Inseego (INSG) - 2022 Q3 - Quarterly Report

PART I Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive loss, stockholders' deficit, and cash flows, along with their accompanying notes, providing a snapshot of the company's financial performance and position for the three and nine months ended September 30, 2022, compared to prior periods Condensed Consolidated Balance Sheets (Unaudited) The balance sheets show a decrease in total assets and a significant increase in total stockholders' deficit as of September 30, 2022, compared to December 31, 2021, indicating a worsening financial position | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :-------------------- | :----------- | :----------- | | Total Assets | $184,400 | $215,843 | | Total Liabilities | $240,200 | $240,697 | | Total Stockholders' Deficit | $(55,800) | $(24,854) | Condensed Consolidated Statements of Operations (Unaudited) The statements of operations reveal increased net losses for both the three and nine months ended September 30, 2022, compared to the prior year, driven by higher operating costs and other expenses, despite a slight increase in total net revenues | Metric (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total Net Revenues | $69,167 | $66,217 | $192,408 | $189,507 | | Gross Profit | $17,956 | $18,943 | $51,098 | $57,765 | | Operating Loss | $(11,909) | $(9,973) | $(43,708) | $(36,689) | | Net Loss | $(15,743) | $(7,190) | $(53,342) | $(37,191) | | Net Loss per Common Share (Basic & Diluted) | $(0.15) | $(0.09) | $(0.52) | $(0.40) | Condensed Consolidated Statements of Comprehensive Loss (Unaudited) The comprehensive loss significantly increased for both the three and nine months ended September 30, 2022, compared to the prior year, primarily due to the higher net loss, partially offset by positive foreign currency translation adjustments in 2022 | Metric (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net Loss | $(15,743) | $(7,190) | $(53,342) | $(37,191) | | Foreign currency translation adjustment | $1,147 | $(2,571) | $4,581 | $(1,878) | | Total Comprehensive Loss | $(14,596) | $(8,153) | $(48,761) | $(37,461) | Condensed Consolidated Statements of Stockholders' Deficit (Unaudited) The statements show a substantial increase in the accumulated deficit and total stockholders' deficit from December 31, 2021, to September 30, 2022, reflecting the ongoing net losses and other equity adjustments | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :-------------------- | :----------- | :----------- | | Accumulated Deficit | $(842,418) | $(787,047) | | Total Stockholders' Deficit | $(55,800) | $(24,854) | - Share-based compensation expense was $2,406 thousand for the three months ended September 30, 2022, and $15,892 thousand for the nine months ended September 30, 2022[15][17] Condensed Consolidated Statements of Cash Flows (Unaudited) The cash flow statements indicate increased cash usage in operating activities and a shift from cash generation to cash usage in investing activities for the nine months ended September 30, 2022, with cash provided by financing activities significantly decreasing compared to the prior year | Metric (in thousands) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------- | :-------------------------- | :-------------------------- | | Net cash used in operating activities | $(24,703) | $(14,757) | | Net cash (used in) provided by investing activities | $(10,445) | $7,665 | | Net cash provided by financing activities | $1,483 | $28,979 | | Net (decrease) increase in cash, cash equivalents and restricted cash | $(31,749) | $21,594 | | Cash, cash equivalents and restricted cash, end of period | $18,063 | $61,609 | Notes to Condensed Consolidated Financial Statements (Unaudited) These notes provide essential context and detailed breakdowns for the condensed consolidated financial statements, covering accounting policies, significant estimates, risks, and specific financial instrument details, debt, share-based compensation, and other financial disclosures - The condensed consolidated financial statements are unaudited and prepared in accordance with SEC rules for interim financial information[21] - Certain prior period amounts were reclassified to conform to the current period presentation, without affecting total revenues, costs, net loss, assets, liabilities, or stockholders' deficit[22] - Significant estimates are made in preparing financial statements, including revenue recognition, capitalized software costs, inventory provisions, asset valuations, derivatives, litigation accruals, income taxes, and share-based compensation expense[26] 1. Basis of Presentation This section outlines the preparation of the unaudited interim financial statements, noting adherence to SEC rules, reclassifications, consistent accounting policies, and the inherent use of management estimates, also addressing significant risks and uncertainties Principles of Consolidation The financial statements consolidate the accounts of the Company and its wholly-owned subsidiaries, eliminating all intercompany transactions and balances - The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries[24] - All intercompany transactions and balances have been eliminated in consolidation[24] Segment Information Management has determined that the Company operates as a single reportable segment, with resource allocation and performance assessments based solely on consolidated operations and financial results - Management has determined that the Company has one reportable segment[25] - Allocations of resources and assessments of performance are based solely on the Company's consolidated operations and financial results[25] Use of Estimates The preparation of financial statements requires management to make estimates and assumptions, which are periodically updated, and actual results may differ materially from these estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions[26] - Significant estimates include revenue recognition, capitalized software costs, allowance for credit losses, provision for excess and obsolete inventory, valuation of intangible and long-lived assets, valuation of goodwill, valuation of derivatives, accruals relating to litigation, income taxes and share-based compensation expense[26] Risks and Uncertainties The Company faces risks from the ongoing COVID-19 pandemic, a global semiconductor supply shortage that could impact operations and material supply, and inflationary pressures that may increase costs and adversely affect financial results - The extent