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EX-32.2 - EXHIBIT 32.2 - INSEEGO CORP.insg20180930ex322.htm
EX-32.1 - EXHIBIT 32.1 - INSEEGO CORP.insg20180930ex321.htm
EX-31.2 - EXHIBIT 31.2 - INSEEGO CORP.insg20180930ex312.htm
EX-31.1 - EXHIBIT 31.1 - INSEEGO CORP.insg20180930ex311.htm
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                          to                     .  
Commission file number: 001-38358
 
INSEEGO CORP.
(Exact name of registrant as specified in its charter)
Delaware
 
81-3377646
(State or Other Jurisdiction
of Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
9605 Scranton Road, Suite 300
San Diego, California
 
92121
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (858) 812-3400
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    x  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
x
 
 
 
 
Non-accelerated filer
¨
Smaller reporting company
¨
 
 
 
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨ No x
The number of shares of the registrant’s common stock outstanding as of November 2, 2018 was 73,392,179.
 
 
 
 
 



TABLE OF CONTENTS
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
Item 5.
 
 
Item 6.
 
 




PART I—FINANCIAL INFORMATION
Item 1.     Financial Statements.
INSEEGO CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share data)

 
September 30,
2018
 
December 31,
2017
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
31,547

 
$
21,198

Restricted cash
61

 
61

Accounts receivable, net of allowance for doubtful accounts of $2,664 and $2,683, respectively
27,418

 
15,674

Inventories, net
13,747

 
20,403

Prepaid expenses and other
6,619

 
9,101

Total current assets
79,392

 
66,437

Property, plant and equipment, net of accumulated depreciation of $29,419 and $28,138, respectively
5,832

 
6,991

Rental assets, net of accumulated depreciation of $11,040 and $9,039, respectively
5,957

 
7,563

Intangible assets, net of accumulated amortization of $29,488 and $25,473, respectively
33,400

 
38,671

Goodwill
33,459

 
37,681

Other assets
869

 
864

Total assets
$
158,909

 
$
158,207

LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
31,580

 
$
29,332

Accrued expenses and other current liabilities
16,407

 
27,558

DigiCore bank facilities
1,583

 
3,075

Total current liabilities
49,570

 
59,965

Long-term liabilities:
 
 
 
Convertible senior notes, net
90,983

 
84,773

Term loan, net
44,673

 
44,055

Deferred tax liabilities, net
4,524

 
5,261

Other long-term liabilities
2,479

 
9,768

Total liabilities
192,229

 
203,822

Commitments and Contingencies

 

Stockholders’ deficit:
 
 
 
Preferred stock, par value $0.001; 2,000,000 shares authorized and none outstanding

 

Common stock, par value $0.001; 150,000,000 shares authorized, 73,391,361 and 58,644,559 shares issued and outstanding, respectively
73

 
59

Additional paid-in capital
544,303

 
519,531

Accumulated other comprehensive (loss) income
(3,985
)
 
4,604

Accumulated deficit
(573,626
)
 
(569,759
)
Total stockholders’ deficit attributable to Inseego Corp.
(33,235
)
 
(45,565
)
Noncontrolling interests
(85
)
 
(50
)
Total stockholders’ deficit
(33,320
)
 
(45,615
)
Total liabilities and stockholders’ deficit
$
158,909

 
$
158,207


See accompanying notes to unaudited condensed consolidated financial statements.

3



INSEEGO CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net revenues:
 
 
 
 
 
 
 
IoT & Mobile Solutions
$
34,636

 
$
41,116

 
$
95,257

 
$
123,143

Enterprise SaaS Solutions
15,994

 
16,345

 
51,163

 
49,620

Total net revenues
50,630

 
57,461

 
146,420

 
172,763

Cost of net revenues:
 
 
 
 
 
 
 
IoT & Mobile Solutions
26,793

 
35,323

 
75,168

 
102,961

Enterprise SaaS Solutions
6,233

 
5,684

 
20,093

 
18,526

Impairment of abandoned product line, net of recoveries

 
82

 
355

 
1,489

Total cost of net revenues
33,026

 
41,089

 
95,616

 
122,976

Gross profit
17,604

 
16,372

 
50,804

 
49,787

Operating costs and expenses:
 
 
 
 
 
 
 
Research and development
5,317

 
5,099

 
15,261

 
16,788

Sales and marketing
5,907

 
6,181

 
16,957

 
20,340

General and administrative
5,837

 
7,118

 
18,634

 
27,249

Amortization of purchased intangible assets
869

 
905

 
2,764

 
2,714

Extinguishment of acquisition-related liabilities
(17,174
)
 

 
(17,174
)
 

Restructuring charges, net of recoveries
245

 
3,446

 
1,165

 
5,698

Total operating costs and expenses
1,001

 
22,749

 
37,607

 
72,789

Operating income (loss)
16,603

 
(6,377
)
 
13,197

 
(23,002
)
Other expense:
 
 
 
 
 
 
 
Interest expense, net
(5,113
)
 
(5,229
)
 
(15,360
)
 
(14,266
)
Other expense, net
(180
)
 
(1,780
)
 
(554
)
 
(3,408
)
Income (loss) before income taxes
11,310

 
(13,386
)
 
(2,717
)
 
(40,676
)
Income tax provision
473

 
409

 
1,185

 
1,270

Net income (loss)
10,837

 
(13,795
)
 
(3,902
)
 
(41,946
)
Less: Net loss attributable to noncontrolling interests
6

 
6

 
35

 
33

Net income (loss) attributable to Inseego Corp.
$
10,843

 
$
(13,789
)
 
$
(3,867
)
 
$
(41,913
)
Per share data:
 
 
 
 
 
 
 
Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.16

 
$
(0.23
)
 
$
(0.06
)
 
$
(0.72
)
Diluted
$
0.15

 
$
(0.23
)
 
$
(0.06
)
 
$
(0.72
)
Weighted-average shares used in computation of net income (loss) per share:
 
 
 
 
 
 
 
Basic
68,480,774

 
59,004,520

 
63,585,229

 
58,157,171

Diluted
71,456,346

 
59,004,520

 
63,585,229

 
58,157,171


See accompanying notes to unaudited condensed consolidated financial statements.

4



INSEEGO CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
10,837

 
$
(13,795
)
 
$
(3,902
)
 
$
(41,946
)
Foreign currency translation adjustment
(1,797
)
 
(3,224
)
 
(8,589
)
 
48

Total comprehensive income (loss)
$
9,040

 
$
(17,019
)
 
$
(12,491
)
 
$
(41,898
)
 
See accompanying notes to unaudited condensed consolidated financial statements.


5



INSEEGO CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended
September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net loss
$
(3,902
)
 
$
(41,946
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
10,564

 
11,098

Provision for bad debts, net of recoveries
536

 
986

Loss on impairment of abandoned product line, net of recoveries
355

 
1,489

Provision for excess and obsolete inventory, net of recoveries
1,219

 
876

Share-based compensation expense
3,678

 
2,942

Amortization of debt discount and debt issuance costs
7,328

 
7,840

Loss on extinguishment of debt, net

 
2,035

Loss on disposal of assets
455

 
648

Deferred income taxes
(4
)
 
9

Non-cash gain on extinguishment of acquisition-related liabilities
(17,174
)
 

Unrealized foreign currency transaction loss (gain), net
319

 
(794
)
Other
98

 
(309
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(13,038
)
 
614

Inventories
1,779

 
3,637

Prepaid expenses and other assets
2,423

 
(4,071
)
Accounts payable
879

 
1,968

Accrued expenses, income taxes, and other
616

 
(1,813
)
Net cash used in operating activities
(3,869
)
 
(14,791
)
Cash flows from investing activities:
 
 
 
Purchases of property, plant and equipment
(936
)
 
(1,737
)
Proceeds from the sale of property, plant and equipment
109

 
182

Purchases of intangible assets and additions to capitalized software development costs
(1,527
)
 
(2,256
)
Net cash used in investing activities
(2,354
)
 
(3,811
)
Cash flows from financing activities:
 
 
 
Gross proceeds received from private placement
19,661

 

Proceeds from term loans

 
64,917

Payment of issuance costs related to term loans

 
(905
)
Principal payments on term loans
(500
)
 
(20,000
)
Repurchase of convertible senior notes

 
(11,900
)
Net repayment of DigiCore bank and overdraft facilities
(1,203
)
 
(620
)
Principal payments under capital lease obligations
(487
)
 
(613
)
Principal payments on mortgage bond
(241
)
 
(216
)
Proceeds from stock option exercises and employee stock purchase plan, net of taxes paid on vested restricted stock units
1,022

 
(793
)
Net cash provided by financing activities
18,252

 
29,870

Effect of exchange rates on cash, cash equivalents and restricted cash
(1,680
)
 
(1,164
)
Net increase in cash, cash equivalents and restricted cash
10,349

 
10,104

Cash, cash equivalents and restricted cash, beginning of period
21,259

 
9,894

Cash, cash equivalents and restricted cash, end of period
$
31,608

 
$
19,998

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the year for:
 
 
 
Interest
$
6,605

 
$
4,571

Income taxes
$
593

 
$
136

Supplemental disclosures of non-cash activities:
 
 
 
Transfer of inventories to rental assets
$
3,018

 
$
4,225

Capital expenditures financed through accounts payable
$
2,178

 
$

Issuance costs financed through accounts payable
$
500

 
$

Issuance of common stock under settlement agreement
$
925

 
$

Issuance of common stock under amended earn-out agreement
$

 
$
2,638

Additional debt discount on exchange of convertible senior notes
$

 
$
3,600

Term loan debt discount issued in common stock
$

 
$
2,340

See accompanying notes to unaudited condensed consolidated financial statements.

