Forward Looking Statements This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). You should not place undue reliance on these statements. These forward-looking statements include statements that reflect the views of our senior management with respect to our current expectations, assumptions, estimates and projections aboutInseego and our industry. These forward-looking statements speak only as of the date of this report. We disclaim any undertaking to publicly update or revise any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Statements that include the words "may," "could," "should," "would," "estimate," "anticipate," "believe," "expect," "preliminary," "intend," "plan," "project," "outlook," "will" and similar words and phrases identify forward-looking statements. Forward-looking statements address matters that involve risks and uncertainties that could cause actual results to differ materially from those anticipated in these forward-looking statements as of the date of this report. We believe that these factors include those related to: •our ability to compete in the market for wireless broadband data access products, wireless modem products, and asset management, monitoring, telematics, vehicle tracking and fleet management products; •our ability to develop and introduce new products and services successfully; •our ability to meet the price and performance standards of the evolving 5G New Radio ("5G NR") products and technologies; •our ability to expand our customer reach/reduce customer concentration; •our ability to grow the Internet of Things ("IoT") and mobile portfolio outside ofNorth America ; •our ability to grow our Ctrack/asset tracking solutions withinNorth America ; •our dependence on a small number of customers for a substantial portion of our revenues; •our ability to make scheduled payments of the principal of, to pay interest on, or to refinance our indebtedness, including our term loan and convertible notes obligations; •our ability to introduce and sell new products that comply with current and evolving industry standards and government regulations; •our ability to develop and maintain strategic relationships to expand into new markets; •our ability to properly manage the growth of our business to avoid significant strains on our management and operations and disruptions to our business; •our reliance on third parties to manufacture our products; •our contract manufacturer's ability to secure necessary supply to build our devices; •our ability to mitigate the impact of tariffs or other government-imposed sanctions; •our ability to accurately forecast customer demand and order the manufacture and timely delivery of sufficient product quantities; •our reliance on sole source suppliers for some products and devices used in our solutions; •the continuing impact of uncertain global economic conditions on the demand for our products; •the impact of geopolitical instability on our business; •the emergence of global public health emergencies, such as the recent outbreak of the 2019 novel coronavirus (2019-nCoV), now known as "COVID-19", which could extend lead times in our supply chain and lengthen sales cycles with our customers; •direct and indirect effects of COVID-19 on our employees, customers and supply chain and the economy and financial markets; •the impact that new or adjusted tariffs may have on the costs of components or our products, and our ability to sell products internationally; •our ability to be cost competitive while meeting time-to-market requirements for our customers; •our ability to meet the product performance needs of our customers in wireless broadband data access in industrial IoT markets; 25
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•demand for fleet, vehicle and asset management software-as-a-service ("SaaS") telematics solutions; •our dependence on wireless telecommunication operators delivering acceptable wireless services; •the outcome of any pending or future litigation, including intellectual property litigation; •infringement claims with respect to intellectual property contained in our solutions; •our continued ability to license necessary third-party technology for the development and sale of our solutions; •the introduction of new products that could contain errors or defects; •conducting business abroad, including foreign currency risks; •the pace of 5G wireless network rollouts globally and their adoption by customers; •our ability to make focused investments in research and development; and •our ability to hire, retain and manage additional qualified personnel to maintain and expand our business. The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this and other reports we file with or furnish to theSecurities and Exchange Commission ("SEC"), including the information in "Item 1A. Risk Factors" included in Part I of our Annual Report on Form 10-K for the year endedDecember 31, 2019 ("Form 10-K"). If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Trademarks "Inseego", theInseego logo, "DigiCore", "Novatel Wireless ", theNovatel Wireless logo, "MiFi", "MiFi Intelligent Mobile Hotspot", "Ctrack", the Ctrack logo, "Inseego North America ", "Inseego Subscribe", and "Skyus" are trademarks or registered trademarks ofInseego and its subsidiaries. Other trademarks, trade names or service marks used in this report are the property of their respective owners. As used in this report on Form 10-Q, unless the context otherwise requires, the terms "we," "us," "our," the "Company" and "Inseego" refer toInseego Corp. , aDelaware corporation, and its wholly and majority-owned subsidiaries. 26
