INSEEGO CORP. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 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 Inseego and our industry. These forward-looking statements speak only as of the date of this report. We disclaim any undertaking to publicly update or revise any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Statements that include the words “may,” “could,” “should,” “would,” “estimate,” “anticipate,” “believe,” “expect,” “preliminary,” “intend,” “plan,” “project,” “outlook,” “will” and similar words and phrases identify forward-looking statements. Forward-looking statements address matters that involve risks and uncertainties that could cause actual results to differ materially from those anticipated in these forward-looking statements as of the date of this report. We believe that these factors include those related to: • our ability to compete in the market for wireless broadband data access products, wireless modem products, and asset management, monitoring, telematics, vehicle tracking and fleet management products; • our ability to develop and introduce new products and services successfully; • our ability to meet the price and performance standards of the evolving 5G New Radio (“5G NR”) products and technologies; • our ability to expand our customer reach/reduce customer concentration; • our ability to grow the Internet of Things (“IoT”) and mobile portfolio outside of North America; • our ability to grow our Intelligent Edge/asset tracking solutions within North America; • our dependence on a small number of customers for a substantial portion of our revenues; • our ability to make scheduled payments on, or to refinance our indebtedness, including our convertible notes obligations; • our ability to introduce and sell new products that comply with current and evolving industry standards and government regulations; • our ability to develop and maintain strategic relationships to expand into new markets; • our ability to properly manage the growth of our business to avoid significant strains on our management and operations and disruptions to our business; • our reliance on third parties to manufacture our products; • our contract manufacturer’s ability to secure necessary supply to build our devices; • increases in costs, disruption of supply or the shortage of semiconductors or other key components of our products; • our ability to mitigate the impact of tariffs or other government-imposed sanctions; • our ability to accurately forecast customer demand and order the manufacture and timely delivery of sufficient product quantities; • our reliance on sole source suppliers for some products and devices used in our solutions; • the continuing impact of uncertain global economic conditions on the demand for our products; • the impact of geopolitical instability on our business, including the current conflict between Russia and Ukraine as well as the ongoing conflict in the Middle East; • the emergence of global public health emergencies, such as the outbreak of the 2019 novel coronavirus (2019-nCoV), known as “COVID-19”, which could extend lead times in our supply chain and lengthen sales cycles with our customers; • the impact of high inflation and rising interest rates; • our ability to be cost competitive while meeting time-to-market requirements for our customers; • our ability to meet the product performance needs of our customers in wireless broadband data access in industrial IoT (“IIoT”) markets; 20 • demand for fleet, vehicle and asset management software-as-a-service (“SaaS”) telematics solutions; • our dependence on wireless telecommunication operators delivering acceptable wireless services; • the outcome of any pending or future litigation, including intellectual property litigation; • infringement claims with respect to intellectual property contained in our solutions; • our continued ability to license necessary third-party technology for the development and sale of our solutions; • the introduction of new products that could contain errors or defects; • conducting business abroad, including foreign currency risks; • the pace of 5G wireless network rollouts globally and their adoption by customers; • our ability to make focused investments in research and development; and • our ability to hire, retain and manage additional qualified personnel to maintain and expand our business. The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this and other reports we file with or furnish to the Securities and Exchange Commission (“SEC”), including the information in “Item 1A. Risk Factors” included in Part I of our Annual Report on Form 10-K for the year ended December 31, 2022 (as amended, the “Form 10-K”). If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. As used in this report on Form 10-Q, unless the context otherwise requires, the terms “we,” “us,” “our,” the “Company” and “Inseego” refer to Inseego Corp., a Delaware corporation, and its wholly-owned subsidiaries. Trademarks “Inseego”, “Inseego Subscribe”, “Inseego Manage”, “Inseego Secure”, “Inseego Vision”, the Inseego logo, “MiFi”, “MiFi Intelligent Mobile Hotspot”, “Wavemaker”, “Clarity”, and “Skyus” are trademarks or registered trademarks of Inseego and its subsidiaries. Other trademarks, trade names or service marks used in this report are the property of their respective owners. 