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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
 
10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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.)
 
 
 
12600 Deerfield Parkway, Suite 100
 

Alpharetta
Georgia
 
30004
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (858812-3400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.001 per share
INSG
Nasdaq Global Select Market
Preferred Stock Purchase Rights
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      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).    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
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 
The number of shares of the registrant’s common stock outstanding as of August 2, 2019 was 79,531,512.



TABLE OF CONTENTS
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Stockholders’ Deficit (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
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)
 
June 30,
2019
 
December 31,
2018
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
20,268

 
$
31,015

Restricted cash
61

 
61

Accounts receivable, net of allowance for doubtful accounts of $1,859 and $1,841, respectively
19,607

 
20,633

Inventories, net
29,392

 
26,431

Prepaid expenses and other
7,308

 
6,212

Total current assets
76,636

 
84,352

Property, plant and equipment, net of accumulated depreciation of $13,943 and $18,436, respectively
9,224

 
6,698

Rental assets, net of accumulated depreciation of $12,140 and $10,879, respectively
5,232

 
5,769

Intangible assets, net of accumulated amortization of $26,764 and $22,101, respectively
36,760

 
31,985

Goodwill
33,584

 
32,942

Right-of-use assets, net
2,709

 

Other assets
509

 
510

Total assets
$
164,654

 
$
162,256

LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
35,856

 
$
39,245

Accrued expenses and other current liabilities
14,088

 
13,024

Convertible senior notes, net
97,194

 

Term loan, net
45,792

 

DigiCore bank facilities
1,046

 
1,412

Total current liabilities
193,976

 
53,681

Long-term liabilities:
 
 
 
Convertible senior notes, net

 
93,054

Term loan, net

 
45,046

Deferred tax liabilities, net
4,559

 
4,457

Other long-term liabilities
3,447

 
2,543

Total liabilities
201,982

 
198,781

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, 78,985,095 and 73,979,882 shares issued and outstanding, respectively
79

 
74

Additional paid-in capital
562,405

 
546,230

Accumulated other comprehensive loss
(3,670
)
 
(4,877
)
Accumulated deficit
(596,081
)
 
(577,817
)
Total stockholders’ deficit attributable to Inseego Corp.
(37,267
)
 
(36,390
)
Noncontrolling interests
(61
)
 
(135
)
Total stockholders’ deficit
(37,328
)
 
(36,525
)
Total liabilities and stockholders’ deficit
$
164,654

 
$
162,256

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
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net revenues:
 
 
 
 
 
 
 
IoT & Mobile Solutions
$
39,983

 
$
31,741

 
$
72,764

 
$
60,621

Enterprise SaaS Solutions
15,908

 
17,316

 
31,683

 
35,169

Total net revenues
55,891

 
49,057

 
104,447

 
95,790

Cost of net revenues:
 
 
 
 
 
 
 
IoT & Mobile Solutions
33,986

 
24,623

 
61,586

 
48,375

Enterprise SaaS Solutions
6,350

 
6,998

 
12,546

 
13,860

Impairment of abandoned product line, net of recoveries

 
(221
)
 

 
355

Total cost of net revenues
40,336

 
31,400

 
74,132

 
62,590

Gross profit
15,555

 
17,657

 
30,315

 
33,200

Operating costs and expenses:
 
 
 
 
 
 
 
Research and development
5,188

 
4,968

 
8,673

 
9,944

Sales and marketing
7,229

 
5,635

 
13,620

 
11,050

General and administrative
7,449

 
6,302

 
13,901

 
12,797

Amortization of purchased intangible assets
857

 
931

 
1,728

 
1,895

Restructuring charges, net of recoveries
15

 
643

 
37

 
920

Total operating costs and expenses
20,738

 
18,479

 
37,959

 
36,606

Operating loss
(5,183
)
 
(822
)
 
(7,644
)
 
(3,406
)
Other expense:
 
 
 
 
 
 
 
Interest expense, net
(5,142
)
 
(5,147
)
 
(10,217
)
 
(10,247
)
Other income (expense), net
(72
)
 
(438
)
 
241

 
(374
)
Loss before income taxes
(10,397
)
 
(6,407
)
 
(17,620
)
 
(14,027
)
Income tax provision
322

 
272

 
570

 
712

Net loss
(10,719
)
 
(6,679
)
 