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The following information should be read in conjunction with the condensed consolidated financial statements and the accompanying notes included in Part I, Item 1 of this report, as well as the annual consolidated financial statements and accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations for the year endedDecember 31, 2019 , contained in our Form 10-K. Business OverviewInseego Corp. is a leader in the design and development of fixed and mobile wireless solutions (advanced 4G and 5G NR), industrial IoT ("IoT") and cloud solutions for large enterprise verticals, service providers and small and medium-sized businesses around the globe. Our customers include wireless service providers, Fortune 500 enterprises, consumers, governments and first responders. Our product portfolio consists of fixed and mobile device-to-cloud solutions that provide compelling, intelligent, reliable and secure end-to-end IoT services with deep business intelligence.Inseego's products and solutions, designed and developed in theU.S. , power mission critical applications with a "zero unscheduled downtime" mandate, such as our 5G fixed wireless access ("FWA") gateway solutions, 4G and 5G mobile broadband, IoT applications such as SD WAN failover management, asset tracking and fleet management services. Our solutions are powered by our key wireless innovations in mobile and FWA technologies, including a suite of products employing the 5G NR standards, and purpose-built SaaS cloud platforms. We have been at the forefront of the ways in which the world stays connected and accesses information, and protects, and derives intelligence from that information. With multiple first-to-market innovations across a number of wireless technologies, including 5G, and a strong and growing portfolio of hardware and software innovations for IoT solutions,Inseego has been advancing technology and driving industry transformations for over 30 years. It is this proven expertise, commitment to quality, obsession with innovation and a relentless focus on execution that makes us a preferred global partner of service providers, distributors, value-added resellers, system integrators, and enterprises worldwide. Our Sources of Revenue We provide intelligent wireless 3G, 4G and 5G hardware products for the worldwide mobile communications and in IoT markets. Our hardware products address multiple vertical markets including private LTE/5G networks, theFirst Responders Network Authority /Firstnet, SD-WAN, telematics, remote monitoring and surveillance, and fixed wireless access and mobile broadband devices. Our broad range of products principally includes intelligent 4G and 5G fixed wireless routers and gateways, and mobile hotspots, and wireless gateways and routers for IoT applications, Gb speed 4G LTE hotspots and USB modems and 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/manage their hardware remotely. Our products currently operate on most major global cellular wireless networks. Our mobile hotspots sold under the MiFi brand have been sold to millions of end users, and provide subscribers with secure and convenient high-speed access to corporate, public and personal information through the Internet and enterprise networks. Our wireless standalone and USB modems and gateways allow us to address the rapidly growing and underpenetrated IoT market segments. Our telematics and mobile asset tracking hardware devices collect and control critical vehicle data and driver behaviors, and can reliably deliver that information to the cloud, all managed by our services enablement platforms. Our MiFi customer base is comprised of wireless operators to whom we provide intelligent fixed and mobile wireless devices. These wireless operators includeVerizon Wireless , AT&T, and Sprint inthe United States , Rogers inCanada , Telstra inAustralia , as well as other international wireless operators, distributors and various companies in other vertical markets and geographies. We sell our wireless routers for IoT, integrated telematics and mobile tracking hardware devices through our direct sales force, value-added resellers and through distributors. The customer base for our IoT products is comprised of transportation companies, industrial enterprises, manufacturers, application service providers, system integrators and distributors in various industries, including fleet and vehicle transportation, aviation ground service management, energy and industrial automation, security and safety, medical monitoring and government. Integrated telematics and asset tracking devices are also sold under our Ctrack brand and provided as part of our integrated SaaS solutions. We sell SaaS, software and services solutions across multiple mobile and IoT vertical markets, including fleet management, vehicle telematics, stolen vehicle recovery, asset tracking, monitoring, business connectivity and subscription management. Our SaaS platforms are device-agnostic and provide a standardized, scalable way to order, connect and manage remote assets and to improve business operations. The platforms are flexible and support both on-premise server or cloud-based deployments and are the basis for the delivery of a wide range of IoT services in multiple industries. We classify our revenues from the sale of our 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. Effective in the third quarter ended onSeptember 30, 2020 , our IoT & Mobile Solutions now also includes our 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 27
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them save money on personnel and telecom expenses. We reclassified our Inseego Subscribe revenue stream, from Enterprise SaaS solutions, to better reflect our end user delineation.
