Report of Foreign Issuer (6-k)

Date : 11/08/2019 @ 10:16PM
Source : Edgar (US Regulatory)
Stock : Sierra Wireless Inc (SWIR)
Quote : 9.31  0.0 (0.00%) @ 12:00AM

Report of Foreign Issuer (6-k)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 6-K
 
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of the
Securities Exchange Act of 1934
  
For the Month of November 2019
 
(Commission File.  No. 000-30718).
 
SIERRA WIRELESS, INC.
(Translation of registrant’s name in English)
 
13811 Wireless Way
Richmond, British Columbia, Canada V6V 3A4
(Address of principal executive offices and zip code)
 
Registrant’s Telephone Number, including area code: 604-231-1100
 
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F:
 
 
Form 20-F
o
40-F
ý
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
 
 
Yes:
o
No:
ý

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
 
 
Yes:
o
No:
ý

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 




 
Sierra Wireless, Inc.
 
 
 
By:
/s/ David G. McLennan
 
 
 
 
 
David G. McLennan, Chief Financial Officer and Secretary
 
 
Date: November 8, 2019
 




INCORPORATION BY REFERENCE

This Report on Form 6-K is incorporated by reference into the Registration Statement on Form S-8 of the registrant, which was filed with the Securities and Exchange Commission on March 31, 2016 (File No. : 333-210315).




A2019COVERQ3.JPG



Table of Contents
 
MANAGEMENT’S DISCUSSION AND ANALYSIS
1

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
2

OVERVIEW
4

Business Overview
4

Third Quarter Overview
5

Outlook
9

CONSOLIDATED RESULTS OF OPERATIONS
11

SEGMENTED INFORMATION
14

SUMMARY OF QUARTERLY RESULTS OF OPERATIONS
16

LIQUIDITY AND CAPITAL RESOURCES
17

NON-GAAP FINANCIAL MEASURES
20

OFF-BALANCE SHEET ARRANGEMENTS
23

TRANSACTIONS BETWEEN RELATED PARTIES
23

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
23

OUTSTANDING SHARE DATA
24

IMPACT OF ACCOUNTING PRONOUNCEMENTS AFFECTING CURRENT PERIOD
24

IMPACT OF ACCOUNTING PRONOUNCEMENTS AFFECTING FUTURE PERIODS
24

INTERNAL CONTROL OVER FINANCIAL REPORTING
25

LEGAL PROCEEDINGS
25

FINANCIAL RISK MANAGEMENT
26

RISKS AND UNCERTAINTIES
27

 
 
CONSOLIDATED FINANCIAL STATEMENTS
38







MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) provides information for the three and nine months ended September 30, 2019, and up to and including November 8, 2019. This MD&A should be read together with our unaudited interim consolidated financial statements and the accompanying notes for the three and nine months periods ended September 30, 2019 and September 30, 2018, respectively, and our audited annual consolidated financial statements and the accompanying notes for the year ended December 31, 2018 (collectively, “the consolidated financial statements”). The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP” or "GAAP"). Except where otherwise specifically indicated, all amounts in this MD&A are expressed in United States dollars.
 
We have prepared this MD&A with reference to National Instrument 51-102 “Continuous Disclosure Obligations” of the Canadian Securities Administrators.  Under the U.S./Canada Multijurisdictional Disclosure System, we are permitted to prepare this MD&A in accordance with the disclosure requirements of Canada, which requirements are different than those of the United States.
 
Certain statements in this MD&A constitute forward-looking statements or forward-looking information within the meaning of applicable securities laws.  You should carefully read “Cautionary Note Regarding Forward-Looking Statements” in this MD&A and should not place undue reliance on any such forward-looking statements.
 
Throughout this document, references are made to certain non-GAAP financial measures that are not measures of performance under U.S. GAAP.  Management believes that these non-GAAP financial measures provide useful information to investors regarding our results of operations as they provide additional measures of our performance and assist in comparisons from one period to another.  These non-GAAP financial measures do not have any standardized meaning prescribed by U.S. GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers.  These non-GAAP financial measures are defined and reconciled to their nearest GAAP measure in “Non-GAAP Financial Measures”.
 
In this MD&A, unless the context otherwise requires, references to "the Company", "Sierra Wireless", "we", "us" and "our" refer to Sierra Wireless, Inc. and its subsidiaries.

Additional information about our company, including our most recent consolidated financial statements and our Annual Information Form, is available on SEDAR at www.sedar.com and on EDGAR at www.sec.gov.




