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could result in operational and administrative inefficiencies and added costs, which could adversely impact our results of operations, stock price and customer relationships.
The Company has entered into a Rights Agreement, and if the holders exercise their share purchase rights under such agreement, it could materially adversely affect the price of our common stock and cause dilution to our existing stockholders.
We entered into a rights agreement on January 22, 2018, with Computershare Trust Company, N.A., a federally chartered trust company, as Rights Agent (as subsequently amended, the “Rights Agreement”), that was approved by our stockholders at our 2018 Annual Meeting of Stockholders. The Rights Agreement is intended to discourage acquisitions of our common stock which could result in a cumulative change in ownership of more than 50% within a rolling three-year period, thereby preserving our current ability to utilize net operating loss carryforwards to offset future income tax obligations, which would become subject to limitations if we were to experience an “ownership change,” as defined under Section 382 of the Internal Revenue Code of 1986, as amended. While this Rights Agreement is intended to preserve our current ability to utilize net operating loss carryforwards, it effectively deters current and future purchasers from accumulating more than 4.9% of our common stock, which could delay or discourage takeover attempts that stockholders may consider favorable. In addition, if the share purchase rights under the Rights Agreement are exercised, additional shares of our common stock will be issued, which could cause dilution to our current stockholders. Moreover, sales in the public market of any shares of our common stock issuable upon such exercise, or the perception that such sales may occur, could adversely affect the prevailing market price of our common stock. These issuances would also cause our per share net income, if any, to decrease in future periods.
RISKS RELATED TO CORPORATE DEVELOPMENT ACTIVITIES
If we do not properly manage the development of our business, we may experience significant strains on our management and operations and disruptions in our business.
Various risks arise if companies and industries quickly grow or evolve. If our business or industry develops more quickly than our ability to respond, our ability to meet customer demand in a timely and efficient manner could be challenged. We may also experience development, certification or production delays as we seek to meet demand for our products or unanticipated product requirements. Our failure to properly manage the developments that we or our industry might experience could negatively impact our ability to execute on our operating plan and, accordingly, could have an adverse impact on our business, our cash flow and results of operations and our reputation with our current or potential customers.
We may, as part of our growth strategy, acquire companies and businesses, and/or divest assets or businesses. The completion of acquisition or divestiture transactions could have an adverse effect on our financial condition.
As part of our business strategy, we may review acquisition and divestiture opportunities that we believe would be advantageous or complementary to the development of our business.business, including the Ctrack Transaction (defined and discussed
below). Based on these opportunities, we may acquire additional businesses, assets or technologies in the future. Alternatively, we may divest businesses, assets or technologies. All of these activities are subject to risks and uncertainties and could disrupt or harm our business. For example, if we make an acquisition, we could take any or all of the following actions, any one of which could adversely affect our business, financial condition, results of operations or stock price:
•use a substantial portion of our available cash;
•incur substantial debt, which may not be available to us on favorable terms and may adversely affect our liquidity;
•issue equity or equity-based securities that would dilute the percentage ownership of existing stockholders;
•assume contingent liabilities; and
•take substantial charges in connection with acquired assets.
Acquired businesses may have liabilities or adverse operating issues that we fail to discover through due diligence prior to the acquisition, such as:
•failure by previous management to comply with applicable laws or regulations;
•inaccurate representations; and
•unfulfilled contractual obligations to customers or vendors.
Following acquisitions and/or divestitures, our reorganized business may not perform as we or the market expects, which could have an adverse effect on the price of our common stock.
The reorganized company resulting from any acquisitions and/or divestitures we pursue and consummate may not perform as we or the market expect. Risks associated with such acquisitions and divestitures, including the Ctrack Transaction, include the following:
•integrating new business acquisitions and divesting existing lines of business is a difficult, expensive and time-consuming process and will divert management’s attention from existing operations, and the failure to successfully manage such transitions could adversely affect our financial condition and results of operations;
•acquisitions and divestitures may change the nature of the business in which we have historically operated, including entering markets in which we have limited or no prior experience, and if we are not able to effectively adjust to such changes in the fundamental nature of our business, our financial condition and results of operations may be adversely affected;
•our assumptions with respect to future revenue, growth rates, expense rates and synergies resulting from acquisitions and/or divestitures may prove to be inaccurate, which may adversely affect the price of our common stock;
•it is possible that our key employees might decide not to remain with us as a result of these changes in our business or for other reasons, and the loss of such personnel could have a material adverse effect on our financial condition, results of operations and growth prospects;
•relationships with third parties, including key vendors and customers, may be affected by changes in our business resulting from these acquisitions and divestitures, and any adverse changes in these third party relationships could adversely affect our business, financial condition and results of operations; and
•the price of our common stock may be affected by factors different from those that affected the price of our common stock prior to such acquisitions and/or divestitures.
As a result, if we fail to properly evaluate or implement acquisitions or divestitures, we may not achieve the anticipated benefits of any such transactions, and we may incur unanticipated costs, either of which could harm our business and operating results.
We cannot provide any assurance that we will be successful in divesting assets we wish to sell, including the divestiture of our Ctrack South African Operations.
On February 24, 2021, we entered into a Share Purchase Agreement pursuant to which an affiliate of Convergence Partners (“Convergence”), an investment management firm in South Africa, has agreed to acquire the South African operations of Ctrack, in an all-cash transaction for 528.9 million South African Rand (ZAR) (approximately $36.2 million United States Dollar (“USD”) based on an exchange rate on February 24, 2021 of 14.62 ZAR to 1 USD) (the “Ctrack Transaction”). The Ctrack Transaction is subject to certain closing conditions, including, among other things, regulatory approvals and Convergence closing a new $100 million investment fund. There can be no assurance that the conditions to the closing of the Ctrack Transaction will ever be satisfied or waived, and, therefore, the Ctrack Transaction may never be consummated.
If the Ctrack Transaction with Convergence is not consummated, our business may be materially affected. In addition to not realizing any of the benefits of completing the Ctrack Transaction, our business may be subject to several additional risks, including reputational risks and negative publicity, difficulties in finding other acquirors or alternative exit strategies for the Ctrack business on terms that are favorable to us, additional expenses, such as legal, accounting and financial advisory fees, and negative reactions from our customers, suppliers or employees. Each of these risks could harm our ability to achieve our planned strategic objectives, which, in turn, could adversely impact our ongoing business, financial condition, results of operations and the market price of our common stock.
Even if the Ctrack Transaction is consummated, the Ctrack Transaction may never achieve some or all of its anticipated benefits. It is anticipated that the Company would provide transition services for at least a six month period following the consummation of the Ctrack Transaction, which could create additional and ongoing operational risks. In addition, the Ctrack Transaction only involves the sale of Ctrack’s South African operations, and portions of the Ctrack operations would remain with the Company following the consummation of the Ctrack Transaction. These remaining Ctrack operations would need to be rebranded, which could create operational and reputational risks for the Company.
See “Item 15. Subsequent Events–Sale of Ctrack South Africa Operations” for further information.
RISKS RELATED TO COMPETITION
The market for the products and services that we offer is rapidly evolving and highly competitive. We may be unable to compete effectively.
The market for the products and services that we offer is rapidly evolving and highly competitive. We expect competition to continue to increase and intensify, especially in the 5G market. Many of our competitors or potential competitors have significantly greater financial, technical, operational and marketing resources than we do. These competitors, for example, may be able to respond more rapidly or more effectively than we can to new or emerging technologies, changes in customer requirements, supplier-related developments, or a shift in the business landscape. They also may devote greater or more effective resources than we do to the development, manufacture, promotion, sale, and post-sale support of their respective products and services.
Many of our current and potential competitors have more extensive customer bases and broader customer, supplier and other industry relationships that they can leverage to establish competitive dealings with many of our current and potential customers. Some of these companies also have more established and larger customer support organizations than we do. In addition, these companies may adopt more aggressive pricing policies or offer more attractive terms to customers than they currently do, or than we are able to do. They may bundle their competitive products with broader product offerings and may introduce new products, services and enhancements. Current and potential competitors might merge or otherwise establish cooperative relationships among themselves or with third parties to enhance their products, services or market position. In addition, at any time any given customer or supplier of ours could elect to enter our then existing line of business and thereafter compete with us, whether directly or indirectly. As a result, it is possible that new competitors or new or otherwise enhanced relationships among existing competitors may emerge and rapidly acquire significant market share to the detriment of our business.
Our products compete with a variety of solutions, including other wireless modems and mobile hotspots, wireless handsets, wireless handheld computing devices, IoT wireless solutions and enterprise software solutions. Our current competitors include:
•fleet management SaaS and services providers, such as Fleetmatics, Masternaut, TomTom, Telogis, MiX Telematics and Cartrack;
•mobile hotspotshotspot providers, such as Netgear,NETGEAR, Franklin Wireless, WNC, Sierra Wireless, Nokia, TCL, ZTE and Huawei;
•IoT solution providers, such as Cradlepoint and Sierra Wireless; and
•customer experience software solutions and services providers, such as Amdocs.
We expect our competitors to continue to improve the features and performance of their current products and to introduce new products, services and technologies which, if successful, could reduce our sales and the market acceptance of our products, generate increased price competition and make our products obsolete. For our products to remain competitive, we must, among other things, continue to invest significant resources (financial, human and otherwise) in, among other things, research and development, sales and marketing, and customer support. We cannot be sure that we will have or will continue to have sufficient resources to make these investments or that we will be able to make the technological advances in the marketplace, meet changing customer requirements, achieve market acceptance and respond to our competitors’ products.
The 5G fixed wireless access gateway business is subject to a number of challenges that will be difficult to overcome.
The developing market for 5G fixed wireless access devices is very competitive. In addition to other challenges, our fixed wireless access gateway products compete against similar products offered by mature companies, including Samsung, Ericsson, Nokia and Wistron NeWeb Corporation. Failure to manage these challenges, or failure of our fixed wireless access business to grow to become successful and profitable, could have a material adverse effect on our financial condition and results of operations.
The market for asset management and fleet management solutions and the markets for telemetry and tracking solutions are all highly fragmented and competitive, with low barriers to entry. If we do not compete effectively, our operating results may be harmed.
The market for asset management and fleet management solutions and the markets for telemetry and tracking solutions are all highly fragmented, consisting of a large number of vendors, competitive and rapidly changing product and service offerings, with relatively low barriers to entry. Competition in all these markets is based primarily on the level of difficulty in installing, using and maintaining solutions, total cost of ownership, product performance, functionality, interoperability, brand and reputation, distribution channels, industries and the financial resources of the vendor. We expect competition to intensify in the future with the introduction of new technologies and market entrants. For example, in the telematics market, mobile service and software providers, such as Google and makers of GPS navigation devices, such as Garmin, provide limited services at lower prices or at no charge, such as basic GPS- based mapping, tracking and turn-by-turn directions that could be expanded or further developed to more directly compete with our fleet management solutions. In addition, wireless carriers, such as Verizon Wireless, offer fleet management solutions that benefit from the carrier’s scale and cost advantages which we are unable to match. Similarly, vehicle OEMs may provide factory-installed devices and effectively compete against us directly or indirectly by partnering with other fleet management suppliers. We can provide no assurances that we will be able to compete effectively in this ecosystem as the competitive landscape continues to develop. Competition could result in reduced operating margins, increased sales and marketing expenses and the loss of market share, any of which would likely cause serious harm to our operating results.
Industry consolidation may result in increased competition, which could result in a loss of customers or a reduction in revenue.
Some of our competitors have made or may make acquisitions or may enter into partnerships or other strategic relationships to offer more comprehensive services than they individually had offered or achieve greater economies of scale. In addition, new entrants not currently considered to be competitors may enter our market through acquisitions, partnerships or strategic relationships. We expect these trends to continue as companies attempt to strengthen or maintain their market positions. Many of the potential entrants may have competitive advantages over us, such as greater name recognition, longer operating histories, more varied services and larger marketing budgets, as well as greater financial, technical and other resources. These pressures could result in a substantial loss of our customers, a reduction in our revenue or increased costs as we seek ways to become more competitive.
RISKS RELATED TO OUR CUSTOMERS AND DEMAND FOR OUR SOLUTIONS
Our inability to adapt to rapid technological change in our markets could impair our ability to remain competitive and adversely affect our results of operations.
All of the markets in which we operate are characterized by rapid technological change, frequent introductions of new products, services and solutions and evolving customer demands. In addition, we are affected by changes in the many industries related to the products or services we offer, including the aviation, automotive, telematics, wireless telemetry, GPS navigation
device and work flow software industries. As the technologies used in each of these industries evolves, we will face new integration and competition challenges. For example, as automobile manufacturers evolve in-vehicle technology, GPS tracking devices may become standard equipment in new vehicles and compete against some segments of our telematics or asset tracking service offerings. If we are unable to adapt to rapid technological change, it could adversely affect our results of operations and our ability to remain competitive.
If we fail to develop and maintain strategic relationships, we may not be able to penetrate new markets.
A key element of our business strategy is to penetrate new markets by developing new service offerings through strategic relationships with industry participants. We are currently investing, and plan to continue to invest, significant resources to develop these relationships. We believe that our success in penetrating new markets for our products will depend, in part, on our ability to develop and maintain these relationships and to cultivate additional or alternative relationships. There can be no assurance, however, that we will be able to develop additional strategic relationships, that existing relationships will survive and successfully achieve their purposes or that the companies with whom we have strategic relationships will not form competing arrangements with others or determine to compete with us.
We depend upon Verizon Wireless for a substantial portion of our revenues, and our business would be negatively affected by an adverse change in our dealings with this customer.
As a result of the significant revenues associated with our MiFi business, sales to Verizon Wireless accounted for 53%55% and 49%53% of our consolidated net revenues for each of the years ended December 31, 20192020 and 2018,2019, respectively. While we have accelerated our engagements with prospective new MiFi customers and continue to focus on growing revenue in other parts of our business, we expect that Verizon Wireless will continue to account for a substantial portion of our net revenues, and any impairment of our relationship with Verizon Wireless would adversely affect our business. Additionally, any change in the forecasted or actual product sell-through of Verizon Wireless could have a detrimental impact on our revenue, bottom line and cash position.
We may not be able to retain and increase sales to our existing customers, which could negatively impact our financial results.
We generally seek to license our software and enterprise solutions pursuant to customer agreements with multi-year terms and subscriptions. However, our customers have no obligation to renew these agreements after their initial terms expire. We also actively seek to sell additional solutions to our existing customers. If our efforts to satisfy our existing customers are not successful, we may not be able to retain them or sell additional functionality to them and, as a result, our revenue and ability to grow could be adversely affected. Customers may choose not to renew their subscriptions for many reasons, including the belief that our service is not required for their business needs or is otherwise not cost-effective, a desire to reduce discretionary spending, or a belief that our competitors’ services provide better value. Additionally, our customers may not renew for reasons entirely out of our control, such as the dissolution of their business or an economic downturn in their industry. A significant increase in our churn rate would have an adverse effect on our business, financial condition, and operating results.
A part of our growth strategy is to sell additional new features and solutions to our existing customers. Our ability to sell new features to customers will depend in significant part on our ability to anticipate industry evolution, practices and standards and to continue to enhance existing solutions or introduce or acquire new solutions on a timely basis to keep pace with technological developments both within our industry and in related industries, and to remain compliant with any regulations mandated by federal agencies or state-mandated or foreign government regulations as they pertain to our customers. However, we may prove unsuccessful either in developing new features or in expanding the third-party software and products with which our solutions integrate. In addition, the success of any enhancement or new feature depends on several factors, including the timely completion, introduction and market acceptance of the enhancement or feature. Any new solutions we develop or acquire might not be introduced in a timely or cost-effective manner and might not achieve the broad market acceptance necessary to generate significant revenue. If any of our competitors implement new technologies before we are able to implement them or better anticipate the innovation and integration opportunities in related industries, those competitors may be able to provide more effective or cheaper solutions than ours.
Another part of our growth strategy is to sell additional subscriptions to existing customers as their fleet sizes or asset
portfolios increase. We cannot be assured that our customers’ fleet sizes or asset portfolios will continue to increase. A significant decrease in our ability to sell additional functionality or subscriptions to existing customers could have an adverse effect on our business, financial condition, and operating results.
Loss of, or a significant reduction in business from, one or more enterprise or government customers could adversely affect our revenue and profitability.
Loss of one or more of our large enterprise or government customers could result in a meaningful decrease in revenue and
profitability, as well as a material increase in our customer churn rate. Because of the variability of industries in which our enterprise and government customers operate and the unpredictability of economic conditions in any particular industry which comprises a significant number of our enterprise or government customers, the composition of, and the volume of business from, our enterprise and government customers is likely to change over time. If we lose one or more large enterprise or government customers, or if we experience a significant reduction in business from one or more large enterprise or government customers, there is no assurance that we would be able to replace those customers to generate comparable revenue over a short time period, which could harm our operating results and profitability.
Adverse economic conditions or reduced spending on information technology solutions may adversely impact our revenue and profitability.
Uncertainty about future economic conditions makes it difficult for us to forecast operating results and to make decisions about future investments. We are unable to predict the likely duration and severity of adverse economic conditions in the United States and other countries, but the longer the duration, the greater risks we face in operating our business. We cannot assure you that current economic conditions, worsening economic conditions or prolonged poor economic conditions will not have a significant adverse impact on the demand for our solutions, and consequently on our results of operations and prospects.
The marketability of our products may suffer if wireless telecommunications operators do not deliver acceptable wireless services.
The success of our business depends, in part, on the capacity, affordability, reliability and prevalence of wireless data networks provided by wireless telecommunications operators and on which our products and solutions operate. Currently, various wireless telecommunications operators, either individually or jointly with us, sell our products in connection with the sale of their wireless data services to their customers. Growth in demand for wireless data access may be limited if, for example, wireless telecommunications operators cease or materially curtail operations, fail to offer services that customers consider valuable at acceptable prices, fail to maintain sufficient capacity to meet demand for wireless data access, delay the expansion of their wireless networks and services, fail to offer and maintain reliable wireless network services or fail to market their services effectively.
Changes in practices of insurance companies in the markets in which we provide our solutions could materially and adversely affect demand for products and services.
We depend in part on the practices of insurance companies in some of our markets to support demand for certain of our products and services. For example, in South Africa, which is currently the largest market for our Ctrack products and services, insurance companies either mandate the installation of tracking devices as a prerequisite for providing insurance coverage to owners of certain vehicles, or provide insurance premium discounts to encourage vehicle owners to subscribe to vehicle tracking and mobile asset recovery solutions such as ours. We benefit from this continued practice in the South African and certain other markets of:
•accepting mobile asset location technologies such as ours as a preferred security product;
•providing premium discounts for using location and recovery products and services such as ours; and
•mandating the use of our products and services, or similar products and services, for certain vehicles.
If any of these policies or practices change, revenues from sale of our products and services could decline, which would materially and adversely affect our business, results of operations and financial condition.
Reduction in regulation in certain markets may adversely impact demand for certain of our solutions by reducing the necessity for, or desirability of, our solutions.
Regulatory compliance and reporting is driven by legislation and requirements, which are often subject to change, from regulatory authorities in nearly every jurisdiction globally. For example, in the United States, fleet operators can face numerous complex regulatory requirements, including mandatory Compliance, Safety and Accountability driver safety scoring, hours of service, compliance and fuel tax reporting. The reduction in regulation in certain markets may adversely impact demand for certain of our solutions, which could materially and adversely affect our business, financial condition and results of operations.
RISKS RELATED TO DEVELOPING, MANUFACTURING AND DELIVERING OUR SOLUTIONS
We currently rely on third parties to manufacture and warehouse many of our products, which exposes us to a number of risks and uncertainties outside our control.
We currently outsource the manufacturing of many of our products to companies including Foxconn and AsiaTelco Technologies Co. In addition, in 2016 we sold portions of our IoT modules business to Telit Wireless Solutions, Inc. (“Telit”),
and we now rely on Telit to supply us with modules that are critical to the functionality of some of our telematics hardware devices, including devices sold or deployed by Ctrack. If one of these third-party manufacturers were to experience delays, disruptions, capacity constraints or quality control problems in its manufacturing operations, product shipments to our customers could be delayed or rejected or our customers could consequently elect to change product demand or cancel the underlying subscription or service. These disruptions would negatively impact our revenues, competitive position and reputation. Further, if we are unable to manage successfully our relationship with a manufacturer, the quality and availability of products used in our services and solutions may be harmed. None of our third-party manufacturers is obligated to supply us with a specific quantity of products, except as may be provided in a particular purchase order that we have submitted to, and that has been accepted by, such third-party manufacturer. Our third-party manufacturers could, under some circumstances, decline to accept new purchase orders from us or otherwise reduce their business with us. If a manufacturer stopped manufacturing our products for any reason or reduced manufacturing capacity, we may be unable to replace the lost manufacturing capacity on a timely and comparatively cost-effective basis, which would adversely impact our operations. In addition, we generally do not enter into long-term contracts with our manufacturers. As a result, we are subject to price increases due to availability, and subsequent price volatility, in the marketplace of the components and materials needed to manufacture our products. If a third-party manufacturer were to negatively change the product pricing and other terms under which it agrees to manufacture for us and we were unable to locate a suitable alternative manufacturer, our manufacturing costs could increase.
Because we outsource the manufacturing of our products, the cost, quality and availability of third-party manufacturing operations is essential to the successful production and sale of our products. Our reliance on third-party manufacturers exposes us to a number of risks which are outside our control, including:
•unexpected increases in manufacturing costs;
•interruptions in shipments if a third-party manufacturer is unable to complete production in a timely manner;
•inability to control quality of finished products;
•inability to control delivery schedules;
•inability to control production levels and to meet minimum volume commitments to our customers;
•inability to control manufacturing yield;
•inability to maintain adequate manufacturing capacity; and
•inability to secure adequate volumes of acceptable components at suitable prices or in a timely manner.
Although we promote ethical business practices and our operations personnel periodically visit and monitor the operations of our manufacturers, we do not control the manufacturers or their labor and other legal compliance practices. If our current manufacturers, or any other third-party manufacturer which we may use in the future, violate U.S. or foreign laws or regulations, we may be subjected to extra duties, significant monetary penalties, adverse publicity, the seizure and forfeiture of products that we are attempting to import or the loss of our import privileges. The effects of these factors could render the conduct of our business in a particular country undesirable or impractical and have a negative impact on our operating results.
We have been moving production to one or more new contract manufacturers, which exposes us to a number of risks and uncertainties outside our control.
We have been moving some production to new contract manufacturers, some of whom we have not contracted with in the past. If our new contract manufacturers are not able to produce our products in the quantities needed prior to the agreed upon delivery dates, or are not able to produce our products in conformity with our quality standards, product shipments to our customers could be delayed or rejected. As a result, our customers may elect to cancel orders or place fewer orders in the future. Such delays, rejections, cancellation or reductions in orders would negatively impact our revenues, competitive position and reputation. Further, if we are unable to successfully manage our relationship with a contract manufacturer, the quality and availability of our products may be harmed.
We depend on sole source suppliers for some products used in our services. The availability and sale of those services would be harmed if any of these suppliers is not able to meet our demand and alternative suitable products are not available on acceptable terms, or at all.
Our services use hardware and software from various third parties, some of which are procured from single suppliers. For example, some of our vehicle tracking and fleet management solutions rely on telecommunications modules procured from Telit and our MiFi mobile hotspots rely substantially on chipsets from Qualcomm. From time to time, certain components used in our products or solutions have been in short supply or their anticipated commercial introduction has been delayed or their availability has been interrupted for reasons outside our control. If there is a shortage or interruption in the availability to us of any such components or products and we cannot timely obtain a commercially and technologically suitable substitute or make
sufficient and timely design or other modifications to permit the use of such a substitute component or product, we may not be able to timely deliver sufficient quantities of our products or solutions to satisfy our contractual obligations and may not be able to meet particular revenue expectations. Moreover, even if we timely locate a substitute part or product, but its price materially exceeds the original cost of the component or product, then our results of operations could be adversely affected.
Natural disasters, public health crises, political crises and other catastrophic events or other events outside of our control could damage our facilities or the facilities of third parties on which we depend, and could impact consumer spending.
Our corporate offices are located in San Diego, California near major earthquake faults and fire zones. If any of our facilities or the facilities of our third-party service providers, dealers or partners is affected by natural disasters, such as earthquakes, tsunamis, wildfires, power shortages, floods, public health crises (such as pandemics and epidemics), political crises (such as terrorism, war, political instability or other conflict) or other events outside our control, including a cyberattack, our critical business or IT systems could be destroyed or disrupted and our ability to conduct normal business operations and our revenues and operating results could be adversely affected. Moreover, these types of events could negatively impact consumer spending in the impacted regions or, depending upon the severity, globally, which could adversely impact our operating results.
A pandemic, epidemic,The effects of COVID-19 and other potential future public health crises, epidemics, pandemics or outbreak of an infectious disease, such as COVID-19, or coronavirus, may materially and adversely affectsimilar events on our business, operating results and our financial results.cash flows are uncertain.
The spread of COVID-19 has affected segments of the global economy and may affect our operations, including the potential interruption of our supply chain. The recent outbreak of COVID-19 originatedwas declared a pandemic by the World Health Organization and a national emergency by the U.S. Government in Wuhan, China, in December 2019March 2020 and has sincenegatively impacted the U.S. and global economy, disrupted global supply chains, resulted in significant travel and transport restrictions, including mandated closures and orders to “shelter-in-place,” and created significant disruption of the financial markets. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including the duration and spread globally.of the pandemic and related actions taken by the U.S. government, state and local government officials, and international governments to prevent disease spread, all of which are uncertain and cannot be predicted.
While the COVID-19 pandemic has led to an increase in demand for our products, particularly our MiFi and mobile wireless devices, relative to historic trends, this increased demand, as well as the revenues, net income and other financial and operating data associated therewith, may not be indicative of results for future periods. Temporary precautionary measures intended to help minimize the risk of the pandemic to our employees and to comply with government mandated closures and “shelter-in-place” orders have been put in place, including temporarily requiring most employees to work remotely, suspending all non-essential travel worldwide for our employees, and suspending employee attendance at industry events and in-person work-related meetings. These efforts could negatively affect our business. While most of our global operations have continued to operate, facility closures or work slowdowns or temporary stoppages could occur. In addition, different countries have different practices and policies that can affect our international operations and the operations of our suppliers and customers. For example, our business in South Africa has not been able to perform new domestic installations or installations in other jurisdictions in observance of such countries’ COVID-19 policies, which we believe may adversely impact revenues from Ctrack. Any impact is dependent on the length of the closure.
In addition, we rely on contract manufacturers and other companies to provide materials, components and products that we sell to our customers. The continued spread of COVID-19 may result in a period of business disruption, including delays or disruptions in our supply chain.
The spread of COVID-19, or another infectious disease, could also negatively affect the operations at our third-party manufacturers, which could result in delays or disruptions in the supply of our products. In addition,products and could impact our ability to meet customer demand. If we are not able to implement alternatives or other mitigations with respect to suppliers that may take temporary precautionary measures intendedhave potential delivery impacts due to help minimize the risk of the virus toCOVID-19, our employees, including temporarily requiring all employees to work remotely, suspending all non-essential travel worldwide for our employees,sales and discouraging employee attendance at industry events and in-person work-related meetings, whichfinancial results could negatively affect our business.be adversely impacted.
The COVID-19 outbreak is a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect longer-term demand for our products and likely impact our operating results. The impact of COVID-19 could worsen if there is an extended duration of any COVID-19 outbreak or a resurgence of COVID-19 infection in affected regions after they have begun to experience improvement. Prolonged impacts of
COVID-19 could result in delays in payment by customers, the speed of regulatory approvals such as FCC and other licenses that are needed for releases of new products, and delays in new 5G network rollouts. Current limitations on travel to customer locations could impact international orders. Accordingly, recent growth in our business may not continue into the future, and you should not rely on our revenue or key business metrics for any previous quarterly or annual period as any indication of our revenue, revenue growth, key business metrics, or key business metrics growth in future periods.
Product liability, product replacement, or recall costs could adversely affect our business and financial performance.
We are subject to product liability and product recall claims if any of our products and services are alleged to have resulted in injury to persons or damage to property. If any of our products proves to be defective, we may need to recall and/or redesign them. In addition, any claim or product recall that results in significant adverse publicity may negatively affect our business, financial condition, or results of operations. We maintain product liability insurance, but this insurance may not adequately cover losses related to product liability claims brought against us. We may also be a defendant in class action litigation, for which no insurance is available. Product liability insurance could become more expensive and difficult to maintain and may not be available on commercially reasonable terms, if at all. In addition, we do not maintain any product recall insurance, so any product recall we are required to initiate could have a significant impact on our financial position, results of operations or cash flows.
We rely on third-party software and other intellectual property to develop and provide our solutions and significant increases in licensing costs or defects in third-party software could harm our business.
We rely on software and other intellectual property licensed from third parties to develop and offer our solutions. In addition, we may need to obtain future licenses from third parties to use software or other intellectual property associated with our solutions. We cannot assure you that these licenses will be available to us on acceptable terms, without significant price increases or at all. Any loss of the right to use any such software or other intellectual property required for the development and maintenance of our solutions could result in delays in the provision of our solutions until equivalent technology is either developed by us, or, if available from others, is identified, obtained, and integrated, which could harm our business. Any errors or defects in third-party software could result in errors or a failure of our solutions, which could harm our business.
Our solutions integrate with third-party technologies and if our solutions become incompatible with these technologies, our solutions would lose functionality and our customer acquisition and retention could be adversely affected.
Our solutions integrate with third-party software and devices to allow our solutions to perform key functions. Errors, viruses or bugs may be present in third-party software that our customers use in conjunction with our solutions. Changes to
third-party software that our customers use in conjunction with our solutions could also render our solutions inoperable. Customers may conclude that our software is the cause of these errors, bugs or viruses and terminate their subscriptions. The inability to easily integrate with, or any defects in, any third-party software could result in increased costs, or in delays in software releases or updates to our products until such issues have been resolved, which could have a material adverse effect on our business, financial condition, results of operations, cash flows and future prospects and could damage our reputation.
Our software may contain undetected errors, defects or other software problems, and if we fail to correct any defect or other software problems, we could lose customers or incur significant costs, which could result in damage to our reputation or harm to our operating results.
Although we warrant that our software will be free of defects for various periods of time, our software platform and its underlying infrastructure are inherently complex and may contain material defects or errors. We must update our solutions quickly to keep pace with the rapidly changing market and the third-party software and devices with which our solutions integrate. We have from time to time found defects in our software and may discover additional defects in the future, particularly as we continue to migrate our product offerings to new platforms or use new devices in connection with our services and solutions. We may not be able to detect and correct defects or errors before customers begin to use our platform or its applications. Consequently, our solutions could contain undetected errors or defects, especially when first introduced or when new versions are released or when new hardware or software is integrated into our solutions. We implement bug fixes and upgrades as part of our regular system maintenance, which may lead to system downtime. Even if we are able to implement the bug fixes and upgrades in a timely manner, any history of defects or inaccuracies in the performance of our software for our customers could result in damage to our reputation or harm to our operating results.
Our “over-the-air” transmission of firmware updates could permit a third party to disable our customers’ in-vehicle devices or introduce malware into our customers’ in-vehicle devices, which could expose us to widespread loss of service and customer claims.
“Over-the-air” transmission of our firmware updates may provide the opportunity for a third party, who has deep inside knowledge of our systems, to modify or disable our customers’ in-vehicle systems or introduce malware into our customers’ in-vehicle systems. No such incidents have occurred to date, but there can be no assurance that they will not occur in the future. Damage to our customers’ in-vehicle devices as a result of such incidents could only be remedied through direct servicing of their installed in-vehicle devices by trained personnel, which would impose a very significant cost on us, particularly if the incidents are widespread. Moreover, such incidents could expose us to widespread loss of service and claims by our customers under various theories of liability, the outcome of which would be uncertain. Third party interference with our over-the-air transmission of firmware, or with our customers’ in-vehicle devices during such process, could materially and adversely affect our business, financial condition and results of operations
Our solutions rely on cellular and GPS networks and any disruption, failure or increase in costs could impede our profitability and harm our financial results.
Two critical links in our current solutions are between in-vehicle devices and GPS satellites and between in-vehicle devices or customer premise equipment and cellular networks, which allow us to obtain location data and transmit it to our system. Increases in the fees charged by cellular carriers for data transmission or changes in the cellular networks, such as a cellular carrier discontinuing support of the network currently used by our in-vehicle devices or customer premise equipment, requiring retrofitting of our devices could increase our costs and impact our profitability. In addition, technologies that rely on GPS depend on the use of radio frequency bands and any modification of the permitted uses of these bands may adversely affect the functionality of GPS and, in turn, our solutions.
The mobile carriers can and will discontinue radio frequency technologies as they become obsolete. If we are unable to design our solutions into new technologies such as 4G, 4G LTE and 5G or 5G NR, our future prospects and revenues could be limited.
Any significant disruption in service on our websites or in our computer systems could damage our reputation and result in a loss of customers, which would harm our business and operating results.
Our brand, reputation, and ability to attract, retain, and serve our customers are dependent upon the reliable performance of our services and our customers’ ability to access our solutions at all times. Our customers rely on our solutions to make operating decisions related to their businesses, as well as to measure, store and analyze valuable data regarding their businesses. Our solutions are vulnerable to interruption and our data centers are vulnerable to damage or interruption from human error, intentional bad acts, computer viruses or hackers, earthquakes, hurricanes, floods, fires, war, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures, and similar events, any of which could limit our customers’ ability to access our solutions. Prolonged delays or unforeseen difficulties in connection with adding capacity or upgrading our
network architecture may cause our service quality to suffer. Any event that significantly disrupts our service or exposes our data to misuse could damage our reputation and harm our business and operating results, including reducing our revenue, causing us to issue credits to customers, subjecting us to potential liability, harming our churn rates, or increasing our cost of acquiring new customers.
We host our solutions and serve our South African customers from our network servers, which are located at our data center facilities in South Africa. In other geographies, we host our solutions and serve our customers from network servers hosted by third parties, which are located at data center facilities in the United States, Europe and Australia. If these data centers are unable to keep up with our growing needs for capacity, this could have an adverse effect on our business. Our disaster recovery systems are located at third-party hosting facilities, except in South Africa where we manage our own disaster recovery system at an offsite facility. While we are increasing redundancy, our systems have not been tested under actual disaster conditions and may not have sufficient capacity to recover all data and services in the event of an outage. In the event of a disaster in which our disaster recovery systems are irreparably damaged or destroyed, we would experience interruptions in access to our products. Any changes in third-party service levels at our data centers or any errors, defects, disruptions, or other performance problems with our solutions could harm our reputation and may damage our data. Interruptions in our services might reduce our revenue, cause us to issue credits or refunds to customers, subject us to potential liability, or harm our churn rates.
We provide minimum service level commitments to certain of our customers, and our failure to meet them could require us to issue credits for future subscriptions or pay penalties, which could harm our results of operations.
Certain of our customer agreements currently, and may in the future, provide minimum service level commitments regarding items such as system availability, functionality or performance. If we are unable to meet the stated service level commitments for these customers or suffer extended periods of service unavailability, we are or may be contractually obligated to provide these customers with credits for future subscriptions, provide services at no cost, or pay other penalties which could adversely impact our revenue. We do not currently have any reserves on our balance sheet for these commitments.
Failure to maintain the security of our information and technology networks, including information relating to our customers and employees, could adversely affect us. Furthermore, if security breaches in connection with the delivery of our services allow unauthorized third parties to obtain control or access of our asset management, fleet management and telemetry solutions, our reputation, business, results of operations and financial condition could be harmed.
We are dependent on information technology networks and systems, including the Internet, to process, transmit and store electronic information and, in the normal course of our business, we collect and retain certain information pertaining to our customers and employees. The protection of customer and employee data is critical to us. We devote significant resources to addressing security vulnerabilities in our products and information technology systems, however, the security measures put in place by us cannot provide absolute security, and our information technology infrastructure may be vulnerable to criminal cyber-attacks or data security incidents due to employee or customer error, malfeasance, or other vulnerabilities. Cybersecurity attacks are increasingly sophisticated, change frequently, and often go undetected until after an attack has been launched. We may fail to identify these new and complex methods of attack or fail to invest sufficient resources in security measures. We cannot be certain that advances in cyber-capabilities or other developments will not compromise or breach the technology protecting the networks that access our services.
As cyber-attacks become more sophisticated, the need to develop our infrastructure to secure our business and customer data can lead to increased cybersecurity protection costs. Such costs may include making organizational changes, deploying additional personnel and protection technologies, training employees, and engaging third party experts and consultants. These efforts come at the potential cost of revenues and human resources that could be utilized to continue to enhance our product offerings.
If a security breach occurs, our reputation, business, results of operations and financial condition could be harmed. We may also be subject to costly notification and remediation requirements if we, or a third party, determines that we have been the subject of a data breach involving personal information of individuals. Though it is difficult to determine what harm may directly result from any specific interruption or security breach, any failure or perceived failure to maintain performance, reliability, security and availability of systems or the actual or potential theft, loss, fraudulent use or misuse of our products or the personally identifiable data of a customer or employee, could result in harm to our reputation or brand, which could lead some customers to seek to stop using certain of our services, reduce or delay future purchases of our services, use competing services, or materially and adversely affect the overall market perception of the security and reliability of our services. A security breach also exposes us to litigation and legal risks, including regulatory actions by state and federal governmental authorities and non-U.S. authorities. We may not have adequate insurance coverages for a cybersecurity breach or may realize increased insurance premiums as a result of a security breach. Ultimately, a security breach exposes the Company to potential
reputational harm among its customers and investors, along with uncertain damages to our competitiveness, stock price, and long-term shareholder value.
RISKS RELATED TO INTERNATIONAL OPERATIONS
Due to the global nature of our operations, we are subject to political and economic risks of doing business internationally.