Our SaaS delivery platforms include our Ctrack platforms, which provide fleet, vehicle, aviation, asset and other telematics applications. Factors Which May Influence Future Results of OperationsNet Revenues . We believe that our future net revenues may be influenced by a number of factors including: •economic environment and related market conditions; •increased competition from other fleet and vehicle telematics solutions, as well as suppliers of emerging devices that contain wireless data access or device management features; •acceptance of our products by new vertical markets; •growth in the aviation ground vertical; •rate of change to new products; •phase-out of earlier generation wireless technologies (such as 3G); •deployment of 5G infrastructure equipment; •adoption of 5G end point products; •competition in the area of 5G technology; •trade protection measures (such as tariffs and duties) and import or export licensing requirements; •our contract manufacturer's ability to secure necessary supply to build our devices; •product pricing; •the impact of the COVID-19 pandemic on our business; and •changes in technologies. Our revenues are also significantly dependent upon the availability of materials and components used in our hardware products. We anticipate introducing additional products during the next twelve months, including SaaS telematics solutions and additional service offerings, IoT hardware and services, and other mobile and fixed wireless devices targeting the emerging 5G market. We continue to develop and maintain strategic relationships with service providers and other wireless industry leaders such asVerizon Wireless , T-Mobile, Sprint, and Qualcomm. Through strategic relationships, we have been able to maintain market penetration by leveraging the resources of our channel partners, including their access to distribution resources, increased sales opportunities and market opportunities. InDecember 2019 , COVID-19 was reported to have surfaced inWuhan, 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, includingthe 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 demand environment for our 5G products during the three months endedSeptember 30, 2020 was consistent with our expectations, with continued demand for our products due to a dramatic increase around the world in remote or tele-work and learning due to the COVID-19 pandemic. While demand for our products continues to be robust, the macroeconomic environment remains uncertain and the demand for our products may not be sustainable for the long term. We continue to monitor the implications of the COVID-19 pandemic on our business, as well as our customers' and suppliers' businesses. Cost of Net Revenues. Cost of net revenues includes all costs associated with our contract manufacturers, distribution, fulfillment and repair services, delivery of SaaS services, warranty costs, amortization of intangible assets, royalties, operations overhead, costs associated with cancellation of purchase orders and costs related to outside services. Also included in cost of net revenues are costs related to inventory adjustments, including acquisition-related amortization of the fair value of inventory, as well as any write downs for excess and obsolete inventory and abandoned product lines. Inventory adjustments are impacted primarily by demand for our products, which is influenced by the factors discussed above. Operating Costs and Expenses. Our operating costs consist of three primary categories: research and development; sales and marketing; and general and administrative costs. Research and development is at the core of our ability to produce innovative, leading-edge products. These expenses consist primarily of engineers and technicianswho design and test our highly complex products and the procurement of testing and certification services. Sales and marketing expenses consist primarily of our sales force and product-marketing professionals. In order to maintain strong sales relationships, we provide co-marketing, trade show support and product training. We are also engaged in 28