1


Cautionary Note Regarding Forward-Looking Statements
This MD&A contains certain statements and information that are not based on historical facts and constitute forward-looking statements or forward-looking information within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 and Canadian securities laws (collectively, “forward-looking statements”) and may include statements and information relating to our Q3 2019 corporate update; financial guidance for our fiscal year 2019; expectations regarding the Company's cost savings initiatives; expectations regarding the acquisition of M2M Group and the timing thereof; our business outlook for the short and longer term; statements regarding our strategy, plans, goals, objectives, expectations and future operating performance; the Company's liquidity and capital resources; the Company's financial and operating objectives and strategies to achieve them; general economic conditions; estimates of our expenses, future revenues, non-GAAP earnings per share and capital requirements; our expectations regarding the legal proceedings we are involved in; statements with respect to the Company's estimated working capital; expectations with respect to the adoption of Internet of Things ("IoT") solutions; expectations regarding trends in the IoT market and wireless module market; expectations regarding product and price competition from other wireless device manufacturers and solution providers; our ability to implement effective control procedures; and expectations regarding the launch of fifth generation cellular embedded modules. Forward-looking statements are provided to help you understand our views of our short and long term plans, expectations and prospects. We caution you that forward-looking statements may not be appropriate for other purposes.

Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, identified by words or phrases such as "outlook", “expects”, “is expected”, “anticipates”, “believes”, “plans”, “projects”, “estimates”, “assumes”, “intends”, “strategy”, “goals”, “objectives”, “potential”, “possible”, or variations thereof, or stating that certain actions, events, conditions or results “may”, “could”, “would”, “should”, “might” or “will” be taken, occur or be achieved, or the negative of any of these terms and similar expressions) are not statements of historical fact and may be forward-looking statements. Forward-looking statements are not promises or guarantees of future performance, they represent our current views and may change significantly. Forward-looking statements are based on a number of material assumptions, including, but not limited to, those listed below, which could prove to be significantly incorrect:

our ability to continue to sell our products and services in the expected quantities at the expected prices and expected times;
our ability to effect and to realize the anticipated benefits of our business transformation initiatives, and the timing thereof;
our ability to develop, manufacture and sell new products and services that meet the needs of our customers and gain commercial acceptance;
expected macro-economic business conditions;
expected cost of sales;
expected component supply constraints;
our ability to win new business;
our ability to integrate acquired businesses and realize expected benefits;
expected deployment of next generation networks by wireless network operators;
our operations not being adversely disrupted by other developments, operating, cyber security, litigation, or regulatory risks; and
expected tax and foreign exchange rates.

Forward-looking statements are subject to a variety of known and unknown risks, uncertainties and other factors that could cause actual events or results to differ significantly from those expressed or implied in our forward-looking statements, including, without limitation:

competition from new or established competitors or from those with greater resources;

2


the loss of, or significant demand fluctuations from, any of our significant customers;
our financial results being subject to fluctuation;
our business transformation initiatives may result in disruptions to our business and may not achieve the anticipated benefits;
our ability to respond to changing technology, industry standards and customer requirements;
failures of our products or services due to design flaws and errors, component quality issues, manufacturing defects, network service interruptions, cyber-security vulnerabilities or other quality issues;
deterioration in macro-economic conditions and resulting reduced demand for our products and services;
our ability to attract or retain key personnel and the impact of organizational change on our business;
cyber-attacks or other breaches of our information technology security;
risks related to the transmission, use and disclosure of user data and personal information;
disruption of, and demands on, our ongoing business and diversion of management's time and attention in connection with acquisitions or divestitures;
risks related to infringement on intellectual property rights of others;
our ability to obtain necessary rights to use software or components supplied by third parties;
our ability to enforce our intellectual property rights;
our reliance on single source suppliers for certain components used in our products;
our dependence on a limited number of third party manufacturers;
unanticipated costs associated with litigation or settlements;
our dependence on mobile network operators to promote and offer acceptable wireless data services;
risks related to contractual disputes with counterparties;
risks related to governmental regulation;
risks inherent in foreign jurisdictions;
risks related to tariffs or other trade restrictions; and
risks that the acquisition of M2M Group may fail to realize the expected benefits.

This list is not exhaustive of the factors that may affect any of our forward-looking statements. Forward-looking statements are statements about the future and are inherently uncertain, and our actual achievements or other future events or conditions may differ materially from those reflected in the forward-looking statements due to a variety of risks, uncertainties and other factors, including, without limitation, those referred to below under "Risks and Uncertainties" and those referred to in our other regulatory filings with the U.S. Securities and Exchange Commission (the "SEC") in the United States and the provincial securities commissions in Canada.

Our forward-looking statements are based on the beliefs, expectations and opinions of management on the date the statements are made, and we do not assume any obligation to update forward-looking statements if circumstances or management’s beliefs, expectations or opinions should change, except as required by applicable law. For the reasons set forth above, investors should not place undue reliance on forward-looking statements.