21 The following information should be read in conjunction with the condensed consolidated financial statements and the accompanying notes included in Part I, Item 1 of this report, as well as the annual consolidated financial statements and accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2022, contained in our Form 10-K. Business Overview Inseego Corp. is a leader in the design and development of cloud-managed 5G wireless wide area network (WWAN) and intelligent edge solutions. Our portfolio is comprised of secure, high-performance, cloud-managed fixed and mobile WWAN modems, routers, and gateways; enterprise networking software-defined edge (“SD EDGE”) solutions powered by our 5G WWAN portfolio that secures and prioritizes corporate network traffic; and intelligent edge and telematics solutions with built-in artificial intelligence (“AI”) technology, created to improve business outcomes. All of these products and solutions are designed and developed in the U.S. and are used in mission-critical applications requiring the highest levels of security and zero unscheduled downtime. These solutions support business applications such as enterprise networking, software-defined wide area network (“SD-WAN”) failover management, asset tracking, edge computing, artificial intelligence, fleet management, and other services. We have been at the forefront of the ways in which the world stays connected and accesses information, protects, and derives intelligence from that information. With multiple first-to-market innovations across a number of wireless technologies, including 5G, and a strong and growing portfolio of hardware and software innovations for IIoT solutions, Inseego has been advancing technology and driving industry transformations for over 30 years. It is this proven expertise, commitment to quality, obsession with innovation and a relentless focus on execution that makes us a preferred global partner of service providers, distributors, value-added resellers, system integrators, and enterprises worldwide. Our Sources of Revenue We provide intelligent, cloud-managed wireless 4G and 5G hardware products for the worldwide mobile communications and IIoT markets. Our hardware products address multiple vertical markets including private LTE/5G networks, the First Responders Network Authority/Firstnet, SD-WAN, telematics, remote monitoring and surveillance, and fixed wireless access and mobile broadband devices. Our broad range of products principally includes intelligent 4G and 5G fixed wireless routers and gateways, mobile hotspots, wireless gateways and routers for IIoT applications, Gb speed 4G LTE hotspots and USB modems, integrated telematics and mobile tracking hardware devices, which are supported by applications software and cloud services designed to enable customers to easily analyze data insights and configure/manage their hardware remotely. Our products currently operate on most major global cellular wireless networks. Our mobile hotspots sold under the MiFi brand have been sold to millions of end users, and provide subscribers with secure and convenient high-speed access to corporate, public and personal information through the Internet and enterprise networks. Our wireless standalone and USB modems and gateways allow us to address the rapidly growing and underpenetrated IoT market segments. Our telematics and mobile asset tracking hardware devices collect and control critical vehicle data and driver behaviors, and can reliably deliver that information to the cloud, all managed by our services enablement platforms. Our MiFi customer base is comprised of wireless operators to whom we provide intelligent fixed and mobile wireless devices. These wireless operators include Verizon Wireless, T-Mobile and U.S. Cellular in the United States, Rogers and Telus in Canada, Telstra in Australia, as well as other international wireless operators, distributors and various companies in other vertical markets and geographies. We sell our 5G WWAN solutions, integrated telematics and mobile tracking hardware devices through our direct sales force, value-added resellers and through distributors. The customer base for our products is comprised of transportation companies, industrial enterprises, retailers, manufacturers, application service providers, system integrators and distributors in various industries, including fleet and vehicle transportation, aviation ground service management, energy and industrial automation, security and safety, medical monitoring and government. Integrated telematics and asset tracking devices are provided as part of our integrated SaaS solutions. We sell SaaS, software and services solutions across multiple vertical markets, including fleet management, vehicle telematics, stolen vehicle recovery, asset tracking, monitoring, business connectivity and subscription management including services related to our Data Management System (DMS) Subscribe solution. Our SaaS delivery platforms include our telematics and asset tracking and management platforms, which provide fleet, vehicle, aviation, municipalities, healthcare, utilities asset and other telematics applications. Our SaaS platforms are device-agnostic and provide a standardized, scalable way to order, connect and manage remote assets and to improve business operations. The platforms are flexible and support both on-premise server or cloud-based deployments and are the basis for the delivery of a wide range of IoT services in multiple industries. We classify our revenues from the sale of our products and services into two distinct groupings, specifically IoT & Mobile Solutions (including DMS Subscribe revenue) and Enterprise SaaS Solutions (mainly Intelligent Edge business) . Both IoT & 22 Mobile Solutions and Enterprise SaaS Solutions revenues include any hardware and software required for the respective solution. Factors Which May Influence Future Results of Operations We believe that our future results of operations may be influenced by a number of factors including: • economic environment and related market conditions such as inflation; • increased competition from other fleet and vehicle telematics solutions, as well as suppliers of emerging devices that contain wireless data access or device management features; • acceptance of our products by new vertical markets; • growth