6




INSEEGO CORP.
Notes to Condensed Consolidated Financial Statements (Unaudited)

 
1. Basis of Presentation
The information contained herein has been prepared by Inseego Corp. (the “Company”) in accordance with the rules of the Securities and Exchange Commission (the “SEC”). The information at September 30, 2018 and the results of the Company’s operations for the three and nine months ended September 30, 2018 and 2017 are unaudited. The condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring accruals, which are, in the opinion of management, necessary for a fair statement of the results of the interim periods presented. These condensed consolidated financial statements and notes hereto should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The year-end condensed consolidated balance sheet data as of December 31, 2017 was derived from the Company’s audited consolidated financial statements and may not include all disclosures required by accounting principles generally accepted in the United States. Certain prior period amounts were reclassified to conform to the current period presentation. These reclassifications did not affect total revenues, costs and expenses, net income (loss), assets, liabilities or stockholders’ deficit. Except as set forth below, the accounting policies used in preparing these unaudited condensed consolidated financial statements are the same as those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The results of operations for the interim periods presented are not necessarily indicative of results to be expected for any other interim period or for the year as a whole.
The Company has a history of operating and net losses and overall usage of cash from operating and investing activities. During the three months ended September 30, 2018, the Company continued certain restructuring initiatives that were commenced during the first quarter of 2018. These restructuring initiatives are aimed at reducing the Company’s operating expenses in an effort to increase operating cash flows to eventually be sufficient to offset debt service costs and cash flows from investing activities. On August 6, 2018, the Company completed a private placement of 12,062,000 shares of common stock and warrants to purchase an additional 4,221,700 shares of 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 (see Note 8, Private Placement ). 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 the next twelve months following the filing date of this report. The Company’s ability to attain more profitable operations and continue generating 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 may decide to raise additional funds to accelerate development of new and existing services and products, to respond to competitive pressures or to acquire complementary products, businesses or technologies. There can be no assurance that any required or desired additional 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 (each as defined below). If additional funds are raised by the issuance of equity securities, the Company’s 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.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly- and majority-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Segment Information
Management has determined that the Company has one 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.
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 the disclosure of contingent liabilities. Actual results could differ materially from

7




INSEEGO CORP.
Notes to Condensed Consolidated Financial Statements (Unaudited)

these estimates. Significant estimates include allowance for doubtful accounts receivable, provision for excess and obsolete inventory, valuation of intangible and long-lived assets, valuation of goodwill, valuation of debt obligations, royalty costs, accruals relating to litigation and restructuring, provision for warranty costs, income taxes, share-based compensation expense and the Company’s ability to continue as a going concern.
Revenue Recognition
Significant changes to the Company’s accounting policies, as a result of the adoption of the new revenue recognition guidance on January 1, 2018, are discussed below.
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 industrial Internet of Things (“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.
Net revenues by product grouping for the three and nine months ended September 30, 2018 and 2017 were as follows (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
IoT & Mobile Solutions
$
34,636

 
$
41,116

 
$
95,257

 
$
123,143

Enterprise SaaS Solutions
15,994

 
16,345

 
51,163

 
49,620

Total
$
50,630

 
$
57,461

 
$
146,420

 
$
172,763

See geographic disaggregation information in Note 9, 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, VoLTE based wireless home phones and cloud management software. The solutions are offered under the MiFi brand 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 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.
Contracts with Customers
The Company adopted 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. These standards provide 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. Revenues for 2018 are reported under ASC 606, while prior period amounts are not adjusted and continue to be reported under ASC 605, Revenue Recognition.
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

8




INSEEGO CORP.
Notes to Condensed Consolidated Financial Statements (Unaudited)

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.
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. If the customer chooses to lease the monitoring device, the Company recognizes the revenue for the monitoring device over the term of the contract. The Company records such revenue in accordance with the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 840, Leases (“ASC 840”), as it has determined that they qualify as operating leases (ownership of the device does not transfer to the other party).
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 specifically 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

9




INSEEGO CORP.
Notes to Condensed Consolidated Financial Statements (Unaudited)

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 obligations.
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 September 30, 2018.
Applying the practical expedient in paragraph ASC 340-40-25-4, 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.
Revenue 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 or hosted data centers. 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.

10




INSEEGO CORP.
Notes to Condensed Consolidated Financial Statements (Unaudited)

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.
Transition Disclosures
Adoption of the new standards related to revenue recognition did not have a material impact on the Company’s consolidated financial statements.
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. Unless otherwise discussed, management believes the impact of recently issued standards, some of which are not yet effective, will not have a material impact on the Company’s consolidated financial statements upon adoption.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that restricted cash and restricted cash equivalents be included as components of total cash and cash equivalents in the statement of cash flows. The Company implemented this guidance in the first quarter of 2018 using a retrospective transition method for each period presented. The following line items in the Company’s unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2017 have been adjusted to reflect the adoption of this new guidance:
 
As Previously Reported
 
Adjustment
 
As Adjusted
Restricted cash
$
(411
)
 
$
411

 
$

Net cash used in operating activities
(15,202
)
 
411

 
(14,791
)
Net increase in cash, cash equivalents and restricted cash
9,693

 
411

 
10,104

Cash, cash equivalents and restricted cash, end of period
19,587

 
411

 
19,998

In June 2016, the FASB issued ASU 2016-13, Financial InstrumentsCredit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected credit losses for financial assets 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.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. This guidance results in the Company providing a more faithful representation of the rights and obligations arising from operating and capital leases by requiring lessees to recognize the lease assets and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases. This guidance is effective prospectively for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. Originally, entities were required to adopt ASU 2016-02 using a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application. However, in July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which now allows entities the option of recognizing the cumulative effect of applying the new standard as an adjustment to the opening balance of retained earnings in the year of adoption while continuing to present all prior periods under previous lease accounting guidance. In July 2018, the FASB also issued ASU 2018-10, Codification Improvements to Topic 842, Leases, which clarifies how to apply certain aspects of ASU 2016-02. The Company has compiled its lease inventory and is currently evaluating the contracts and assessing the impact of this guidance.

11




INSEEGO CORP.
Notes to Condensed Consolidated Financial Statements (Unaudited)

2. Financial Statement Details
Inventories, net
Inventories, net, consist of the following (in thousands):
 
September 30,
2018
 
December 31,
2017
Finished goods
$
8,820

 
$
14,331

Raw materials and components
4,927

 
6,072

Total inventories, net
$
13,747

 
$
20,403

Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in thousands):
 
September 30,
2018
 
December 31,
2017
Royalties
$
1,564

 
$
1,558

Payroll and related expenses
2,499

 
2,870

Professional fees
727

 
1,789

Accrued interest
1,685

 
239

Deferred revenue
2,464

 
1,823

Acquisition-related liabilities
1,000

 
13,186

Other
6,468

 
6,093

Total accrued expenses and other current liabilities
$
16,407

 
$
27,558

Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows (in thousands):
 
September 30,
2018
 
December 31,
2017
 
September 30,
2017
 
December 31,
2016
Cash and cash equivalents
$
31,547

 
$
21,198

 
$
19,587

 
$
9,894

Restricted cash
61

 
61

 
411

 

Total cash, cash equivalents and restricted cash
$
31,608

 
$
21,259

 
$
19,998

 
$
9,894

As of September 30, 2018, restricted cash included collateral requirements related to the Company’s corporate credit card program.
3. Goodwill and Other Intangible Assets
The balances in goodwill and other intangible assets were primarily a result of the Company’s acquisitions of DigiCore Holdings Limited (which has been renamed Ctrack Holdings (Pty) Ltd.) and of R.E.R. Enterprises, Inc. (“RER”) and its wholly-owned subsidiary and principal operating asset, Feeney Wireless, LLC (which has been renamed Inseego North America, LLC) (“FW”). See Note 4, Goodwill and Other Intangible Assets, in the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 for a discussion of the components of goodwill and additional information regarding other intangible assets.
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 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.

