SEC Filing | Inseego Corp.

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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 September 30, 2019



☐	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: (858) 812-3400

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	INSG	Nasdaq Global Select Market

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 November 1, 2019 was 80,031,491.

TABLE OF CONTENTS



		Page
PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets (Unaudited)	3

	Condensed Consolidated Statements of Operations (Unaudited)	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)	5

	Condensed Consolidated Statements of Stockholders’ Deficit (Unaudited)	6

	Condensed Consolidated Statements of Cash Flows (Unaudited)	8

	Notes to Condensed Consolidated Financial Statements (Unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34

Item 4.	Controls and Procedures	34

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	36

Item 1A.	Risk Factors	36

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 3.	Defaults Upon Senior Securities	36

Item 4.	Mine Safety Disclosures	36

Item 5.	Other Information	37

Item 6.	Exhibits	38

SIGNATURES		39

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

INSEEGO CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value and share data)



	September 30, 2019			December 31, 2018
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	13,945		$	31,015
Restricted cash	—			61
Accounts receivable, net of allowance for doubtful accounts of $2,008 and $1,841, respectively	21,533			20,633
Inventories, net	25,960			26,431
Prepaid expenses and other	10,358			6,212
Total current assets	71,796			84,352
Property, plant and equipment, net of accumulated depreciation of $15,846 and $18,436, respectively	7,469			6,698
Rental assets, net of accumulated depreciation of $11,325 and $10,879, respectively	5,033			5,769
Intangible assets, net of accumulated amortization of $28,140 and $22,101, respectively	39,852			31,985
Goodwill	31,477			32,942
Right-of-use assets, net	2,323			—
Other assets	743			510
Total assets	$	158,693		$	162,256
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	28,845		$	39,245
Accrued expenses and other current liabilities	16,596			13,024
Convertible senior notes, net	99,264			—
Term loan, net	46,165			—
DigiCore bank facilities	197			1,412
Total current liabilities	191,067			53,681
Long-term liabilities:
Convertible senior notes, net	—			93,054
Term loan, net	—			45,046
Deferred tax liabilities, net	4,208			4,457
Other long-term liabilities	1,738			2,543
Total liabilities	197,013			198,781
Commitments and Contingencies
Stockholders’ deficit:
Preferred stock, par value $0.001; 2,000,000 shares authorized:
Series E Preferred stock, par value $0.001; 10,000 shares designated, 10,000 and 0 shares issued and outstanding, respectively, liquidation preference of $1,000 per share	—			—
Common stock, par value $0.001; 150,000,000 shares authorized, 79,825,651 and 73,979,882 shares issued and outstanding, respectively	80			74
Additional paid-in capital	574,485			546,230
Accumulated other comprehensive loss	(7,789		)	(4,877		)
Accumulated deficit	(605,018		)	(577,817		)
Total stockholders’ deficit attributable to Inseego Corp.	(38,242		)	(36,390		)
Noncontrolling interests	(78		)	(135		)
Total stockholders’ deficit	(38,320		)	(36,525		)
Total liabilities and stockholders’ deficit	$	158,693		$	162,256

See accompanying notes to unaudited condensed consolidated financial statements.

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,
	2019			2018			2019			2018
Net revenues:
IoT & Mobile Solutions	$	45,926		$	34,636		$	118,690		$	95,257
Enterprise SaaS Solutions	16,790			15,994			48,473			51,163
Total net revenues	62,716			50,630			167,163			146,420
Cost of net revenues:
IoT & Mobile Solutions	37,873			26,793			99,459			75,168
Enterprise SaaS Solutions	6,218			6,233			18,764			20,093
Impairment of abandoned product line, net of recoveries	—			—			—			355
Total cost of net revenues	44,091			33,026			118,223			95,616
Gross profit	18,625			17,604			48,940			50,804
Operating costs and expenses:
Research and development	6,655			5,317			15,328			15,261
Sales and marketing	7,149			5,907			20,769			16,957
General and administrative	7,135			5,837			21,036			18,634
Amortization of purchased intangible assets	847			869			2,575			2,764
Extinguishment of acquisition-related liabilities	—			(17,174		)	—			(17,174		)
Restructuring charges, net of recoveries	13			245			50			1,165
Total operating costs and expenses	21,799			1,001			59,758			37,607
Operating income (loss)	(3,174		)	16,603			(10,818		)	13,197
Other expense:
Interest expense, net	(5,119		)	(5,113		)	(15,336		)	(15,360		)
Other expense, net	(307		)	(180		)	(66		)	(554		)
Income (loss) before income taxes	(8,600		)	11,310			(26,220		)	(2,717		)
Income tax provision	223			473			793			1,185
Net income (loss)	(8,823		)	10,837			(27,013		)	(3,902		)
Less: Net loss (income) attributable to noncontrolling interests	17			6			(57		)	35
Net income (loss) attributable to Inseego Corp.	(8,806		)	10,843			(27,070		)	(3,867		)
Series E preferred stock dividends	(131		)	—			(131		)	—
Net income (loss) attributable to common shareholders	$	(8,937	)	$	10,843		$	(27,201	)	$	(3,867	)
Per share data:
Net income (loss) per common share:
Basic	$	(0.11	)	$	0.16		$	(0.35	)	$	(0.06	)
Diluted	$	(0.11	)	$	0.15		$	(0.35	)	$	(0.06	)
Weighted-average shares used in computation of net income (loss) per common share:
Basic	79,550,445			68,480,774			77,606,317			63,585,229
Diluted	79,550,445			71,456,346			77,606,317			63,585,229