Our largest subsidiary, Ctrack, is headquartered in South Africa and conducts business in over 50 countries. Most of our employees are located outside the United States, and international revenue represents a significant percentage of our worldwide revenue. The risks inherent in global operations include:
•difficulty managing sales, product development and logistics and support across continents;
•limitations on ownership or participation in local enterprises;
•lack of familiarity with, and unexpected changes in, foreign laws, regulations and legal standards, including employment laws, product liability laws, privacy laws and environmental laws, which may vary widely across the countries in which we operate;
•increased expense to comply with U.S. laws that apply to foreign operations, including the U.S. Foreign Corrupt Practices Act (the “FCPA”) and Office of Foreign Assets Control regulations;
•compliance with, and potentially adverse tax consequences of, foreign tax regimes;
•fluctuations in currency exchange rates, currency exchange controls, price controls and limitations on repatriation of earnings;
•transportation delays and interruptions;
•local labor laws;
•local economic conditions;
•political, social and economic instability and disruptions;
•acts of terrorism and other security concerns;
•government embargoes or foreign trade restrictions such as tariffs, duties, taxes or other controls;
•import and export controls;
•increased product development costs due to differences among countries’ safety regulations and radio frequency allocation schemes and standards;
•longer warranty terms and broader product warranty requirements;
•increased expense related to localization of products and development of foreign language marketing and sales materials;
•longer sales cycles;
•longer accounts receivable payment cycles and difficulty in collecting accounts receivable in foreign countries;
•increased financial accounting and reporting burdens and complexities;
•workforce reorganizations in various locations;
•restrictive employment regulations;
•difficulties in staffing and managing multi-national operations;
•difficulties and increased expense in implementing corporate policies and controls;
•international intellectual property laws, which may be more restrictive or offer lower levels of protection than U.S. law;
•compliance with differing and changing local laws and regulations in multiple international locations, including regional data privacy laws, as well as compliance with U.S. laws and regulations where applicable in these international locations; and
•limitations on our ability to enforce legal rights and remedies.
If we are unable to successfully manage these and other risks associated with managing and expanding our international business, the risks could have a material adverse effect on our business, results of operations or financial condition.
Weakness or deterioration in global economic conditions or jurisdictions where we have significant foreign operations could have a material adverse effect on our results of operations and financial condition.
As a result of weak or deteriorating economic conditions globally, or in certain jurisdictions where we have significant foreign operations such as South Africa, we could experience lower demand for our products, which could adversely impact
our results of operations. Additionally, there could be a number of related effects on our business resulting from weak economic conditions, including the insolvency of one or more of our suppliers resulting in product launch or product delivery delays, customer insolvencies resulting in that customer’s inability to order products from us or pay for already delivered products, and reduced demand by the ultimate end-users of our products. Although we continue to monitor market conditions, we cannot predict future market conditions or their impact on demand for our products.
Weakness or deterioration in global political conditions where we have significant business interests could have a material adverse effect on our business, results of operations and financial condition.
We sell to customers throughout the world and we currently have operations and activities in South Africa, Europe, China and other Asian countries. The political risks associated with the Company’s global operations include:
•economic and commercial instability risks, corruption and changes in local government laws, regulations and policies, such as those related to tariffs and trade barriers, taxation, exchange controls, employment regulations and repatriation of earnings;
•political instability, civil unrest, expropriation, nationalization of properties by a government, imposition of sanctions and changes to import or export regulations and fees;
•conflicts, territorial disputes, war or terrorist activities;
•major public health issues, such as an outbreak of a pandemic or epidemic, which could cause disruptions in our operations or workforce, or the supply of products; and
•difficulties enforcing intellectual property and contractual rights in certain jurisdictions.
The impact of any of the foregoing factors is difficult to predict, and any one or more of them could adversely affect our business, operating results and financial condition. Existing insurance arrangements may not provide protection for the costs that may arise from such events.
Fluctuations in foreign currency exchange rates, especially the South African Rand against the U.S. Dollar, could adversely affect our results of operations.
A significant portion of our revenues are generated from sales agreements denominated in foreign currencies, and we expect to enter into additional such agreements as we expand our international customer base. In addition, we employ a significant number of employees outside the United States, and the associated employment and facilities costs are denominated in foreign currencies. As a result, we are exposed to changes in foreign currency exchange rates. We have particularly large exposure in South Africa where our Ctrack subsidiary is headquartered and the costs of operating in South Africa are subject to the effects of exchange fluctuations of the South African Rand against the U.S. Dollar. Fluctuations in the value of foreign currencies, particularly the South African Rand against the U.S. Dollar, will create greater uncertainty in our revenues and can significantly and adversely affect our operating results. The South African Rand exchange rate is affected by various international and South African economic and political factors.
We do not currently employ any vehicles as a hedge against currency fluctuations, however, we may decide to use hedging vehicles in the future. At times, we may attempt to manage the risk associated with currency changes, in part, by minimizing the effects of volatility on cash flows by identifying forecasted transactions exposed to these risks, or we may decide to use hedging vehicles such as foreign exchange forward contracts. Since there is a high correlation between the hedging instruments and the underlying exposures, the gains and losses on these underlying exposures are generally offset by reciprocal changes in the value of the hedging instruments. We may use derivative financial instruments as risk management tools and not for trading or speculative purposes. Nevertheless, there can be no assurance that we will not incur foreign currency losses or that foreign exchange forward contracts we may enter into to reduce the risk of such losses will be successful.
Unionization efforts in certain countries in which we operate could materially increase our costs or limit our flexibility.
Certain of our employees and contractors in South Africa are represented by labor unions or work under collective bargaining or similar agreements, which are subject to periodic renegotiation. Efforts may also be made from time to time to unionize other portions of our global workforce. In addition, we may be subject to strikes or work stoppages and other labor disruptions in the future. Additional unionization efforts, new or renegotiated collective bargaining agreements or work stoppages could materially increase our costs, reduce our net revenues or limit our operational flexibility.
RISKS RELATED TO REGULATIONS, TAXATION AND ACCOUNTING MATTERS
Our substantial international operations may increase our exposure to potential liability under anti-corruption, trade protection, tax and other laws and regulations.
The FCPA and other anti-corruption laws and regulations (“Anti-Corruption Laws”) prohibit corrupt payments by our employees, vendors or agents. From time to time, we may receive inquiries from authorities in the United States and elsewhere about our business activities outside of the United States and our compliance with Anti-Corruption Laws. While we devote substantial resources to our global compliance programs and have implemented policies, training and internal controls designed to reduce the risk of corrupt payments, our employees, vendors or agents may violate our policies.
Our failure to comply with Anti-Corruption Laws could result in significant fines and penalties, criminal sanctions against us, our officers or our employees, prohibitions on the conduct of our business, and damage to our reputation. Operations outside of the United States may be affected by changes in trade protection laws, policies and measures, and other regulatory requirements affecting trade and investment.
As a result of our international operations we are subject to foreign tax regulations. Such regulations may not be clear, not consistently applied and subject to sudden change, particularly with regard to international transfer pricing. Our earnings could be reduced by the uncertain and changing nature of such tax regulations.
Our software contains encryption technologies, certain types of which are subject to U.S. and foreign export control regulations and, in some foreign countries, restrictions on importation and/or use. Any failure on our part to comply with encryption or other applicable export control requirements could result in financial penalties or other sanctions under the U.S. or foreign export regulations, including restrictions on future expFortexport activities, which could harm our business and operating results. Regulatory restrictions could impair our access to technologies needed to improve our solutions and may also limit or reduce the demand for our solutions outside of the United States.
A governmental challenge to our transfer pricing policies or practices could impose significant costs on us.
Our company has intercompany transactions with its subsidiaries and consequently closely monitors the appropriateness of our transfer pricing policies and compliance therewith. The global transfer pricing environment, including with respect to operational and reporting requirements, is continuously evolving and subject to input from multiple sources and jurisdictions. These complexities require management to closely monitor new developments, which it does.
Many countries routinely examine transfer pricing policies of taxpayers subject to their jurisdiction, and authorities challenge transfer pricing policies aggressively where there is potential non-compliance and impose interest and penalties where non-compliance is determined. Although the documentation of and support for our transfer pricing policies has not been the subject of a governmental proceeding beyond examination to date, there can be no assurance that a governmental authority will not challenge these policies more aggressively in the future or, if challenged, that we will prevail. We could suffer costs related to one or more challenges to our transfer pricing policies.
If we do not achieve applicable black economic empowerment objectives in our South African businesses, we risk not being able to renew certain of our existing contracts which service South African government and quasi-governmental customers, as well as not being awarded future corporate and governmental contracts which would result in the loss of revenue.
The South African government, through the Broad-Based Black Economic Empowerment Act, No. 53 of 2003, and the codes of good practice and industry charters published pursuant thereto (collectively “BBBEE”), has established a legislative framework for the promotion of broad-based black economic empowerment. Achievement of BBBEE objectives is measured by a scorecard which establishes a weighting for the various components of BBBEE. BBBEE objectives are pursued in significant part by requiring parties who contract with corporate, governmental or quasi-governmental entities in South Africa to achieve BBBEE compliance through satisfaction of an applicable scorecard. Parties improve their BBBEE score when contracting with businesses that have earned good BBBEE ratings in relation to their scorecards (this includes black-owned businesses).
Ctrack has material contracts with governmental entities that require it to maintain minimum BBBEE rating levels as measured under the BBBEE scorecard. Failure to achieve applicable BBBEE objectives could jeopardize our ability to maintain existing business or to secure future business from these and other corporate, governmental or quasi-governmental customers that could materially and adversely affect our business, financial condition and results of operations.
We are required to comply with South African labor laws with respect to certain of our employees and face the risk of disruption from labor disputes in South Africa, which could result in additional operating costs.
South African laws relating to labor that regulate work time, provide for mandatory compensation in the event of termination of employment for operational reasons, and impose monetary penalties for non-compliance with administrative and reporting requirements in respect of affirmative action policies, could result in additional operating costs. In addition, future changes to South African legislation and regulations relating to labor may increase our costs or alter our relationship with our employees and result in labor disruptions. Resulting disruptions could materially and adversely affect our business, results of operations and financial condition.
Socio-economic inequality in South Africa or regionally may subject us to political and economic risks which may affect the ownership or operation of our business.
We maintain significant operations in South Africa. As a result, we are subject to political and economic risks relating to South Africa. While South Africa features highly developed and sophisticated business sectors and financial and legal infrastructure at the core of its economy, large parts of the country’s population, particularly in rural areas, do not have access to adequate education, health care, housing and other services, including water and electricity. In addition, South Africa also has higher levels of crime and unemployment than the United States.
It is difficult to predict the future political, social and economic direction of South Africa or the manner in which any future government will attempt to address the country’s inequalities. It is also difficult to predict the impact that addressing these inequalities will have on our business. Furthermore, there has been regional, political and economic instability in countries neighboring South Africa, which could materially and adversely affect our business, results of operations and financial condition.
Although political conditions in South Africa are generally stable, changes may occur in the composition of its ruling party or in its political, fiscal and legal systems which might affect the ownership or operation of our business. These risks may include changes in legislation, arbitrary interference with private ownership of contract rights, and changes to exchange controls, taxation and other laws or policies affecting foreign trade or investment. Any such changes, including changes in investment ratings, regulations and policies or a shift in political attitudes both within and towards South Africa are beyond our control and could materially and adversely affect our business, financial condition and results of operations.
A lack of growth, high inflation or increased interest rates in the South Africa economy could reduce our anticipated revenue and increase our operating costs.
On June 4, 2019, Statistics South Africa announced that the South African economy shrunk by 3.2% during the first quarter of 2019, following a prior announcement on March 5, 2019, that the growth rate during 2018 was 0.8%. Additionally, theThe economy of South Africa has in the past and may in the future continue to be characterized by rates of inflation and interest rates that are substantially higher than those prevailing in the United States and other highly developed economies. Economic conditions in South Africa could reduce our anticipated revenue growth, increase our South African-based costs, decrease our operating margins and adversely affect our ability to obtain cost-effective debt financing in South Africa.
Evolving regulations and changes in applicable laws relating to data privacy may increase our expenditures related to compliance efforts or otherwise limit the solutions we can offer, which may harm our business and adversely affect our financial condition.
Our products and solutions enable us to collect, manage and store a wide range of data related to vehicle tracking and fleet management such as vehicle location and fuel usage, speed and mileage. Some of the data we collect or use in our business is subject to data privacy laws, which are complex and increase our cost of doing business. The U.S. federal government and various state governments have adopted or proposed limitations on the collection, distribution and use of personal information. Many foreign jurisdictions, including the European Union and the United Kingdom, have adopted legislation (including directives or regulations) that increase or change the requirements governing data collection and storage in these jurisdictions. In addition, the California Consumer Privacy Act, (“CCPA”), which took effect on January 1, 2020, provides new data privacy rights for California consumers, including the right to know what personal information is being collected about them and how it is being used. We market our products in over 50 countries, and accordingly, we are subject to many different, and potentially conflicting, privacy laws. If our privacy or data security measures fail to comply, or are perceived to fail to comply, with current or future laws and regulations, we may be subject to litigation, regulatory investigations or other liabilities.
Furthermore, there can be no assurance that our employees, contractors and agents will comply with the policies and procedures we establish regarding data privacy and data security, particularly as we expand our operations through organic growth and acquisitions. While our employees may violate our policies and procedures, the Company remains responsible for, and obligated to implement, policies and procedures and enter into contracts with service providers that require appropriate
protection. Any violations could subject us to civil or criminal penalties, including substantial fines or prohibitions on our ability to offer our products in one or more countries, and could also materially damage our reputation, our brand, our international expansion efforts, our business, results of operations and financial condition.
The transmission of data over the Internet and cellular networks is a critical component of our SaaS business model. Additionally, as cloud computing continues to evolve, increased regulation by federal, state or foreign agencies becomes more likely, particularly in the areas of data privacy and data security. In addition, taxation of services provided over the Internet or other charges imposed by government agencies, or by private organizations for accessing the Internet, may be imposed. Any regulation imposing greater fees for Internet use or restricting information exchange over the Internet, could result in a decline in the use of the Internet and the viability of Internet-based services, which could harm our business.
Our solutions and products enable us to collect, manage and store a wide range of data related to fleet management such as mobile asset location and fuel usage, speed and mileage. We obtain our data from a variety of sources, including our customers and third-party providers. The United States and various state governments have adopted or proposed limitations on the collection, distribution and use of personal data, as well as requirements that must be followed if a breach of such personal data occurs. The European Union and the United Kingdom have adopted legislation (including directives, national laws and regulations) that increase or change the requirements governing data collection, use, storage and disclosure of personal data in these jurisdictions. The current European Union legislation related to data protection is the General Data Protection Regulation (“GDPR”), which came into effect on May 25, 2018. We have updated and will continue to evaluate our group data protection and security policies, charters, and procedures to assist in maintaining data privacy and data security in line with international practices.
The Protection of Personal Information Act, No. 4 of 2013 (the “POPI Act”) was promulgated into law in November 2013 in South Africa. Certain sections of the POPI Act, came into effect on April 11, 2014. The remaining sections of the POPI Act will commencecame into effect on a date to be determined by the South African President, the general assumption being that the remaining sections will commence on AprilJuly 1, 2020. The POPI Act allows for a one year transition period from its commencement for all persons to comply with its requirements. A failure to comply with the POPI Act may result in a fine not exceeding R10 million and/or imprisonment of up to 10 years, depending on the severity of the contravention.
We may also be subject to costly notification and remediation requirements if we, or a third party, determines that we have been the subject of a data breach involving personal data of individuals. Data breach notification regulations vary among the countries where we conduct business, and also vary among the states of the United States, and any breach of personal data
could be subject to any number of these requirements.
As noted above, we have sought to implement internationally recognized practices regarding data privacy and data security. If our privacy or data security measures fail to comply, or are perceived to fail to comply, with current or future laws and regulations, we may be subject to litigation, regulatory investigations or other liabilities. Moreover, if future laws and regulations limit our customers’ ability to use and share this data or our ability to store, process and share data with our customers over the Internet, demand for our solutions could decrease and our costs could increase. We might also have to limit the manner in which we collect data, the types of personal data that we collect, or the solutions we offer. Any of these risks would materially and adversely affect our business, results of operations and financial condition.
Enhanced United States fiscal, tax and trade restrictions and executive and legislative actions could adversely affect our business, financial condition, and results of operations.
There is currently significant uncertainty about the future relationship between the United States and various other countries, most significantly China, with respect to trade policies, treaties, tariffs and taxes. The current U.S. administration has called for substantial changes to U.S. foreign trade policy with respect to China and other countries, including significant new and increased tariffs on goods imported into the United States. In 2018, the Office of the U.S. Trade Representative (the “USTR”) enacted tariffs on imports into the U.S. from China, including communications equipment products and components manufactured and imported from China. The tariff became effective in September 2018, with an initial rate of 10% and was scheduled to increase from 10% to 25% on January 1, 2019. The scheduled increase was delayed until March 2, 2019, however trade negotiations between the U.S. and China continue and the scheduled increase has been further delayed indefinitely. Our business may also be affected by tariffs set by countries into which we sell our products, whether as a response to U.S. foreign trade policy or otherwise. In addition, changes in international trade agreements, regulations, restrictions and tariffs, including new tariffs, may increase our operating costs, reduce our margins and make it more difficult for us to compete in the U.S. and overseas markets, and our business, financial condition and results of operations could be adversely impacted.
We have taken actions to mitigate the impact of such tariffs, however, there is no assurance that all such efforts will be successful. These actions include moving our contract manufacturing out of mainland China and working directly with U.S. Customs and Border Protection (“CBP”) to address the harmonized tariff codes used for our products. The majority of the move out of mainland China has been completed, and we expect the balance to be completed by the end of the first quarter 2020. The inability to mitigate the impact of the recently enacted tariffs, including the inability to obtain favorable results from our efforts with CBP, or any similar future increases in tariffs would increase our costs, and our business, financial condition and results of operations could be adversely affected.
In some cases, the U.S. government’s imposition of trade restrictions involving products sold by certain Chinese manufacturers has caused U.S. wireless carriers to divert business from international providers to the Company, and accordingly, the Company has invested resources in satisfying the needs of such customers. If the U.S. government were to remove or reduce such trade restrictions, it could cause such carriers to reduce their business with the Company and we may be unable to recoup or attain a return on such investments.
RISKS RELATED TO OWNING OUR SECURITIES
Our share price has been highly volatile in the past and could be highly volatile in the future.
The market price of our common stock can be highly volatile due to the risks and uncertainties described in this report, as well as other factors, including: comments by securities analysts; announcements by us or others regarding, among other things, operating results, additions or departures of key personnel, and acquisitions or divestitures; additional equity or debt financing; technological innovations; introductions of new products; litigation; price and volume fluctuations in the overall stock market; the level of demand for our stock, including the amount of short interest in our stock, and particularly with respect to market prices and trading volumes of other high technology stocks; and our failure to meet market expectations.
In addition, the stock market has from time to time experienced extreme price and volume fluctuations that were unrelated to the operating performance of particular companies. In the past, some companies have experienced volatility that subsequently resulted in securities class action litigation. If litigation were instituted on this basis, it could result in substantial costs and a diversion of management’s attention and resources.
The price of our stock may be vulnerable to manipulation, including through short sales.
We believe there has been and may continue to be substantial off-market transactions in derivatives of our stock, including short selling activity or related similar activities, which are beyond our control and which may be beyond the full
control of the SEC and Financial Institutions Regulatory Authority (“FINRA”). Short sales are transactions in which a market participant sells a security that it does not own. To complete the transaction, the market participant must borrow the security to make delivery to the buyer. The market participant is then obligated to replace the security borrowed by purchasing the security at the market price at the time of required replacement. If the price at the time of replacement is lower than the price at which the security was originally sold by the market participant, then the market participant will realize a gain on the transaction. Thus, it is in the market participant’s interest for the market price of the underlying security to decline as much as possible during the period prior to the time of replacement. While SEC and FINRA rules prohibit some forms of short selling and other activities that may result in stock price manipulation, such activity may nonetheless occur without detection or enforcement. Significant short selling or other types of market manipulation could cause our stock trading price to decline, to become more volatile, or both.
Previous short selling efforts have impacted, and may in the future continue to impact, the value of our stock in an extreme and volatile manner to our detriment and the detriment of our stockholders. In addition, market participants with admitted short positions in our stock have published, and may in the future continue to publish, negative information regarding us and our management team on internet sites or blogs that we believe is inaccurate and misleading. We believe that the publication of this negative information may in the future lead to significant downward pressure on the price of our stock to our detriment and the further detriment of our stockholders. These and other efforts by certain market participants to manipulate the price of our common stock for their personal financial gain may cause our stockholders to lose a portion of their investment, may make it more difficult for us to raise equity capital when needed without significantly diluting existing stockholders, and may reduce demand from new investors to purchase shares of our stock.
Future settlements of any conversion obligations with respect to the 2025 Notes may result in dilution to existing stockholders, lower prevailing market prices for our common stock or require a significant cash outlay.
The 2025 Notes are currently convertible at the option of the holders at any time until close of business on the business day immediately preceding the maturity date. The 2025 Notes are convertible into shares of the Company’s common stock at a conversion rate of 79.2896 shares of common stock per $1,000 principal amount of 2025 Notes (which is equivalent to an initial conversion price of $12.61 per share of common stock). The conversion rate is subject to adjustment if certain events occur, but in no event will the conversion rate exceed 95.1474 shares of common stock per $1,000 principal amount of 2025 Notes (which is equivalent to a conversion price of $10.51 per share of common stock). Holders of the 2025 Notes who convert may also be entitled to receive, under certain circumstances, an interest make-whole payment payable in, at our election, either cash or shares of common stock. If holders of the 2025 Notes elect to convert their 2025 Notes into common stock, or if we elect to settle any interest make-whole payments due upon conversion of the 2025 Notes with shares of common stock, this may cause significant dilution to our existing stockholders. Any sales in the public market of the common stock issued upon such conversion could adversely affect prevailing market prices of our common stock. If we do elect to settle any interest make-whole payments due upon conversion of the 2025 Notes with cash, such payments could adversely affect our liquidity.
Certain provisions in the indenture governing the 2025 Notes (as amended or supplemented, the “Indenture”) could delay or prevent an otherwise beneficial takeover or takeover attempt of us.
Certain provisions in the Indenture relating to the 2025 Notes could make it more difficult or more expensive for a third party to acquire us. For example, if a takeover would constitute a fundamental change (as defined in the Indenture), holders of the 2025 Notes will have the right to require us to repurchase their notes in cash. In addition, if a takeover constitutes a make-whole fundamental change, we may be required to increase the conversion rate for holders who convert their 2025 Notes in connection with such takeover. In either case, and in other cases, our obligations under the 2025 Notes and the related Indenture could increase the cost of acquiring us or otherwise discourage a third party from acquiring us.
Future issuances of our common stock to holders of warrants may materially and adversely affect the price of our common stock and cause dilution to our existing stockholders.
As of December 31, 2020, we had outstanding warrants to purchase 2,500,000 shares of our common stock. These warrants are generally only exercisable on a cash basis but may be exercised on a cashless basis if and only if a registration statement relating to the issuance of the shares underlying the warrants is not then effective or an exemption from registration is not available for the resale of such shares. Any such net exercise will dilute the ownership interests of existing stockholders without any corresponding benefit to the Company of a cash payment for the exercise price of such warrant.
Ownership of our common stock is concentrated, and as a result, certain stockholders may exercise significant influence over us.
As of December 31, 2020, North Sound Trading, L.P. and Golden Harbor Ltd. (together the “Investors”) and their affiliates own an aggregate of approximately 25.7% of the outstanding shares of our common stock. The Investors and their affiliates also hold approximately $80.4 million of the 2025 Notes (48.2% of the outstanding principal amount). The Indenture relating to the 2025 Notes includes a Section 382 conversion blocker that may prevent the Investors from converting their 2025
Notes unless they receive the prior written approval of our Board of Directors. Assuming the conversion of the 2025 Notes owned by the Investors and their affiliates and the exercise of the warrants also owned by the Investors and their affiliates, the Investors and their affiliates would own approximately 31.8% of the outstanding shares of our common stock. As a result, the Investors have the ability to significantly influence the outcome of any matter submitted for the vote of the holders of our common stock.
The concentration of voting power could exert substantial influence over our business. For example, the concentration of voting power could delay, defer or prevent a change of control, entrench our management and the board of directors or delay or prevent a merger, consolidation, takeover or other business combination involving us on terms that other security holders may desire. In addition, conflicts of interest could arise in the future between us on the one hand, and either or both of the Investors on the other hand, concerning potential competitive business activities, business opportunities, capital financing, the issuance of additional securities and other matters.
In addition, pursuant to that certain Securities Purchase Agreement, dated August 6, 2018, by and among Inseego and the Investors (the “Purchase Agreement”), each of the Investors has the right to nominate a director so long as such Investor and its affiliates beneficially own at least 5% of the issued and outstanding shares of common stock of the Company, subject to satisfaction of reasonable qualification standards. The Purchase Agreement further provides that, at any time at which either Investor, together with its affiliates, beneficially owns more than 20% of the issued and outstanding common shares of stock of the Company, such Investor shall be entitled to appoint a second director, and the size of our Board of Directors shall not be increased to exceed seven directors. Notwithstanding the fact that all directors will be subject to fiduciary duties to the Company and to applicable law, the interests of the directors designated by the Investors may differ from the interests of our security holders as a whole or of our other directors.
Our outstanding Series E Preferred Stock or future equity offerings could adversely affect the holders of our common stock in some circumstances.
There are currently 35,000 shares of Series E Fixed-Rate Cumulative Perpetual Preferred Stock, par value $0.001 per share (the “Series E Preferred Stock”) outstanding with an aggregate liquidation preference of $35 million. The Series E Preferred Stock is senior to our shares of common stock in right of payment of dividends and other distributions. In the event of a liquidation, dissolution or winding up of the Company, the holders of the Series E Preferred Stock will be entitled to receive, after satisfaction of liabilities to creditors and subject to the rights of holders of any senior securities, but before any distribution of assets is made to holders of common stock or any other junior securities, the Series E Base Amount (as defined below) plus (without duplication) any accrued and unpaid dividends. In the future, we may offer additional shares of Series E Preferred Stock or other equity, equity-linked or debt securities, which may have rights, preferences or privileges senior to our common stock. Because our decision to issue debt or equity securities or incur other borrowings in the future will depend on market conditions and other factors beyond our control, the amount, timing, nature or success of our future capital raising efforts is uncertain. Thus, holders of our common stock bear the risk that our future issuances of debt or equity securities or our incurrence of other borrowings may negatively affect the market price of our common stock.
GENERAL RISK FACTORS
If financial or industry analysts do not publish research or reports about our business, or if they issue negative or misleading evaluations of our stock, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts, or the content and opinions included in their reports. If one or more of the analysts who cover us were to adversely change their recommendation regarding our stock, or provide more favorable relative recommendations about our competitors, our stock price could decline. If one or more of the analysts who cover us cease coverage of our Company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
If we fail to maintain an effective system of internal controls over financial reporting, we may not be able to report our financial results timely and accurately, which could adversely affect investor confidence in the Company, and in turn, our results of operations and our stock price.
Effective internal controls are necessary for us to provide reliable financial reports and operate successfully as a public company. Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies evaluate and report on their systems of internal control over financial reporting. In addition, our independent registered public accounting firm must report on its evaluation of those controls.
Any failure to maintain effective internal controls could cause a delay in compliance with our reporting obligations, SEC rules and regulations or Section 404 of the Sarbanes-Oxley Act of 2002, which could subject us to a variety of administrative sanctions, including, but not limited to, SEC enforcement action, ineligibility for short form registration, the suspension or delisting of our common stock from the stock exchange on which it is listed and the inability of registered broker-dealers to make a market in our common stock, which could adversely affect our business and the trading price of our common stock.
If the accounting estimates we make, and the assumptions on which we rely, in preparing our financial statements prove inaccurate, our actual results may be adversely affected.
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments about, among other things, allowance for doubtful accounts receivable, provision for excess and obsolete inventory, valuation of intangible and long-lived assets, valuation of goodwill, royalty costs, accruals relating to litigation and restructuring, income taxes, share-based compensation expense and the Company’s ability to continue as a going concern. These estimates and judgments affect the reported amounts of our assets, liabilities, revenues and expenses, the amounts of charges accrued by us, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances and at the time they are made. If our estimates or the assumptions underlying them are not correct, actual results may differ materially from our estimates and we may need to, among other things, accrue additional charges that could adversely affect our results of operations, which in turn could adversely affect our stock price. In addition, new accounting pronouncements and interpretations of accounting pronouncements have occurred and may occur in the future that could adversely affect our reported financial results.
Any changes to the accounting systems or new accounting system implementations may be ineffective or cause delays in our ability to provide timely financial resultsresults.
A change in the Company’s accounting systems or new accounting system implementations could cause trial balances to driftbe out of balance or hinder the reconciliation of items which are time consuming to diagnose, impacting our ability to provide timely audited and unaudited financial results. Any such change could have a significant impact on the effectiveness of our system of internal controls and could cause a delay in compliance with our reporting obligations, which could adversely affect our business and the trading price of our common stock.
Any changes to existing accounting pronouncements or taxation rules or practices may cause adverse fluctuations in our reported results of operations or affect how we conduct our business.
A change in accounting pronouncements or taxation rules or practices can have a significant effect on our reported results and may affect our reporting of transactions completed before the change is effective. New accounting pronouncements, taxation rules and varying interpretations of accounting pronouncements or taxation rules have occurred in the past and may occur in the future. The change to existing rules, future changes, if any, or the need for us to modify a current tax position may adversely affect our reported financial results or the way we conduct our business.
Enhanced United States fiscal, tax and trade restrictions and executive and legislative actions could adversely affect our business, financial condition, and results of operations.
There is currently significant uncertainty about the future relationship between the United States and various other countries, most significantly China, with respect to trade policies, treaties, tariffs and taxes. The current U.S. administration has called for substantial changes to U.S. foreign trade policy with respect to China and other countries, including significant new and increased tariffs on goods imported into the United States. In 2018, the Office of the U.S. Trade Representative (the “USTR”) enacted tariffs on imports into the U.S. from China, including communications equipment products and components manufactured and imported from China. The tariff became effective in September 2018, with an initial rate of 10% and was scheduled to increase from 10% to 25% on January 1, 2019. The scheduled increase was delayed until March 2, 2019, however trade negotiations between the U.S. and China continue and the scheduled increase has been further delayed indefinitely. Our business may also be affected by tariffs set by countries into which we sell our products, whether as a response to U.S. foreign trade policy or otherwise. In addition, changes in international trade agreements, regulations, restrictions and tariffs, including new tariffs, may increase our operating costs, reduce our margins and make it more difficult for us to compete in the U.S. and overseas markets, and our business, financial condition and results of operations could be adversely impacted.
We have taken actions to mitigate the impact of such tariffs, however, there is no assurance that all such efforts will be successful. These actions include moving our contract manufacturing out of mainland China and working directly with U.S. Customs and Border Protection (“CBP”) to address the harmonized tariff codes used for our products. The majority of the move out of mainland China has been completed, and we expect the balance to be completed by the end of the first quarter 2020. The inability to mitigate the impact of the recently enacted tariffs, including the inability to obtain favorable results from our efforts with CBP, or any similar future increases in tariffs would increase our costs, and our business, financial condition and results of operations could be adversely affected.
In some cases, the U.S. government’s imposition of trade restrictions involving products sold by certain Chinese manufacturers has caused U.S. wireless carriers to divert business from international providers to the Company, and accordingly, the Company has invested resources in satisfying the needs of such customers. If the U.S. government were to
remove or reduce such trade restrictions, it could cause such carriers to reduce their business with the Company and we may be unable to recoup or attain a return on such investments.
RISKS RELATED TO OWNING OUR SECURITIES
Our share price has been highly volatile in the past and could be highly volatile in the future.
The market price of our common stock can be highly volatile due to the risks and uncertainties described in this report, as well as other factors, including: comments by securities analysts; announcements by us or others regarding, among other things, operating results, additions or departures of key personnel, and acquisitions or divestitures; additional equity or debt financing; technological innovations; introductions of new products; litigation; price and volume fluctuations in the overall stock market, and particularly with respect to market prices and trading volumes of other high technology stocks; and our failure to meet market expectations.
In addition, the stock market has from time to time experienced extreme price and volume fluctuations that were unrelated to the operating performance of particular companies. In the past, some companies have experienced volatility that subsequently resulted in securities class action litigation. If litigation were instituted on this basis, it could result in substantial costs and a diversion of management’s attention and resources.
Our future capital needs are uncertain and we may need to raise additional funds in the future. We may not be able to raise such additional funds on acceptable terms or at all.
We may need to raise substantial additional capital in the future to fund our operations, develop and commercialize new products and solutions or acquire companies. If we require additional funds in the future, we may not be able to obtain those funds on acceptable terms, or at all. If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or additional equity financing that we raise may contain terms that are not favorable to us or our stockholders. In addition, restrictions in our existing debt agreements may limit the amount and/or type of indebtedness that we are able to incur.
If we do not have, or are not able to obtain, sufficient funds, we may have to delay development or commercialization of our products and solutions, liquidate some or all of our assets, or delay, reduce the scope of or eliminate some or all of our sales and marketing expansion programs. Any of these actions could harm our operating results.
If financial or industry analysts do not publish research or reports about our business, or if they issue negative or misleading evaluations of our stock, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts, or the content and opinions included in their reports. If one or more of the analysts who cover us were to adversely change their recommendation regarding our stock, or provide more favorable relative recommendations about our competitors, our stock price could decline. If one or more of the analysts who cover us cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
Future issuances of our common stock to holders of warrants may materially and adversely affect the price of our common stock and cause dilution to our existing stockholders.
As of December 31, 2019, we had outstanding warrants to purchase 2,838,454 shares of our common stock. These warrants are generally only exercisable on a cash basis but may be exercised on a cashless basis if and only if a registration statement relating to the issuance of the shares underlying the warrants is not then effective or an exemption from registration is not available for the resale of such shares. Any such net exercise will dilute the ownership interests of existing stockholders without any corresponding benefit to the Company of a cash payment for the exercise price of such warrant.
Future settlements of any conversion obligations with respect to the Inseego Notes may result in dilution to existing stockholders, lower prevailing market prices for our common stock or require a significant cash outlay.
Prior to December 15, 2021, holders may convert their Inseego Notes only if certain conditions are met. Because the sale price condition included in the Inseego Indenture was satisfied during December 2019, the Inseego Notes are currently convertible and will remain convertible until March 31, 2020, at which time the convertibility will need to be reevaluated. On or after December 15, 2021, until close of business on the business day immediately preceding the maturity date, holders may convert their Inseego Notes at any time. The Inseego Notes are convertible into cash, shares of the Company’s common stock, or a combination thereof, at the election of the Company, and are currently convertible at a conversion rate of 212.7660 shares of common stock per $1,000 principal amount of Inseego Notes (which is equivalent to an initial conversion price of $4.70 per
share of common stock). The conversion rate is subject to adjustment if certain events occur, but in no event will the conversion rate exceed 387.5968 shares of common stock per $1,000 principal amount of Inseego Notes (which is equivalent to a conversion price of $2.58 per share of common stock). If we elect to settle conversions of the Inseego Notes with common stock, this may cause significant dilution to our existing stockholders. Any sales in the public market of the common stock issued upon such conversion could adversely affect prevailing market prices of our common stock. If we do not elect to settle conversion of the Inseego Notes solely with common stock, we would be required to settle a portion, or all, of our conversion obligation through the payment of cash, which could adversely affect our liquidity.
Certain provisions in the Inseego Indenture could delay or prevent an otherwise beneficial takeover or takeover attempt of us.
Certain provisions in the Inseego Indenture could make it more difficult or more expensive for a third party to acquire us. For example, if a takeover would constitute a fundamental change (as defined in the Inseego Indenture), holders of the Inseego Notes will have the right to require us to repurchase their Inseego Notes in cash. In addition, if a takeover constitutes a make-whole fundamental change, we may be required to increase the conversion rate for holders who convert their Inseego Notes in connection with such takeover. In either case, and in other cases, our obligations under the Inseego Notes and the Inseego Indenture could increase the cost of acquiring us or otherwise discourage a third party from acquiring us.
Ownership of our common stock is concentrated, and as a result, certain stockholders may exercise significant influence over us.
As of March 13, 2020, North Sound Trading, L.P. and Golden Harbor Ltd. (together the “Investors”) and their affiliates own an aggregate of approximately 32.1% of the outstanding shares of our common stock. The Investors and their affiliates also hold 100% of the total principal of the Term Loan and approximately $44.8 million of the Inseego Notes (99.7% of the total principal amount). Assuming the conversion of the Inseego Notes and exercise of the warrants also owned by the Investors and their affiliates, the Investors and their affiliates would own approximately 39.7% of the outstanding shares of our common stock. As a result, the Investors have the ability to significantly influence the outcome of any matter submitted for the vote of the holders of our common stock.
The concentration of voting power could exert substantial influence over our business. For example, the concentration of voting power could delay, defer or prevent a change of control, entrench our management and the board of directors or delay or prevent a merger, consolidation, takeover or other business combination involving us on terms that other security holders may desire. In addition, conflicts of interest could arise in the future between us on the one hand, and either or both of the Investors on the other hand, concerning potential competitive business activities, business opportunities, capital financing, the issuance of additional securities and other matters.