(18,190
)
 
(14,739
)
Less: Net loss (income) attributable to noncontrolling interests
(60
)
 
19

 
(74
)
 
29

Net loss attributable to Inseego Corp.
$
(10,779
)
 
$
(6,660
)
 
$
(18,264
)
 
$
(14,710
)
Per share data:
 
 
 
 
 
 
 
Net loss per share:
 
 
 
 
 
 
 
Basic and diluted
$
(0.14
)
 
$
(0.11
)
 
$
(0.24
)
 
$
(0.24
)
Weighted-average shares used in computation of net loss per share:
 
 
 
 
 
 
 
Basic and diluted
78,844,666

 
61,468,129

 
76,618,142

 
61,096,886


See accompanying notes to unaudited condensed consolidated financial statements.

4



INSEEGO CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(10,719
)
 
$
(6,679
)
 
$
(18,190
)
 
$
(14,739
)
Foreign currency translation adjustment
1,790

 
(9,969
)
 
1,207

 
(6,792
)
Total comprehensive loss
$
(8,929
)
 
$
(16,648
)
 
$
(16,983
)
 
$
(21,531
)
 
See accompanying notes to unaudited condensed consolidated financial statements.


5



INSEEGO CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(In thousands)
(Unaudited)
 
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive Income (Loss)
 
Accumulated Deficit
 
Noncontrolling Interests
 
Total
Stockholders’ Deficit
 
Shares
 
Amount
 
 
 
 
 
Balance, March 31, 2018
59,222

 
$
59

 
$
520,793

 
$
7,781

 
$
(577,809
)
 
$
(60
)
 
$
(49,236
)
Net loss

 

 

 

 
(6,660
)
 
(19
)
 
(6,679
)
Foreign currency translation adjustment

 

 

 
(9,969
)
 

 

 
(9,969
)
Exercise of stock options and vesting of restricted stock units
521

 
1

 
350

 

 

 

 
351

Taxes withheld on net settled vesting of restricted stock units

 

 
(174
)
 

 

 

 
(174
)
Share-based compensation

 

 
1,064

 

 

 

 
1,064

Balance, June 30, 2018
59,743

 
$
60

 
$
522,033

 
$
(2,188
)
 
$
(584,469
)
 
$
(79
)
 
$
(64,643
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2019
78,699

 
$
79

 
$
558,208

 
$
(5,460
)
 
$
(585,302
)
 
$
(121
)
 
$
(32,596
)
Net income (loss)

 

 

 

 
(10,779
)
 
60

 
(10,719
)
Foreign currency translation adjustment

 

 

 
1,790

 

 

 
1,790

Exercise of stock options and vesting of restricted stock units
240

 

 
517

 

 

 

 
517

Taxes withheld on net settled vesting of restricted stock units

 

 
(206
)
 

 

 

 
(206
)
Issuance of common shares
46

 

 
241

 

 

 

 
241

Share-based compensation

 

 
3,645

 

 

 

 
3,645

Balance, June 30, 2019
78,985

 
$
79

 
$
562,405

 
$
(3,670
)
 
$
(596,081
)
 
$
(61
)
 
$
(37,328
)

 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive Income (Loss)
 
Accumulated Deficit
 
Noncontrolling Interests
 
Total
Stockholders’ Deficit
 
Shares
 
Amount
 
 
 
 
 
Balance, December 31, 2017
58,645

 
$
59

 
$
519,531

 
$
4,604

 
$
(569,759
)
 
$
(50
)
 
$
(45,615
)
Net loss

 

 

 

 
(14,710
)
 
(29
)
 
(14,739
)
Foreign currency translation adjustment

 

 

 
(6,792
)
 

 

 
(6,792
)
Exercise of stock options and vesting of restricted stock units
1,098

 
1

 
871

 

 

 

 
872

Taxes withheld on net settled vesting of restricted stock units

 

 
(313
)
 

 

 

 
(313
)
Share-based compensation

 

 
1,944

 

 

 

 
1,944

Balance, June 30, 2018
59,743

 
$
60

 
$
522,033

 
$
(2,188
)
 
$
(584,469
)
 
$
(79
)
 
$
(64,643
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
73,980

 
$
74

 
$
546,230

 
$
(4,877
)
 
$
(577,817
)
 
$
(135
)
 