in the aviation ground vertical; • rate of change to new products; • deployment of 5G infrastructure equipment; • adoption of 5G end point products; • competition in the area of 5G technology; • our contract manufacturer’s ability to secure necessary supply to of semiconductors and other key components to build our devices; • product pricing; and • changes in technologies. Our revenues are also significantly dependent upon the availability of materials and components used in our hardware products. We have made significant investments in additional products and services, including SaaS and additional service offerings, industrial IoT hardware and services, and other mobile and fixed wireless devices targeting the emerging 5G market. We continue to develop and maintain strategic relationships with service providers and other wireless industry leaders such as Verizon Wireless, T-Mobile, and Qualcomm. Through strategic relationships, we have been able to maintain market penetration by leveraging the resources of our channel partners, including their access to distribution resources, increased sales opportunities and market opportunities. The demand environment for our 5G products during the three and nine months ended September 30, 2023 was consistent with our expectations. However, we have recently experienced lower sales of LTE gigabit hotspots within IoT & Mobile Solutions as we transition from 4G products to 5G product offerings. The macroeconomic environment continues to remain uncertain and the demand for our products in prior years may not be sustainable for the long term. The net realizable value of inventory is impacted primarily by demand for our products, which are influenced by these factors. The inflationary pressures impacting the global supply chain could potentially increase the cost of net revenues in the current and future years. Although general and administrative expenses are not directly related to revenue levels, certain expenses, such as legal expenses and provisions for bad debts, may cause significant volatility in future general and administrative expenses, which may, in turn, impact net revenue levels. As part of our business strategy, we may review acquisition or divestiture opportunities that we believe would be advantageous or complementary to the development of our business. Given our current cash position and recent losses, any additional acquisitions we make would likely involve issuing stock or drawing on our Credit Facility 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 integration of any acquired business, products, technologies or personnel. Key Components of Revenues and Expenses Net Revenues . We classify our revenues from the sale of our products and services into two distinct groupings, specifically IoT & Mobile Solutions and Enterprise SaaS Solutions. Both IoT & Mobile Solutions and Enterprise SaaS Solutions revenues include any hardware and software required for the respective solution. Cost of Net Revenues . Cost of net revenues includes all costs associated with our contract manufacturers, distribution, fulfillment and repair services, delivery of SaaS services, warranty costs, amortization of intangible assets, royalties, operations overhead, costs associated with cancellation of purchase orders and costs related to outside services. Also included in cost of net revenues are costs related to inventory adjustments, as well as any write downs for excess and obsolete inventory and abandoned product lines. 23 Operating Costs and Expenses . Our operating costs consist of three primary categories: research and development, sales and marketing, and general and administrative costs. Research and development is at the core of our ability to produce innovative, leading-edge products. These expenses consist primarily of engineers and technicians who design and test our highly complex products and the procurement of testing and certification services. Sales and marketing expenses consist primarily of our sales force and product-marketing professionals. In order to maintain strong sales relationships, we provide co-marketing, trade show support and product training. We are also engaged in a wide variety of marketing activities, such as awareness and lead generation programs as well as product marketing. Other marketing initiatives include public relations, seminars and co-branding with partners. General and administrative expenses include primarily salary and employee-related costs for executives and 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. Critical Accounting Policies and Estimates In the notes to our consolidated financial statements and in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Form 10-K, we have disclosed those accounting policies that we consider to be significant in determining our results of operations and financial condition. There have been no material changes to those policies that we consider to be significant since the filing of our Form 10-K. The accounting principles used in preparing our unaudited condensed consolidated financial statements conform in all material respects to accounting principles generally accepted in the U.S. Inventories and Provision for Excess and Obsolete Inventory Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. Inbound shipping and handling costs are classified as a component of cost of net revenues in the consolidated statements of operations. The valuation of inventory requires significant judgment and estimates, including evaluating the need for any adjustments to net realizable value related to excess or obsolete inventory to ensure that the inventory is reported at the lower of cost or net realizable value. The Company reviews the components of its inventory and its inventory purchase commitments on a regular basis for excess and obsolete inventory based on