SEC Filing | Inseego Corp.

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insg-20200930

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, 2020


☐			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

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 3, 2020 was 98,880,267.

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 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)	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37

Item 4.	Controls and Procedures	37

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	38

Item 1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38

Item 3.	Defaults Upon Senior Securities	38

Item 4.	Mine Safety Disclosures	38

Item 5.	Other Information	38

Item 6.	Exhibits	39

SIGNATURES		40

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

INSEEGO CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value and share data)


	September 30, 2020		December 31, 2019
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	41,994	$	12,074

Accounts receivable, net of allowance for doubtful accounts of $1,701 and $2,133, respectively	38,042		19,656

Inventories, net	24,241		25,290

Prepaid expenses and other	10,962		7,117


Total current assets	115,239		64,137
Property, plant and equipment, net of accumulated depreciation of $18,606 and $16,017, respectively	13,052		10,756
Rental assets, net of accumulated depreciation of $13,934 and $12,791, respectively	5,069		5,385
Intangible assets, net of accumulated amortization of $40,772 and $33,011, respectively	51,974		44,392

Goodwill	28,742		33,659
Right-of-use assets, net	9,279		2,657
Other assets	384		387
Total assets	$	223,739	$	161,373
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	51,098	$	26,482
Accrued expenses and other current liabilities	23,263		17,861


DigiCore bank facilities	130		187


Total current liabilities	74,491		44,530
Long-term liabilities:

2025 Notes, net	162,839		—
2022 Notes, net	—		101,334
Term loan, net	—		46,538

Deferred tax liabilities, net	3,278		3,949
Other long-term liabilities	10,353		2,380
Total liabilities	250,961		198,731
Commitments and contingencies
Stockholders’ deficit:
Preferred stock, par value $0.001; 2,000,000 shares authorized:
Series E Preferred stock, par value $0.001; 39,500 and 10,000 shares designated, respectively, 35,000 and 10,000 shares issued and outstanding, respectively, liquidation preference of $1,000 per share (plus any accrued but unpaid dividends)	—		—
Common stock, par value $0.001; 150,000,000 shares authorized, 98,788,531 and 81,974,051 shares issued and outstanding, respectively	99		82
Additional paid-in capital	706,212		584,862
Accumulated other comprehensive loss	(14,613)		(3,879)
Accumulated deficit	(718,829)		(618,303)


Total stockholders’ deficit attributable to Inseego Corp.	(27,131)		(37,238)
Noncontrolling interests	(91)		(120)
Total stockholders’ deficit	(27,222)		(37,358)
Total liabilities and stockholders’ deficit	$	223,739	$	161,373

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,
	2020		2019		2020		2019
Net revenues:
IoT & Mobile Solutions	$	77,342	$	47,733	$	189,071	$	123,548
Enterprise SaaS Solutions	12,898		14,983		38,698		43,615
Total net revenues	90,240		62,716		227,769		167,163
Cost of net revenues:
IoT & Mobile Solutions	60,135		38,482		148,414		101,607
Enterprise SaaS Solutions	4,935		5,609		14,958		16,616

Total cost of net revenues	65,070		44,091		163,372		118,223
Gross profit	25,170		18,625		64,397		48,940
Operating costs and expenses:
Research and development	10,684		6,655		29,448		15,328
Sales and marketing	8,446		7,149		25,849		20,769
General and administrative	8,699		7,148		23,257		21,086
Amortization of purchased intangible assets	779		847		2,358		2,575



Total operating costs and expenses	28,608		21,799		80,912		59,758
Operating loss	(3,438)		(3,174)		(16,515)		(10,818)
Other income (expense):


Loss on debt conversion and extinguishment, net	(1,180)		—		(76,354)		—
Interest expense, net	(1,657)		(5,119)		(8,197)		(15,336)
Other income (expense), net	1,053		(307)		2,818		(66)
Loss before income taxes	(5,222)		(8,600)		(98,248)		(26,220)
Income tax provision	217		223		193		793


Net loss	(5,439)		(8,823)		(98,441)		(27,013)
Less: Net loss (income) attributable to noncontrolling interests	(3)		17		(29)		(57)
Net loss attributable to Inseego Corp.	(5,442)		(8,806)		(98,470)		(27,070)
Series E preferred stock dividends	(829)		(131)		(2,056)		(131)
Net loss attributable to common shareholders	$	(6,271)	$	(8,937)	$	(100,526)	$	(27,201)
Per share data:
Net loss per common share:


Basic and diluted	$	(0.06)	$	(0.11)	$	(1.06)	$	(0.35)


Weighted-average shares used in computation of net loss per common share:
Basic and diluted	98,016,798		79,550,445		95,136,713		77,606,317

See accompanying notes to unaudited condensed consolidated financial statements.