12




INSEEGO CORP.
Notes to Condensed Consolidated Financial Statements (Unaudited)

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.
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 nine months ended September 30, 2018.
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 September 30, 2018 (in thousands):
 
Balance as of
September 30, 2018
 
Level 1
Assets:
 
 
 
Cash equivalents
 
 
 
Money market funds
$
15,020

 
$
15,020

Total cash equivalents
$
15,020

 
$
15,020

The Company had no financial instruments measured at fair value on a recurring basis as of December 31, 2017.
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 Convertible Notes (as defined below) (see Note 5, Debt). The Company carries its Convertible Notes at amortized cost. The debt and equity components of the Convertible Notes were measured using Level 3 inputs and are not measured on a recurring basis. The fair value of the liability component of the Convertible Notes, which approximates the carrying value of such notes, was $91.0 million and $84.8 million as of September 30, 2018 and December 31, 2017, respectively.
5. Debt
Previous Credit Agreements
On October 31, 2014, the Company entered into a five-year senior secured revolving credit facility in the amount of $25.0 million (the “Revolver”) with Wells Fargo Bank, National Association, as lender. Concurrently with the acquisition of FW, the Company amended the Revolver to include FW as a borrower and Loan Party, as defined by the agreement. On November 17, 2015, the Revolver was amended to increase the maximum borrowing capacity to $48.0 million. On March 20, 2017, at the Company’s request, the financial covenants with respect to liquidity requirements and EBITDA targets, among other things, were amended in order to enable draw-downs by the Company from time to time. In exchange for such accommodations, the aggregate amount available under the Revolver was decreased from $48.0 million to $10.0 million.

13




INSEEGO CORP.
Notes to Condensed Consolidated Financial Statements (Unaudited)

The Company terminated the Revolver on May 8, 2017, in connection with the execution of a credit agreement between the Company and Lakestar Semi Inc., a private investment fund managed by Soros Fund Management LLC, dated as of May 8, 2017 (the “Prior Credit Agreement”). The Prior Credit Agreement provided for a $20.0 million secured term loan with a maturity date of May 8, 2018. In conjunction with the closing of the Prior Credit Agreement, the Company received proceeds of $18.0 million, net of a $2.0 million debt discount, and paid issuance costs of approximately $0.4 million.
On August 23, 2017, upon entering into the Credit Agreement described below, the Company used a portion of the proceeds of the new Term Loan (as defined below) to repay all outstanding amounts under and terminate the Prior Credit Agreement. In connection with the termination of the Prior Credit Agreement, the Company recognized a loss on extinguishment of debt of approximately $1.7 million, which is included in other expense, net, in the condensed consolidated statements of operations. There was no early termination fee paid in connection with the termination of the Prior Credit Agreement.
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 funds managed by Highbridge Capital Management, LLC, as 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 outstanding Inseego 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.
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%. 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.
As required by the terms of the Credit Agreement, during the three months ended September 30, 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).
The Term Loan consists of the following (in thousands):
 
September 30,
2018
 
December 31, 2017
Principal
$
47,500

 
$
48,000

Less: unamortized debt discount and debt issuance costs
(2,827
)
 
(3,945
)
Net carrying amount
$
44,673

 
$
44,055

The effective interest rate on the Term Loan was 13.64% for the nine months ended September 30, 2018. The following table sets forth total interest expense recognized related to the Term Loan (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Contractual interest expense
$
1,185

 
$
435

 
$
3,452

 
$
435

Amortization of debt discount
332

 
139

 
998

 
139

Amortization of debt issuance costs
40

 
17

 
120

 
17

Total interest expense
$
1,557

 
$
591

 
$
4,570

 
$
591


14




INSEEGO CORP.
Notes to Condensed Consolidated Financial Statements (Unaudited)

Convertible Senior Notes
Novatel Wireless Notes
On June 10, 2015, Novatel Wireless, Inc., a wholly owned subsidiary of Inseego Corp. (“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. The Company used a portion of the proceeds from the offering to finance its acquisition of Ctrack, to pay fees and expenses related to the acquisition, and for general corporate purposes.
The Novatel Wireless Notes are governed by the terms of an indenture, dated June 10, 2015 (as amended, the “Novatel Wireless Indenture”), between Novatel Wireless, as issuer, Inseego Corp. and Wilmington Trust, National Association, as trustee. 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 the Company’s common stock, or a combination thereof, at the election 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.
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 aggregate principal amount of 5.50% convertible senior notes due 2022 (the “Inseego Notes” and collectively with the Novatel Wireless Notes, the “Convertible 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 from, and including, December 15, 2016, 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 Inseego Notes will mature on June 15, 2022, unless earlier converted, redeemed or repurchased.
The Inseego Notes will be convertible into cash, shares of the Company’s common stock, or a combination thereof, at the election of the Company, at an initial conversion rate of 212.7660 shares of common stock per $1,000 principal amount of the Inseego Notes, which corresponds to an initial conversion price of $4.70 per share of the Company’s common stock. The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of stock dividends and payment of cash dividends. Under certain limited circumstances which are described in the Inseego Indenture, holders may convert their Inseego Notes prior to the close of business on the business day immediately preceding December 15, 2021. On or after December 15, 2021, the holders may convert any of their Inseego Notes at any time prior to the close of business on the business day immediately preceding the maturity date.
Under certain limited circumstances which are described in the Inseego Indenture, the Company may redeem all or a portion of the Inseego Notes at its option on or after June 15, 2018, 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. The Inseego Notes are subject to repurchase by the Company at the option of the holders on June 15, 2020 (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. 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 record date to receive the related interest.
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.

15




INSEEGO CORP.
Notes to Condensed Consolidated Financial Statements (Unaudited)

The Inseego Indenture also provides for customary events of default. Upon the occurrence of certain events of bankruptcy, insolvency or reorganization involving the Company, 100% of the principal and accrued and unpaid interest of the Inseego Notes will automatically become immediately due and payable.
Because the exchange of the Novatel Wireless Notes for 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 issuance 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.
Note Purchase Agreement
On August 23, 2017, in connection with the Credit Agreement described above, the Company and certain of the Lenders entered into a Note Purchase Agreement (the “Note Purchase Agreement”) pursuant to which the Company repurchased approximately $14.9 million of outstanding Inseego Notes from such Lenders in exchange for $11.9 million deemed to have been loaned to the Company pursuant to the Credit Agreement and the accrued and unpaid interest on such notes. In connection with the repurchase of such notes, the Company recognized a loss on extinguishment of debt of approximately $0.3 million, which is included in other expense, net, in the condensed consolidated statements of operations.
The Convertible Notes consist of the following (in thousands):
 
September 30,
2018
 
December 31,
2017
Liability component:
 
 
 
Principal
$
105,125

 
$
105,125

Less: unamortized debt discount and debt issuance costs
(14,142
)
 
(20,352
)
Net carrying amount
$
90,983

 
$
84,773

Equity component
$
41,905

 
$
41,905

 
The effective interest rate on the liability component of the Convertible Notes was 15.46% for the nine months ended September 30, 2018. The following table sets forth total interest expense recognized related to the Convertible Notes (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Contractual interest expense
$
1,446

 
$
1,564

 
$
4,337

 
$
4,864

Amortization of debt discount
1,955

 
2,126

 
5,866

 
6,586

Amortization of debt issuance costs
115

 
125

 
344

 
388

Total interest expense
$
3,516

 
$
3,815

 
$
10,547

 
$
11,838


16




INSEEGO CORP.
Notes to Condensed Consolidated Financial Statements (Unaudited)

6. Share-based Compensation
The Company included the following amounts for share-based compensation awards in the unaudited condensed consolidated statements of operations (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
  
2018
 
2017
 
2018
 
2017
Cost of revenues
$
153

 
$
35

 
$
227

 
$
130

Research and development
564

 
225

 
972

 
541

Sales and marketing
313

 
320

 
761

 
536

General and administrative
704

 
214

 
1,718

 
1,566

Restructuring

 
169

 

 
169

Total
$
1,734

 
$
963

 
$
3,678

 
$
2,942

Stock Options
The following table summarizes the Company’s stock option activity:
Outstanding — December 31, 2017
6,566,483

Granted
4,248,142

Exercised
(1,172,996
)
Canceled
(1,164,750
)
Outstanding — September 30, 2018
8,476,879

Exercisable — September 30, 2018
3,141,297

At September 30, 2018, total unrecognized compensation expense related to stock options was $4.5 million, which is expected to be recognized over a weighted-average period of 2.97 years.
Restricted Stock Units
The following table summarizes the Company’s restricted stock unit (“RSU”) activity:
Non-vested — December 31, 2017
1,055,977

Granted
919,226

Vested
(1,106,238
)
Forfeited
(451,954
)
Non-vested — September 30, 2018
417,011

At September 30, 2018, total unrecognized compensation expense related to RSUs was $0.5 million, which is expected to be recognized over a weighted-average period of 1.69 years.
7. Earnings Per Share
Basic earnings per share (“EPS”) excludes dilution and is computed by dividing net income (loss) attributable to Inseego Corp. 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.