See accompanying notes to unaudited condensed consolidated financial statements.

INSEEGO CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net income (loss)	$	(8,823	)	$	10,837		$	(27,013	)	$	(3,902	)
Foreign currency translation adjustment	(4,119		)	(1,797		)	(2,912		)	(8,589		)
Total comprehensive income (loss)	$	(12,942	)	$	9,040		$	(29,925	)	$	(12,491	)

See accompanying notes to unaudited condensed consolidated financial statements.

INSEEGO CORP.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(In thousands)

(Unaudited)



	Preferred Stock			Common Stock			Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Noncontrolling Interests			Total Stockholders’ Deficit
	Shares	Amount		Shares	Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Noncontrolling Interests			Total Stockholders’ Deficit
Balance, June 30, 2018	—	$	—	59,743	$	60	$	522,033		$	(2,188	)	$	(584,469	)	$	(79	)	$	(64,643	)
Net income (loss)	—	—		—	—		—			—			10,843			(6		)	10,837
Foreign currency translation adjustment	—	—		—	—		—			(1,797		)	—			—			(1,797		)
Exercise of stock options, vesting of restricted stock units and shares issued under employee stock purchase plan	—	—		958	1		799			—			—			—			800
Taxes withheld on net settled vesting of restricted stock units	—	—		—	—		(337		)	—			—			—			(337		)
Issuance of common shares	—	—		12,690	12		20,074			—			—			—			20,086
Share-based compensation	—	—		—	—		1,734			—			—			—			1,734
Balance, September 30, 2018	—	$	—	73,391	$	73	$	544,303		$	(3,985	)	$	(573,626	)	$	(85	)	$	(33,320	)

Balance, June 30, 2019	—	$	—	78,985	$	79	$	562,405		$	(3,670	)	$	(596,081	)	$	(61	)	$	(37,328	)
Net income (loss)	—	—		—	—		—			—			(8,806		)	(17		)	(8,823		)
Foreign currency translation adjustment	—	—		—	—		—			(4,119		)	—			—			(4,119		)
Exercise of stock options, vesting of restricted stock units and shares issued under employee stock purchase plan	—	—		645	—		601			—			—			—			601
Taxes withheld on net settled vesting of restricted stock units	—	—		—	—		(942		)	—			—			—			(942		)
Issuance of Series E preferred shares	10	—		—	—		10,000			—			—			—			10,000
Issuance of common shares	—	—		196	1		1,037			—			—			—			1,038
Share-based compensation	—	—		—	—		1,253			—			—			—			1,253
Series E preferred stock dividends	—	—		—	—		131			—			(131		)	—			—
Balance, September 30, 2019	10	$	—	79,826	$	80	$	574,485		$	(7,789	)	$	(605,018	)	$	(78	)	$	(38,320	)

INSEEGO CORP.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(In thousands)

(Unaudited)