estimated future usage and sales. Write-downs in inventory value or losses on inventory purchase commitments depend on various items, including factors related to customer demand, economic and competitive conditions, technological advances or new product introductions by the Company or its customers that vary from its current expectations. Results of Operations Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022 Net revenues . Net revenues for the three months ended September 30, 2023 were $48.6 million, compared to $69.2 million for the same period in 2022. The following table summarizes net revenues by our two product categories (in thousands): Three Months Ended September 30, Change Product Category 2023 2022 $ % IoT & Mobile Solutions $ 41,357 $ 62,633 $ (21,276) (34.0) % Enterprise SaaS Solutions 7,226 6,534 692 10.6 Total $ 48,583 $ 69,167 $ (20,584) (29.8) IoT & Mobile Solutions. The $21.3 million decrease in IoT & Mobile Solutions net revenues over the same period in 2022 is primarily due to decreases in our carrier offerings and lower sales of LTE gigabit hotspots as we transition from 4G products to 5G product offerings, partially offset by sales of our second-generation and fourth-generation 5G hotspot related to our MiFi business (launched in later part of 2022). Enterprise SaaS Solutions. The $0.7 million increase in Enterprise SaaS Solutions net revenues over the same period in 2022 is primarily due to increase in Enterprise SaaS Solutions net revenue throughout the rest of the world as a result of the lifting of COVID-19 related installation restrictions in place during fiscal 2022 . 24 Cost of net revenues. Cost of net revenues for the three months ended September 30, 2023 was $46.7 million, or 96.1% of net revenues, compared to $51.2 million, or 74.0% of net revenues, for the same period in 2022. The following table summarizes cost of net revenues by our two product categories (in thousands): Three Months Ended September 30, Change Product Category 2023 2022 $ % IoT & Mobile Solutions $ 43,560 $ 48,209 $ (4,649) (9.6) % Enterprise SaaS Solutions 3,128 3,002 126 4.2 Total $ 46,688 $ 51,211 $ (4,523) (8.8) IoT & Mobile Solutions. The $4.6 million decrease in IoT & Mobile Solutions cost of net revenues over the same period in 2022 is primarily a result of lower sales of LTE gigabit hotspots, offset by increase in inventory and contract manufacturer reserves as further described below. Enterprise SaaS Solutions. The $0.1 million increase in Enterprise SaaS Solutions cost of net revenues over the same period in 2022 is primarily due to increased costs associated with providing our recurring rental and subscription services. Gross profit. Gross profit for the three months ended September 30, 2023 was $1.9 million, or a gross margin of 3.9%, compared to $18.0 million, or a gross margin of 26.0%, for the same period in 2022. The decrease in gross profit is primarily due to an increase in inventory and contract manufacturer reserves and decrease in revenue from IoT and Mobile Solutions, offset by increase in revenue from Enterprise SaaS Solutions, reduced costs associated with providing our recurring rental and subscription services, and various initiatives to improve efficiencies in production. As discussed in Note 2 Financial Statement Details in the condensed consolidated financial statements , in the third quarter of the current fiscal year , the Company recorded a write-down of $6.8 million to reflect inventories at net realizable value in addition to $1.3 million write-off of capitalized inventory order fees. Further, management accrued an additional $6.3 million in contract manufacturing liabilities (included in a ccrued expenses and other current liabilities ) related to excess materials at the contract manufacturers’ sites. All of these charges were recorded in cost of revenues during the three months ended September 30, 2023 and thereby negatively impacted Gross Profit. Additionally, the Company recognized a $0.6 million write-down of capitalized software costs related to the products that had carrying value in excess of their net realizable value (discussed separately under operating costs and expenses below). Management’s analysis was based on meaningful new information that became available during the third quarter of the current fiscal year, updated sales projections and other dynamics in the market. Operating costs and expenses. The following table summarizes operating costs and expenses (in thousands): Three Months Ended September 30, Change Operating costs and expenses 2023 2022 $ % Research and development $ 8,951 $ 15,417 $ (6,466) (41.9) % Sales and marketing 5,355 8,295 (2,940) (35.4) General and administrative 4,906 5,720 (814) (14.2) Amortization of purchased intangible assets 424 433 (9) (2.1) Write-down of capitalized software 611 — 611 100.0 Total $ 20,247 $ 29,865 $ (9,618) (32.2) Research and development expenses. Research and development expenses for the three months ended September 30, 2023 were $9.0 million, or 18.4% of net revenues, compared to $15.4 million, or 22.3% of net revenues, for the same period in 2022. The decrease in research and development expenses was primarily due to fewer new projects undertaken during the current period. Sales and marketing expenses. Sales and marketing expenses for the three months ended September 30, 2023 were $5.4 million, or 11.0% of net revenues, compared to $8.3 million, or 12.0% of net revenues, for the same period in 2022. The decrease in sales and marketing expenses was primarily due to lower professional fees and reduction in sales headcount compared to the same period in 2022. General and administrative expenses. General and administrative expenses for the three months ended September 30, 2023 were $4.9 million, or 10.1% of net revenues, compared to $5.7 million, or 8.3% of net