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a wide variety of marketing activities, such as awareness and lead generation programs as well as product marketing. Other marketing initiatives include public relations, seminars and co-branding with partners. General and administrative expenses include primarily corporate functions such as accounting, human resources, legal, administrative support and professional fees. This category also includes the expenses needed to operate as a publicly-traded company, including compliance with the Sarbanes-Oxley Act of 2002, as amended,SEC filings, stock exchange fees and investor relations expense. Although general and administrative expenses are not directly related to revenue levels, certain expenses, such as legal expenses and provisions for bad debts, may cause significant volatility in future general and administrative expenses which may, in turn, impact net revenue levels. We have undertaken certain restructuring activities and cost reduction initiatives in an effort to better align our organizational structure and costs with our strategy. Restructuring charges consist primarily of severance costs incurred in connection with the reduction of our workforce and facility exit-related costs, as well as discontinued operations, if any. As part of our business strategy, we may review acquisition or divestiture opportunities that we believe would be advantageous or complementary to the development of our business. Given our current cash position and recent losses, any additional acquisitions we make would likely involve issuing stock in order to provide the purchase consideration for the acquisitions. If we make any additional acquisitions, we may incur substantial expenditures in conjunction with the acquisition process and the subsequent assimilation of any acquired business, products, technologies or personnel. Critical Accounting Policies and Estimates In the notes to our consolidated financial statements and in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Form 10-K, we have disclosed those accounting policies that we consider to be significant in determining our results of operations and financial condition. There have been no material changes to those policies that we consider to be significant since the filing of our Form 10-K, other than our policy on derivative financial instruments as disclosed below. The accounting principles used in preparing our unaudited condensed consolidated financial statements conform in all material respects to accounting principles generally accepted in theU.S. 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
Convertible Debt Instruments
We account for our 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 our nonconvertible debt borrowing rate. We determine 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, we estimate 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, we assign a value to the debt component equal to the estimated fair value of similar debt instruments without the conversion feature, which could result in recording the debt instrument at a discount. If the debt instrument is recorded at a discount, we amortize the debt discount over the life of the debt instrument as additional non-cash interest expense utilizing the effective interest method.
We evaluate 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.
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If an embedded derivative is bifurcated from share-settled convertible debt, we record the debt component at cost less a debt discount equal to the bifurcated derivative's fair value. We amortize 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.
Results of Operations Three Months EndedSeptember 30, 2020 Compared to Three Months EndedSeptember 30, 2019 Net revenues. Net revenues for the three months endedSeptember 30, 2020 were$90.2 million , compared to$62.7 million for the same period in 2019. The following table summarizes net revenues by our two product categories (in thousands): Three Months Ended September 30, Change Product Category 2020 2019 $ % IoT & Mobile Solutions$ 77,342 $ 47,733 $ 29,609 62.0 % Enterprise SaaS Solutions 12,898 14,983 (2,085) (13.9) % Total$ 90,240 $ 62,716 $ 27,524 43.9 %
IoT & Mobile Solutions. The increase in IoT & Mobile Solutions net revenues is primarily a result of increased sales in our LTE gigabit hotspots, the introduction of our second-generation 5G hotspot related to our MiFi business, and increased revenues in our DMS business due to subscriber growth. As a result of the COVID-19 pandemic, there has been an increase in demand for our products due to a dramatic increase around the world in remote or tele-work and learning.
