Item 1.
Financial Statements
NOVATEL WIRELESS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
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September 30,
2016
|
|
December 31,
2015
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
17,165
|
|
|
$
|
12,570
|
|
|
Accounts receivable, net of allowance for doubtful accounts of $812 at September 30, 2016 and $601 at December 31, 2015
|
27,497
|
|
|
35,263
|
|
|
Short-term investments
|
—
|
|
|
1,267
|
|
|
Inventories
|
39,970
|
|
|
55,837
|
|
|
Prepaid expenses and other
|
12,390
|
|
|
6,039
|
|
|
Total current assets
|
97,022
|
|
|
110,976
|
|
|
Property, plant and equipment, net of accumulated depreciation of $65,154 at September 30, 2016 and $62,832 at December 31, 2015
|
7,820
|
|
|
8,812
|
|
|
Rental assets, net of accumulated depreciation of $2,057 at September 30, 2016 and $1,034 at December 31, 2015
|
6,582
|
|
|
6,155
|
|
|
Intangible assets, net of accumulated amortization of $22,802 at September 30, 2016 and $17,380 at December 31, 2015
|
41,007
|
|
|
43,089
|
|
|
Goodwill
|
33,117
|
|
|
29,520
|
|
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Other assets
|
36
|
|
|
201
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|
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Total assets
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$
|
185,584
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|
|
$
|
198,753
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|
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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|
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|
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Current liabilities:
|
|
|
|
|
Accounts payable
|
$
|
32,397
|
|
|
$
|
35,286
|
|
|
Accrued expenses and other current liabilities
|
37,091
|
|
|
25,613
|
|
|
DigiCore bank facilities
|
2,702
|
|
|
3,313
|
|
|
Total current liabilities
|
72,190
|
|
|
64,212
|
|
|
Long-term liabilities:
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|
|
|
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Convertible senior notes, net
|
88,796
|
|
|
82,461
|
|
|
Revolving credit facility
|
—
|
|
|
—
|
|
|
Deferred tax liabilities, net
|
3,453
|
|
|
3,475
|
|
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Other long-term liabilities
|
13,386
|
|
|
18,142
|
|
|
Total liabilities
|
177,825
|
|
|
168,290
|
|
|
Commitments and Contingencies
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
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Preferred stock, par value $0.001; 2,000,000 shares authorized and none outstanding
|
—
|
|
|
—
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|
|
Common stock, par value $0.001; 150,000,000 shares authorized at September 30, 2016 and December 31, 2015, respectively, 53,929,603 and 53,165,024 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
|
54
|
|
|
53
|
|
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Additional paid-in capital
|
506,141
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|
|
502,337
|
|
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Accumulated other comprehensive loss
|
(1,868
|
)
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|
(8,507
|
)
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|
Accumulated deficit
|
(496,623
|
)
|
|
(463,451
|
)
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|
Total stockholders’ equity attributable to Novatel Wireless, Inc.
|
7,704
|
|
|
30,432
|
|
|
Noncontrolling interests
|
55
|
|
|
31
|
|
|
Total stockholders’ equity
|
7,759
|
|
|
30,463
|
|
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Total liabilities and stockholders’ equity
|
$
|
185,584
|
|
|
$
|
198,753
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
NOVATEL WIRELESS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
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Three Months Ended
September 30,
|
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Nine Months Ended
September 30,
|
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2016
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2015
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|
2016
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|
2015
|
|
Net revenues:
|
|
|
|
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|
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Hardware
|
$
|
46,096
|
|
|
$
|
52,049
|
|
|
$
|
149,402
|
|
|
$
|
154,332
|
|
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SaaS, software and services
|
14,785
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|
|
2,219
|
|
|
41,234
|
|
|
5,097
|
|
|
Total net revenues
|
60,881
|
|
|
54,268
|
|
|
190,636
|
|
|
159,429
|
|
|
Cost of net revenues:
|
|
|
|
|
|
|
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Hardware
|
32,768
|
|
|
39,155
|
|
|
109,395
|
|
|
115,753
|
|
|
SaaS, software and services
|
5,189
|
|
|
645
|
|
|
13,896
|
|
|
1,251
|
|
|
Total cost of net revenues
|
37,957
|
|
|
39,800
|
|
|
123,291
|
|
|
117,004
|
|
|
Gross profit
|
22,924
|
|
|
14,468
|
|
|
67,345
|
|
|
42,425
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
7,942
|
|
|
7,687
|
|
|
24,248
|
|
|
28,135
|
|
|
Sales and marketing
|
7,953
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|
|
3,948
|
|
|
24,062
|
|
|
12,403
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|
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General and administrative
|
14,551
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|
|
9,110
|
|
|
34,744
|
|
|
23,462
|
|
|
Amortization of purchased intangible assets
|
1,008
|
|
|
273
|
|
|
2,912
|
|
|
1,096
|
|
|
Impairment of purchased intangible assets
|
2,594
|
|
|
—
|
|
|
2,594
|
|
|
—
|
|
|
Restructuring charges, net of recoveries
|
794
|
|
|
953
|
|
|
1,685
|
|
|
789
|
|
|
Total operating costs and expenses
|
34,842
|
|
|
21,971
|
|
|
90,245
|
|
|
65,885
|
|
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Operating loss
|
(11,918
|
)
|
|
(7,503
|
)
|
|
(22,900
|
)
|
|
(23,460
|
)
|
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Other income (expense):
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|
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|
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Non-cash change in acquisition-related escrow
|
—
|
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|
(10,533
|
)
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—
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(10,317
|
)
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Interest expense, net
|
(3,877
|
)
|
|
(2,407
|
)
|
|
(11,712
|
)
|
|
(3,319
|
)
|
|
Other income (expense), net
|
(3,560
|
)
|
|
(359
|
)
|
|
986
|
|
|
(658
|
)
|
|
Loss before income taxes
|
(19,355
|
)
|
|
(20,802
|
)
|
|
(33,626
|
)
|
|
(37,754
|
)
|
|
Income tax provision (benefit)
|
(799
|
)
|
|
45
|
|
|
(478
|
)
|
|
139
|
|
|
Net loss
|
(18,556
|
)
|
|
(20,847
|
)
|
|
(33,148
|
)
|
|
(37,893
|
)
|
|
Less: Net income attributable to noncontrolling interests
|
(11
|
)
|
|
—
|
|
|
(24
|
)
|
|
—
|
|
|
Net loss attributable to Novatel Wireless, Inc.
|
$
|
(18,567
|
)
|
|
$
|
(20,847
|
)
|
|
$
|
(33,172
|
)
|
|
$
|
(37,893
|
)
|
|
Per share data:
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Net loss per share:
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Basic and diluted
|
$
|
(0.34
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(0.73
|
)
|
|
Weighted-average shares used in computation of net loss per share:
|
|
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|
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|
|
|
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Basic and diluted
|
53,876,795
|
|
|
55,180,537
|
|
|
53,584,410
|
|
|
51,647,970
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
NOVATEL WIRELESS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
|
|
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|
|
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Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Net loss
|
$
|
(18,556
|
)
|
|
$
|
(20,847
|
)
|
|
$
|
(33,148
|
)
|
|
$
|
(37,893
|
)
|
|
Foreign currency translation adjustment
|
4,044
|
|
|
—
|
|
|
6,639
|
|
|
—
|
|
|
Total comprehensive loss
|
$
|
(14,512
|
)
|
|
$
|
(20,847
|
)
|
|
$
|
(26,509
|
)
|
|
$
|
(37,893
|
)
|
See accompanying notes to unaudited condensed consolidated financial statements.
NOVATEL WIRELESS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
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Nine Months Ended
September 30,
|
|
|
2016
|
|
2015
|
|
Cash flows from operating activities:
|
|
|
|
|
Net loss
|
$
|
(33,148
|
)
|
|
$
|
(37,893
|
)
|
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
Depreciation and amortization
|
10,836
|
|
|
4,484
|
|
|
Amortization of acquisition-related inventory step-up
|
1,829
|
|
|
765
|
|
|
Provision for bad debts, net of recoveries
|
96
|
|
|
62
|
|
|
Provision for excess and obsolete inventory
|
2,580
|
|
|
810
|
|
|
Share-based compensation expense
|
3,437
|
|
|
3,227
|
|
|
Amortization of debt discount and debt issuance costs
|
6,335
|
|
|
2,581
|
|
|
Gain on divestiture and sale of other assets, net of loss on disposal of assets
|
(4,290
|
)
|
|
—
|
|
|
Loss on impairment of purchased intangible assets
|
2,594
|
|
|
—
|
|
|
Non-cash change in acquisition-related escrow
|
—
|
|
|
10,317
|
|
|
Deferred income taxes
|
(735
|
)
|
|
—
|
|
|
Non-cash earn-out compensation expense
|
2,109
|
|
|
—
|
|
|
Unrealized foreign currency transaction loss, net
|
3,038
|
|
|
—
|
|
|
Other
|
183
|
|
|
—
|
|
|
Changes in assets and liabilities, net of effects from acquisitions and divestitures:
|
|
|
|
|
Accounts receivable
|
9,881
|
|
|
(6,664
|
)
|
|
Inventories
|
3,757
|
|
|
6,039
|
|
|
Prepaid expenses and other assets
|
(6,186
|
)
|
|
(574
|
)
|
|
Accounts payable
|
(7,077
|
)
|
|
(13,868
|
)
|
|
Accrued expenses, income taxes, and other
|
4,812
|
|
|
4,417
|
|
|
Net cash provided by (used in) operating activities
|
51
|
|
|
(26,297
|
)
|
|
Cash flows from investing activities:
|
|
|
|
|
Acquisition-related escrow
|
—
|
|
|
(88,274
|
)
|
|
Acquisitions, net of cash acquired
|
(3,750
|
)
|
|
(9,063
|
)
|
|
Purchases of property, plant and equipment
|
(875
|
)
|
|
(996
|
)
|
|
Proceeds from the sale of property, plant and equipment
|
392
|
|
|
—
|
|
|
Proceeds from the sale of divested assets
|
11,300
|
|
|
—
|
|
|
Proceeds from the sale of short-term investments
|
1,210
|
|
|
—
|
|
|
Purchases of intangible assets and additions to capitalized software costs
|
(2,092
|
)
|
|
(224
|
)
|
|
Net cash provided by (used in) investing activities
|
6,185
|
|
|
(98,557
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
Gross proceeds from the issuance of convertible senior notes
|
—
|
|
|
120,000
|
|
|
Payment of issuance costs related to convertible senior notes
|
—
|
|
|
(3,540
|
)
|
|
Proceeds from the exercise of warrant to purchase common stock
|
—
|
|
|
8,644
|
|
|
Net repayments of DigiCore bank facilities
|
(965
|
)
|
|
—
|
|
|
Net repayments of revolving credit facility
|
—
|
|
|
(5,158
|
)
|
|
Payoff of acquisition-related assumed liabilities
|
—
|
|
|
(2,633
|
)
|
|
Principal payments under capital lease obligations
|
(722
|
)
|
|
—
|
|
|
Principal payments on mortgage bond
|
(175
|
)
|
|
—
|
|
|
Proceeds from stock option exercises and employee stock purchase plan, net of taxes paid on vested restricted stock units
|
368
|
|
|
257
|
|
|
Net cash provided by (used in) financing activities
|
(1,494
|
)
|
|
117,570
|
|
|
Effect of exchange rates on cash and cash equivalents
|
(147
|
)
|
|
(350
|
)
|
|
Net increase (decrease) in cash and cash equivalents
|
4,595
|
|
|
(7,634
|
)
|
|
Cash and cash equivalents, beginning of period
|
12,570
|
|
|
17,853
|
|
|
Cash and cash equivalents, end of period
|
$
|
17,165
|
|
|
$
|
10,219
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
Interest
|
$
|
3,712
|
|
|
$
|
110
|
|
|
Income taxes
|
$
|
92
|
|
|
$
|
123
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
NOVATEL WIRELESS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1
. Basis of Presentation
The information contained herein has been prepared by Novatel Wireless, Inc. (the “Company”) in accordance with the rules of the Securities and Exchange Commission. The information at
September 30, 2016
and the results of the Company’s operations for the three and
nine
months ended
September 30, 2016
and
2015
are unaudited. The condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring accruals, which are, in the opinion of management, necessary for a fair statement of the results of the interim periods presented. These condensed consolidated financial statements and notes hereto should be read in conjunction with the audited financial statements from which they were derived and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2015
. Except as set forth below, the accounting policies used in preparing these unaudited condensed consolidated financial statements are the same as those described in the Company’s Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of results to be expected for any other interim period or for the year as a whole.