revenues, for the same period in 25 2022. The decrease in general and administrative expense was primarily due to decrease in share-based compensation expense due to lower RSU bonus released during the three months ended September 30, 2023 compared to the same period in 2022. Amortization of purchased intangible assets. Amortization of purchased intangible assets for each of the three months ended September 30, 2023 and 2022 was $0.4 million. Write down of capitalized software. Write down of capitalized software for the three months ended September 30, 2023 and 2022 was $0.6 million and $0, respectively. This write down was primarily due to lower sales demand for some of our products as also discussed in the Gross Profit section above. Other (expense) income. The following table summarizes other (expense) income (in thousands): Three Months Ended September 30, Change Other (expense) income 2023 2022 $ % Interest expense, net $ (2,891) $ (2,034) $ (857) 42.1 Other (expense) income, net (578) (1,758) 1,180 (67.1) Total $ (3,469) $ (3,792) $ 323 (8.5) Interest expense, net. The $0.9 million increase in interest expense, net over the same period in 2022 was primarily due to the Credit Agreement (as defined below) which commenced in the second half of 2022 and higher interest rates in 2023. Other (expense) income, net. The $1.2 million decrease in other expenses, net over the same period in 2022 is primarily due to less foreign currency exchange losses in the current period. Income tax provision (benefit). Income tax for the three months ended September 30, 2023 and 2022 was a benefit of less than $0.1 million and a provision of less than $0.1 million, respectively. This $0.1 million decrease in income tax expense was driven by an decrease in pre-tax profits at certain foreign subsidiaries for the current year period compared to a loss in the prior year period. Series E preferred stock dividends. During the three months ended September 30, 2023 and 2022, we recorded dividends of $0.8 million and $0.7 million respectively, on our Fixed-Rate Cumulative Perpetual Preferred Stock, Series E, par value $0.001 per share (the “Series E Preferred Stock”). Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022 Net revenues . Net revenues for the nine months ended September 30, 2023 were $152.9 million, compared to $192.4 million for the same period in 2022. The following table summarizes net revenues by our two product categories (in thousands): Nine Months Ended September 30, 2023 Change Product Category 2023 2022 $ % IoT & Mobile Solutions $ 131,367 $ 172,129 $ (40,762) (23.7) % Enterprise SaaS Solutions 21,567 20,279 1,288 6.4 Total $ 152,934 $ 192,408 $ (39,474) (20.5) IoT & Mobile Solutions. The $40.8 million decrease in IoT & Mobile Solutions net revenues over the same period in 2022 is primarily due to decreases in our carrier offerings and lower sales of LTE gigabit hotspots as we transition from 4G products to 5G product offerings, partially offset by sales of our second-generation and fourth-generation 5G hotspot related to our MiFi business (launched in later part of 2022), sales from our expanding Enterprise FWA business and subscriber growth in our Enterprise and Inseego Subscribe businesses. Enterprise SaaS Solutions. The $1.3 million increase in Enterprise SaaS Solutions net revenues over the same period in 2022 is primarily due to increase in Enterprise SaaS Solutions net revenue throughout the rest of the world as a result of the lifting of COVID-19 related installation restrictions in place during fiscal 2022 . Cost of net revenues. Cost of net revenues for the nine months ended September 30, 2023 was $114.0 million, or 74.5% of net revenues, compared to $141.3 million, or 73.4% of net revenues, for the same period in 2022. 26 The following table summarizes cost of net revenues by our two product categories (in thousands): Nine Months Ended September 30, 2023 Change Product Category 2023 2022 $ % IoT & Mobile Solutions $ 105,011 $ 131,805 $ (26,794) (20.3) % Enterprise SaaS Solutions 8,945 9,505 (560) (5.9) Total $ 113,956 $ 141,310 $ (27,354) (19.4) IoT & Mobile Solutions. The $26.8 million decrease in IoT & Mobile Solutions cost of net revenues over the same period in 2022 is primarily is a result of lower sales of LTE gigabit hotspots, offset by increase in inventory and contract manufacturer reserves as further described below. Enterprise SaaS Solutions. The $0.6 million decrease in Enterprise SaaS Solutions cost of net revenues over the same period in 2022 is primarily due to reduced costs associated with providing our recurring rental and subscription services. Gross profit. Gross profit for the nine months ended September 30, 2023 was $39.0 million, or a gross margin of 25.5%, compared to $51.1 million, or a gross margin of 26.6%, for the same period in 2022. The decrease in gross profit is primarily due to an increase in inventory and contract manufacturer reserves and decrease in revenue from IoT and Mobile Solutions, offset by increase in revenue from Enterprise SaaS Solutions, reduced costs associated with providing our recurring rental and subscription services, and various initiatives to improve efficiencies in production. As discussed in Note 2 Financial Statement Details in the condensed consolidated financial statements , in the third quarter of the current fiscal year , the Company recorded a write-down of $6.8 million to reflect inventories at net realizable value in addition to $1.3 million write-off of capitalized inventory order fees. Further, management accrued an additional $6.3 million in contract manufacturing liabilities (included in a ccrued expenses and other current liabilities ) related to excess materials at the contract manufacturers’ sites. All of these charges were recorded in cost of revenues during the three months ended September 