Enterprise SaaS Solutions. The decrease in Enterprise SaaS Solutions net
revenues is primarily a result of lower Ctrack system revenues due to the
effects of COVID-19 and the effect of strengthening
Three Months Ended September 30, Change Product Category 2020 2019 $ % IoT & Mobile Solutions$ 60,135 $ 38,482 $ 21,653 56.3 % Enterprise SaaS Solutions 4,935 5,609 (674) (12.0) % Total$ 65,070 $ 44,091 $ 20,979 47.6 % IoT & Mobile Solutions. The increase in IoT & Mobile Solutions cost of net revenues is primarily a result of the increased sales of our LTE gigabit hotspots, and 5G hotspots, as well as associated expenses such as freight and royalties. As a result of the COVID-19 pandemic, there has been an increase in demand for our products due to a dramatic increase around the world in remote or tele-work and learning. Enterprise SaaS Solutions. Enterprise SaaS Solutions cost of net revenues decreased as a result of lower Ctrack system revenues, partially offset by the effect of strengtheningU.S. Dollar foreign exchange rates on international costs. Gross profit. Gross profit for the three months endedSeptember 30, 2020 was$25.2 million , or a gross margin of 27.9%, compared to$18.6 million , or a gross margin of 29.7%, for the same period in 2019. The increase in gross profit was primarily attributable to the increase in IoT & Mobile Solutions revenues. Research and development expenses. Research and development expenses for the three months endedSeptember 30, 2020 were$10.7 million , or 11.8% of net revenues, compared to$6.7 million , or 10.6% of net revenues, for the same period in 2019. The increase was primarily a result of increased staffing, test units, and other development spending related to our 5G product programs. 30
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Sales and marketing expenses. Sales and marketing expenses for the three months endedSeptember 30, 2020 were$8.4 million , or 9.4% of net revenues, compared to$7.1 million , or 11.4% of net revenues, for the same period in 2019. The increase was primarily a result of an increase in employment costs attributable to an increase in headcount. General and administrative expenses. General and administrative expenses for the three months endedSeptember 30, 2020 were$8.7 million , or 9.6% of net revenues, compared to$7.1 million , or 11.4% of net revenues, for the same period in 2019. The increase was primarily a result of increased employment costs attributable to an increase in headcount and non-recurring legal expenses, offset by the effect of strengtheningU.S. Dollar foreign exchange rates on international costs. Amortization of purchased intangible assets. Amortization of purchased intangible assets for each of the three months endedSeptember 30, 2020 and 2019 was$0.8 million . Loss on debt conversion and extinguishment, net. The loss on debt conversion of$1.2 million for the three months endedSeptember 30, 2020 primarily represents the loss on debt conversion of 2025 Notes. There was no such expense for the same period in 2019. Interest expense, net. Interest expense, net, for the three months endedSeptember 30, 2020 and 2019 was$1.7 million and$5.1 million , respectively. The decrease in interest expense was due to the reduction in debt associated with the conversion of debt into equity during the three months endedJune 30, 2020 , payment in full of the Term Loan during the three months endedJune 30, 2020 , as well as a lower interest rate on the 2025 Notes, as compared to the 2022 Notes. Other income (expense), net. Other income, net, for the three months endedSeptember 30, 2020 was$1.1 million , which primarily includes the fair value adjustment related to our interest make-whole payment. For the same period in 2019, other expense, net, was$0.3 million which primarily included foreign currency transaction gains and losses. Income tax provision. The income tax provision of$0.2 million for the three months endedSeptember 30, 2020 and 2019, primarily related to certain of our entities in foreign jurisdictions. Net loss (income) attributable to noncontrolling interests. Net income attributable to noncontrolling interests for the three months endedSeptember 30, 2020 was$3,000 , compared to a net loss attributable to noncontrolling interests of$17,000 for the same period in 2019. Series E preferred stock dividends. During the three months endedSeptember 30, 2020 and 2019, we recorded dividends of$0.8 million and$0.1 million , respectively, on our Fixed-Rate Cumulative Perpetual Preferred Stock, Series E, par value$0.001 per share (the "Series E Preferred Stock"). Nine Months EndedSeptember 30, 2020 Compared to Nine Months EndedSeptember 30, 2019 Net revenues. Net revenues for the nine months endedSeptember 30, 2020 were$227.8 million , an increase of$60.6 million , or 36.3%, compared to the same period in 2019. The following table summarizes net revenues by our two product categories (dollars in thousands): Nine Months Ended September 30, Change Product Category 2020 2019 $ % IoT & Mobile Solutions$ 189,071 $ 123,548 $ 65,523 53.0 % Enterprise SaaS Solutions 38,698 43,615 (4,917) (11.3) % Total$ 227,769 $ 167,163 $ 60,606 36.3 %
IoT & Mobile Solutions. The increase in IoT & Mobile Solutions net revenues is
primarily a result of increased sales in our LTE gigabit hotspots, 5G hotspots
and USB modems, related to our MiFi business, and increased revenues in our DMS
business due to subscriber growth. As a result of the COVID-19 pandemic, there
has been an increase in demand for our products due to a dramatic increase
around the world in remote or tele-work and learning.