of the impact of the COVID-19 pandemic on the Company's operational and financial performance will depend on future developments, which are uncertain and cannot be predicted[27] - A global semiconductor supply shortage may negatively impact the Company's customers and the supply of materials, potentially having a material impact if it persists[28] - Inflationary pressures impacting the global supply chain could increase the cost of net revenues and adversely impact future revenues, gross margins, and financial results[29] Sale of Ctrack South Africa The Company completed the sale of its Ctrack South Africa business operations on July 30, 2021, recognizing a pre-tax gain of $5.3 million and receiving $31.5 million in net cash proceeds - The Company completed the sale of its Ctrack business operations in Africa, Pakistan and the Middle East ("Ctrack South Africa") on July 30, 2021[31] - A pre-tax gain of $5.3 million was recognized from the sale[31] - Total cash proceeds received from the sale were $31.5 million, net of cash divested[31] Liquidity As of September 30, 2022, the Company had $18.1 million in unrestricted cash and $14.6 million available under its revolving credit facility, and management believes these resources, along with anticipated cash flows and cost reduction efforts, will be sufficient for the next twelve months, though future profitability depends on adequate revenue and cost management - As of September 30, 2022, the Company had $18.1 million in unrestricted cash and cash equivalents[32] - The Company had $14.6 million of excess availability under its secured asset-backed revolving credit facility as of September 30, 2022[32] - Management believes current liquidity, anticipated cash flows from operations, and cost reduction efforts will be sufficient to meet cash flow needs for the next twelve months[33] Cash, Cash Equivalents and Restricted Cash Cash and cash equivalents are defined as highly liquid investments with short maturities, generally held with large financial institutions, and restricted cash held in escrow as of December 31, 2021, was released during the third quarter of 2022, resulting in no restricted cash on the balance sheet - Cash and cash equivalents include highly liquid investments with original maturities of three months or less[35] - Restricted cash held in escrow as of December 31, 2021, was released during the third quarter of 2022, with no restricted cash on the balance sheet as of September 30, 2022[35] Recently Adopted Accounting Pronouncements The Company adopted ASU 2020-06 (Debt with Conversion and Other Options) and ASU 2021-04 (Earnings Per Share) in the first quarter of fiscal 2022, neither of which had a material impact on the condensed consolidated financial statements - The Company adopted ASU 2020-06, which simplifies accounting for convertible instruments, in the first quarter of fiscal 2022 with no impact to the condensed consolidated financial statements[36] - The Company adopted ASU 2021-04, addressing issuer's accounting for certain modifications or exchanges of freestanding equity-classified written call options, in the first quarter of fiscal 2022 with no impact[37] Recent Accounting Pronouncements Not Yet Adopted The Company is currently evaluating the impact of ASU 2022-04 (Liabilities—Supplier Finance Programs), issued in September 2022, which requires disclosure of key terms and a rollforward of related obligations, effective for periods beginning after December 15, 2022 - FASB issued ASU No. 2022-04, Liabilities—Supplier Finance Programs, which requires disclosure of key terms and a rollforward of related obligations[38] - The ASU is effective for annual and interim periods beginning after December 15, 2022, with the rollforward requirement effective for annual periods beginning after December 15, 2023[40] - The Company is currently evaluating the impact of this ASU on its consolidated financial statements[40] 2. Financial Statement Details This section provides detailed breakdowns of inventories, prepaid expenses and other assets, and accrued expenses and other current liabilities, showing changes between September 30, 2022, and December 31, 2021 Inventories Inventories increased to $42.4 million as of September 30, 2022, from $37.4 million at December 31, 2021, with increases in both finished goods and raw materials/components | Category | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :------- | :-------------------------- | :-------------------------- | | Finished goods | $35,644 | $33,112 | | Raw materials and components | $6,762 | $4,290 | | Total inventories | $42,406 | $37,402 | Prepaid expenses and other Prepaid expenses and other decreased to $10.9 million as of September 30, 2022, from $13.6 million at December 31, 2021, primarily due to lower rebate receivables and insurance prepayments | Category | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :------- | :-------------------------- | :-------------------------- | | Rebate receivables | $4,015 | $6,398 | | Receivables from contract manufacturers | $3,239 | $2,626 | | Software licenses | $1,062 | $1,261 | | Insurance | $218 | $1,269 | | Deposits | $870 | $1,023 | | Financed assets | $295 | $323 | | Other | $1,203 | $724 | | Total | $10,902 | $13,624 | Accrued expenses and other current liabilities Accrued expenses and other current liabilities increased to $31.5 million as of September 30, 2022, from $26.3 million at December 31, 2021, mainly driven by higher customer contract liabilities and accrued interest | Category | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :------- | :-------------------------- | :-------------------------- | | Royalties | $1,970 | $2,243 | | Payroll and related expenses | $10,106 | $9,326 | | Warranty obligations | $458 | $473 | | Professional fees | $586 | $502 | | Accrued interest | $2,410 | $877 | | Customer contract liabilities | $8,554 | $3,832 | | Operating lease liabilities | $1,662 | $1,769 | | Accrued contract manufacturing liabilities | $1,599 | $927 | | Value added tax payables | $424 | $642 | | Other | $3,707 | $5,662 | | Total | $31,476 | $26,253 | 3. Fair Value Measurement of Assets and Liabilities This section details the fair value measurement of financial instruments, categorizing them into Level 1, 2, or 3, with the interest make-whole payment derivative liability, valued using a Monte Carlo model, significantly decreasing in fair value from December 31, 2021, to September 30, 2022 | Instrument | Sep 30, 2022 (Total Fair Value, in thousands) | Dec 31, 2021 (Total Fair Value, in