30, 2023 and thereby negatively impacted Gross Profit. Additionally, the Company recognized a $0.6 million write-down of capitalized software costs related to the products that had carrying value in excess of their net realizable value (discussed separately under operating costs and expenses below). Management’s analysis was based on meaningful new information that became available during the third quarter of the current fiscal year, updated sales projections and other dynamics in the market. . Operating costs and expenses. The following table summarizes operating costs and expenses (in thousands): Nine Months Ended September 30, 2023 Change Operating costs and expenses 2023 2022 $ % Research and development $ 27,127 $ 47,597 $ (20,470) (43.0) % Sales and marketing 17,975 25,789 (7,814) (30.3) General and administrative 16,703 20,101 (3,398) (16.9) Amortization of purchased intangible assets 1,277 1,319 (42) (3.2) Write-down of capitalized software 1,115 — 1,115 n/a Total $ 64,197 $ 94,806 $ (30,609) (32.3) Research and development expenses. Research and development expenses for the nine months ended September 30, 2023 were $27.1 million , or 17.7% of net revenues, compared to $47.6 million, or 24.7% of net revenues, for the same period in 2022. The decrease in research and development expenses was primarily due to fewer new projects undertaken during the current period. Sales and marketing expenses. Sales and marketing expenses for the nine months ended September 30, 2023 were $18.0 million , or 11.8% of net revenues, compared to $25.8 million , or 13.4% of net revenues, for the same period in 2022. The decrease in sales and marketing expenses was primarily due to lower professional fees and reduction in sales headcount compared to the same period in 2022. General and administrative expenses. General and administrative expenses for the nine months ended September 30, 2023 were $16.7 million , or 10.9% of net revenues, compared to $20.1 million , or 10.4% of net revenues, for the same period in 2022. The decrease in general and administrative expense was primarily due to decrease in share-based compensation expense due to lower RSU bonus released during the nine months ended September 30, 2023 compared to the same period in 2022. 27 Amortization of purchased intangible assets. Amortization of purchased intangible assets for each of the nine months ended September 30, 2023 and 2022 was $1.3 million. Write-down of capitalized software. Write down of capitalized software for the nine months ended September 30, 2023 and 2022 was $1.1 million and $0, respectively. The write-down was primarily due to lower sales demand for some of our products as also discussed in our Gross Profi t section above. Other (expense) income. The following table summarizes other (expense) income (in thousands): Nine Months Ended September 30, 2023 Change Other (expense) income 2023 2022 $ % Loss on debt conversion and extinguishment, net — (450) 450 (100.0) % Interest expense, net $ (6,902) $ (6,621) $ (281) 4.2 Other (expense) income, net 875 (3,145) 4,020 (127.8) Total $ (6,027) $ (10,216) $ 4,189 (41.0) Loss on debt conversion and extinguishment, net. The loss on debt conversion and extinguishment, net for the nine months ended September 30, 2023 and 2022 was $0 and $0.5 million, respectively. This was a non-recurring event in 2022. Interest expense, net. The $0.3 million increase in interest expense, net over the same period in 2022 was primarily due to higher interest rates in 2023 and the Credit Agreement which commenced in the second half of 2022. Other (expense) income, net. The $4.0 million increase in other income, net over the same period in 2022 was primarily due to favorable changes in foreign exchange rates in the current period. Income tax provision (benefit). Income tax provision (benefit) for the nine months ended September 30, 2023 and 2022 was a provision of $0.6 million and a benefit of $0.6 million, respectively. This $1.2 million increase in income tax expense was driven by an increase in pre-tax profits at certain foreign subsidiaries for the current year period compared to a loss in the prior year period. Series E preferred stock dividends. During the nine months ended September 30, 2023 and 2022, we recorded dividends of $2.2 million and $2.0 million, respectively, on our Fixed-Rate Cumulative Perpetual Preferred Stock, Series E, par value $0.001 per share (the “Series E Preferred Stock”). Liquidity and Capital Resources Our principal sources of liquidity are our existing cash and cash equivalents and availability to borrow under our Credit Facility (as defined below). As of September 30, 2023, we had available cash and cash equivalents totaling $18.9 million and $5.2 million of availability to borrow under our Credit Facility. We have a history of operating and net losses and overall usage of cash from operating and investing activities. Our management believes that our cash and cash equivalents, together with anticipated cash flows from operations, availability under our secured asset-backed Credit Facility, and anticipated savings from ongoing cost reduction efforts, will be sufficient to meet our cash flow needs for the next twelve months from the filing date of this report. If events or circumstances occur such that we do not meet our operating plan as expected, or if we become obligated to pay unforeseen expenditures as a result of potential litigation, we may be required to raise capital, reduce planned research and development activities, incur restructuring charges or reduce other operating expenses which could have an adverse impact on our ability to achieve our intended business objectives. Our liquidity could be compromised 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. Ultimately, our ability to attain profitability and to generate positive cash flow