Enterprise SaaS Solutions. The decrease in Enterprise SaaS Solutions net
revenues is primarily a result of lower Ctrack system revenues due to the
effects of COVID-19 in fiscal 2020.
Cost of net revenues. Cost of net revenues for the nine months ended
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The following table summarizes cost of net revenues by our two product categories (dollars in thousands):
Nine Months Ended September 30, Change Product Category 2020 2019 $ % IoT & Mobile Solutions$ 148,414 $ 101,607 $ 46,807 46.1 % Enterprise SaaS Solutions 14,958 16,616 (1,658) (10.0) % Total$ 163,372 $ 118,223 $ 45,149 38.2 %
IoT & Mobile Solutions. The increase in IoT & Mobile Solutions cost of net revenues is primarily a result of the increased sales in our LTE gigabit hotspots, 5G hotspots, and USB modems related to our MiFi business, as well as associated expenses such as freight and royalties. As a result of the COVID-19 pandemic, there has been an increase in demand for our products due to a dramatic increase around the world in remote or tele-work and learning.
Enterprise SaaS Solutions. Enterprise SaaS Solutions cost of net revenues decreased slightly as a result of lower Ctrack system revenues, partially offset by the effect of strengtheningU.S. Dollar foreign exchange rates on international costs. Gross profit. Gross profit for the nine months endedSeptember 30, 2020 was$64.4 million , or a gross margin of 28.3%, compared to$48.9 million , or a gross margin of 29.3%, for the same period in 2019. The increase in gross profit was primarily attributable to the increase in IoT & Mobile Solutions revenues. Research and development expenses. Research and development expenses for the nine months endedSeptember 30, 2020 were$29.4 million , or 12.9% of net revenues, compared to$15.3 million , or 9.2% of net revenues, for the same period in 2019. The increase was primarily a result of increased staffing, test units, and other development spending related to our 5G product programs. Sales and marketing expenses. Sales and marketing expenses for the nine months endedSeptember 30, 2020 were$25.8 million , or 11.3% of net revenues, compared to$20.8 million , or 12.4% of net revenues, for the same period in 2019. The increase was primarily a result of an increase in employment costs attributable to an increase in headcount. General and administrative expenses. General and administrative expenses for the nine months endedSeptember 30, 2020 were$23.3 million , or 10.2% of net revenues, compared to$21.1 million , or 12.6% of net revenues, for the same period in 2019. The increase was primarily a result of an increase in employment costs and non-recurring legal expenses. Amortization of purchased intangible assets. The amortization of purchased intangible assets for the nine months endedSeptember 30, 2020 and 2019 was$2.4 million and$2.6 million , respectively, the decrease was primarily the result of changes in foreign exchange rates. Loss on debt conversion and extinguishment. The loss on debt conversion and extinguishment expense of$76.4 million for the nine months endedSeptember 30, 2020 primarily represents the loss on debt conversion and extinguishment of the 2022 Notes, including a$7.9 inducement expense incurred in connection with certain conversions of the 2022 Notes, and loss recorded on debt conversion of 2025 Notes. There was no such expense for the same period in 2019. Interest expense, net. Interest expense, net for each of the nine months endedSeptember 30, 2020 and 2019 was$8.2 million and$15.3 million , respectively. Interest expense is primarily a result of the interest expense and amortization of the debt discount and debt issuance costs related to our Term Loan, 2022 Notes and 2025 Notes. The decrease in interest expense was due to the conversion of debt into equity in the current fiscal year, payment in full of the Term Loan during the nine months endedSeptember 30, 2020 , as well as a lower interest rate on the 2025 Notes, as compared to the 2022 Notes. Other income (expense), net. Other income, net, for the nine months endedSeptember 30, 2020 was$2.8 million , which primarily includes the fair value adjustment related to our interest make-whole payment as well as foreign currency transaction gains and losses, and gains on the sale of certain fixed assets. Other expense, net for the same period in 2019 was$0.1 million , which primarily consisted of foreign currency transaction gains and losses. Income tax provision. The income tax provision of$0.2 million for the nine months endedSeptember 30, 2020 and the income tax provision of$0.8 million for the same period in 2019, respectively, primarily relate to certain of our entities in foreign jurisdictions. 32