For the three months ended
September 30, 2016
and
2015
, the Company incurred a net loss of
$18.6 million
and
$20.8 million
, respectively. The Company’s ability to transition to attaining profitable operations is dependent upon achieving a level and mix of revenues adequate to support its evolving cost structure. If events or circumstances occur such that the Company does not meet its operating plan as expected, the Company may be required to reduce planned research and development activities, incur additional restructuring charges or reduce other operating expenses which could have an adverse impact on its ability to achieve its intended business objectives. These additional reductions in expenditures, if required, could have an adverse impact on the Company’s ability to achieve certain of its business objectives. The Company’s management believes that its cash and cash equivalents and availability under its senior secured revolving credit facility, together with anticipated cash flows from operations, will be sufficient to meet its working capital needs for the next twelve months and the foreseeable future.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Segment Information
Management has determined that the Company has
one
reportable segment. The Chief Executive Officer, who is also the Chief Operating Decision Maker, does not manage any part of the Company separately, and the allocation of resources and assessment of performance is based solely on the Company’s consolidated operations and operating results.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent liabilities. Actual results could differ materially from these estimates. Significant estimates include allowance for doubtful accounts receivable, provision for excess and obsolete inventory, valuation of intangible and long-lived assets, valuation of goodwill, valuation of debt obligations, royalty costs, accruals relating to litigation and restructuring, provision for warranty costs, income taxes and share-based compensation expense.
New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the “FASB”), which are adopted by the Company as of the specified date. Unless otherwise discussed, management believes the impact of recently issued standards, some of which are not yet effective, will not have a material impact on its unaudited condensed consolidated financial statements upon adoption.
In August 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact of this guidance.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
, which requires measurement and recognition of expected credit losses for financial assets held. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. The Company is currently assessing the impact of this guidance.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which affects entities that issue share-based payment awards to their employees. The guidance is designed to identify areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. This guidance is effective prospectively for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently assessing the impact of this guidance.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. This guidance results in the Company providing a more faithful representation of the rights and obligations arising from operating and capital leases by requiring lessees to recognize the lease assets and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases. This guidance is effective prospectively for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently assessing the impact of this guidance.
In September 2015, the FASB issued ASU 2015-16,
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments
, which eliminates the requirement for an acquirer to retrospectively adjust provisional amounts recorded in a business combination to reflect new information about the facts and circumstances that existed as of the acquisition date and that, if known, would have affected the measurement or recognition of amounts initially recognized. As an alternative, the update requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The update requires that the acquirer record, in the financial statements of the period in which adjustments to provisional amounts are determined, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The Company implemented this guidance during the first quarter of 2016. This guidance did not have a material impact on the Company’s unaudited condensed consolidated financial statements upon adoption.
In April 2015, the FASB issued ASU 2015-05,
Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
. Under this standard, if a cloud computing arrangement includes a software license, the software license element of the arrangement should be accounted for consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the arrangement should be accounted for as a service contract. The Company implemented this guidance during the first quarter of 2016. This guidance did not have a material impact on the Company’s unaudited condensed consolidated financial statements upon adoption.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”), which provides guidance for revenue recognition. The new standard will require revenue recognized to represent the transfer of promised goods or services to customers in an amount that reflects the consideration the company expects to receive in exchange for those goods or services. The standard also requires new, expanded disclosures regarding revenue recognition. In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers: Deferral of Effective Date
, which deferred the effective date of adoption of ASU 2014-09 to interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted but not before the original effective date of December 15, 2016. In April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
, which clarifies aspects of ASU 2014-09 pertaining to the identification of performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. There are two adoption methods available for implementation of this guidance. Under one method, the guidance is applied retrospectively to contracts for each reporting period presented, subject to allowable practical expedients. Under the other method, the guidance is applied only to the most current period presented, recognizing the cumulative effect of the change as an adjustment to the beginning balance of retained earnings, and also requires additional disclosures comparing the results to the previous guidance. The Company is currently evaluating the adoption methods and assessing the impact of this guidance.
2
. Acquisitions and Divestitures
Acquisitions
DigiCore Holdings Limited (DBA Ctrack)
On June 18, 2015, the Company entered into a transaction implementation agreement (the “TIA”) with DigiCore Holdings Limited (“DigiCore” or “Ctrack”). Pursuant to the terms of the TIA, the Company acquired
100%
of the issued and outstanding ordinary shares of DigiCore (with the exception of certain excluded shares, including treasury shares) for
4.40
South African Rand per ordinary share outstanding on October 5, 2015. Upon consummation of the acquisition, DigiCore became an indirect wholly-owned subsidiary of the Company.
Upon the closing of the transaction, holders of unvested in-the-money DigiCore stock options received stock options to purchase shares of the Company’s common stock as replacement awards.
In connection with the acquisition, the Company incurred
$1.7 million
in total transaction costs and expenses, all of which were recognized in 2015.
Purchase Price
The total purchase price was approximately
$80.0 million
and included a cash payment for all of the outstanding ordinary shares of DigiCore and the purchase of in-the-money vested stock options held by Ctrack employees on the closing date of the transaction and the portion of the fair value of replacement equity awards issued to Ctrack employees that related to services performed prior to the date the transaction closed.
Set forth below is supplemental purchase consideration information related to the Ctrack acquisition (in thousands):
|
|
|
|
|
|
|
|
|
Cash payments
|
|
$
|
79,365
|
|
|
Fair value of replacement equity awards issued to Ctrack employees for preacquisition services
|
|
623
|
|
|
Total purchase price
|
|
$
|
79,988
|
|
Allocation of Fair Value
The Company accounted for the transaction using the acquisition method and, accordingly, the consideration has been allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their respective estimated fair values on the acquisition date. Goodwill resulting from this acquisition is largely attributable to the experienced workforce of Ctrack and synergies expected to arise after the integration of Ctrack’s products and operations into those of the Company. Goodwill resulting from this acquisition is not deductible for tax purposes. Identifiable intangible assets acquired as part of the acquisition included definite-lived intangible assets for developed technologies, customer relationships and trade names, which are being amortized using the straight-line method over their estimated useful lives, as well as indefinite-lived intangible assets. Liabilities assumed from Ctrack included a mortgage bond and capital lease obligations.
The fair value has been allocated based on the estimated fair values of assets acquired and liabilities assumed as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 5, 2015
|
|
Cash
|
|
$
|
2,437
|
|
|
Accounts receivable
|
|
15,052
|
|
|
Inventory
|
|
11,361
|
|
|
Property, plant and equipment
|
|
5,924
|
|
|
Rental assets
|
|
6,603
|
|
|
Intangible assets
|
|
28,270
|
|
|
Goodwill
|
|
29,273
|
|
|
Other assets
|
|
5,695
|
|
|
Bank facilities
|
|
(2,124
|
)
|
|
Accounts payable
|
|
(7,446
|
)
|
|
Accrued and other liabilities
|
|
(15,018
|
)
|
|
Noncontrolling interests
|
|
(39
|
)
|
|
Net assets acquired
|
|
$
|
79,988
|
|
Valuation of Intangible Assets Acquired
The following table sets forth the components of definite-lived intangible assets acquired in connection with the Ctrack acquisition (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Assigned
|
|
Amortization Period
(in years)
|
|
Developed technologies
|
|
$
|
10,170
|
|
|
6.0
|
|
Trade name
|
|
14,030
|
|
|
10.0
|
|
Customer relationships
|
|
4,070
|
|
|
5.0
|
|
Total intangible assets acquired
|
|
$
|
28,270
|
|
|
|
R.E.R. Enterprises, Inc. (DBA Feeney Wireless)
On March 27, 2015, the Company entered into an asset purchase agreement (“APA”) with R.E.R. Enterprises, Inc. (“RER”) to acquire all of the issued and outstanding shares of RER and its wholly-owned subsidiary and principal operating asset, Feeney Wireless, LLC, an Oregon limited liability company (collectively, “FW”), which develops and sells solutions for the Internet of Things that integrate wireless communications into business processes. This strategic acquisition expanded the Company’s product and solutions offerings to include private labeled cellular routers, in-house designed and assembled cellular routers, high-end wireless surveillance systems, modems, computers and software, along with associated hardware, purchased from major industry suppliers. Additionally, FW’s services portfolio includes consulting, systems integration and device management services.
In connection with the acquisition, the Company incurred
$0.9 million
in total costs and expenses, all of which were recognized in 2015.
Purchase Price
The total consideration was approximately
$24.8 million
and included a cash payment at closing of approximately
$9.3 million
,
$1.5 million
of which was placed into an escrow fund to serve as partial security for the indemnification obligations of RER and its former shareholders, the Company’s assumption of
$0.5 million
in certain transaction-related expenses incurred by FW, and the future issuance of shares of the Company’s common stock valued at
$15.0 million
, which would have been payable in March 2016.
The total consideration of
$24.8 million
did not include amounts, if any, payable under an earn-out arrangement pursuant to which the Company may have been required to pay up to an additional
$25.0 million
to the former shareholders of RER contingent upon FW’s achievement of certain financial targets for the years ending December 31, 2015, 2016, and 2017 (the “Earn-Out Arrangement”). Such payments, if any, under the Earn-Out Arrangement would have been payable in either cash or
shares of the Company’s common stock at the discretion of the Company, and would have been recorded as compensation expense during the service period earned.
Set forth below is supplemental purchase consideration information related to the FW acquisition (in thousands):
|
|
|
|
|
|
|
|
|
Cash payments
|
|
$
|
9,268
|
|
|
Future issuance of common stock
|
|
15,000
|
|
|
Other assumed liabilities
|
|
509
|
|
|
Total purchase price
|
|
$
|
24,777
|
|
On January 5, 2016, the Company and RER amended certain payment terms of the APA. Under the amended agreement, the
$1.5 million
placed into escrow on the date of acquisition was released to RER and its former shareholders on January 8, 2016, and the
$15.0 million
that was payable in shares of the Company’s common stock in March 2016 will now be paid in
five
cash installments over a
four
-year period, beginning in March 2016. In addition, the Earn-Out Arrangement has been amended as follows: (a) any amount earned under the Earn-Out Arrangement for the achievement of financial targets for the year ended December 31, 2015 will now be paid in
five
cash installments over a
four
-year period, beginning in March 2016 and (b) in replacement of the potential earn-out contingent upon FW’s achievement of certain financial targets for the years ended December 31, 2016 and 2017 the Company will issue to the former shareholders of RER approximately
2.9 million
shares of the Company’s common stock in
three
equal installments over a
three
-year period, beginning in March 2017, contingent upon the retention of certain key personnel.