INSEEGO CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net loss	$	(5,439)	$	(8,823)	$	(98,441)	$	(27,013)
Foreign currency translation adjustment	1,170		(4,119)		(10,734)		(2,912)

Total comprehensive loss	$	(4,269)	$	(12,942)	$	(109,175)	$	(29,925)

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
Balance, June 30, 2019	—	$	—	78,985	$	79	$	562,405	$	(3,670)	$	(596,081)	$	(61)	$	(37,328)
Net loss	—	—		—	—		—		—		(8,806)		(17)		(8,823)
Foreign currency translation adjustment	—	—		—	—		—		(4,119)		—		—		(4,119)
Exercise of stock options, vesting of restricted stock units and stock 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)

Balance, June 30, 2020	35	$	—	97,018	$	97	$	686,410	$	(15,783)	$	(712,558)	$	(94)	$	(41,928)
Net (loss) income	—	—		—	—		—		—		(5,442)		3		(5,439)
Foreign currency translation adjustment	—	—		—	—		—		1,170		—		—		1,170
Exercise of stock options, vesting of restricted stock units and stock issued under employee stock purchase plan	—	—		504	1		1,485		—		—		—		1,486
Taxes withheld on net settled vesting of restricted stock units	—	—		—	—		(45)		—		—		—		(45)





Issuance of common shares under settlement agreement				90	—		972		—				—		972



Issuance of common stock in connection with the Notes Exchange	—	—		—	—		1		—		—		—		1




Issuance of common shares in connection with conversion of 2025 Notes	—	—		1,177	1		14,353		—		—		—		14,354
Share-based compensation	—	—		—	—		2,207		—		—		—		2,207
Series E preferred stock dividends	—	—		—	—		829		—		(829)		—		—



Balance, September 30, 2020	35	$	—	98,789	$	99	$	706,212	$	(14,613)	$	(718,829)	$	(91)	$	(27,222)

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
Balance, December 31, 2018	—	$	—	73,980	$	74	$	546,230	$	(4,877)	$	(577,817)	$	(135)	$	(36,525)
Net (loss) income	—	—		—	—		—		—		(27,070)		57		(27,013)
Foreign currency translation adjustment	—	—		—	—		—		(2,912)		—		—		(2,912)

Exercise of stock options, vesting of restricted stock units and stock 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)
Exercise of warrants	—			4,222	4		10,635		—		—		—		10,639
Issuance of Series E preferred shares	10	—		—	—		10,000		—		—		—		10,000
Issuance of common shares	—	—		242	1		1,278		—		—		—		1,279
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)



Balance, December 31, 2019	10	$	—	81,974	$	82	$	584,862	$	(3,879)	$	(618,303)	$	(120)	$	(37,358)
Net (loss) income	—	—		—	—		—		—		(98,470)		29		(98,441)
Foreign currency translation adjustment	—	—		—	—		—		(10,734)		—		—		(10,734)

Exercise of stock options, vesting of restricted stock units and stock issued under employee stock purchase plan	—	—		1,471	2		3,196		—		—		—		3,198
Taxes withheld on net settled vesting of restricted stock units	—	—		—	—		(326)		—		—		—		(326)
Issuance of Series E preferred stock	25	—		—	—		25,000		—		—		—		25,000
Issuance of Series E preferred stock in lieu of interest	2	—		—	—		2,330		—		—		—		2,330
Repurchase of Series E preferred stock	(2)	—		—	—		(2,354)		—		—		—		(2,354)
Issuance of common shares in connection with private exchanges of 2022 Notes	—	—		13,739	14		66,074		—		—		—		66,088





Issuance of common shares in connection with conversion of 2025 Notes	—	—		1,177	1		14,353		—		—		—		14,354
Exercise of warrants	—	—		338	—		1,861		—		—		—		1,861
Share-based compensation	—	—		—	—		8,188		—		—		—		8,188
Series E preferred stock dividends	—	—		—	—		2,056		—		(2,056)		—		—
Issuance of common shares under settlement agreement				90	—		972		—		—		—		972
Balance, September 30, 2020	35	$	—	98,789	$	99	$	706,212	$	(14,613)	$	(718,829)	$	(91)	$	(27,222)

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,
	2020		2019
Cash flows from operating activities:
Net loss	$	(98,441)	$	(27,013)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	15,948		12,770

Provision for bad debts, net of recoveries	240		691

Provision for excess and obsolete inventory, net of recoveries	430		389
Share-based compensation expense	8,188		5,955