17




INSEEGO CORP.
Notes to Condensed Consolidated Financial Statements (Unaudited)

The calculation of basic and diluted EPS was as follows (in thousands, except share and per share data):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss) attributable to Inseego Corp.
$
10,843

 
$
(13,789
)
 
$
(3,867
)
 
$
(41,913
)
 
 
 
 
 
 
 
 
Basic weighted-average common shares outstanding
68,480,774

 
59,004,520

 
63,585,229

 
58,157,171

Dilutive common share equivalents
2,975,572

 

 

 

Diluted weighted-average number of shares outstanding
71,456,346

 
59,004,520

 
63,585,229

 
58,157,171

 
 
 
 
 
 
 
 
Basic net income (loss) per share
$
0.16

 
$
(0.23
)
 
$
(0.06
)
 
$
(0.72
)
Diluted net income (loss) per share
$
0.15

 
$
(0.23
)
 
$
(0.06
)
 
$
(0.72
)
For the three months ended September 30, 2018, the computation of diluted EPS excluded 28,086,624 shares related to the Convertible Notes as their effect would have been anti-dilutive. For the nine months ended September 30, 2018, the computation of diluted EPS excluded 37,975,693 shares primarily related to the Convertible Notes, warrants, stock options and RSUs as their effect would have been anti-dilutive.
8. Private Placement
On August 6, 2018, the Company completed a private placement of 12,062,000 shares of common stock, par value $0.001 per share, and warrants to purchase an additional 4,221,700 shares of 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 has an initial exercise price of $2.52 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 February 6, 2019, 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.
The Company assessed the terms of the warrants under ASC 815, Derivatives and Hedges. Pursuant to this guidance, the Company has determined that the warrants do not require liability accounting and has classified the warrants as equity.
9. Geographic Information and Concentrations of Risk
Geographic Information
The following table details the Company’s net revenues by geographic region based on shipping destination (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
United States and Canada
$
35,891

 
$
42,056

 
$
98,559

 
$
125,969

South Africa
9,145

 
9,754

 
30,038

 
29,694

Other
5,594

 
5,651

 
17,823

 
17,100

Total
$
50,630

 
$
57,461

 
$
146,420

 
$
172,763

Concentrations of Risk
For the three months ended September 30, 2018, one customer accounted for 46.9% of net revenues. For the three months ended September 30, 2017, two customers accounted for 48.0% and 14.9% of net revenues, respectively. For the nine months ended September 30, 2018, one customer accounted for 46.6% of net revenues. For the nine months ended September 30, 2017, two customers accounted for 49.6% and 11.4% of net revenues, respectively.
As of September 30, 2018, one customer accounted for 35.9% of accounts receivable, net. As of December 31, 2017, one customer accounted for 23.9% of accounts receivable, net.

18




INSEEGO CORP.
Notes to Condensed Consolidated Financial Statements (Unaudited)

10. Commitments and Contingencies
Legal
The Company is, from time to time, party to various legal proceedings arising in the ordinary course of business. For example, the Company is currently named as a defendant or co-defendant in some patent infringement lawsuits in the U.S. and may be required to 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 27, 2015, a patent infringement action was brought against Novatel Wireless by Carucel Investments, L.P. (“Carucel”), a non-practicing entity (Carucel Investments, L.P. v. Novatel Wireless, Inc., et al., U.S.D.C. S.D. Florida, Civil Action No. 0:15-cv-61116-BB). The complaint alleged that certain MiFi mobile hotspots manufactured by Novatel Wireless infringed claims of patents owned by Carucel. On April 10, 2017, judgment was entered in favor of Novatel Wireless. Carucel filed to appeal certain orders in the litigation and on July 13, 2018, the U.S. Federal Circuit Court of Appeals affirmed the judgment.
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 issue 500,000 shares of the Company’s common stock to the former stockholders of RER, (iii) 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, (iv) 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 (v) 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, the Company recognized a gain of $17.2 million, which is included in extinguishment of acquisition-related liabilities in the unaudited condensed consolidated statement of operations for the period ended September 30, 2018. The Company’s remaining liability under the Settlement Agreement at September 30, 2018 consists of approximately $1.0 million in current liabilities and $1.0 million in long-term liabilities.
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. Income Taxes
The Company’s income tax provision of $0.5 million and $0.4 million for the three months ended September 30, 2018 and 2017, respectively, and $1.2 million and $1.3 million for the nine months ended September 30, 2018 and 2017, respectively, consists primarily of foreign income taxes at certain of the Company’s international entities and minimum state taxes for its U.S.-based entities. The Company has income tax expense rather than an expected benefit based on statutory rates due primarily to losses at U.S. and international subsidiaries whose net operating losses are fully reserved.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) significantly revised the U.S. corporate income tax law, by among other things, reducing the corporate income tax rate to 21% for tax years beginning in 2018, limiting the deduction for interest expense, implementing a modified territorial system that includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries, and creating new taxes on certain foreign sourced earnings.
In 2017, the SEC issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), the Company recorded provisional estimates related to the Tax Act. The Company continues to analyze the Tax Act, and in certain areas, has made estimates of the effects on its unaudited condensed consolidated financial statements

19




INSEEGO CORP.
Notes to Condensed Consolidated Financial Statements (Unaudited)

and tax disclosures. The ultimate impact may differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional Internal Revenue Service guidance that may be issued and actions it may take as a result of the Tax Act. The accounting is expected to be completed during the fourth quarter of 2018.
Further, the Tax Act includes U.S. taxation on foreign intangible income, effective January 1, 2018. The FASB allows an entity to make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as foreign intangible income in future years or provide for the tax expense related to the foreign intangible income as a period cost in the year it is incurred. The Company has not recorded any provisional amount for deferred taxes on the foreign intangible income because it is still collecting and analyzing the data needed to make the accounting policy election.
12. Restructuring
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 $6.1 million and be completed when the Richardson, TX lease expires in June 2020.
In the first and second quarters of 2017, the Company commenced certain restructuring initiatives intended to continue to improve its strategic focus on its most profitable business lines and consolidate operations of its subsidiaries with those of the Company, including reductions-in-force, further reorganization of executive level management and the consolidation of certain of its facilities (the “2017 Initiatives”). The 2017 Initiatives cost a total of approximately $4.4 million and were completed in May 2018.
In the first quarter of 2018, the Company commenced certain restructuring initiatives intended to continue to consolidate operations of its subsidiaries with those of the Company, including reductions-in-force and the consolidation of certain of its facilities (the “2018 Initiatives”). The 2018 Initiatives are expected to cost a total of approximately $1.0 million and to be completed in December 2018.
The following table sets forth activity in the restructuring liability for the nine months ended September 30, 2018 (in thousands):
 
Balance at December 31, 2017
 
Costs Incurred
 
Payments
 
Translation Adjustment
 
Balance at September 30, 2018
 
 
Cumulative Costs Incurred to Date
2015 Initiatives
 
 
 
 
 
 
 
 
 
 
 
 
Employee Severance Costs
$

 
$

 
$

 
$

 
$

 
 
$
4,131

Facility Exit Related Costs
981

 
91

 
(345
)
 

 
727

 
 
1,819

2017 Initiatives
 
 
 
 
 
 
 
 
 
 
 
 
Employee Severance Costs
287

 
61

 
(359
)
 
11

 

 
 
3,412

Facility Exit Related Costs
106

 
2

 
(108
)
 

 

 
 
285

Other Related Costs
160

 
20

 
(180
)
 

 

 
 
675

2018 Initiatives
 
 
 
 
 
 
 
 
 
 
 
 
Employee Severance Costs

 
991

 
(946
)
 
(32
)
 
13

 
 
991

Total
$
1,534

 
$
1,165

 
$
(1,938
)
 
$
(21
)
 
$
740

 
 
$
11,313

The balance of the restructuring liability at September 30, 2018 consists of approximately $0.4 million in current liabilities and $0.3 million in long-term liabilities.
During the nine months ended September 30, 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 adjustment in accordance with the ASC 330, Inventory, and included the adjustment in impairment of abandoned product line, net of recoveries, within cost of net revenues in the unaudited condensed consolidated statements of operations.