$
(36,525
)
Net income (loss)

 

 

 

 
(18,264
)
 
74

 
(18,190
)
Foreign currency translation adjustment

 

 

 
1,207

 

 

 
1,207

Exercise of stock options and vesting of restricted stock units
737

 
1

 
915

 

 

 

 
916

Taxes withheld on net settled vesting of restricted stock units

 

 
(318
)
 

 

 

 
(318
)
Issuance of common shares
46

 

 
241

 

 

 

 
241

Exercise of warrants
4,222

 
4

 
10,635

 

 

 

 
10,639

Share-based compensation

 

 
4,702

 

 

 

 
4,702

Balance, June 30, 2019
78,985

 
$
79

 
$
562,405

 
$
(3,670
)
 
$
(596,081
)
 
$
(61
)
 
$
(37,328
)


See accompanying notes to unaudited condensed consolidated financial statements.

6



INSEEGO CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six Months Ended
June 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net loss
$
(18,190
)
 
$
(14,739
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
7,208

 
7,319

Provision for bad debts, net of recoveries
385

 
314

Provision for excess and obsolete inventory, net of recoveries
336

 
1,076

Share-based compensation expense
4,702

 
1,944

Amortization of debt discount and debt issuance costs
4,886

 
4,886

Deferred income taxes
(17
)
 
(6
)
Other
680

 
965

Changes in assets and liabilities:
 
 
 
Accounts receivable
688

 
(8,676
)
Inventories
(4,608
)
 
3,503

Prepaid expenses and other assets
(1,208
)
 
2,881

Accounts payable
(3,861
)
 
904

Accrued expenses, income taxes, and other
(1,056
)
 
532

Net cash provided by (used in) operating activities
(10,055
)
 
903

Cash flows from investing activities:
 
 
 
Purchases of property, plant and equipment
(2,973
)
 
(653
)
Proceeds from the sale of property, plant and equipment
454

 
30

Additions to capitalized software development costs and purchases of intangible assets
(8,801
)
 
(1,099
)
Net cash used in investing activities
(11,320
)
 
(1,722
)
Cash flows from financing activities:
 
 
 
Proceeds from the exercise of warrant to purchase common stock
10,639

 

Net repayment of DigiCore bank and overdraft facilities
(394
)
 
(208
)
Principal payments under finance lease obligations
(532
)
 
(360
)
Principal payments on mortgage bond

 
(166
)
Proceeds from stock option exercises and employee stock purchase plan, net of taxes paid on vested restricted stock units
598

 
559

Net cash provided by (used in) financing activities
10,311

 
(175
)
Effect of exchange rates on cash
317

 
(1,368
)
Net decrease in cash, cash equivalents and restricted cash
(10,747
)
 
(2,362
)
Cash, cash equivalents and restricted cash, beginning of period
31,076

 
21,259

Cash, cash equivalents and restricted cash, end of period
$
20,329

 
$
18,897

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the year for:
 
 
 
Interest
$
5,327

 
$
5,362

Income taxes
$
642

 
$
545

Supplemental disclosures of non-cash activities:
 
 
 
Transfer of inventories to rental assets
$
1,636

 
$
2,176

Capital expenditures financed through accounts payable
$
2,026

 
$
25

Right-of-use assets obtained in exchange for operating leases liabilities
$
3,554

 
$

See accompanying notes to unaudited condensed consolidated financial statements.