In addition, pursuant to that certain Securities Purchase Agreement, dated August 6, 2018, by and among Inseego and the Investors (the “Purchase Agreement”), each of the Investors has the right to nominate a director so long as such Investor and its affiliates beneficially own at least 5% of the issued and outstanding shares of common stock of the Company, subject to satisfaction of reasonable qualification standards. The Purchase Agreement further provides that, at any time at which either Investor, together with its affiliates, beneficially owns more than 20% of the issued and outstanding common shares of stock of the Company, such Investor shall be entitled to appoint a second director, and the size of our Board of Directors shall not be increased to exceed seven directors. Notwithstanding the fact that all directors will be subject to fiduciary duties to the Company and to applicable law, the interests of the directors designated by the Investors may differ from the interests of our security holders as a whole or of our other directors.
In addition to their rights as stockholders and rights under the Purchase Agreement, the Investors also own a significant portion of our debt securities. Any restructuring or amendment of our Term Loan or of the Inseego Notes will require the consent and/or participation of one or both of the Investors. There can be no assurance that we will be able to obtain favorable terms in connection with the restructuring of our debt arrangements or any recapitalization that requires the approval of such Investors.
Our outstanding Series E Preferred Stock or future equity offerings could adversely affect the holders of our common stock in some circumstances.
There are currently 35,000 shares of Series E Fixed-Rate Cumulative Perpetual Preferred Stock, par value $0.001 per share (the “Series E Preferred Stock”) outstanding with an aggregate liquidation preference of $35 million. In addition, we may issue additional shares of Series E Preferred Stock to satisfy interest obligations under our Term Loan. The Series E Preferred Stock is senior to our shares of common stock in right of payment of dividends and other distributions. In the event of a liquidation, dissolution or winding up of the Company, the holders of the Series E Preferred Stock will be entitled to receive, after satisfaction of liabilities to creditors and subject to the rights of holders of any senior securities, but before any distribution of assets is made to holders of common stock or any other junior securities, the Series E Base Amount (as defined below) plus
(without duplication) any accrued and unpaid dividends. In the future, we may offer additional shares of Series E Preferred Stock or other equity, equity-linked or debt securities, which may have rights, preferences or privileges senior to our common stock. Because our decision to issue debt or equity securities or incur other borrowings in the future will depend on market conditions and other factors beyond our control, the amount, timing, nature or success of our future capital raising efforts is uncertain. Thus, holders of our common stock bear the risk that our future issuances of debt or equity securities or our incurrence of other borrowings may negatively affect the market price of our common stock.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal executive office is located in Alpharetta, Georgia. Our corporate offices are located in San Diego, California where we lease approximately 25,000 square feet under an arrangement that expires in July 2027 and approximately 12,00013,000 square feet under an arrangement that expires in June 2020.July 2027. We also currently lease approximately 14,000 square feet in Eugene, Oregon under a lease arrangement that expires in January 2023, and own property in Centurion, South Africa with approximately 28,000 square feet. We further lease space in various geographic locations abroad primarily for sales and support personnel, for research and development, or for temporary facilities. We believe that our existing facilities are adequate to meet our current needs and that we can renew our existing leases or obtain alternative space on terms that would not have a material impact on our financial condition.
Item 3. Legal Proceedings
We are engaged in legal actions that arise in the ordinary course of our business. In general, while there can be no assurance, we believe that the ultimate outcome of these legal actions will not have a material adverse effect on our business, results of operations, financial condition or cash flows.
The disclosure in Note 10, Commitments and Contingencies, in the accompanying consolidated financial statements includes a discussion of our legal proceedings and is incorporated herein by reference.
Item 4. Mine Safety Disclosures
None.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock Data
Shares of our common stock are currently quoted and traded on The Nasdaq Global Select Market under the symbol “INSG”.
Number of Stockholders of Record
As of March 9, 2020,February 24, 2021, there were approximately 3125 holders of record of our common stock. Because many of the shares of our common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Dividends
We have never declared or paid cash dividends on any shares of our capital stock. We currently intend to retain all available funds for use in the operation and development of our business and, therefore, do not anticipate paying any cash dividends in the foreseeable future. Any future determination relating to our dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including future earnings, capital requirements, financial condition and future prospects and other factors the Board of Directors may deem relevant. In addition, both the Credit Agreement and the Inseego Indenture contain covenants that limit the ability of the Company to pay cash dividends.
Unregistered Sales of Equity Securities
None, except as previously disclosed in the Company’s Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and except foras set forth below.
On August 4, 2020, the issuancesCompany granted to Craig Foster, the Company’s Chief Financial Officer, options to purchase 200,000 shares of the Company’s common stock uponand 27,510 restricted stock units (“RSUs”). The options have a ten-year term and an exercise price of $14.54, which was the exerciseclosing price per share of outstanding warrants described in the following table:
|
| | |
| Date | Shares of Common Stock Issued upon Exercise of Outstanding Warrants | Consideration Received |
| December 9, 2019 | 190,100 | $1,045,550 |
| December 10, 2019 | 102,000 | $561,000 |
| December 11, 2019 | 351,483 | $1,880,434 |
| December 12, 2019 | 478,300 | $2,558,905 |
| December 13, 2019 | 25,000 | $133,750 |
| December 18, 2019 | 11,700 | $62,595 |
| December 19, 2019 | 8,200 | $43,870 |
| December 20, 2019 | 7,500 | $40,125 |
| December 23, 2019 | 80,846 | $432,526 |
The issuances ofCompany’s common stock described inas reported by NASDAQ on August 4, 2020. The options and the table above were exempt from the registration requirementsRSUs will vest over a four-year period, with 25% of the Securities Act pursuant toawards vesting on the exemption for transactions by an issuer not involving any public offering underfirst anniversary of the date of grant and the remainder vesting in equal monthly installments over the three years thereafter. The awards were inducement grants made in accordance with Nasdaq Listing Rule 5635(c)(4) and Section 4(a)(2) of the Securities Act.Act of 1933, as amended. The Company intends to file a registration statement on a Form S-8 to register the shares of common stock underlying the options and the RSUs.
Purchases of Equity Securities None.
Item 6. Selected Financial Data
Not applicable.Because we were a smaller reporting company, as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, for the fiscal year ended December 31, 2020 and are transitioning into large accelerated filer status, we are not required to provide the information required under this item.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our consolidated financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. This report contains certain forward-looking statements relating to future events or our future financial performance. These statements are subject to risks and uncertainties which could cause actual results to differ materially from those discussed in this report. You are cautioned not to place undue reliance on this information which speaks only as of the date of this report. Except as required by law, we assume no responsibility for updating any forward-looking statements, whether as a result of new information, future events or otherwise. For a discussion of the important risks related to our business and future operating performance, see the discussion under the caption “Item 1A. Risk Factors” and under the caption “Factors Which May Influence Future Results of Operations” below.
Business Overview and Background
Inseego Corp. is a Delaware corporation formed in 2016 as the successor to Novatel Wireless, Inc., a Delaware corporation formed in 1996, resulting from an internal reorganization that was completed in November 2016. Our principal executive office is located at 12600 Deerfield Parkway, Suite 100, Alpharetta, GA 30004, our corporate offices are located at 9710 Scranton Road, Suite 200, San Diego, CA 92121 and our sales and engineering offices are located throughout the world. Inseego’s common stock trades on the NASDAQ Global Select Market under the trading symbol “INSG”.
Overview
Inseego Corp. is a leader in the design and development of fixed and mobile wireless solutions advanced(advanced 4G and 5G NR,NR), IIoT and cloud solutions for large enterprise verticals,Fortune 500 enterprises, service providers, and small and medium-sized businesses, governments, and consumers around the globe. Our product portfolio consists of fixed and mobile device-to-cloud solutions that provide compelling, intelligent, reliable and secure end-to-end IoT services with deep business intelligence. Inseego’s products and solutions, designed and developed in the U.S., power mission critical applications with a “zero unscheduled downtime” mandate, such as our 5G FWA gateway solutions, 4G and 5G mobile broadband, IIoT applications such as SD WAN failover management, asset tracking and fleet management services. Our solutions are powered by our key wireless innovations in mobile and FWA technologies, including a suite of products employing the 5G NR standards, and purpose-built SaaS cloud platforms.
We have been at the forefront of the ways in which the world stays connected and accesses information, and protects and derives intelligence from that information. With multiple first-to-market innovations across a number of wireless technologies, including 5G, and a strong and growing portfolio of hardware and software innovations for IIoT solutions, Inseego has been advancing technology and driving industry transformations for over 30 years. It is this proven expertise, commitment to quality, obsession with innovation and a relentless focus on execution that makes us a preferred global partner of service providers, distributors, value-added resellers, system integrators, and enterprises worldwide.
Business Segment Reporting
We do not provide separate segment reporting for our various lines of business. Our Chief Executive Officer, who is also our Chief Operating Decision Maker, evaluates the business as a single entity and reviews financial information and makes business decisions based on the overall results of the business. As such, the Company’s operations constitute a single operating segment and one reportable segment.
Factors Which May Influence Future Results of Operations
Net Revenues. We believe that our future net revenues will be influenced by a number of factors including:
•economic environment and related market conditions;
•increased competition from other fleet and vehicle telematics solutions, as well as suppliers of emerging devices that contain wireless data access or device management feature;features;
•acceptance of our products by new vertical markets;
•growth in the aviation ground vertical;
•rate of change to new products;
•phase-out of earlier generation wireless technologies (such as 3G);
•deployment of 5G infrastructure equipment;
•adoption of 5G end point products;
•competition in the area of 5G technology;
•product pricing; and
•changes in technologies.
Our revenues are also significantly dependent upon the availability of materials and components used in our hardware products.
We anticipate introducing additional products during the next twelve months, including SaaS telematics solutions and additional service offerings, industrial IoT hardware and services, and other mobile and fixed wireless devices targeting the emerging 5G market. We continue to develop and maintain strategic relationships with service providers and other wireless industry leaders such as Verizon Wireless, T-Mobile, Sprint, and Qualcomm. Through strategic relationships, we have been able to maintain market penetration by leveraging the resources of our channel partners, including their access to distribution resources, increased sales opportunities and market opportunities.
Cost of Net Revenues. Cost of net revenues includes all costs associated with our contract manufacturers, distribution, fulfillment and repair services, delivery of SaaS services, warranty costs, amortization of intangible assets, royalties, operations overhead, costs associated with cancellation of purchase orders and costs related to outside services. Also included in cost of net revenues are costs related to inventory adjustments, including acquisition-related amortization of the fair value of inventory, as well as any write downs for excess and obsolete inventory and abandoned product lines. Inventory adjustments are impacted primarily by demand for our products, which is influenced by the factors discussed above.
Operating Costs and Expenses. Our operating costs consist of three primary categories: research and development, sales and marketing and general and administrative costs.
Research and development is at the core of our ability to produce innovative, leading-edge products. These expenses consist primarily of engineers and technicians who design and test our highly complex products and the procurement of testing and certification services.
Sales and marketing expenses consist primarily of our sales force and product-marketing professionals. In order to maintain strong sales relationships, we provide co-marketing, trade show support and product training. We are also engaged in a wide variety of marketing activities, such as awareness and lead generation programs as well as product marketing. Other marketing initiatives include public relations, seminars and co-branding with partners.
General and administrative expenses include primarily corporate functions such as accounting, human resources, legal, administrative support and professional fees. This category also includes the expenses needed to operate as a publicly traded company, including compliance with the Sarbanes-Oxley Act of 2002, as amended, SEC filings, stock exchange fees and investor relations expense. Although general and administrative expenses are not directly related to revenue levels, certain expenses such as legal expenses and provisions for bad debts may cause significant volatility in future general and administrative expenses which may, in turn, impact net revenue levels.
We have undertaken certain restructuring activities and cost reduction initiatives in an effort to better align our organizational structure and costs with our strategy. Restructuring charges consist primarily of severance costs incurred in connection with the reduction of our workforce and facility exit-related costs, as well as discontinued operations, if any.
As part of our business strategy, we may review acquisition or divestiture opportunities that we believe would be advantageous or complementary to the development of our business. Given our current cash position and recent losses, any additional acquisitions we make would likely involve issuing stock in order to provide the purchase consideration for the acquisitions. If we make any additional acquisitions, we may incur substantial expenditures in conjunction with the acquisition process and the subsequent assimilation of any acquired business, products, technologies or personnel.
38
Results of Operations
The following table sets forth our consolidated statements of operations expressed as a percentage of net revenues, derived from the accompanying consolidated financial statements for the periods indicated.
| | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 | | |
| | | | | |
| Net revenues: | (as a percent of net revenues) |
|
| IoT & Mobile Solutions | 83.2 | % | | 73.3 | % | | |
| Enterprise SaaS Solutions | 16.8 | | | 26.7 | | | |
| Total net revenues | 100.0 | | | 100.0 | | | |
| Cost of net revenues: | | | | | |
| IoT & Mobile Solutions | 64.5 | | | 60.6 | | | |
| Enterprise SaaS Solutions | 6.6 | | | 10.3 | | | |
| | | | | |
| Total cost of net revenues | 71.1 | | | 70.9 | | | |
| Gross profit | 28.9 | | | 29.1 | | | |
| Operating costs and expenses: | | | | | |
| Research and development | 14.3 | | | 10.9 | | | |
| Sales and marketing | 11.4 | | | 13.2 | | | |
| General and administrative | 9.8 | | | 12.4 | | | |
| | | | | |
| Amortization of purchased intangible assets | 1.0 | | | 1.6 | | | |
| Impairment of capitalized software | 0.4 | | | — | | | |
| | | | | |
| | | | | |
| Total operating costs and expenses | 37.0 | | | 38.0 | | | |
| Operating loss | (8.0) | | | (8.9) | | | |
| Other income (expense): | | | | | |
| | | | | |
| Loss on debt conversion and extinguishment, net | (24.3) | | | — | | | |
| Interest expense, net | (3.2) | | | (9.3) | | | |
| Other income (expense), net | 0.3 | | | 0.2 | | | |
| Loss before income taxes | (35.2) | | | (18.0) | | | |
| Income tax provision | 0.2 | | | 0.2 | | | |
| Net loss | (35.4) | | | (18.2) | | | |
| Less: Net loss (income) attributable to noncontrolling interests | — | | | — | | | |
| Net loss attributable to Inseego Corp. | (35.4) | | | (18.2) | | | |
| Series E preferred stock dividends | (0.9) | | | (0.2) | | | |
| Net loss attributable to common stockholders | (36.4) | % | | (18.4) | % | | |
| | | | | |
| | | | | |
39
|
| | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 |
| | | | | |
| | Net revenues: | (as a percent of net revenues) |
| |
| | IoT & Mobile Solutions | 70.2 | % | | 66.9 | % |
| | Enterprise SaaS Solutions | 29.8 |
| | 33.1 |
|
| | Total net revenues | 100.0 |
| | 100.0 |
|
| | Cost of net revenues: | | | |
| | IoT & Mobile Solutions | 59.2 |
| | 52.0 |
|
| | Enterprise SaaS Solutions | 11.6 |
| | 12.9 |
|
| | Impairment of abandoned product line, net of recoveries | — |
| | 0.2 |
|
| | Total cost of net revenues | 70.8 |
| | 65.1 |
|
| | Gross profit | 29.2 |
| | 34.9 |
|
| | Operating costs and expenses: | | | |
| | Research and development | 10.9 |
| | 10.2 |
|
| | Sales and marketing | 13.2 |
| | 11.4 |
|
| | General and administrative | 12.4 |
| | 12.5 |
|
| | Amortization of purchased intangible assets | 1.6 |
| | 1.8 |
|
| | Extinguishment of acquisition-related liabilities | — |
| | (8.5 | ) |
| | Restructuring charges, net of recoveries | — |
| | 0.6 |
|
| | Total operating costs and expenses | 38.1 |
| | 27.9 |
|
| | Operating income (loss) | (8.9 | ) | | 6.9 |
|
| | Other income (expense): | | | |
| | Interest expense, net | (9.3 | ) | | (10.1 | ) |
| | Other income (expense), net | 0.2 |
| | (0.4 | ) |
| | Loss before income taxes | (18.0 | ) | | (3.6 | ) |
| | Income tax provision | 0.2 |
| | 0.4 |
|
| | Net loss | (18.2 | ) | | (4.0 | ) |
| | Less: Net loss (income) attributable to noncontrolling interests | — |
| | — |
|
| | Net loss attributable to Inseego Corp. | (18.2 | )% | | (4.0 | )% |
| | Preferred stock dividend | (0.2 | )% | | — |
|
| | Let loss attributable to common shareholders | (18.4 | )% | | (4.0 | )% |
Year Ended December 31, 20192020 Compared to Year Ended December 31, 20182019
Net revenues. Net revenues for the year ended December 31, 20192020 were $219.5$313.8 million, an increase of $17.0$94.3 million, or 8.4%43.0%, compared to the same period in 2018.2019.
The following table summarizes net revenues by our two product categories (dollars in thousands):
| | | | | Year Ended December 31, | | Change | | Year Ended December 31, | | Change |
| Product Category | | 2019 | | 2018 | | $ | | % | Product Category | | 2020 | | 2019 | | $ | | % |
| IoT & Mobile Solutions | | $ | 154,167 |
| | $ | 135,349 |
| | $ | 18,818 |
| | 13.9 | % | IoT & Mobile Solutions | | $ | 261,169 | | | $ | 160,873 | | | $ | 100,296 | | | 62.3 | % |
| Enterprise SaaS Solutions | | 65,329 |
| | 67,114 |
| | (1,785 | ) | | (2.7 | )% | Enterprise SaaS Solutions | | 52,663 | | | 58,623 | | | (5,960) | | | (10.2) | % |
| Total | | $ | 219,496 |
| | $ | 202,463 |
| | $ | 17,033 |
| | 8.4 | % | Total | | $ | 313,832 | | | $ | 219,496 | | | $ | 94,336 | | | 43.0 | % |
IoT & Mobile Solutions. The increase in IoT & Mobile Solutions net revenues is primarily a result of increased sales in our LTE gigabit hotspots, and the introduction of our second-generation 5G hotspot related to our MiFi business, partially offset byand increased revenues in our Inseego Subscribe business due to subscriber growth. As a reductionresult of the COVID-19 pandemic, there has been an increase in IoT sales.demand for our products due to a dramatic increase around the world in remote or tele-working and learning.
Enterprise SaaS Solutions. Enterprise SaaS Solutions net revenues were down slightly year-over-year due to the effecteffects of strengthening U.S. Dollar foreign exchange rates on international sales partially offset by increased subscription revenues.and the effect of COVID-19.
Cost of net revenues. Cost of net revenues for the year ended December 31, 20192020 was $155.5$223.0 million, or 70.9%71.1% of net revenues, compared to $131.9$155.5 million, or 65.1%70.9% of net revenues, for the same period in 2018.2019.
The following table summarizes cost of net revenues by our two product categories (dollars in thousands):
| | | | | Year Ended
December 31, | | Change | | Year Ended
December 31, | | Change |
| Product Category | | 2019 | | 2018 | | $ | | % | Product Category | | 2020 | | 2019 | | $ | | % |
| IoT & Mobile Solutions | | $ | 129,957 |
| | $ | 105,344 |
| | $ | 24,613 |
| | 23.4 | % | IoT & Mobile Solutions | | $ | 202,421 | | | $ | 132,980 | | | $ | 69,441 | | | 52.2 | % |
| Enterprise SaaS Solutions | | 25,568 |
| | 26,167 |
| | (599 | ) | | (2.3 | )% | Enterprise SaaS Solutions | | 20,568 | | | 22,545 | | | (1,977) | | | (8.8) | % |
| Impairment of abandoned product line, net of recoveries | — |
| | 355 |
| | (355 | ) | | (100.0 | )% | |
| | Total | | $ | 155,525 |
| | $ | 131,866 |
| | $ | 23,659 |
| | 17.9 | % | Total | | $ | 222,989 | | | $ | 155,525 | | | $ | 67,464 | | | 43.4 | % |
IoT & Mobile Solutions. The increase in IoT & Mobile Solutions cost of net revenues is primarily a result of increased sales of our LTE gigabit hotspots, and 5G hotspots, as well as associated expenses such as freight and royalties. In addition,As a result of the cost per unit is higher onCOVID-19 pandemic, there has been an increase in demand in our products due to a dramatic increase around the 5G hotspot as compared to the older generation of hotspot.world in remote or tele-working and learning.
Enterprise SaaS Solutions. Enterprise SaaS Solutions cost of net revenues decreased as a result of lower Ctrack system revenue, partially offset by the effect of strengthening U.S. Dollar foreign exchange rates on international costs, partially offset by costs to service the increase in revenues.
Impairment of abandoned product line, net of recoveries. The impairment of abandoned product line in 2018 reflects the additional write down of certain inventory related to product lines which were abandoned during the fourth quarter of 2016, net of recoveries related to the subsequent sale of such abandoned products.costs.
Gross profit. Gross profit for the year ended December 31, 20192020 was $90.8 million, or a gross margin of 28.9%, compared to $64.0 million, or a gross margin of 29.2%, compared to $70.6 million, or a gross margin of 34.9%29.1%, for the same period in 2018.2019. The slight decrease in the gross profit percentage was primarily attributable to a declinean unfavorable product mix offset by improvements in MiFiIoT & Mobile Solutions gross margins.margin.
Research and development expenses. Research and development expenses for the year ended December 31, 20192020 were $23.9$45.0 million, or 10.9%14.3% of net revenues, compared to $20.6$23.9 million, or 10.2%10.9% of net revenues, for the same period in 2018.2019. The increase was primarily a result of increased staffing, test units, and other development spending related to 5G product programs, including additional headcount, partially offset by the Company starting to capitalize certain additional research and development costs beginning in 2019.programs.
Sales and marketing expenses. Sales and marketing expenses for the year ended December 31, 20192020 were $28.9$35.8 million, or 13.2%11.4% of net revenues, compared to $23.0$28.9 million, or 11.4%13.2% of net revenues, for the same period in 2018.2019. The increase was primarily a result of an increase in headcount.
General and administrative expenses. General and administrative expenses for the year ended December 31, 2020 were $30.7 million, or 9.8% of net revenues, compared to $27.3 million, or 12.4% of net revenues, for the same period in 2019. The increase was primarily a result of an increase in employment costs attributable to an increase in headcount and an increase in share-based compensation related to an equity bonus.
General and administrative expenses. General and administrative expenses for the year ended December 31, 2019 were $27.3 million, or 12.4% of net revenues, compared to $25.3 million, or 12.5% of net revenues, for the same period in 2018. The
increase was primarily a result of an increase in employment costs attributable to an increase in headcount, non-recurring legal fees, and an increase in share-based compensation related to an equity bonus.expenses.
Amortization of purchased intangible assets. The amortization of purchased intangible assets for the years ended December 31, 2020 and 2019 and 2018 was $3.4$3.2 million and $3.6$3.4 million, respectively.
Impairment of acquisition-related liabilities.capitalized software. During the twelve months ended December 31, 2018,2020, we recorded a gainloss of $17.2$1.4 million related to the extinguishment of certain acquisition-related liabilities resulting from the Settlement Agreement, as defined below. We did not have an extinguishment of acquisition-related liabilities duringon capitalized software development costs. There was no such expense for the same period in 2019.
Restructuring charges, net of recoveries.Loss on debt conversion and extinguishment, net. Restructuring charges, net of recoveries, forDuring the yearstwelve months ended December 31, 20192020, we recorded a loss of $76.4 million, which primarily represents the loss on debt conversion and 2018 were $0.1extinguishment of the 2022 Notes, including a $7.9 million and $1.2 million, respectively, and primarily consisted of severance costsinducement expense incurred in connection with certain conversions of the reduction2022 Notes, and a $67.2 million loss recorded on debt conversion of our workforce and facility exit related costs.the 2025 Notes. There was no such expense for the same period in 2019.
Interest expense, net. Interest expense, net, for each of the years ended December 31, 2020 and 2019 was $9.9 million and 2018 was $20.4 million.million, respectively. Interest expense iswas primarily a result of the interest expense and amortization of the debt discount and debt issuance costs related to our Term Loanprevious term loan, the 2022 Notes and Convertible Seniorthe 2025 Notes. The decrease in interest expense was due to the conversion of debt into equity in 2020, payment in full of our previous term loan during 2020, as well as a lower interest rate on the 2025 Notes, as compared to the 2022 Notes.
Other income (expense), net. Other income, net, for the year ended December 31, 20192020 was $0.4$1.0 million, which primarily included the fair value adjustment related to our interest-make-whole payment on the 2025 Notes as well as foreign currency transaction gains and losses, and gains on the sale of certain fixed assets.losses. Other expense, net for the same period in 20182019 was $0.9$0.4 million, which primarily consisted of foreign currency transaction gains and losses.
Income tax provision. Income tax provision for the years ended December 31, 2020 and 2019 and 2018 was $0.5$0.7 million and $0.8$0.5 million, respectively, which primarily related to certain of our profitable entitiessubsidiaries in foreign jurisdictions.
The effective tax rate for the year ended December 31, 20192020 is different than the U.S. statutory rate primarily due to a valuation allowance recorded against additional tax assets generated during the year and certain profitable foreign subsidiaries.
Series E preferred stockPreferred Stock dividends. During the year ended December 31, 2020 and 2019, we recorded $2.9 million and $0.4 million, respectively, of accrued Series E preferred stockPreferred Stock dividends. We did not have Series E preferred stock dividends for the year ended 2018.
Liquidity and Capital Resources
Our principal sources of liquidity are our existing cash and cash equivalents and cash generated from operations. As of December 31, 2019,2020, we had cash and cash equivalents of $12.1$40.0 million compared with cash and cash equivalents of $31.0$12.1 million as of December 31, 2018.2019.
On AugustIn order to make continued growth investments, on March 6, 2018,2020, the Company completed a private placement of 12,062,000issued and sold 25,000 shares of common stock and warrants to purchase an additional 4,221,700 shares of common stock, for gross proceeds of $19.7 million in cash (the “2018 Private Placement”). In connection with the Private Placement, the Company incurred issuance costs of approximately $0.5 million.
On August 9, 2019, we completed a private placement of 10,000 shares ofour Series E Preferred Stock, for an aggregate purchase price of $10.0 million in accordance$25.0 million. There are currently 35,000 shares of Series E Preferred Stock outstanding with the terms and provisionsan aggregate liquidation preference of a Securities Purchase Agreement, dated August 9, 2019, by and among the Company and certain accredited investors.$35 million. Each share of Series E Preferred Stock entitles the holder thereof to receive, when, as and if declared by the Company out of assets legally available therefor, cumulative cash dividends at an annual rate of 9.00% payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, beginning on October 1, 2019. If dividends are not declared and paid in any quarter, or if such dividends are declared but holders of the Series E Preferred Stock elect not to receive them in cash, the quarterly dividend will be deemed to accrue and will be added to the Series E Base Amount. The Series E Preferred Stock has no voting rights unless otherwise required by law. The Series E Preferred Stock is perpetual and has no maturity date. However, wethe Company may, at ourits option, redeem shares of the Series E Preferred Stock, in whole or in part, on or after July 1, 2022, at a price equal to 110% of the Series E Base Amount plus (without duplication) any accrued and unpaid dividends. The “Series E Base Amount” means $1,000 per share, plus any accrued but unpaid dividends, whether or not declared by ourthe Company’s board of directors, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series E Preferred Stock. In the event of a liquidation, dissolution or winding up of the Company, the holders of the Series E Preferred Stock will be entitled to receive, after satisfaction of liabilities to creditors and subject to the rights of holders of any senior securities, but before any distribution of assets is made to holders of common stock or any other junior securities, the Series E Base Amount plus (without duplication) any accrued and unpaid dividends.
DuringIn the fourthfirst quarter of 2019,2020, $59.9 million of the Company’s 2022 Notes were exchanged for common stock in private exchange transactions. Additionally, in the second quarter of 2020, the Company received $6.9restructured its outstanding debt by completing a $100.0 million registered public offering (the “Offering”) of 2025 Notes and also entered into privately-negotiated Exchange Agreements, pursuant to which an aggregate of $45.0 million in netprincipal amount of the 2022 Notes were exchanged for an aggregate of $32.0 million in cash and $80.4 million in principal amount of the 2025 Notes (the “Private Exchange Transactions”). The Company also used a portion of the proceeds from the exerciseOffering to repay in full our previous term loan. In the third quarter of 1,255,1292020, the Company redeemed the remaining $2,000 principal amount of the 2022 Notes.
During the quarter ended September 30, 2020, certain holders of the 2025 Notes converted approximately $13.5 million in principal amount of the 2025 Notes into 1,177,156 shares of the Company’s common stock purchase warrants issued 2015.
On March 6, 2020, the Company completed a private placement of 25,000 additional shares of Series E Preferred Stock, for an aggregate purchase price of $25.0 million in accordance with the terms and provisionsof
such notes. As of a Securities Purchase Agreement, dated March 6,December 31, 2020, by and among the Company and an accredited investor.
Term Loan
On August 23, 2017, we, and certainCompany’s outstanding debt primarily consisted of our direct and indirect subsidiaries (the “Guarantors”), entered into a credit agreement (the “Credit Agreement”) with Cantor Fitzgerald Securities, as administrative agent and collateral agent, and certain lenders (the “Lenders”). Pursuant to the Credit Agreement, the Lenders provided us with a term loan$166.9 million in the principal amount of $48.0 million (the “Term Loan”) with a maturity date of August 23, 2020 (the “Maturity Date”). In conjunction with the closing of the Term Loan, we received proceeds of $46.9 million, $35.0 million of which was funded to us in cash2025 Notes.
Additionally, on the closing date, net of approximately $1.1 million related to an original issue discount and commitment fee, and the remaining $11.9 million of which was funded through our repurchase and cancellation of approximately $14.9 million of our outstanding Inseego Notes pursuant to the terms of the Note Purchase Agreement (as defined below). Additionally, in conjunction with the closing of the Term Loan, we issued 2,000,000 shares of our common stock to the Lenders with a market value of approximately $2.3 million, accrued an exit fee of approximately $0.6 million and paid issuance costs of approximately $0.5 million.
The Term Loan is secured by a first priority lien on substantially all of the assets of the Company and the Guarantors, including equity interests in certain of our direct and indirect subsidiaries, in each case subject to certain customary exceptions and permitted liens. The Credit Agreement includes customary representations and warranties, a material adverse change clause, as well as customary reporting and financial covenants, including a restriction on the level of capital expenditures. The Company obtained waivers of the capital expenditure restriction from the lenders during the year ended December 31, 2019. As a result of the waivers, as of December 31, 2019, the Company was in compliance with all financial covenants under the Credit Agreement. On March 9, 2020, we entered into an amendment to the Credit Agreement, which among other things, amended certain financial covenants set forth therein and permits the use of our Series E Preferred Stock to make certain payments, including interest payments, due thereunder.
On March 10, 2020,January 25, 2021, the Company entered into a letter agreementan Equity Distribution Agreement with Canaccord Genuity LLC (the “Letter Agreement”) with South Ocean Funding, LLC (“South Ocean”“Agent”), the Lender, holder of the aggregate principal amount currently outstanding under the Credit Agreement, which provides: (i) that the Company and South Ocean will work together, in good faith, to reach an agreement to amend or refinance the Credit Agreement in order to extend the maturity of the Credit Agreement until a date after March 15, 2021; and (ii) should an agreement not be reached to amend or refinance the Credit Agreement prior to August 23, 2020, upon request of the Company, the maturity date of the Credit Agreement will be extended to no earlier than March 15, 2021.
The Term Loan bears interest at a rate per annum equal to the three-month LIBOR, but in no event less than 1.00%, plus 7.625% (9.535% at December 31, 2019). Interest on the Term Loan is payable on the last business day of each calendar month and on the Maturity Date. Principal on the Term Loan is payable on the Maturity Date. At December 31, 2019, four months of interest due to related parties, totaling $1.3 million was deferred and is included in accrued expenses and other current liabilities on the condensed consolidated balance sheet.
As required by the terms of the Credit Agreement, during the year ended December 31, 2019, the Company repaid $0.5 million of principal on the Term Loan in connection with the Settlement Agreement (as defined below).
Related parties currently hold 100% of the principal amount.
Convertible Senior Notes
On June 10, 2015, Novatel Wireless issued $120.0 million of 5.50% convertible senior notes due 2020 (the “Novatel Wireless Notes”) which are governed by the terms of an indenture, dated June 10, 2015, between Novatel Wireless, as issuer, Inseego and Wilmington Trust, National Association, as trustee, as amended by certain supplemental indentures. The Novatel Wireless Notes are senior unsecured obligations of Novatel Wireless and bear interest at a rate of 5.50% per year, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2015. The Novatel Wireless Notes will mature on June 15, 2020, unless earlier repurchased or converted. The Novatel Wireless Notes will be convertible into cash, shares of our common stock, or a combination thereof, at our election, at an initial conversion price of $5.00 per share of our common stock.
On January 9, 2017, in connection with the settlement of an exchange offer and consent solicitation with respect to the 5.50% convertible senior notes due 2020 (the “Novatel Wireless Notes”), the Company issued approximately $119.8 million aggregate principal amount of the 5.50% convertible senior notes due 2022 (the “Inseego Notes”). The Inseego Notes were issued in exchange for approximately $119.8 million aggregate principal amount of outstanding Novatel Wireless Notes that were validly tendered and accepted for exchange and subsequently canceled. The Inseego Notes are governed by the terms of
an indenture, dated January 9, 2017 (the “Inseego Indenture”), between the Company, as issuer, and Wilmington Trust, National Association, as trustee. The Inseego Notes are senior unsecured obligations of the Company and bear interest at a rate of 5.50% per year, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on June 15, 2017.
The exchange of the Novatel Wireless Notes for the Inseego Notes was treated as a debt modification in accordance with applicable Financial Accounting Standards Board (“FASB”) guidance and the Company recognized $3.6 million as an additional component of debt discount and additional paid-in capital attributed to the increase in the fair value of the embedded conversion feature of the Inseego Notes before and after modification.
The Inseego Notes will mature on June 15, 2022, unless earlier converted, redeemed or repurchased. The Inseego Notes will be convertible into cash, shares of our common stock, or a combination thereof, at our election, at an initial conversion price of $4.70 per share of our common stock. Because the sale price condition included in the Inseego Indenture was satisfied during December 2019, the Inseego Notes are currently convertible and will remain convertible until March 31, 2020 at which time the convertibility will need to be reevaluated.
On August 23, 2017, in connection with the Credit Agreement described above, we entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with the Lenders pursuant to which we repurchased approximately $14.9the Company may offer and sell, from time to time, through or to the Agent, up to $40.0 million of outstanding Inseego Notes from such Lenders in exchange for $11.9 million deemed to have been loaned to usshares of its common stock (the “ATM Offering”) pursuant to the Credit AgreementCompany’s Registration Statement on Form S-3ASR (File No. 333-238057), which was filed with the Securities and Exchange Commission on May 7, 2020, and the accrued and unpaid interest on such notes.424(b) prospectus supplement relating to the ATM Offering dated January 25, 2021.
The Inseego Notes are subject to repurchase by
In January 2021, the Company at the option of the holders on June 15, 2020 unless earlier converted. On March 6, 2020, the holders of substantially all of the outstanding indebtedness under the Inseego Notes agreed to waive their optional right to require the Company to repurchase the Notes on June 15, 2020.
On March 3, 2020 the Company and the Trustee entered into a First Supplemental Indenture which eliminated certain covenants prohibiting the incurrence of certain indebtedness and certain restricted payments.
During the first quarter of 2020, we exchanged $59.9 million of outstanding Inseego Notes for 13,688,876sold 1,516,073 shares of common stock, at a public offering price of $20.11 per share, for net proceeds of $29.6 million, pursuant to the ATM Offering. See Note 15, Subsequent Events.
The Company has a history of operating and $250,000net losses and overall usage of outstanding Novatel Wireless Notescash from operating and investing activities. The Company’s management believes that its cash and cash equivalents, together with anticipated cash flows from operations, will be sufficient to meet its cash flow needs for 50,000 shares of common stock. As ofthe next twelve months from the filing date of this report,report. The Company’s ability to attain more profitable operations and continue to generate positive cash flow is dependent upon achieving a level and mix of revenues adequate to support its evolving cost structure. If events or circumstances occur such that the Company does not meet its operating plan as expected, or if the Company becomes obligated to pay unforeseen expenditures as a result of ongoing litigation, the Company may be required to raise capital, reduce planned research and development activities, incur additional restructuring charges or reduce other operating expenses which could have an adverse impact on its ability to achieve its intended business objectives.
The Company’s liquidity could be impaired if there were $45.0 millionis any interruption in its business operations, a material failure to satisfy its contractual commitments or a failure to generate revenue from new or existing products. There can be no assurance that any required or desired restructuring or financing will be available on terms favorable to the Company, or at all. Additionally, the Company is uncertain of outstanding Inseego Notesthe full extent to which the COVID-19 pandemic will impact the Company’s business, operations and no outstanding Novatel Wireless Notes.
In connection with the exchanges of Inseego Notes described above, we issued 942,702 additional shares of our common stock. We will account for the debt conversion as an induced conversion under ASC 470, Debt, and as such, expect to record an expense on induced conversion of approximately $7.9 million during the first quarter of 2020.financial results.
Settlement Agreement
Pursuant to the amended merger agreement with respect to our acquisition of R.E.R. Enterprises, Inc. (“RER”) and its wholly ownedwholly-owned subsidiary and principal operating asset, Feeney Wireless, LLC (which has been renamed Inseego North America, LLC), the Company previously agreed to pay a total of $15.0 million in deferred purchase price in five cash installments over a four-year period, beginning in March 2016. The Company also agreed to provide earn-out consideration to the former stockholders of RER in the form of $6.1 million in cash over a four-year period, beginning in March 2016, and issuance of up to 2,920,000 shares of the Company’s common stock in three equal annual installments, beginning in March 2016, contingent upon retention of certain key personnel of RER.