3


OVERVIEW

Business Overview
Sierra Wireless is an Internet of Things ("IoT") pioneer that empowers businesses and industries to transform and thrive in the connected economy.
We provide integrated Device-to-Cloud IoT solutions that are comprised of our recurring connectivity services, our IoT cloud platform, and our embedded cellular modules and gateways. Enterprises, industrial companies and Original Equipment Manufacturers ("OEMs") worldwide rely on our expertise to deliver fully-integrated IoT solutions to reduce complexity, gather intelligent edge data and enable connected IoT products and services.
To accelerate our transformation to a Device-to-Cloud IoT solutions company, we launched certain strategic and organizational structure changes in late 2018.  Since then, we have designed and commenced implementation of a variety of cost reduction initiatives broadly across the Company, and organizationally, we have combined three development teams into a single research and development ("R&D") entity to improve efficiency. Similarly, we have combined product management into one centralized team. We also re-organized our Go-To-Market team with a strong focus on IoT solutions under a unified sales force to focus on leveraging our IoT device leadership position into more highly integrated Device-to-Cloud IoT solutions.

Based on the organizational changes we made in the first quarter of this year, our segments have changed from those reported at December 31, 2018 when we previously reported three segments. Our new organizational structure clearly delineates our Device-to-Cloud IoT solutions activities and we now have two reportable segments effective the first quarter of 2019: (i) the IoT Solutions segment and (ii) the Embedded Broadband segment. We have adjusted our comparative information to align with this new segmentation.

IoT Solutions
Our IoT Solutions segment is focused on integrated end-to-end IoT solutions that include recurring connectivity services, our IoT cloud platform, software and devices (cellular modules and gateways) targeted primarily at enterprises and OEMs in the IoT space. Our primary focus is on three key markets: (i) Industrial Edge for manufacturing asset monitoring; (ii) Mobile Edge for mobile manufacturing asset tracking; and (iii) Infrastructure Edge for commercial infrastructure and building monitoring. The IoT opportunities we are focusing on have a high potential for recurring connectivity services to be provided to the customer along with our cloud platform, devices and management tools. Our new IoT Solutions segment is comprised of our former IoT Services and Enterprise Solutions segments, as well as a portion of our former OEM Solutions segment.
In this segment, we provide Device-to-Cloud IoT solutions that include: (i) our global cellular connectivity services, which are subscription-based and include our flexible Smart SIM and core network platforms; (ii) our cloud platform services, which provide a secure and scalable cloud platform for deploying and managing IoT subscriptions, over-the-air updates, devices and applications; and (iii) our managed broadband cellular services, which include a combination of hardware, managed high speed connectivity and cloud services. We also provide unified data orchestration to provide enhanced data management from the edge of the network to the cloud. This service, called Octave, securely integrates edge device, network and cloud application programming interfaces into a single platform.
Our devices in this reporting segment are comprised of IoT embedded cellular wireless modules which include Low Power Wide Area technologies ("LPWA"), second generation ("2G"), third generation ("3G"), and fourth generation ("4G") Long-Term Evolution ("LTE") products. We are currently working on the development of fifth generation ("5G") cellular embedded modules for anticipated launch in 2020. We also provide 3G and 4G cellular gateways and routers that are complemented by cloud-based services and on-premise software for secure device and network management.

4


Our gateway solutions address a broad range of vertical market applications within the mobility, industrial and enterprise market segments. Our AirLink gateways and routers have strong brand recognition with network operators, distributors, value added resellers and end customers. Our products are known for their high reliability and technical capability in mission-critical applications. These gateways and routers leverage our expertise in wireless technologies and offer the latest capabilities in LTE networking, including FirstNet solutions as well as Wi-Fi, Bluetooth and Global Navigation Satellite System ("GNSS") technologies. We also provide our customers with AirLink Management Services through our IoT platform and have introduced new advanced reporting and analytics to our portfolio.
Embedded Broadband
Our Embedded Broadband segment is comprised of our high-speed cellular embedded modules that are typically used in non-industrial applications, namely Automobile, Mobile Computing and Enterprise Networking markets. The products in this segment are typically high-speed 4G LTE and LTE-Advanced cellular modules that are ordered in larger volumes. In this segment, we have limited opportunities to provide connectivity services or fully-integrated IoT solutions to the OEM customer. We have a strong customer base in the Embedded Broadband business that is expected to transition over time from 4G LTE to 5G cellular technology.

As a leading embedded module vendor, we make it simple for our customers to embed high-speed cellular technologies and manage these devices through our IoT cloud platform. The design cycles in this business segment can range from two to three years in the Automotive market to 12 to 18 months in the Mobile Computing market. We are currently working on a number of potential 5G design opportunities with existing customers and new customers. Our portfolio also includes cloud-based remote device and data management capability, as well as support for our embedded application framework called Legato, which is an open source, Linux-based platform.

