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 on, or to refinance our indebtedness, including our 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; •increases in costs, disruption of supply or the shortage of semiconductors or other key components of our products; •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; •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 ("IIoT") markets; 25 -------------------------------------------------------------------------------- •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 be successful in divesting assets or businesses we wish to sell; •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, 2020 ("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", "Inseego Subscribe", "Inseego ManageTM ", theInseego logo, "DigiCore", "Novatel Wireless ", theNovatel Wireless logo, "MiFi", "MiFi Intelligent Mobile Hotspot", "Ctrack", the Ctrack logo, "Inseego North America ", 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 -------------------------------------------------------------------------------- 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, 2020 , 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 ("IIoT") and cloud solutions for Fortune 500 enterprises, service providers, small and medium-sized businesses, governments, and consumers around the globe. 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, IIoT 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 IIoT 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. OnFebruary 24, 2021 , we entered into a Share Purchase Agreement (the "Purchase Agreement") with an affiliate ofConvergence Partners ("Convergence"), an investment management firm inSouth Africa , to sell our Ctrack business operations inAfrica ,Pakistan and theMiddle East (together, "Ctrack South Africa"), in an all-cash transaction for528.9 million South African Rand ("ZAR") (approximately$36.6 million United States Dollars ("USD")) based on an exchange rate onJune 30, 2021 of14.32 ZAR to1 USD ). The Purchase Agreement provides for an adjustment to the purchase price based on a normalized level of net working capital. The consummation of the sale was subject to a number of customary conditions precedent. Additionally, the consummation of the sale was subject to Convergence closing an investment fund. OnJuly 30, 2021 , we completed the sale of Ctrack South Africa. Initial cash proceeds of approximately$36600000.0 million were received. Final cash proceeds net of transaction cost are subject to foreign exchange rates as well as certain post-closing working capital adjustments that will be provided by Convergence and agreed upon by us no later than 35 business days after completion of the sale. The estimated gain upon sale is approximately$4.4 million , calculated based on the foreign exchange rate as ofJuly 30, 2021 . The actual gain may differ from this estimate, by up to$1 million to$2 million , as a result of post-closing working capital adjustments and related foreign exchange fluctuations. Our Sources of Revenue We provide intelligent wireless 4G and 5G hardware products for the worldwide mobile communications and IIoT 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 IIoT applications, Gb 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/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, T-Mobile 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 IIoT, integrated telematics and mobile tracking hardware devices through our direct sales force, value-added resellers and through distributors. The customer base for our IIoT products is comprised of transportation companies, industrial enterprises, manufacturers, application service providers, system integrators and distributors in various 27 -------------------------------------------------------------------------------- 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 IIoT 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, rebranded asInseego 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. We reclassified ourInseego 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. Since the sale of our Ctrack South Africa operations was completed onJuly 30, 2021 , certain portions of our SaaS revenue will no longer be generated, butInseego will continue to provide telematics solutions in the rest of the world, including inNorth America ,Europe andAustralia . 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; •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 of semiconductors and other key components to build our devices; •product pricing; •the impact of the COVID-19 pandemic on our business; and •the sale of our Ctrack South Africa operations; •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 worldwide, 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 endedJune 30, 2021 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 28 -------------------------------------------------------------------------------- learning due to the COVID-19 pandemic. Recently, our IoT & Mobile Solutions have experienced lower sales of LTE gigabit hotspots as COVID-19 pandemic demand have eased. The macroeconomic environment remains uncertain and the demand for our products in the prior year may not be sustainable for the long term. We will 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 technicians who design and test our highly complex products and the procurement of testing and certification services. Sales and marketing expenses consist primarily of our sales force and product-marketing professionals. In order to maintain strong sales relationships, we provide co-marketing, trade show support and product training. We are also engaged in a wide variety of 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. 