On May 11, 2017, the Company initiated a lawsuit against the former stockholders of RER in the Court of Chancery of the State of Delaware seeking recovery of damages for civil conspiracy, fraud in the inducement, unjust enrichment and breach of fiduciary duty. On January 16, 2018, the former stockholders of RER filed an answer and counterclaim in the matter seeking recovery of certain deferred and earn-out payments allegedly owed to them by the Company in connection with the Company’s acquisition of RER. On July 26, 2018, the Company and the former stockholders of RER entered into a mutual general release and settlement agreement (the “Settlement Agreement”) pursuant to which the parties agreed to release all claims against each other and the Company agreed to (i) pay the former stockholders of RER $1.0 million in cash by August 17, 2018, (ii) immediately instruct its transfer agent to permit the transfer or sale of 973,333 shares of the Company’s common stock that the Company had issued to the former stockholders of RER in March 2017, (iii) immediately issue 500,000 shares of the Company’s common stock to the former stockholders of RER, (iv) within 12 months following the execution of the Settlement Agreement, deliver to the former stockholders of RER an additional $1.0 million in cash, common stock, or a combination thereof, at the Company’s option, (v) within 24 months following the execution of the Settlement Agreement deliver to the former stockholders of RER an additional $1.0 million in cash, common stock, or a combination thereof, at the Company’s option, and (vi) file one or more registration statements with respect to the resale of the shares of the Company’s common stock issued to the former stockholders of RER pursuant to the Settlement Agreement. OurOn July 24, 2020, the Company issued 89,928 shares in satisfaction of all remaining liabilityliabilities under the Settlement Agreement at December 31, 2019 consists of approximately $1.0 million in current liabilities.
Rights Agreement
On January 22, 2018, the Company entered into the Rights Agreement and issued a Right to each of the stockholders of record of each share of the Company’s common stock outstanding on February 2, 2018. Each Right entitles the registered holder, under certain circumstances, to purchase from the Company one one-thousandth of a share of Series D Preferred Stock, par value $0.001 per share (the “Preferred Shares”), of the Company, at a price of $10.00 per one one-thousandth of a Preferred Share represented by a Right, subject to adjustment. The description and terms of the Rights are set forth in the Rights Agreement.
The Rights are not exercisable until the Distribution Date (as defined in the Rights Agreement). The Rights will expire on the earlier of (i) the close of business on January 22, 2021, (ii) the time at which the Rights are redeemed and (iii) the time at which the Rights are exchanged.
Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends.
In connection with an issuance of warrants, on March 28, 2019, we entered into Amendment No. 3 to the Rights Agreement, dated January 22, 2018, as amended from time to time, between us and Computershare Trust Company, N.A., as rights agent, for the purpose of modifying the definition of “Acquiring Person” under the Rights Agreement to permit each of the Investors to remain a Grandfathered Stockholder (as defined in the Rights Agreement) and not be deemed an “Acquiring Person” under the Rights Agreement.
The Investors will remain Grandfathered Stockholders as long as they do not acquire, after the date of the Third Amendment to Rights Agreement, beneficial ownership of our securities (other than as a result of any adjustment provision or the accrual of interest under any outstanding convertible notes) equal to more than 0.50% of the then-outstanding common stock.
DigiCore Secured Banking Facility
DigiCore has a secured banking facility with Absa, which had a maximum borrowing capacity of $1.0 million at December 31, 2019. The facility bears interest at the South Africa prime interest rate less 0.10% (9.90% at December 31, 2019) and is subject to renewal annually. At December 31, 2019, $0.2 million remained outstanding under this facility.
DigiCore Secured Overdraft Facility
DigiCore has a secured overdraft facility with Grindrod Bank in South Africa, which had a maximum borrowing capacity of $0.3 million at December 31, 2019. The facility bears interest at the South Africa prime interest rate plus 1.00% (11.00% at December 31, 2019), requires monthly interest and, in certain instances, minimum principal payments. The facility is subject to renewal annually. At December 31, 2019, $21 thousand remained outstanding under this facility.
Historical Cash Flows
The following table summarizes our consolidated statements of cash flows for the periods indicated (in thousands):
| | | | | | | | Year Ended December 31, |
| | Year Ended December 31, | | 2020 | | 2019 |
| | 2019 | | 2018 | |
| Net cash used in operating activities | $ | (17,999 | ) | | $ | (1,765 | ) | |
| Net cash provided by (used in) operating activities | | Net cash provided by (used in) operating activities | $ | 20,050 | | | $ | (17,999) | |
| Net cash used in investing activities | (28,213 | ) | | (4,234 | ) | Net cash used in investing activities | (34,713) | | | (28,213) | |
| Net cash provided by financing activities | 27,469 |
| | 17,667 |
| Net cash provided by financing activities | 42,081 | | | 27,469 | |
| Effect of exchange rates on cash | (259 | ) | | (1,851 | ) | Effect of exchange rates on cash | 523 | | | (259) | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | (19,002 | ) | | 9,817 |
| Net increase (decrease) in cash, cash equivalents and restricted cash | 27,941 | | | (19,002) | |
| Cash, cash equivalents and restricted cash, beginning of period | 31,076 |
| | 21,259 |
| Cash, cash equivalents and restricted cash, beginning of period | 12,074 | | | 31,076 | |
| Cash, cash equivalents and restricted cash, end of period | $ | 12,074 |
| | $ | 31,076 |
| |
| Cash, and cash equivalents, end of period | | Cash, and cash equivalents, end of period | $ | 40,015 | | | $ | 12,074 | |
Operating activities. Net cash used inprovided by operating activities was $18.0$20.1 million for the year ended December 31, 20192020 compared to $1.8net cash used in operating activities of $18.0 million for the same period in 2018.2019. Net cash used inprovided by operating activities for the year ended December 31, 20192020 was primarily attributable to the net losscash provided by changes in the period and net cash used for working capital, partially offset by non-cash charges forloss on debt conversion and extinguishment, a non-cash fair value adjustment on derivative instrument, depreciation and amortization, including the amortization of debt discount and debt issuance costs, and share-based compensation expense.expense, offset by net losses incurred during the period. Net cash used in operating activities for the year ended December 31, 20182019 was primarily attributable to the net losses incurred during the period, partially offset by non-cash charges for depreciation and amortization, including the amortization of debt discount and debt issuance costs, loss on extinguishment of debt and share-based compensation expense.
Investing activities. Net cash used in investing activities during the year ended December 31, 20192020 was $28.2$34.7 million compared to $4.2$28.2 million used in investing activities for the same period in 2018.2019. Cash used in investing activities during the year ended December 31, 20192020 was primarily related to the purchases of property, plant and equipment and capitalization of certain costs related to the research and development of software to be sold in our products, in large part due to the increase in development in support of 5G products and services as well as certain internally developed software projects. Cash used in investing activities during the same period in 20182019 was primarily attributable to the purchases of property, plant and equipment and the capitalization of certain costs related to the development of software to be sold in our solutions.products.
Financing activities. Net cash provided by financing activities during the year ended December 31, 20192020 was $27.5$42.1 million, compared to net cash provided by financing activities of $17.7$27.5 million for the same period in 2018.2019. Net cash provided by financing activities during the year ended December 31, 2020 was primarily related to net proceeds received from the Offering, the issuance of Series E Preferred Stock, the exercise of warrants to purchase common stock and stock option exercises and purchases through our employee stock purchase plan, partially offset by $32.0 million of cash paid to investors in the Private Exchange Transactions, $48.8 million of cash used to pay off our previous term loan and related extinguishment costs, the repurchase of Series E Preferred Stock, principal payments under finance lease obligations and taxes paid on vested restricted stock units. Net cash provided by financing activities during the year ended December 31, 2019 was primarily relatedattributable to the proceeds received from the issuance and sale of Series E preferred stockPreferred Stock and the exercise of warrants to purchase common stock, as well as proceeds received from stock option exercises and purchases made under the employee stock purchase plan, partially offset by net repayments of bank and overdraft facilities, of DigiCore Holdings Limited, principal payments under finance lease obligations and taxes paid on vested restricted stock units. Net cash provided by financing activities during the year ended December 31, 2018 was primarily attributable to the net proceeds received from the 2018 Private Placement and proceeds received from stock option exercises and purchases made under the employee stock purchase plan, partially offset by net repayments of DigiCore bank and overdraft facilities, principal payments under capital lease obligations and the Term Loanour previous term loan and taxes paid on vested restricted stock units.
Other Liquidity Needs
As of December 31, 2019,2020, we had available cash and cash equivalents totaling $12.1$40.0 million and working capital of $19.6$38.4 million.
Under the terms of the indenture governing the Inseego Notes, each holder of the notes has the right to require the Company to repurchase its notes for cash on June 15, 2020 (“the Optional Repurchase Date”). On March 6, 2020, the holders of the outstanding indebtedness under the Inseego Notes agreed to waive their optional right to require the Company to repurchase the Notes on the Optional Repurchase Date.
The Company’s liquidity could be compromised if there is any interruption in its business operations, a material failure to satisfy its contractual commitments or a failure to generate revenue from new or existing products. Ultimately, the Company’s ability to attain profitability and to generate positive cash flow is dependent upon achieving a level of revenues adequate to support its evolving cost structure and increasing working capital needs. If events or circumstances occur such that the Company does not meet its operating plan as expected, the Company may be required to raise additional capital, reduce planned research and development activities, incur additional restructuring charges or reduce other operating expenses which could have an adverse impact on the Company’s ability to achieve its intended business objectives. There can be no assurance that any required or desired restructuring or financing will be available on terms favorable to the Company, or at all. In addition, in order to obtain additional borrowings, the Company must comply with certain requirements under the Credit Agreement and the Inseego Indenture. If additional funds are raised by the issuance of equity securities, Company stockholders could experience dilution of their ownership interests and
securities issued may have rights senior to those of the holders of the Company’s common stock. If additional funds are raised by the issuance of debt securities, the Company may be subject to additional limitations on its operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues, expenses and disclosures of contingent assets and liabilities. Actual results could differ from these estimates.
Revenue Recognition
Sources of Revenue
The Company generates revenue from a broad range of product sales including intelligent wireless hardware products for the worldwide mobile communications and IoT markets. The Company’s products principally include intelligent 4G and 5G mobile hotspots, wireless gateways and routers for IoT applications, 1 Gigabit speed 4G LTE hotspots and USB modems,
integrated telematics and mobile tracking hardware devices, which are supported by applications software and cloud services designed to enable customers to easily analyze data insights and configure and manage their hardware.
The Company classifies its revenues from the sale of its products and services into two distinct groupings, specifically IoT & Mobile Solutions and Enterprise SaaS Solutions. Both IoT & Mobile Solutions and Enterprise SaaS Solutions revenues include any hardware and software required for the respective solution.
Net revenues by product grouping for the year ended December 31, 20192020 and 20182019 were as follows (in thousands):
| | | | Year Ended
December 31, | | Year Ended
December 31, |
| | 2019 | | 2018 | | 2020 | | 2019 |
| IoT & Mobile Solutions | $ | 154,167 |
| | $ | 135,349 |
| IoT & Mobile Solutions | $ | 261,169 | | | $ | 160,873 | |
| Enterprise SaaS Solutions | 65,329 |
| | 67,114 |
| Enterprise SaaS Solutions | 52,663 | | | 58,623 | |
| Total | $ | 219,496 |
| | $ | 202,463 |
| Total | $ | 313,832 | | | $ | 219,496 | |
Net revenues by geographic region based on shipping destination for the year ended December 31, 20192020 and 20182019 were as follows (in thousands):
| | | | Year Ended
December 31, | | Year Ended
December 31, |
| | 2019 | | 2018 | | 2020 | | 2019 |
| United States and Canada | $ | 158,756 |
| | $ | 139,246 |
| United States and Canada | $ | 260,009 | | | $ | 158,756 | |
| South Africa | 35,001 |
| | 38,608 |
| South Africa | 28,208 | | | 35,001 | |
| Other | 25,739 |
| | 24,609 |
| Other | 25,615 | | | 25,739 | |
| Total | $ | 219,496 |
| | $ | 202,463 |
| Total | $ | 313,832 | | | $ | 219,496 | |
IoT & Mobile Solutions. The IoT & Mobile Solutions portfolio is comprised of end-to-end edge to cloud solutions including 4G LTE mobile broadband gateways, routers, modems, hotspots, HD quality VoLTE based wireless home phones, cloud management software and an advanced 5G portfolio of products (currently in various stages of development). The solutions are offered under the MiFi brands for consumer and business markets, and under the Skyus brand for industrial IoT markets.
Enterprise SaaS Solutions. The Enterprise SaaS Solutions consist of various subscription offerings to gain access to the Company’s Ctrack telematics platforms, which provide fleet vehicle, aviation ground vehicle and asset tracking and performance information, and other telematics applications, and the Company’s Device Management System (“DMS”), a hosted SaaS platform that helps organizations manage the selection, deployment and spend of their customers wireless assets, helping them save money on personnel and telecom expenses.
Contracts with Customers
The Company adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) (as amended, “ASC 606”), effective January 1, 2018, using the modified retrospective method applied to those contracts which were not substantially completed as of January 1, 2018. ASC 606 provides guidance on recognizing revenue, including a five-step model to determine when revenue recognition is appropriate. The standard requires that an entity recognize revenue to depict the transfer of control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The Company routinely enters into a variety of agreements with customers, including quality agreements, pricing agreements and master supply agreements which outline the general commercial terms and conditions under which the Company does business with a specific customer, including shipping terms and pricing for the products and services that the Company offers. The Company also sells to some customers solely based on purchase orders. The Company has concluded for the vast majority of its revenues, that its contracts with customers are either a purchase order or the combination of a purchase order with a master supply agreement.
The Company determines revenue recognition through the following five steps:
| |
1) | identification of the contract, or contracts, with a customer; |
| |
2) | identification of the performance obligations in the contract; |
| |
3) | determination of the transaction price; |
432)identification of the performance obligations in the contract;
4)allocation of the transaction price to the performance obligations in the contract; and
| |
4) | allocation of the transaction price to the performance obligations in the contract; and |
| |
5) | recognition of revenue when, or as, performance obligations are satisfied. |
The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
The Company’s performance obligations are established when a customer submits a purchase order notification (in writing, electronically or verbally) for goods and services, and the Company accepts the order. The Company identifies performance obligations as the delivery of the requested product or service in appropriate quantities and to the location specified in the customer’s contract and/or purchase order. The Company generally recognizes revenue upon the satisfaction of these criteria when control of the product or service has been transferred to the customer at which time it has an unconditional right to receive payment. The Company’s prices are fixed and have no history of being affected by contingent events that could impact the transaction price. The Company does not offer price concessions and does not accept payment that is less than the price stated when it accepts the purchase order.
Revenue Recognition
Revenue is recognized upon transfer of control of products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company enters into contracts that may include various combinations of products and services which are generally capable of being distinct and accounted for as separate performance obligations.
Hardware. Hardware revenue from the sale of the Company’s IoT & Mobile Solutions devices is recognized when the Company transfers control to the customer, typically at the time when the product is delivered, shipped or installed at which time the title passes to the customer, and there are no further performance obligations with regards to the hardware device.
SaaS and Other Services. SaaS subscription revenue is recognized over time on a ratable basis over the contract term beginning on the date that its service is made available to the customer. Subscription periods range from monthly to multi-year, with the majority of contracts being one to three years. Telematics includes a device which collects and transmits the information from the vehicle or other asset. The Company’s customers have an option to purchase the monitoring device or lease it over the term of the contract. If the customer purchases the hardware device, the Company recognizes the revenue at a point in time as discussed above in the hardware revenue recognition disclosure. Prior to adoption of the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 842, Leases (“ASC 842”), on January 1, 2019, if the customer chose to lease the monitoring device, the Company accounted for the monitoring device lease as an operating lease, recognized the revenue for the monitoring device lease over the term of the contract and recorded such revenue in accordance with the previous lease accounting guidance in ASC 840, Leases.Leases. Under the new standard, because the Company’s rental asset lease contracts qualify as operating leases under ASC 842 and the contracts also include services to operate the underlying asset, and to maintain the asset, the Company has elected the practical expedient to combine the lease and the non-leasenon-
lease components because the service is the predominant element in the eyes of the customer and the pattern of service delivery is the same for both elements. The Company recognizes revenue over time on a ratable basis over the term of the contract.
Maintenance and support services revenue. Periodically, the Company sells separately priced warranty contracts that extend beyond the Company’s base warranty period. The separately priced service contracts range from 12 months to 36 months. The Company typically receives payment at the inception of the contract and recognizes revenue as earned on a straight-line basis over the term of the contract.
Professional services revenue. From time to time, the Company enters into special engineering design service agreements. Revenues from engineering design services are designed to meet specifications of a particular product, and therefore do not create an asset with an alternative use. The Company recognizes revenue based on the achievement of certain applicable milestones and the amount of payment the Company believes it is entitled to at the time.
With respect to revenue related to third party product sales or other arrangements that involve the services of another party, for which the Company does not control the sale or service and acts as an agent to the transaction, the Company recognizes revenue on a net basis. The portion of the gross amount billed to customers that is remitted by the Company to another party is not reflected as revenue.
Multiple Performance Obligations
The Company’s contracts with customers may include commitments to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted
for separately versus together may require significant judgment. When hardware, software and services are sold in various combinations, judgment is required to determine whether each performance obligation is considered distinct and accounted for separately, or not distinct and accounted for together with other performance obligationsobligations.
In instances where the software elements included within hardware for various products are considered to be functioning together with non-software elements to provide the tangible product’s essential functionality, these arrangements are accounted for as a single distinct performance obligation.
Judgment is required to determine the stand-alone selling price (“SSP”) for each distinct performance obligation. When available, the Company uses observable inputs to determine SSP. In instances where SSP is not directly observable, such as when the Company does not sell the product or service separately, it determines the SSP based on a cost-plus model as market and other observable inputs are seldom present based on the proprietary nature of the Company’s products.
Contract Liabilities
Timing of revenue recognition may differ from the timing of invoicing to customers. If customers are invoiced for subscription services in advance of the service period, deferred revenue liabilities, or contract liabilities, are recorded. Deferred revenue liabilities, or contract liabilities, are also recorded when the Company collects payments in advance of performing the services.
Contract Assets
The Company capitalizes sales commissions earned by its sales force when they are considered to be incremental and recoverable costs of obtaining a contract with a customer. These costs are deferred and then amortized over a period of benefit. There were no significant amounts of assets recorded related to contract costs as of December 31, 2019.2020.
Applying the practical expedient in paragraph 40-25-4 of ASC 340,Other assets and deferred costs, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in selling, general and administrative expenses.
Significant Judgments in the Application of the Guidance in ASC 606
Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. The Company considered the performance obligations in its customer master supply agreements and determined that, for the majority of its revenue, the Company generally satisfies performance obligations at a point in time upon delivery of the product to the customer.
Revenues from the Company’s SaaS subscription services represent a single promise to provide continuous access to its software solutions and their processing capabilities in the form of a service through one of the Company’s data centers or a hosted data center. As each day of providing access to the software is substantially the same, and the customer simultaneously receives and consumes the benefits as access is provided, the Company has determined that its subscription services arrangements include a single performance obligation comprised of a series of distinct services. The Company’s SaaS subscriptions also include an unspecified volume of call center support and any remote system diagnostic and software upgrades as needed. These services are combined with the recurring monthly subscription service since they are highly interrelated and interdependent. Revenue from the Company’s subscription services is recognized over time on a ratable basis over the contract term beginning on the date that the service is made available to the customer.
Allowance for Doubtful Accounts Receivable
We provide an allowance for our accounts receivable for estimated losses that may result from our customers’ inability to pay. We determine the amount of the allowance by analyzing known uncollectible accounts, aged receivables, economic conditions, historical losses, and changes in customer payment cycles and our customers’ creditworthiness. Amounts later determined and specifically identified to be uncollectible are charged or written off against this allowance. To minimize the likelihood of uncollectible accounts, we review our customers’ creditworthiness periodically based on credit scores generated by independent credit reporting services, our experience with our customers and the economic condition of our customers’ industries. Material differences may result in the amount and timing of expense for any period if we were to make different judgments or utilize different estimates. If the financial condition of our customers deteriorates resulting in an impairment of their ability to make payments, additional allowances may be required.
Inventories and Provision for Excess and Obsolete Inventory
Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. We review the components of our inventory and our inventory purchase commitments on a regular basis for excess and obsolete inventory based on estimated future usage and sales. Write-downs in inventory value or losses on inventory purchase commitments depend on various items, including factors related to customer demand, economic and competitive conditions, technological advances or new product introductions by us or our customers that vary from our current expectations. Whenever inventory is written down, a new cost basis is established, and the inventory is not subsequently written up if market conditions improve.
We believe that, when made, the estimates we use in calculating the inventory provision are reasonable and properly reflect the risk of excess and obsolete inventory. If customer demand for our inventory is substantially less than our estimates, inventory write-downs may be required, which could have a material adverse effect on our consolidated financial statements.
Purchased Intangible Assets
In determining the fair value allocation for our acquisitions, we considered, among other factors, our intended uses of the acquired assets and the historical and estimated future demand for the acquired company’s products and services. The estimated fair value of intangible assets is determined using the income approach. The income approach relies on an estimation of the present value of the future monetary benefits expected to flow to the owner of an asset during its remaining economic life. This approach requires a projection of the cash flow that the asset is expected to generate in the future. The projected cash flow is discounted to its present value using a rate of return, or discount rate that accounts for the time value of money and the degree of risks inherent in the asset. The expected future cash flow that is projected should include all of the economic benefits attributable to the asset, including the tax savings associated with the amortization of the intangible asset value over the tax life of the asset. The income approach may take the form of a “relief from royalty” methodology, a cost savings methodology, a “with and without” methodology or excess earnings methodology, depending on the specific asset under consideration.
Research and development
Research and development expense consists primarily of personnel costs for our engineers engaged in the design and development of our products, software and technologies, including salary, bonus and share‐based compensation expense, project material costs, services, depreciation and amortization. Such costs are charged to research and development expense as they are incurred, to the extent not capitalized as software development costs for external or internal use.
Software Development Costs for External Use
Software development costs for external use are expensed as incurred until technological feasibility has been established, at which time those costs are capitalized as intangible assets until the software is implemented into products sold to customers. Capitalized software development costs are amortized on a straight-line basis over the estimated useful life. Costs incurred to enhance existing software or after the implementation of the software into a product are expensed in the period they are
incurred and included in research and development expense in the consolidated statements of operations. The straight-line recognition method approximates the manner in which the expected benefit will be derived. Also, at each balance sheet date, the unamortized capitalized software development costs for external use is compared to the net realizable value of that product by analyzing critical inputs such as costs necessary to bring the software to market, and life of the software. The amount by which unamortized software costs exceed the net realizable value, if any, is recognized as a charge to amortization expense in the period it is determined.
Software Development Costs for Internal Use
Costs incurred in the preliminary stages of development are expensed as incurred and included in research and development expense in the consolidated statements of operations. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing performed to ensure the product is ready for its intended use. The Company also capitalizes costs related to specific upgrades and enhancements of internal-use software when it is probable that the expenditures will result in additional functionality. Maintenance and training costs are expensed as incurred. Capitalized internal-use software costs are recorded as part of intangible assets and are amortized on a straight-line basis over the estimated useful life of the software. The Company does not capitalize pilot projects and projects for which it believes that the future economic benefits are less than probable. The Company tests these assets for impairment whenever events or circumstances occur that could impact their recoverability.
Long-Lived Assets
We periodically evaluate the carrying value of the unamortized balances of our long-lived assets, including property, plant and equipment, rental assets and intangible assets, which requires us to make assumptions and judgments regarding the carrying value of these assets. We consider assets to be impaired if the carrying value may not be recoverable based upon our assessment of the following events or changes in circumstances: the asset’s ability to continue to generate income from operations and positive cash flow in future periods; loss of legal ownership or title to the asset; significant changes in our strategic business objectives and utilization of the asset; or significant negative industry or economic trends.
Our assessment includes comparingIndefinite-lived assets, including goodwill and in-process capitalized software development costs, are not amortized; however, they are tested for impairment annually, and between annual tests, if certain events occur indicating that the carrying amounts may be impaired. The Company performs an annual impairment review of long-livedindefinite-lived assets during the fourth fiscal quarter of each year, and more frequently if we believe indicators of impairment exist. To review for impairment, we first assess qualitative factors to their associated undiscounted expected future cash flows, which are determined using an expected cash flow model. This model requires estimates of our future revenues, profits, capital expenditures, working capital and other relevant factors. We estimate these amounts by evaluating our historical trends, current budgets, operating plans and other industry data. If the assets are considereddetermine whether events or circumstances lead to be impaired, the impairment charge recognizeda determination that it is the amount by which the asset’s carrying value exceeds its estimated fair value.
The timing and frequency of our impairment test is based on an ongoing assessment of triggering eventsmore likely than not that could reduce the fair value of our long-livedthe Company’s reporting unit is less than its carrying amount. The Company’s qualitative assessment of the recoverability of indefinite-lived assets below their carrying value. We monitor our long-lived asset balanceswas based on various macroeconomic, industry-specific, and conduct formal tests on at least an annual basiscompany specific factors. These factors include: (i) industry or earlier when impairment indicators are present. We believeeconomic trends; (ii) current, historical, or projected financial performance; and (iii) the Company’s market capitalization. After assessing the totality of events and circumstances, if the Company determines that it is not more likely than not that the assumptionsfair value of the Company’s reporting unit is less than its carrying amount, no further assessment is performed. If the Company determines that it is more likely than not that the fair value of the Company’s reporting unit is less than its carrying amount, the Company calculates the fair value of the reporting unit and estimates we usedcompares the fair value to value long-lived assets were appropriate based on the information available to management. The majority of our long-lived assets are being amortized or depreciated over approximately two to ten years. As most of these assets are associated with technology or trade conditions that may change rapidly, such changes could have an immediate impact on our impairment analysis.reporting unit’s net book value.
Valuation of Goodwill
Our goodwill resulted from our acquisitions of RER and DigiCore Holdings Limited during 2015. In accordance with the ASC 350, Intangibles—Goodwill and Other, we review goodwill for impairment at least annually, typically at the beginning of the fourth quarter of each year, and more frequently if events or changes in circumstances occur that indicate a potential reduction in the fair value of the reporting unit to which the goodwill has been assigned below its carrying value.
Convertible Debt
We account forevaluate embedded features within convertible debt instruments that are settleablewill be settled in cashshares upon conversion (including partial cash settlement) by separatingunder ASC 815, Derivatives and Hedging (“ASC 815”), to determine whether the liabilityembedded feature(s) should be bifurcated from the host instrument and equity components of the instruments inaccounted for as a manner that reflects our nonconvertible debt borrowing rate. We determine the carrying amount of the liability component by measuring thederivative at fair value of similar debt instruments that do not have the conversion feature. If a similar debt instrument does not exist, we estimate thewith changes in fair value by using assumptions that market participants would userecorded in pricing aearnings.
If an embedded derivative is bifurcated from share-settled convertible debt, instrument, including market interest rates, credit standing, yield curves and volatilities. Determining the fair value ofwe record the debt component requires the use of accounting estimates and assumptions. These estimates and assumptions are judgmental in nature and could haveat cost less a significant impact on the determination of the debt component and the associated non-cash interest expense.
Upon issuance, we assign a value to the debt componentdiscount equal to the estimatedbifurcated derivative’s fair value of similar debt instruments without the conversion feature, which could result in our recording the debt instrument at a discount. If the debt instrument is recorded at a discount, wevalue. We amortize the debt discount over the life of the debt instrument as additional non-cash interest expense utilizing the effective interest method. The convertible debt and the derivative liability are presented in total on the consolidated balance sheet. The derivative liability will be remeasured at each reporting period with changes in fair value recorded in the consolidated statements of operations in other income, net.
Derivative Financial Instruments
We evaluate stock warrants, debt instruments and other contracts to determine if those contracts or embedded components of those contracts qualify as derivative financial instruments to be separately accounted for under the relevant sections of the Financial Accounting Standards Board (the “FASB”) ASC. The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative financial instrument and is marked-to-market at each balance sheet date and recorded as an asset or liability. In the event that the fair value is recorded as an asset or liability, the change in fair value is recorded in the consolidated statements of operations as other income or other expense. Upon conversion, exercise or expiration of a derivative financial instrument, the instrument is marked to fair value.
Litigation
We are, from time to time, party to various legal proceedings arising in the ordinary course of business. We will record a loss when we determine information available prior to the issuance of the financial statements indicates the loss is both probable and estimable. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, we record the minimum estimated liability related to the claim. As additional information becomes available, we assess the potential liability related to our pending litigation and revise our estimates, if necessary. Our policy is to expense litigation costs as incurred.
Share-based Compensation
We have stock incentive plans under which stock options and restricted stock units have been granted to employees, non-employee consultants and non-employee members of our Board of Directors. We also have an employee stock purchase plan for all eligible employees. Share-based payments, including grants of stock options, restricted stock units and stock purchase rights, are recognized in the financial statements based upon their respective grant date fair values.
We estimate the fair value of stock option awards and stock purchase rights on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is principally recognized as expense ratably over the requisite service periods. We have estimated the fair value of stock options and stock purchase rights as of the date of grant or assumption using the Black-Scholes option-pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and that are freely transferable. The Black-Scholes model considers, among other factors, the expected life of the award and the expected volatility of our stock price. We evaluate the assumptions used to value stock options and stock purchase rights on a quarterly basis. Although the Black-Scholes model is an acceptable model, the fair values generated by the model may not be indicative of the actual fair values of our equity awards, as it does not consider other factors important to those awards to recipients, such as continued service, periodic vesting requirements and limited transferability.
Compensation cost associated with grants of restricted stock units are measured at fair value, which has historically been the closing price of our common stock on the date of the grant.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Because we were a smaller reporting company, as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, for the fiscal year ended December 31, 2020 and are transitioning into large accelerated filer status, we are not required to provide the information required under this item. Item 8. �� Financial Statements and Supplementary Data
Our consolidated financial statements and the Reports of Independent Registered Public Accounting Firms appear in Part IV of this report.
Item 9. Changes in and Disagreements withWith Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in our reports to the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial and accounting officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by SEC rules, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and our principal financial and accounting officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2019,2020, the end of the period covered by this report. Based on the foregoing, our principal executive officer and principal financial and accounting officer concluded that our disclosure controls and procedures were effective as of December 31, 2019.2020.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that internal controls may become inadequate because of changes in conditions, or because the degree of compliance with policies and procedures may deteriorate.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth in by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (2013 framework) in Internal Control—Integrated Framework. Based on our evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2019.2020.
Marcum LLP, the independent registered public accounting firm that audited the consolidated financial statements included in this Annual Report on Form 10-K, has also audited our internal control over financial reporting as of December 31, 2019,2020, as stated in their report which is included herein.
Changes in Internal Control over Financial Reporting
An evaluation was also performed under the supervision and with the participation of our management, including our principal executive officer and our principal financial and accounting officer, of any change in our internal control over financial reporting that occurred during our last fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. The evaluation did not identify any change in our internal control over financial reporting that occurred during our latest fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Shareholders and Board of Directors of
Inseego Corp.
Opinion on Internal Control over Financial Reporting
We have audited Inseego Corp.’s's (the “Company”) internal control over financial reporting as of December 31, 2019,2020 based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets as of December 31, 20192020 and 20182019 and the related consolidated statements of operations, comprehensive loss, shareholders’stockholders’ deficit, and cash flows and the related notes for each of the two years in the period ended December 31, 20192020 of the Company, and our report dated March 13, 20201, 2021 expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’sCompany's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’sManagement Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that degree of compliance with the policies or procedures may deteriorate.
/s/ Marcum LLP
Philadelphia, Pennsylvania
March 13, 20201, 2021
PART III
Items 10, 11, 12, 13 and 14.
The information required by Items 10, 11, 12, 13 and 14 is incorporated by reference from the Company’s definitive proxy statement for the 20202021 Annual Meeting of Stockholders, which the Company intends to file with the SEC within 120 days of the end of the fiscal year end to which this report relates.
PART IV
Item 15. Exhibits,Exhibit and Financial Statement Schedules
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(a)(1) | The Company’s consolidated financial statements and report of the Marcum LLP, Independent Registered Public Accounting Firm, are included in Section IV of this report beginning on page F-1. |
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(a)(2) | Schedules have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the consolidated financial statements or related notes thereto. |
(a)(1) The Company’s consolidated financial statements and report of the Marcum LLP, Independent Registered Public Accounting Firm, are included in Section IV of this report beginning on page F-1.
(a)(2) Schedules have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the consolidated financial statements or related notes thereto.
(b) Exhibits
The following Exhibits are filed as part of, or incorporated by reference into this report:
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| Exhibit No. | | Description |
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| 2.1 | | | | Description10.1 to the Company’s Current Report on Form 8-K, filed February 25, 2021).
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| 3.1 | | |
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| 3.2 | | |
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| 3.3 | | |
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| 3.4 | | |
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| 3.5 | | |
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| 4.1 | | |
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| 4.2** | | |
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| 4.4 | | |
| 4.5 | | |
4.4 | | |
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4.5 | | |
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4.6 | | |
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4.7 | | |
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4.8 | | |
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Exhibit No.4.6 | | Description |
4.9 | | |
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4.10 | | |
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4.11 | | |
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4.124.7 | | |
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4.134.8 | | |
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10.1* | | |
| 10.1* | | |
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10.2*Exhibit No. | | Description |
| 10.2* | | |
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| 10.3* | | |
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| 10.4* | | |
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| 10.5* | | |
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| 10.6* | | |
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| 10.7* | | |
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| 10.10* | | |
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| 10.11* | | |
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10.12 | | |
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10.13 | | First Amendment to Credit Agreement, dated as of August 9, 2019, by and among Inseego Corp. and certain of its direct and indirect subsidiaries, Cantor Fitzgerald Securities, as Agent, and certain funds managed by Highbridge Capital Management, LLC, as Lenders (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q, filed on November 12, 2019). |
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10.14 | | |
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Exhibit No.10.12 | | Description |
10.15 | | |
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10.16 | | |
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10.17 | | Mutual General Release and Settlement Agreement, dated July 26, 2018, between Inseego Corp., successor to Novatel Wireless, Inc., on the one hand, and Robert E. Ralston and Ethan B. Ralston, on the other hand (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed July 31, 2018). |
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10.18 | | |
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10.19 | | |
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10.2010.13 | | |
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10.2110.14 | | |
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10.22**10.15 | | |
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10.2310.16 | | |
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| 10.17 | | |
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| 21 | | |
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21*23.1** | | |
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23.1** | | |
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24*31.1** | | |
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31.1** | | |
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| 31.2** | | |
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| 32.1** | | |
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| Exhibit No. | | Description |
| 32.2** | | |
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| 101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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| 101.SCH | | XBRL Taxonomy Extension Schema Document. |
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| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
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| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. |
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| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. |
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| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |
* | | |
| 104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
| * | | Management contract, compensatory plan or arrangement |
| ** | | Filed herewith |
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Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Date: March 13, 20201, 2021 | | INSEEGO CORP. |
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| | By | | /s/ Dan Mondor |
| | | | Dan Mondor |
| | | | Chief Executive Officer
(Principal Executive Officer)
|
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature appears below constitutes and appoints Dan Mondor and Stephen Smith, or either of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
| Signature | | Title | | Date |
| /s/ Dan Mondor | | Chief Executive Officer
(Principal Executive Officer and Director) | | March 1, 2021 |
| Dan Mondor | | | |
| | | | |
Signature | | Title | | Date |
/s/ Dan MondorCraig Foster | | Chief Executive Officer
(Principal Executive Officer and Director)
| | March 13, 2020 |
Dan Mondor | | | |
| | | | |
/s/ Stephen Smith | | Chief Financial Officer
(Principal Financial and Accounting Officer)
| | March 13, 20201, 2021 |
Stephen SmithCraig Foster | | | | |
| | | | |
/s/ ChrisChristopher Harland | | Director | | March 13, 20201, 2021 |
ChrisChristopher Harland | | |
| | | | |
| /s/ Christopher Lytle | | Director | | March 1, 2021 |
| Christopher Lytle | | | | |
| | | | |
| /s/ Jeffrey Tuder | | Director | | March 13, 20201, 2021 |
| Jeffrey Tuder | | |
| | | | |
| /s/ James B. Avery | | Director | | March 13, 20201, 2021 |
| James B. Avery | | |
| | | | |
/s/ Brian Miller | | Director | | March 13, 2020 |
Brian Miller | | |
| | | | |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Inseego Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Inseego Corp. (the “Company”) as of December 31, 20192020 and 2018,2019, the related consolidated statements of operations, comprehensive loss, stockholders’ deficit and cash flows for each of the two years in the period ended December 31, 2019,2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192020 and 2018,2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019,2020, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”("PCAOB"), the Company's internal control over financial reporting as of December 31, 2019,2020, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013 and our report dated March 13, 2020, 1, 2021, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’sCompany's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits providesprovide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to an account or disclosure that is material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
As described in Note 3 to the consolidated financial statements, the Company’s consolidated capitalized software development costs, net of accumulated amortization, and consolidated in-process capitalized software development costs balances totaled $37.2 million as of December 31, 2020. The Company capitalizes certain software development costs for new offerings as well as upgrades to existing software platforms. Management determines the amount of internal software costs to be capitalized principally based on the amount of time spent by developers, both employees and external consultants, on projects in the application stage of development. There is judgment in the determination for which costs are eligible for capitalization as well as the recoverability of such costs.