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Net income attributable to noncontrolling interests. Net income attributable to noncontrolling interests for the nine months endedSeptember 30, 2020 was$29,000 , compared to a net income attributable to noncontrolling interests of$57,000 for the same period in 2019. Series E preferred stock dividends. During the nine months endedSeptember 30, 2020 and 2019, we recorded accrued dividends of$2.1 million and$0.1 million , respectively, on our Series E Preferred Stock. Liquidity and Capital Resources Our principal sources of liquidity are our existing cash and cash equivalents and cash generated from operations and financing sources. As ofSeptember 30, 2020 , we had cash and cash equivalents of$42.0 million and working capital of$40.7 million . OnAugust 6, 2018 , we completed a private placement of 12,062,000 shares of common stock and warrants to purchase an additional 4,221,700 shares of common stock (the "2018 Warrants"). OnMarch 28, 2019 , the 2018 Warrants were exercised at an exercise price of$2.52 per share, for aggregate cash proceeds to the Company of approximately$10.6 million . In connection with the exercise of the 2018 Warrants, onMarch 28, 2019 , the Company issued additional warrants to purchase 2,500,000 shares of common stock. The new warrants have an initial exercise price of$7.00 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, will be exercisable at any time on or afterSeptember 28, 2019 , and will expire onJune 30, 2022 .
On
Term Loan
On
On
On
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The Term Loan bore interest at a rate per annum equal to the three-month LIBOR, but in no event less than 1.00%, plus 7.625%.
Convertible Notes
2025 Notes
On
On
We issued the 2025 Notes under an indenture, dated
The 2025 Notes will mature on
Holders of the 2025 Notes may convert the 2025 Notes into shares of our common
stock (together with cash in lieu of any fractional share), at their option, at
any time until the close of business on the scheduled trading day immediately
before the maturity date. Upon conversion of the 2025 Notes, we will deliver for
each
The initial conversion rate for the 2025 Notes is 79.2896 shares of common stock
per
Holders of the 2025 Notes
If a fundamental change (as defined in the Indenture) occurs at any time prior to the maturity date, then the noteholders may require us to repurchase their 2025 Notes at a cash repurchase price equal to the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. If a make-whole fundamental change (as defined in the Indenture) occurs, then we will in certain circumstances increase the conversion rate for a specified period of time.
The 2025 Notes will be redeemable, in whole or in part, at our option at any
time, and from time to time, on or after
The Indenture contains customary events of default. If an event of default (other than certain events of bankruptcy, insolvency or reorganization involving the Company) occurs and is continuing, the Trustee, by notice to the Company, or the holders of the 2025 Notes representing at least 25% in aggregate principal amount of the outstanding 2025 Notes, by notice to the Company and the Trustee, may declare 100% of the principal of, and all accrued and unpaid interest on, all of the then outstanding 2025 Notes to be due and payable immediately. Upon the occurrence of certain events of bankruptcy, insolvency or
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reorganization involving the Company, 100% of the principal of, and all accrued and unpaid interest on, all of the then outstanding 2025 Notes will automatically become immediately due and payable. Notwithstanding the foregoing, the Indenture provides that, to the extent the Company elects, the sole remedy for an event of default relating to certain failures by the Company to comply with certain reporting covenants in the Indenture will, for the first 360 days after such event of default, consist exclusively of the right to receive additional interest on the 2025 Notes.