thousands) | | :--------- | :------------------------------------------ | :------------------------------------------ | | Cash equivalents (Money market funds) | $0 | $126 | | 2025 Notes (Interest make-whole payment) | $24 | $926 | - The fair value of the interest make-whole payment derivative liability was determined using a Monte Carlo model[45] - Unrealized gains on the interest make-whole payment derivative were $0.9 million for the nine months ended September 30, 2022, compared to $3.4 million for the same period in 2021[45] Other Financial Instruments The carrying values of most financial assets and liabilities approximate their fair values due to their short-term nature, with the exception of the 2025 Notes, for which determining fair value is not practicable - The carrying values of the Company's other financial assets and liabilities approximate their fair values because of their short-term nature[48] - It is not practicable to determine the fair value of the 2025 Notes due to the lack of information available[48] - The carrying amount of the 2025 Notes was $158.1 million as of September 30, 2022, and $157.9 million as of December 31, 2021[48] 4. Debt This section details the Company's debt instruments, including a new $50 million secured asset-backed revolving credit facility established in August 2022 and the existing $161.9 million 2025 Notes, with the Company in compliance with all credit agreement covenants as of September 30, 2022 | 2025 Notes (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :------------------------ | :----------- | :----------- | | Principal | $161,898 | $161,898 | | Add: fair value of embedded derivative | $24 | $926 | | Less: unamortized debt discount | $(2,140) | $(2,761) | | Less: unamortized issuance costs | $(1,703) | $(2,197) | | Net carrying amount | $158,079 | $157,866 | | Total Interest Expense on 2025 Notes (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :---------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total Interest Expense | $1,687 | $1,687 | $5,061 | $5,016 | Asset-backed Revolving Credit Facility The Company entered into a $50 million secured asset-backed revolving credit facility on August 5, 2022, maturing December 31, 2024, with $4.5 million outstanding and a borrowing base of $19.1 million as of September 30, 2022, and the Company was in compliance with all covenants - A secured asset-backed revolving credit facility of up to $50 million was established on August 5, 2022, maturing on December 31, 2024[49][50] - As of September 30, 2022, the Credit Facility had outstanding borrowings of $4.5 million and a borrowing base of $19.1 million[53] - The Company was in compliance with all Credit Agreement covenants as of September 30, 2022, including maintaining consolidated Liquidity above $10 million[52] 2025 Notes The Company has $161.9 million in principal amount of 3.25% convertible senior notes due May 1, 2025, which are senior unsecured obligations, with an effective interest rate on the liability component of 4.13% for the three months and 4.18% for the nine months ended September 30, 2022 - $161.9 million in principal amount of the 2025 Notes were outstanding as of September 30, 2022, and December 31, 2021[58] - The 2025 Notes are senior unsecured obligations bearing an annual interest rate of 3.25%, payable semi-annually, and are due on May 1, 2025[58] - The effective interest rate on the liability component of the 2025 Notes was 4.13% for the three months ended September 30, 2022, and 4.18% for the nine months ended September 30, 2022[59] 5. Share-based Compensation Share-based compensation expense increased for the nine months ended September 30, 2022, totaling $15.9 million, and this section details the activity for stock options and restricted stock units (RSUs) under the Company's incentive plans | Functional Line Item (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :---------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Cost of revenues | $199 | $416 | $1,873 | $2,228 | | Research and development | $513 | $604 | $5,011 | $4,366 | | Sales and marketing | $489 | $614 | $3,086 | $3,161 | | General and administrative | $1,205 | $1,428 | $5,922 | $4,712 | | Total | $2,406 | $3,062 | $15,892 | $14,467 | Stock Options As of September 30, 2022, 8,412,550 stock options were outstanding, with 1,422,500 granted and 831,400 canceled during the nine-month period, and total unrecognized compensation expense for stock options was $8.9 million, to be recognized over 2.76 years - Outstanding stock options as of September 30, 2022, totaled 8,412,550[64] - During the nine months ended September 30, 2022, 1,422,500 stock options were granted and 831,400 were canceled[64] - Total unrecognized compensation expense related to stock options was $8.9 million, expected to be recognized over a weighted-average period of 2.76 years[64] Restricted Stock Units As of September 30, 2022, 1,491,624 non-vested RSUs were outstanding, with 2,516,362 RSUs granted and 2,051,578 vested during the nine-month period, and total unrecognized compensation expense for RSUs was $5.0 million, to be recognized over 2.71 years - Non-vested Restricted Stock Units (RSUs) as of September 30, 2022, totaled 1,491,624[66] - During the nine months ended September 30, 2022, 2,516,362 RSUs were granted and 2,051,578 vested[66] - Total unrecognized compensation expense related to RSUs was $5.0 million, expected to be recognized over a weighted-average period of 2.71 years[66] 6. Earnings Per Share Basic and diluted net loss per common share were identical for all periods presented, as potentially dilutive securities were excluded from the diluted EPS calculation due to their anti-dilutive effect in loss periods | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :----- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Basic and diluted net loss per share | $(0.15) | $(0.09) | $(0.52) | $(0.40) | - Potentially dilutive securities (2025 Notes, warrants, stock options, RSUs, employee stock purchase plan) were excluded from diluted EPS computation in loss periods as their effect would be anti-dilutive[67][69] 7. Private Placements and Public Offering The 2019 Warrants to purchase 2.5 million shares of common stock expired unexercised at June 30, 2022, and in January 2021, the Company completed an ATM Offering, selling 1.5 million shares of common stock for net proceeds of $29.4 million - Warrants to purchase 2,500,000 shares of common stock (2019 Warrants) expired unexercised at June 30, 2022[70] - In January 2021, the Company