The principal considerations in our determination of performing procedures relating to the amount of costs eligible for capitalization, together with assessment of the capitalized cost recoverability, is a critical audit matter, and are the significant judgments made by management when determining the costs eligible for capitalization as well as assessing the recoverability of such costs over time; this in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to management’s determination of capitalized costs and management’s judgment related to the recognition of costs for projects in the application stage as well as recoverability of such costs.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls related to capitalized software development costs, including controls over management’s determination of time and related costs eligible
for capitalization. These procedures also included, among others (i) testing management’s process for determining the time and related costs eligible for capitalization in the current year, (ii) evaluating whether the time and related costs were eligible for capitalization, and (iii) testing the completeness and accuracy of underlying data used in management’s estimate of eligible time and related costs. Evaluating management’s assumptions related to eligible software development cost for capitalization and the recoverability of such costs recorded involved evaluating whether the assumptions used by management were reasonable considering (i) inquiries with management and the director of program management in evaluating the software development costs capitalized for a sample of capitalized projects, and (ii) assessing current sales data along with sales forecasts to determine whether the costs of the capitalized projects are recoverable.
/s/ Marcum LLP
We have served as the Company’s auditor since 2018.
Philadelphia, Pennsylvania
March 13, 2020
INSEEGO CORP.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| | | | December 31, | | December 31, |
| | 2019 | | 2018 | | 2020 | | 2019 |
| ASSETS | | | | ASSETS | | | |
| Current assets: | | | | Current assets: | |
| Cash and cash equivalents | $ | 12,074 |
| | $ | 31,015 |
| Cash and cash equivalents | $ | 40,015 | | | $ | 12,074 | |
| Restricted cash | — |
| | 61 |
| |
| Accounts receivable, net of allowance for doubtful accounts of $2,133 and $1,841, respectively | 19,656 |
| | 20,633 |
| |
| Inventories, net | 25,290 |
| | 26,431 |
| |
| | Accounts receivable, net of allowance for doubtful accounts of $1,384 and $2,133, respectively | | Accounts receivable, net of allowance for doubtful accounts of $1,384 and $2,133, respectively | 29,940 | | | 19,656 | |
| Inventories | | Inventories | 33,952 | | | 25,290 | |
| Prepaid expenses and other | 7,117 |
| | 6,212 |
| Prepaid expenses and other | 10,201 | | | 7,117 | |
| Total current assets | 64,137 |
| | 84,352 |
| Total current assets | 114,108 | | | 64,137 | |
| Property, plant and equipment, net | 10,756 |
| | 6,698 |
| Property, plant and equipment, net | 13,699 | | | 10,756 | |
| Rental assets, net | 5,385 |
| | 5,769 |
| Rental assets, net | 6,109 | | | 5,385 | |
| Intangible assets, net | 44,392 |
| | 31,985 |
| Intangible assets, net | 51,487 | | | 44,392 | |
| Goodwill | 33,659 |
| | 32,942 |
| Goodwill | 32,511 | | | 33,659 | |
| | Right-of-use assets, net | 2,657 |
| | — |
| Right-of-use assets, net | 9,092 | | | 2,657 | |
| Other assets | 387 |
| | 510 |
| Other assets | 388 | | | 387 | |
| Total assets | $ | 161,373 |
| | $ | 162,256 |
| Total assets | $ | 227,394 | | | $ | 161,373 | |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | | | | LIABILITIES AND STOCKHOLDERS’ DEFICIT | | | |
| Current liabilities: | | | | Current liabilities: | |
| Accounts payable | 26,482 |
| | 39,245 |
| Accounts payable | 52,339 | | | 26,482 | |
| Accrued expenses and other current liabilities | 17,861 |
| | 13,024 |
| Accrued expenses and other current liabilities | 23,373 | | | 18,048 | |
| DigiCore bank facilities | 187 |
| | 1,412 |
| |
| | Total current liabilities | 44,530 |
| | 53,681 |
| Total current liabilities | 75,712 | | | 44,530 | |
| Long-term liabilities: | | | | Long-term liabilities: | | | |
| Convertible senior notes, net | 101,334 |
| | 93,054 |
| |
| 2025 Notes, net | | 2025 Notes, net | 165,147 | | | 0 | |
| 2022 Notes, net | | 2022 Notes, net | 0 | | | 101,334 | |
| Term loan, net | 46,538 |
| | 45,046 |
| Term loan, net | 0 | | | 46,538 | |
| | Deferred tax liabilities, net | 3,949 |
| | 4,457 |
| Deferred tax liabilities, net | 4,505 | | | 3,949 | |
| Other long-term liabilities | 2,380 |
| | 2,543 |
| Other long-term liabilities | 9,929 | | | 2,380 | |
| Total liabilities | 198,731 |
| | 198,781 |
| Total liabilities | 255,293 | | | 198,731 | |
| Commitments and Contingencies |
| |
| Commitments and Contingencies | 0 | | 0 |
| Stockholders’ deficit: | | | | Stockholders’ deficit: | |
| Preferred stock, par value $0.001; 2,000,000 shares authorized: | | | | Preferred stock, par value $0.001; 2,000,000 shares authorized: | |
| Series E Preferred stock, par value $0.001; 10,000 shares designated, 10,000 and 0 shares issued and outstanding, respectively, liquidation preference of $1,000 per share | — |
| | — |
| |
| Common stock, par value $0.001; 150,000,000 shares authorized, 81,974,051 and 73,979,882 shares issued and outstanding, respectively | 82 |
| | 74 |
| |
| Series E Preferred stock, par value $0.001; 39,500 and 10,000 shares designated, respectively, 35,000 and 10,000 shares issued and outstanding, respectively, liquidation preference of $1,000 per share (plus any accrued but unpaid dividends) | | Series E Preferred stock, par value $0.001; 39,500 and 10,000 shares designated, respectively, 35,000 and 10,000 shares issued and outstanding, respectively, liquidation preference of $1,000 per share (plus any accrued but unpaid dividends) | 0 | | | 0 | |
| Common stock, par value $0.001; 150,000,000 shares authorized,99,399,029 and 81,974,051 shares issued and outstanding, respectively | | Common stock, par value $0.001; 150,000,000 shares authorized,99,399,029 and 81,974,051 shares issued and outstanding, respectively | 99 | | | 82 | |
| Additional paid-in capital | 584,862 |
| | 546,230 |
| Additional paid-in capital | 711,487 | | | 584,862 | |
| Accumulated other comprehensive loss | (3,879 | ) | | (4,877 | ) | Accumulated other comprehensive loss | (6,972) | | | (3,879) | |
| Accumulated deficit | (618,303 | ) | | (577,817 | ) | Accumulated deficit | (732,422) | | | (618,303) | |
| | Total stockholders’ deficit attributable to Inseego Corp. | (37,238 | ) | | (36,390 | ) | Total stockholders’ deficit attributable to Inseego Corp. | (27,808) | | | (37,238) | |
| Noncontrolling interests | (120 | ) | | (135 | ) | Noncontrolling interests | (91) | | | (120) | |
| Total stockholders’ deficit | (37,358 | ) | | (36,525 | ) | Total stockholders’ deficit | (27,899) | | | (37,358) | |
| Total liabilities and stockholders’ deficit | $ | 161,373 |
| | $ | 162,256 |
| Total liabilities and stockholders’ deficit | $ | 227,394 | | | $ | 161,373 | |
See accompanying notes to consolidated financial statements.
INSEEGO CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
| | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 | | |
| Net revenues: | | | | | |
| IoT & Mobile Solutions | $ | 261,169 | | | $ | 160,873 | | | |
| Enterprise SaaS Solutions | 52,663 | | | 58,623 | | | |
| Total net revenues | 313,832 | | | 219,496 | | | |
| Cost of net revenues: | | | | | |
| IoT & Mobile Solutions | 202,421 | | | 132,980 | | | |
| Enterprise SaaS Solutions | 20,568 | | | 22,545 | | | |
| | | | | |
| Total cost of net revenues | 222,989 | | | 155,525 | | | |
| Gross profit | 90,843 | | | 63,971 | | | |
| Operating costs and expenses: | | | | | |
| Research and development | 44,953 | | | 23,853 | | | |
| Sales and marketing | 35,750 | | | 28,914 | | | |
| General and administrative | 30,689 | | | 27,327 | | | |
| | | | | |
| Amortization of purchased intangible assets | 3,175 | | | 3,421 | | | |
| Impairment of capitalized software | 1,410 | | | 0 | | | |
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| | | | | |
| | | | | |
| Total operating costs and expenses | 115,977 | | | 83,515 | | | |
| Operating loss | (25,134) | | | (19,544) | | | |
| Other income (expense): | | | | | |
| | | | | |
| Loss on debt conversion and extinguishment, net | (76,354) | | | 0 | | | |
| Interest expense, net | (9,942) | | | (20,381) | | | |
| Other income, net | 992 | | | 351 | | | |
| Loss before income taxes | (110,438) | | | (39,574) | | | |
| Income tax provision | 748 | | | 536 | | | |
| Net loss | (111,186) | | | (40,110) | | | |
| Less: Net income attributable to noncontrolling interests | (29) | | | (15) | | | |
| Net loss attributable to Inseego Corp. | (111,215) | | | (40,125) | | | |
| | | | | |
| Series E preferred stock dividends | (2,904) | | | (361) | | | |
| Net loss attributable to common stockholders | $ | (114,119) | | | $ | (40,486) | | | |
| Per share data: | | | | | |
| Net loss per common share: | | | | | |
| Basic and diluted | $ | (1.19) | | | $ | (0.52) | | | |
| Weighted-average common shares outstanding: | | | | | |
| Basic and diluted | 96,111,547 | | | 78,322,496 | | | |
|
| | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 |
| Net revenues: | | | |
| IoT & Mobile Solutions | $ | 154,167 |
| | $ | 135,349 |
|
| Enterprise SaaS Solutions | 65,329 |
| | 67,114 |
|
| Total net revenues | 219,496 |
| | 202,463 |
|
| Cost of net revenues: | | | |
| IoT & Mobile Solutions | 129,957 |
| | 105,344 |
|
| Enterprise SaaS Solutions | 25,568 |
| | 26,167 |
|
| Impairment of abandoned product line, net of recoveries | — |
| | 355 |
|
| Total cost of net revenues | 155,525 |
| | 131,866 |
|
| Gross profit | 63,971 |
| | 70,597 |
|
| Operating costs and expenses: | | | |
| Research and development | 23,853 |
| | 20,593 |
|
| Sales and marketing | 28,914 |
| | 23,027 |
|
| General and administrative | 27,267 |
| | 25,325 |
|
| Amortization of purchased intangible assets | 3,421 |
| | 3,624 |
|
| Extinguishment of acquisition-related liabilities | — |
| | (17,174 | ) |
| Restructuring charges, net of recoveries | 60 |
| | 1,191 |
|
| Total operating costs and expenses | 83,515 |
| | 56,586 |
|
| Operating income (loss) | (19,544 | ) | | 14,011 |
|
| Other income (expense): | | | |
| Interest expense, net | (20,381 | ) | | (20,444 | ) |
| Other income (expense), net | 351 |
| | (895 | ) |
| Loss before income taxes | (39,574 | ) | | (7,328 | ) |
| Income tax provision | 536 |
| | 815 |
|
| Net loss | (40,110 | ) | | (8,143 | ) |
| Less: Net loss (income) attributable to noncontrolling interests | (15 | ) | | 85 |
|
| Net loss attributable to Inseego Corp. | (40,125 | ) | | (8,058 | ) |
| Series E preferred stock dividends | (361 | ) | | — |
|
| Net loss attributable to common stockholders | $ | (40,486 | ) | | $ | (8,058 | ) |
| Per share data: | | | |
| Net loss per common share: | | | |
| Basic and diluted | $ | (0.52 | ) | | $ | (0.12 | ) |
| Weighted-average common shares outstanding: | | | |
| Basic and diluted | 78,322,496 |
| | 66,104,376 |
|
See accompanying notes to consolidated financial statements.
INSEEGO CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
| | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 | | |
| Net loss | $ | (111,186) | | | $ | (40,110) | | | |
| | | | | |
| Foreign currency translation adjustment | (3,093) | | | 998 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Total comprehensive loss | (114,279) | | | (39,112) | | | |
| Comprehensive income attributable to noncontrolling interests | (29) | | | (15) | | | |
| Comprehensive loss attributable to Inseego Corp. | $ | (114,308) | | | $ | (39,127) | | | |
|
| | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 |
| Net loss | $ | (40,110 | ) | | $ | (8,143 | ) |
| Foreign currency translation adjustment | 998 |
| | (9,481 | ) |
| Total comprehensive loss | $ | (39,112 | ) | | $ | (17,624 | ) |
See accompanying notes to consolidated financial statements.
INSEEGO CORP.
(in thousands)
INSEEGO CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | Common Stock | | Additional
Paid-in Capital | | | | Accumulated Deficit | | Accumulated
Other
Comprehensive Income (Loss) | | Noncontrolling Interests | | Total
Stockholders’ Deficit |
| | Shares | | Amount | | Shares | | Amount | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2018 | 0 | | | $ | 0 | | | 73,980 | | | $ | 74 | | | $ | 546,230 | | | | | $ | (577,817) | | | $ | (4,877) | | | $ | (135) | | | $ | (36,525) | |
| Net loss | — | | | — | | | — | | | — | | | — | | | | | (40,125) | | | — | | | 15 | | | (40,110) | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | | | — | | | 998 | | | — | | | 998 | |
| | | | | | | | | | | | | | | | | | | |
| Exercise of stock options, vesting of restricted stock units and stock issued under employee stock purchase plan | — | | | — | | | 2,254 | | | $ | 2 | | | 3,263 | | | | | — | | | — | | | — | | | 3,265 | |
| Issuance of Series E preferred shares | 10 | | | — | | | — | | | — | | | 10,000 | | | | | — | | | — | | | — | | | 10,000 | |
| Taxes withheld on net settled vesting of restricted stock units | — | | | — | | | — | | | — | | | (1,269) | | | | | — | | | — | | | — | | | (1,269) | |
| Exercise of warrants | — | | | | | 5,477 | | | 6 | | | 17,536 | | | | | | | | | | | 17,542 | |
| | | | | | | | | | | | | | | | | | | |
| Issuance of common shares | — | | | — | | | 263 | | | $ | 0 | | | 1,439 | | | | | | | | | | | 1,439 | |
| Share-based compensation | — | | | — | | | — | | | — | | | 7,302 | | | | | — | | | — | | | — | | | 7,302 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Series E preferred stock dividends | — | | | | | — | | | — | | | 361 | | | | | (361) | | | — | | | — | | | 0 | |
| Balance, December 31, 2019 | 10 | | | 0 | | | 81,974 | | | 82 | | | 584,862 | | | | | (618,303) | | | (3,879) | | | (120) | | | (37,358) | |
| Net loss | — | | | — | | | — | | | — | | | — | | | | | (111,215) | | | — | | | 29 | | | (111,186) | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | | | — | | | (3,093) | | | — | | | (3,093) | |
| | | | | | | | | | | | | | | | | | | |
| Exercise of stock options, vesting of restricted stock units and stock issued under employee stock purchase plan | — | | | — | | | 2,081 | | | 2 | | | 5,420 | | | | | — | | | — | | | — | | | 5,422 | |
| Taxes withheld on net settled vesting of restricted stock units | — | | | — | | | — | | | — | | | (354) | | | | | — | | | — | | | — | | | (354) | |
| Issuance of Series E preferred shares | 25 | | | — | | | — | | | — | | | 25,000 | | | | | — | | | — | | | — | | | 25,000 | |
| Issuance of Series E preferred stock in lieu of interest | 2 | | | — | | | — | | | — | | | 2,330 | | | | | — | | | — | | | — | | | 2,330 | |
| Repurchase of Series E preferred stock | (2) | | | — | | | — | | | — | | | (2,354) | | | | | — | | | — | | | — | | | (2,354) | |
| Issuance of common shares in connection with the Notes Exchange | — | | | — | | | 13,739 | | | 14 | | | 66,074 | | | | | — | | | — | | | — | | | 66,088 | |
| Issuance of common shares related to conversion of 2025 Notes | — | | | — | | | 1,177 | | | 1 | | | 14,353 | | | | | — | | | — | | | — | | | 14,354 | |
| Exercise of warrants | — | | | — | | | 338 | | | 0 | | | 1,861 | | | | | — | | | — | | | — | | | 1,861 | |
| Share-based compensation | — | | | — | | | | | — | | | 10,419 | | | | | — | | | — | | | — | | | 10,419 | |
| Series E preferred stock dividends | — | | | — | | | — | | | — | | | 2,904 | | | | | (2,904) | | | — | | | — | | | 0 | |
| Issuance of common shares under settlement agreement | — | | | | | 90 | | | — | | | 972 | | | | | — | | | — | | | — | | | 972 | |
| Balance, December 31, 2020 | 35 | | | 0 | | | 99,399 | | | 99 | | | 711,487 | | | | | (732,422) | | | (6,972) | | | (91) | | | (27,899) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interests | | Total Stockholders’ Deficit |
| | Shares | | Amount | | Shares | | Amount | | | | | |
| Balance, December 31, 2017 | — |
| | $ | — |
| | 58,645 |
| | $ | 59 |
| | $ | 519,531 |
| | $ | (569,759 | ) | | $ | 4,604 |
| | $ | (50 | ) | | $ | (45,615 | ) |
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (8,058 | ) | | — |
| | (85 | ) | | (8,143 | ) |
| Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (9,481 | ) | | — |
| | (9,481 | ) |
| Exercise of stock options, vesting of restricted stock units and stock issued under employee stock purchase plan | — |
| | — |
| | 2,645 |
| | $ | 3 |
| | 2,405 |
| | — |
| | — |
| | — |
| | 2,408 |
|
| Taxes withheld on net settled vesting of restricted stock units | — |
| | — |
| | — |
| | — |
| | (656 | ) | | — |
| | — |
| | — |
| | (656 | ) |
| Issuance of common shares | — |
| | — |
| | 12,690 |
| | $ | 12 |
| | 20,074 |
| | | | | | | | 20,086 |
|
| Share-based compensation | — |
| | — |
| | — |
| | — |
| | 4,876 |
| | — |
| | — |
| | — |
| | 4,876 |
|
| Balance, December 31, 2018 | — |
| | — |
| | 73,980 |
| | 74 |
| | 546,230 |
| | (577,817 | ) | | (4,877 | ) | | (135 | ) | | (36,525 | ) |
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (40,125 | ) | | — |
| | 15 |
| | (40,110 | ) |
| Foreign currency translation adjustment | — |
| �� | — |
| | — |
| | — |
| | — |
| | — |
| | 998 |
| | — |
| | 998 |
|
| Exercise of stock options, vesting of restricted stock units and stock issued under employee stock purchase plan | — |
| | — |
| | 2,254 |
| | 2 |
| | 3,263 |
| | — |
| | — |
| | — |
| | 3,265 |
|
| Taxes withheld on net settled vesting of restricted stock units | — |
| | — |
| | — |
| | — |
| | (1,269 | ) | | — |
| | — |
| | — |
| | (1,269 | ) |
| Issuance of Series E preferred shares | 10 |
| | — |
| | — |
| | — |
| | 10,000 |
| | — |
| | — |
| | — |
| | 10,000 |
|
| Issuance of common shares | — |
| | — |
| | 263 |
| | — |
| | 1,439 |
| | — |
| | — |
| | — |
| | 1,439 |
|
| Exercise of warrants | — |
| | — |
| | 5,477 |
| | 6 |
| | 17,536 |
| | — |
| | — |
| | — |
| | 17,542 |
|
| Share-based compensation | — |
| | — |
| | — |
| | — |
| | 7,302 |
| | — |
| | — |
| | — |
| | 7,302 |
|
| Series E preferred stock dividends | — |
| | — |
| | — |
| | — |
| | 361 |
| | (361 | ) | | — |
| | — |
| | — |
|
| Balance, December 31, 2019 | 10 |
| | $ | — |
| | 81,974 |
| | $ | 82 |
| | $ | 584,862 |
| | $ | (618,303 | ) | | $ | (3,879 | ) | | $ | (120 | ) | | $ | (37,358 | ) |
See accompanying notes to consolidated financial statements.
INSEEGO CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 | |
| Cash flows from operating activities: | | | | |
| Net loss | $ | (111,186) | | | $ | (40,110) | | |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | |
| Depreciation and amortization | 27,946 | | | 18,426 | | |
| | | | |
| | | | |
| Fair value adjustment on derivative instrument | 597 | | | 0 | | |
| Provision for bad debts, net of recoveries | 512 | | | 715 | | |
| Impairment of capitalized software | 1,410 | | | 0 | | |
| Provision for excess and obsolete inventory | 538 | | | 980 | | |
| Share-based compensation expense | 10,419 | | | 7,302 | | |
| Amortization of debt discount and debt issuance costs | 4,016 | | | 9,772 | | |
| Loss on debt conversion and extinguishment, net | 76,354 | | | 0 | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Deferred income taxes | 659 | | | (598) | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Other | 667 | | | 840 | | |
| Changes in assets and liabilities: | | | | |
| | | | |
| Accounts receivable | (10,797) | | | 377 | | |
| Inventories | (13,336) | | | (3,077) | | |
| Prepaid expenses and other assets | (3,070) | | | (901) | | |
| Accounts payable | 27,087 | | | (12,996) | | |
| Accrued expenses, income taxes, and other | 8,234 | | | 1,271 | | |
| Net cash provided by (used in) operating activities | 20,050 | | | (17,999) | | |
| Cash flows from investing activities: | | | | |
| | | | |
| | | | |
| Purchases of property, plant and equipment | (5,736) | | | (6,621) | | |
| Proceeds from the sale of property, plant and equipment | 392 | | | 517 | | |
| | | | |
| Additions to capitalized software development costs and purchases of intangible assets | (29,369) | | | (22,109) | | |
| | | | |
| | | | |
| | | | |
| Net cash used in investing activities | (34,713) | | | (28,213) | | |
| Cash flows from financing activities: | | | | |
| Gross proceeds received from issuance of Series E preferred stock | 25,000 | | | 10,000 | | |
| Gross proceeds from the issuance of 2025 Notes | 100,000 | | | 0 | | |
| Payment of issuance costs related to 2025 Notes | (3,645) | | | 0 | | |
| Cash paid to investors in private exchange transactions | (32,062) | | | 0 | | |
| Payoff of term loan and related extinguishment costs | (48,830) | | | 0 | | |
| Repurchase of Series E preferred stock | (2,354) | | | 0 | | |
| | | | |
| | | | |
| | | | |
| Proceeds from the exercise of warrants to purchase common stock | 1,861 | | | 17,542 | | |
| Net borrowing of bank and overdraft facilities | (199) | | | (1,047) | | |
| | | | |
| | | | |
| Principal payments under finance lease obligations | (2,756) | | | (1,022) | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Proceeds from stock option exercises and employee stock purchase plan, net of taxes paid on vested restricted stock units | 5,066 | | | 1,996 | | |
| Net cash provided by financing activities | 42,081 | | | 27,469 | | |
| Effect of exchange rates on cash | 523 | | | (259) | | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | 27,941 | | | (19,002) | | |
| Cash, cash equivalents and restricted cash, beginning of period | 12,074 | | | 31,076 | | |
| Cash, and cash equivalents, end of period | $ | 40,015 | | | $ | 12,074 | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
INSEEGO CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
| | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 |
| Cash flows from operating activities: | | | |
| Net loss | $ | (40,110 | ) | | $ | (8,143 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | |
| Depreciation and amortization | 18,426 |
| | 13,733 |
|
| Provision for bad debts, net of recoveries | 715 |
| | 555 |
|
| Provision for excess and obsolete inventory, net of recoveries | 980 |
| | 1,040 |
|
| Share-based compensation expense | 7,302 |
| | 4,876 |
|
| Amortization of debt discount and debt issuance costs | 9,772 |
| | 9,772 |
|
| Deferred income taxes | (598 | ) | | 14 |
|
| Non-cash gain on extinguishment of acquisition-related liabilities | — |
| | (17,174 | ) |
| Other | 840 |
| | 2,022 |
|
| Changes in assets and liabilities: | | | |
| Accounts receivable | 377 |
| | (6,883 | ) |
| Inventories | (3,077 | ) | | (11,437 | ) |
| Prepaid expenses and other assets | (901 | ) | | 3,251 |
|
| Accounts payable | (12,996 | ) | | 9,646 |
|
| Accrued expenses, income taxes, and other | 1,271 |
| | (3,037 | ) |
| Net cash used in operating activities | (17,999 | ) | | (1,765 | ) |
| Cash flows from investing activities: | | | |
| Purchases of property, plant and equipment | (6,621 | ) | | (1,338 | ) |
| Proceeds from the sale of property, plant and equipment | 517 |
| | 144 |
|
| Additions to capitalized software development costs and purchases of intangible assets | (22,109 | ) | | (3,040 | ) |
| Net cash used in investing activities | (28,213 | ) | | (4,234 | ) |
| Cash flows from financing activities: | | | |
| Gross proceeds received from issuance of Series E preferred stock | 10,000 |
| | — |
|
| Gross proceeds received from private placement | — |
| | 19,661 |
|
| Payment of issuance costs related to private placement | — |
| | (500 | ) |
| Principal payments on term loans | — |
| | (500 | ) |
| Proceeds from the exercise of warrants to purchase common stock | 17,542 |
| | — |
|
| Net repayment of DigiCore bank and overdraft facilities | (1,047 | ) | | (1,453 | ) |
| Principal payments under finance lease obligations | (1,022 | ) | | (977 | ) |
| Principal payments on mortgage bond | — |
| | (316 | ) |
| Proceeds from stock option exercises and employee stock purchase plan, net of taxes paid on vested restricted stock units | 1,996 |
| | 1,752 |
|
| Net cash provided by financing activities | 27,469 |
| | 17,667 |
|
| Effect of exchange rates on cash | (259 | ) | | (1,851 | ) |
| Net increase (decrease) in cash, cash equivalents and restricted cash | (19,002 | ) | | 9,817 |
|
| Cash, cash equivalents and restricted cash, beginning of period | 31,076 |
| | 21,259 |
|
| Cash, cash equivalents and restricted cash, end of period | $ | 12,074 |
| | $ | 31,076 |
|
| Supplemental disclosures of cash flow information: | | | |
| Cash paid during the year for: | | | |
| Interest | $ | 9,296 |
| | $ | 10,642 |
|
| Income taxes, net of tax refunds | $ | 939 |
| | $ | 672 |
|
| Supplemental disclosures of non-cash activities: | | | |
| Transfer of inventories to rental assets | $ | 3,748 |
| | $ | 3,973 |
|
| Purchases of property, plant and equipment under capital lease | $ | 1,341 |
| | $ | 1,563 |
|
| Right-of-use assets obtained in exchange for operating leases liabilities | $ | 4,694 |
| | $ | — |
|
| Capital expenditures financed through accounts payable | $ | 2,926 |
| | $ | 1,680 |
|
| Issuance of common stock under settlement agreement | $ | 1,439 |
| | $ | 925 |
|
| | | | | | | | | | | | |
| Supplemental disclosures of cash flow information: | | | | |
| Cash paid during the year for: | | | | |
| Interest | $ | 3,215 | | | $ | 9,296 | | |
| Income taxes, net of tax refunds | $ | 142 | | | $ | 939 | | |
| Supplemental disclosures of non-cash activities: | | | | |
| Transfer of inventories to rental assets | $ | 4,036 | | | $ | 3,748 | | |
| Purchases of property, plant and equipment under capital lease | $ | 664 | | | $ | 1,341 | | |
| Right-of-use assets obtained in exchange for operating leases liabilities | $ | 7,931 | | | $ | 4,694 | | |
| Capital expenditures financed through accounts payable or accrued liabilities | $ | 5,710 | | | $ | 2,926 | | |
| Issuance of common stock under Settlement Agreement | $ | 972 | | | $ | 1,439 | | |
| Preferred stock issued in extinguishment of term loan accrued interest | $ | 2,330 | | | $ | 0 | | |
| Debt discount and issuance costs extinguished in notes conversion | $ | 1,728 | | | $ | 0 | | |
| 2022 Notes conversion to equity | $ | 59,907 | | | $ | 0 | | |
| Novatel Wireless Notes conversion to equity | $ | 250 | | | $ | 0 | | |
| 2025 Notes issued to extinguish 2022 Notes | $ | 80,375 | | | $ | 0 | | |
| 2025 Notes conversion, including shares issued in satisfaction of interest-make-whole payment | $ | 14,353 | | | $ | 0 | | |
See accompanying notes to consolidated financial statements.
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Significant Accounting Policies
Inseego Corp. (the “Company” or “Inseego”) is a leader in the design and development of fixed and mobile wireless solutions (advanced 4G and 5G New Radio (“5G NR”)), industrial Internet of Things (“IoT”IIoT”) and cloud solutions for large enterprise verticals, service providers and small and medium-sized businesses around the globe. Inseego’s productcustomers include wireless service providers, fortune 500 enterprises, consumers, governments, and first responders. Product portfolio consists of fixed and mobile device-to-cloud solutions that produceprovide compelling, intelligent, reliable and secure end-to-end IoT services with deep business intelligence. Inseego’s products and solutions, designed and developed in the U.S., power mission critical applications with a “zero unscheduled downtime” mandate, such as our 5G fixed wireless access (“FWA”) gateway solutions, 4G and 5G mobile broadband, industrial IoT,IIoT applications such as SD WAN failover management, asset tracking and fleet management services. Inseego’s solutions are powered by its key wireless innovations in mobile and FWA technologies, including a suite of products employing the 5G NR standards, and purpose-built SaaS cloud platforms.
Inseego is a Delaware corporation formed in 2016 and is the successor to Novatel Wireless, Inc., a Delaware corporation formed in 1996 (“Novatel Wireless”), as a result ofresulting from an internal reorganization that was completed in November 2016. The Company’s principal executive office is located at 12600 Deerfield Parkway, Suite 100, Alpharetta, GA 30004, its corporate offices are located at 9710 Scranton Road, Suite 200, San Diego CA 92121 and its sales and engineering offices are located throughout the world. Inseego’s common stock trades on The NASDAQ Global Select Market under the trading symbol “INSG”.
Basis of Presentation
The Company had a net loss attributable to Inseego Corp. of $40.5$111.2 million during the year ended December 31, 2019.2020. As of December 31, 2019,2020, the Company had available cash and cash equivalents totaling $12.1$40.0 million and working capital of $19.6$38.4 million. The Company has a history of operating and net losses and overall usage of cash from operating and investing activities.
In order to make continued investments in its growth plan, on August 9, 2019,On March 6, 2020, the Company issued and sold 10,00025,000 shares of Fixed-Rate Cumulative Perpetual Preferred Stock, Series E, par value $0.001 per share (the “Series E Preferred Stock”), for an aggregate purchase price of $10.0 million. For additional information see Note 7, Stockholders Equity.
On March 6, 2020, the Company issued and sold an additional 25,000 shares of Series E Preferred Stock, for an aggregate purchase price of $25.0 million.
Under the terms of the indenture governing the Inseego Notes (as defined below), both the Company and the holders have rights with respect to conversion or redemption based on the value of the underlying stock. In the first quarter of 2020, $59.9 million of the Company’s 5.5% convertible senior notes due 2022 (the “2022 Notes” formerly referred to as the “Inseego Notes”) were exchanged for common stock.
Understock in private exchange transactions. Additionally, in the terms of the indenture governing the Inseego Notes (as defined below), each holder of the notes has the right to require the Company to repurchase its notes for cash on June 15, 2020 (the “Optional Repurchase Date”). In March 2020, all of the remaining Inseego Note holders have waived this right.
Under the terms of the Senior Credit Agreement, interest is paid based on the three-month LIBOR plus 7.65 percent, payable in cash. In the firstsecond quarter of 2020, the Credit Agreement was amended such that any interest paymentCompany restructured its outstanding debt by completing a $100.0 million registered public offering (the “Offering”) of 3.25% convertible senior notes due will be made2025 (the “2025 Notes”) and also entered into privately-negotiated exchange agreements (“Exchange Agreements”), pursuant to which an aggregate of $45.0 million in sharesprincipal amount of Series E Preferred Stock. On March 10,the 2022 Notes were exchanged for an aggregate of $32.0 million in cash and $80.4 million in principal amount of the 2025 Notes (the “Private Exchange Transactions”). The Company also used a portion of the proceeds from the Offering to repay in full its previous term loan. In the third quarter of 2020, the Company entered into a letter agreement (the “Letter Agreement”) with South Ocean Funding, LLC (“South Ocean”),redeemed the Lender, holderremaining $2,000 principal amount of the aggregate2022 Notes.
During the quarter ended September 30, 2020, certain holders of the 2025 Notes converted approximately $13.5 million in principal amount currentlyof the 2025 Notes into 1,177,156 shares of the Company’s common stock in accordance with the terms of such notes. As of December 31, 2020, the Company’s outstanding under the Credit Agreement, which provides: (i) thatdebt primarily consisted of $166.9 million in principal amount of 2025 Notes.
Additionally, in January 2021, the Company sold 1,516,073 shares of common stock, at a public offering price of $20.11 per share, for net proceeds of $29.6 million, pursuant to the ATM Offering. See Note 15, Subsequent Events.
The Company has a history of operating and South Ocean will work together, in good faith, to reach an agreement to amend or refinance the Credit Agreement in order to extend the maturitynet losses and overall usage of the Credit Agreement until a date after March 15, 2021;cash from operating and (ii) should an agreement not be reached to amend or refinance the Credit Agreement prior to August 23, 2020, upon request of the Company, the maturity date of the Credit Agreement will be extended to no earlier than March 15, 2021.
investing activities. The Company’s management believes that its cash and cash equivalents, together with anticipated cash flows from operations, will be sufficient to meet its working capitalcash flow needs for the next twelve months followingfrom the filing date of this report. The Company’s ability to transition toattain more profitable operations and continue to generate positive cash flow is dependent upon achieving a level and mix of revenuerevenues adequate to support its evolving cost structure. If events or circumstances occur such that the Company does not meet its operating plan as expected, or if the Company becomes obligated to pay unforeseen expenditures as a result of ongoing litigation, the Company may be required to raise capital, reduce planned research and development activities, incur additional restructuring charges or reduce other operating expenses which could have an adverse impact on its ability to achieve its intended business objectives.
The Company’s liquidity could be impaired if there is any interruption in its business operations, a material failure to satisfy its contractual commitments or a failure to generate revenue from new or existing products. Ultimately, the Company’s ability to attain profitability and to generate positive cash flow is dependent upon achieving a level of revenues adequate to support its evolving cost structure and increasing working capital needs. If events or circumstances occur such that the
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Company does not meet its operating plan as expected, the Company may be required to raise additional capital, reduce planned research and development activities, incur additional restructuring charges or reduce other operating expenses which could have an adverse impact on its ability to achieve its intended business objectives. There can be no assurance that any required or desired restructuring or financing will be available on terms favorable to the Company, or at all. In addition, in order to obtain additional borrowings,
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Additionally, the Company must comply with certain requirements under the Credit Agreement and the Inseego Indenture (as defined below). If additional funds are raised by the issuance of equity securities, Company stockholders could experience dilution of their ownership interests and securities issued may have rights senior to thoseis uncertain of the holders offull extent to which the COVID-19 pandemic will impact the Company’s common stock. If additional funds are raised by the issuance of debt securities, the Company may be subject to additional limitations on its operations.business, operations and financial results.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent liabilities. Actual results could differ materially from these estimates. Estimates are assessed each period and updated to reflect current information, such as the economic considerations related to the impact that the novel coronavirus pandemic ("COVID-19") could have on our significant accounting estimates. Significant estimates include revenue recognition, capitalized software costs, allowance for doubtful accounts receivable, provision for excess and obsolete inventory, valuation of intangible and long-lived assets, valuation of goodwill, royalty costs,valuation of derivatives, accruals relating to litigation, and restructuring, income taxes, and share-based compensation expense and the Company’s ability to continue as a going concern.expense.
Segment Information
Management has determined that the Company has 1 reportable segment. The Chief Executive Officer, who is also the Chief Operating Decision Maker, does not manage any part of the Company separately, and the allocation of resources and assessment of performance is based solely on the Company’s consolidated operations and operating results.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with original maturities of three months or less. Cash and cash equivalents are recorded at market value, which approximates cost. Gains and losses associated with the Company’s foreign currency denominated demand deposits are recorded as a component of other income, (expense), net, in the consolidated statements of operations.
Allowance for Doubtful Accounts Receivable
The Company provides an allowance for its accounts receivable for estimated losses that may result from its customers’ inability to pay. The Company determines the amount of the allowance by analyzing known uncollectible accounts, aged receivables, economic conditions, historical losses, and changes in customer payment cycles and its customers’ creditworthiness. Amounts later determined and specifically identified to be uncollectible are charged or written off against this allowance. To minimize the likelihood of uncollectibility, the Company reviews its customers’ creditworthiness periodically based on credit scores generated by independent credit reporting services, its experience with its customers and the economic condition of its customers’ industries. Material differences may result in the amount and timing of expense for any period if the Company were to make different judgments or utilize different estimates.
Inventories and Provision for Excess and Obsolete Inventory
Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. Shipping and handling costs are classified as a component of cost of net revenues in the consolidated statements of operations. The Company reviews the components of its inventory and its inventory purchase commitments on a regular basis for excess and obsolete inventory based on estimated future usage and sales. Write-downs in inventory value or losses on inventory purchase commitments depend on various items, including factors related to customer demand, economic and competitive conditions, technological advances or new product introductions by the Company or its customers that vary from its current expectations. Whenever inventory is written down, a new cost basis is established and the inventory is not subsequently written up if market conditions improve.
The Company believes that, when made, the estimates used in calculating the inventory provision are reasonable and properly reflect the risk of excess and obsolete inventory. If customer demand for the Company’s inventory is substantially less
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than its estimates, inventory write-downs may be required, which could have a material adverse effect on its consolidated financial statements.