	Preferred Stock			Common Stock			Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Noncontrolling Interests			Total Stockholders’ Deficit
	Shares	Amount		Shares	Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Noncontrolling Interests			Total Stockholders’ Deficit
Balance, December 31, 2017	—	$	—	58,645	$	59	$	519,531		$	4,604		$	(569,759	)	$	(50	)	$	(45,615	)
Net income (loss)	—	—		—	—		—			—			(3,867		)	(35		)	(3,902		)
Foreign currency translation adjustment	—	—		—	—		—			(8,589		)	—			—			(8,589		)
Exercise of stock options, vesting of restricted stock units and shares issued under employee stock purchase plan	—	—		2,056	2		1,670			—			—			—			1,672
Taxes withheld on net settled vesting of restricted stock units	—	—		—	—		(650		)	—			—			—			(650		)
Issuance of common shares	—	—		12,690	12		20,074			—			—			—			20,086
Share-based compensation	—	—		—	—		3,678			—			—			—			3,678
Balance, September 30, 2018	—	$	—	73,391	$	73	$	544,303		$	(3,985	)	$	(573,626	)	$	(85	)	$	(33,320	)

Balance, December 31, 2018	—	$	—	73,980	$	74	$	546,230		$	(4,877	)	$	(577,817	)	$	(135	)	$	(36,525	)
Net income (loss)	—	—		—	—		—			—			(27,070		)	57			(27,013		)
Foreign currency translation adjustment	—	—		—	—		—			(2,912		)	—			—			(2,912		)
Exercise of stock options, vesting of restricted stock units and shares issued under employee stock purchase plan	—	—		1,382	1		1,516			—			—			—			1,517
Taxes withheld on net settled vesting of restricted stock units	—	—		—	—		(1,260		)	—			—			—			(1,260		)
Issuance of Series E preferred shares	10	—		—	—		10,000			—			—			—			10,000
Issuance of common shares	—	—		242	1		1,278			—			—			—			1,279
Exercise of warrants	—	—		4,222	4		10,635			—			—			—			10,639
Share-based compensation	—	—		—	—		5,955			—			—			—			5,955
Series E preferred stock dividends	—	—		—	—		131			—			(131		)	—			—
Balance, September 30, 2019	10	$	—	79,826	$	80	$	574,485		$	(7,789	)	$	(605,018	)	$	(78	)	$	(38,320	)

See accompanying notes to unaudited condensed consolidated financial statements.

INSEEGO CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities:
Net loss	$	(27,013	)	$	(3,902	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	12,770			10,564
Provision for bad debts, net of recoveries	691			536
Provision for excess and obsolete inventory, net of recoveries	389			1,219
Share-based compensation expense	5,955			3,678
Amortization of debt discount and debt issuance costs	7,329			7,328
Deferred income taxes	(13		)	(4		)
Non-cash gain on extinguishment of acquisition-related liabilities	—			(17,174		)
Other	1,349			1,227
Changes in assets and liabilities:
Accounts receivable	(1,912		)	(13,038		)
Inventories	(2,525		)	1,779
Prepaid expenses and other assets	(4,535		)	2,423
Accounts payable	(8,887		)	879
Accrued expenses, income taxes, and other	1,404			616
Net cash used in operating activities	(14,998		)	(3,869		)
Cash flows from investing activities:
Purchases of property, plant and equipment	(4,169		)	(936		)
Proceeds from the sale of property, plant and equipment	454			109
Additions to capitalized software development costs and purchases of intangible assets	(16,800		)	(1,527		)
Net cash used in investing activities	(20,515		)	(2,354		)
Cash flows from financing activities:
Gross proceeds received from issuance of Series E preferred stock	10,000			—
Gross proceeds received from private placement	—			19,661
Principal payments on term loans	—			(500		)
Proceeds from the exercise of warrant to purchase common stock	10,639			—
Net repayment of DigiCore bank and overdraft facilities	(1,159		)	(1,203		)
Principal payments under finance lease obligations	(795		)	(487		)
Principal payments on mortgage bond	—			(241		)
Proceeds from stock option exercises and employee stock purchase plan, net of taxes paid on vested restricted stock units	257			1,022
Net cash provided by financing activities	18,942			18,252
Effect of exchange rates on cash	(560		)	(1,680		)
Net increase (decrease) in cash, cash equivalents and restricted cash	(17,131		)	10,349
Cash, cash equivalents and restricted cash, beginning of period	31,076			21,259
Cash, cash equivalents and restricted cash, end of period	$	13,945		$	31,608
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest	$	6,231		$	6,605
Income taxes	$	583		$	593
Supplemental disclosures of non-cash activities:
Transfer of inventories to rental assets	$	2,712		$	3,018
Capital expenditures financed through accounts payable	$	799		$	2,178
Right-of-use assets obtained in exchange for operating leases liabilities	$	3,554		$	—
Issuance costs financed through accounts payable	$	—		$	500
Issuance of common stock under settlement agreement	$	1,279		$	925

See accompanying notes to unaudited condensed consolidated financial statements.