7




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 June 30, 2019 and the results of the Company’s operations for the six months ended June 30, 2019 and 2018 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 unaudited 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, 2018. The year-end condensed consolidated balance sheet data as of December 31, 2018 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 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, 2018. 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.
As of June 30, 2019, the Company had available cash and cash equivalents totaling $20.3 million and a working capital deficit of $117.3 million
In order to make continued investments in its growth plan, on August 9, 2019, the Company issued and sold 10,000 shares of Fixed-Rate Cumulative Perpetual Preferred Stock, Series E, par value $0.001 per share (the “Series E Preferred Stock”), for an aggregate purchase price of $10.0 million. For additional information see Note 13, Subsequent Events.
Under the terms of the indenture governing the Inseego Notes (as defined below), each holder of the notes has the right to require the Company to repurchase its notes for cash on June 15, 2020 (the “Optional Repurchase Date”). Should noteholders exercise this right, in addition to the Company’s obligation to repurchase the notes, such repurchase would constitute a default under the Company’s Credit Agreement (as defined below). In addition, the Novatel Wireless Notes (as defined below) are scheduled to mature on June 15, 2020.
Based on the above, the Company’s management does not believe that its current cash and cash equivalents, together with anticipated cash flows from operations, will be sufficient to meet its working capital needs, including any required repurchase of the Inseego Notes and repayment of the Credit Agreement and Novatel Wireless Notes, without additional sources of cash. These circumstances, unless mitigated, raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s plan to mitigate the substantial doubt as to its ability to continue as a going concern is through the restructuring of its existing debt or issuance of additional debt or equity securities.
The Company’s liquidity could also be impaired if there is any interruption in its business operations, a material failure to satisfy its contractual commitments or a failure to generate revenue from new or existing products. Ultimately, the Company’s ability to attain profitability and to generate positive cash flow is dependent upon achieving a level of revenues adequate to support its evolving cost structure and increasing working capital needs. If events or circumstances occur such that the Company does not meet its operating plan as expected, the Company may be required to raise additional capital, reduce planned research and development activities, incur additional restructuring charges or reduce other operating expenses which could have an adverse impact on its ability to achieve its intended business objectives. There can be no assurance that any required or desired restructuring or financing will be available on terms favorable to the Company, or at all. In addition, in order to obtain additional borrowings, the Company must comply with certain requirements under the Credit Agreement and the Inseego Indenture (as defined below). If additional funds are raised by the issuance of equity securities, Company stockholders could experience dilution of their ownership interests and securities issued may have rights senior to 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 unaudited 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.

8




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

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 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
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 4G and 5G mobile hotspots, wireless gateways and routers for IoT applications, 1 Gigabit speed 4G LTE hotspots and USB modems, integrated telematics and mobile tracking hardware devices, which are supported by applications software and cloud services designed to enable customers to easily analyze data insights and configure and manage their hardware. 
The Company classifies its revenues from the sale of its products and services into two distinct groupings, specifically IoT & Mobile Solutions and Enterprise SaaS Solutions. Both IoT & Mobile Solutions and Enterprise SaaS Solutions revenues include any hardware and software required for the respective solution.
IoT & Mobile Solutions. The IoT & Mobile Solutions portfolio is comprised of end-to-end edge to cloud solutions including 4G LTE mobile broadband gateways, routers, modems, hotspots, HD quality VoLTE based wireless home phones, cloud management software and an advanced 5G portfolio of products (currently in various stages of development). The solutions are offered under the MiFi and MiFiiQ brands for consumer and business markets, and under the Skyus brand for industrial IoT markets.
Enterprise SaaS Solutions. The Enterprise SaaS Solutions consist of various subscription offerings to gain access to the Company’s Ctrack telematics platforms, which provide fleet vehicle, aviation ground vehicle and asset tracking and performance information, and other telematics applications, and the Company’s Device Management System (“DMS”), a hosted 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 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.

9




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

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. Prior to adoption of the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 842, Leases (“ASC 842”), on January 1, 2019, if the customer chose to lease the monitoring device, the Company accounted for the monitoring device lease as an operating lease, recognized the revenue for the monitoring device lease over the term of the contract and recorded such revenue in accordance with the previous lease accounting guidance in ASC 840, Leases. Under the new standard, because the Company’s rental asset lease contracts qualify as operating leases under ASC 842 and the contracts also include services to operate the underlying asset, and to maintain the asset, the Company has elected the practical expedient to combine the lease and the non-lease components because the service is the predominant element in the eyes of the customer and the pattern of service delivery is the same for both elements. The Company recognizes revenue over time on a ratable basis over the term of the contract.
Maintenance and support services revenue. Periodically, the Company sells separately priced warranty contracts that extend beyond the Company’s base warranty period. The separately priced service contracts range from 12 months to 36 months. The Company typically receives payment at the inception of the contract and recognizes revenue as earned on a straight-line basis over the term of the contract.
Professional services revenue. From time to time, the Company enters into special engineering design service agreements. Revenues from engineering design services are 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