sold 1,516,073 shares of common stock through an ATM Offering, generating net proceeds of $29.4 million[71] 8. Geographic Information and Concentrations of Risk This section provides a breakdown of net revenues by geographic region, showing the impact of the Ctrack South Africa divestiture and growth in Australia, and highlights significant customer concentrations in both net revenues and accounts receivable Geographic Information Net revenues from the United States and Canada remained the largest contributor, with revenues from South Africa ceasing after the Ctrack divestiture in July 2021, while Australia showed significant growth | Region (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | United States and Canada | $53,924 | $56,614 | $159,393 | $150,822 | | Europe | $6,954 | $5,828 | $20,176 | $17,425 | | South Africa | $0 | $2,435 | $0 | $17,333 | | Australia | $7,543 | $982 | $9,966 | $2,883 | | Other | $746 | $358 | $2,873 | $1,044 | | Total | $69,167 | $66,217 | $192,408 | $189,507 | - Revenues from South Africa ceased after the sale of the Ctrack South Africa business in July 2021[72] Concentrations of Credit Risk The Company has significant customer concentration, with two customers accounting for a substantial portion of net revenues for both the three and nine months ended September 30, 2022, and a few customers representing a large percentage of accounts receivable - For the three months ended September 30, 2022, two customers accounted for 33.9% and 29.3% of net revenues, respectively[74] - For the nine months ended September 30, 2022, two customers accounted for 50.8% and 44.4% of net revenues, respectively[75] - As of September 30, 2022, three customers accounted for 33.5%, 15.3%, and 13.3% of accounts receivable, net, respectively[75] 9. Commitments and Contingencies The Company has noncancellable purchase obligations with contract manufacturers totaling $104.7 million as of September 30, 2022, a decrease from the prior year, and also enters into indemnification agreements in the normal course of business, with no expected material adverse effect Noncancellable Purchase Obligations As of September 30, 2022, the Company had approximately $104.7 million in noncancellable purchase obligations with its contract manufacturers, a decrease from $165.8 million at December 31, 2021 - Future payments under noncancellable purchase obligations were approximately $104.7 million as of September 30, 2022[76] - This represents a decrease from approximately $165.8 million as of December 31, 2021[76] Indemnification The Company periodically enters into agreements to indemnify its customers for claims, such as intellectual property infringement, and while the maximum exposure cannot be estimated, the Company does not believe these would have a material adverse effect - The Company periodically enters into agreements to indemnify and defend its customers for claims, including those alleging infringement of third-party patents or other intellectual property rights[77] - The Company's maximum exposure under these indemnification provisions cannot be estimated but is not believed to have a material adverse effect on its results of operations or financial condition[77] 10. Leases The Company's operating right-of-use assets were $6.9 million and total operating lease liabilities were $7.7 million as of September 30, 2022, with a weighted-average remaining lease term of 4.4 years and a discount rate of 9.0%, and operating lease costs increased significantly for both the three and nine months ended September 30, 2022 | Lease Component (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :----------------------------- | :----------- | :----------- | | Operating right-of-use assets, net | $6,902 | $7,839 | | Total operating lease liabilities | $7,718 | $8,881 | - Weighted-average remaining lease term was 4.4 years and weighted-average discount rate was 9.0% as of September 30, 2022[78] - Operating lease costs included in operating costs and expenses were $589 thousand for the three months and $1,789 thousand for the nine months ended September 30, 2022[78] 11. Income Taxes The Company reported an income tax provision of $42 thousand for the three months and a benefit of $(0.6) million for the nine months ended September 30, 2022, primarily influenced by foreign income taxes, minimum state taxes, and foreign currency losses/gains, with full valuation allowances impacting the effective tax rate - Income tax provision (benefit) was $42 thousand for the three months ended September 30, 2022, and $(0.6) million for the nine months ended September 30, 2022[81] - Income taxes primarily consisted of foreign income taxes and minimum state taxes for U.S.-based entities[81] - The income tax expense differs from expected statutory rates primarily due to full valuation allowances at U.S. and several foreign subsidiaries[81] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations, analyzing key trends, performance drivers, and future outlook, covering revenue streams, cost structures, and liquidity Forward Looking Statements This section contains forward-looking statements based on management's current expectations, assumptions, estimates, and projections, which involve inherent risks and uncertainties that could cause actual results to differ materially - The report contains forward-looking statements that reflect management's current expectations, assumptions, estimates, and projections[84] - These statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated[84] - Key risk factors include the ability to compete, develop new products, meet 5G standards, expand customer reach, manage indebtedness, secure supply, mitigate tariffs, and navigate global economic conditions and public health emergencies[85] Business Overview Inseego Corp. is a leader in designing and developing advanced 4G and 5G NR, IIoT, and cloud solutions, providing intelligent, reliable, and secure device-to-cloud services with deep business intelligence for a global customer base, leveraging over 30 years of innovation in wireless technologies - Inseego Corp. is a leader in the design and development of fixed and mobile wireless solutions (advanced 4G and 5G NR), IIoT and cloud solutions[89] - The product portfolio consists of fixed and mobile device-to-cloud solutions providing intelligent, reliable, and secure end-to-end IoT services with deep business intelligence[89] - Inseego has been advancing technology and driving industry transformations for over 30 years, with multiple first-to-market innovations across wireless