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. 29 -------------------------------------------------------------------------------- Results of Operations Three Months EndedJune 30, 2021 Compared to Three Months EndedJune 30, 2020 Net revenues. Net revenues for the three months endedJune 30, 2021 were$65.7 million , compared to$80.7 million for the same period in 2020. The following table summarizes net revenues by our two product categories (in thousands): Three Months Ended June 30, Change Product Category 2021 2020 $ % IoT & Mobile Solutions$ 51,836 $ 69,314 $ (17,478) (25.2) % Enterprise SaaS Solutions 13,857 11,375 2,482 21.8 % Total$ 65,693 $ 80,689 $ (14,996) (18.6) % IoT & Mobile Solutions. The decrease in IoT & Mobile Solutions net revenues is primarily due to decreases in our enterprise and carrier offerings within IoT & Mobile Solutions, and lower sales of LTE gigabit hotspots as COVID-19 pandemic demand eased, partially offset by increased sales of our second-generation 5G hotspot related to our MiFi business and increased revenues in ourInseego Subscribe business due to subscriber growth. Enterprise SaaS Solutions. Enterprise SaaS Solutions net revenues increased year-over-year as we experienced COVID-19 related installation restrictions in fiscal 2020 and such imposed restrictions were lifted in fiscal 2021. The effect of the weakeningU.S. Dollar to SouthAfrica Rand foreign exchange rates on international sales also contributed to the increase in net revenues. Cost of net revenues. Cost of net revenues for the three months endedJune 30, 2021 was$45.3 million , or 69.0% of net revenues, compared to$58.7 million , or 72.7% of net revenues, for the same period in 2020. The following table summarizes cost of net revenues by our two product categories (in thousands): Three Months Ended June 30, Change Product Category 2021 2020 $ % IoT & Mobile Solutions$ 39,740 $ 54,240 $ (14,500) (26.7) % Enterprise SaaS Solutions 5,604 4,449 1,155 26.0 % Total$ 45,344 $ 58,689 $ (13,345) (22.7) % IoT & Mobile Solutions. The decrease in IoT & Mobile Solutions cost of net revenues is primarily a result of lower sales of LTE gigabit hotspots. Enterprise SaaS Solutions. Enterprise SaaS Solutions cost of net revenues increased by 26.0% compared to the same period in 2020 primarily due to increased sales, and the weakeningU.S. Dollar to SouthAfrica Rand foreign exchange rates on international costs. Gross profit. Gross profit for the three months endedJune 30, 2021 was$20.3 million , or a gross margin of 31.0%, compared to$22.0 million , or a gross margin of 27.3%, for the same period in 2020. The increase in gross margin was primarily attributable to the more favorable mix of our product offerings, as well as favorable margins on our Inseego Subscribe revenue. Research and development expenses. Research and development expenses for the three months endedJune 30, 2021 were$11.8 million , or 17.9% of net revenues, compared to$10.5 million , or 13.1% of net revenues, for the same period in 2020. The increase was primarily a result of staffing, test units, and other development spending related to our 5G product programs, partially offset by the timing and amount of bonus grants to eligible employees during the first quarter of fiscal 2021, compared to bonus grants awarded to employees during the second quarter of fiscal 2020. See Note 6. Share-based Compensation in the accompanying unaudited condensed consolidated financial statements for further information. Sales and marketing expenses. Sales and marketing expenses for the three months endedJune 30, 2021 were$9.8 million , or 14.9% of net revenues, compared to$8.6 million , or 10.7% of net revenues, for the same period in 2020. The increase was primarily a result of higher spend on marketing 5G products, partially offset by the timing and amount of bonus grants to eligible employees during the first quarter of fiscal 2021, compared to bonus grants awarded to employees during the 30 -------------------------------------------------------------------------------- second quarter of fiscal 2020. See Note 6. Share-based Compensation in the accompanying unaudited condensed consolidated financial statements for further information. General and administrative expenses. General and administrative expenses for the three months endedJune 30, 2021 were$7.4 million , or 11.3% of net revenues, compared to$7.4 million , or 9.2% of net revenues, for the same period in 2020. The increase was primarily a result of higher legal expenses, partially offset by the timing and amount