Property, Plant and Equipment
Property, plant and equipment are initially stated at cost and depreciated using the straight-line method. Test equipment, computer equipment, purchased software, furniture and fixtures, product tooling and vehiclesLand is not depreciated. Buildings are depreciated over lives ranging from thirteen months to six50 years. Leasehold improvements are depreciated over the shorter of the related
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remaining lease period or useful life. Buildingslife, not to exceed 5 years. Product tooling is depreciated over 13 months. Computer equipment, purchased software, vehicles, production equipment, and furniture and fixtures, are depreciated over 50lives ranging from 2 to 5 years. Land is not depreciated. Amortization of equipment under capital leases is included in depreciation expense.
Expenditures for repairs and maintenance are expensed as incurred. Expenditures for major renewals and betterments that extend the useful lives of existing property, plant and equipment are capitalized and depreciated. Upon retirement or disposition of property, plant and equipment, any resulting gain or loss is recognized in other income, (expense), net, in the consolidated statements of operations.
Rental Assets
The cost of rental assets, which represents fleet management and vehicle tracking hardware installed in customers’ vehicles where such hardware is provided as part of a fixed term contract with the customer, is capitalized and disclosed separately in the consolidated balance sheets. The Company depreciates rental assets to costs of net revenues on a straight-line basis over the term of the contract, generally three to four years, commencing on installation of the rental asset.
Research and development
Research and development expense consists primarily of personnel costs for our engineers engaged in the design and development of our products, software and technologies, including salary, bonus and share‐based compensation expense, project material costs, services, depreciation and amortization. Such costs are charged to research and development expense as they are incurred, to the extent not capitalized as software development costs for external or internal use.
Software Development Costs for External Use
Software development costs for external use are expensed as incurred until technological feasibility has been established, at which time those costs are capitalized as intangible assets until the software is implemented into products sold to customers. Capitalized software development costs are amortized on a straight-line basis over the estimated useful life. The straight-line recognition method approximates the manner in which the expected benefit will be derived. Costs incurred to enhance existing software or after the implementation of the software into a product are expensed in the period they are incurred and included in research and development expense in the consolidated statements of operations.
Software Development Costs for Internal Use
Costs incurred in the preliminary stages of development are expensed as incurred and included in research and development expense in the consolidated statements of operations. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing performed to ensure the product is ready for its intended use. The Company also capitalizes costs related to specific upgrades and enhancements of internal-use software when it is probable that the expenditures will result in additional functionality. Maintenance and training costs are expensed as incurred. Capitalized internal-use software costs are recorded as part of intangible assets and are amortized on a straight-line basis over the estimated useful life of the software. The Company does not capitalize pilot projects and projects for which it believes that the future economic benefits are less than probable. The Company tests these assets for impairment whenever events or circumstances occur that could impact their recoverability. For the year ended December 31, 2020 and 2019, the Company recorded $1.4 million and $0 of impairment loss, respectively, related to software development costs for internal use.
Intangible Assets
Intangible assets include purchased finite-lived and indefinite-lived intangible assets resulting from the acquisitions of DigiCore Holdings Limited (“DigiCore” or “Ctrack”) and R.E.R. Enterprises, Inc. (“RER”) and its wholly owned subsidiary and principal operating asset, Feeney Wireless, LLC (which was renamed Inseego North America, LLC) (“INA”), along with the costs of non-exclusive and perpetual worldwide software technology licenses and capitalized software developments costs for both internal and external use. Finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets (see Note 3, Goodwill and Other Intangible Assets).
Indefinite-lived assets, including goodwill and in-process capitalized software development costs, are not amortized; however, they are tested for impairment annually, and between annual tests, if certain events occur indicating that the carrying amounts may be impaired. The Company tests goodwillperforms an annual impairment review of indefinite-lived assets during the fourth fiscal quarter of each year, and more frequently if we believe indicators of impairment exist. To review for impairment, by comparingwe first assess qualitative factors to determine whether events or circumstances lead to a determination that it is more likely than not that the fair value of eachthe Company’s reporting unit withis less than its carrying amount. The Company’s qualitative assessment of the recoverability of indefinite-lived assets was based on various macroeconomic, industry-specific, and company specific
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factors. These factors include: (i) industry or economic trends; (ii) current, historical, or projected financial performance, and; (iii) the Company’s market capitalization. After assessing the totality of events and circumstances, if the Company determines that it is not more likely than not that the fair value of the Company’s reporting unit is less than its carrying amount, no further assessment is performed. If the Company determines that it is more likely than not that the fair value of the Company’s reporting unit is less than its carrying amount, the Company calculates the fair value of the reporting unit and an impairment charge is recorded forcompares the amount, if any, by which the carryingfair value exceedsto the reporting unit’s fairnet book value. For the years ended December 31, 20192020 and 20182019, the Company recorded 0 impairment loss related to indefinite-lived intangible assets.
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Long-Lived Assets
The Company periodically evaluates the carrying value of the unamortized balances of its long-lived assets, including property, plant and equipment, rental assets and intangible assets, to determine whether impairment of these assets has occurred or whether a revision to the related amortization periods should be made. When the carrying value of an asset exceeds the associated undiscounted expected future cash flows, it is considered to be impaired and is written down to fair value. Fair value is determined based on an evaluation of the assetsassets’ associated undiscounted future cash flows or appraised value. This evaluation is based on management’s projections of the undiscounted future cash flows associated with each class of asset. If management’s evaluation indicates that the carrying values of these assets are impaired, such impairment is recognized by a reduction of the applicable asset carrying value to its estimated fair value and the impairment is expensed as a part of continuing operations. For the year ended December 31, 2018, the Company recorded an impairment loss related to long-lived assets of approximately $0.7 million, which is included in other income (expense), net, in the consolidated statements of operations. For the year ended December 31,2020 and 2019, the Company had no impairment loss related to long-lived assets.assets, except for the impairment of the capitalized software development costs for internal use, noted above.
RestructuringConvertible Debt Instruments
The Company accounts for facility exit costsevaluates embedded features within convertible debt that will be settled in accordance with the Financial Accounting Standards Board (“FASB”)shares upon conversion under Accounting Standards Codification (“ASC”) 420, 815,Exit or Disposal Cost Obligations Derivatives and Hedging, which requires that (“ASC 815”) to determine whether the embedded feature(s) should be bifurcated from the host instrument and accounted for as a liability for such costs be recognized and measured initiallyderivative at fair value on the cease-use date based on remaining lease rentals, adjusted for the effects of any prepaid or deferred items recognized, reduced by the estimated sublease rentals that could be reasonably obtained even ifwith changes in fair value recorded in earnings.
If an embedded derivative is bifurcated from share-settled convertible debt, the Company does not intend to sublease the facilities.
The Company is required to estimate future sublease income and future net operating expenses of the facilities, among other expenses. The most significant of these estimates relate to the timing and extent of future sublease income which reduce lease obligations, and the probability that such sublease income will be realized. The Company bases its estimates of sublease income, in part, on information from third party real estate experts, current market conditions and rental rates, an assessment of the time period over which reasonable estimates could be made, and the location of the respective facility, among other factors. Further adjustments to the facility exit liability accrual will be required in future periods if actual exit costs or sublease income differ from current estimates. Exit costs recorded by the Company under these provisions are neither associated with, nor do they benefit, continuing activities.
Convertible Debt
The Company accounts for its convertible debt instruments that are settleable in cash upon conversion (including partial cash settlement) by separating the liability and equity components of the instruments in a manner that reflects the Company’s nonconvertible debt borrowing rate. The Company determines the carrying amount of the liability component by measuring the fair value of similar debt instruments that do not have the conversion feature. If a similar debt instrument does not exist, the Company estimates the fair value by using assumptions that market participants would use in pricing a debt instrument, including market interest rates, credit standing, yield curves and volatilities. Determining the fair value ofrecords the debt component requires the use of accounting estimates and assumptions. These estimates and assumptions are judgmental in nature and could haveat cost less a significant impact on the determination of the debt component and the associated non-cash interest expense.
Upon issuance, the Company assigns a value to the debt componentdiscount equal to the estimatedbifurcated derivative’s fair value of similar debt instruments without the conversion feature, which could result in the Company recording the debt instrument at a discount. If the debt instrument is recorded at a discount, thevalue. The Company amortizes the debt discount over the life of the debt instrument as additional non-cash interest expense utilizing the effective interest method. The convertible debt and the derivative liability are presented in total on the consolidated balance sheet. The derivative liability will be remeasured at each reporting period with changes in fair value recorded in the consolidated statements of operations in other income, net.
Derivative Financial Instruments
The Company evaluates stock warrants, debt instruments and other contracts to determine if those contracts or embedded components of those contracts qualify as derivative financial instruments to be separately accounted for under the relevant sections of the Financial Accounting Standards Board (the “FASB”) ASC. The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative financial instrument and is marked-to-market at each balance sheet date and recorded as an asset or liability. In the event that the fair value is recorded as an asset or liability, the change in fair value is recorded in the consolidated statements of operations as other income or other expense. Upon conversion, exercise or expiration of a derivative financial instrument, the instrument is marked to fair value.
Revenue Recognition
The Company generates revenue from a broad range of product sales including intelligent wireless hardware products for the worldwide mobile communications and industrial IoT markets. The Company’s products principally include intelligent mobile hotspots, wireless routers for IoT applications, USB modems, integrated telematics and mobile tracking hardware devices, which are supported by applications software and cloud services designed to enable customers to easily analyze data insights and configure and manage their hardware.
The Company classifies its revenues from the sale of its products and services into two distinct groupings, specifically IoT & Mobile Solutions and Enterprise SaaS Solutions. Both IoT & Mobile Solutions and Enterprise SaaS Solutions revenues include any hardware and software required for the respective solution.
F-13
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net revenues by product grouping for the years ended December 31, 20192020 and 20182019 were as follows (in thousands):
|
| | | | | | | |
| | Year Ended
December 31, |
| | 2019 | | 2018 |
| IoT & Mobile Solutions | $ | 154,167 |
| | $ | 135,349 |
|
| Enterprise SaaS Solutions | 65,329 |
| | 67,114 |
|
| Total | $ | 219,496 |
| | $ | 202,463 |
|
| | | | | | | | | | | |
| Year Ended
December 31, |
| 2020 | | 2019 |
| IoT & Mobile Solutions | $ | 261,169 | | | $ | 160,873 | |
| Enterprise SaaS Solutions | 52,663 | | | 58,623 | |
| Total | $ | 313,832 | | | $ | 219,496 | |
See geographic disaggregation information in Note 12, Geographic Information and Concentrations of Risk.
IoT & Mobile Solutions. The IoT & Mobile Solutions portfolio is comprised of end-to-end edge to cloud solutions including 4G LTE mobile broadband gateways, routers, modems, hotspots, HD quality VoLTE based wireless home phones, cloud management software and an advanced 5G portfolio of products (currently in various stages of development). The solutions are offered under the MiFi and MiFiiQTM brands for consumer and business markets, and under the Skyus brand for industrial IoT markets. Effective in the third quarter ended on September 30, 2020, IoT & Mobile Solutions now also includes the Company’s Device Management System (“DMS”), rebranded as Inseego SubscribeTM , a hosted SaaS platform that helps organizations manage the selection, deployment and spend of their customer’s wireless assets, helping them save money on personnel and telecom expenses. The Company reclassified its Inseego Subscribe revenue stream from Enterprise SaaS Solutions to better reflect the Company's end user delineation. This reclassification had no impact on previously reported total net revenue, gross profit, or net loss.
Enterprise SaaS Solutions. The Enterprise SaaS Solutions consist of various subscription offerings to gain access to the Company’s Ctrack telematics platforms, which provide fleet vehicle, aviation ground vehicle and asset tracking and performance information, and other telematics applications, and the Company’s Device Management System (“DMS”), a hosted software-as-a-service (“SaaS”) platform that helps organizations manage the selection, deployment and spend of their customer’s wireless assets, helping them save money on personnel and telecom expenses.applications.
Contracts with Customers
The Company adoptedfollows Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (as amended, “ASC 606”), effective January 1, 2018, using the modified retrospective method applied to those contracts which were not substantially completed as of January 1, 2018. ASC 606 provides guidance on recognizing revenue, including a five-step model to determine when revenue recognition is appropriate. The standard requires that an entity recognize revenue to depict the transfer of control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The Company routinely enters into a variety of agreements with customers, including quality agreements, pricing agreements and master supply agreements which outline the general commercial terms and conditions under which the Company does business with a specific customer, including shipping terms and pricing for the products and services that the Company offers. The Company also sells to some customers solely based on purchase orders. The Company has concluded, for the vast majority of its revenues, that its contracts with customers are either a purchase order or the combination of a purchase order with a master supply agreement.
The Company determines revenue recognition through the following five steps:
| |
1) | identification of the contract, or contracts, with a customer; |
| |
2) | identification of the performance obligations in the contract; |
| |
3) | determination of the transaction price; |
| |
4) | allocation of the transaction price to the performance obligations in the contract; and |
| |
5) | recognition of revenue when, or as, performance obligations are satisfied. |
1)identification of the contract, or contracts, with a customer;
2)identification of the performance obligations in the contract;
3)determination of the transaction price;
4)allocation of the transaction price to the performance obligations in the contract; and
5)recognition of revenue when, or as, performance obligations are satisfied.
The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
The Company’s performance obligations are established when a customer submits a purchase order notification (in writing, electronically or verbally) for goods and services, and the Company accepts the order. The Company identifies performance obligations as the delivery of the requested product or service in appropriate quantities and to the location specified in the customer’s contract and/or purchase order. The Company generally recognizes revenue upon the satisfaction of these criteria when control of the product or service has been transferred to the customer at which time it has an unconditional right to receive payment. The Company’s prices are fixed and have no history of being affected by contingent events that could
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impact the transaction price. The Company does not offer price concessions and does not accept payment that is less than the price stated when it accepts the purchase order.
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Revenue Recognition
Revenue is recognized upon transfer of control of products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company enters into contracts that may include various combinations of products and services which are generally capable of being distinct and accounted for as separate performance obligations.
Hardware. Hardware revenue from the sale of the Company’s IoT & Mobile Solutions devices is recognized when the Company transfers control to the customer, typically at the time when the product is delivered, shipped or installed at which time the title passes to the customer, and there are no further performance obligations with regards to the hardware device.
SaaS and Other Services. SaaS subscription revenue is recognized over time on a ratable basis over the contract term beginning on the date that its service is made available to the customer. Subscription periods range from monthly to multi-year, with the majority of contracts being one to three years. Telematics includes a device which collects and transmits the information from the vehicle or other asset. The Company’s customers have an option to purchase the monitoring device or lease it over the term of the contract. If the customer purchases the hardware device, the Company recognizes the revenue at a point in time as discussed above in the hardware revenue recognition disclosure. Prior to adoption of FASB ASC, Leases (“ASC 842”), on January 1, 2019, if the customer chose to lease the monitoring device, the Company accounted for the monitoring device lease as an operating lease, recognized the revenue for the monitoring device lease over the term of the contract and recorded such revenue in accordance with the previous lease accounting guidance in ASC 840, Leases. Under the new standard, becauseBecause the Company’s rental asset lease contracts qualify as operating leases under ASC 842,Leases (“ASC 842”), and the contracts also include services to operate the underlying asset, and to maintain the asset, the Company has elected the practical expedient to combine the lease and the non-lease components because the service is the predominant element in the eyes of the customer and the pattern of service delivery is the same for both elements. The Company recognizes revenue over time on a ratable basis over the term of the contract.
Maintenance and support services revenue. Periodically, the Company sells separately-priced warranty contracts that extend beyond the Company’s base warranty period. The separately priced service contracts range from 12 months to 36 months. The Company typically receives payment at the inception of the contract and recognizes revenue as earned on a straight-line basis over the term of the contract.
Professional services revenue. From time to time, the Company enters into special engineering design service agreements. Revenues from engineering design services are designed to meet specifications of a particular product, and therefore do not create an asset with an alternative use. The Company recognizes revenue based on the achievement of certain applicable milestones and the amount of payment the Company believes it is entitled to at the time.
With respect to revenue related to third party product sales or other arrangements that involve the services of another party, for which the Company does not control the sale or service and acts as an agent to the transaction, the Company recognizes revenue on a net basis. The portion of the gross amount billed to customers that is remitted by the Company to another party is not reflected as revenue.
Multiple Performance Obligations
The Company’s contracts with customers may include commitments to transfer multiple products and services to a customer. When hardware, software and services are sold in various combinations, judgment is required to determine whether each performance obligation is considered distinct and accounted for separately, or not distinct and accounted for together with other performance obligations. The Company considered the performance obligations in its customer master supply agreements and determined that, for the majority of its revenue, the Company generally satisfies performance obligations at a point in time upon delivery of the product to the customer.
In instances where the software elements included within hardware for various products are considered to be functioning together with non-software elements to provide the tangible product’s essential functionality, these arrangements are accounted for as a single distinct performance obligation.
Judgment is required to determine the stand-alone selling price (“SSP”) for each distinct performance obligation. When available, the Company uses observable inputs to determine SSP. In instances where SSP is not directly observable, such as when the Company does not sell the product or service separately, it determines the SSP based on a cost-plus model as market and other observable inputs are seldom present based on the proprietary nature of the Company’s products.
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Contract Liabilities
Timing of revenue recognition may differ from the timing of invoicing to customers. If customers are invoiced for subscription services in advance of the service period, deferred revenue liabilities, or contract liabilities, are recorded. Deferred revenue liabilities, or contract liabilities, are also recorded when the Company collects payments in advance of performing the services.
Contract Assets
The Company capitalizes sales commissions earned by its sales force when they are considered to be incremental and recoverable costs of obtaining a contract with a customer. These costs are deferred and then amortized over a period of benefit. There were no significant amounts of assets recorded related to contract costs as of December 31, 2019.2020.
Applying the practical expedient in paragraph 40-25-4 of ASC 340,Other Assets and Deferred Costs, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in selling, general and administrative expenses.
Significant Judgments in the Application of the Guidance in ASC 606
Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. The Company considered the performance obligations in its customer master supply agreements and determined that, for the majority of its revenue, the Company generally satisfies performance obligations at a point in time upon delivery of the product to the customer.
Revenues from the Company’s SaaS subscription services represent a single promise to provide continuous access to its software solutions and their processing capabilities in the form of a service through one of the Company’s data centers or a hosted data center. As each day of providing access to the software is substantially the same, and the customer simultaneously receives and consumes the benefits as access is provided, the Company has determined that its subscription services arrangements include a single performance obligation comprised of a series of distinct services. The Company’s SaaS subscriptions also include an unspecified volume of call center support and any remote system diagnostic and software upgrades as needed. These services are combined with the recurring monthly subscription service since they are highly interrelated and interdependent. Revenue from the Company’s subscription services is recognized over time on a ratable basis over the contract term beginning on the date that the service is made available to the customer.
Shipping and Handling Charges
Fees charged to customers for shipping and handling of products are included in product revenues, and costs for shipping and handling of products are included as a component of cost of sales.
Taxes Collected from Customers
Taxes collected on the value of transaction revenue are excluded from product and services revenues and cost of sales and are accrued in current liabilities until remitted to governmental authorities.
Foreign Currency Transactions
Foreign currency transactions are transactions denominated in a currency other than a subsidiary’s functional currency. A change in the exchange rates between a subsidiary’s functional currency and the currency in which a transaction is denominated increases or decreases the expected amount of functional currency cash flows upon settlement of the transaction. That increase or decrease in expected functional currency cash flows is reported by the Company as a foreign currency transaction gain (loss). The primary component of the Company’s foreign currency transaction gain (loss) is due to agreements in place with certain subsidiaries in foreign countries regarding intercompany transactions. Based upon historical experience, the Company anticipates repayment of these transactions in the foreseeable future, and recognizes the realized and unrealized gains (losses) on these transactions that result from foreign currency changes in the period in which they occur as foreign currency transaction gain (loss), which is recorded as other income, (expense), net, in the consolidated statements of operations.
Foreign Currency Translation
Assets and liabilities of the Company’s international subsidiaries in which the local currency is the functional currency are translated into U.S. Dollars at period-end exchange rates. Income and expenses are translated into U.S. Dollars at the average
F-16
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
exchange rates during the period. The resulting translation adjustments are included in the Company’s consolidated balance sheets as a component of accumulated other comprehensive loss.
Income Taxes
The Company recognizes federal, state and foreign current tax liabilities or assets based on its estimate of taxes payable to or refundable by tax authorities in the current fiscal year. The Company also recognizes federal, state and foreign deferred tax liabilities or assets based on the Company’s estimate of future tax effects attributable to temporary differences and carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Deferred tax assets are reduced by valuation allowances if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. The Company evaluates deferred income taxes on a quarterly basis to determine if valuation allowances are required by considering available evidence. If the Company is unable to generate sufficient future taxable income in certain tax jurisdictions, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, the Company could be required to increase its valuation allowance against its deferred tax assets which could result in an increase in the Company’s effective tax rate and an adverse impact on operating results. The Company will continue to evaluate the necessity of the valuation allowance based on the remaining deferred tax assets.
The Company follows the accounting guidance related to financial statement recognition, measurement and disclosure of uncertain tax positions. The Company recognizes the impact of an uncertain income tax position on an income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Uncertain tax positions are recognized in the first subsequent financial reporting period in which that threshold is met or from changes in circumstances such as the expiration of applicable statutes of limitations.
Litigation
The Company is, from time to time, party to various legal proceedings arising in the ordinary course of business. The Company records a loss when information indicates that a loss is both probable and estimable. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, the Company records the minimum estimated liability related to the claim. As additional information becomes available, the Company assesses the potential liability related to the Company’s pending litigation and revises its estimates, if necessary. The Company expenses litigation costs as incurred.
Share-Based Compensation
The Company has granted stock options and restricted stock units (“RSUs”)RSUs to employees, non-employee consultants and non-employee members of our Board of Directors. The Company also has an employee stock purchase plan (“ESPP”) for eligible employees. The Company measures the compensation cost associated with all share-based payments based on grant date fair values. The fair value of each stock option and stock purchase right is estimated on the date of grant using an option pricing model that meets certain requirements. The Company generally uses the Black-Scholes option pricing model to estimate the fair value of its stock options and stock purchase rights. The Black-Scholes model is considered an acceptable model but the fair values generated by it may not be indicative of the actual fair values of the Company’s equity awards as it does not consider certain factors important to those awards to recipients, such as continued service and periodic vesting requirements, as well as limited transferability. The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by the Company’s stock price and a number of assumptions, including expected volatility, expected term, risk-free interest rate and expected dividends.
For grants of stock options, the Company uses a blend of historical and implied volatility for traded options on its stock in order to estimate the expected volatility assumption required in the Black-Scholes model. The Company’s use of a blended volatility estimate in computing the expected volatility assumption for stock options is based on its belief that while the implied volatility is representative of expected future volatility, the historical volatility over the expected term of the award is also an indicator of expected future volatility. Due to the short duration of stock purchase rights under the Company’s ESPP, the Company utilizes historical volatility in order to estimate the expected volatility assumption of the Black-Scholes model.
The expected term of stock options granted is estimated using historical experience. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected terms of the Company’s stock options and stock purchase rights. The dividend yield assumption is based on the Company’s history and expectation of no dividend payouts. The Company
F-17
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
estimates forfeitures at the time of grant and revises these estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimates its forfeiture rate assumption for all types of share-based compensation awards based on historical forfeiture rates related to each category of award.
Compensation cost associated with grants of restricted stock units are measured at fair value, which has historically been the closing price of the Company’s common stock on the date of grant.
The Company recognizes share-based compensation expense over the requisite service period of each individual award, which generally equals the vesting period, using the straight-line method for awards that contain only service conditions. For awards that contain performance conditions, the Company recognizes the share-based compensation expense on a straight-line basis for each vesting tranche.
The Company evaluates the assumptions used to value stock awards on a quarterly basis. If factors change and the Company employs different assumptions, share-based compensation expense may differ significantly from what it has recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, the Company may be required to accelerate, increase or cancel any remaining unearned share-based compensation expense.
Net Loss Per Share Attributable to Inseego Corp.
The Company computes basic and diluted per share data for all periods for which a statement of operations is presented. Basic net loss per share excludes dilution and is computed by dividing the net loss by the weighted-average number of shares that were outstanding during the period. Diluted earnings per share (“EPS”) reflects the potential dilution that could occur if securities or other contracts to acquire common stock were exercised or converted into common stock. Potential dilutive securities are excluded from the diluted EPS computation in loss periods as their effect would be anti-dilutive.
Fair Value of Financial Instruments
The Company’s fair value measurements relate to its cash equivalents and money market funds, which are classified pursuant to authoritative guidance for fair value measurements. The Company places its cash equivalents in instruments that meet credit quality standards, as specified in its investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issue, issuer or type of instrument.
The Company’s financial instruments consist principally of long-term debt. From time to time, the Company may utilize foreign exchange forward contracts. These contracts are valued using pricing models that take into account the currency rates as of the balance sheet date.
Comprehensive Loss
Comprehensive loss consists of net earnings and foreign currency translation adjustments.
Prior Period Reclassifications
Certain amounts in prior periods have been reclassified to conform with current period presentation.
New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB, which are adopted by the Company as of the specified date.
In December 2019,August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40)-Accounting For Convertible Instruments and Contracts in an Entity's Own Equity. The ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify thesimplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU
removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted net income taxes.per share calculation in certain areas. The amendment eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. The amendment also clarifies existing guidance related to the recognition of franchise tax, the evaluation of a step up in the tax basis of goodwill, and the effects of enacted changes in tax laws or rates in the effective tax rate computation, among other clarifications. Thenew guidance is effective for annual and interim periods beginning after December 15, 2021, and early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, beginning after December 15, 2020.years. The Company early adopted the pronouncement effective for the fourth quarter 2019,is currently evaluating the impact of which was not material to the 2019that this new guidance will have on its consolidated financial statements.
In June 2016, the FASB issued Accounting Standard Update (“ASU”)ASU 2016-13, Financial Instruments—Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected credit losses for financial assets
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
held. This guidance is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted. The Company is currently assessing the impact of this guidance.
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either financing or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification determines whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less are accounted for similar to previous guidance for operating leases. The new standard requires lessors to account for leases using an approach that is substantially equivalent to previous guidance for sales-type leases, direct financing leases and operating leases. The Company adopted the standard on January 1, 2019, the date it became effective for public companies, using the modified retrospective approach whereby the cumulative effect of adoption was recognized on the adoption date and prior periods were not restated. There was no net cumulative effect adjustment to retained earnings as of January 1, 2019 as a result of this adoption. Upon adoption, the Company elected the package of practical expedients permitted within the standard, which among other things, allows for the carryforward of historical lease classification. The Company also elected the practical expedient provided in a subsequent amendment to the standard that removed the requirement to separate lease and non-lease components, provided certain conditions were met. Refer to Note 10, Leases, for the impact offrom the adoption of this guidance onpronouncement to the Company’s condensed consolidated financial statements.
2. Financial Statement Details
Inventories
Inventories consist of the following (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Finished goods | $ | 21,229 |
| | $ | 14,797 |
|
| Raw materials and components | 4,061 |
| | 11,634 |
|
| | $ | 25,290 |
| | $ | 26,431 |
|
| | | | | | | | | | | |
| December 31, |
| | 2020 | | 2019 |
| Finished goods | $ | 27,009 | | | $ | 21,229 | |
| Raw materials and components | 6,943 | | | 4,061 | |
| $ | 33,952 | | | $ | 25,290 | |
Property, Plant and Equipment
Property, plant and equipment consists of the following (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Land | $ | 253 |
| | $ | 247 |
|
| Buildings | 2,303 |
| | 2,247 |
|
| Test equipment | 10,952 |
| | 14,444 |
|
| Computer equipment and purchased software | 6,911 |
| | 4,889 |
|
| Product tooling | 2,139 |
| | 504 |
|
| Furniture and fixtures | 1,535 |
| | 677 |
|
| Vehicles | 2,535 |
| | 1,990 |
|
| Leasehold improvements | 145 |
| | 136 |
|
| | 26,773 |
| | 25,134 |
|
| Less—accumulated depreciation and amortization | (16,017 | ) | | (18,436 | ) |
| | $ | 10,756 |
| | $ | 6,698 |
|
| | | | | | | | | | | |
| | December 31, |
| | 2020 | | 2019 |
| Land | $ | 244 | | | $ | 253 | |
| Buildings | 2,213 | | | 2,303 | |
| Test equipment | 16,775 | | | 10,952 | |
| Computer equipment and purchased software | 7,899 | | | 6,911 | |
| Product tooling | 3,125 | | | 2,139 | |
| Furniture and fixtures | 1,310 | | | 1,535 | |
| Vehicles | 2,988 | | | 2,535 | |
| Leasehold improvements | 860 | | | 145 | |
| 35,414 | | | 26,773 | |
| Less—accumulated depreciation and amortization | (21,715) | | | (16,017) | |
| $ | 13,699 | | | $ | 10,756 | |
At December 31, 2020, the Company had vehicles and equipment under finance leases with an aggregate carrying value of $2.6 million, net of accumulated amortization of $1.0 million. At December 31, 2019, the Company had vehicles and equipment under capitalfinance leases with an aggregate carrying value of $2.1 million, net of accumulated amortization of $2.6 million. At December 31, 2018, the Company had vehicles and equipment under capital leases with an aggregate carrying value of $1.9 million, net of accumulated amortization of $2.0 million.
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rental Assets
Rental assets consist of the following (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Rental assets | $ | 18,176 |
| | $ | 16,648 |
|
| Less—accumulated depreciation | (12,791 | ) | | (10,879 | ) |
| | $ | 5,385 |
| | $ | 5,769 |
|
| | | | | | | | | | | |
| | December 31, |
| | 2020 | | 2019 |
| Rental assets | $ | 21,863 | | | $ | 18,176 | |
| Less—accumulated depreciation | (15,754) | | | (12,791) | |
| $ | 6,109 | | | $ | 5,385 | |
Depreciation and amortization expense related to property, plant and equipment, including equipment under capital leases, and rental assets was $8.8$10.0 million and $7.0$8.8 million for the years ended December 31, 2020 and 2019, and 2018, respectively.
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Royalties | $ | 1,415 |
| | $ | 1,727 |
|
| Payroll and related expenses | 2,716 |
| | 2,415 |
|
| Professional fees | 483 |
| | 514 |
|
| Accrued interest | 1,543 |
| | 239 |
|
| Deferred revenue | 2,235 |
| | 2,048 |
|
| Operating lease liabilities | 1,101 |
| | — |
|
| Acquisition-related liabilities | 1,000 |
| | 1,000 |
|
| Other | 7,368 |
| | 5,081 |
|
| | $ | 17,861 |
| | $ | 13,024 |
|
| | | | | | | | | | | |
| December 31, |
| | 2020 | | 2019 |
| Royalties | $ | 2,410 | | | $ | 1,415 | |
| Payroll and related expenses | 6,006 | | | 2,716 | |
| | | |
| | | |
| Professional fees | 921 | | | 483 | |
| | | |
| Accrued interest | 888 | | | 1,543 | |
| Deferred revenue | 2,853 | | | 2,235 | |
| | | |
| Operating lease liabilities | 1,619 | | | 1,101 | |
| Acquisition-related liabilities | 0 | | | 1,000 | |
| | | |
| Other | 8,676 | | | 7,555 | |
| $ | 23,373 | | | $ | 18,048 | |
Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Cash and cash equivalents | $ | 12,074 |
| | $ | 31,015 |
|
| Restricted cash | — |
| | 61 |
|
| Total cash, cash equivalents and restricted cash | $ | 12,074 |
| | $ | 31,076 |
|
3. Goodwill and Other Intangible Assets
A summary of the activity in goodwill is presented below (in thousands):
|
| | | |
| Balance at December 31, 2017 | $ | 37,681 |
|
| Effect of change in foreign currency exchange rates | (4,739 | ) |
| Balance at December 31, 2018 | 32,942 |
|
| Effect of change in foreign currency exchange rates | 717 |
|
| Balance at December 31, 2019 | $ | 33,659 |
|
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | |
| Balance at December 31, 2018 | $ | 32,942 | |
| |
| |
| |
| |
| Effect of change in foreign currency exchange rates | 717 | |
| Balance at December 31, 2019 | 33,659 | |
| |
| |
| Effect of change in foreign currency exchange rates | (1,148) | |
| Balance at December 31, 2020 | $ | 32,511 | |
The Company’s intangible assets are comprised of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| | Weighted-Average Life
(in years) | | Gross Carrying Value | | Accumulated Amortization | | | | Net Carrying Value |
| Finite-lived intangible assets: | | | | | | | | | |
| Developed technologies | 6.0 | | $ | 12,692 | | | $ | (10,878) | | | | | $ | 1,814 | |
| Trademarks and trade names | 10.0 | | 17,823 | | | (9,597) | | | | | 8,226 | |
| Customer relationships | 8.5 | | 12,306 | | | (8,703) | | | | | 3,603 | |
| Capitalized software development costs | 3.3 | | 47,818 | | | (31,051) | | | | | 16,767 | |
| Other | 2.5 | | 3,389 | | | (2,791) | | | | | 598 | |
| Total finite-lived intangible assets | | | $ | 94,028 | | | $ | (63,020) | | | | | 31,008 | |
| Indefinite-lived intangible assets: | | | | | | | | | |
| In-process capitalized software development costs | | | | | | | | | 20,479 | |
| Total intangible assets | | | | | | | | | $ | 51,487 | |
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | |
| | December 31, 2019 |
| | Weighted-Average Life
(in years) | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
| Finite-lived intangible assets: | | | | | | | |
| Developed technologies | 6.0 | | $ | 13,076 |
| | $ | (9,198 | ) | | $ | 3,878 |
|
| Trademarks and trade names | 10.0 | | 18,352 |
| | (8,040 | ) | | 10,312 |
|
| Customer relationships | 8.4 | | 12,460 |
| | (7,413 | ) | | 5,047 |
|
| Capitalized software development costs | 3.6 | | 19,375 |
| | (6,570 | ) | | 12,805 |
|
| Other | 2.4 | | 2,986 |
| | (1,790 | ) | | 1,196 |
|
| Total finite-lived intangible assets | | | $ | 66,249 |
| | $ | (33,011 | ) | | 33,238 |
|
| Indefinite-lived intangible assets: | | | | | | | |
| In-process capitalized software development costs | | | | | | | 11,154 |
|
| Total intangible assets | | | | | | | $ | 44,392 |
|
| | | | December 31, 2018 | | December 31, 2019 |
| | Weighted-Average Life
(in years) | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Weighted-Average Life
(in years) | | Gross Carrying Value | | Accumulated Amortization | | | Net Carrying Value |
| Finite-lived intangible assets: | | | | | | | Finite-lived intangible assets: | | | | | | | | |
| Developed technologies | 6.0 | | $ | 12,846 |
| | $ | (7,034 | ) | | $ | 5,812 |
| Developed technologies | 6.0 | | $ | 13,076 | | | $ | (9,198) | | | | $ | 3,878 | |
| Trademarks and trade names | 10.0 | | 18,034 |
| | (6,103 | ) | | 11,931 |
| Trademarks and trade names | 10.0 | | 18,352 | | | (8,040) | | | | 10,312 | |
| Customer relationships | 8.4 | | 12,368 |
| | (5,711 | ) | | 6,657 |
| Customer relationships | 8.4 | | 12,460 | | | (7,413) | | | | 5,047 | |
| Capitalized software development costs | 5.0 | | 7,221 |
| | (2,406 | ) | | 4,815 |
| Capitalized software development costs | 3.6 | | 19,375 | | | (6,570) | | | | 12,805 | |
| Other | 2.3 | | 2,475 |
| | (847 | ) | | 1,628 |
| Other | 2.4 | | 2,986 | | | (1,790) | | | | 1,196 | |
| Total finite-lived intangible assets | | $ | 52,944 |
| | $ | (22,101 | ) | | 30,843 |
| Total finite-lived intangible assets | | $ | 66,249 | | | $ | (33,011) | | | | 33,238 | |
| Indefinite-lived intangible assets: | | | | | | | Indefinite-lived intangible assets: | | | | | | | |
| In-process capitalized software development costs | | | | | | 1,142 |
| In-process capitalized software development costs | | | | 11,154 | |
| Total intangible assets | | | | | | $ | 31,985 |
| Total intangible assets | | | | $ | 44,392 | |
Amortization expense for the years ended December 31, 20192020 and 20182019 was approximately $9.7$18.0 million and $6.7$9.7 million, respectively, including approximately $4.1$12.9 million and $1.4$4.1 million related to capitalized software development costs for the years ended December 31, 20192020 and 2018,2019, respectively.
The Company recorded 0a $1.4 million impairment lossesloss on intangible assets during the years ended December 31, 20192020 and 0 impairment loss during the year ended December 31, 2018.2019.
The following table represents details of the amortization of finite-lived intangible assets that is estimated to be expensed in the future (in thousands): (In process)
|
| | | |
| 2020 | 12,477 |
|
| 2021 | 7,119 |
|
| 2022 | 4,419 |
|
| 2023 | 4,309 |
|
| 2024 | 3,557 |
|
| Thereafter | 1,357 |
|
| Total | $ | 33,238 |
|
| | | | | |
| 2021 | 13,026 | |
| 2022 | 7,390 | |
| 2023 | 4,383 | |
| 2024 | 3,937 | |
| 2025 | 2,272 | |
| |
| Total | $ | 31,008 | |
4. Fair Value Measurement of Assets and Liabilities
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). A fair value measurement reflects the assumptions
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
market participants would use in pricing an asset or liability based on the best available information. These assumptions include the risk inherent in a particular valuation technique (such as a pricing model) and the risks inherent in the inputs to the model.