The Company recognized approximately
$1.3 million
and
$2.1 million
in expense during the three and
nine
months ended
September 30, 2016
, respectively, in connection with the potential payment, in the form of shares of the Company’s common stock to the former shareholders of RER, which is contingent upon FW’s retention of certain key personnel. As of
September 30, 2016
, the total amount earned pursuant to the Earn-Out Arrangement was
$8.2 million
,
$6.7 million
of which remained outstanding as of
September 30, 2016
and is included in accrued expenses and other current liabilities and in other long-term liabilities in the unaudited condensed consolidated balance sheets.
Allocation of Fair Value
The Company accounted for the transaction using the acquisition method and, accordingly, the consideration has been allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their respective estimated fair values on the acquisition date as set forth below. Goodwill resulting from this acquisition is largely attributable to the experienced workforce of FW and synergies expected to arise after the integration of FW’s products and operations into those of the Company. Goodwill resulting from this acquisition is deductible for tax purposes. Identifiable intangible assets acquired as part of the acquisition included definite-lived intangible assets for developed technologies, customer relationships, and trademarks, which are being amortized using the straight-line method over their estimated useful lives, as well as indefinite-lived intangible assets, including in-process research and development. Liabilities assumed from FW included a term loan and capital lease obligations. The term loan and certain capital lease obligations were paid in full by the Company immediately following the closing of the acquisition on
March 27, 2015
.
The fair value has been allocated based on the estimated fair values of assets acquired and liabilities assumed as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 27, 2015
|
|
Cash
|
|
$
|
205
|
|
|
Accounts receivable
|
|
3,331
|
|
|
Inventory
|
|
10,008
|
|
|
Property, plant and equipment
|
|
535
|
|
|
Intangible assets
|
|
18,880
|
|
|
Goodwill
|
|
3,949
|
|
|
Other assets
|
|
544
|
|
|
Accounts payable
|
|
(7,494
|
)
|
|
Accrued and other liabilities
|
|
(1,916
|
)
|
|
Deferred revenues
|
|
(270
|
)
|
|
Note payable
|
|
(2,575
|
)
|
|
Capital lease obligations
|
|
(420
|
)
|
|
Net assets acquired
|
|
$
|
24,777
|
|
Valuation of Intangible Assets Acquired
The following table sets forth the components of intangible assets acquired in connection with the FW acquisition (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Assigned
|
|
Amortization Period
(in years)
|
|
Definite-lived intangible assets:
|
|
|
|
|
|
Developed technologies
|
|
$
|
3,660
|
|
|
6.0
|
|
Trademarks
|
|
4,700
|
|
|
10.0
|
|
Customer relationships
|
|
8,500
|
|
|
10.0
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
In-process research and development
|
|
2,020
|
|
|
|
|
Total intangible assets acquired
|
|
$
|
18,880
|
|
|
|
During the three months ended September 30, 2016, the Company recorded an impairment loss related to the developed technologies acquired in connection with the FW acquisition (see Note
4
).
Pro Forma Summary
The unaudited consolidated pro forma results for the three and
nine
months ended
September 30, 2016
and
2015
are set forth in the table below (in thousands). These pro forma consolidated results combine the results of operations of the Company, Ctrack and FW as though Ctrack and FW had been acquired as of January 1, 2015 and include amortization charges for the acquired intangibles for both acquisitions and interest expense related to the Company’s borrowings to finance the Ctrack acquisition. The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Net revenues
|
$
|
60,881
|
|
|
$
|
70,390
|
|
|
$
|
190,636
|
|
|
$
|
214,172
|
|
|
Net loss
|
$
|
(18,556
|
)
|
|
$
|
(14,824
|
)
|
|
$
|
(33,148
|
)
|
|
$
|
(35,142
|
)
|
Divestitures
Hardware Modules and Related Assets
On April 11, 2016, the Company signed a definitive asset purchase agreement with Telit Technologies (Cyprus) Limited and Telit Wireless Solutions, Inc. (collectively, “Telit”) pursuant to which the Company sold, and Telit acquired, certain hardware modules and related assets for an initial purchase price of
$11.0 million
in cash, which included
$9.0 million
that was paid to the Company on the closing date of the transaction,
$1.0 million
that would be paid to the Company in equal quarterly installments over a
two
-year period in connection with the provision by the Company of certain transition services and
$1.0 million
that would be paid to the Company following the satisfaction of certain conditions by the Company, including the assignment of specified contracts and the delivery of certain certifications and approvals. The Company also had the potential to receive an additional cash payment of approximately
$3.8 million
from Telit related to their purchase of module product inventory from the Company,
$1.0 million
of which would be paid to the Company in equal quarterly installments over the
two
-year period following the closing date in connection with the provision by the Company of certain transition services. In addition to the above, the Company may have been entitled to receive a subsequent earn-out payment following the closing of the transaction if certain conditions were met.
On September 29, 2016, the Company entered into a Final Resolution Letter Agreement (the “Final Resolution”) with Telit. Per the Final Resolution, Telit agreed to pay the Company
$2.1 million
in full satisfaction of their payment obligations under certain sections of the original purchase agreement, including all installment payments, and the Company agreed to ship the remainder of the hardware modules and related assets as soon as practicable. Under the Final Resolution, the aggregate purchase consideration totaled
$11.7 million
, which consisted of
$11.3 million
in cash and
$0.4 million
in net settled Company liabilities.
During the nine months ended
September 30, 2016
, the Company recognized a gain of approximately
$4.5 million
in connection with the fulfillment of certain obligations pursuant to the asset purchase agreement, as amended, which is included in other income (expense), net, in the unaudited condensed consolidated statements of operations. During the three months ended
September 30, 2016
, the Company recognized a decrease of approximately
$2.4 million
in the
$6.9 million
gain that it had recognized during the six months ended June 30, 2016, as a result of the Final Resolution, which is included in other income (expense), net, in the unaudited condensed consolidated statements of operations. As of
September 30, 2016
, the Company recorded a liability of
$1.5 million
for the fair value of the remaining hardware and related assets due to Telit, which is included in accrued expenses and other current liabilities in the unaudited condensed consolidated balance sheets.
Mobile Broadband Business
On September 21, 2016, the Company, Vanilla Technologies, Inc., a Delaware corporation and direct wholly owned subsidiary of the Company (“Newco”), T.C.L. Industries Holdings (H.K.) Limited, a Hong Kong limited liability company (“TCL”), and Jade Ocean Global Limited, a British Virgin Islands business company (the “Purchaser” and, together with TCL, the “Purchasers”), entered into a Stock Purchase Agreement (the “Purchase Agreement”). Pursuant to the Purchase Agreement, the Purchaser will acquire the Company’s mobile broadband business, which includes its MiFi branded hotspots and USB modem product lines, and related liabilities (the “MiFi Business”) for cash consideration of
$50.0 million
, subject to potential adjustment based on the Company’s working capital as of the closing date (such acquisition of the MiFi Business being referred to herein as the “Sale”).
In connection with the proposed Sale, the Company intends to implement a reorganization (the “Reorganization”), which will result in Newco owning all of the capital stock of the Company. In connection with the Reorganization, (i) the Company will contribute to Newco all of its assets and liabilities (other than the MiFi Business), including its equity interests in DigiCore, FW, Novatel Wireless Solutions, Inc., Enfora Comercio de Eletronicos LTDA and each of their direct and indirect subsidiaries; and (ii) Vanilla Merger Sub, Inc., a newly formed Delaware corporation and direct, wholly owned subsidiary of Newco and an indirect, wholly owned subsidiary of the Company, will merge with and into the Company, with the Company surviving as a direct, wholly owned subsidiary of Newco (the “Merger”). As a result of and upon the effective time of the Merger, each share of the Company common stock issued and outstanding immediately prior to the effective time of the Merger will automatically convert into an equivalent corresponding share of Newco common stock, having the same designations, rights, powers and preferences and the qualifications, limitations and restrictions as the corresponding share of the Company common stock being converted. Accordingly, upon consummation of the Merger, the Company’s current stockholders will become stockholders of Newco. Effective November 9, 2016, Newco will be named Inseego Corp. and will trade on the NASDAQ Global Select Market under the ticker symbol “INSG.”
The Sale will be structured as a purchase by Purchaser of all of the issued and outstanding shares of common stock of the Company, which shares will be solely owned by Newco immediately prior to the consummation of the Sale as a result of the
Reorganization. The consummation of the Sale is subject to the completion of the Reorganization and is expected to occur in the first quarter of 2017.
In addition, the consummation of the Sale is subject to certain other conditions, including, but not limited to, (i) the approval of the Sale by the stockholders of Newco following the Reorganization, (ii) the Company no longer being a borrower under the Indenture, dated June 10, 2015, governing its
5.50%
Senior Convertible Notes due 2020 (the “Convertible Notes”), (iii) obtaining approval of the transaction from the Committee on Foreign Investment in the United States, (iv) subject to certain materiality exceptions, the accuracy of the representations and warranties of each of the parties to the Purchase Agreement, and (v) the compliance in all material respects by the parties with the covenants contained in the Purchase Agreement.
3
. Balance Sheet Details
Inventories
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31,
2015
|
|
Finished goods
|
$
|
30,095
|
|
|
$
|
47,094
|
|
|
Raw materials and components
|
9,875
|
|
|
8,743
|
|
|
Total inventories
|
$
|
39,970
|
|
|
$
|
55,837
|
|
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31,
2015
|
|
Royalties
|
$
|
4,125
|
|
|
$
|
2,740
|
|
|
Payroll and related expenses
|
6,705
|
|
|
4,406
|
|
|
Warranty obligations
|
516
|
|
|
932
|
|
|
Market development funds and price protection
|
2,544
|
|
|
2,805
|
|
|
Professional fees
|
2,152
|
|
|
1,060
|
|
|
Accrued interest
|
1,925
|
|
|
274
|
|
|
Deferred revenue
|
2,168
|
|
|
1,836
|
|
|
Restructuring
|
829
|
|
|
1,044
|
|
|
Acquisition-related liabilities
|
7,384
|
|
|
5,274
|
|
|
Divestiture-related liabilities
|
1,537
|
|
|
—
|
|
|
Other
|
7,206
|
|
|
5,242
|
|
|
Total accrued expenses and other current liabilities
|
$
|
37,091
|
|
|
$
|
25,613
|
|
Accrued Warranty Obligations
Accrued warranty obligations activity during the
nine
months ended
September 30, 2016
was as follows (in thousands):
|
|
|
|
|
|
|
|
Warranty liability at December 31, 2015
|
$
|
932
|
|
|
Additions charged to operations
|
351
|
|
|
Deductions from liability
|
(767
|
)
|
|
Warranty liability at September 30, 2016
|
$
|
516
|
|
4
. Intangible Assets
The balances in goodwill and intangible assets were primarily a result of the Company’s acquisitions of Ctrack, FW and Enfora, Inc. See Note 4,
Intangible Assets
, in the Company's 2015 Annual Report on Form 10-K for a discussion of the components of goodwill and additional information regarding intangible assets.
