on our Q3 results; second, share with you what we're doing right now to protect shareholder value; and third, provide guidance on Q4. As the operator noted, we’ll of course, wrap up by opening the call to your questions. First off, I'm really glad to have joined Ashish and the team here at Inseego. After six weeks or so on the job, I'm bullish on the opportunity that sits in front of us. I see a clear path and the ability to help make an impact in monetizing it. Inseego has a very strong technology prowess and unique product-related capabilities. We've already seen industry leaders seek out our engineering input and advice. This is one of the assets that uniquely positions Inseego to penetrate a $50 billion TAM that's starting to unfold and that should translate into meaningful stockholder value. As we move forward to execute on this, I'm focusing my time and efforts on three areas across the company. One, our overall capital structure management in addressing our near-term stock price level and the reverse stock split, working through our convert overhang, and evaluating our portfolio of businesses. Second, I'm focused on our business strategy in driving our profitable growth profile and roadmap from our Q4 execution to our 2024 and intermediate term plan. And third, I'm focused on our operational execution and driving a metrics and performance management construct for results. I'm particularly looking forward to working…

We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Lance Vitanza with Cowen. Please go ahead.

Thank you. Thanks, gentlemen. Let me start with -- I guess I just want to try to understand a couple of things, Stephen, that I think you said, did you say that you expect zero 4G hotspot revenue in the fourth quarter?

Very de minimis amount

Very de minimis amount, yeah. Okay. So then the -- I guess the -- so the runoff that's been ongoing, is that that suggest that that's we've come to an end? Or is there -- was there sort of like a glitch and then maybe we get a couple more quarters in 2024 of additional 4G hotspot contribution?

No, Len. This is it for the project. Okay. Okay. Okay. Well, okay. So then -- okay. So then we can just focus on the 5G business. So I guess the question there is -- and I don't know, Stephen, if you -- I know you've only been there six weeks. So I get it. But do you have a sense yet for really kind of like what the fixed costs are associated with the 5G kind of platform. And then as you get beyond those fixed costs, what kind of variable cost on contribution margin from the incremental revenues do you expect? I'm just trying to get a sense for the basic kind of economic proposition as we look ahead.

Yeah, it's a great question, and it is one of the exact things that we've been spending time on and I have as I've been on-boarding. The good news is that the crux of what you're saying should pan out. In other words, there's a decent amount of variable costs and controllable costs that we have in that part of the business. So that, for example, when we were facing revenue pressure now, we can reduce spend fairly immediately. So there's labor costs that are variable, there's outside contractor and programmatic costs that we have, such that we can control the near-term profitability of that product a; and b, to your second point, from a long-term perspective, it should be more of a step function in cost structure so that as you start to scale out and grow revenues more exponentially, you'll see a steeper curve in revenue than you will at cost structure, so you should get an expansion in profitability.

And then I guess for Steve. I guess for Ashish. Thank you, Steven. I guess for Ashish, do the delays -- one of the things that we routinely hear is that the product technology is very high and very good. But I guess, did the product delays that you discussed -- unfortunately there, do they sort of create a situation where your customers are kind of forced to make other plans? Or how does that sort of -- I guess just from a competitive standpoint, how stable would you see? And what kind of relationships, how would you describe the level of the relationships that you have with some of your key customers?

Yes. Good question, Lance. So I would say that our product is really preferred in the slots we are in. During this quarter, I would say we are facing two different dynamics. One was the inability to supply the product due to supply chain challenges, because the demand went up very quickly in late June. So we could supply a lot of product in the first half of the quarter. And then we shipped a lot of product between from mid to late in the quarter, and that's creating some headwinds for the next quarter, which is Q4. So that's one dynamic. There's some perishable demand there because especially on hotspots when we could ship the product. I mean, there are other products that the customers have. The second dynamic is the delayed launch with one customer. And that, again, is impacting Q4, and that got delayed because some new requirements came in at the 11th hour. We're working so diligently with the customer. And in fact, we have soft launched it. I mean the initial feedback from the end customers is very positive. So I would say to sum it up, we are the preferred product in the slots we are in, but like the demand is perishable.

But I guess really what I'm trying to get at is, it doesn't sound like you are losing market share as a result of this. It sounds like some of the delays are actually driven by the customers. And then the other ones, the customers are -- they are hanging with you. They're not saying like, oh, you're three weeks late, so we're going to another supplier?

That's correct.

Okay. And then just maybe my last question before I'll hand over to Baton here. But, just touch on the balance sheet, and I don't know if the 10-Q is out yet. But I'm wondering, I guess, a couple of things. Number one, will there be any sort of warning around possible liquidity shortfalls over the coming 12 months, either in the liquidity section of the MD&A or do we have to worry about anything along those lines? And then just sort of thinking about the debt obligations the ABL, it doesn't expire until next December, but that does mean that you'll have to start recording the balances as current liabilities early next year unless you extend that maturity? I'm wondering if you have a prognosis for that. And then, I know you mentioned this briefly, Steven, but then the converts obviously mature not until May of 2025, which gives you at least some time. So is the plan with respect to the converts to kind of wait until spring when presumably the momentum -- the operating momentum is a little bit better? Or how should we think about that? Thanks.