10




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 June 30, 2019.
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.
Revenues from the Company’s SaaS subscription services represent a single promise to provide continuous access to its software solutions and their processing capabilities in the form of a service through one of the Company’s data centers or a hosted data center. As each day of providing access to the software is substantially the same, and the customer simultaneously receives and consumes the benefits as access is provided, the Company has determined that its subscription services arrangements include a single performance obligation comprised of a series of distinct services. The Company’s SaaS subscriptions also include an unspecified volume of call center support and any remote system diagnostic and software upgrades as needed. These services are combined with the recurring monthly subscription service since they are highly interrelated and interdependent. Revenue from the Company’s subscription services is recognized over time on a ratable basis over the contract term beginning on the date that the service is made available to the customer.
Shipping and Handling Charges
Fees charged to customers for shipping and handling of products are included in product revenues, and costs for shipping and handling of products are included as a component of cost of sales.

11




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.
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 June 2016, the FASB issued Accounting Standard Update (“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 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either financing or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification determines whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less are accounted for similar to previous guidance for operating leases. The new standard requires lessors to account for leases using an approach that is substantially equivalent to previous guidance for sales-type leases, direct financing leases and operating leases. The Company adopted the standard on January 1, 2019, the date it became effective for public companies, using the modified retrospective approach whereby the cumulative effect of adoption was recognized on the adoption date and prior periods were not restated. There was no net cumulative effect adjustment to retained earnings as of January 1, 2019 as a result of this adoption. Upon adoption, the Company elected the package of practical expedients permitted within the standard, which among other things, allows for the carryforward of historical lease classification. The Company also elected the practical expedient provided in a subsequent amendment to the standard that removed the requirement to separate lease and non-lease components, provided certain conditions were met. Refer to Note 10, Leases, for the impact of the adoption of this guidance on the Company’s condensed consolidated financial statements.
2. Financial Statement Details
Inventories, net
Inventories, net, consist of the following (in thousands):
 
June 30,
2019
 
December 31,
2018
Finished goods
$
24,751

 
$
14,797

Raw materials and components
4,641

 
11,634

Total inventories, net
$
29,392

 
$
26,431



12




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

Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in thousands):
 
June 30,
2019
 
December 31,
2018
Royalties
$
1,835

 
$
1,727

Payroll and related expenses
2,248

 
2,415

Professional fees
522

 
514

Accrued interest
239

 
239

Deferred revenue
2,318

 
2,048

Operating lease liabilities
1,507

 

Acquisition-related liabilities
1,000

 
1,000

Other
4,419

 
5,081

Total accrued expenses and other current liabilities
$
14,088

 
$
13,024


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):
 
June 30,
2019
 
December 31,
2018
 
June 30,
2018
 
December 31,
2017
Cash and cash equivalents
$
20,268

 
$
31,015

 
$
18,836

 
$
21,198

Restricted cash
61

 
61

 
61

 
61

Total cash, cash equivalents and restricted cash
$
20,329

 
$
31,076

 
$
18,897

 
$
21,259


As of June 30, 2019, restricted cash included collateral requirements related to the Company’s corporate credit card program.
3. 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.
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.

13




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

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 six months ended June 30, 2019.
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 June 30, 2019 (in thousands):
 
Balance as of
June 30, 2019
 
Level 1
Assets:
 
 
 
Cash equivalents
 
 
 
Money market funds
$
125

 
$
125

Total cash equivalents
$
125

 
$
125


The following table summarizes the Company’s financial instruments measured at fair value on a recurring basis in accordance with the authoritative guidance for fair value measurements as of December 31, 2018 (in thousands):
 
Balance as of
December 31, 2018
 
Level 1
Assets:
 
 
 
Cash equivalents
 
 
 
Money market funds
$
10,085

 
$
10,085

Total cash equivalents
$
10,085

 
$
10,085


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 4, 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. It is not practicable to determine the fair value of the Convertible Notes due to the lack of information available to calculate the fair value of such notes. The carrying value of the liability component of the Convertible Notes was $97.2 million and $93.1 million as of June 30, 2019 and December 31, 2018, respectively.
4. Debt
Term Loan
On August 23, 2017, the Company and certain of its direct and indirect subsidiaries (the “Guarantors”) entered into a credit agreement (the “Credit Agreement”) with Cantor Fitzgerald Securities, as administrative agent and collateral agent, and certain 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 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.