In September 2016, the Company completed all in-process research and development projects and reclassified them to developed technologies. These developed technologies will be amortized over a useful life of
six years
.
During the three and
nine
months ended
September 30, 2016
, the Company recorded an impairment loss primarily related to developed technologies acquired in connection with the FW acquisition of approximately
$2.6 million
.
5
. Fair Value Measurement of Assets and Liabilities
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). A fair value measurement reflects the assumptions market participants would use in pricing an asset or liability based on the best available information. These assumptions include the risk inherent in a particular valuation technique (such as a pricing model) and the risks inherent in the inputs to the model.
The Company classifies inputs to measure fair value using a three-level hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The categorization of financial instruments within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) and is defined as follows:
|
|
|
|
Level 1:
|
Pricing inputs are based on quoted market prices for identical assets or liabilities in active markets (e.g., NYSE or NASDAQ). Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
|
|
|
|
|
Level 2:
|
Pricing inputs include benchmark yields, trade data, reported trades and broker dealer quotes, two-sided markets and industry and economic events, yield to maturity, Municipal Securities Rule Making Board reported trades and vendor trading platform data. Level 2 includes those financial instruments that are valued using various pricing services and broker pricing information including Electronic Communication Networks and broker feeds.
|
|
|
|
|
Level 3:
|
Pricing inputs include significant inputs that are generally less observable from objective sources, including the Company’s own assumptions.
|
The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. There have been no transfers of assets or liabilities between fair value measurement classifications during the
nine
months ended
September 30, 2016
.
The following table summarizes the Company’s financial instruments measured at fair value on a recurring basis in accordance with the authoritative guidance for fair value measurements as of
September 30, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
September 30, 2016
|
|
Level 1
|
|
Assets:
|
|
|
|
|
|
Cash equivalents
|
|
|
|
|
|
Money market funds
|
|
$
|
35
|
|
|
$
|
35
|
|
|
Total cash equivalents
|
|
$
|
35
|
|
|
$
|
35
|
|
The following table summarizes the Company’s financial instruments measured at fair value on a recurring basis in accordance with the authoritative guidance for fair value measurements as of
December 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
December 31, 2015
|
|
Level 1
|
|
Assets:
|
|
|
|
|
|
Cash equivalents
|
|
|
|
|
|
Money market funds
|
|
$
|
35
|
|
|
$
|
35
|
|
|
Total cash equivalents
|
|
35
|
|
|
35
|
|
|
Short-term investments
|
|
1,267
|
|
|
1,267
|
|
|
Total assets at fair value
|
|
$
|
1,302
|
|
|
$
|
1,302
|
|
Other Financial Instruments
The Company’s financial assets and liabilities are carried at fair value or at amounts that, because of their short-term nature, approximate current fair value, with the exception of its
$120.0 million
in Convertible Notes (see Note
6
). The Company carries its Convertible Notes at amortized cost. The debt and equity components of the Convertible Notes were
measured using Level 3 inputs and are not measured on a recurring basis. The fair value of the liability component of the Convertible Notes, which approximated its carrying value on the valuation date due to the recent issuance of such Convertible Notes, was
$88.8 million
as of
September 30, 2016
.
6
. Debt
Revolving Credit Facility
On October 31, 2014, the Company entered into a
five
-year senior secured revolving credit facility in the amount of
$25.0 million
(the “Revolver”) with Wells Fargo Bank, National Association, as lender. Concurrently with the acquisition of FW, the Company amended the Revolver to include FW as a borrower and Loan Party, as defined by the agreement. On November 17, 2015, the Revolver was amended to increase the maximum borrowing capacity to
$48.0 million
.
The amount of borrowings that may be made under the Revolver is based on a borrowing base comprised of a specified percentage of eligible receivables. If, at any time during the term of the Revolver, the amount of borrowings outstanding under the Revolver exceeds the borrowing base then in effect, the Company is required to repay such borrowings in an amount sufficient to eliminate such excess. The Revolver includes
$3.0 million
available for letters of credit,
$0.7 million
of which was available for letters of credit at
September 30, 2016
.
The Company may borrow funds under the Revolver from time to time, with interest payable monthly at a base rate determined by using the daily three month LIBOR rate, plus an applicable margin of
3.00%
to
3.50%
depending on the Company’s liquidity as determined on the last day of each calendar month. The Revolver is secured by a first priority lien on substantially all of the assets of the Company and certain of its subsidiaries, subject to certain exceptions and permitted liens. The Revolver includes customary representations and warranties, as well as customary reporting and financial covenants.
There was
no
outstanding balance on the Revolver at
September 30, 2016
or
December 31, 2015
. As of
September 30, 2016
, the Company had available borrowings of approximately
$6.9 million
and was in compliance with all financial covenants contained in the credit agreement.
Convertible Senior Notes
On June 10, 2015, the Company issued
$120.0 million
aggregate principal amount of Convertible Notes. The Company incurred issuance costs of approximately
$3.9 million
. The Company used a portion of the proceeds from the offering to finance its acquisition of Ctrack, to pay fees and expenses related to the acquisition, and for general corporate purposes.
The Convertible Notes are governed by the terms of the Indenture, dated June 10, 2015, entered into between the Company, as issuer, and Wilmington Trust, National Association, as trustee. The Convertible Notes are senior unsecured obligations and bear interest at a rate of
5.50%
per year, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2015. The Convertible Notes will mature on June 15, 2020, unless earlier repurchased or converted. The Convertible Notes will be convertible into cash, shares of the Company’s common stock, or a combination thereof, at the election of the Company, at an initial conversion price of
$5.00
per share of the Company’s common stock.
The Convertible Notes consisted of the following at
September 30, 2016
(in thousands):
|
|
|
|
|
|
|
|
Liability component:
|
|
|
Principal
|
$
|
120,000
|
|
|
Less: unamortized debt discount and debt issuance costs
|
(31,204
|
)
|
|
Net carrying amount
|
$
|
88,796
|
|
|
Equity component
|
$
|
38,305
|
|
The Company determined the expected life of the debt was equal to the
five
-year term of the Convertible Notes. The effective interest rate on the liability component was
16.95%
for the
nine
months ended
September 30, 2016
. The following table sets forth total interest expense recognized related to the Convertible Notes during the three and
nine
months ended
September 30, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Contractual interest expense
|
$
|
1,650
|
|
|
$
|
1,649
|
|
|
$
|
4,950
|
|
|
$
|
2,016
|
|
|
Amortization of debt discount
|
1,980
|
|
|
1,980
|
|
|
5,940
|
|
|
2,420
|
|
|
Amortization of debt issuance costs
|
132
|
|
|
132
|
|
|
395
|
|
|
161
|
|
|
Total interest expense
|
$
|
3,762
|
|
|
$
|
3,761
|
|
|
$
|
11,285
|
|
|
$
|
4,597
|
|
7
. Share-based Compensation
The Company included the following amounts for share-based compensation awards in the unaudited condensed consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Cost of revenues
|
$
|
49
|
|
|
$
|
49
|
|
|
$
|
156
|
|
|
$
|
107
|
|
|
Research and development
|
201
|
|
|
196
|
|
|
662
|
|
|
598
|
|
|
Sales and marketing
|
170
|
|
|
135
|
|
|
593
|
|
|
318
|
|
|
General and administrative
|
695
|
|
|
874
|
|
|
2,026
|
|
|
2,204
|
|
|
Total
|
$
|
1,115
|
|
|
$
|
1,254
|
|
|
$
|
3,437
|
|
|
$
|
3,227
|
|
Stock Options
The following table summarizes the Company’s stock option activity:
|
|
|
|
|
|
|
Outstanding — December 31, 2014
|
3,064,880
|
|
|
Granted
|
6,656,737
|
|
|
Exercised
|
(273,005
|
)
|
|
Canceled
|
(3,363,776
|
)
|
|
Outstanding — December 31, 2015
|
6,084,836
|
|
|
Granted
|
1,051,550
|
|
|
Exercised
|
(35,196
|
)
|
|
Canceled
|
(542,237
|
)
|
|
Outstanding — September 30, 2016
|
6,558,953
|
|
|
Exercisable — September 30, 2016
|
1,603,054
|
|
At
September 30, 2016
, total unrecognized compensation expense related to stock options was
$4.6 million
, which is expected to be recognized over a weighted-average period of
2.80 years
.
Restricted Stock Units
The following table summarizes the Company’s restricted stock unit (“RSU”) activity:
|
|
|
|
|
|
|
Non-vested at December 31, 2014
|
1,628,179
|
|
|
Granted
|
1,042,659
|
|
|
Vested
|
(926,308
|
)
|
|
Forfeited
|
(784,327
|
)
|
|
Non-vested at December 31, 2015
|
960,203
|
|
|
Granted
|
2,914,000
|
|
|
Vested
|
(422,148
|
)
|
|
Forfeited
|
(244,471
|
)
|
|
Non-vested at September 30, 2016
|
3,207,584
|
|
At
September 30, 2016
, total unrecognized compensation expense related to RSUs was
$3.7 million
, which is expected to be recognized over a weighted-average period of
2.96 years
.
Employee Stock Purchase Plan
During the three months ended
September 30, 2016
and
2015
, the Company recognized
$0.1 million
and
$0.1 million
, respectively, of stock-based compensation expense related to the employee stock purchase plan (the “ESPP”). During the
nine
months ended
September 30, 2016
and
2015
, the Company recognized
$0.3 million
and
$0.3 million
, respectively, of stock-based compensation expense related to the ESPP.
8
. Geographic Information and Concentrations of Risk
Geographic Information
The following table details the Company’s concentration of net revenues by geographic region based on shipping destination:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
United States and Canada
|
72.4
|
%
|
|
96.4
|
%
|
|
74.6
|
%
|
|
96.2
|
%
|
|
Latin America
|
0.2
|
|
|
0.4
|
|
|
0.2
|
|
|
0.6
|
|
|
Europe, Middle East, Africa and other
|
25.2
|
|
|
2.9
|
|
|
23.5
|
|
|
3.0
|
|
|
Asia and Australia
|
2.2
|
|
|
0.3
|
|
|
1.7
|
|
|
0.2
|
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Concentrations of Risk
Historically, a significant portion of the Company’s net revenues comes from a small number of customers. For the three months ended
September 30, 2016
and
2015
, sales to the Company's largest customer accounted for
55.3%
and
64.2%
, respectively, of net revenues. For the
nine
months ended
September 30, 2016
and
2015
, sales to the Company’s largest customer accounted for
54.6%
and
56.0%
, respectively, of net revenues.
9
. Earnings Per Share
Basic earnings per share (“EPS”) excludes dilution and is computed by dividing net income (loss) attributable to Novatel Wireless, Inc. by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock using the treasury stock method. Potentially dilutive securities (consisting of warrants, stock options and RSUs calculated using the treasury stock method) are excluded from the diluted EPS computation in loss periods and when the applicable exercise price is greater than the market price on the period end date as their effect would be anti-dilutive.
The calculation of basic and diluted EPS was as follows (in thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Net loss attributable to Novatel Wireless, Inc.
|
$
|
(18,567
|
)
|
|
$
|
(20,847
|
)
|
|
$
|
(33,172
|
)
|
|
$
|
(37,893
|
)
|
|
Weighted-average common shares outstanding
|
53,876,795
|
|
|
55,180,537
|
|
|
53,584,410
|
|
|
51,647,970
|
|
|
Basic and diluted net loss per share
|
$
|
(0.34
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(0.73
|
)
|
For the three and
nine
months ended
September 30, 2016
, the computation of diluted EPS excluded
11,653,167
shares related to warrants, stock options and RSUs as their effect would have been anti-dilutive. For the three and
nine
months ended
September 30, 2015
, the computation of diluted EPS excluded
8,520,706
shares related to warrants, stock options and RSUs as their effect would have been anti-dilutive.