of bonus grants to eligible employees during the first quarter of 2021, compared to bonus grants awarded to employees during the second quarter of fiscal 2020. See Note 6. Share-based Compensation in the accompanying unaudited condensed consolidated financial statements for further information. Amortization of purchased intangible assets. Amortization of purchased intangible assets for each of the three months endedJune 30, 2021 and 2020 was$0.7 million and$0.8 million , respectively. The decrease was primarily as a result of certain purchased intangible assets being fully amortized as of the fourth quarter of 2020. Impairment of capitalized software. During the three months endedJune 30, 2021 , we recorded a loss of$1.2 million on capitalized software development costs. There was no such expense for the same period in 2020. Loss on debt conversion and extinguishment, net. The loss on debt conversion and extinguishment, net of$67.2 million during the three months endedJune 30, 2020 was primarily related to the extinguishment of the 2022 Notes, while there was no such expense for the same period in fiscal 2021. Interest expense, net. Interest expense, net, for the three months endedJune 30, 2021 and 2020 was$1.7 million and$3.2 million , respectively. The decrease in interest expense was primarily due to the lower interest rate on the 2025 Notes, as compared to the 2022 Notes and our previous term loan, partially offset by the higher principal amount of 2025 Notes. Other income (expense), net. Other expense, net, for the three months endedJune 30, 2021 was$0.6 million , which primarily includes the fair value adjustment related to our interest make-whole arrangement, as well as transaction costs incurred related to the sale of Ctrack South Africa. For the same period in 2020, other income, net, was$0.8 million , which primarily includes the fair value adjustment related to our interest make-whole arrangement. Income tax provision (benefit). The income tax provision of$0.2 million for the three months endedJune 30, 2021 and the income tax benefit of$0.1 million for the same period in 2020, respectively, primarily relate to provision in fiscal 2021 or benefits in fiscal 2020 from certain of our entities in foreign jurisdictions. 31 -------------------------------------------------------------------------------- Net loss (income) attributable to noncontrolling interests. Net income attributable to noncontrolling interests for the three months endedJune 30, 2021 was nil, compared to a net loss attributable to noncontrolling interests of$6,000 for the same period in 2020. Series E preferred stock dividends. During the three months endedJune 30, 2021 and 2020, we recorded dividends of$0.9 million and$0.8 million , respectively, on our Fixed-Rate Cumulative Perpetual Preferred Stock, Series E, par value$0.001 per share (the "Series E Preferred Stock"). The increase was primarily attributable to the additional shares of Series E Preferred Stock issued inMarch 2020 . See Note 8. Private Placements and Public Offering in the accompanying unaudited condensed consolidated financial statements for further information. Six Months EndedJune 30, 2021 Compared to Six Months EndedJune 30, 2020 Net revenues. Net revenues for the six months endedJune 30, 2021 were$123.3 million , compared to$137.5 million for the same period in 2020. The following table summarizes net revenues by our two product categories (in thousands): Six Months Ended June 30, Change Product Category 2021 2020 $ % IoT & Mobile Solutions 94,795$ 111,729 $ (16,934) (15.2) % Enterprise SaaS Solutions 28,495 25,800 2,695 10.4 % Total$ 123,290 $ 137,529 $ (14,239) (10.4) % IoT & Mobile Solutions. The decrease in IoT & Mobile Solutions net revenues is primarily due to decreases in our enterprise and carrier offerings within IoT & Mobile Solutions, and lower sales of LTE gigabit hotspots as COVID-19 pandemic demand eased, partially offset by increased sales of our second-generation 5G hotspot related to our MiFi business and increased revenues in ourInseego Subscribe business due to subscriber growth. Enterprise SaaS Solutions. Enterprise SaaS Solutions net revenues increased year-over-year as we experienced COVID-19 related installation restrictions in fiscal 2020 and such imposed restrictions were lifted in fiscal 2021. The effect of the weakeningU.S. Dollar to SouthAfrica Rand foreign exchange rates on international sales also contributed to the increase in net revenues. Cost of net revenues. Cost of net revenues for the six months endedJune 30, 2021 was$84.5 million or 68.5% of net revenues, compared to$98.3 million or 71.5% of net revenues, for the six months endedJune 30, 2020 . The following table summarizes cost of net revenues by our two product categories (in thousands): Six Months Ended June 30, Change Product Category 2021 2020 $ % IoT & Mobile Solutions 73,178 88,279 (15,101) (17.1) % Enterprise SaaS Solutions 11,288 10,023 1,265 12.6 % Total$ 84,466 $ 98,302 $ (13,836) (14.1) %
IoT & Mobile Solutions. The decrease in IoT & Mobile Solutions cost of net revenues is primarily a result of the decreased sales in our LTE gigabit hotspots.