14




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

As required by the terms of the Credit Agreement, during the year ended December 31, 2018, the Company repaid $0.5 million of principal on the Term Loan in connection with the Settlement Agreement, as defined below (see Note 9, Commitments and Contingencies).
At June 30, 2019, approximately $10.3 million of the Term Loan was held by related parties. On July 10, 2019, subsequent to the balance sheet date, such related parties acquired an additional $29.2 million of the Term Loan.
The Term Loan consists of the following (in thousands):
 
June 30,
2019
 
December 31, 2018
Principal
$
47,500

 
$
47,500

Less: unamortized debt discount and debt issuance costs
(1,708
)
 
(2,454
)
Net carrying amount
$
45,792

 
$
45,046


The Term Loan is reflected as a current liability on the Company’s balance sheet because the payment obligations described below with respect to the Convertible Notes will trigger acceleration of the amounts due pursuant to the Credit Agreement.
The effective interest rate on the Term Loan was 13.70% for the six months ended June 30, 2019. The following table sets forth total interest expense recognized related to the Term Loan (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Contractual interest expense
$
1,210

 
$
1,173

 
$
2,390

 
$
2,267

Amortization of debt discount
333

 
333

 
666

 
666

Amortization of debt issuance costs
40

 
40

 
80

 
80

Total interest expense
$
1,583

 
$
1,546

 
$
3,136

 
$
3,013


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.
Because the Novatel Wireless Notes will mature within the next twelve months, the Company has included such indebtedness as a current liability on its balance sheet.

15




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

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 at a rate of 5.50% per year, payable semi-annually in arrears on June 15 and December 15 of each year. 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, 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 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.
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.
At June 30, 2019, approximately $19.4 million of the Inseego Notes were held by related parties. On July 23, 2019, subsequent to the balance sheet date, such related parties acquired an additional $25.4 million of the Inseego Notes.
Because the Optional Repurchase Date will occur within the next twelve months, the Company has included such indebtedness as a current liability on its balance sheet.

16




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

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.
The Convertible Notes consist of the following (in thousands):
 
June 30,
2019
 
December 31,
2018
Liability component:
 
 
 
Principal
$
105,125

 
$
105,125

Less: unamortized debt discount and debt issuance costs
(7,931
)
 
(12,071
)
Net carrying amount
$
97,194

 
$
93,054

Equity component
$
41,905

 
$
41,905

 
The effective interest rate on the liability component of the Convertible Notes was 14.47% for the six months ended June 30, 2019. The following table sets forth total interest expense recognized related to the Convertible Notes (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Contractual interest expense
$
1,445

 
$
1,445

 
$
2,891

 
$
2,891

Amortization of debt discount
1,955

 
1,955

 
3,911

 
3,911

Amortization of debt issuance costs
115

 
115

 
229

 
229

Total interest expense
$
3,515

 
$
3,515

 
$
7,031

 
$
7,031


5. 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
June 30,
 
Six Months Ended
June 30,
  
2019
 
2018
 
2019
 
2018
Cost of revenues
$
574

 
$
20

 
$
697

 
$
74

Research and development
957

 
193

 
1,132

 
408

Sales and marketing
818

 
235

 
1,032

 
448

General and administrative
1,296

 
616

 
1,841

 
1,014

Total
$
3,645

 
$
1,064

 
$
4,702

 
$
1,944


Stock Options
The following table summarizes the Company’s stock option activity:
Outstanding — December 31, 2018
8,796,212

Granted
825,757

Exercised
(414,792
)
Canceled
(666,318
)
Outstanding — June 30, 2019
8,540,859

Exercisable — June 30, 2019
2,868,281


At June 30, 2019, total unrecognized compensation expense related to stock options was $5.8 million, which is expected to be recognized over a weighted-average period of 2.59 years.