Amortization of debt discount and debt issuance costs	3,632		7,329
Fair value adjustment on derivative instrument	(1,372)		—
Loss on debt conversion and extinguishment, net	76,354		—




Deferred income taxes	110		(13)



Other	50		1,349
Changes in assets and liabilities:

Accounts receivable	(19,065)		(1,912)
Inventories	(2,078)		(2,525)
Prepaid expenses and other assets	(3,918)		(4,535)
Accounts payable	25,170		(8,887)
Accrued expenses, income taxes, and other	11,464		1,404
Net cash provided by (used in) operating activities	16,712		(14,998)
Cash flows from investing activities:


Purchases of property, plant and equipment	(5,084)		(4,169)
Proceeds from the sale of property, plant and equipment	327		454


Additions to capitalized software development costs and purchases of intangible assets	(20,216)		(16,800)


Net cash used in investing activities	(24,973)		(20,515)
Cash flows from financing activities:
Gross proceeds from the issuance of 2025 Notes	100,000		—
Payment of issuance costs related to 2025 Notes	(3,600)		—
Cash paid to investors in private exchange transactions	(32,062)		—
Payoff of term loan and related extinguishment costs	(48,830)		—
Gross proceeds received from issuance of Series E preferred stock	25,000		10,000
Repurchase of Series E preferred stock	(2,354)		—









Proceeds from the exercise of warrants to purchase common stock	1,861		10,639
Net borrowing (repayment) of DigiCore bank and overdraft facilities	110		(1,159)


Principal payments under finance lease obligations	(2,243)		(795)



Proceeds from stock option exercises and employee stock purchase plan, net of taxes paid on vested restricted stock units	2,872		257
Net cash provided by financing activities	40,754		18,942
Effect of exchange rates on cash	(2,573)		(560)





Net increase (decrease) in cash, cash equivalents and restricted cash	29,920		(17,131)
Cash, cash equivalents and restricted cash, beginning of period	12,074		31,076
Cash, cash equivalents and restricted cash, end of period	$	41,994	$	13,945
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest	$	640	$	6,231
Income taxes	$	286	$	583
Supplemental disclosures of non-cash activities:
Transfer of inventories to rental assets	$	2,650	$	2,712
Capital expenditures financed through accounts payable	$	3,786	$	799
Right-of-use assets obtained in exchange for operating leases liabilities	$	7,704	$	3,554

Issuance of common stock under Settlement Agreement	$	972	$	1,279



Preferred stock issued in extinguishment of term loan accrued interest	$	2,330	$	—
Debt discount and issuance costs extinguished in notes conversion	$	1,728	$	—
2022 Notes conversion to equity	$	59,907	$	—
Novatel Wireless Notes conversion to equity	$	250	$	—
2025 Notes issued to extinguish the 2022 Notes	$	80,375	$	—
2025 Notes conversion, including shares issued in satisfaction of interest make-whole payment	$	14,353	$	—

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, 2020 and the results of the Company’s operations for the three and nine months ended September 30, 2020 and 2019 are unaudited. The condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring accruals, except otherwise disclosed herein, 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, 2019. The year-end condensed consolidated balance sheet data as of December 31, 2019 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, 2019. 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.

Risks and Uncertainties

In December 2019, COVID-19 was reported to have surfaced in Wuhan, China, resulting in shutdowns of manufacturing and commerce globally in the months that followed. Since then, the COVID-19 pandemic has spread to multiple countries worldwide, including the United States and has resulted in authorities implementing numerous measures to try to contain the disease or slow its spread, such as travel bans and restrictions, quarantines, shelter-in-place orders and shutdowns. The extent of the impact of the COVID-19 pandemic on the Company’s operational and financial performance will depend on future developments, including the duration and spread of the pandemic and related actions taken by the U.S. government, state and local government officials, and international governments to prevent the spread of the disease, all of which are uncertain and cannot be predicted.

Liquidity

As of September 30, 2020, the Company had available cash and cash equivalents totaling $42.0 million and working capital of $40.7 million.

In order to make continued growth investments, on March 6, 2020, the Company issued and sold 25,000 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 $25.0 million.

In the first quarter of 2020, $59.9 million of the Company’s 5.5% convertible senior notes due 2022 (the “2022 Notes” formerly referred to as the “Inseego Notes”) were exchanged for common stock in private exchange transactions. Additionally, in the second quarter of 2020, the Company restructured its outstanding debt by completing a $100.0 million registered public offering (the “Offering”) of 3.25% convertible senior notes due 2025 (the “2025 Notes”) and also entered in privately-negotiated Exchange Agreements, pursuant to which an aggregate of $45.0 million in principal amount of the 2022 Notes were exchanged for an aggregate of $32 million in cash and $80.4 million in principal amount of the 2025 Notes (the “Private Exchange Transactions”). In the third quarter of 2020, the Company redeemed the remaining $2,000 principal amount of the 2022 Notes.