technologies, including 5G[90] Our Sources of Revenue The Company generates revenue from two distinct categories: IoT & Mobile Solutions, which includes 4G and 5G hardware products like hotspots and routers, and Enterprise SaaS Solutions, offering fleet management, telematics, and asset tracking platforms, with the sale of Ctrack South Africa in 2021 impacting SaaS revenues - Revenue is classified into two distinct groupings: IoT & Mobile Solutions and Enterprise SaaS Solutions, both including hardware and software[95] - IoT & Mobile Solutions include intelligent 4G and 5G fixed wireless routers and gateways, mobile hotspots (MiFi brand), and wireless gateways/routers for IIoT applications[91] - Enterprise SaaS Solutions include telematics and asset tracking and management platforms (e.g., Ctrack platforms) for fleet, vehicle, aviation, and other telematics applications[94][96] Factors Which May Influence Future Results of Operations Future results are influenced by macroeconomic conditions, competition, product acceptance, 5G deployment, supply chain stability, and the impact of the COVID-19 pandemic, with the Company continuing to invest in R&D and strategic partnerships to drive growth and maintain market penetration - Future net revenues may be influenced by economic environment, competition, product acceptance in new vertical markets, 5G deployment and adoption, supply chain stability, and technological changes[102] - The demand environment for 5G products was consistent with expectations, but sales of LTE gigabit hotspots decreased as COVID-19 pandemic demand eased[99] - The Company has made significant investments in SaaS, industrial IoT hardware and services, and other mobile and fixed wireless devices targeting the emerging 5G market[98] Net Revenues Net revenues are significantly dependent on the availability of materials and components, and while 5G product demand met expectations, sales of LTE gigabit hotspots declined due to easing COVID-19 demand, and the macroeconomic environment remains uncertain - Net revenues are significantly dependent upon the availability of materials and components used in hardware products[97] - Lower sales of LTE gigabit hotspots within IoT & Mobile Solutions were experienced as COVID-19 pandemic demand eased[99] - The macroeconomic environment continues to remain uncertain, and prior year product demand may not be sustainable for the long term[99] Cost of Net Revenues Cost of net revenues includes manufacturing, distribution, warranty, and SaaS delivery costs, and is susceptible to inflationary pressures and inventory adjustments, which could adversely impact gross margins - Cost of net revenues includes all costs associated with contract manufacturers, distribution, fulfillment, repair services, SaaS delivery, warranty, royalties, and operations overhead[100] - Inventory adjustments, including write-downs for excess and obsolete inventory, are also included and are impacted by product demand[100] - Inflationary pressures impacting the global supply chain could potentially increase the cost of net revenues and adversely impact future gross margins[100] Operating Costs and Expenses Operating costs are categorized into research and development (R&D), sales and marketing, and general and administrative (G&A) expenses, with R&D critical for product innovation, sales and marketing for market presence, and G&A for corporate functions and public company compliance - Operating costs consist of three primary categories: research and development, sales and marketing, and general and administrative costs[101] - Research and development expenses primarily cover engineers, technicians, and testing/certification services for complex product design[101] - General and administrative expenses include corporate functions (accounting, HR, legal) and costs associated with operating as a publicly-traded company, such as SEC filings and investor relations[104] Critical Accounting Policies and Estimates The Company's critical accounting policies and estimates, as previously disclosed in its Form 10-K, remain unchanged, and the unaudited condensed consolidated financial statements conform in all material respects to GAAP - There have been no material changes to the Company's critical accounting policies and estimates since the filing of its Form 10-K[106] - The unaudited condensed consolidated financial statements conform in all material respects to accounting principles generally accepted in the U.S. (GAAP)[106] Results of Operations This section provides a detailed comparison of the Company's financial performance for the three and nine months ended September 30, 2022, versus the same periods in 2021, highlighting changes in net revenues, cost of revenues, gross profit, operating expenses, and other income/expense items, showing increased net losses driven by higher operating costs and the absence of a prior-year gain on divestiture | Metric (in thousands) | 2022 | 2021 | Change ($) | Change (%) | | :-------------------- | :---------- | :---------- | :---------- | :---------- | | Total Net Revenues | $69,167 | $66,217 | $2,950 | 4.5% | | Gross Profit | $17,956 | $18,943 | $(987) | (5.2)% | | Operating Loss | $(11,909) | $(9,973) | $(1,936) | (19.4)% | - Gross margin decreased to 26.0% in 2022 from 28.6% in 2021, primarily due to a higher mix of lower-margin 5G product revenue and increased supply chain costs[111] - The absence of a $5.3 million gain on the sale of Ctrack South Africa in 2021 significantly impacted the year-over-year change in other (expense) income[113] Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021 Net revenues increased by 4.5% to $69.2 million, driven by IoT & Mobile Solutions but offset by Enterprise SaaS Solutions, while gross profit decreased by 5.2% to $18.0 million, with gross margin falling to 26.0%, and operating loss widened to $(11.9) million, largely due to increased R&D and the absence of a $5.3 million gain from the Ctrack South Africa sale in the prior year Net revenues Total net revenues increased by 4.5% to $69.2 million, driven by a $5.7 million increase in IoT & Mobile Solutions from 5G hotspot sales and Enterprise FWA, partially offset by a $2.7 million decrease in Enterprise SaaS Solutions due to the Ctrack South Africa divestiture and lower 4G product revenue | Product Category (in thousands) | 2022 | 2021 | Change ($) | Change (%) | | :------------------------------ | :---------- | :---------- | :---------- | :---------- | | IoT & Mobile Solutions | $62,633 | $56,975 | $5,658 | 9.9% | | Enterprise