is dependent upon achieving a level of revenues adequate to support our evolving cost structure and increasing working capital needs. If events or circumstances occur such that we do not meet our operating plan as expected, we may be required to raise additional capital, reduce planned research and development activities, incur additional restructuring charges or reduce other operating expenses and capital expenditures which could have an adverse impact on our ability to achieve our intended business objectives. There can be no assurance that any required or desired restructuring or financing will be available on terms favorable to us, or at all. If additional funds are raised by the issuance of equity securities, Company stockholders could experience dilution of their ownership interests and securities issued may have rights senior to those of the holders of the Company’s common stock. If additional funds are raised by the issuance of debt securities, we may be subject to additional limitations on our operations. Revolving Credit Facility 28 On August 5, 2022, we entered into a Loan and Security Agreement (the “Credit Agreement”) with Siena Lending Group LLC, as lender (“Lender”). The Credit Agreement established a $50.0 million secured asset-backed revolving credit facility (“Credit Facility”) with a final maturity date of December 31, 2024. On February 25, 2023, we entered into an amendment of the Credit Agreement with an effective date of December 15, 2022, which clarified certain terms within the Credit Agreement. On May 2, 2023, we entered into a third amendment of the Credit Agreement which increased the borrowing base under the Credit Facility by $4.0 million, increased the minimum borrowing amount for interest calculations to $8.5 million, and modified certain covenants (as so amended, the “Amended Credit Agreement”). Availability under the Credit Facility is determined monthly by a Borrowing Base (as defined in the Amended Credit Agreement) comprised of a percentage of eligible accounts receivable and eligible inventory of the Borrowers. Outstanding amounts exceeding the borrowing base must be repaid immediately. Borrowings under the Credit Facility may take the form of base rate (“Base Rate”) loans or Secured Overnight Financing Rate (“SOFR”) loans. SOFR loans will bear interest at a rate per annum equal to Term SOFR (as defined in the Amended Credit Agreement as the Term SOFR Reference Rate for a term of one month on the day) plus the Applicable Margin (as defined in the Amended Credit Agreement), with a Term SOFR floor of 1%. Base Rate loans will bear interest at a rate per annum equal to the Applicable Margin plus the greatest of (a) the per annum rate of interest which is identified as the “Prime Rate” and normally published in the Money Rates section of The Wall Street Journal, (b) the sum of the Federal Funds Rate (as defined in the Amended Credit Agreement) plus 0.5% and (c) 3.50% per annum. The Applicable Margin varies depending on the average outstanding amount for a preceding month. If the average outstanding amount for a preceding month is less than $15 million, the Applicable Margin will be 2.50% for Base Rate loans and 3.50% for SOFR loans. If the average outstanding amount for a preceding month is between $15 million and $25 million, the Applicable Margin will be 3.00% for Base Rate loans and 4.00% for SOFR loans. If the average outstanding amount for a preceding month is greater than $25 million, the Applicable Margin will be 4.5% for Base Rate loans and 5.50% for SOFR loans. On May 2, 2023, in addition to the amendment to the Credit Agreement entered into as described above, South Ocean Funding, LLC and North Sound Ventures, LP (the “Participants”) collectively purchased a $4.0 million last-out subordinated participation interest in the Amended Credit Agreement (the “Participation Interest”) from the Lender pursuant to a Participation Agreement between the Participants and the Lender (the “Participation Agreement”). In connection with the purchase of the Participation Interest, we agreed to pay the Participants an exit fee upon the earlier of (a) the scheduled maturity date of the Amended Credit Agreement, (b) the termination of the Lender’s commitment to make revolving loans prior to the scheduled maturity date of the Amended Credit Agreement, and (c) the early redemption of the Participants’ Participation Interest under the Participation Agreement (the earliest to occur of the foregoing, the “Exit Event”). The aggregate exit fee payable to the Participants is equal to (i) 7.5% of the Participation Interest, if the Exit Event occurs on or before December 31, 2023, (ii) 10.0% of the Participation interest, if the Exit Event occurs between January 1, 2024 and June 30, 2024 and (iii) 12.5% of the Participation Interest, if the Exit Events occurs after June 30, 2024. Further, the purchase of the Participation Interest granted an option for the Participants to purchase the subject revolving loan or to redeem its Participation Interest under certain circumstances. South Ocean Funding, LLC is an affiliate of Golden Harbor, Ltd. and North Sound Ventures, LP is an affiliate of North Sound Management, Inc. As of the date hereof, each of Golden Harbor, Ltd. and North Sound Management, Inc. hold in excess of 5% of the Company’s outstanding common stock. James Avery, a member of our Board of Directors, currently serves as Senior Managing Director of Tavistock Group, an affiliate of South Ocean Funding, LLC. The Amended Credit Agreement contains a financial covenant whereby the Loan Parties shall not permit the consolidated Liquidity (as defined in the Amended Credit Agreement) to be less than $10 million at any time. The Amended Credit Agreement also contains certain customary covenants, which include, but are not limited to, restrictions on indebtedness, liens, fundamental changes, restricted payments, asset sales, and investments, and places limits on various other payments. We were in compliance with the financial covenants contained in the Amended Credit Agreement as of September 30, 2023. As of September 30, 2023, we had no outstanding borrowings, excess availability (collateral value less lender reserves) of $10.2 million and availability to borrow of approximately $5.2 million under the Amended Credit Agreement. 