Yes. Really good questions and we're glad you asked, because it's obviously meaningfully important and material to equity value. So thank you. The short answer on your last question is we are not waiting until spring to manage the situation. We are on the convert. We have a relatively small group of holders on the convert. Some of them are on our board, some have been and it's a group with whom we're engaged and we're actively looking to manage that through. So we are not waiting. We are taking care of that now, and it is an important aspect of the cap structure. To your earlier points, which are really good around liquidity and the short-term facility, we -- I guess the nutshell is we have ample capacity. So we do not feel a constraint on our ability to borrow. It really is a true working capital facility. We have very large carrier customers that sometimes they pay really awesome like they did this quarter. We have lots of cash. Sometimes they take longer. And so that's where that working capital facility comes in place really well. I think our view is that, that facility is not really an issue for the company, either short-term or longer-term. The bigger nut to focus on is the convert, which we are focused on, and we are not waiting for that.

Thank you so much. Yes, it does. And thanks very much and best of luck.

Okay. Thanks, Lance.

[Operator Instructions] The next question comes from Tore Svanberg from Stifel. Please go ahead.

Hi. Yes. Good afternoon. This is Jeremy calling for Tore. I guess maybe the first question, digging in a little bit more deeply into the delay on the fixed wireless asset side. The new requirements for the product are there -- is there any indication that it's a change in strategy on the behalf of the carrier, whether the upside to the – maybe smaller or larger potential SAM for you guys? Are there any -- just trying to get a clearer picture and few any shift in possible SAM because of this delay?

Yes, Jeremy, it's not the case. I mean, it's a very specific requirement as it relates to the network of this particular customer. So it's very pointed in that fashion. It doesn't really change the broader market for us.

Great. And I guess maybe moving to the just the financials. I know you mentioned non-GAAP gross margins of 33%. But so this is the inventory adjustment that you mentioned in the $1 million write-off of inventory order fees. So if we take that out, we get to 33% non-GAAP. Is there any reason why this isn't this will show up in the non-GAAP net income because it looks like the costs are excluded from -- they're not added back, I guess, when you show the non-GAAP net income?

Yes, we made a point of pulling it out of EBITDA for that purpose. And as you said, it will come out of the COGS line specifically to mobile solutions to get to the 34.6, and that's how we recorded it.

Got it. Okay. And is there -- there's -- is there going to be any, I guess, impact going forward from these charges? Or is there a potential for any kind of, I guess, benefit on the back end of it?

I couldn't hear the first part. Is there any benefit on board? Is that -- what was the…

Sorry, on the back end, I guess, if you can take a charge now, is there some chance that some of this could be to cover.

Yes. Yes, absolutely. I mean the charge is a P&L charge. It's not a disposition of inventory. It's not a destruction of inventory. It's just based on how much inventory and raw materials we have today. And what we've sold in the last 12 months? And what the sales forecast is now going forward. And so you say, okay, it looks like we will not be able to clear that amount, so you take a reserve. And to your good point, if something happens and there's a Blue Bird or things break really well and positively, then we'll see some upside. But we're obviously not planning on making things with a Blue Bird or Upside, and that's essentially why there's a reserve.

Got it. Great. And maybe two more quick questions, one would be on the $2 million OpEx that's coming out. Can we see that fully realized in Q1 of next year? And maybe would it be fair to say something like just a fraction of that in Q4.

Yes, that's exactly right. A part of it will be in Q4, just based on the fact that it's early November and then the full benefit in Q1 spot on.

Got it. And the last question would be just looking at the -- your working capital went down quite a bit, which is nice on the cash flow side. I was surprised to see accounts receivable dropped $8 million and how we reconcile that with late shipments in the quarter? Were you able to collect really quickly on those shipments? Is that kind of what happened there?

That's exactly what happened. We -- as we said before, on the other side of the table, we have large carrier customers that we sell to and through. And this quarter, we had one or two that paid very quickly on a lot of stuff. And so our DSOs improved tremendously. We had very large cash collections. Awesome, right? We'd much rather have cash earlier. It's a nice dynamic to have, but it's obviously not -- it's a bit of an anomaly to have that improvement in a short period of time. And so you see a huge pop in cash.

Got it. And sorry, one last question, if I could squeeze it in. Do you have new breakeven targets whether for adjusted EBITDA or on a free cash flow basis?

Well, our commitment and our focus is on maintaining profitability in the form of adjusted EBITDA. So that's an important metric for us. The EBITDA -- adjusted EBITDA positive. We're also focused on the cash burn and particularly as we exit this quarter and head into next year of generating free cash flow. So that's a target for us as we plan out and set ourselves up for Q1.

Very good. Thank you very much.

Yeah. Good questions. Thank you.

Thank you, Jeremy.

This concludes our question-and-answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.