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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). You should not place undue reliance on these statements. These forward-looking statements include statements that reflect the views of our senior management with respect to our current expectations, assumptions, estimates and projections about Inseego and our industry. These forward-looking statements speak only as of the date of this report. We disclaim any undertaking to publicly update or revise any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Statements that include the words “may,” “could,” “should,” “would,” “estimate,” “anticipate,” “believe,” “expect,” “preliminary,” “intend,” “plan,” “project,” “outlook,” “will” and similar words and phrases identify forward-looking statements. Forward-looking statements address matters that involve risks and uncertainties that could cause actual results to differ materially from those anticipated in these forward-looking statements as of the date of this report. We believe that these factors include those related to:
our ability to compete in the market for wireless broadband data access products, wireless modem products, and asset management, monitoring, telematics, vehicle tracking and fleet management products;
our ability to develop and timely introduce new products and services successfully;
our dependence on a small number of customers for a substantial portion of our revenues;
our ability to realize the benefits of our recent reorganization transactions;
our ability to realize the benefits of recent restructuring activities and cost-reduction initiatives including reductions-in-force, reorganization of executive level management and the consolidation of certain of our facilities;
our ability to make scheduled payments of the principal of, to pay interest on, or to refinance our indebtedness, including our term loan and convertible notes obligations;
our ability to introduce and sell new products that comply with current and evolving industry standards and government regulations;
our ability to develop and maintain strategic relationships to expand into new markets;
our ability to properly manage the growth of our business to avoid significant strains on our management and operations and disruptions to our business;
our reliance on third parties to manufacture our products;
our ability to accurately forecast customer demand and order the manufacture and timely delivery of sufficient product quantities;
our reliance on sole source suppliers for some products used in our solutions;
the continuing impact of uncertain global economic conditions on the demand for our products;
the impact of geopolitical instability on our business;
the impact that new or adjusted tariffs may have on the costs of components or our products, and our ability to sell products internationally;
our ability to be cost competitive while meeting time-to-market requirements for our customers;
our ability to meet the product performance needs of our customers in wireless broadband data access in Internet of Things (“IoT”) markets;
demand for fleet, vehicle and asset management software-as-a-service (“SaaS”) telematics solutions;
our dependence on wireless telecommunication operators delivering acceptable wireless services;
the outcome of any pending or future litigation, including intellectual property litigation;
infringement claims with respect to intellectual property contained in our products;
our continued ability to license necessary third-party technology for the development and sale of our products;
the introduction of new products that could contain errors or defects;

21



doing business abroad, including foreign currency risks;
our ability to make focused investments in research and development; and
our ability to hire, retain and manage additional qualified personnel to maintain and expand our business.
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this and other reports we file with or furnish to the Securities and Exchange Commission (“SEC”), including the information in “Item 1A. Risk Factors” included in Part I of our Annual Report on Form 10-K for the year ended December 31, 2017 (“Form 10-K”). If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate.
Trademarks
“Inseego”, the Inseego logo, “Novatel Wireless”, the Novatel Wireless logo, “MiFi”, “MiFi Intelligent Mobile Hotspot”, “MiFi Freedom. My Way.”, “Ctrack”, the Ctrack logo, “Inseego North America”, “Skyus” and “Crossroads” are trademarks or registered trademarks of Inseego Corp. and its subsidiaries. Other trademarks, trade names or service marks used in this report are the property of their respective owners.
As used in this report on Form 10-Q, unless the context otherwise requires, the terms “we,” “us,” “our,” the “Company” and “Inseego” refer to Inseego Corp., a Delaware corporation, and its wholly owned subsidiaries.


22



The following information should be read in conjunction with the condensed consolidated financial statements and the accompanying notes included in Part I, Item 1 of this report, as well as the annual consolidated financial statements and accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2017, contained in our Form 10-K.
Business Overview
Inseego is a leader in the design and development of products and solutions that enable high performance mobile applications for large enterprise verticals, service providers and small and medium-sized businesses around the globe. Our product portfolio consists of enterprise SaaS solutions and IoT and mobile solutions, which together form the backbone of compelling, intelligent, reliable and secure IoT services with deep business intelligence. Inseego’s products and solutions power mission critical applications with a “zero unscheduled downtime” mandate, such as asset tracking, fleet management, industrial IoT, SD WAN failover management and mobile broadband services. Our solutions are powered by our key innovations in purpose built SaaS cloud platforms, IoT and mobile technologies, including the newly emerging 5G technology.
We have invented and reinvented ways in which the world stays connected, accesses information and derives intelligence from that information. With multiple first-to-market innovations and a strong and growing portfolio of hardware and software innovations for IoT, Inseego has been advancing technology and driving industry transformation for over 30 years. It is this proven expertise and commitment to quality and innovation that makes us a preferred global partner of service providers, distributors, value-added resellers, system integrators, enterprises, small and medium-sized businesses and consumers.
Our Sources of Revenue
Inseego sells SaaS, software and services solutions across multiple mobile and industrial IoT vertical markets, including fleet management, vehicle telematics, aviation (ground service) telematics, usage-based insurance, stolen vehicle recovery, asset tracking, monitoring, business connectivity and subscription management. Our SaaS platforms are device-agnostic and provide a standardized, scalable way to order, connect and manage remote assets and improve business operations. The platforms are flexible and support both on-premise server or cloud-based deployments and are the basis for the delivery of a wide range of IoT services in multiple industries.
Our SaaS delivery platforms include our Ctrack platforms, which provide fleet, vehicle, aviation, asset and other telematics applications and our Device Management Solutions (“DMS”), a hosted SaaS platform that helps organizations manage the selection, deployment and spend of their wireless assets by helping them to save money on personnel and telecom expenses.
We provide intelligent wireless hardware products for the worldwide mobile communications and industrial IoT markets. Our hardware products address multiple vertical markets including fleet and commercial telematics, after-market telematics, smart city infrastructure management, remote monitoring and control, security and connected home and wireless surveillance systems. Our broad range of products principally includes 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 remotely. Our products currently operate on every major cellular wireless technology platform. Our mobile hotspots, sold under the MiFi brand, are actively used by millions of customers to provide subscribers with secure and convenient high-speed access to corporate, public and personal information through the Internet and enterprise networks. Our wireless routers and USB modems serve as gateways to the rapidly growing and underpenetrated IoT market segments. Our telematics and mobile asset tracking hardware devices collect and control critical vehicle data and driver behaviors, and can reliably deliver that information to the cloud, all managed by our services enablement platforms.
We sell our intelligent mobile hotspots primarily to wireless operators either directly or through strategic relationships. Our mobile-hotspot customer base is comprised of wireless operators, including Verizon Wireless in the U.S., as well as distributors and various companies in other vertical markets and geographies.
We sell our wireless routers for industrial IoT, integrated telematics and mobile tracking hardware devices through our direct sales force and through distributors. The customer base for our wireless router products is comprised of transportation companies, industrial enterprises, manufacturers, application service providers, system integrators and distributors in various industries, including fleet and vehicle transportation, aviation, energy and industrial automation, security and safety, medical monitoring and government. Integrated telematics devices are also sold by Ctrack and provided as part of the integrated Ctrack SaaS solution.
In the first quarter of 2018, the Company reclassified its net revenues into two distinct product groupings, specifically IoT & Mobile Solutions and Enterprise SaaS Solutions. IoT & Mobile Solutions is comprised of intelligent hotspot and industrial

23



IoT products including the MiFi and Skyus branded products and solutions. Enterprise SaaS Solutions is comprised of the Ctrack telematics platforms, which provide fleet, vehicle, aviation, asset and other telematics applications and DMS. Both IoT & Mobile Solutions and Enterprise SaaS Solutions include hardware and software required for their respective solution.
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 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;
application of any tariffs;
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 tier-one 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, tariffs, 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 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. General and administrative expenses are not directly related to revenue levels and certain expenses, such as legal expenses and provisions for bad debts, may cause significant volatility in future general and administrative expenses.