Enterprise SaaS Solutions. Enterprise SaaS Solutions cost of net revenues increased by 12.6% compared to the same period in 2020 primarily due to increased sales, and the weakeningU.S. Dollar to SouthAfrica Rand foreign exchange rates on international costs. Gross profit. Gross profit for the six months endedJune 30, 2021 was$38.8 million , or a gross margin of 31.5%, compared to$39.2 million , or a gross margin of 28.5%, for the same period in 2020. The increase in gross margin was primarily attributable to the favorable mix of our product offerings, as well as favorable margins on our Inseego Subscribe revenue. Research and development expenses. Research and development expenses for the six months endedJune 30, 2021 were$26.3 million , or 21.4% of net revenues, compared to$18.8 million , or 13.6% of net revenues, for the same period in 2020. The increase was primarily a result of staffing, test units, other development spending related to 5G product programs, and the amount of bonus grants to eligible employees during the six months endedJune 30, 2021 compared to the amount of bonus 32 -------------------------------------------------------------------------------- grants awarded to eligible employees during the six months endedJune 30, 2020 . See Note 6. Share-based Compensation in the accompanying unaudited condensed consolidated financial statements for further information. Sales and marketing expenses. Sales and marketing expenses for the six months endedJune 30, 2021 were$20.8 million , or 16.9% of net revenues, compared to$17.4 million , or 12.7% of net revenues, for the same period in 2020. The increase was primarily a result of higher spend on marketing 5G products, and the amount of bonus grants to eligible employees during the six months endedJune 30, 2021 compared to the amount of bonus grants awarded to eligible employees during the six months endedJune 30, 2020 . See Note 6. Share-based Compensation in the accompanying unaudited condensed consolidated financial statements for further information. General and administrative expenses. General and administrative expenses for the six months endedJune 30, 2021 were$16.1 million , or 13.0% of net revenues, compared to$14.6 million , or 10.6% of net revenues, for the same period in 2020. The increase was primarily a result of the amount of bonus grants to eligible employees during the six months endedJune 30, 2021 compared to the amount of bonus grants awarded to eligible employees during the six months endedJune 30, 2020 . See Note 6. Share-based Compensation in the accompanying unaudited condensed consolidated financial statements for further information. Amortization of purchased intangible assets. Amortization of purchased intangible assets for each of the six months endedJune 30, 2021 and 2020 was$1.1 million and$1.6 million , respectively. The decrease was primarily as a result of certain purchased intangible assets being fully amortized as of the fourth quarter of 2020. Impairment of capitalized software. During the six months endedJune 30, 2021 , we recorded a loss of$1.2 million on capitalized software development costs. There was no such expense for the same period in 2020. Loss on debt conversion and extinguishment. The loss on debt conversion and extinguishment, net for each of the six months endedJune 30, 2021 and 2020 was$0.4 million and$75.2 million , respectively, and primarily represents the loss on debt conversion of the 2025 Notes and debt conversion and extinguishment of the 2022 Notes, respectively. Interest expense, net. Interest expense, net for each of the six months endedJune 30, 2021 and 2020 was$3.5 million and$6.5 million , respectively. The decrease in interest expense was primarily due to the lower interest rate on the 2025 Notes, as compared to the 2022 Notes and our previous term loan, partially offset by the higher principal amount of the 2025 Notes. Other income (expense), net. Other income, net, for each of the six months endedJune 30, 2021 and 2020 was$1.1 million and$1.8 million , respectively, which primarily includes the fair value adjustment related to our interest make-whole arrangement as well as foreign currency transaction gains and losses. Income tax provision (benefit). The income tax provision of$0.4 million for the six months endedJune 30, 2021 and the income tax benefit of$24,000 for the six months endedJune 30, 2020 , respectively, primarily relate to