During the quarter ended September 30, 2020, certain holders of the 2025 Notes converted approximately $13.5 million in principal amount of the 2025 Notes into 1,177,156 shares of the Company’s common stock in accordance with the terms of such notes. As of September 30, 2020, the Company’s outstanding debt primarily consisted of $166.9 million in principal amount of 2025 Notes.

The Company has a history of operating and net losses and overall usage of cash from operating and investing activities. The Company’s management believes that its cash and cash equivalents, together with anticipated cash flows from operations, will be sufficient to meet its cash flow needs for the next twelve months from the filing date of this report. The Company’s ability to attain more profitable operations and continue to generate positive cash flow is dependent upon achieving a level and mix of revenues adequate to support its evolving cost structure. If events or circumstances occur such that the Company does not meet its operating plan as expected, or if the Company becomes obligated to pay unforeseen expenditures as a result of ongoing litigation, the Company may be required to raise capital, reduce planned research and development activities, incur additional restructuring charges or reduce other operating expenses which could have an adverse impact on its ability to achieve its intended business objectives.

INSEEGO CORP.

Notes to Condensed Consolidated Financial Statements (Unaudited)

The Company’s liquidity could be impaired if there is any interruption in its business operations, a material failure to satisfy its contractual commitments or a failure to generate revenue from new or existing products. There can be no assurance that any required or desired restructuring or financing will be available on terms favorable to the Company, or at all. Additionally, the Company is uncertain of the full extent to which the COVID-19 pandemic will impact the Company’s business, operations and financial results.

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.

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 revenue recognition, capitalized software costs, allowance for doubtful accounts receivable, provision for excess and obsolete inventory, valuation of intangible and long-lived assets, valuation of goodwill, valuation of debt obligations, valuation of derivatives, royalty costs, accruals relating to litigation, income taxes and share-based compensation expense. The inputs related to certain estimates include consideration of the economic impact of the COVID-19 pandemic. As the impact of the COVID-19 pandemic continues to develop, these estimates could carry a higher degree of variability and volatility, and may change materially in future periods.

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, and various Software as a Service (“SaaS”) products. The Company’s products principally include intelligent mobile hotspots, wireless routers for IoT applications, USB modems, integrated telematics and mobile tracking hardware devices, which are supported by applications software and cloud software 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 portfolio of 5G products. The solutions are offered under the MiFi™ brand for consumer and enterprise markets, and under the Skyus brand for industrial IoT markets. Effective in the third quarter ended on September 30, 2020, IoT & Mobile Solutions now also includes the Company’s Device Management System (“DMS”), rebranded as Inseego SubscribeTM, a hosted SaaS platform that helps organizations manage the selection, deployment and spend of their customer’s wireless assets, helping them save money on personnel and telecom expenses. The Company reclassified its Inseego Subscribe revenue stream from Enterprise SaaS solutions to better reflect the Company's end user delineation. This reclassification had no impact on previously reported total net revenue, gross profit, or net loss.

Enterprise SaaS Solutions. The Enterprise SaaS Solutions portfolio consists 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.

Reclassification

Certain reclassifications have been made to the prior period condensed consolidated statement of operations to conform to the current period presentation.

INSEEGO CORP.

Notes to Condensed Consolidated Financial Statements (Unaudited)

Derivative Financial Instruments

The Company evaluates stock options, stock warrants, debt instruments and other contracts to determine if those contracts or embedded components of those contracts qualify as derivative financial instruments to be separately accounted for under the relevant sections of the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification. The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative financial instrument and is marked-to-market at each balance sheet date and recorded as an asset or liability. In the event that the fair value is recorded as an asset or liability, the change in fair value is recorded in the consolidated statements of operations as other income or other expense. Upon conversion, exercise or expiration of a derivative financial instrument, the instrument is marked to fair value.

Convertible Debt Instruments

The Company accounts for its convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) by separating the liability and equity components of the instruments in a manner that reflects the Company's nonconvertible debt borrowing rate. The Company determines the carrying amount of the liability component by measuring the fair value of similar debt instruments that do not have the conversion feature. If a similar debt instrument does not exist, the Company estimates the fair value by using assumptions that market participants would use in pricing a debt instrument, including market interest rates, credit standing, yield curves and volatility. Determining the fair value of the debt component requires the use of accounting estimates and assumptions. These estimates and assumptions require significant judgment and could have a significant impact on the determination of the debt component and the associated non-cash interest expense.