SaaS Solutions | $6,534 | $9,242 | $(2,708) | (29.3)% | | Total | $69,167 | $66,217 | $2,950 | 4.5% | - The increase in IoT & Mobile Solutions net revenues was primarily due to higher sales of second-generation 5G hotspots and increases in Enterprise FWA and Subscribe business[107] - The decrease in Enterprise SaaS Solutions net revenues was primarily due to lower sales attributable to the Ctrack South Africa divestiture and a decrease in Enterprise SaaS solutions revenue from the rest of the world[108] Cost of net revenues Total cost of net revenues increased by 8.3% to $51.2 million, representing 74.0% of net revenues, up from 71.4% in the prior year, mainly due to higher sales and production costs of second-generation 5G hotspots, partially offset by reduced costs from the Ctrack South Africa divestiture | Product Category (in thousands) | 2022 | 2021 | Change ($) | Change (%) | | :------------------------------ | :---------- | :---------- | :---------- | :---------- | | IoT & Mobile Solutions | $48,209 | $43,595 | $4,614 | 10.6% | | Enterprise SaaS Solutions | $3,002 | $3,679 | $(677) | (18.4)% | | Total | $51,211 | $47,274 | $3,937 | 8.3% | - The increase in IoT & Mobile Solutions cost of net revenues was primarily due to higher sales and production costs of second-generation 5G hotspots[109] - The decrease in Enterprise SaaS Solutions cost of net revenues was primarily due to a decrease in costs attributable to the Ctrack South Africa divestiture[110] Gross profit Gross profit for the three months ended September 30, 2022, decreased to $18.0 million, resulting in a gross margin of 26.0%, down from 28.6% in the prior year, primarily due to a higher mix of lower-margin 5G product revenue, increased supply chain costs, and the impact of the Ctrack South Africa divestiture - Gross profit for the three months ended September 30, 2022, was $18.0 million, compared to $18.9 million for the same period in 2021[111] - Gross margin decreased to 26.0% in 2022 from 28.6% in 2021[111] - The decrease in gross profit is primarily due to a higher mix of lower-margin 5G product revenue, higher supply chain costs, and a decrease in margin attributable to the Ctrack South Africa divestiture[111] Operating costs and expenses Total operating costs and expenses increased by 3.3% to $29.9 million, with research and development expenses rising significantly due to 5G product launches and certification, while sales and marketing and general and administrative expenses decreased due to headcount reductions and the Ctrack divestiture | Operating costs and expenses (in thousands) | 2022 | 2021 | Change ($) | Change (%) | | :---------------------------------------- | :---------- | :---------- | :---------- | :---------- | | Research and development | $15,417 | $12,626 | $2,791 | 22.1% | | Sales and marketing | $8,295 | $9,172 | $(877) | (9.6)% | | General and administrative | $5,720 | $6,599 | $(879) | (13.3)% | | Amortization of purchased intangible assets | $433 | $519 | $(86) | (16.6)% | | Total | $29,865 | $28,916 | $949 | 3.3% | - Research and development expenses increased by 22.1% primarily due to additional certification costs for major 5G products, increased amortization, and a net decrease in capitalizable costs[111] - Sales and marketing expenses decreased by 9.6% due to lower commission costs and other sales personnel-related costs from reduced headcount[112] Other (expense) income Total other (expense) income shifted from a $2.8 million income in 2021 to a $(3.8) million expense in 2022, primarily due to the absence of the $5.3 million gain on the sale of Ctrack South Africa in the prior year and higher foreign currency exchange losses | Other (expense) income (in thousands) | 2022 | 2021 | Change ($) | Change (%) | | :------------------------------------ | :---------- | :---------- | :---------- | :---------- | | Gain on sale of Ctrack South Africa | $0 | $5,262 | $(5,262) | 100.0% | | Interest expense, net | $(2,034) | $(1,655) | $(379) | 22.9% | | Other (expense) income, net | $(1,758) | $(828) | $(930) | 112.3% | | Total | $(3,792) | $2,779 | $(6,571) | (236.5)% | - The absence of the $5.3 million gain on the sale of Ctrack South Africa in 2021 was a primary driver of the change[113] - Other (expense) income, net, increased by $0.9 million primarily due to higher foreign currency exchange losses[114] Income tax provision (benefit) and Series E preferred stock dividends Income tax shifted from a benefit to a provision, and Series E preferred stock dividends decreased significantly due to the extinguishment of 10,000 preferred stock shares in September 2021 | Metric (in thousands) | 2022 | 2021 | Change ($) | Change (%) | | :-------------------- | :--- | :--- | :--------- | :--------- | | Income tax provision (benefit) | $42 | $(4) | $46 | (1150.0)% | | Series E preferred stock dividends | $(691) | $(1,843) | $1,152 | (62.5)% | - The decrease in Series E preferred stock dividends was primarily attributable to the extinguishment of 10,000 shares of preferred stock in September 2021[114] Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021 Net revenues increased by 1.5% to $192.4 million, driven by IoT & Mobile Solutions but significantly offset by Enterprise SaaS Solutions, while gross profit decreased by 11.6% to $51.1 million, with gross margin falling to 26.6%, and operating loss widened to $(43.7) million, primarily due to increased R&D and the absence of the Ctrack South Africa sale gain | Metric (in thousands) | 2022 | 2021 | Change ($) | Change (%) | | :-------------------- | :---------- | :---------- | :---------- | :---------- | | Total Net Revenues | $192,408 | $189,507 | $2,901 | 1.5% | | Gross Profit | $51,098 | $57,765 | $(6,667) | (11.6)% | | Operating Loss | $(43,708) | $(36,689) | $(7,019) | (19.1)% | - Gross margin decreased to 26.6% in 2022 from 30.5% in 2021, primarily due to a higher mix of lower-margin 5G product revenue and increased supply chain costs[119] - The absence of a $5.3 million gain on the sale of Ctrack South Africa in 2021 significantly impacted the year-over-year change in other (expense) income[123] Net revenues Total net revenues increased by 1.5% to $192.4 million, primarily driven by a $20.4 million increase in IoT & Mobile Solutions from 5G hotspot sales and Enterprise FWA, largely offset by a $17.5 million decrease in Enterprise SaaS Solutions due to the Ctrack South Africa divestiture | Product Category (in thousands) | 2022 | 2021 | Change ($) | Change (%) | | :------------------------------ | :---------- | :---------- | :---------- | :---------- | | IoT & Mobile Solutions | $172,129 | $151,770 | $20,359 | 13.4% | | Enterprise SaaS Solutions | $20,279 | $37,737 | $(17,458) | (46.3)% | | Total | $192,408 | $189,507 | $2,901 | 1.5% | - The increase in IoT & Mobile Solutions net revenues was primarily due to higher sales of second-generation 5G hotspots, strong performance of Enterprise FWA business, and an increase in subscriber growth[115] - The decrease in Enterprise SaaS Solutions net revenues was primarily due to lower sales attributable to the Ctrack South Africa divestiture and a decrease in Enterprise SaaS solutions revenue in the rest of the world[116] Cost of net revenues Total cost of net revenues increased by 7.3% to $141.3 million, representing 73.4% of net revenues, up from 69.5% in the prior year, mainly due to higher sales and freight costs for 5G hotspots, partially offset by reduced costs from the Ctrack South Africa divestiture | Product Category (in thousands) | 2022 | 2021 | Change ($) | Change (%) | | :------------------------------ | :---------- | :---------- | :---------- | :---------- | | IoT & Mobile Solutions | $131,805 | $116,777 | $15,028 | 12.9% | | Enterprise SaaS Solutions | $9,505 | $14,965 | $(5,460) | (36.5)% | | Total | $141,310 | $131,742 | $9,568 | 7.3% | - The increase in IoT & Mobile Solutions cost of net revenues was primarily due to higher sales of second-generation 5G hotspots and an increase in freight costs[117] - The decrease in Enterprise SaaS Solutions cost of net revenues was primarily due to a decrease in costs attributable to the Ctrack South Africa divestiture[118] Gross profit Gross profit for the nine months ended September 30, 2022, decreased to $51.1 million, resulting in a gross margin of 26.6%, down from 30.5% in the prior year, primarily due to a higher mix of lower-margin 5G product revenue, increased supply chain costs (e.g., freight), and the impact of the Ctrack South Africa divestiture - Gross profit for the nine months ended September 30, 2022, was $51.1 million, compared to $57.8 million for the same period in 2021[119] - Gross margin decreased to 26.6% in 2022 from 30.5% in 2021[119] - The decrease in gross margin is primarily due to a higher mix of lower-margin 5G product revenue, higher supply chain costs (i.e. freight cost) and a decrease in margin attributable to the Ctrack South Africa divestiture[119] Operating costs and expenses Total operating costs and expenses remained relatively flat at $94.8 million, with research and development expenses increasing significantly due to fewer capitalizable projects and 5G product launch costs, while sales and marketing and general and administrative expenses decreased due to the Ctrack divestiture and headcount reductions | Operating costs and expenses (in thousands) | 2022 | 2021 | Change ($) | Change (%) | | :---------------------------------------- | :---------- | :---------- | :---------- | :---------- | | Research and development | $47,597 | $38,954 | $8,643 | 22.2% | | Sales and marketing | $25,789 | $29,997 | $(4,208) | (14.0)% | | General and administrative | $20,101 | $22,657 | $(2,556) | (11.3)% | | Amortization of purchased intangible assets | $1,319 | $1,649 | $(330) | (20.0)% | | Impairment of capitalized software | $0 | $1,197 | $(1,197) | (100.0)% | | Total | $94,806 | $94,454 | $352 | 0.4% | - Research and development expenses increased by 22.2% primarily due to a net decrease in capitalizable costs, increased amortization from recently launched projects, and costs related to 5G product programs and share-based compensation[119] - Sales and marketing expenses decreased by 14.0% due to lower payroll costs from the Ctrack South Africa divestiture and reduced commission/personnel expenses from headcount reduction[120] Other (expense) income Total other (expense) income shifted dramatically from a $(57) thousand expense in 2021 to a $(10.2) million expense in 2022, primarily due to the absence of the $5.3 million gain on the sale of Ctrack South Africa and a significant increase in foreign currency exchange losses | Other (expense) income (in thousands) | 2022 | 2021 | Change ($) | Change (%) | | :------------------------------------ | :---------- | :---------- | :---------- | :---------- | | Gain on sale of Ctrack South Africa | $0 | $5,262 | $(5,262) | 100.0% | | Loss on debt conversion and extinguishment, net | $(450) | $(432) | $(18) | 4.2% | | Interest expense, net | $(6,621) | $(5,178) | $(1,443) | 27.9% | | Other (expense) income, net | $(3,145) | $291 | $(3,436) | (1180.8)% | | Total | $(10,216) | $(57) | $(10,159) | 17822.8% | - The absence of the $5.3 million gain on the sale of Ctrack South Africa in 2021 was a primary factor in the significant change[123] - Other (expense) income, net, increased by $3.4 million due to an increase in foreign exchange transaction losses[125] Income tax (benefit) provision, net income attributable to noncontrolling interests, and Series E preferred stock dividends The income tax shifted from a provision to a benefit, net income attributable to noncontrolling interests ceased due to the Ctrack South Africa divestiture, and Series E preferred stock dividends decreased due to preferred stock extinguishment | Metric (in thousands) | 2022 | 2021 | Change ($) | Change (%) | | :-------------------- | :--- | :--- | :--------- | :--------- | | Income tax (benefit) provision | $(582) | $445 | $(1,027) | (230.8)% | | Net income attributable to noncontrolling interests | $0 | $(214) | $214 | (100.0)% | | Series E preferred stock dividends | $(2,029) | $(3,596) | $1,567 | (43.6)% | - The income tax (benefit) provision was largely driven by foreign currency losses in 2022 and gains in 2021 at foreign subsidiaries[126] - Net income attributable to noncontrolling interests was zero in 2022 due to the sale of noncontrolling interests as part of the Ctrack South Africa divestiture[127] Liquidity and Capital Resources The Company's liquidity is primarily derived from its cash and cash equivalents and a new revolving credit facility, and despite a history of operating and net losses, management believes current resources, anticipated cash flows, and cost reduction efforts will be sufficient for the next 12 months - Principal sources of liquidity include $18.1 million in cash and cash equivalents and $14.6 million of excess availability under the new revolving credit facility as of September 30, 2022[129] - Management believes current liquidity, anticipated cash flows from operations, and ongoing cost reduction efforts will be sufficient to meet cash flow