10
. Commitments and Contingencies
Operating Leases
On June 10, 2016, the Company entered into a lease agreement for approximately
41,400
square feet in San Diego, CA to serve as the Company’s new corporate headquarters. The lease will commence on December 15, 2016 and has a term of approximately
36 months
. The monthly rent expense for this lease agreement will be approximately
$0.1 million
.
Legal
The Company is, from time to time, party to various legal proceedings arising in the ordinary course of business. For example, the Company is currently named as a defendant or co-defendant in some patent infringement lawsuits in the U.S. and is indirectly participating in other U.S. patent infringement actions pursuant to its contractual indemnification obligations to certain customers. Based on an evaluation of these matters and discussions with the Company’s intellectual property litigation counsel, the Company currently believes that liabilities arising from or sums paid in settlement of these existing matters, if any, would not have a material adverse effect on its consolidated results of operations or financial condition.
On September 26, 2016, the Company settled a breach of contract claim alleging that the Company had failed to pay certain royalties on hardware products sold by its subsidiary, Enfora, Inc. Under the terms of the settlement agreement, the Company is required to pay an aggregate settlement amount of
$2.8 million
,
$2.5 million
of which remained outstanding as of
September 30, 2016
, is included in accrued expenses and other current liabilities and in other long-term liabilities in the unaudited condensed consolidated balance sheets, and is payable in
eight
equal quarterly installments. The contract underlying the claim has now been terminated.
Indemnification
In the normal course of business, the Company periodically enters into agreements that require the Company to indemnify and defend its customers for, among other things, claims alleging that the Company’s products infringe third-party patents or other intellectual property rights. The Company’s maximum exposure under these indemnification provisions cannot be estimated but the Company does not believe that there are any matters individually or collectively that would have a material adverse effect on its financial condition, results of operation or cash flows.
11
. Income Taxes
The Company’s effective income tax rate was
4.1%
and
(0.2)%
for the three months ended
September 30, 2016
and
2015
, respectively, and
1.4%
and
(0.4)%
for the
nine
months ended
September 30, 2016
and
2015
, respectively. The Company’s effective income tax rates are significantly lower than the statutory tax rate primarily due to an increase in the Company’s valuation allowance related to its U.S.-based deferred tax amounts, resulting from carryforward net operating losses generated during the three and
nine
months ended
September 30, 2016
and
2015
. Pursuant to Internal Revenue Code (“IRC”)
Sections 382 and 383, annual use of the Company’s net operating loss and research and development credit carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period.
12
. Restructuring
In September 2013, the Company commenced certain restructuring initiatives including the closure of the Company’s development site in Calgary, Canada, and the consolidation of certain supply chain management activities (the “2013 Initiatives”). The 2013 Initiatives are expected to cost a total of approximately
$6.6 million
and be completed when the facility leases expire in December 2016.
In August 2015, the Company approved a restructuring initiative to better position the Company to operate in current market conditions and more closely align operating expenses with revenues, which included employee severance costs and facility exit related costs. In the fourth quarter of 2015, the Company commenced certain initiatives relating to the reorganization of executive level management, which included, among other actions, the replacement of the former Chief Executive Officer (collectively, the “2015 Initiatives”). The Company continued these initiatives in 2016 with a reduction-in-force and the completion of the closure of its facility in Richardson, TX. The 2015 Initiatives are expected to cost a total of approximately
$4.8 million
and be completed when the Richardson, TX lease expires in June 2020.
In April 2016, the Company commenced certain restructuring initiatives to consolidate the operations of Ctrack with those of the Company, including the closure of the Company’s manufacturing operations in Durban, South Africa resulting in a reduction-in-force. In July 2016, the Company commenced certain restructuring initiatives intended to improve its strategic focus on its most profitable business lines while de-prioritizing certain hardware-only product lines to non-carrier customers, including a reduction-in-force (collectively with the Durban facility closure, the “2016 Initiatives”). The 2016 Initiatives are expected to cost a total of approximately
$0.9 million
and were completed in October 2016, subsequent to the balance sheet date.
The following table sets forth activity in the restructuring liability for the
nine
months ended
September 30, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
Costs Incurred
|
|
Payments
|
|
Non-cash
|
|
Translation Adjustment
|
|
Balance at September 30, 2016
|
|
|
Cumulative Costs Incurred to Date
|
|
2013 Initiatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Severance Costs
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
$
|
3,986
|
|
|
Facility Exit Related Costs
|
72
|
|
|
5
|
|
|
(58
|
)
|
|
—
|
|
|
—
|
|
|
19
|
|
|
|
2,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 Initiatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Severance Costs
|
1,330
|
|
|
538
|
|
|
(1,292
|
)
|
|
—
|
|
|
14
|
|
|
590
|
|
|
|
4,129
|
|
|
Facility Exit Related Costs
|
328
|
|
|
268
|
|
|
(274
|
)
|
|
159
|
|
|
—
|
|
|
481
|
|
|
|
649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Initiatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Severance Costs
|
—
|
|
|
874
|
|
|
(869
|
)
|
|
—
|
|
|
—
|
|
|
5
|
|
|
|
874
|
|
|
Total
|
$
|
1,730
|
|
|
$
|
1,685
|
|
|
$
|
(2,493
|
)
|
|
$
|
159
|
|
|
$
|
14
|
|
|
$
|
1,095
|
|
|
|
$
|
12,268
|
|
The balance of the restructuring liability at
September 30, 2016
consists of approximately
$0.8 million
in current liabilities and
$0.3 million
in long-term liabilities.
As used in this report on Form 10-Q, unless the context otherwise requires, the terms “we,” “us,” “our,” the “Company” and “Novatel Wireless” refer to Novatel Wireless, Inc., a Delaware corporation, and its wholly owned subsidiaries.
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 about Novatel Wireless 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 products relating to the Internet of Things (“IoT”), including telematics, vehicle tracking and fleet management products;
|
|
|
|
|
•
|
our ability to develop and timely introduce new products successfully;
|
|
|
|
|
•
|
our dependence on a small number of customers for a substantial portion of our revenues;
|
|
|
|
|
•
|
our ability to execute on our corporate development activities without distracting or disrupting our business operations;
|
|
|
|
|
•
|
our ability to integrate the operations of R.E.R. Enterprises, Inc. (“RER”) and its wholly-owned subsidiary and principal operating asset, Feeney Wireless, LLC (collectively, “FW”), DigiCore Holdings Limited (“DigiCore” or “Ctrack”), and any business, products, technologies or personnel that we may acquire in the future, including: (i) our ability to retain key personnel from the acquired company or business and (ii) our ability to realize the anticipated benefits of the acquisition;
|
|
|
|
|
•
|
our ability to successfully complete the proposed restructuring and the sale of our mobile broadband business;
|
|
|
|
|
•
|
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 procure components and manufacture our products;
|
|
|
|
|
•
|
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 components used in our products;
|
|
|
|
|
•
|
the continuing impact of uncertain global economic and/or industry-specific conditions on the demand for our products;
|
|
|
|
|
•
|
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;
|
|
|
|
|
•
|
demand for fleet and vehicle management software-as-a-service 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 products;
|
|
|
|
|
•
|
our continued ability to license necessary third-party technology for the development and sale of our products;
|
|
|
|
|
•
|
the introduction of new products that could contain errors or defects;
|
|
|
|
|
•
|
doing business abroad, including foreign currency risks;
|
|
|
|
|
•
|
our ability to make focused investments in research and development; and
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|
•
|
our ability to hire, retain and manage additional qualified personnel to maintain and expand our business.
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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 the Securities and Exchange Commission (“SEC”), including the information in “Item 1A. Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2015. 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
“Novatel Wireless”, the Novatel Wireless logo, “Inseego”, “MiFi”, “MiFi Intelligent Mobile Hotspot”, “MiFi OS”, “MiFi Powered”, “MiFi Home”, “MobiLink”, “Ovation”, “Expedite” and “MiFi Freedom. My Way.” are trademarks or registered trademarks of Novatel Wireless, Inc. “Enfora”, the Enfora logo, “Spider”, “Enabling Information Anywhere”, “Enabler” and “N4A” are trademarks or registered trademarks of Enfora, Inc. “FW”, “Crossroads” and the Feeney Wireless logo are trademarks or registered trademarks of Feeney Wireless, LLC. “DigiCore”, “Ctrack” and the Ctrack logo are trademarks or registered trademarks of DigiCore Holdings Limited. Other trademarks, trade names or service marks used in this report are the property of their respective owners.
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Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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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 audited consolidated financial statements and accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2015 contained in our Annual Report on Form 10-K for the year ended December 31, 2015.
Business Overview
We are a leader in the design and development of products and solutions that simplify IoT, delivering innovative hardware and cloud-based, software-as-a-service (“SaaS”) services to carriers, distributors, retailers, original equipment manufacturers and vertical markets worldwide. Our products and solutions provide anywhere, anytime communications and analytics for consumers and businesses of all sizes, with approximately
590,000
global subscribers, including
182,000
subscribers within the fleet management vertical of telematics.
We have invented and reinvented ways in which the world stays connected and accesses information. With multiple first-to-market innovations, a strong and growing portfolio of hardware and software innovations for IoT, we have been advancing technology and driving industry transformation for over 20 years. It is this proven expertise and commitment to quality and innovation that make us the preferred global partner of operators, distributors, system integrators, businesses and consumers.
Our Sources of Revenue
SaaS, Software and Services
Through our acquisitions of DigiCore in October 2015 and of FW in March 2015, our product portfolio was further expanded to include additional product offerings for fleet and vehicle telematics, stolen vehicle recovery, usage-based insurance, IoT integration services and solutions, and applications software and SaaS services. Our SaaS delivery platforms include Ctrack® platforms, which provide asset, fleet, vehicle, and SaaS telematics, and the FW Crossroads platform, which provides easy IoT device management and service enablement. We sell our SaaS, software and services solutions through our direct sales force and through distributors.
Ctrack specializes in the research, design, development, manufacturing, sales and support of technologically advanced solutions for the vehicle tracking, fleet management and insurance telematics verticals for an international client base. With more than 30 years of innovation, technical and implementation experience, Ctrack provides advanced machine-to-machine communication and telematics solutions that add value to its global base of customers with mobile assets. Ctrack’s operations span more than 50 countries on six continents with approximately 940 employees and
411,000
subscribers. Through successful global acquisitions and by identifying strong and capable distributors, Ctrack has been able to establish a strong presence in high-growth, low-penetration, developed markets such as the United Kingdom, the Netherlands and Australia, and emerging markets such as Asia, Africa and Latin America.
Ctrack’s end-to-end research, design, development, manufacture, sales and support of tailored solutions for its customers is serviced by a global network of staff and team members. Ctrack develops a range of asset management and monitoring systems using GPS satellite positioning, GSM cellular communication systems and other advanced communication and sensor technologies. The result is products and solutions ranging from basic track-and-trace with stolen vehicle response services for the consumer market to complete integrated enterprise-level solutions for large fleet owners under the Ctrack brand.
Our SaaS, software and services customer base includes fleet transportation companies, vehicle insurance companies, public and private telecommunications entities, commercial companies, and both state and federal government agencies.