provision in fiscal 2021 or benefits in fiscal 2020 from certain of our entities in foreign jurisdictions. Net loss (income) attributable to noncontrolling interests. Net income attributable to noncontrolling interests for the six months endedJune 30, 2021 was$0.2 million , compared to a net income attributable to noncontrolling interests of$26,000 for the same period in 2020. Series E preferred stock dividends. During the six months endedJune 30, 2021 , and 2020 we recorded dividends of$1.8 million and$1.2 million , respectively, on our Series E Preferred Stock. The increase was primarily attributable to the additional shares of Series E Preferred Stock issued inMarch 2020 . See Note 8. Private Placements and Public Offering in the accompanying unaudited condensed consolidated financial statements for further information. Liquidity and Capital Resources As ofJune 30, 2021 , the Company had available cash and cash equivalents totaling$36.7 million , including$5.8 million cash and cash equivalents classified as held-for-sale, and working capital of$32.4 million , excluding assets and liabilities classified as held-for-sale. OnMarch 6, 2020 , we issued and sold 25,000 shares of Series E Preferred Stock for an aggregate purchase price of$25.0 million . In the first quarter of 2020,$59.9 million of our 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, we restructured our 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 into 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$32.0 million in cash and$80.4 million in principal amount of the 2025 Notes (the "Private Exchange 33 -------------------------------------------------------------------------------- Transactions"). We also used a portion of the proceeds from the Offering to repay in full our previous term loan. In the third quarter of 2020, we redeemed the remaining$2,000 principal amount of the 2022 Notes. As ofJune 30, 2021 , our outstanding debt primarily consisted of$161.9 million in principal amount of 2025 Notes. OnJanuary 25, 2021 , we entered into an Equity Distribution Agreement withCanaccord Genuity LLC (the "Agent"), pursuant to which we may offer and sell, from time to time, through or to the Agent, up to$40.0 million of shares of our common stock (the "ATM Offering"). InJanuary 2021 , we sold 1,516,073 shares of common stock, at an average price of$20.11 per share, for net proceeds of$29.4 million , after deducting underwriter fees and discounts of$0.9 million , and other offering fees, pursuant to the ATM Offering. OnJuly 30, 2021 , the Company completed the sale of Ctrack South Africa. Initial cash proceeds of approximately$36600000.0 million were received. Final cash proceeds net of transaction cost will be subject to foreign exchange rates as well as certain post-closing working capital adjustments that will be provided by Convergence and agreed upon by the Company no later than 35 business days after completion of the sale. We have a history of operating and net losses and overall usage of cash from operating and investing activities. Our management believes that our cash and cash equivalents, together with anticipated cash flows from operations, will be sufficient to meet our cash flow needs for the next twelve months from the filing date of this report. Our 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 our evolving cost structure. If events or circumstances occur such that we do not meet its operating plan as expected, or if we become obligated to pay unforeseen expenditures as a result of ongoing litigation, we may be required to raise capital, reduce planned research and development activities, incur additional restructuring charges or reduce other operating expenses which could have an adverse impact on our ability to achieve our intended business objectives. Our liquidity could be impaired if there is any interruption in our business operations, a material failure to satisfy our contractual commitments or a failure to generate revenue from new or existing products. There can be no assurance that any required or desired restructuring or financing will be available on terms favorable to us, or at all. Additionally, we are uncertain of the full extent to which the COVID-19 pandemic will impact our business, operations and financial results. Contractual Obligations and Commitments
There were no material changes in our contractual obligations in the second quarter of 2021.