17




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

Restricted Stock Units
The following table summarizes the Company’s restricted stock unit (“RSU”) activity:
Non-vested — December 31, 2018
454,382

Granted
273,867

Vested
(275,534
)
Forfeited
(48,750
)
Non-vested — June 30, 2019
403,965


At June 30, 2019, total unrecognized compensation expense related to RSUs was $0.8 million, which is expected to be recognized over a weighted-average period of 1.41 years.
6. Earnings Per Share
Basic earnings per share (“EPS”) excludes dilution and is computed by dividing net 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.
For the three months ended June 30, 2019, the computation of diluted EPS excluded 35,777,398 shares related to the Convertible Notes, warrants, stock options and RSUs as their effect would have been anti-dilutive. For the six months ended June 30, 2019, the computation of diluted EPS excluded 35,760,242 shares primarily related to the Convertible Notes, warrants, stock options and RSUs as their effect would have been anti-dilutive.
7. 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 (the “2018 Warrants”), 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. In connection with the private placement, the Company incurred issuance costs of approximately $0.5 million.
On March 28, 2019, the 2018 Warrants were exercised at an exercise price of $2.52 per share, for aggregate cash proceeds to the Company of approximately $10.6 million. In connection with the exercise of the 2018 Warrants, on March 28, 2019, the Company issued additional warrants to purchase 2,500,000 shares of common stock (the “2019 Warrants”) to the accredited investors. Each 2019 Warrant has an initial exercise price of $7.00 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, will be exercisable at any time on or after September 28, 2019, and will expire on June 30, 2022. The 2019 Warrants may be exercisable on a cashless exercise basis if, and only if, the shares of common stock underlying such warrants cannot be immediately resold pursuant to an effective registration statement or Rule 144 of the Securities Act of 1933, as amended, without volume or manner of sale restrictions.
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.

18




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

8. 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
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
United States and Canada
$
41,459

 
$
32,562

 
$
74,953

 
$
62,668

South Africa
8,558

 
10,208

 
16,927

 
20,893

Other
5,874

 
6,287

 
12,567

 
12,229

Total
$
55,891

 
$
49,057

 
$
104,447

 
$
95,790


Concentrations of Risk
For the three months ended June 30, 2019 and 2018, one customer accounted for 56.0% and 45.1% of net revenues, respectively. For the six months ended June 30, 2019 and 2018, one customer accounted for 54.7% and 46.9% of net revenues, respectively.
As of June 30, 2019, two customers accounted for 27.3% and 11.0% of accounts receivable, net, respectively. As of December 31, 2018, two customers accounted for 30.5% and 12.8% of accounts receivable, net, respectively.
9. 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 11, 2017, the Company initiated a lawsuit against the former stockholders of RER in the Court of Chancery of the State of Delaware seeking recovery of damages for civil conspiracy, fraud in the inducement, unjust enrichment and breach of fiduciary duty. On January 16, 2018, the former stockholders of RER filed an answer and counterclaim in the matter seeking recovery of certain deferred and earn-out payments allegedly owed to them by the Company in connection with the Company’s acquisition of RER. On July 26, 2018, the Company and the former stockholders of RER entered into a mutual general release and settlement agreement (the “Settlement Agreement”) pursuant to which the parties agreed to release all claims against each other and the Company agreed to (i) pay the former stockholders of RER $1.0 million in cash by August 17, 2018, (ii) immediately instruct its transfer agent to permit the transfer or sale of 973,333 shares of the Company’s common stock that the Company had issued to the former stockholders of RER in March 2017, (iii) immediately issue 500,000 shares of the Company’s common stock to the former stockholders of RER, (iv) within 12 months following the execution of the Settlement Agreement, deliver to the former stockholders of RER an additional $1.0 million in cash, common stock, or a combination thereof, at the Company’s option, (v) within 24 months following the execution of the Settlement Agreement deliver to the former stockholders of RER an additional $1.0 million in cash, common stock, or a combination thereof, at the Company’s option, and (vi) file one or more registration statements with respect to the resale of the shares of the Company’s common stock issued to the former stockholders of RER pursuant to the Settlement Agreement. The Company’s remaining liability under the Settlement Agreement at June 30, 2019 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.