Hardware
We provide intelligent wireless hardware products for the worldwide mobile communications market. Our hardware products address multiple vertical markets for our customers including fleet and commercial telematics, after-market telematics, remote monitoring and control, security and connected home and wireless surveillance systems. Our broad range of products principally includes intelligent mobile hotspots, wireless routers for IoT, 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 also configure and manage our hardware remotely. Our products currently operate on every major cellular wireless technology platform. Our mobile hotspots are actively used by millions of customers annually to provide subscribers with secure and convenient high-speed access to corporate, public and personal information through the Internet and enterprise networks. Our wireless routers and USB modems serve as gateways to the rapidly growing and underpenetrated IoT segment. Our telematics and mobile 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 platform that includes the N4A™ Communications and Management Software and N4A Device Manager.
We sell our intelligent mobile hotspots primarily to wireless operators either directly or through strategic relationships. Our mobile-hotspot customer base is comprised of wireless operators, including Verizon Wireless, Inc. (“Verizon Wireless”) and T-Mobile US, Inc. (“T-Mobile”), as well as distributors and various companies in other vertical markets.
We sell our wireless routers for IoT and integrated telematics and mobile tracking hardware devices through our direct sales force and through distributors. The customer base for our wireless routers for IoT and integrated telematics and mobile tracking hardware devices is comprised of transportation companies, industrial companies, manufacturers, application service providers, system integrators and distributors, and enterprises in various industries, including fleet and vehicle transportation, energy and industrial automation, security and safety, medical monitoring and government.
The hardware used in our solutions is produced by contract manufacturers. Their services include component procurement, assembly, testing, quality control and fulfillment. Our contract manufacturers include AsiaTelco Technologies Co., Inventec Appliances Corporation, Hon Hai Precision Industry Co., Ltd. and Production Logix CC. Under our manufacturing agreements, contract manufacturers provide us with services including component procurement, product manufacturing, final assembly, testing, quality control and fulfillment.
Our hardware products are managed through a structured life cycle process, from identifying initial customer requirements through development and commercial introduction to eventual phase-out. During product development, emphasis is placed on innovation, time-to-market, performance, meeting industry standards and customer product specifications, ease of integration, cost reduction, manufacturability, quality and reliability.
Merger, Acquisition and Divestiture Activities
Acquisitions
DigiCore Holdings Limited (DBA Ctrack)
On June 18, 2015, we entered into a transaction implementation agreement (the “TIA”) with DigiCore. Pursuant to the terms of the TIA, we acquired
100%
of the issued and outstanding ordinary shares of DigiCore for
4.40
South African Rand per ordinary share outstanding.
On October 5, 2015 (the “Closing Date”), the transaction was completed. The total purchase price was approximately
$80.0 million
and included (i) cash consideration of
$79.4 million
for all of the outstanding ordinary shares of DigiCore and the purchase of in-the-money vested stock options held by Ctrack employees on the closing date and (ii)
$0.6 million
for the portion of the fair value of replacement equity awards issued to Ctrack employees that related to services performed prior to the Closing Date. Upon consummation of the acquisition, DigiCore became an indirect wholly-owned subsidiary of the Company.
R.E.R. Enterprises, Inc. (DBA Feeney Wireless)
On March 27, 2015, the Company entered into an asset purchase agreement (“APA”) with FW to acquire all of the issued and outstanding shares of FW. The total consideration was approximately
$24.8 million
and included a cash payment at closing of approximately
$9.3 million
, including
$1.5 million
which was placed into an escrow fund to serve as partial security for the indemnification obligations of RER and its former shareholders, the Company’s assumption of
$0.5 million
in certain transaction-related expenses incurred by FW, and the future issuance of shares of our common stock valued at
$15.0 million
to RER's former shareholders, which would have been payable in March 2016.
The total consideration of $24.8 million paid by the Company for FW did not include amounts, if any, payable under an earn-out arrangement pursuant to which we may have been required to pay up to an additional $25.0 million to the former shareholders of RER contingent upon FW’s achievement of certain financial targets for the years ending December 31, 2015, 2016, and 2017 (the “Earn-Out Arrangement”).
On January 5, 2016, the Company and RER amended certain payment terms of the APA related to the Company’s acquisition of RER (the “RER Amendment”). Under the RER Amendment, the $1.5 million placed into escrow on the date of acquisition was released to RER and its former shareholders on January 8, 2016, and the $15.0 million that was payable in shares of our common stock in March 2016 will now be paid in five cash installments over a four-year period, beginning in March 2016. Under the RER Amendment, the Earn-Out Arrangement has been amended as follows: (a) any amount earned under the Earn-Out Arrangement for the achievement of financial targets for the year ended December 31, 2015 will now be paid in five cash installments over a four-year period, beginning in March 2016 and (b) in replacement of the potential earn-out contingent upon FW’s achievement of certain financial targets for the years ended December 31, 2016 and 2017, we will issue
to the former shareholders of RER approximately 2.9 million shares of our common stock in three equal installments over a three-year period, beginning in March 2017, contingent upon FW’s retention of certain key personnel. Consideration due to former shareholders of RER under the Earn-Out Arrangement is treated as compensation expense during the service period earned.
We recognized approximately
$1.3 million
and
$2.1 million
in expense during the three and
nine
months ended
September 30, 2016
, respectively, in connection with the potential payment, in the form of shares of our common stock, due to the former shareholders of RER, contingent upon FW’s retention of certain key personnel. As of
September 30, 2016
, the total amount earned pursuant to the Earn-Out Arrangement was
$8.2 million
,
$6.7 million
of which remained outstanding as of
September 30, 2016
and is included in accrued expenses and other current liabilities and in other long-term liabilities in the unaudited condensed consolidated balance sheets.
Divestitures
Hardware Modules and Related Assets
On April 11, 2016, we signed a definitive asset purchase agreement with Telit Technologies (Cyprus) Limited and Telit Wireless Solutions, Inc. (collectively, “Telit”) pursuant to which we sold, and Telit acquired, certain hardware modules and related assets for an initial purchase price of
$11.0 million
in cash, which included
$9.0 million
that was paid to us on the closing date of the transaction,
$1.0 million
that would be paid to us in equal quarterly installments over a two-year period in connection with the provision by us of certain transition services and
$1.0 million
that would be paid to us following the satisfaction of certain conditions by us, including the assignment of specified contracts and the delivery of certain certifications and approvals. We also had the potential to receive an additional cash payment of approximately
$3.8 million
from Telit related to their purchase of module product inventory from us,
$1.0 million
of which would be paid to us in equal quarterly installments over the two-year period following the closing date in connection with the provision by us of certain transition services. In addition to the above, we may have been entitled to receive a subsequent earn-out payment following the closing of the transaction if certain conditions are met.
On September 29, 2016, we entered into a Final Resolution Letter Agreement (the “Final Resolution”) with Telit. Per the Final Resolution, Telit agreed to pay us
$2.1 million
in full satisfaction of their payment obligations under certain sections of the original purchase agreement, including all installment payments, and we agreed to ship the remainder of the hardware modules and related assets as soon as practicable. Under the Final Resolution, the aggregate purchase consideration totaled
$11.7 million
, which consisted of
$11.3 million
in cash and
$0.4 million
in net settled Company liabilities.
During the nine months ended
September 30, 2016
, we recognized a gain of approximately
$4.5 million
in connection with the fulfillment of certain obligations pursuant to the asset purchase agreement, as amended, which is included in other income (expense), net, in the unaudited condensed consolidated statements of operations. During the three months ended
September 30, 2016
, the Company recognized a decrease of approximately
$2.4 million
in the $6.9 million gain that it had recognized during the six months ended June 30, 2016, as a result of the Final Resolution, which is included in other income (expense), net, in the unaudited condensed consolidated statements of operations. As of
September 30, 2016
, we recorded a liability of
$1.5 million
for the fair value of the remaining hardware and related assets due to Telit, which is included in accrued expenses and other current liabilities in the unaudited condensed consolidated balance sheets.
Mobile Broadband Business
On September 21, 2016, we entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Vanilla Technologies, Inc., a Delaware corporation and direct wholly owned subsidiary of the Company (“Newco”), T.C.L. Industries Holdings (H.K.) Limited, a Hong Kong limited liability company (“TCL”), and Jade Ocean Global Limited, a British Virgin Islands business company (the “Purchaser” and, together with TCL, the “Purchasers”). Pursuant to the Purchase Agreement, the Purchaser will acquire our mobile broadband business, which includes our MiFi branded hotspots and USB modem product lines, and related liabilities (the “MiFi Business”) for cash consideration of $50.0 million, subject to potential adjustment based on our working capital as of the closing date (such acquisition of the MiFi Business being referred to herein as the “Sale”).
In connection with the proposed Sale, we intend to implement a reorganization (the “Reorganization”), which will result in Newco owning all of the capital stock of the Company. In connection with the Reorganization, (i) the Company will contribute to Newco all of its assets and liabilities (other than the MiFi Business), including its equity interests in DigiCore, FW, Novatel Wireless Solutions, Inc., Enfora Comercio de Eletronicos LTDA and each of their direct and indirect subsidiaries; and (ii) Vanilla Merger Sub, Inc., a newly formed Delaware corporation and direct, wholly owned subsidiary of Newco and an indirect, wholly owned subsidiary of the Company, will merge with and into the Company, with the Company surviving as a direct, wholly owned subsidiary of Newco (the “Merger”). As a result of and upon the effective time of the Merger, each share of the Company common stock issued and outstanding immediately prior to the effective time of the Merger will automatically
convert into an equivalent corresponding share of Newco common stock, having the same designations, rights, powers and preferences and the qualifications, limitations and restrictions as the corresponding share of the Company common stock being converted. Accordingly, upon consummation of the Merger, the Company’s current stockholders will become stockholders of Newco. Effective November 9, 2016, Newco will be named Inseego Corp. and will trade on the NASDAQ Global Select Market under the ticker symbol “INSG.”
The Sale will be structured as a purchase by Purchaser of all of the issued and outstanding shares of common stock of the Company, which shares will be solely owned by Newco immediately prior to the consummation of the Sale as a result of the Reorganization. The consummation of the Sale is subject to the completion of the Reorganization and is expected to occur in the first quarter of 2017.
In addition, the consummation of the Sale is subject to certain other conditions, including, but not limited to, (i) the approval of the Sale by the stockholders of Newco following the Reorganization, (ii) the Company no longer being a borrower under the Indenture, dated June 10, 2015, governing its 5.50% Senior Convertible Notes due 2020 (the “Convertible Notes”), (iii) obtaining approval of the transaction from the Committee on Foreign Investment in the United States (“CFIUS”), (iv) subject to certain materiality exceptions, the accuracy of the representations and warranties of each of the parties to the Purchase Agreement, and (v) the compliance in all material respects by the parties with the covenants contained in the Purchase Agreement.
Factors Which May Influence Future Results of Operations
Net Revenues.
We believe that our future net revenues will be influenced largely by the speed and breadth of the demand for wireless access to data through the use of next generation networks, including demand for 3G and 4G products, 3G and 4G data access services, demand for fleet and vehicle management SaaS telematics solutions, customer acceptance of our new products that address these markets and our ability to meet customer demand. Factors that could potentially affect customer demand for our products include the following:
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•
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economic environment and related market conditions;
|
|
|
|
|
•
|
increased competition from other wireless data device suppliers and fleet and vehicle telematics solutions, as well as suppliers of emerging devices that contain a wireless data access feature;
|
|
|
|
|
•
|
demand for broadband access services and networks;
|
|
|
|
|
•
|
rate of change to new products;
|
|
|
|
|
•
|
decreased demand for 3G and 4G products;
|
|
|
|
|
•
|
changes in technologies.
|
Our revenues are also significantly dependent upon the availability of materials and components used in our products.