Convertible Notes 2025 Notes
On
OnMay 12, 2020 , we also entered into separate privately-negotiated Exchange Agreements certain holders of the 2022 Notes. Pursuant to the Exchange Agreements, each of these noteholders agreed to exchange the 2022 Notes that they held (representing an aggregate of$45.0 million principal amount of 2022 Notes with an estimated fair value of approximately$112.4 million as of the date of exchange) for an aggregate of$32.0 million in cash and$80.4 million principal amount of 2025 Notes in concurrent Private Exchange Transactions. The 2025 Notes issued in the Private Exchange Transactions are part of the same series as the 2025 Notes issued in the Offering. We issued the 2025 Notes under an indenture, datedMay 12, 2020 (the "Base Indenture"), between the Company andWilmington Trust, National Association , as trustee (the "Trustee"), as supplemented by the first supplemental indenture, datedMay 12, 2020 (the "Supplemental Indenture" and, together with the Base Indenture, the "Indenture"), between us and the Trustee. The 2025 Notes will mature onMay 1, 2025 , unless earlier repurchased, redeemed or converted. The 2025 Notes are senior unsecured obligations of the Company and bear interest at an annual rate of 3.25%, payable semi-annually in arrears onMay 1 andNovember 1 of each year, beginning onNovember 1, 2020 . 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$1,000 principal amount of 2025 Notes converted a number of shares of common stock (together with cash in lieu of any fractional share), equal to the conversion rate. The initial conversion rate for the 2025 Notes is 79.2896 shares of common stock per$1,000 principal amount of 2025 Notes, which represents an initial conversion price of approximately$12.61 per share, and is subject to adjustment upon the occurrence of certain events, including, but not limited to, certain stock dividends, splits and combinations, the issuance of 34 --------------------------------------------------------------------------------
certain rights, options or warrants to holders of the common stock, certain distributions of assets, debt securities, capital stock or other property to holders of the common stock, cash dividends on the common stock and certain Company tender or exchange offers.
Holders of the 2025 Notes who convert their 2025 Notes may also be entitled to receive, under certain circumstances, an interest make-whole payment payable in, at the Company's election, either cash or shares of the Common Stock (together with cash in lieu of any fractional share). 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 afterMay 6, 2023 and on or before the scheduled trading day before the maturity date, at a cash redemption price equal to the principal amount of the 2025 Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, as long as the last reported sale price per share of the common stock exceeds 130% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date we send the related redemption notice; and (ii) the trading day immediately before the date we send such notice. 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 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. Historical Cash Flows The following table summarizes our unaudited condensed consolidated statements of cash flows for the periods indicated (in thousands): Six Months Ended June 30, 2021 2020 Net cash (used in) provided by operating activities$ (12,030) $ 4,662 Net cash used in investing activities (17,434) (13,233) Net cash provided by financing activities 29,511 41,144 Effect of exchange rates on cash 321 (2,547) Net increase in cash, cash equivalents and restricted cash 368 30,026 Cash, cash equivalents and restricted cash, beginning of period 40,015 12,074 Cash, cash equivalents, and restricted cash, end of period1 $
40,383
1Cash, cash equivalents and restricted cash balance includes cash, cash equivalents and restricted cash classified as held for sale as ofJune 30, 2021 . Operating activities. Net cash used in operating activities was$12.0 million for the six months endedJune 30, 2021 , compared to net cash provided by operating activities of$4.7 million for the same period in 2020. Net cash used in operating activities for the six months endedJune 30, 2021 was primarily attributable to net loss incurred during the period, net cash used by working capital, and fair value adjustment on derivative instrument, partially offset by depreciation and amortization, share-based compensation expense, and the amortization of debt discount and debt issuance costs. Net cash provided by operating activities for the six months endedJune 30, 2020 was primarily attributable to net cash provided by working capital, non-cash charges for the debt conversion and extinguishment of the 2022 Notes, depreciation and amortization, including the 35 -------------------------------------------------------------------------------- amortization of debt discount and debt issuance costs, and share-based compensation