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, 2019 and the results of the Company’s operations for the three and nine months ended September 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 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, 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 September 30, 2019, the Company had available cash and cash equivalents totaling $13.9 million and a working capital deficit of $119.3 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 7, Private Placements.

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.

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 MiFi^iQ 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.

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

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, 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.

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 Instruments—Credit 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):



	September 30, 2019		December 31, 2018
Finished goods	$	21,785	$	14,797
Raw materials and components	4,175		11,634
Total inventories, net	$	25,960	$	26,431

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):



	September 30, 2019		December 31, 2018
Royalties	$	1,982	$	1,727
Payroll and related expenses	2,684		2,415
Professional fees	611		514
Accrued interest	2,011		239
Deferred revenue	2,316		2,048
Operating lease liabilities	1,201		—
Acquisition-related liabilities	1,000		1,000
Other	4,791		5,081
Total accrued expenses and other current liabilities	$	16,596	$	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):



	September 30, 2019		December 31, 2018		September 30, 2018		December 31, 2017
Cash and cash equivalents	$	13,945	$	31,015	$	31,547	$	21,198
Restricted cash	—		61		61		61
Total cash, cash equivalents and restricted cash	$	13,945	$	31,076	$	31,608	$	21,259

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.

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, 2019.

INSEEGO CORP.

Notes to Condensed Consolidated Financial Statements (Unaudited)

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, 2019 (in thousands):



	Balance as of September 30, 2019		Level 1
Assets:
Cash equivalents
Money market funds	$	125	$	125
Total cash equivalents	$	125	$	125



	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 $99.3 million and $93.1 million as of September 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, including a restriction on the level of capital expenditures. The Company obtained a waiver of the capital expenditure restriction from the lenders during the quarter ended September 30, 2019. As a result of the waiver, as of September 30, 2019, the Company was in compliance with all financial covenants under the Credit Agreement.

The Term Loan bears interest at a rate per annum equal to the three-month LIBOR, but in no event less than 1.00%, plus 7.625% (9.749% at September 30, 2019). Interest on the Term Loan is payable on the last business day of each calendar month and on the Maturity Date. At September 30, 2019, one month of interest due to related parties, totaling $0.3 million, was

INSEEGO CORP.

Notes to Condensed Consolidated Financial Statements (Unaudited)

deferred and is included in accrued expenses and other current liabilities on the condensed consolidated balance sheet. Principal on the Term Loan is payable on the Maturity Date.

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 September 30, 2019, approximately $39.5 million of the Term Loan was held by related parties.

The Term Loan consists of the following (in thousands):



	September 30, 2019			December 31, 2018
Principal	$	47,500		$	47,500
Less: unamortized debt discount and debt issuance costs	(1,335		)	(2,454		)
Net carrying amount	$	46,165		$	45,046

The effective interest rate on the Term Loan was 13.67% for the nine months ended September 30, 2019. 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,
	2019		2018		2019		2018
Contractual interest expense	$	1,225	$	1,185	$	3,615	$	3,452
Amortization of debt discount	333		332		999		998
Amortization of debt issuance costs	40		40		120		120
Total interest expense	$	1,598	$	1,557	$	4,734	$	4,570

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, between Novatel Wireless, as issuer, Inseego Corp. 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 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.

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.

INSEEGO CORP.

Notes to Condensed Consolidated Financial Statements (Unaudited)

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 September 30, 2019, approximately $44.8 million of the Inseego Notes were held by related parties.

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.

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.

INSEEGO CORP.

Notes to Condensed Consolidated Financial Statements (Unaudited)

The Convertible Notes consist of the following (in thousands):



	September 30, 2019			December 31, 2018
Liability component:
Principal	$	105,125		$	105,125
Less: unamortized debt discount and debt issuance costs	(5,861		)	(12,071		)
Net carrying amount	$	99,264		$	93,054
Equity component	$	41,905		$	41,905

The effective interest rate on the liability component of the Convertible Notes was 14.17% for the nine months ended September 30, 2019. 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,
	2019		2018	2019	2018
Contractual interest expense	$	1,446