We anticipate introducing additional products during the next twelve months, including 4G broadband-access products, SaaS telematics solutions and additional service offerings. We continue to develop and maintain strategic relationships with wireless and computing industry leaders like QUALCOMM Incorporated, Verizon Wireless, T-Mobile and major software vendors. 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.
Our future net revenues will also be affected by the consummation of the Sale, which is expected to occur in the first quarter of 2017.
Cost of Net Revenues.
All costs associated with our contract manufacturers, as well as distribution, fulfillment and repair services, are included in our cost of net revenues. Cost of net revenues also includes costs of delivering SaaS services, warranty costs, amortization of intangible assets, royalties, operations overhead, costs associated with our cancellation of purchase orders, costs related to outside services and costs related to inventory adjustments, including the FW and Ctrack acquisition-related amortization of the fair value of inventory, as well as any write downs for excess and obsolete inventory. 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. We expect to continue to incur these expenses in future periods prior to recognizing net revenues from sales of these products.
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, product training and demo units for merchandising. We are also engaged in a wide variety of 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.
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 part of our business strategy, we review, and intend to continue to review, acquisition opportunities that we believe would be advantageous or complementary to the development of our business, such as the acquisitions of FW and Ctrack. Given our current cash position and recent losses, any additional acquisitions we make would likely involve issuing stock and/or borrowing additional funds 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 2015 Annual Report on 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 2015 Annual Report on 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 the U.S.
Results of Operations
Three Months Ended
September 30, 2016
Compared to Three Months Ended
September 30, 2015
Net revenues
. Net revenues for the three months ended
September 30, 2016
were
$60.9 million
,
an increase
of
$6.6 million
, or
12.2%
, compared to the same period in
2015
.
The following table summarizes net revenues by our two product categories (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Change
|
|
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
Product Category
|
|
|
|
|
|
|
|
|
|
Hardware
|
|
$
|
46,096
|
|
|
$
|
52,049
|
|
|
$
|
(5,953
|
)
|
|
(11.4
|
)%
|
|
SaaS, Software and Services
|
|
14,785
|
|
|
2,219
|
|
|
12,566
|
|
|
566.3
|
%
|
|
Total
|
|
$
|
60,881
|
|
|
$
|
54,268
|
|
|
$
|
6,613
|
|
|
12.2
|
%
|
Hardware
.
The
decrease
in hardware net revenues is primarily a result of the divestiture of certain hardware modules to Telit and the ongoing focus on our most profitable products, partially offset by the acquisition of Ctrack with its hardware net revenues.
SaaS, software and services
.
The
increase
in SaaS, software and services net revenues is primarily a result of our acquisition of Ctrack with its subscription-based solutions.
Cost of net revenues.
Cost of net revenues for the three months ended
September 30, 2016
was
$38.0 million
, or
62.3%
of net revenues, as compared to
$39.8 million
, or
73.3%
of net revenues, for the same period in
2015
.
The following table summarizes cost of net revenues by our two product categories (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Change
|
|
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
Product Category
|
|
|
|
|
|
|
|
|
|
Hardware
|
|
$
|
32,768
|
|
|
$
|
39,155
|
|
|
$
|
(6,387
|
)
|
|
(16.3
|
)%
|
|
SaaS, software and services
|
|
5,189
|
|
|
645
|
|
|
4,544
|
|
|
704.5
|
%
|
|
Total
|
|
$
|
37,957
|
|
|
$
|
39,800
|
|
|
$
|
(1,843
|
)
|
|
(4.6
|
)%
|
Hardware
.
The
decrease
in hardware cost of net revenues is primarily a result of the divestiture of certain hardware modules to Telit and the ongoing focus on our most profitable products, partially offset by the acquisition of Ctrack with its hardware net revenues.
SaaS, software and services
.
The
increase
in SaaS, software and services cost of net revenues is primarily a result of our acquisition of Ctrack with its cost of SaaS, software and services net revenues.
Gross profit.
Gross profit for the three months ended
September 30, 2016
was
$22.9 million
, or a gross margin of
37.7%
, compared to
$14.5 million
, or a gross margin of
26.7%
for the same period in
2015
. The
increase
in gross profit was primarily attributable to the changes in net revenues and cost of net revenues discussed above, as the Company sought to transition its revenue mix toward the more highly profitable SaaS, software and services business.
Research and development expenses.
Research and development expenses for the three months ended
September 30, 2016
were
$7.9 million
, or
13.0%
of net revenues, compared to
$7.7 million
, or
14.2%
of net revenues, for the same period in
2015
. The
increase
in research and development expenses was primarily a result of the acquisition of Ctrack, which was almost entirely offset by our cost containment initiatives.
Sales and marketing expenses.
Sales and marketing expenses for the three months ended
September 30, 2016
were
$8.0 million
, or
13.1%
of net revenues, compared to
$3.9 million
, or
7.3%
of net revenues, for the same period in
2015
. The
increase
was primarily a result of the acquisition of Ctrack, partially offset by our cost containment initiatives.
General and administrative expenses.
General and administrative expenses for the three months ended
September 30, 2016
were
$14.6 million
, or
23.9%
of net revenues, compared to
$9.1 million
, or
16.8%
of net revenues, for the same period in
2015
. The
increase
was primarily a result of the acquisition of Ctrack, a legal settlement entered into during the period and ongoing legal expenses associated with the divestiture of our mobile broadband business, partially offset by our cost containment initiatives.
Amortization of purchased intangible assets
.
The amortization of purchased intangible assets for the three months ended
September 30, 2016
and
2015
was
$1.0 million
and
$0.3 million
, respectively. Amortization of purchased intangible assets for the three months ended
September 30, 2016
includes the amortization of intangible assets purchased through the acquisitions of Ctrack and FW. Amortization of purchased intangible assets for the three months ended
September 30, 2015
includes the amortization of intangible assets purchased through the acquisition of FW.
Impairment of purchased intangible assets.
During the three months ended
September 30, 2016
, we recorded an impairment loss of
$2.6 million
primarily related to the developed technologies acquired through our acquisition of FW. We did not have an impairment loss during the same period in
2015
.
Restructuring charges.
Restructuring expenses for the three months ended
September 30, 2016
and
2015
were
$0.8 million
and
$1.0 million
, respectively, and primarily consisted of severance costs incurred in connection with the reduction of our workforce, as well as facility exit related costs.
Non-cash change in acquisition-related escrow.
During the three months ended
September 30, 2015
, we recorded a non-cash loss of $10.5 million related to an acquisition-related escrow account for the purchase of Ctrack due to the weakening of the South African Rand compared to the U.S. Dollar. We did not have an acquisition-related escrow account during the three months ended
September 30, 2016
.
Interest expense, net
.
Interest
expense
, net, for the three months ended
September 30, 2016
and
2015
was
$3.9 million
and
$2.4 million
, respectively. Interest expense is primarily related to the Convertible Notes, which includes the amortization of the debt discount and debt issuance costs. The increase in interest expense, net, is primarily a result of the Convertible Notes interest expense being partially offset by interest income related to an acquisition-related escrow account for the purchase of Ctrack during the three months ended
September 30, 2015
.
Other income (expense), net
.
Other
expense
, net, for the three months ended
September 30, 2016
was
$3.6 million
, compared to
$0.4 million
for the same period in
2015
. The increase in other expense is primarily a result of the Final Resolution related to our sale of certain hardware modules and related assets to Telit, which resulted in a decrease in the gain recognized in the second quarter of 2016, as well as an unrealized foreign currency loss on an outstanding intercompany loan that Ctrack has with one of its wholly-owned subsidiaries, which is re-measured at each reporting period, and the effect of exchange rates on cash and cash equivalents during the period.
Income tax provision (benefit)
.
Income tax benefit for the three months ended
September 30, 2016
was
$0.8 million
as compared to an income tax provision of
$45,000
for the same period in
2015
. The
decrease
in income tax provision is primarily due to a decrease in our valuation allowance related to the purchase accounting for certain intangible assets, partially offset by an increase in income tax provision due to certain of our profitable subsidiaries in foreign jurisdictions.
Net income attributable to noncontrolling interests
.
For the three months ended
September 30, 2016
, net income attributable to noncontrolling interests was
$11,000
. We did not have any noncontrolling interests during the three months ended
September 30, 2015
.
Nine Months Ended
September 30, 2016
Compared to
Nine Months Ended
September 30, 2015
Net revenues
. Net revenues for the
nine
months ended
September 30, 2016
were
$190.6 million
,
an increase
of
$31.2 million
, or
19.6%
, compared to the same period in
2015
.
The following table summarizes net revenues by our two product categories (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
Change
|
|
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
Product Category
|
|
|
|
|
|
|
|
|
|
Hardware
|
|
$
|
149,402
|
|
|
$
|
154,332
|
|
|
$
|
(4,930
|
)
|
|
(3.2
|
)%
|
|
SaaS, software and services
|
|
41,234
|
|
|
5,097
|
|
|
36,137
|
|
|
709.0
|
%
|
|
Total
|
|
$
|
190,636
|
|
|
$
|
159,429
|
|
|
$
|
31,207
|
|
|
19.6
|
%
|
Hardware
.
The
decrease
in hardware net revenues is primarily a result of the divestiture of certain hardware modules to Telit and the ongoing focus on our most profitable products, partially offset by the acquisition of Ctrack with its hardware net revenues.
SaaS, software and services
.
The
increase
in SaaS, software and services net revenues is primarily a result of our acquisition of Ctrack with its SaaS, software and services net revenues.
Cost of net revenues.
Cost of net revenues for the
nine
months ended
September 30, 2016
was
$123.3 million
, or
64.7%
of net revenues, compared to
$117.0 million
, or
73.4%
of net revenues, for the same period in
2015
.
The following table summarizes cost of net revenues by our two product categories (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
Change
|
|
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
Product Category
|
|
|
|
|
|
|
|
|
|
Hardware
|
|
$
|
109,395
|
|
|
$
|
115,753
|
|
|
$
|
(6,358
|
)
|
|
(5.5
|
)%
|
|
SaaS, software and services
|
|
13,896
|
|
|
1,251
|
|
|
12,645
|
|
|
1,010.8
|
%
|
|
Total
|
|
$
|
123,291
|
|
|
$
|
117,004
|
|
|
$
|
6,287
|
|
|
5.4
|
%
|
Hardware
.
The
decrease
in hardware cost of net revenues is primarily a result of the divestiture of certain hardware modules to Telit and the ongoing focus on our most profitable products, partially offset by the acquisition of Ctrack with its cost of hardware net revenues.
SaaS, software and services
.
The
increase
in SaaS, software and services cost of net revenues is primarily a result of our acquisition of Ctrack with its cost of SaaS, software and services net revenues.
Gross profit.
Gross profit for the
nine
months ended
September 30, 2016
was
$67.3 million
, or a gross margin of
35.3%
, compared to
$42.4 million
, or a gross margin of
26.6%
, for the same period in
2015
. The
increase
in gross profit was primarily
a result of the changes in net revenues and cost of net revenues discussed above, as the Company sought to transition its revenue mix toward more highly profitable SaaS, software and services business.