needs for the next twelve months[130] - The Company's ability to attain profitability and generate positive cash flow is dependent upon achieving a level and mix of revenues adequate to support its evolving cost structure and increasing working capital needs[131] Revolving Credit Facility The Company established a $50 million secured asset-backed revolving credit facility on August 5, 2022, maturing December 31, 2024, with borrowings subject to variable interest rates and a borrowing base, and as of September 30, 2022, $4.5 million was outstanding, and the Company was in compliance with all financial covenants - A secured asset-backed revolving credit facility of up to $50 million was established on August 5, 2022, maturing on December 31, 2024[132][133] - Borrowings bear interest at Base Rate or SOFR plus an Applicable Margin, with a Term SOFR floor of 1%[134] - As of September 30, 2022, the Credit Facility had outstanding borrowings of $4.5 million and a borrowing base of $19.1 million, and the Company was in compliance with all covenants[136][137] 2025 Notes The Company has $161.9 million in principal amount of 3.25% convertible senior notes due May 1, 2025, which are senior unsecured obligations with interest payable semi-annually - $161.9 million in principal amount of the 2025 Notes were outstanding as of September 30, 2022, and December 31, 2021[139] - The 2025 Notes are senior unsecured obligations and bear interest at an annual rate of 3.25%, payable semi-annually, with the entire principal balance due on May 1, 2025[139] Contractual Obligations and Commitments The Company's noncancellable purchase obligations with contract manufacturers decreased to approximately $104.7 million as of September 30, 2022, from $165.8 million at December 31, 2021, with no other material changes in contractual obligations reported - Noncancellable purchase obligations with contract manufacturers were approximately $104.7 million as of September 30, 2022[140] - This represents a decrease from approximately $165.8 million as of December 31, 2021[140] - There were no material changes in other contractual obligations during the three and nine months ended September 30, 2022[141] Historical Cash Flows Net cash used in operating activities increased to $24.7 million for the nine months ended September 30, 2022, from $14.8 million in 2021, with investing activities shifting from providing cash to using cash, and financing activities providing significantly less cash compared to the prior year, primarily due to the absence of a public offering | Cash Flow Category (in thousands) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net cash used in operating activities | $(24,703) | $(14,757) | | Net cash (used in) provided by investing activities | $(10,445) | $7,665 | | Net cash provided by financing activities | $1,483 | $28,979 | | Net (decrease) increase in cash, cash equivalents and restricted cash | $(31,749) | $21,594 | - Net cash used in operating activities increased primarily due to a higher net loss and increased working capital usage[143][144] - Net cash provided by financing activities decreased significantly to $1.5 million, primarily from net borrowings on the new revolving credit facility, compared to $29.0 million in 2021 from a public offering[147][148][149] Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to market risks, primarily interest rate risk from its variable-rate revolving credit facility and currency risk due to foreign operations, with fluctuations in foreign exchange rates impacting revenues, earnings, and the reported value of foreign-denominated assets and liabilities, and increased volatility due to the COVID-19 pandemic - The Company is exposed to market risk in the ordinary course of business, including fluctuations due to changes in foreign currency exchange rates and interest rates[150] - The ongoing COVID-19 pandemic has increased the volatility of global financial markets, which may increase foreign currency exchange risk[150] Interest Rate Risk The Company faces interest rate risk from its variable-rate revolving credit facility and from the embedded derivative in its fixed-rate 2025 Notes, with the derivative marked to fair value and sensitive to changes in stock price, volatility, and risk-free rates - Total fixed-rate borrowings under the 2025 Notes were $161.9 million as of September 30, 2022, and December 31, 2021[152] - The 2025 Notes include an embedded derivative, marked to fair value, which may incur gains and losses due to changes in stock price, volatility, and risk-free rate[153] - A hypothetical 1% increase in interest rates on a fully drawn $19.1 million revolving credit facility would result in a $0.2 million change in annualized interest expense[154] Currency Risk The Company is exposed to foreign currency transaction risk, as a portion of its sales are denominated in foreign currencies, and foreign currency translation risk, which impacts the reported value of foreign-denominated assets, liabilities, earnings, and cash flows upon translation into U.S. Dollars - Sales denominated in foreign currencies were approximately 22.0% and 17.2% of total revenue for the three and nine months ended September 30, 2022, respectively[156] - A hypothetical 10% change in Foreign Functional Currency exchange rates would have increased or decreased revenue by approximately $1.5 million and $3.3 million for the three and nine months ended September 30, 2022, respectively[156] - Fluctuations in foreign currencies impact the reported amounts of total assets, liabilities, earnings, and cash flows of foreign subsidiaries upon translation into U.S. Dollars[157] Item 4. Controls and Procedures The Company's management, including the Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of its disclosure controls and procedures as of September 30, 2022, and concluded they were effective, with no material changes in internal control over financial reporting during the quarter - The Company's disclosure controls and procedures were evaluated and concluded to be effective as of September 30, 2022[159][160] - There were no material changes in the Company's internal control over financial reporting during the quarter ended September 30, 2022[161] PART II Item 1. Legal Proceedings The Company is not currently involved in any legal proceedings that, if determined adversely, would individually or in the aggregate be reasonably expected to have a material adverse effect on its business, financial position, or results of operations - The Company is not currently part