expense, partially offset by the net loss in the period. Investing activities. Net cash used in investing activities during the six months endedJune 30, 2021 was$17.4 million , compared to net cash used in investing activities of$13.2 million for the same period in 2020. Cash used in investing activities during the six months endedJune 30, 2021 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 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. Financing activities. Net cash provided by financing activities during the six months endedJune 30, 2021 was$29.5 million , compared to net cash provided by financing activities of$41.1 million for the same period in 2020. Net cash provided by financing activities during the six months endedJune 30, 2021 was primarily related to net proceeds received from the ATM Offering, proceeds from stock option exercises and purchases through our employee stock purchase plan, partially offset by the principal payments under finance lease obligations and taxes paid on vested restricted stock units. Net cash provided by financing activities for the same period in 2020 was primarily related to proceeds received from the registered Offering of 2025 Notes, the sale of Series E Preferred Stock, the exercise of warrants to purchase common stock, and stock option exercises, partially offset by payoff of the Term Loan and related expenses, cash paid to investors in the Private Exchange Transactions, payment of debt issuance costs, repurchase of Series E Preferred Stock, principal payments under finance lease obligations, and taxes paid on vested restricted stock units. Off-Balance Sheet Arrangements We do not engage in any off-balance sheet arrangements. Item 3. Quantitative and Qualitative Disclosures About Market Risk. The Company is exposed to market risk in the ordinary course of our business. Our revenue, earnings, cash flows, receivables, and payables are subject to fluctuations due to changes in foreign currency exchange rates. The ongoing COVID-19 pandemic has increased the volatility of global financial markets, which may increase our foreign currency exchange risk. Foreign Currency Exchange Risk The Company's results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. A majority of the Company's revenue is denominated inU.S. dollars, and therefore, our revenue is not directly subject to foreign currency risk. However, as we have operations in foreign countries, includingSouth Africa andEurope , a strongerU.S. dollar could make our products and services more expensive in foreign countries and therefore reduce demand. A weakerU.S. dollar could have the opposite effect. Such economic exposure to currency fluctuations is difficult to measure or predict because our sales are also influenced by many other factors. For the six months endedJune 30, 2021 , sales denominated in foreign currencies were approximately 23.6% of total revenue. The Company's expenses are generally denominated in the currencies in which our operations are located, which is primarily in theU.S. and to a lesser extent inSouth Africa andEurope . The Company's results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. These foreign functional currencies consist of the South African Rand, pound sterling, Euro, and Australian Dollar (collectively, the "Foreign Functional Currencies"). For the six months endedJune 30, 2021 , a hypothetical 10% change in foreign functional currency exchange rates would have increased or decreased our revenue by approximately$2.8 million . Actual gains and losses in the future may differ materially from the hypothetical gains and losses discussed above based on changes in the timing and amount of foreign currency exchange rate movements. Additionally, with the completion of Ctrack South Africa operations divestiture, our foreign exchange risk is expected to decrease. Net foreign currency translation losses of$0.7 million were recorded for the six months endedJune 30, 2021 . Item 4. Controls and Procedures. Evaluation of Disclosure Controls and ProceduresThe Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Exchange Act, that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in theSEC's rules and forms, and that such information is accumulated and communicated to the Company's 36 -------------------------------------------------------------------------------- management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. As required by Rule 13a-15(b) promulgated under the Exchange Act, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as ofJune 30, 2021 , the end of the period covered by this report. Based on the foregoing, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as ofJune 30, 2021 . Changes in Internal Control Over Financial Reporting There were no changes in the Company's internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, during the three months endedJune 30, 2021 , that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 37
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