For convertible debt that may be settled in cash upon conversion, the Company assigns a value to the debt component equal to the estimated fair value of similar debt instruments without the conversion feature, which could result in the Company recording the debt instrument at a discount. If the debt instrument is recorded at a discount, the Company amortizes the debt discount over the life of the debt instrument as additional non-cash interest expense utilizing the effective interest method.

The Company evaluates embedded features within convertible debt that will be settled in shares upon conversion under Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging (“ASC 815”), to determine whether the embedded feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings.

If an embedded derivative is bifurcated from share-settled convertible debt, the Company records the debt component at cost less a debt discount equal to the bifurcated derivative’s fair value. The Company amortizes the debt discount over the life of the debt instrument as additional non-cash interest expense utilizing the effective interest method. The convertible debt and the derivative liability are presented in total on the unaudited condensed consolidated balance sheet. The derivative liability will be remeasured at each reporting period with changes in fair value recorded in the consolidated statements of operations in other income (expense), net.

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 August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40)-Accounting For Convertible Instruments and Contracts in an Entity's Own Equity. The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted net income per share calculation in certain areas. The new guidance is effective for annual and interim periods beginning after December 15, 2021, and early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently evaluating the impact that this new guidance will have on its consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify the accounting for income taxes. The amendment eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the

INSEEGO CORP.

Notes to Condensed Consolidated Financial Statements (Unaudited)

recognition of deferred tax liabilities for outside basis differences. The amendment also clarifies existing guidance related to the recognition of franchise tax, the evaluation of a step up in the tax basis of goodwill, and the effects of enacted changes in tax laws or rates in the effective tax rate computation, among other clarifications. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company early adopted the pronouncement effective for the fourth quarter 2019, the impact of which was not material to the 2019 consolidated financial statements.

In June 2016, the FASB issued 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. There was no impact from the adoption of this pronouncement to the Company’s condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either financing or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification determines whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less are accounted for similar to previous guidance for operating leases. The new standard requires lessors to account for leases using an approach that is substantially equivalent to previous guidance for sales-type leases, direct financing leases and operating leases. The Company adopted the standard on January 1, 2019, the date it became effective for public companies, using the modified retrospective approach whereby the cumulative effect of adoption was recognized on the adoption date and prior periods were not restated. There was no net cumulative effect adjustment to retained earnings as of January 1, 2019 as a result of this adoption. Upon adoption, the Company elected the package of practical expedients permitted within the standard, which among other things, allows for the carryforward of historical lease classification. The Company also elected the practical expedient provided in a subsequent amendment to the standard that removed the requirement to separate lease and non-lease components, provided certain conditions were met. Refer to Note 10, Leases, for the impact 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, 2020		December 31, 2019
Finished goods	$	20,299	$	21,229
Raw materials and components	3,942		4,061
Total inventories, net	$	24,241	$	25,290

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (in thousands):


	September 30, 2020		December 31, 2019
Royalties	$	2,672	$	1,415
Payroll and related expenses	5,426		2,716


Professional fees	1,522		483

Accrued interest	2,078		1,543
Deferred revenue	4,295		2,235

Operating lease liabilities	1,327		1,101
Acquisition-related liabilities	—		1,000

Other	5,943		7,368
Total accrued expenses and other current liabilities	$	23,263	$	17,861

INSEEGO CORP.

Notes to Condensed Consolidated Financial Statements (Unaudited)

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, 2020		December 31, 2019		September 30, 2019		December 31, 2018
Cash and cash equivalents	$	41,994	$	12,074	$	13,945	$	31,015
Restricted cash	—		—		—		61
Total cash, cash equivalents and restricted cash	$	41,994	$	12,074	$	13,945	$	31,076

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 fair market value for level 3 securities may be highly sensitive to the use of unobservable inputs and subjective assumptions. Generally, changes in significant unobservable inputs may result in significantly lower or higher fair value measurements.

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, 2020.

The following tables summarize 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, 2020 (in thousands):


	Balance as of September 30, 2020		Level 1
Assets:
Cash equivalents
Money market funds	$	126	$	126

Total cash equivalents	$	126	$	126

INSEEGO CORP.

Notes to Condensed Consolidated Financial Statements (Unaudited)


	Balance as of September 30, 2020		Level 3
Liabilities:
2025 Notes
Interest make-whole payment	$	2,929	$	2,929

Total embedded derivatives	$	2,929	$	2,929

The fair value of the interest make-whole payment derivative liability was determined using a Monte Carlo model with the following key assumptions:


	May 12, 2020		September 30, 2020
Volatility	60	%