2025 Notes On May 12, 2020, we completed a registered public offering of $100.0 million aggregate principal amount of our 3.25% convertible senior notes due 2025 (the “2025 Notes”) and issued $80.4 million principal amount of 2025 Notes in the privately negotiated exchange agreements that closed concurrently with the registered offering in May 2020. As of September 30, 2023 and December 31, 2022, $161.9 million in principal amount of the 2025 Notes were outstanding. Assuming no repurchases or conversions of the 2025 Notes prior to May 1, 2025, the entire principal balance of $161.9 million is due on May 1, 2025. The 2025 Notes are senior unsecured obligations of the Company and bear interest at an annual rate of 3.25%, payable semi-annually in arrears on May 1 and November 1 of each year. Equity Distribution Agreement 29 On January 25, 2021, we entered into an Equity Distribution Agreement with Canaccord Genuity LLC (the “Agent”), pursuant to which we may offer and sell, from time to time, through or to the Agent, up to $40.0 million of shares of our common stock (the “ATM Offering”) pursuant to the Company’s Registration Statement on Form S-3ASR (File No. 333-238057), as filed with the SEC on May 7, 2020 and amended from time to time. D uring the nine months ended September 30, 2023, the Company sold 8,035,959 shares of common stock, at an average price of $0.75 per share, for net proceeds of $5.9 million, after deducting underwriter fees and discounts. There was no ATM transactions during the quarter ended September 30, 2023. Effective as of November 2, 2023 , the Equity Distribution Agreement was terminated by the Company, and there will be no further sales under the ATM Offering . Contractual Obligations and Commitments Our material contractual obligations as of September 30, 2023, were follows: • To mitigate the risk of material shortages and price increases, we enter into non-cancellable purchase obligations with certain key contract manufacturers for the purchase of goods and services in the three to four quarters following the balance sheet date. Our purchase obligations consist of agreements to purchase goods and services entered into in the ordinary course of business. As of September 30, 2023, our future payments under these noncancellable purchase obligations were approximately $28.4 million. • $161,898 in outstanding principal amount of 2025 Notes with required interest payments; and • Operating lease liabilities that are included on our consolidated balance sheet; see Note 10. Leases. There were no material changes in our other contractual obligations during the three months ended September 30, 2023. Historical Cash Flows The following table summarizes our unaudited condensed consolidated statements of cash flows for the periods indicated (in thousands): Nine Months Ended September 30, 2023 2022 Net cash provided by (used in) operating activities $ 22,403 $ (24,703) Net cash used in investing activities (6,517) (10,445) Net cash (used in) provided by financing activities (2,026) 1,483 Effect of exchange rates on cash (2,057) 1,916 Net increase (decrease) in cash, cash equivalents and restricted cash 11,803 (31,749) Cash, cash equivalents and restricted cash, beginning of period 7,143 49,812 Cash, cash equivalents, and restricted cash, end of period $ 18,946 $ 18,063 Operating activities. Net cash provided by operating activities for the nine months ended September 30, 2023 is primarily comprised of a $31.8 million net loss incurred during the period, net cash provided by changes in working capital of $20.5 million, partially offset by non-cash charges, including depreciation and amortization of $16.3 million, share-based compensation expense of $6.0 million, and amortization of debt discount and debt issuance costs of $2.0 million. Net cash used in operating activities for the same period in 2022 is primarily comprised of a $53.3 million net loss and a $0.9 million non-cash gain attributable to the fair value adjustment on derivative instruments, which was offset by net cash provided by working capital of $12.4 million, and non-cash charges, depreciation and amortization of $20.9 million share-based compensation expense of $15.9 million, $2.5 million of amortization of debt issuance and discount costs and other non-cash adjustments. Investing activities. Net cash used in investing activities during the nine months ended September 30, 2023 is primarily comprised of $6.1 million of c ash outflows related to the development of software in support of our products and services and $0.4 million of property, plant and equipment purchases. Net cash used in investing activities during the same period in 2022 is primarily comprised of $9.2 million of cash outflows related to the development of software in support of our products and services and $1.2 million of property, plant and equipment purchases. 30 Financing activities. Net cash used in financing activities during the nine months ended September 30, 2023 is primarily comprised of $6.1 million in proceeds from the public offering, partially offset by $7.9 million of cash outflow related to repayments of our Credit Facility. Net cash provided by financing activities for the same period in 2022 is primarily comprised of $4.5 million net borrowing of our Credit Facility, partially offset by $1.6 million in principal repayments of financed assets.