24



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 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 and/or borrowing additional funds 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.
Critical Accounting Policies and Estimates
In the notes to our consolidated financial statements and in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Form 10-K, we have disclosed those accounting policies that we consider to be significant in determining our results of operations and financial condition. Except as disclosed below, there have been no material changes to those policies that we consider to be significant since the filing of our Form 10-K. The accounting principles used in preparing our unaudited condensed consolidated financial statements conform in all material respects to accounting principles generally accepted in the U.S.
Revenue Recognition
Significant changes to our accounting policies, as a result of adopting the new revenue recognition guidance on January 1, 2018, are discussed below.
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 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.
Net revenues by product grouping for the three and nine months ended September 30, 2018 and 2017 were as follows (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
IoT & Mobile Solutions
$
34,636

 
$
41,116

 
$
95,257

 
$
123,143

Enterprise SaaS Solutions
15,994

 
16,345

 
51,163

 
49,620

Total
$
50,630

 
$
57,461

 
$
146,420

 
$
172,763

Net revenues by geographic region based on shipping destination for the three and nine months ended September 30, 2018 and 2017 were as follows (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
United States and Canada
$
35,891

 
$
42,056

 
$
98,559

 
$
125,969

South Africa
9,145

 
9,754

 
30,038

 
29,694

Other
5,594

 
5,651

 
17,823

 
17,100

Total
$
50,630

 
$
57,461

 
$
146,420

 
$
172,763

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, VoLTE based wireless home phones and cloud

25



management software. The solutions are offered under the MiFi brand 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 DMS.
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. These standards provide 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. Revenues for 2018 are reported under ASC 606, while prior period amounts are not adjusted and continue to be reported under ASC 605, Revenue Recognition.
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.
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. If the customer chooses to lease the monitoring device, the Company recognizes the revenue for the monitoring device over the term of the contract. The Company

26



records such revenue in accordance with the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 840, Leases (“ASC 840”), as it has determined that they qualify as operating leases (ownership of the device does not transfer to the other party).
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 specifically 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 obligations.
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 September 30, 2018.
Applying the practical expedient in paragraph ASC 340-40-25-4, 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.

27



Revenue 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 or hosted data centers. 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.
Transition Disclosures
Adoption of the new standards related to revenue recognition did not have a material impact on the Company’s consolidated financial statements.
Results of Operations
Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017
Net revenues. Net revenues for the three months ended September 30, 2018 were $50.6 million, compared to $57.5 million for the same period in 2017.
The following table summarizes net revenues by our two product categories (in thousands):
 
 
Three Months Ended
September 30,
 
Change
Product Category
 
2018
 
2017
 
$
 
%
IoT & Mobile Solutions
 
$
34,636

 
$
41,116

 
$
(6,480
)
 
(15.8
)%
Enterprise SaaS Solutions
 
15,994

 
16,345

 
(351
)
 
(2.1
)%
Total
 
$
50,630

 
$
57,461

 
$
(6,831
)
 
(11.9
)%
IoT & Mobile Solutions. The decrease in IoT & Mobile Solutions net revenues is primarily a result of reduced sales from mobile hotspots and home devices as key customers focus on our upcoming 5G products, partially offset by increased services revenue.
Enterprise SaaS Solutions. The decrease in Enterprise SaaS Solutions net revenues is primarily a result of the execution of a new, multi-year, lower priced contract with a key customer negotiated following the expiration of the previous contract on certain SaaS products, as well as the impact of foreign currency weakness versus the U.S. dollar.
Cost of net revenues. Cost of net revenues for the three months ended September 30, 2018 was $33.0 million, or 65.2% of net revenues, compared to $41.1 million, or 71.5% of net revenues, for the same period in 2017.
The following table summarizes cost of net revenues by our two product categories (in thousands):
 
 
Three Months Ended
September 30,
 
Change
Product Category
 
2018
 
2017
 
$
 
%
IoT & Mobile Solutions
 
$
26,793

 
$
35,323

 
$
(8,530
)
 
(24.1
)%
Enterprise SaaS Solutions
 
6,233

 
5,684

 
549

 
9.7
 %
Impairment of abandoned product line, net of recoveries

 
82

 
(82
)
 
(100.0
)%
Total
 
$
33,026

 
$
41,089

 
$
(8,063
)
 
(19.6
)%
IoT & Mobile Solutions. The decrease in IoT & Mobile Solutions cost of net revenues is primarily a result of decreased sales along with a lower cost per unit as a result of changing contract manufacturers.
Enterprise SaaS Solutions. Enterprise SaaS Solutions cost of net revenues increased as a percentage of revenue as a result of a new, multi-year, lower priced contract with a key customer negotiated following the expiration of the previous contract on certain SaaS products, as well as the impact of foreign currency weakness versus the U.S. dollar.

28



Impairment of abandoned product line, net of recoveries. The impairment of abandoned product line, net of recoveries, reflects additional write downs of the value of certain inventory related to product lines that were abandoned during the fourth quarter of 2016, net of recoveries related to the subsequent sale of such abandoned products.
Gross profit. Gross profit for the three months ended September 30, 2018 was $17.6 million, or a gross margin of 34.8%, compared to $16.4 million, or a gross margin of 28.5% for the same period in 2017. The increase in gross profit was primarily attributable to the improved gross margins that resulted from changing contract manufacturers and increased higher-margin services revenue, which has offset the decline in total revenues as discussed above.
Research and development expenses. Research and development expenses for the three months ended September 30, 2018 were $5.3 million, or 10.5% of net revenues, compared to $5.1 million, or 8.9% of net revenues, for the same period in 2017. The increase in research and development expenses was primarily a result of increased testing and certification costs incurred related to new products, partially offset by our cost containment initiatives.
Sales and marketing expenses. Sales and marketing expenses for the three months ended September 30, 2018 were $5.9 million, or 11.7% of net revenues, compared to $6.2 million, or 10.8% of net revenues, for the same period in 2017. The decrease was primarily a result of our cost containment initiatives, as well as the impact of currency weakness versus the U.S. dollar.
General and administrative expenses. General and administrative expenses for the three months ended September 30, 2018 were $5.8 million, or 11.5% of net revenues, compared to $7.1 million, or 12.4% of net revenues, for the same period in 2017. The decrease was primarily a result of our cost containment initiatives, as well as the impact of foreign currency weakness versus the U.S. dollar.
Amortization of purchased intangible assets. Amortization of purchased intangible assets for the three months ended September 30, 2018 and 2017 was $0.9 million and $0.9 million, respectively.
Extinguishment of acquisition-related liabilities. During the three months ended September 30, 2018, we recorded a gain of $17.2 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 during the same period in 2017.
Restructuring charges, net of recoveries. Restructuring charges, net of recoveries, for the three months ended September 30, 2018 and 2017 were $0.2 million and $3.4 million, respectively, and primarily consisted of severance costs incurred in connection with the reduction of our workforce, as well as facility exit related costs.
Interest expense, net. Interest expense, net, for the three months ended September 30, 2018 and 2017 was $5.1 million and $5.2 million, respectively.
Other expense, net. Other expense, net, for the three months ended September 30, 2018 was $0.2 million, which primarily consisted of foreign currency transaction gains and losses. Other expense, net, for the three months ended September 30, 2017 was $1.8 million, which primarily consisted of a loss on extinguishment of debt related to the repayment of the Prior Credit Agreement and repurchase of certain of our Inseego Notes.
Income tax provision. Income tax provision for the three months ended September 30, 2018 and 2017 was $0.5 million and $0.4 million, respectively, which primarily related to certain of our profitable entities in foreign jurisdictions.
Net loss attributable to noncontrolling interests. Net loss attributable to noncontrolling interests for the three months ended September 30, 2018 and 2017 was $6,000 and $6,000, respectively.