The Company classifies inputs to measure fair value using a three-level hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The categorization of financial instruments within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) and is defined as follows:
| |
Level 1: | Pricing inputs are based on quoted market prices for identical assets or liabilities in active markets (e.g., NYSE or NASDAQ). Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. |
| |
Level 2: | Pricing inputs include benchmark yields, trade data, reported trades and broker dealer quotes, two-sided markets and industry and economic events, yield to maturity, Municipal Securities Rule Making Board reported trades and vendor trading platform data. Level 2 includes those financial instruments that are valued using various pricing services and broker pricing information including Electronic Communication Networks and broker feeds. |
| |
Level 3: | Pricing inputs include significant inputs that are generally less observable from objective sources, including the Company’s own assumptions. |
Level 1: Pricing inputs are based on quoted market prices for identical assets or liabilities in active markets (e.g., NYSE or NASDAQ). Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2: Pricing inputs include benchmark yields, trade data, reported trades and broker dealer quotes, two-sided markets and industry and economic events, yield to maturity, Municipal Securities Rule Making Board reported trades and vendor trading platform data. Level 2 includes those financial instruments that are valued using various pricing services and broker pricing information including Electronic Communication Networks and broker feeds.
Level 3: Pricing inputs include significant inputs that are generally less observable from objective sources, including the Company’s own assumptions.
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. There have been no transfers of assets or liabilities between fair value measurement classifications during the year ended December 31, 2019.2020.
The following table summarizes the Company’s financial instruments measured at fair value on a recurring basis in accordance with the authoritative guidance for fair value measurements as of December 31, 2020 (in thousands):
| | | | | | | | | | | |
| Balance as of
December 31, 2020 | | Level 1 |
| Assets: | | | |
| Cash equivalents | | | |
| Money market funds | $ | 126 | | | $ | 126 | |
| | | |
| Total cash equivalents | $ | 126 | | | $ | 126 | |
| | | |
| | | |
The following table summarizes the Company’s financial instruments measured at fair value on a recurring basis in accordance with the authoritative guidance for fair value measurements as of December 31, 2019 (in thousands):
| | | | | | | | | | | |
| Balance as of
December 31, 2019 | | Level 1 |
| Assets: | | | |
| Cash equivalents | | | |
| Money market funds | $ | 126 | | | $ | 126 | |
| | | |
| Total cash equivalents | $ | 126 | | | $ | 126 | |
| | | |
| | | |
|
| | | | | | | |
| | Balance as of
December 31, 2019 | | Level 1 |
| Assets: | | | |
| Cash equivalents | | | |
| Money market funds | $ | 126 |
| | $ | 126 |
|
| Total cash equivalents | $ | 126 |
| | $ | 126 |
|
| | | | | | | | | | | |
| Balance as of
December 31, 2020 | | Level 3 |
| Liabilities: | | | |
| 2025 Notes | | | |
| Interest make-whole payment | $ | 4,898 | | | $ | 4,898 | |
| | | |
| Total embedded derivatives | $ | 4,898 | | | $ | 4,898 | |
The fair value of the interest make-whole payment derivative liability was determined using a Monte Carlo model with the following key assumptions:
| | | | | | | | | | | |
| May 12, 2020 | | December 31, 2020 |
| Volatility | 60 | % | | 50 | % |
| Stock price | $10.62 per share | | $15.47 per share |
| Credit spread | 14.97 | % | | 19.25 | % |
| Term | 4.97 years | | 4.34 years |
| Dividend yield | 0 | % | | 0 | % |
| Risk-free rate | 0.34 | % | | 0.30 | % |
The following table summarizessets forth a summary of changes in the fair value of Level 3 liabilities for the twelve months ended December 31, 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of
December 31, 2019 | | Additions | | Conversions | | Change in fair value | | Balance as of
December 31, 2020 |
| Liabilities: | | | | | | | | | |
| Interest make-whole payment | $ | 0 | | | $ | 4,582 | | | $ | (281) | | | $ | 597 | | | $ | 4,898 | |
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company evaluated the 2025 Notes under ASC 815, Derivatives and Hedging, and identified an embedded derivative that required bifurcation. The embedded derivative is an interest make-whole payment that was valued at $4.6 million on May 12, 2020.
The estimated fair value of the interest make-whole derivative liability at the date of issuance was determined using significant assumptions which include an implied credit spread rate for notes with a similar term, the expected volatility and dividend yield of the Company’s financial instruments measured atcommon stock and the risk-free interest rate.
Changes in the fair value on a recurring basisof the interest make-whole payment are included in the Company’s consolidated statement of operations for the current fiscal year within other income, net. During the year ended December 31, 2020, certain holders of the 2025 Notes converted an aggregate of approximately $13.5 million in principal amount of the 2025 Notes into shares of the Company’s common stock in accordance with the authoritative guidance for fair value measurements asterms of December 31, 2018 (in thousands):
|
| | | | | | | |
| | Balance as of
December 31, 2018 | | Level 1 |
| Assets: | | | |
| Cash equivalents | | | |
| Money market funds | $ | 10,085 |
| | $ | 10,085 |
|
| Total cash equivalents | $ | 10,085 |
| | $ | 10,085 |
|
such notes and a portion of the embedded derivative was settled in shares of the Company’s common stock resulting in $0.3 million of the derivative liability being extinguished upon conversion. As of December 31, 20192020, the embedded derivative had a fair value of $4.9 million and 2018,a $0.6 million loss on the Company had 0 outstanding foreign currency exchange forward contracts.change in fair value was recorded to other income (expense), net, on the consolidated statement of operations.
During the years ended December 31, 2020 and 2019, and 2018,there were no transfers between the Company recorded net foreign currency transaction losses of approximately $0.3 million and $0.4 million, respectively, primarily related to outstanding intercompany loans that Ctrack has with certain of its subsidiaries, which are remeasured at each reporting period and payable upon demand.
All recorded gains and losses on foreign currency transactions are recorded in other income (expense), net, inlevels within the consolidated statements of operations.fair value hierarchy.
Other Financial Instruments
The Company’s financial assets and liabilities are carried at fair value or at amounts that, because of their short-term nature, approximate current fair value, with the exception of its $105.1 million in Convertiblethe 2025 Notes (as defined below) (seeand 2022 Notes. (See Note 5, Debt).
The Company carries its Convertible2025 Notes at amortized cost. The debt and equity componentscost adjusted for changes in fair value of the Convertible Notes were initially measured using Level 3 inputs and are not measured on a recurring basis.embedded derivative. It is not practicable
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to determine the fair value of the Convertible2025 Notes due to the lack of information available to calculate the fair value of such notes. The carrying value of the liability component of the Convertible Notes was $101.3 million and $93.1 million as of December 31, 2019 and 2018, respectively.
5. Debt
Short-Term Borrowings
DigiCore Secured Banking Facility
DigiCore has a secured banking facility with Absa Bank Limited in South Africa (“Absa”), which had a maximum borrowing capacity of $1.0 million at December 31, 2019. The facility bears interest at the South Africa prime interest rate less 0.10% (9.90% at December 31, 2019) and is subject to renewal annually. At December 31, 2019 and 2018, $0.2 million and $1.0 million, respectively, was outstanding under this facility.
DigiCore Secured Overdraft Facility
DigiCore has a secured overdraft facility with Grindrod Bank Limited in South Africa, which had a maximum borrowing capacity of $0.3 million at December 31, 2019. The facility bears interest at the South Africa prime interest rate plus 1.00% (11.00% at December 31, 2019), requires monthly interest and, in certain instances, minimum principal payments. The facility is subject to renewal annually. At December 31, 2019 and 2018, $21.0 thousand and $0.4 million, respectively, was outstanding under this facility.
Long-Term Debt
Term Loan
On August 23, 2017, the Company and certain of its direct and indirect subsidiaries (the “Guarantors”) entered into a credit agreement (the “Credit Agreement”) with Cantor Fitzgerald Securities, as administrative agent and collateral agent, and certain lenders (the “Lenders”). Pursuant to the Credit Agreement, the Lenders provided the Company with a term loan in the principal amount of $48.0 million (the “Term Loan”) with a maturity date of August 23, 2020 (the “Maturity Date”). In conjunction with the closing of the Term Loan, the Company received proceeds of $46.9 million, $35.0 million of which was funded to the Company in cash on the closing date, net of an original issue discount and commitment fee, and the remaining $11.9 million of which was funded through the Company’s repurchase and cancellation of approximately $14.9 million of its then outstanding Inseego2022 Notes (as defined below) pursuant to the terms of the Note Purchase Agreement (as defined below). The Company paid issuance costs of approximately $0.5 million. Additionally, the Company issued shares of its common stock and accrued an exit fee, which, when combined with the original debt discount and commitment fee, resulted in a total debt discount of approximately $4.0 million.
The Term Loan is secured by a first priority lien on substantially all of the assets of the Company and the Guarantors, including equity interests in certain of the Company’s direct and indirect subsidiaries, in each case subject to certain customary exceptions and permitted liens. The Credit Agreement includes customary representations and warranties, a material adverse change clause, as well as customary reporting and financial covenants, including a restriction on the level of capital expenditures. The Company obtained waivers of the capital expenditure restriction from the lenders during the year ended December 31, 2019. As a result of the waivers, as of December 31, 2019, the Company was in compliance with all financial covenants under the Credit Agreement. On March 9,31, 2020, the Company entered into an amendment to the Credit Agreement, which among other things, amended certain financial covenants set forth therein and permits the useissued 2,330 shares of the Company’s Series E Preferred Stock to make certain payments, includingSouth Ocean Funding L.L.C. (“South Ocean”), the Lender holding all of the aggregate principal amount then outstanding under the Credit Agreement in satisfaction of all then accrued interest payments, due thereunder.under the Credit Agreement.
On May 12, 2020, the Company used a portion of the proceeds from the Offering to repay in full the Term Loan and terminate the Credit Agreement. The amounts paid included $47.5 million in outstanding principal, approximately $0.5 million in interest accrued thereon, and prepayment and exit fees of $1.4 million. The Company also used a portion of the proceeds of the Offering to repurchase the 2,330 shares of Series E Preferred Stock that had been issued to South Ocean for $2.4 million.
The Term Loan bearsbore interest at a rate per annum equal to the three-month LIBOR, but in no event less than 1.00%, plus 7.625% (9.535% at December 31, 2019). Interest on the Term Loan is payable on the last business day of each calendar month and on the Maturity Date. Principal on the Term Loan is payable on the Maturity Date. At December 31, 2019, interest due to related parties, totaling $1.3 million, was deferred and is included in accrued expenses and other current liabilities on the condensed consolidated balance sheet. This amount will convert to Series E Preferred Stock based on the amendment noted above. Principal on the Term Loan is payable on the Maturity Date.
F-23
As required by the terms of the Credit Agreement, during the year ended December 31, 2018, the Company repaid $0.5 million of principal on the Term Loan in connection with the Settlement Agreement, as defined below (see Note 10, Commitments and Contingencies).
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Related parties currently hold 100% of the principal amount. On March 10, 2020, the Company entered into a letter agreement (the “Letter Agreement”) with South Ocean Funding, LLC (“South Ocean”), the Lender, holder of the aggregate principal amount currently outstanding under the Credit Agreement, which provides: (i) that the Company and South Ocean will work together, in good faith, to reach an agreement to amend or refinance the Credit Agreement in order to extend the maturity of the Credit Agreement until a date after March 15, 2021; and (ii) should an agreement not be reached to amend or refinance the Credit Agreement prior to August 23, 2020, upon request of the Company, the maturity date of the Credit Agreement will be extended to no earlier than March 15, 2021.
The Term Loan consisted of the following (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Principal | $ | 47,500 |
| | $ | 47,500 |
|
| Less: unamortized debt discount and debt issuance costs | (962 | ) | | (2,454 | ) |
| Net carrying amount | $ | 46,538 |
| | $ | 45,046 |
|
| | | | | | | | |
| | December 31, |
| | 2019 |
| Principal | | $ | 47,500 | |
| Less: unamortized debt discount and debt issuance costs | | (962) | |
| Net carrying amount | | $ | 46,538 | |
The effective interest rate on the Term Loan was 13.50%15.19% for the year ended December 31, 2019.2020. The following table sets forth total interest expense recognized related to the Term Loan during the years ended December 31, 20192020 and 20182019 (in thousands):
| | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 |
| Contractual interest expense | $ | 1,667 | | | $ | 4,789 | |
| Amortization of debt discount | 859 | | | 1,331 | |
| Amortization of debt issuance costs | 103 | | | 161 | |
| Total interest expense | $ | 2,629 | | | $ | 6,281 | |
|
| | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 |
| Contractual interest expense | $ | 4,789 |
| | $ | 4,684 |
|
| Amortization of debt discount | 1,331 |
| | 1,331 |
|
| Amortization of debt issuance costs | 161 |
| | 160 |
|
| Total interest expense | $ | 6,281 |
| | $ | 6,175 |
|
Convertible Senior2025 Notes
Novatel Wireless Notes
On June 10, 2015, Novatel Wireless issued $120.0May 12, 2020, the Company completed its registered public Offering of $100.0 million aggregate principal amount of 5.50% convertible senior notes due2025 Notes.
On May 12, 2020, (the “Novatel Wireless Notes”). Thethe Company incurred issuance costsalso entered into Exchange Agreements with certain related party holders of the 2022 Notes. Pursuant to the Exchange Agreements, these noteholders agreed to exchange the 2022 Notes that they held (representing an aggregate of $45.0 million principal amount of 2022 Notes with an estimated fair value of approximately $3.9 million. The Company used a portion$112.4 million as of the proceeds fromdate of exchange) for an aggregate of $32.0 million in cash and $80.4 million principal amount of 2025 Notes in private placement transactions that closed concurrently with the offering to finance its acquisitionregistered Offering. In connection therewith, the Company recorded $67.2 million in loss on debt conversion and extinguishment, net in the consolidated statement of Ctrack, to pay fees and expenses relatedoperations. The 2025 Notes issued in the Private Exchange Transactions are part of the same series as the 2025 Notes issued in the registered Offering.
During the year ended December 31, 2020, certain holders of the 2025 Notes converted pursuant to the acquisition and for general corporate purposes.
The Novatel Wireless Notes are governed by theoriginal terms of the 2025 Notes, an indenture, dated June 10, 2015, between Novatel Wireless, as issuer, Inseego and Wilmington Trust, National Association, as trustee, as amended by certain supplemental indentures. The Novatel Wirelessaggregate of approximately $13.5 million in principal amount of the 2025 Notes are senior unsecured obligations of Novatel Wireless and bear interest at a rate of 5.50% per year, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2015. The Novatel Wireless Notes will mature on June 15, 2020, unless earlier repurchased or converted. The Novatel Wireless Notes will be convertible into cash,1,177,156 shares of the Company’s common stock, or a combination thereof, at the electionincluding 108,572 shares of common stock issued in satisfaction of the Company, at an initial conversion price of $5.00 per share of the Company’s common stock.
Following the settlement of the exchange offer and consent solicitation described below, approximately $0.2 million aggregate principal amount of Novatel Wireless Notes remain outstanding.interest make-whole payment. In connection withtherewith, the exchange offer and consent solicitation, the Novatel Wireless Notes and its related indenture were amended to, among other things, eliminate certain eventsCompany recorded a loss of default and substantially all of the restrictive covenants$1.2 million in the Novatel Wireless Notes and its related indenture, including the merger covenant, which sets forth certain requirements that must be met for Novatel Wireless to consolidate, merge or sell all or substantially allconsolidated statement of its assets, and the reporting covenant, which requires Novatel Wireless to provide certain periodic reports to noteholders. The Novatel Wireless Notes’ related indenture, as amended, also provides that the form of settlement of any conversions of the Novatel Wireless Notes will be elected by the Company.operations.
Inseego Notes
On January 9, 2017, in connection with the settlement of an exchange offer and consent solicitation with respect to the Novatel Wireless Notes, the Company issued approximately $119.8 million of 5.50% convertible senior notes due 2022 (the “Inseego Notes” and collectively with Novatel Wireless Notes, the “Convertible Notes”). The Inseego Notes were issued in
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
exchange for approximately $119.8 million aggregate principal amount of outstanding Novatel Wireless Notes that were validly tendered and accepted for exchange and subsequently canceled.
The Inseego2025 Notes are governed by the terms ofissued under an indenture, dated January 9, 2017May 12, 2020 (the “Inseego“Base Indenture”), between the Company as issuer, and Wilmington Trust, National Association, as trustee (the “Trustee”). , as supplemented by the first supplemental indenture, dated May 12, 2020 (the “Supplemental Indenture” and, together with the Base Indenture, the “Indenture”), between the Company and the Trustee.
The Inseego2025 Notes will mature on May 1, 2025, unless earlier repurchased, redeemed or converted. The 2025 Notes are senior unsecured obligations of the Company and bear interest from, and including, December 15, 2016, at aan annual rate of 5.50% per year,3.25%, payable semi-annually in arrears on June 15May 1 and December 15November 1 of each year, beginning on June 15, 2017. The InseegoNovember 1, 2020.
Holders of the 2025 Notes will mature on June 15, 2022, unless earlier converted, redeemed or repurchased.
The Inseegomay convert the 2025 Notes will be convertible into cash, shares of the Company’s common stock or a combination thereof,(together with cash in lieu of any fractional share), at their option, at any time until the electionclose of business on the scheduled trading day immediately before the maturity date. Upon conversion of the 2025 Notes, the Company at anwill deliver for each $1,000 principal amount of 2025 Notes converted a number of shares of common stock (together with cash in lieu of any fractional share), equal to the conversion rate.
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The initial conversion rate of 212.7660for the 2025 Notes is 79.2896 shares of common stock per $1,000 principal amount of the Inseego2025 Notes, which corresponds torepresents an initial conversion price of $4.70approximately $12.61 per share, of the Company’s common stock. The conversion rateand is subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, certain stock dividends, splits and combinations, the issuance of certain rights, options or warrants to holders of the common stock, certain distributions of assets, debt securities, capital stock or other property to holders of the common stock, cash dividends on the common stock and payment of cash dividends. Because the sale price condition includedcertain Company tender or exchange offers.
If a fundamental change (as defined in the Inseego Indenture was satisfied during December 2019, the Inseego Notes are currently convertible and will remain convertible until March 31, 2020, at which time the convertibility will be reevaluated.
At any time prior to the close of business on the business day immediately preceding December 15, 2021, holders may convert their Inseego Notes at their option only under the following circumstances:
| |
(i) | during any calendar quarter (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter equals or exceeds 130% of the conversion price on such trading day; |
| |
(ii) | during the 5 consecutive business day period immediately after any 5 consecutive trading day period (the “Measurement Period”) in which the trading price per $1,000 principal amount of the Inseego Notes for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price per share of the Company’s common stock and the conversion rate on each such trading day; |
| |
(iii) | upon the occurrence of certain corporate events specified in the Inseego Indenture; or |
| |
(iv) | if the Company has called the Inseego Notes for redemption. |
On or after December 15, 2021, the holders may convert any of their Inseego NotesIndenture) occurs at any time prior to the closematurity date, then the noteholders may require the Company to repurchase their 2025 Notes at a cash repurchase price equal to the principal amount of businessthe 2025 Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date.If a make-whole fundamental change (as defined in the Indenture) occurs, then the Company will in certain circumstances increase the conversion rate for a specified period of time.
The 2025 Notes will be redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on or after May 6, 2023 and on or before the businessscheduled trading day immediately precedingbefore the maturity date.
The Company may redeem all ordate, at a portioncash redemption price equal to the principal amount of the Inseego2025 Notes at its optionto be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, as long as the last reported sale price per share of the Company’s common stock equals or exceeds 140%130% of the conversion price foron (i) each of at least 20 trading days, (whetherwhether or not consecutive)consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately prior tobefore the date on which the Company provides written notice of redemption, at a redemption price equal to 100% of the principal amount of the Inseego Notes to be redeemed, plus any accrued and unpaid interest on such Inseego Notes, subject to the right of holders as of the close of business on an interest record date to receivesends the related interest. In addition, ifredemption notice; and (ii) the trading day immediately before the date the Company calls the Inseego Notes for redemption, a “make-whole fundamental change” (as defined in the Inseego Indenture) will be deemed to occur. As a result, the Company will, in certain circumstances, increase the conversion rate for holders who convert their Inseego Notes in connection withsends such redemption.notice.
The Inseego Notes are subject to repurchase by the Company at the Optional Repurchase Date at a repurchase price in cash equal to 100% of the principal amount of the Inseego Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the Optional Repurchase Date, subject to the right of holders of the Inseego Notes on a record date to receive interest through the corresponding interest payment date. On March 6, 2020, the holders of substantially all of the outstanding indebtedness under the notes agreed to waive their optional right to require the Company to repurchase the notes on June 15, 2020.
No “sinking fund” is provided for the Inseego Notes, which means that the Company is not required to periodically redeem or retire the Inseego Notes. If the Company undergoes a “fundamental change” (as defined in the Inseego Indenture), subject to certain conditions, holders may require the Company to repurchase for cash all or part of their Inseego Notes in principal amounts of $1,000, or an integral multiple of $1,000 in excess thereof. The fundamental change repurchase price will be equal to 100% of the principal amount of the Inseego Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date, subject to the right of holders as of the close of business on an interest
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
record date to receive the related interest. In addition, every fundamental change is a make-whole fundamental change. As a result, the Company will, in certain circumstances, increase the conversion rate for holders who convert their Inseego Notes in connection with such fundamental change.
The Inseego Indenture contains certain covenants, effective until June 15, 2020, that limit the amount of debt, including secured debt, that may be incurred by the Company or its subsidiaries, and that limit the ability of the Company to pay dividends, repurchase its equity securities or make other restricted payments. The Company was in compliance with such covenants at December 31, 2019.
The Inseego Indenture also provides for customary events of default. If an event of default (other than certain events of bankruptcy, insolvency or reorganization involving the Company) occurs and is continuing, the Trustee, by notice to the Company, or the holders of the 2025 Notes representing at least 25% in aggregate principal amount of the outstanding Inseego2025 Notes, by notice to the Company and the Trustee, may declare 100% of the principal of, and all accrued and unpaid interest on, all of the then outstanding Inseego2025 Notes to be immediately due and payable.payable immediately. Upon the occurrence of certain events of bankruptcy, insolvency or reorganization involving the Company, 100% of the principal of, and all accrued and unpaid interest on, all of the Inseegothen outstanding 2025 Notes will automatically become immediately due and payable. Notwithstanding the foregoing, the Inseego Indenture provides that, to the extent the Company elects, and for up to 60 days, the sole remedy for an event of default relating to certain failures by the Company to comply with certain reporting covenants consistsin the Indenture will, for the first 360 days after such event of default, consist exclusively of the right to receive specialadditional interest on the Inseego2025 Notes.
Interest make-whole payment
The 2025 Notes atalso include an interest make-whole payment feature whereby if the last reported sale price of the Company’s common stock for each of the five trading days immediately preceding a conversion date is greater than or equal to $10.51, the Company will, in addition to the other consideration payable or deliverable in connection with such conversion, make an interest make-whole payment to the converting holder equal to the sum of the present values of the scheduled payments of interest that would have been made on the 2025 Notes to be converted had such notes remained outstanding from the conversion date through the earlier of (i) the date that is three years after the conversion date and (ii) the maturity date. The present values will be computed using a discount rate equal to 0.50% per annum1%. The Company will satisfy its obligation to pay the interest make-whole payment, at its election, in cash or shares of common stock (together with cash in lieu of fractional shares).The Company has determined that this feature is an embedded derivative and has recognized the fair value of this derivative as a liability in the consolidated balance sheets, with subsequent changes to fair value to be recorded at each reporting period on the consolidated statement of operations in other income, net.
As of December 31, 2020, $166.9 million in principal amount of the 2025 Notes were outstanding, Inseego Notes.
Because the exchange$80.4 million of which was held by related parties. Assuming no repurchases or conversion of the Novatel Wireless2025 Notes forprior to May 1, 2025, the Inseego Notes described above was treated as a debt modification in accordance with applicable FASB guidance (it was between a parent and a subsidiary company and for substantially identical notes), the Company did not recognize a gain or loss with respect to the issuanceentire principal balance of the Inseego Notes. In accordance with authoritative guidance, the Company recognized $3.6 million as an additional component of debt discount and additional paid-in capital attributed to the increase in the fair value of the embedded conversion feature of the Inseego Notes before and after modification. The Company will amortize the debt discount on the Inseego Notes as a component of interest expense using the effective interest method through June 2020.
At December 31, 2019, approximately $44.8$166.9 million of the Inseego2025 Notes, were held by related parties.is due on May 1, 2025.
The Convertible Notes consisted of the following (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Liability component: | | | |
| Principal | $ | 105,125 |
| | $ | 105,125 |
|
| Less: unamortized debt discount and debt issuance costs | (3,791 | ) | | (12,071 | ) |
| Net carrying amount | $ | 101,334 |
| | $ | 93,054 |
|
| Equity component | $ | 41,905 |
| | $ | 41,905 |
|
F-25
In connection with the issuance of the Convertible Notes, the Company incurred approximately $3.9 million of issuance costs, which primarily consisted of underwriting, legal and other professional fees, and allocated the costs to the liability and equity components based on the allocation of the proceeds. Of the approximately $3.9 million of issuance costs, approximately $1.3 million were allocated to the equity component and recorded as a reduction to additional paid-in capital and $2.6 million were allocated to the liability component and recorded as a decrease to the carrying amount of the liability component on the consolidated balance sheet. The portion allocated to the liability component is being amortized to interest expense using the effective interest method through June 2020.
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 2025 Notes consist of the following (in thousands):
| | | | | | | |
| December 31,
2020 | | |
| Liability component | | | |
| Principal | $ | 166,898 | | | |
| Add: fair value of embedded derivative | 4,898 | | | |
| Less: unamortized debt discount | (3,703) | | | |
| Less: unamortized issuance costs | (2,946) | | | |
| Net carrying amount | $ | 165,147 | | | |
The effective interest rate on the liability component of the Convertible2025 Notes was 13.88%4.10% for the yeartwelve months ended December 31, 2019.2020. The following table sets forth total interest expense recognized related to the Convertible2025 Notes (in thousands):
| | | | | | | | | | | | | | |
| | | | Year Ended December 31, 2020 |
| | | | | | |
| Contractual interest expense | | | | | $ | 3,434 | | |
| Amortization of debt discount | | | | | 552 | | |
| Amortization of debt issuance costs | | | | | 439 | | |
| Total interest expense | | | | | $ | 4,425 | | |
As the offering of the 2025 Notes took place during the yearstwelve months ended December 31, 2019 and 2018 (in thousands):2020, there was no interest expense in the comparable twelve months of 2019.
|
| | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 |
| Contractual interest expense | $ | 5,782 |
| | $ | 5,782 |
|
| Amortization of debt discount | 7,821 |
| | 7,822 |
|
| Amortization of debt issuance costs | 459 |
| | 459 |
|
| Total interest expense | $ | 14,062 |
| | $ | 14,063 |
|
AtSubsequent to December 31, 2019, the minimum calendar year principal payments and maturities of long-term debt were as follows, assuming no repurchases or conversions2020, $5.0 million of the Novatel Wireless2025 Notes priorwere converted into 428,669 shares, pursuant to June 15, 2020,original terms of the maturity date, or2025 Notes, including 32,221 shares of common stock in satisfaction of the Inseego Notes prior to June 15, 2022, the maturity date (in thousands):interest-make-whole payments.
|
| | | |
| 2020 | $ | 47,750 |
|
| 2021 | — |
|
| 2022 | 104,875 |
|
| 2023 | — |
|
| 2024 | — |
|
| Thereafter | — |
|
| Total | $ | 152,625 |
|
2022 Notes
On January 9, 2017, in connection with the Note Exchange Shares(as defined below), the Company issued approximately $119.8 million aggregate principal amount of 2022 Notes.
InDuring the first quarter ofthree months ended March 31, 2020, the Company entered into privately-negotiated exchange agreements with certain investors holding the Inseego2022 Notes. Pursuant to thethose exchange agreements, the investors exchanged $59.9 million in aggregate principal amount of outstanding Inseego2022 Notes for 13,688,876 shares of the Company’s common stock, par value $0.001 per share.stock. The investors that participated in such exchange agreements agreed to waive any accrued but unpaid interest on the exchanged Inseego2022 Notes. Included in the 13,688,876 shares of common stock issued in the exchange transactions that took place during the three months ended March 31, 2020 were 942,706 shares valued at $7.9 million on the date of issuance at fair value, which were issued pursuant to the terms of the privately-negotiated exchange agreements and were in excess of the consideration issuable under the original conversion terms of the exchanged 2022 Notes. ASC 470, Debt, requires the recognition through earnings of an inducement charge equal to the fair value of the consideration delivered in excess of the consideration issuable under the original conversion terms. This resulted in a non-cash charge of $7.9 million, which was recorded as inducement expense within loss on debt conversion and extinguishment, net, in the consolidated statement of operations.
Pursuant to the Private Exchange Transactions described above, on May 12, 2020, the holders of an aggregate of $45.0 million principal amount of 2022 Notes exchanged their 2022 Notes for a combination of 2025 Notes and cash. As a result of the Private Exchange Transactions, $2,000 in principal amount of the 2022 Notes were outstanding as of June 30, 2020. On July 22, 2020, pursuant to a redemption notice issued on May 15, 2020, the Company redeemed the remaining $2,000 principal amount of the 2022 Notes.
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 2022 Notes consist of the following (in thousands):
| | | | | | | | |
| | December 31,
2019 |
| Liability component | | |
| Principal | | $ | 105,125 | |
| Less: unamortized debt discount and issuance costs | | (3,791) | |
| Net carrying amount | | $ | 101,334 | |
The effective interest rate on the liability component of the 2022 Notes was 12.89% for the twelve months ended December 31, 2020. The following table sets forth total interest expense recognized related to the 2022 Notes (in thousands):
| | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 |
| Contractual interest expense | $ | 768 | | | $ | 5,782 | |
| Amortization of debt discount | 1,952 | | | 7,821 | |
| Amortization of debt issuance costs | 111 | | | 459 | |
| Total interest expense | $ | 2,831 | | | $ | 14,062 | |
Novatel Wireless Notes
On June 10, 2015, Novatel Wireless issued $120.0 million of 5.50% convertible senior notes due 2020 (the “Novatel Wireless Notes”). The Company incurred issuance costs of approximately $3.9 million, which were governed by the terms of an indenture, dated June 10, 2015, between Novatel Wireless, as issuer, Inseego and Wilmington Trust, National Association, as trustee, as amended by certain supplemental indentures (“the Novatel Indenture”). On January 9, 2017, in connection with the abovesettlement of an exchange offer and consent solicitation with respect to the Novatel Wireless Notes (the “Note Exchange”), approximately $119.8 million aggregate principal amount of outstanding Novatel Wireless Notes were validly tendered and accepted for exchange and subsequently canceled. In February 2020, the holders of the remaining $250,000 of the aggregate
principal amount of Novatel Wireless Notes that remained outstanding following the Note Exchange, Shares, the Company issued 942,702 additionalconverted their Novatel
Wireless Notes into 50,000 shares of Inseego Corp. common stock, at the Company’s common stock. The Company will account forconversion price of $5.00 per share, in accordance
with the debt conversionterms of the Novatel Indenture. Accordingly, no Novatel Wireless Notes were outstanding as an induced conversion under ASC 470 -“Debt”, and as such, expects to record a loss on induced conversion of approximately $7.9 million as other expense during the first quarter ofDecember 31, 2020.
6. Income Taxes
The Company’s loss before income taxes for the years ended December 31, 20192020 and 20182019 is comprised of the following (in thousands):
| | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 | | |
| Domestic | $ | (109,837) | | | $ | (39,187) | | | |
| Foreign | (601) | | | (387) | | | |
| Loss before income taxes | $ | (110,438) | | | $ | (39,574) | | | |
|
| | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 |
| Domestic | $ | (39,187 | ) | | $ | (7,335 | ) |
| Foreign | (387 | ) | | 7 |
|
| Loss before income taxes | $ | (39,574 | ) | | $ | (7,328 | ) |
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for income taxes for the years ended December 31, 20192020 and 20182019 is comprised of the following (in thousands):
|
| | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 |
| Current: | | | |
| Federal | $ | (49 | ) | | $ | — |
|
| State | 35 |
| | 35 |
|
| Foreign | 1,148 |
| | 766 |
|
| Total current | 1,134 |
| | 801 |
|
| Deferred: | | | |
| Federal | 12 |
| | 12 |
|
| State | — |
| | — |
|
| Foreign | (610 | ) | | 2 |
|
| Total deferred | (598 | ) | | 14 |
|
| Provision for income taxes | $ | 536 |
| | $ | 815 |
|
| | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 | | |
| Current: | | | | | |
| Federal | $ | 0 | | | $ | (49) | | | |
| State | (4) | | | 35 | | | |
| Foreign | 93 | | | 1,148 | | | |
| Total current | 89 | | | 1,134 | | | |
| Deferred: | | | | | |
| Federal | 12 | | | 12 | | | |
| State | 0 | | | 0 | | | |
| Foreign | 647 | | | (610) | | | |
| Total deferred | 659 | | | (598) | | | |
| Provision for income taxes | $ | 748 | | | $ | 536 | | | |
The Company’s net deferred tax liabilities consist of the following (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Deferred tax assets: | | | |
| Provision for excess and obsolete inventory | $ | 2,003 |
| | $ | 2,710 |
|
| Depreciation and amortization | — |
| | 1,426 |
|
| Interest expense limitation | 5,562 |
| | 2,769 |
|
| Net operating loss and tax credit carryforwards | 95,258 |
| | 86,385 |
|
| Share-based compensation | 1,226 |
| | 1,218 |
|
| Right-of-use-asset | 650 |
| | — |
|
| Unrecognized tax benefits | 1,288 |
| | 1,163 |
|
| Deferred tax assets | 105,987 |
| | 95,671 |
|
| Deferred tax liabilities: |
| | |
| Operating lease liability | (650 | ) | | — |
|
| Purchased intangible assets | (3,623 | ) | | (4,485 | ) |
| Depreciation and amortization | (1,742 | ) | | — |
|
| Accrued expenses | (219 | ) | | (1,799 | ) |
| Deferred tax liabilities | (6,234 | ) | | (6,284 | ) |
| Valuation allowance | (103,702 | ) | | (93,844 | ) |
| Net deferred tax liabilities | $ | (3,949 | ) | | $ | (4,457 | ) |
| | | | | | | | | | | |
| | December 31, |
| | 2020 | | 2019 |
| Deferred tax assets: | | | |
| Accrued expenses | $ | 1,940 | | | $ | 647 | |
| Provision for excess and obsolete inventory | 2,016 | | | 2,003 | |
| | | |
| Convertible debt | 13,367 | | | 0 | |
| Interest expense limitation | 7,798 | | | 5,562 | |
| Net operating loss and tax credit carryforwards | 108,340 | | | 95,258 | |
| Share-based compensation | 1,911 | | | 1,226 | |
| Right-of-use-asset | 2,059 | | | 650 | |
| Unrecognized tax benefits | 1,567 | | | 1,288 | |
| Deferred tax assets | 138,998 | | | 106,634 | |
| Deferred tax liabilities: | | | |
| Operating lease liability | (2,059) | | | (650) | |
| Acquired intangible assets | (2,155) | | | (3,623) | |
| Convertible debt | 0 | | | (866) | |
| Depreciation and amortization | (5,545) | | | (1,742) | |
| Unrealized foreign currency gains | (375) | | | 0 | |
| Deferred tax liabilities | (10,134) | | | (6,881) | |
| Valuation allowance | (133,369) | | | (103,702) | |
| Net deferred tax liabilities | $ | (4,505) | | | $ | (3,949) | |
The Company recognizes federal, state and foreign current tax liabilities or assets based on its estimate of taxes payable to or refundable by tax authorities in the current fiscal year. The Company also recognizes federal, state and foreign deferred tax liabilities or assets based on the Company’s estimate of future tax effects attributable to temporary differences and carryforwards. The Company records a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized.
The Company assesses whether a valuation allowance should be recorded against its deferred tax assets based on the consideration of all available evidence, using a “more likely than not” realization standard. The four sources of taxable income that must be considered in determining whether deferred tax assets will be realized are: (1) future reversals of existing taxable temporary differences (i.e., offset of gross deferred tax assets against gross deferred tax liabilities); (2) taxable income in prior
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
carryback years, if carryback is permitted under the applicable tax law; (3) tax planning strategies; and (4) future taxable income exclusive of reversing temporary differences and carryforwards.
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 20192020 and 2018,2019, the Company recognized valuation allowances of $9.2$26.4 million and $2.9$9.2 million, respectively, related to its deferred tax assets created in those respective years. As a result, no net income tax benefits resulted in the Company’s statements of operations from the operating losses created during those years.
The provision for income taxes reconciles to the amount computed by applying the statutory federal income tax rate of 21% in 20192020 and 20182019 to loss before income taxes as follows (in thousands):
|
| | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 |
| Federal tax benefit, at statutory rate | $ | (8,311 | ) | | $ | (1,555 | ) |
| State benefit, net of federal benefit | 27 |
| | 27 |
|
| Foreign tax rate difference | 476 |
| | 24 |
|
| Valuation allowance against future tax benefits | 9,168 |
| | 2,878 |
|
| Research and development credits | (1,456 | ) | | (471 | ) |
| Share-based compensation | 341 |
| | 121 |
|
| Other | 291 |
| | (209 | ) |
| Provision for income taxes | $ | 536 |
| | $ | 815 |
|
| | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 | | |
| Federal tax benefit, at statutory rate | $ | (23,192) | | | $ | (8,311) | | | |
| State benefit, net of federal benefit | (1,285) | | | 27 | | | |
| Foreign tax rate difference | (140) | | | 476 | | | |
| | | | | |
| | | | | |
| Valuation allowance against future tax benefits | 26,410 | | | 9,168 | | | |
| Loss on conversion of debt | 2,015 | | | 0 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Research and development credits | (2,355) | | | (1,456) | | | |
| Share-based compensation | (1,134) | | | 341 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Other, including true-up of prior year provisions | 429 | | | 291 | | | |
| Provision for income taxes | $ | 748 | | | $ | 536 | | | |
At December 31, 2019,2020, the Company had U.S. federal net operating loss carryforwards (“NOLs”) related to tax years 20192020 and prior of approximately $389.1$429.3 million. Approximately $41.3$81.5 million of these NOLs have no expiration date. The remainder begin to expire in 2021, unless previously utilized. Some of these NOLs may be limited by either past or future changes in control events. The Company has California net operating loss carryforwards at December 31, 20192020 of approximately $44.0$55.0 million, which begin to expire in 2028, unless previously utilized, and foreign net operating losses for its active foreign subsidiaries of approximately $50.2$46.7 million, which generally have no expiration date. At December 31, 2019,2020, the Company had federal research and development tax credit carryforwards of approximately $10.2$12.8 million, which begin to expire in 2026, unless previously utilized, and California research and development tax credit carryforwards of approximately $12.1$14.0 million, which have no expiration date.