19




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

10. Leases
Lessee
The Company is a lessee in lease agreements for office space, automobiles and certain equipment. Certain of the Company’s leases contain provisions that provide for one or more options to renew at the Company’s sole discretion. The majority of the Company’s leases are comprised of fixed lease payments, with a small percentage of its real estate leases including lease payments subject to a rate or index which may be variable. Certain real estate leases also include executory costs such as common area maintenance (non-lease component). As a practical expedient permitted under ASC 842, the Company has elected to account for the lease and non-lease components as a single lease component. Lease payments, which may include lease components and non-lease components, are included in the measurement of the Company’s lease liabilities to the extent that such payments are either fixed amounts or variable amounts based on a rate or index (fixed in substance) as stipulated in the lease contract.
None of the Company’s lease agreements contain any material residual value guarantees or material restrictive covenants. As a result of the Company’s election of the package of practical expedients permitted within ASC 842, which among other things, allows for the carryforward of historical lease classification, all of the Company’s lease agreements in existence at the date of adoption that were classified as operating leases under ASC 840 have been classified as operating leases under ASC 842. Lease expense for payments related to the Company’s operating leases is recognized on a straight-line basis over the related lease term, which includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
Right-of-use assets represent the Company’s right to use an underlying asset during the lease term and lease liabilities represent the Company’s obligation to make lease payments as specified in the lease. Right-of-use assets and lease liabilities related to the Company’s operating leases are recognized at the lease commencement date based on the present value of the remaining lease payments over the lease term. When the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available surrounding the Company’s borrowing rates at the lease commencement date in determining the present value of lease payments. The right-of-use asset also includes any lease payments made at or before lease commencement less any lease incentives. As of June 30, 2019, the Company had right-of-use assets of $2.7 million and lease liabilities related to its operating leases of $2.8 million. Right-of-use assets are included in right-of-use assets, net, on the condensed consolidated balance sheet and lease liabilities related to the Company’s operating leases are included in accrued expenses and other liabilities and other long-term liabilities on the condensed consolidated balance sheet. As of June 30, 2019, the Company’s weighted-average remaining lease term and weighted-average discount rate related to its operating leases were 2.3 years and 9.1%, respectively.
During the three and six months ended June 30, 2019, the cash paid for amounts included in the measurement of lease liabilities related to the Company’s operating leases was approximately $0.5 million and $1.0 million, respectively, which is included as an operating cash outflow within the consolidated statements of cash flows. During the three and six months ended June 30, 2019, the operating lease costs related to the Company’s operating leases were approximately $0.4 million and $0.9 million, respectively, which is included in operating costs and expenses in the condensed consolidated statements of operations. During the three months ended June 30, 2019, the Company did not enter into any lease agreements set to commence in the future and there were no newly leased assets for which a right-of-use asset was recorded in exchange for a new lease liability, other than those lease assets recorded upon implementation.
The future minimum payments under operating leases were as follows at June 30, 2019 (in thousands):
2019 (remainder)
$
1,038

2020
1,038

2021
627

2022
348

2023
61

Total minimum operating lease payments
3,112

Less: amounts representing interest
(299
)
Present value of net minimum operating lease payments
2,813

Less: current portion
(1,507
)
Long-term portion of operating lease obligations
$
1,306



20




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

Lessor
Prior to January 1, 2019, and as previously disclosed in the Company’s Form 10-K for the year ended December 31, 2018, the Company derived revenue from customers who lease the Company’s monitoring devices. The Company recorded such revenue in accordance with the previous lease accounting guidance ASC 840, Leases, and determined that the leases qualify as operating leases.
Monitoring device leases in which the Company serves as lessor are classified as operating leases. Accordingly, rental devices are carried at historical cost less accumulated depreciation and impairment, if any, and are included in rental assets, net, on the condensed consolidated balance sheets.
Since the lease components meet the criteria for an operating lease under ASC 842, the Company has elected the practical expedient to combine the lease and the non-lease components because the service is the predominant element in the eyes of the customer and the pattern of service delivery is the same for both elements. The Company will account for the combined component as a single performance obligation under ASC 606, Revenue from Contracts with Customers.
11. Income Taxes
The Company’s income tax provision of $0.3 million and $0.3 million for the three months ended June 30, 2019 and 2018, respectively, and $0.6 million and $0.7 million for the six months ended June 30, 2019 and 2018, respectively, consisting 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 primarily due to full valuation allowances at most of its entities.
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.
The following table sets forth activity in the restructuring liability for the six months ended June 30, 2019 (in thousands):
 
Balance at December 31, 2018
 
Costs Incurred
 
Payments
 
Balance at June 30, 2019
 
 
Cumulative Costs Incurred to Date
2015 Initiatives
 
 
 
 
 
 
 
 
 
 
Employee Severance Costs
$

 
$

 
$

 
$

 
 
$
4,131

Facility Exit Related Costs
634

 
37

 
(235
)
 
436

 
 
1,879

Total
$
634

 
$
37

 
$
(235