29



Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Net revenues. Net revenues for the nine months ended September 30, 2018 were $146.4 million, compared to $172.8 million for the same period in 2017.
The following table details net revenues by product grouping (in thousands):
 
 
Nine Months Ended
September 30,
 
Change
 
 
2018
 
2017
 
$
 
%
IoT & Mobile Solutions
 
$
95,257

 
$
123,143

 
$
(27,886
)
 
(22.6
)%
Enterprise SaaS Solutions
 
51,163

 
49,620

 
1,543

 
3.1
 %
Total
 
$
146,420

 
$
172,763

 
$
(26,343
)
 
(15.2
)%
IoT & Mobile Solutions. The decrease in IoT & Mobile Solutions net revenues is primarily a result of reduced sales from mobile hotspots and home devices as key customers focus on our upcoming 5G products, partially offset by increased services revenue.
Enterprise SaaS Solutions. The increase in Enterprise SaaS Solutions net revenues is primarily a result of increased revenues from Ctrack, partially offset by the execution of a new, multi-year, lower priced contract with a key customer negotiated following the expiration of the previous contract on certain SaaS products.
Cost of net revenues. Cost of net revenues for the nine months ended September 30, 2018 was $95.6 million, or 65.3% of net revenues, compared to $123.0 million, or 71.2% of net revenues, for the same period in 2017.
The following table details cost of net revenues by product grouping (in thousands):
 
 
Nine Months Ended
September 30,
 
Change
 
 
2018
 
2017
 
$
 
%
IoT & Mobile Solutions
 
$
75,168

 
$
102,961

 
$
(27,793
)
 
(27.0
)%
Enterprise SaaS Solutions
 
20,093

 
18,526

 
1,567

 
8.5
 %
Impairment of abandoned product line, net of recoveries
355

 
1,489

 
(1,134
)
 
(76.2
)%
Total
 
$
95,616

 
$
122,976

 
$
(27,360
)
 
(22.2
)%
IoT & Mobile Solutions. The decrease in IoT & Mobile Solutions cost of net revenues is primarily a result of decreased sales along with a lower cost per unit as a result of changing contract manufacturers.
Enterprise SaaS Solutions. The increase in Enterprise SaaS Solutions cost of net revenues is primarily a result of increased sales and product mix.
Impairment of abandoned product line, net of recoveries. The impairment of abandoned product line 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.
Gross profit. Gross profit for the nine months ended September 30, 2018 was $50.8 million, or a gross margin of 34.7%, compared to $49.8 million, or a gross margin of 28.8%, for the same period in 2017. The increase in gross profit was primarily attributable to the improvement in gross margins as a result of changing contract manufacturers and increased higher-margin services revenue.
Research and development expenses. Research and development expenses for the nine months ended September 30, 2018 were $15.3 million, or 10.4% of net revenues, compared to $16.8 million, or 9.7% of net revenues, for the same period in 2017. The decrease was primarily a result of our cost containment initiatives.
Sales and marketing expenses. Sales and marketing expenses for the nine months ended September 30, 2018 were $17.0 million, or 11.6% of net revenues, compared to $20.3 million, or 11.8% of net revenues, for the same period in 2017. The decrease was primarily a result of our cost containment initiatives.
General and administrative expenses. General and administrative expenses for the nine months ended September 30, 2018 were $18.6 million, or 12.7% of net revenues, compared to $27.2 million, or 15.8% of net revenues, for the same period

30



in 2017. General and administrative expenses decreased for the nine months ended September 30, 2018 primarily as a result of non-recurring legal costs incurred during 2017 and our cost containment initiatives.
Amortization of purchased intangible assets. The amortization of purchased intangible assets for the nine months ended September 30, 2018 and 2017 was $2.8 million and $2.7 million, respectively.
Extinguishment of acquisition-related liabilities. During the nine months ended September 30, 2018, we recorded a gain of $17.2 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 during the same period in 2017.
Restructuring charges, net of recoveries. Restructuring charges, net of recoveries, for the nine months ended September 30, 2018 and 2017 were $1.2 million and $5.7 million, respectively, and predominantly consisted of severance costs incurred in connection with the reduction of our workforce, as well as facility exit related costs.
Interest expense, net. Interest expense, net, for the nine months ended September 30, 2018 and 2017 was $15.4 million and $14.3 million, respectively. The increase in interest expense is primarily a result of the interest expense and amortization of the debt discount and debt issuance costs related to our Term Loan, as discussed below.
Other expense, net. Other expense, net, for the nine months ended September 30, 2018 was $0.6 million, which primarily related to foreign currency transaction gains and losses, compared to other expense, net, of $3.4 million for the same period in 2017, which primarily consisted of a loss on extinguishment of debt related to the repayment of the Prior Credit Agreement and repurchase of certain of our Inseego Notes, as well as the termination of the Revolver, as defined below.
Income tax provision. Income tax provision for the nine months ended September 30, 2018 and 2017 was $1.2 million and $1.3 million, respectively, which primarily related to certain of our profitable entities in foreign jurisdictions.
Net loss attributable to noncontrolling interests. Net loss attributable to noncontrolling interests was $35,000 and $33,000 for the nine months ended September 30, 2018 and 2017, respectively.
Liquidity and Capital Resources
Our principal sources of liquidity are our existing cash and cash equivalents and cash generated from operations. As of September 30, 2018, we had cash and cash equivalents of $31.5 million compared with cash and cash equivalents of $21.2 million as of December 31, 2017.
On August 6, 2018, the Company completed a private placement of 12,062,000 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. In connection with the private placement, the Company incurred issuance costs of approximately $0.5 million.
Previous Credit Agreements
On October 31, 2014, we entered into a five-year senior secured revolving credit facility in the amount of $25.0 million (the “Revolver”) with Wells Fargo Bank, National Association, as lender. On November 17, 2015, the Revolver was amended to increase the maximum borrowing capacity to $48.0 million. On March 20, 2017, at our request, the financial covenants with respect to liquidity requirements and EBITDA targets, among other things, were amended in order to enable draw-downs by the Company from time to time. In exchange for such accommodations, the aggregate amount available under the Revolver was decreased from $48.0 million to $10.0 million.
We terminated the Revolver on May 8, 2017, in connection with the execution of a Credit Agreement with Lakestar Semi Inc., a private investment fund managed by Soros Fund Management LLC, dated as of May 8, 2017 (the “Prior Credit Agreement”). The Prior Credit Agreement provided for a $20.0 million secured term loan with a maturity date of May 8, 2018.
On August 23, 2017, upon entering into the Credit Agreement described below, we used a portion of the proceeds of the new Term Loan (as defined below) to repay all outstanding amounts under and terminate the Prior Credit Agreement. There was no early termination fee paid in connection with the termination of the Prior Credit Agreement.
Term Loan
On August 23, 2017, we, and certain 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 funds managed by Highbridge Capital Management, LLC, as lenders (the “Lenders”). Pursuant to the Credit Agreement, the Lenders provided us 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, we received proceeds of

31



$46.9 million, $35.0 million of which was funded to us in cash 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 (as defined below) 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.
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%. 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.
As required by the terms of the Credit Agreement, during the three months ended September 30, 2018, the Company repaid $0.5 million of principal on the Term Loan in connection with the Settlement Agreement, as defined below.
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 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” and collectively with the Novatel Wireless Notes, the “Convertible 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 Inseego Notes permit the Company to have a senior credit facility up to a maximum amount of $48.0 million.
The exchange of the Novatel Wireless Notes for the Inseego Notes was treated as a debt modification in accordance with applicable 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.
Note Purchase Agreement
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 $14.9 million of outstanding Inseego Notes from such Lenders in exchange for $11.9 million deemed to have been loaned to us pursuant to the Credit Agreement and the accrued and unpaid interest on such notes.