Research and development expenses.
Research and development expenses for the
nine
months ended
September 30, 2016
were
$24.2 million
, or
12.7%
of net revenues, compared to
$28.1 million
, or
17.6%
of net revenues, for the same period in
2015
. The
decrease
was primarily due to reduction of headcount and associated expenses as we rationalized our product portfolio as well as the lack of an all-employee retention bonus that was paid in 2015, partially offset by our acquisitions of Ctrack and FW with their associated research and development expenses.
Sales and marketing expenses.
Sales and marketing expenses for the
nine
months ended
September 30, 2016
were
$24.1 million
, or
12.6%
of net revenues, compared to
$12.4 million
, or
7.8%
of net revenues, for the same period in
2015
. The
increase
was primarily a result of the acquisitions of Ctrack and FW, partially offset by our cost containment initiatives and the lack of an all-employee retention bonus that was paid in 2015.
General and administrative expenses.
General and administrative expenses for the
nine
months ended
September 30, 2016
were
$34.7 million
, or
18.2%
of net revenues, compared to
$23.5 million
, or
14.7%
of net revenues, for the same period in
2015
. General and administrative expenses
increase
d for the
nine
months ended
September 30, 2016
primarily a result of the acquisitions of Ctrack and FW, as well as a legal settlement entered into during the period, partially offset by our cost containment initiatives and the lack of an all-employee retention bonus that was paid in 2015.
Amortization of purchased intangible assets
.
The amortization of purchased intangible assets for the
nine
months ended
September 30, 2016
and
2015
was
$2.9 million
and
$1.1 million
, respectively. Amortization of purchased intangible assets for the
nine
months ended
September 30, 2016
includes the amortization of intangible assets purchased through the acquisitions of Ctrack and FW. Amortization of purchased intangible assets for the
nine
months ended
September 30, 2015
includes the amortization of intangible assets purchased through the acquisition of FW for the period following the March 27, 2015 date of acquisition through
September 30, 2015
.
Impairment of purchased intangible assets.
During the
nine
months ended
September 30, 2016
, we recorded an impairment loss of
$2.6 million
primarily related to the developed technologies acquired through our acquisition of FW. We did not have an impairment loss during the same period in
2015
.
Restructuring charges.
Restructuring charges for the
nine
months ended
September 30, 2016
and
2015
were
$1.7 million
and
$0.8 million
, respectively, and predominantly consisted of severance costs incurred in connection with the reduction of our workforce, as well as facility exit related costs.
Non-cash change in acquisition-related escrow.
During the
nine
months ended September 30, 2015, we recorded a non-cash loss of $10.3 million related to an acquisition-related escrow account for the purchase of Ctrack due to the weakening of the South African Rand compared to the U.S. Dollar. We did not have an acquisition-related escrow account during the
nine
months ended
September 30, 2016
.
Interest expense, net
.
Interest
expense
, net for the
nine
months ended
September 30, 2016
was
$11.7 million
, compared to
$3.3 million
for the same period in
2015
. The increase in interest expense is primarily a result of the interest expense related to the Convertible Notes that we issued in June 2015, which includes the amortization of the debt discount and debt issuance costs.
Other income (expense), net
.
Other
income
, net, for the
nine
months ended
September 30, 2016
was
$1.0 million
, compared to other
expense
, net of
$0.7 million
for the same period in
2015
. The increase in other income is a result of our sale of certain hardware modules and other related assets to Telit, partially offset by an unrealized foreign currency loss on an outstanding intercompany loan that Ctrack has with one of its wholly-owned subsidiaries, which is re-measured at each reporting period, and the effect of exchange rates on cash and cash equivalents during the period.
Income tax provision (benefit)
.
Income tax benefit for the
nine
months ended
September 30, 2016
was
$0.5 million
as compared to an income tax provision of
$0.1 million
for the same period in
2015
. The
decrease
in income tax provision is primarily due to a decrease in our valuation allowance related to the purchase accounting for certain intangible assets, partially offset by an increase in income tax provision due to certain of our profitable subsidiaries in foreign jurisdictions.
Net income attributable to noncontrolling interests
.
For the
nine
months ended
September 30, 2016
, net income attributable to noncontrolling interests was
$24,000
. We did not have any noncontrolling interests during the
nine
months ended
September 30, 2015
.
Liquidity and Capital Resources
Our principal sources of liquidity are our existing cash and cash equivalents and cash generated from operations.
Revolving Credit Facility
On October 31, 2014, we entered into a senior secured revolving credit facility in the amount of $25.0 million with Wells Fargo Bank, National Association (the “Revolver”). On November 17, 2015, the Revolver was amended to increase the maximum borrowing capacity to $48.0 million. The amount of borrowings that may be made under the Revolver are based on a borrowing base and are comprised of a specified percentage of eligible receivables. If, at any time during the term of the Revolver, the amount of borrowings outstanding under the Revolver exceeds the borrowing base then in effect, we would be required to repay such borrowings in an amount sufficient to eliminate such excess. The Revolver includes $3.0 million available for letters of credit,
$0.7 million
of which was available for letters of credit at
September 30, 2016
. As of
September 30, 2016
, there was
no
outstanding balance on the Revolver and we had available borrowings of approximately
$6.9 million
.
Convertible Senior Notes
On June 10, 2015, we issued $120.0 million of Convertible Notes, which are governed by the terms of the Indenture between us, as issuer, and Wilmington Trust, National Association, as trustee. The Convertible Notes are senior unsecured obligations and bear interest at a rate of 5.50% per year, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2015. The Convertible Notes will mature on June 15, 2020, unless earlier repurchased or converted. The Convertible Notes will be convertible into cash, shares of our common stock, or a combination thereof, at our election, at an initial conversion price of $5.00 per share of our common stock.
RER Amendment
Pursuant to the RER Amendment, we are obligated to pay a total of $15.0 million in five cash installments over a four-year period, beginning in March 2016. We are also obligated to pay a total of approximately $6.1 million in cash over a four-year period, beginning in March 2016, related to the Earn-Out Arrangement. We believe that our cash and cash equivalents and our availability under the Revolver, together with anticipated cash flows from operations, will be sufficient to meet these obligations.
Historical Cash Flows
The following table summarizes our condensed consolidated statements of cash flows for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
2016
|
|
2015
|
|
Net cash provided by (used in) operating activities
|
$
|
51
|
|
|
$
|
(26,297
|
)
|
|
Net cash provided by (used in) investing activities
|
6,185
|
|
|
(98,557
|
)
|
|
Net cash provided by (used in) financing activities
|
(1,494
|
)
|
|
117,570
|
|
|
Effect of exchange rates on cash and cash equivalents
|
(147
|
)
|
|
(350
|
)
|
|
Net increase (decrease) in cash and cash equivalents
|
4,595
|
|
|
(7,634
|
)
|
|
Cash and cash equivalents, beginning of period
|
12,570
|
|
|
17,853
|
|
|
Cash and cash equivalents, end of period
|
$
|
17,165
|
|
|
$
|
10,219
|
|
Operating activities.
Net cash
provided by
operating activities was
$0.1 million
for the
nine
months ended
September 30, 2016
compared to
$26.3 million
used in
operating activities for the same period in
2015
. Net cash
provided by
operating activities for the
nine
months ended
September 30, 2016
was primarily attributable to a decrease in accounts receivable and inventory and the non-cash charges for depreciation and amortization, including the amortization of the acquisition-related inventory step up and debt discount and debt issuance costs, the loss on impairment of purchased intangible assets, the provision for excess and obsolete inventory and share-based compensation expense, partially offset by the net loss in the period, a gain on the divestiture of certain hardware modules and related assets, and
a decrease
in accounts payable and an increase in prepaid expenses and other assets. Net cash
used in
operating activities for the
nine
months ended
September 30, 2015
was primarily attributable to the net loss in the period along with the decrease in accounts payable and increase in accounts receivable, partially offset by the non-cash change in acquisition-related escrow, non-cash charges for depreciation and amortization, including the amortization of the acquisition-related inventory step up and debt discount and debt issuance costs, and share-based compensation expense.
Investing activities.
Net cash
provided by
investing activities during the
nine
months ended
September 30, 2016
was
$6.2 million
compared to
$98.6 million
used in
investing activities for the same period in
2015
. Cash
provided by
investing activities during the
nine
months ended
September 30, 2016
was primarily attributable to the proceeds received from the sale of divested assets and short-term investments, partially offset by the cash earn-out payments made to FW and the capitalization of certain costs related to the research and development of software to be sold in our solutions. Cash
used in
investing activities during the
nine
months ended
September 30, 2015
was primarily attributable to our acquisition of FW and our then-pending acquisition of Ctrack.
Financing activities.
Net cash
used in
financing activities during the
nine
months ended
September 30, 2016
was
$1.5 million
, compared to net cash
provided by
financing activities of
$117.6 million
for the same period in
2015
. Net cash
used in
financing activities during the
nine
months ended
September 30, 2016
was primarily related to repayments of Ctrack debt and payments on capital lease obligations, partially offset by proceeds from the May 2016 purchases under our employee stock purchase plan. Net cash
provided by
financing activities during the
nine
months ended
September 30, 2015
was primarily related to proceeds received from the issuance of the Convertible Notes and exercise of a warrant, partially offset by the repayment on the Revolver, the payment of issuance costs related to the Convertible Notes and the payoff of the FW assumed liabilities.
Other Liquidity Needs
As of
September 30, 2016
, we had available cash and cash equivalents totaling
$17.2 million
and working capital of
$24.8 million
. We also had availability for borrowings under the Revolver. Borrowings under this facility are secured by a first priority lien on substantially all of our assets and the assets of certain of our subsidiaries, subject to certain exceptions and permitted liens. As of
September 30, 2016
, there was
no
outstanding balance on the Revolver and we had available borrowings of approximately
$6.9 million
. In addition, during the
nine
months ended
September 30, 2016
, the Company received approximately
$11.3 million
related to the closing of the asset sale to Telit, a portion of which was used to repay the outstanding balance on the Revolver.
Our ability to transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support our evolving cost structure. If events or circumstances occur such that we do not meet our operating plan as expected, we may be required to 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. We believe that our cash and cash equivalents and our availability under the Revolver, together with anticipated cash flows from operations, will be sufficient to meet our working capital needs for the next twelve months.
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.
We expect that our liquidity, including the amount of available borrowings under the Revolver, will also be affected by the consummation of the Sale which is expected to occur in the first quarter of 2017.
We may raise additional funds to accelerate development of new and existing services and products, to respond to competitive pressures or to acquire complementary products, businesses or technologies. There can be no assurance that any required additional financing will be available on terms favorable to us, or at all. In addition, in order to obtain additional borrowings we must comply with certain requirements under the Revolver. If additional funds are raised by the issuance of equity securities, our shareholders could experience dilution of their ownership interests and securities issued may have rights senior to those of the holders of our common stock. If additional funds are raised by the issuance of debt securities, we may be subject to certain limitations on our operations. If adequate funds are not available or not available on acceptable terms, we may be unable to take advantage of acquisition opportunities, develop or enhance products or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations.
Contractual Obligations and Commercial Commitments
There have been no material changes to our contractual obligations and commercial commitments from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2016 and June 30, 2016, other than the disclosure in Note
10
,
Commitments and Contingencies
, in the accompanying unaudited condensed consolidated financial statements which are incorporated herein by reference.
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet financing activities.