During the quarter ended
2022 Notes
On
During the three months ended
Pursuant to the Private Exchange Transactions described above, on
Settlement Agreement
Pursuant to the amended merger agreement with respect to our acquisition of
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Historical Cash Flows The following table summarizes our unaudited condensed consolidated statements of cash flows for the periods indicated (in thousands):
Nine Months Ended September 30, 2020 2019 Net cash provided by (used in) operating activities$ 16,712 $ (14,998) Net cash used in investing activities (24,973) (20,515) 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 Operating activities. Net cash provided by operating activities was$16.7 million for the nine months endedSeptember 30, 2020 , compared to net cash used in operating activities of$15.0 million for the same period in 2019. Net cash provided by operating activities for the nine months endedSeptember 30, 2020 was primarily attributable to net cash provided by working capital, offset by a non-cash loss on debt conversion and extinguishment, a non-cash fair value adjustment on derivative instrument, charges for the fair value of inducement shares issued in the privately-negotiated exchange transactions with certain holders of the 2022 Notes, charge for the exchange of 2022 Notes for 2025 Notes in a Private Exchange Transaction, debt exchange, depreciation and amortization, including the amortization of debt discount and debt issuance costs, and share-based compensation expense. Net cash used in operating activities for the nine months endedSeptember 30, 2019 was primarily attributable to the net loss in the period and net cash used in working capital, partially offset by non-cash charges for depreciation and amortization, including the amortization of debt discount and debt issuance costs, provisions for bad debts and excess and obsolete inventory and share-based compensation expense. Investing activities. Net cash used in investing activities during the nine months endedSeptember 30, 2020 was$25.0 million , compared to net cash used in investing activities of$20.5 million for the same period in 2019. Cash used in investing activities during the nine months endedSeptember 30, 2020 was primarily related to the purchases of property, plant and equipment and capitalization of certain costs related to the research and development of software to be sold in our products, in large part due to the increase in development in support of 5G products and services. Cash used in investing activities during the same period in 2019 was primarily related to the purchases of property, plant and equipment and capitalization of certain costs related to the research and development of software to be sold in our products. Financing activities. Net cash provided by financing activities during the nine months endedSeptember 30, 2020 was$40.8 million , compared to net cash provided by financing activities of$18.9 million for the same period in 2019. Net cash provided by financing activities during the nine months endedSeptember 30, 2020 was primarily related to net proceeds received from the Offering, Private Exchange Transactions, the issuance of Series E Preferred Stock, the exercise of warrants to purchase common stock and stock option exercises and purchases through our employee stock purchase plan, partially offset by the repurchase of Series E preferred stock, principal payments under finance lease obligations and taxes paid on vested restricted stock units, payoff of the Term Loan of$48.8 million and payment of$32 million in cash for the Private Exchange Transactions. Net cash provided by financing activities for the same period in 2019 was primarily related to proceeds received from the issuance of Series E preferred stock, the exercise of warrants to purchase common stock and stock option exercises and purchases through our employee stock purchase plan, partially offset by principal payments under finance lease obligations and taxes paid on vested restricted stock units, and debt repayments related to our previous acquisition ofDigicore Holdings Limited . Other Liquidity Needs Based on the above, the Company's management believes that its current cash and cash equivalents, together with anticipated cash flows from operations, will be sufficient to meet its working capital needs over the next twelve months without additional sources of cash. 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. 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 36
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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.
The global outbreak of COVID-19 was declared a pandemic by the
Off-Balance Sheet Arrangements We do not engage in any off-balance sheet arrangements.
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