32



As of the filing date of this report, the following aggregate principal amounts remain outstanding (in thousands):
Inseego Notes
$
104,875

Novatel Wireless Notes
250

Total
$
105,125

Settlement Agreement
Pursuant to the amended merger agreement with respect to our acquisition of R.E.R. Enterprises, Inc. (“RER”) and its wholly-owned subsidiary and principal operating asset, Feeney Wireless, LLC (which has been renamed Inseego North America, LLC) (“FW”), the Company 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 issue 500,000 shares of the Company’s common stock to the former stockholders of RER, (iii) 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, (iv) 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 (v) 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. The Company’s remaining liability under the Settlement Agreement at September 30, 2018 consists of approximately $1.0 million in current liabilities and $1.0 million in long-term liabilities.
Historical Cash Flows
The following table summarizes our cash flows for the periods indicated (in thousands): 
 
Nine Months Ended
September 30,
 
2018
 
2017
Net cash used in operating activities
$
(3,869
)
 
$
(14,791
)
Net cash used in investing activities
(2,354
)
 
(3,811
)
Net cash provided by financing activities
18,252

 
29,870

Effect of exchange rates on cash, cash equivalents and restricted cash
(1,680
)
 
(1,164
)
Net increase in cash, cash equivalents and restricted cash
10,349

 
10,104

Cash, cash equivalents and restricted cash, beginning of period
21,259

 
9,894

Cash, cash equivalents and restricted cash, end of period
$
31,608

 
$
19,998

Operating activities. Net cash used in operating activities was $3.9 million for the nine months ended September 30, 2018, compared to net cash used in operating activities of $14.8 million for the same period in 2017. Net cash used in operating activities for the nine months ended September 30, 2018 was primarily attributable to the net loss in the period, excluding the non-cash gain on extinguishment of acquisition-related liabilities, and net cash used in working capital, partially offset by non-cash charges for depreciation and amortization, including the amortization of debt discount and debt issuance costs, provision for excess and obsolete inventory and share-based compensation expense. Net cash used in operating activities for the nine months ended September 30, 2017 was primarily attributable to the net loss in the period, partially offset by non-cash charges for depreciation and amortization, including the amortization of debt discount and debt issuance costs, loss on impairment of abandoned product line, loss on extinguishment of debt and share-based compensation expense.
Investing activities. Net cash used in investing activities during the nine months ended September 30, 2018 was $2.4 million, compared to net cash used in investing activities of $3.8 million for the same period in 2017. Cash used in

33



investing activities during the nine months ended September 30, 2018 and 2017 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 solutions.
Financing activities. Net cash provided by financing activities during the nine months ended September 30, 2018 was $18.3 million, compared to net cash provided by financing activities of $29.9 million for the same period in 2017. Net cash provided by financing activities during the nine months ended September 30, 2018 was primarily related to gross proceeds received from a 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 Loan and taxes paid on vested restricted stock units. Net cash provided by financing activities for the same period in 2017 was primarily related to proceeds from the Term Loan, partially offset by the repurchase of certain Inseego Notes, payment of issuance costs related to the Term Loan and Prior Credit Agreement, net repayments of DigiCore bank and overdraft facilities, principal payments under capital lease obligations and taxes paid on vested restricted stock units.
Other Liquidity Needs
As of September 30, 2018, we had available cash and cash equivalents totaling $31.5 million and working capital of $29.8 million.
The restructuring initiatives commenced in the second quarter of 2017 and the first quarter of 2018 are aimed at significantly reducing our cost of revenues and operating expenses in an effort to increase operating cash flows to eventually be sufficient to offset debt service costs and cash flows from investing activities. Our ability to attain more profitable operations and continue generating positive cash flow is dependent upon achieving a level of revenues adequate to support our evolving cost structure. If events or circumstances occur such that we do not meet our operating plan as expected, we 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 our ability to achieve our intended business objectives. We believe that our cash and cash equivalents, together with anticipated cash flows from operations, will be sufficient to meet our cash flow needs for the next twelve months following the filing date of this report.
Our liquidity could be impaired if there is any interruption in our business operations, a material failure to satisfy our contractual commitments or a failure to generate revenue from new or existing products.
We may decide to raise additional funds to accelerate development of new and existing services and products, to respond to competitive pressures or to acquire complementary products, businesses or technologies. There can be no assurance that any required or desired additional financing will be available on terms favorable to us, or at all. In addition, in order to obtain additional borrowings, we must comply with certain requirements under the Credit Agreement. If additional funds are raised by the issuance of equity securities, our stockholders could experience dilution of their ownership interests and securities issued may have rights senior to those of the holders of our common stock. If additional funds are raised by the issuance of debt securities, we may be subject to additional limitations on our operations.
Contractual Obligations and Commercial Commitments
Except as described below, during the nine months ended September 30, 2018, there were no material changes to our contractual obligations and commercial commitments from those disclosed in our Form 10-K.
The Settlement Agreement described above provides for full settlement of all claims of the Company against the former stockholders of RER, and all claims of the former stockholders of RER against the Company, in exchange for the Company’s payment of approximately $3.9 million in cash and common stock. This Settlement Agreement reduced the Company’s acquisition-related liabilities by approximately $17.2 million from approximately $21.1 million previously accrued (consisting of $15.8 million in cash and $5.3 million in common stock).
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet arrangements.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
Market risk is the risk of potential economic loss principally arising from adverse changes in the fair value of financial instruments. The major components of market risk affecting us are interest rate risk, global credit risk and foreign currency exchange rate risk.

34




During the nine months ended September 30, 2018, there were no material changes in the quantitative or qualitative aspects of our market risk profile. For additional information regarding the Company’s exposure to certain market risks, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” included in our Form 10-K.
Item 4.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Exchange Act, that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act 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 the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2018, the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2018.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act, during the three months ended September 30, 2018, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


35




PART II—OTHER INFORMATION
Item  1.
Legal Proceedings.
The disclosure in Note 10, Commitments and Contingencies, in the accompanying unaudited condensed consolidated financial statements includes a discussion of our legal proceedings and is incorporated herein by reference.
The Company is also engaged in various other legal actions arising in the ordinary course of our business and, while there can be no assurance, the Company currently believes that the ultimate outcome of these other legal actions will not have a material adverse effect on its business, results of operations, financial condition or cash flows.
Item  1A.
Risk Factors.
There have been no material changes in our risk factors from those disclosed in “Item 1A. Risk Factors” of the Form 10-K, except for the risk factors listed below.
We are in the process of moving production to one or more new contract manufacturers, which, together with our use of other contract manufacturers, exposes us to a number of risks and uncertainties outside our control.
We currently outsource the manufacturing of many of our products to a contract manufacturer located in China and are in the process of moving some production to other contract manufacturers operating in other countries. If one of our contract 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 cancel orders. These disruptions would negatively impact our revenues, competitive position and reputation. Further, if we are unable to manage successfully our relationship with a contract manufacturer, the quality and availability of products may be harmed. None of our contract manufacturers are 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 contract manufacturer. Our contract manufacturers could, under some circumstances, decline to accept new purchase orders from us or otherwise reduce their business with us. If a manufacturer stops manufacturing our products for any reason or reduces manufacturing capacity, or suffers a significant decline in output quality, we may be unable to replace the lost manufacturing capacity or find a replacement manufacturer 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 contract 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 significantly increase and our business, financial condition and results of operations could be adversely impacted.
Fiscal, tax and trade policies and executive and legislative actions could adversely affect our business, financial condition, and results of operations.
The current U.S. presidential administration has called for substantial changes to U.S. trade policy and has imposed significant increases in U.S. import tariffs. We have taken actions to mitigate the impact of such tariffs, however, there is no assurance that all such efforts will be successful. The inability to mitigate the impact of the recently enacted tariffs would increase our costs, and our business, financial condition and results of operations could be adversely affected. In addition, changes in international trade agreements, regulations, restrictions and tariffs, including new tariffs, may increase our operating costs 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.
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 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;

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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.
While the impact of any of the foregoing factors is difficult to predict, any one or more of them could adversely affect our business, operating results or financial condition. Existing insurance arrangements may not provide protection for the costs that may arise from such events.
Item  2.
Unregistered Sales of Equity Securities and Use of Proceeds.
Except as previously disclosed in the Company’s Current Reports on Form 8-K filed with the SEC on July 31, 2018 and August 7, 2018, there were no unregistered sales of the Company’s equity securities during the three-month period ended September 30, 2018.
Item  3.
Defaults Upon Senior Securities.
None.
Item 4.
Mine Safety Disclosures.
Not applicable.
Item 5.
Other Information.
None.

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Item 6.
Exhibits.
Exhibit No.
 
Description
 
 
 
2.1*
 
2.2
 
2.3*
 
3.1
 
3.2
 
3.3
 
4.1
 
4.2
 
4.3
 
4.4
 
4.5
 
10.1
 
10.2
 
10.3
 
10.4
 
31.1**
 
31.2**
 
32.1**
 
32.2**
 

38




Exhibit No.
 
Description
 
 
 
101**
 
The following financial statements and footnotes from the Inseego Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Comprehensive Income (Loss); (iv) Condensed Consolidated Statements of Cash Flows; and (v) the Notes to Condensed Consolidated Financial Statements.
*
 
Certain schedules and exhibits to this agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished supplementally to the SEC upon request.
**
 
Filed herewith.


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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.
 
Date: November 8, 2018
 
Inseego Corp.
 
 
 
 
 
By:
 
/s/    DAN MONDOR
 
 
 
 
Dan Mondor
 
 
 
 
Chief Executive Officer

 
 
 
By:
 
/s/    STEPHEN SMITH
 
 
 
 
Stephen Smith
 
 
 
 
Chief Financial Officer



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