Pursuant to Internal Revenue Code (“IRC”) Sections 382 and 383, annual use of the Company’s net operating loss and research and development credit carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a rolling three-year period. An analysis was performed for the period through December 31, 20192020 and did not identify any events of cumulative change in ownership during the review period. The Company will continue monitoring any future changes in stock ownership.
The Company entered into a Rights Agreement on January 22, 2018 (the “Rights Agreement”), subsequent to the balance sheet date, with Computershare Trust Company, N.A., a federally chartered trust company, as rights agent. The Rights Agreement is intended to discourage acquisitions of the Company’s common stock which could result in a cumulative change in ownership of more than 50% within a rolling three-year period, thereby preserving the Company’s current ability to utilize net operating loss carryforwards to offset future income tax obligations; however, there is no assurance that the Rights Agreement will prevent a cumulative change in ownership.
It is the Company’s intention to reinvest undistributed earnings of its foreign subsidiaries and thereby indefinitely postpone their remittance. Accordingly, no provision has been made for foreign withholding taxes on U.S. income taxes which may become payable if undistributed earnings of the foreign subsidiary were paid as dividends to the Company.
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which includes modifications to the limitation on business interest expense and net operating loss provisions, and provides a payment delay of employer payroll taxes during 2020 after the date of enactment. Payments of approximately $1.4 million of employer payroll taxes otherwise due in 2020, were delayed with 50% due by December 31, 2021 and the remaining 50% by December 31, 2022. The CARES Act did not have a material impact on the Company’s consolidated financial statements.
The Company follows the accounting guidance related to financial statement recognition, measurement and disclosure of uncertain tax positions. The Company recognizes the impact of an uncertain income tax position on an income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. NaN income tax benefit was recognized during the years ended December 31, 20192020 and 2018.2019. At December 31, 20192020 and 2018,2019, the Company did not0t have interest expense related to uncertain tax positions or a liability for unrecognized tax benefits. The Company does not expect changes to its uncertain tax position in the next twelve months.
F-29
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in thousands):
|
| | | |
| Balance at December 31, 2017 | $ | 36,582 |
|
| Increases related to current and prior year tax positions | 324 |
|
| Balance at December 31, 2018 | 36,906 |
|
| Increases related to current and prior year tax positions | 929 |
|
| Balance at December 31, 2019 | $ | 37,835 |
|
| | | | | |
| |
| |
| |
| Balance at December 31, 2018 | $ | 36,906 | |
| Increases related to current and prior year tax positions | 929 | |
| |
| Balance at December 31, 2019 | 37,835 | |
| Increases related to current and prior year tax positions | 1,796 | |
| |
| Balance at December 31, 2020 | $ | 39,631 | |
There are no tax benefits that, if recognized, would affect the effective tax rate that are included in the balances of unrecognized tax benefits at December 31, 2019.2020.
The Company and its subsidiaries file U.S., state and foreign income tax returns in jurisdictions with various statutes of limitations. The Company’s tax returns are subject to examination by federal, state and foreign taxing authorities. The Company’s federal and state tax returns are subject to examination for the years beginning in 20152016 and 2014,2015, respectively. Net operating loss carryforwards arising prior to these years are also open to examination, if and when utilized. The Company believes appropriate provisions for all outstanding issues have been made for all jurisdictions and all open years. However, because audit outcomes and the timing of audit settlements are subject to significant uncertainty, the Company’s current estimate of the total amounts of unrecognized tax benefits could increase or decrease for all open years.
7. Stockholders’ Equity
On August 6, 2018, the Company completed a private placement of 12,062,000 shares of its common stock and warrants (the “2018 Warrants”) to purchase an additional 4,221,700 shares of its common stock, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, to certain accredited investors for gross proceeds of $19.7 million in cash. Each warrant hashad an initial exercise price of $2.52 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, and will expire on August 6, 2023. The warrants may be exercisable on a cashless exercise basis if, and only if, the shares of common stock underlying such warrants cannot be immediately resold pursuant to an effective registration statement or Rule 144 of the Securities Act of 1933, as amended, without volume or manner of sale restrictions. In connection with the private placement, the Company incurred issuance costs of approximately $0.5 million.transactions.
On March 28, 2019, the 2018 Warrants were exercised at an exercise price of $2.52 per share, for aggregate cash proceeds to the Company of approximately $10.6 million. In connection with the exercise of the 2018 Warrants, on March 28, 2019, the Company issued additional warrants to purchase 2,500,000 shares of common stock (the “2019 Warrants”) to the accredited investors. Each 2019 Warrant has an initial exercise price of $7.00 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, will be exercisable at any time on or after September 28, 2019, and will expire on June 30, 2022. The 2019 Warrants may be exercisable on a cashless exercise basis if, and only if, the shares of common stock underlying such warrants cannot be immediately resold pursuant to an effective registration statement or Rule 144 of the Securities Act of 1933, as amended, without volume or manner of sale restrictions.
During the fourth quarter of 2019, the Company received $6.9 million in net cash proceeds from the exercise of 1,255,129 of the Company’s common stock purchase warrants issued in 2015.
The Company assessed the terms of the warrants under ASC 815, Derivatives and HedgesHedging. Pursuant to this guidance, the Company has determined that the warrants do not require liability accounting and has classified the warrants as equity.
Preferred Stock
The Company has a total of 2,000,000 shares of preferred stock authorized for issuance at a par value of $0.001 per share, 150,000 of which have been designated Series D Preferred Stock and 39,500 of which have been designated Series E Preferred Stock.
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 in accordance with the terms and provisions of a Securities Purchase Agreement, dated August 9, 2019, by and among the Company and certain accredited investors. Each share of Series E Preferred Stock entitles the holder thereof to receive, when, as and if declared by the Company out of assets legally available therefor, cumulative cash dividends at an annual rate of 9.00% payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, beginning on October 1, 2019. If dividends are not declared and paid in any quarter, or if such dividends are declared but holders of the Series E Preferred Stock elect not to receive them in cash, the quarterly dividend will be deemed to
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
accrue and will be added to the Series E Base Amount. The Series E Preferred Stock has no voting rights unless otherwise required by law. The Series E Preferred Stock is perpetual and has no maturity date. However, the Company may, at its option, redeem shares of the Series E Preferred Stock, in whole or in part, on or after July 1, 2022, at a price equal to 110% of the Series E Base Amount plus (without duplication) any accrued and unpaid dividends. The “Series E Base Amount” means $1,000 per share,
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
plus any accrued but unpaid dividends, whether or not declared by the Company’s board of directors, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series E Preferred Stock. In the event of a liquidation, dissolution or winding up of the Company, the holders of the Series E Preferred Stock will be entitled to receive, after satisfaction of liabilities to creditors and subject to the rights of holders of any senior securities, but before any distribution of assets is made to holders of common stock or any other junior securities, the Series E Base Amount plus (without duplication) any accrued and unpaid dividends.
There were no dividends declared and $0.4 million of dividends were accrued as of December 31, 2019.
On March 6, 2020, the Company entered into a Securities Purchase Agreement with an accredited investor pursuant to which, among other things, the Company issued and sold to the investor, in a private placement transaction, an aggregate of 25,000 shares of the Company’s Series E Preferred Stock, for a purchase price of $1,000 per share of Series E Preferred Stock, resulting in gross proceeds to the Company of $25.0 million.
There were no dividends declared and $2.9 million and $0.4 million of dividends were accrued as of December 31, 2020, and 2019, respectively.
Rights Agreement
On January 22, 2018, the Company entered into thea Rights Agreement with Computershare Trust Company, N.A., a federally chartered trust company, as rights agent (as subsequently amended, the “Rights Agreement”) and issued a dividend of 1 preferred share purchase right (a “Right”) to each of the stockholders of record of each share of common stock outstanding on February 2, 2018. Each Right entitlesentitled the registered holder to purchase from the Company one one-thousandth of a share of Series D Preferred Stock, par value $0.001 per share (the “Preferred Shares”), of the Company, at a price of $10.00 per one one-thousandth of a Preferred Share represented by a Right (the “Purchase Price”), subject to adjustment. The description and terms of the Rights are set forth in the Rights Agreement.
The Rights arewere not exercisable until the Distribution Date (as defined in the Rights Agreement). The Rights will expire on the earlier of (i) the close of businessexpired on January 22, 2021, (ii) the time at which the Rights are redeemed, and (iii) the time at which the Rights are exchanged.2021.
Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends.
In connection with the issuance of the 2019 Warrants, on March 28, 2019, the Company entered into an Amendment No. 3 to the Rights Agreement, dated January 22, 2018, as amended by that certain Amendment No. 1 to Rights Agreement, dated August 6, 2018, and as amended by that certain Amendment No. 2 to Rights Agreement, dated December 4, 2018, between the Company and Computershare Trust Company, N.A., as rights agent, for the purpose of modifying the definition of “Acquiring Person” under the Rights Agreement to permit each of the Investors to remain a Grandfathered Stockholder (as defined in the Rights Agreement) and not be deemed an “Acquiring Person” under the Rights Agreement in connection with the Investors’ purchase of the 2019 Warrants.
The Investors will remain Grandfathered Stockholders under the terms of the Rights Agreement as long as they do not acquire, after the date of the Third Amendment to Rights Agreement, beneficial ownership of Company securities (other than as a result of any adjustment provision or the accrual of interest under any outstanding convertible notes) equal to more than 0.50% of the then-outstanding common stock.
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common Shares Reserved for Future Issuance
The Company had reserved shares of common stock for possible future issuance as of December 31, 20192020 and 20182019 as follows:
| | | | | | | | | | | |
| | December 31, |
| | 2020 | | 2019 |
| Common stock warrants outstanding | 2,500,000 | | | 2,838,454 | |
| Stock options outstanding | 8,479,979 | | | 9,044,304 | |
| Restricted stock units outstanding | 417,105 | | | 400,315 | |
| Shares available for issuance pursuant to Convertible Notes | 15,879,948 | | | 40,649,225 | |
| | | |
| Shares available for future grants of awards under the 2018 Omnibus Incentive Compensation Plan | 2,849,488 | | | 2,488,221 | |
| Shares available under the 2000 Employee Stock Purchase Plan | 391,201 | | | 622,476 | |
| Total shares of common stock reserved for issuance | 30,517,721 | | | 56,042,995 | |
|
| | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Common stock warrants outstanding | 2,838,454 |
| | 5,815,283 |
|
| Stock options outstanding | 9,044,304 |
| | 8,796,212 |
|
| Restricted stock units outstanding | 400,315 |
| | 454,382 |
|
| Shares available for issuance pursuant to Convertible Notes | 40,649,225 |
| | 40,649,225 |
|
| Shares available for future grants of awards under the 2015 Incentive Compensation Plan | 4,557 |
| | 1,943,085 |
|
| Shares available for future grants of awards under the 2018 Omnibus Incentive Compensation Plan | 2,483,664 |
| | 3,224,425 |
|
| Shares available under the 2000 Employee Stock Purchase Plan | 622,476 |
| | 825,537 |
|
| Total shares of common stock reserved for issuance | 56,042,995 |
| | 61,708,149 |
|
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Share-based Compensation
During the year ended December 31, 2019,2020, the Company granted awards under the 2018 Omnibus Incentive Compensation Plan, previously named the Amended and Restated 2009 Omnibus Incentive Compensation Plan (the “2018 Plan”), and the 2015 Incentive Compensation Plan (the “2015 Plan”). The Compensation Committee of the Board of Directors administers the plans.
UnderDuring the year ended December 31, 2019, the Board approved and transferred all available shares from the 2015 Plan andto the 2018 Plan. Under the 2018 Plan, a maximum of 1,946,9158,897,084 shares and 20,576,085 shares, respectively, of common stock may be issued upon the exercise of stock options, in the form of restricted stock, or in settlement of RSUs or other awards, including awards with alternative vesting schedules such as performance-based criteria.
For the years ended December 31, 20192020 and 2018,2019, the following table presents total share-based compensation expense in each functional line item on the consolidated statements of operations (in thousands):
|
| | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 |
| Cost of revenues | $ | 1,133 |
| | $ | 390 |
|
| Research and development | 1,548 |
| | 1,017 |
|
| Sales and marketing | 1,669 |
| | 970 |
|
| General and administrative | 2,952 |
| | 2,499 |
|
| Total | $ | 7,302 |
| | $ | 4,876 |
|
| | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 | | |
| Cost of revenues | $ | 1,583 | | | $ | 1,133 | | | |
| Research and development | 2,823 | | | 1,548 | | | |
| Sales and marketing | 2,346 | | | 1,669 | | | |
| General and administrative | 3,667 | | | 2,952 | | | |
| | | | | |
| Total | $ | 10,419 | | | $ | 7,302 | | | |
Stock Options
The Compensation Committee of the Board of Directors determines eligibility, vesting schedules and exercise prices for stock options granted. Stock options generally have a term of ten years and vest over a three-three- to four-year period.
The following table presents the weighted-average assumptions used in the Black-Scholes valuation model by the Company in calculating the fair value of each stock option granted:
|
| | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 |
| Expected dividend yield | — | % | | — | % |
| Risk-free interest rate | 1.8 | % | | 2.8 | % |
| Volatility | 81 | % | | 84 | % |
| Expected term (in years) | 5.8 |
| | 5.8 |
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | |
| | 2020 | | 2019 | | | | | | | | |
| Expected dividend yield | 0 | % | | 0 | % | | | | | | | | |
| Risk-free interest rate | 0.9 | % | | 1.8 | % | | | | | | | | |
| Volatility | 95 | % | | 81 | % | | | | | | | | |
| Expected term (in years) | 5.8 | | 5.8 | | | | | | | | |
The weighted-average fair value of stock option awards granted during the years ended December 31, 2020 and 2019 was $7.11 and 2018 was $3.56, and $1.56, respectively.
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the Company’s stock option activity for the years ended December 31, 20192020 and 20182019 (dollars in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | |
| Stock
Options
Outstanding | | Weighted-Average
Exercise
Price Per
Option | | Weighted-Average
Remaining
Contractual
Term
(in years) | | Aggregate
Intrinsic
Value |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Outstanding — December 31, 2019 | 9,044,304 | | | $ | 2.91 | | | | | |
| Granted | 1,526,000 | | | 9.41 | | | | | |
| Exercised | (1,357,620) | | | 3.06 | | | | | |
| Canceled | (732,705) | | | 3.60 | | | | | |
| Outstanding — December 31, 2020 | 8,479,979 | | | $ | 3.99 | | | 7.47 | | $ | 97,315 | |
| Vested and Expected to Vest — December 31, 2020 | 7,667,800 | | | $ | 3.71 | | | 7.34 | | $ | 90,150 | |
| Exercisable — December 31, 2020 | 4,293,975 | | | $ | 2.10 | | | 6.41 | | $ | 57,398 | |
|
| | | | | | | | | | | | |
| | Stock
Options
Outstanding | | Weighted-Average
Exercise
Price Per
Option | | Weighted-Average
Remaining
Contractual
Term
(in years) | | Aggregate
Intrinsic
Value |
| Outstanding — December 31, 2018 | 8,796,212 |
| | $ | 2.10 |
| | | | |
| Granted | 2,660,936 |
| | 5.17 |
| | | | |
| Exercised | (1,489,067 | ) | | 1.69 |
| | | | |
| Canceled | (923,777 | ) | | 3.64 |
| | | | |
| Outstanding — December 31, 2019 | 9,044,304 |
| | $ | 2.91 |
| | 8.30 | | $ | 39,997 |
|
| Vested and Expected to Vest — December 31, 2019 | 7,814,925 |
| | $ | 2.75 |
| | 8.17 | | $ | 35,753 |
|
| Exercisable — December 31, 2019 | 3,648,992 |
| | $ | 1.93 |
| | 7.28 | | $ | 19,735 |
|
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2018, 1,611,7312019, 1,489,067 shares were issued upon the exercise of stock options. The total intrinsic value of stock options exercised to purchase common stock during the years ended December 31, 20192020 and 20182019 was approximately $5.6$11.7 million and $2.4$5.6 million, respectively.
As of December 31, 2019,2020, total unrecognized share-based compensation expense related to non-vested stock options was $9.0$12.3 million, which is expected to be recognized over a weighted-average period of approximately 2.82.5 years. The Company recognized approximately $3.5$5.8 million and $2.5$3.5 million of share-based compensation expense related to the vesting of stock option awards during the years ended December 31, 20192020 and 2018,2019, respectively.
Restricted Stock Units
Pursuant to the 2018 Plan and the 2015 Plan, the Company may issue RSUs that, upon satisfaction of vesting conditions, allow for recipients to receive common stock. Issuances of such awards reduce common stock available under the 2018 Plan and 2015 Plan for stock incentive awards. The Company measures compensation cost associated with grants of RSUs at fair value, which is generally the closing price of the Company’s stock on the date of grant. RSUs generally vest over a three-three- to four-year period.
A summary of restricted stock unit activity under all plans for the year ended December 31, 20192020 is presented below:
|
| | | | | | |
| | Number of Shares | | Weighted-Average Grant-Date Fair Value |
| Non-vested — December 31, 2018 | 454,382 |
| | $ | 2.17 |
|
| Granted | 870,150 |
| | 5.07 |
|
| Vested | (809,482 | ) | | 4.20 |
|
| Forfeited | (114,735 | ) | | 3.66 |
|
| Non-vested — December 31, 2019 | 400,315 |
| | $ | 3.95 |
|
| | | | | | | | | | | |
| Number of Shares | | Weighted-Average Grant-Date Fair Value |
| Non-vested — December 31, 2019 | 400,315 | | | $ | 3.95 | |
| Granted | 570,368 | | | 10.52 | |
| Vested | (548,160) | | | 7.28 | |
| Forfeited | (5,418) | | | 4.06 | |
| Non-vested — December 31, 2020 | 417,105 | | | $ | 8.68 | |
During the year ended December 31, 2018,2019, the weighted-average grant-date fair value of RSUs granted was $2.01.$5.07. During the years ended December 31, 20192020 and 2018,2019, the total fair value of shares vested was $4.0$5.1 million and $2.1$4.0 million, respectively.
As of December 31, 2019,2020, there was $0.6$1.8 million of unrecognized share-based compensation expense related to non-vested RSUs, which is expected to be recognized over a weighted-average period of 0.92.2 years. The Company recognized approximately $3.5$4.1 million and $2.2$3.5 million of share-based compensation expense related to the vesting of RSUs during the years ended December 31, 20192020 and 2018,2019, respectively.
2000 Employee Stock Purchase Plan
The ESPP permits eligible employees of the Company to purchase newly issued shares of common stock, at a price equal to 85% of the lower of the fair market value on (i) the first day of the offering period or (ii) the last day of each six-month
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
purchase period, through payroll deductions of up to 10% of their annual cash compensation. Under the ESPP, a maximum of 5,324,000 shares of common stock may be purchased by eligible employees.
During the years ended December 31, 20192020 and 2018,2019, the Company issued 203,061231,275 shares and 282,101203,061 shares, respectively, under the ESPP. The Company recognized approximately $0.3$0.6 million and $0.2$0.3 million of share-based compensation expense related to the ESPP during the years ended December 31, 20192020 and 2018,2019, respectively.
9. Earnings per Share
Basic EPS excludes dilution and is computed by dividing net income (loss)loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock using the treasury stock method. Potentially dilutive securities (consisting primarily of the Convertible Notes calculated using the if-converted and treasury stock method and warrants, stock options and RSUs calculated using the treasury stock method) are excluded from the diluted EPS computation in loss periods and when the applicable exercise price is greater than the market price on the period end date as their effect would be anti-dilutive.
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The calculation of basic and diluted earnings per share was as follows (in thousands, except share and per share data):
|
| | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 |
| Net loss attributable to common stockholders | $ | (40,486 | ) | | $ | (8,058 | ) |
| Weighted-average common shares outstanding | 78,322,496 |
| | 66,104,376 |
|
| Basic and diluted net loss per share | $ | (0.52 | ) | | $ | (0.12 | ) |
| | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 | | |
| Net loss attributable to common stockholders | $ | (114,119) | | | $ | (40,486) | | | |
| Weighted-average common shares outstanding | 96,111,547 | | | 78,322,496 | | | |
| Basic and diluted net loss per share | $ | (1.19) | | | $ | (0.52) | | | |
For the year ended December 31, 2019,2020, the computation of diluted EPS excluded 34,791,83826,180,766 shares, primarily related to Convertible Notes, warrants, stock options and RSUs for which the effect would have been anti-dilutive.
10. Commitments and Contingencies
Legal
The Company is, from time to time, party to various legal proceedings arising in the ordinary course of business. The Company is regularly required to directly or indirectly participate in other U.S. patent infringement actions pursuant to its contractual indemnification obligations to certain customers. Based on an evaluation of these matters and discussions with the Company’s intellectual property litigation counsel, the Company currently believes that liabilities arising from or sums paid in settlement of these existing matters, if any, would not have a material adverse effect on its consolidated results of operations or financial condition.
On May 11, 2017, the Company initiated a lawsuit against the former stockholders of RERR.E.R. Enterprises, Inc. (“RER”) in the Court of Chancery of the State of Delaware seeking recovery of damages for civil conspiracy, fraud in the inducement, unjust enrichment and breach of fiduciary duty. On January 16, 2018, the former stockholders of RER filed an answer and counterclaim in the matter seeking recovery of certain deferred and earn-out payments allegedly owed to them by the Company in connection with the Company’s acquisition of RER. On July 26, 2018, the Company and the former stockholders of RER entered into a mutual general release and settlement agreement (the “Settlement Agreement”) pursuant to which the parties agreed to release all claims against each other and the Company agreed to (i) pay the former stockholders of RER $1.0 million in cash by August 17, 2018, (ii) immediately instruct its transfer agent to permit the transfer or sale of 973,333 shares of the Company’s common stock that the Company had issued to the former stockholders of RER in March 2017, (iii) immediately issue 500,000 shares of the Company’s common stock to the former stockholders of RER, (iv) within 12 months following the execution of the Settlement Agreement, deliver to the former stockholders of RER an additional $1.0 million in cash, common stock, or a combination thereof, at the Company’s option, (v) within 24 months following the execution of the Settlement Agreement deliver to the former stockholders of RER an additional $1.0 million in cash, common stock, or a combination thereof, at the Company’s option, and (vi) file one or more registration statements with respect to the resale of the shares of the Company’s common stock issued to the former stockholders of RER pursuant to the Settlement Agreement. In connection with the settlement,On July 24, 2020, the Company recognized a gainissued 89,928 shares of $17.2 million, which is includedcommon stock to the former stockholders of RER in extinguishmentsatisfaction of acquisition-relatedall remaining liabilities inunder the consolidated statement of operations for the period ended December 31, 2019. The Company’s remaining liability under the
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Settlement Agreement at December 31, 2019 consists of approximately $1.0 million and is classified within accrued expenses and other current liabilities on the consolidated balance sheets.Agreement.
Indemnification
In the normal course of business, the Company periodically enters into agreements that require the Company to indemnify and defend its customers for, among other things, claims alleging that the Company’s products infringe third-party patents or other intellectual property rights. The Company’s maximum exposure under these indemnification provisions cannot be estimated but the Company does not believe that there are any matters individually or collectively that would have a material adverse effect on its consolidated results of operations or financial condition.
11. Leases
Lessee
The Company is a lessee in lease agreements for office space, automobiles and certain equipment. Certain of the Company’s leases contain provisions that provide for one or more options to renew at the Company’s sole discretion. The majority of the Company’s leases are comprised of fixed lease payments, with a small percentage of its real estate leases including lease payments subject to a rate or index which may be variable. Certain real estate leases also include executory costs such as common area maintenance (non-lease component). As a practical expedient permitted under ASC 842, the Company has elected to account for the lease and non-lease components as a single lease component. Lease payments, which may include lease components and non-lease components, are included in the measurement of the Company’s lease liabilities to
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the extent that such payments are either fixed amounts or variable amounts based on a rate or index (fixed in substance) as stipulated in the lease contract.
None of the Company’s lease agreements contain any material residual value guarantees or material restrictive covenants. As a result of the Company’s election of the package of practical expedients permitted within ASC 842, which among other things, allows for the carryforward of historical lease classification, all of the Company’s lease agreements in existence at the date of adoption that were classified as operating leases under ASC 840, Leaseshave been classified as operating leases under ASC 842. Lease expense for payments related to the Company’s operating leases is recognized on a straight-line basis over the related lease term, which includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
Right-of-use assets represent the Company’s right to use an underlying asset during the lease term and lease liabilities represent the Company’s obligation to make lease payments as specified in the lease. Right-of-use assets and lease liabilities related to the Company’s operating leases are recognized at the lease commencement date based on the present value of the remaining lease payments over the lease term. When the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the lease term and the information available surrounding the Company’s borrowing rates at the lease commencement date in determining the present value of lease payments. The right-of-use asset also includes any lease payments made at or before lease commencement less any lease incentives. As of December 31, 2019,2020, the Company had right-of-use assets of $2.7$9.1 million and lease liabilities related to its operating leases of $2.8$9.9 million. Right-of-use assets are included in right-of-use assets, net, on the consolidated balance sheet and lease liabilities related to the Company’s operating leases are included in accrued expenses and other liabilities and other long-term liabilities on the consolidated balance sheet. As of December 31, 2019,2020, the Company’s weighted-average remaining lease term and weighted-average discount rate related to its operating leases were 2.95.8 years and 9.4%9.1%, respectively.
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The future minimum payments under operating leases were as follows at December 31, 20192020 (in thousands):
| | | 2020 | $ | 1,315 |
| |
| 2021 | 911 |
| 2021 | $ | 2,460 | |
| 2022 | 615 |
| 2022 | 2,225 | |
| 2023 | 276 |
| 2023 | 1,916 | |
| 2024 | 93 |
| 2024 | 1,787 | |
| 2025 | | 2025 | 1,630 | |
| Thereafter | | Thereafter | 2,807 | |
| Total minimum operating lease payments | 3,210 |
| Total minimum operating lease payments | 12,825 | |
| Less: amounts representing interest | (401 | ) | Less: amounts representing interest | (2,921) | |
| Present value of net minimum operating lease payments | 2,809 |
| Present value of net minimum operating lease payments | 9,904 | |
| Less: current portion | (1,101 | ) | Less: current portion | (1,619) | |
| Long-term portion of operating lease obligations | $ | 1,708 |
| Long-term portion of operating lease obligations | $ | 8,285 | |
Lessor
Prior to January 1, 2019, and as previously disclosed in the Company’s Form 10-K for the year ended December 31, 2018, the Company derived revenue from customers who lease the Company’s monitoring devices. The Company recorded such revenue in accordance with the previous lease accounting guidance ASC 840, Leases, and determined that the leases qualify as operating leases.
Monitoring device leases in which the Company serves as lessor are classified as operating leases. Accordingly, rental devices are carried at historical cost less accumulated depreciation and impairment, if any, and are included in rental assets, net, on the condensed consolidated balance sheets.
Since the lease components meet the criteria for an operating lease under ASC 842, the Company has elected the practical expedient to combine the lease and the non-lease components because the service is the predominant element in the eyes of the customer and the pattern of service delivery is the same for both elements. The Company will account for the combined component as a single performance obligation under ASC 606, Revenue from Contracts with Customers.
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Geographic Information and Concentrations of Risk
Geographic Information
The following table details the geographic concentration of the Company’s assets (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| United States and Canada | $ | 81,769 |
| | $ | 79,809 |
|
| South Africa | 53,610 |
| | 56,937 |
|
| Other | 25,994 |
| | 25,510 |
|
| | $ | 161,373 |
| | $ | 162,256 |
|
| | | | | | | | | | | |
| | December 31, |
| | 2020 | | 2019 |
| United States and Canada | $ | 148,485 | | | $ | 81,769 | |
| South Africa | 48,211 | | | 53,610 | |
| | | |
| | | |
| Other | 30,698 | | | 25,994 | |
| $ | 227,394 | | | $ | 161,373 | |
The following table details the Company’s net revenues by geographic region based on shipping destination (in thousands):
|
| | | | | | | |
| | Year Ended
December 31, |
| | 2019 | | 2018 |
| United States and Canada | $ | 158,756 |
| | $ | 139,246 |
|
| South Africa | 35,001 |
| | 38,608 |
|
| Other | 25,739 |
| | 24,609 |
|
| Total | $ | 219,496 |
| | $ | 202,463 |
|
| | | | | | | | | | | |
| Year Ended
December 31, |
| 2020 | | 2019 |
| United States and Canada | $ | 260,009 | | | $ | 158,756 | |
| South Africa | 28,208 | | | 35,001 | |
| Other | 25,615 | | | 25,739 | |
| Total | $ | 313,832 | | | $ | 219,496 | |
Concentrations of Risk
For the years ended December 31, 20192020 and 2018,2019, one customer accounted for 52.5%54.5% and 48.8%52.5% of net revenues, respectively. At December 31, 2020, two customers accounted for 33.3% and 17.2% of total accounts receivable. At December 31, 2019, two customers accounted for 25.0% and 11.2% of total accounts receivable. At
During the years ended December 31, 2018, two customers accounted for 30.5%2020 and 12.8%2019, the Company recorded net foreign currency transaction losses of total accounts receivable.approximately $0.7 million and $0.3 million, respectively, primarily related to outstanding intercompany loans that Ctrack has with certain of its subsidiaries, which are remeasured at each reporting period and payable upon demand.
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Retirement Savings Plan
The Company has a defined contribution 401(k) retirement savings plan (the “Plan”). Substantially all of the Company’s U.S. employees are eligible to participate in the Plan after meeting certain minimum age and service requirements. The Company matches 50% of the first 6% of an employee’s designated deferral of their eligible compensation. Employees may make discretionary contributions to the Plan subject to Internal Revenue Service limitations. Employer matching contributions under the Plan amounted to approximately $0.5$0.7 million and $0.4 million for the years ended December 31, 20192020 and 2018,2019, respectively. Employer matching contributions vest immediately.
In the third quarter of 2015, the Company approved a restructuring initiative to better position the Company to operate in current market conditions and more closely align operating expenses with revenues, which included employee severance costs and facility exit related costs. In the fourth quarter of 2015, the Company commenced certain initiatives relating to the reorganization of executive level management (collectively, the “2015 Initiatives”). The Company continued these initiatives in 2016 with a reduction-in-force and the completion of the closure of its facility in Richardson, TX. The 2015 Initiatives are expected to cost a total of approximately $6.0 million and be completed when the Richardson, TX lease expires in June 2020.
The following table sets forth activity in the restructuring liability for the year ended December 31, 2019 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | |
| | Balance at December 31, 2018 | | Costs Incurred | | Payments | | | Balance at December 31, 2019 | | | Cumulative Costs Incurred to Date |
| 2015 Initiatives | | | | | | | | | | | |
| Employee Severance Costs | $ | — |
| | $ | — |
| | $ | — |
| | | $ | — |
| | | $ | 4,131 |
|
| Facility Exit Related Costs | 634 |
| | 60 |
| | (474 | ) | | | 220 |
| | | 1,914 |
|
| Total | $ | 634 |
| | $ | 60 |
| | $ | (474 | ) | | | $ | 220 |
| | | $ | 6,045 |
|
The balance of the restructuring liability at December 31, 2019 consists of approximately $0.2 million included in accrued expenses and other current liabilities in the consolidated balance sheet.
During the year ended December 31, 2018, the Company wrote down the value of certain inventory by approximately $0.4 million
related to the abandonment of certain product lines that management decided to exit. The Company accounted for the adjustments in accordance with the ASC 330, Inventory, and included the adjustments in impairment of abandoned product line, net of recoveries, within cost of net revenues in the consolidated statements of operations.
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15.14. Quarterly Financial Information (Unaudited)
The following is a summary of unaudited quarterly results of operations for the years ended December 31, 20192020 and 2018:2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| | | | | | | |
| | (in thousands, except per share amounts) |
| Net revenues | $ | 56,840 | | | $ | 80,689 | | | $ | 90,240 | | | $ | 86,063 | |
| Gross profit | 17,227 | | | 22,000 | | | 25,170 | | | 26,447 | |
| Net loss attributable to common stockholders | (18,590) | | | (75,665) | | | (6,271) | | | (13,593) | |
| Basic and diluted net loss per share | (0.20) | | | (0.78) | | | (0.06) | | | (0.14) | |
| | | | | | | |
| | | | | | | |
| 2019 |
| First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| | | | | | | |
| (in thousands, except per share amounts) |
| Net revenues | $ | 48,556 | | | $ | 55,891 | | | $ | 62,716 | | | $ | 52,333 | |
| Gross profit | 14,760 | | | 15,555 | | | 18,625 | | | 15,031 | |
| Net loss attributable to stockholders | (7,485) | | | (10,779) | | | (8,937) | | | (13,285) | |
| Basic and diluted net income (loss) per share | (0.10) | | | (0.14) | | | (0.11) | | | (0.17) | |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| | 2019 |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| | | | | | | | |
| | (in thousands, except per share amounts) |
| Net revenues | $ | 48,556 |
| | $ | 55,891 |
| | $ | 62,716 |
| | $ | 52,333 |
|
| Gross profit | 14,760 |
| | 15,555 |
| | 18,625 |
| | 15,031 |
|
| Net income (loss) attributable to common stockholders | (7,485 | ) | | (10,779 | ) | | (8,937 | ) | | (13,285 | ) |
| Basic and diluted net loss per share | (0.10 | ) | | (0.14 | ) | | (0.11 | ) | | (0.17 | ) |
| | | | | | | | |
| | 2018 |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| | | | | | | | |
| | (in thousands, except per share amounts) |
| Net revenues | $ | 46,733 |
| | $ | 49,057 |
| | $ | 50,630 |
| | $ | 56,043 |
|
| Gross profit | 15,543 |
| | 17,657 |
| | 17,604 |
| | 19,793 |
|
| Net loss attributable to stockholders | (8,050 | ) | | (6,660 | ) | | 10,843 |
| | (4,191 | ) |
| Basic net income (loss) per share | (0.13 | ) | | (0.11 | ) | | 0.16 |
| | (0.06 | ) |
| Diluted net income (loss) per share | (0.13 | ) | | (0.11 | ) | | 0.15 |
| | (0.06 | ) |
16.
INSEEGO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Subsequent Events
On March 3, 2020 the Company and the Trustee entered into a First Supplemental Indenture which eliminated certain covenants in the Inseego Indenture prohibiting the incurrence of certain indebtedness and certain restricted payments.At-the-Market Offering
On March 6, 2020, the holders of substantially all of the outstanding indebtedness under the Inseego Notes agreed to waive their optional right to require the Company to repurchase the Inseego Notes on June 15, 2020.
On March 6, 2020, the Company entered into a Securities Purchase Agreement with an accredited investor pursuant to which, among other things, the Company issued and sold to the investor, in a private placement transaction, an aggregate of 25,000 shares of the Company’s Series E Preferred Stock, for a purchase price of $1,000 per share of Series E Preferred Stock, resulting in gross proceeds to the Company of $25.0 million.
On March 9, 2020,January 25, 2021, the Company entered into an amendmentEquity Distribution Agreement with Canaccord Genuity LLC (the “Agent”), pursuant to which the Company may offer and sell, from time to time, through or to the Credit Agreement, which among other things, amended certain financial covenants set forth therein and permits the useAgent, up to $40.0 million of shares of its common stock (the “ATM Offering”) pursuant to the Company’s Series E Preferred StockRegistration Statement on Form S-3ASR (File No. 333-238057), which was filed with the Securities and Exchange Commission on May 7, 2020, and the 424(b) prospectus supplement relating to make certain payments, including interest payments, due thereunder.the Offering dated January 25, 2021.
In January 2021, the Company sold 1,516,073 shares of common stock, at a public offering price of $20.11 per share, for net proceeds of $29.6 million, pursuant to the ATM Offering.
Sale of Ctrack South African Operations
On March 10, 2020,February 24, 2021, the Company enteredannounced its entry into a letter agreement (the “Letter Agreement”Share Purchase Agreement with an affiliate of Convergence, to sell its South African operations, in an all-cash transaction for 528.9 million South African Rand (ZAR) (approximately $36.2 million United States Dollar (“USD”) with South Ocean Funding, LLC (“South Ocean”)based on an exchange rate on February 24, 2021 of 14.62 ZAR to 1 USD), subject to certain regulatory approvals and other closing conditions. The transaction is expected to close during the Lender holding allsecond quarter of the aggregate principal amount currently outstanding under the Credit Agreement, which provides: (i) that the Company and South Ocean will work together, in good faith, to reach an agreement to amend or refinance the Credit Agreement in order to extend the maturity of the Credit Agreement until a date after March 15, 2021; and (ii) should an agreement not be reached to amend or refinance the Credit Agreement prior to August 23, 2020, upon request of the Company, the maturity date of the Credit Agreement will be extended to no earlier than March 15,fiscal 2021.