Additionally, we continue to seek opportunities to partner, acquire or invest in businesses, products and technologies that will help us drive our growth strategy forward and expand our position in the IoT market.

Third Quarter Overview
Our revenue of $174.0 million in the third quarter represents a decrease of 14.5% compared to the same period of 2018, driven by lower revenues from our Embedded Broadband and IoT Solutions segments. Our revenue of $539.2 million in the first nine months of 2019 represents a decrease of 8.9%, compared to the same period of 2018, driven by lower revenues from our Embedded Broadband segment, partially offset by growth in our IoT Solutions segment.
In the third quarter of 2019, compared to the same period of 2018, IoT Solutions segment revenue decreased by $2.0 million, or 2.1%, to $93.4 million due to lower Integrated IoT solutions module revenue, partially offset by stronger subscription, support and other services revenue and stronger sales of Enterprise gateway products. Within the IoT Solutions segment, excluding iTank revenue of $0.6 million, which was sold at the end of 2018, subscription, support and other services revenue was up 4.9% and within this, recurring subscription revenue was up 6.7%. Embedded Broadband segment revenue decreased by $27.4 million, or 25.3%, to $80.6 million due to weaker demand from networking, mobile computing and automotive customers.
Gross margin was 31.6% in the third quarter of 2019 compared to 33.1% in the same period of 2018, driven by unfavourable product and customer mix in our Embedded Broadband segment, partly offset by improved sales of higher margin gateways in our IoT Solutions segment. Gross margin was 31.3% in the first nine months of 2019 compared to 33.5% in the same period of 2018, driven by unfavorable product and customer mix in our Embedded Broadband segment combined with a specific provision related to a quality issue with an Asian automotive customer that we resolved in the second quarter of 2019, partly offset by improved sales of higher margin gateways in our IoT Solutions segment.
On April 30, 2019, we announced two initiatives related to the acceleration of our transformation to a Device-to Cloud IoT solutions company:

5


1) Consolidation of engineering resources and the transfer of certain functions to lower cost locations resulting in a significant reduction in our engineering team in Issy-Les-Moulineaux, outside of Paris, France. Following a detailed process, the majority of employees impacted by this program have been notified and we expect the program to be largely complete by the end of 2019. Our sales and customer support capability in Issy-Les-Moulineaux will remain unchanged and our teams in Toulouse and Sophia Antipolis will continue to provide key technical capability for our cloud and services offerings; and
2) Outsourcing of a select group of general and administrative transaction-based activities to a global outsourcing partner. Transition activities commenced in the third quarter of 2019 and we expect the activities to be fully transitioned by the end of 2019.
These two initiatives have impacted approximately 128 positions, of which 97 positions were in France. During the three months ended September 30, 2019, we recorded $2.7 million in severance and $3.6 million in transitional costs relating to these two initiatives (nine months ended September 30, 2019 - $17.7 million in severance and $6.6 million in transitional costs).
Foreign exchange rate changes impact our foreign currency denominated revenue and operating expenses. We estimate that changes in exchange rates between the third quarter of 2019 and the same period of 2018 negatively impacted our gross margin by $0.3 million and positively impacted our operating expenses by $0.6 million, resulting in a net positive impact on operating income of approximately $0.3 million.
Financial highlights for the third quarter of 2019:    

GAAP:
Revenue was $174.0 million compared to $203.4 million in the third quarter of 2018.
Gross margin was 31.6% compared to 33.1% in the third quarter of 2018.
Restructuring expense was $6.3 million compared to $0.2 million in the third quarter of 2018.
Loss from operations was $12.6 million compared to earnings from operations of $0.9 million in the third quarter of 2018.
Net loss was $20.2 million, or $0.56 per diluted share, compared to $1.0 million, or $0.03 per diluted share, in the third quarter of 2018.
Cash and cash equivalents were $86.9 million as at September 30, 2019 compared to $84.8 million at June 30, 2019.

NON-GAAP(1):
Gross margin was 31.7% compared to 33.1% in the third quarter of 2018.
Operating expenses were $53.3 million compared to $56.5 million in the third quarter of 2018.
Earnings from operations were $1.8 million compared to $10.9 million in the third quarter of 2018.
Adjusted EBITDA was $6.3 million compared to $16.0 million in the third quarter of 2018.
Net earnings were $1.0 million, or $0.03 per diluted share, compared to $10.5 million, or $0.29 per diluted share, in the third quarter of 2018.

We adopted the new accounting standard for lease accounting effective January 1, 2019. See "Impact of Accounting Pronouncements Affecting Current Periods" and Note 2 and 12 of our unaudited interim consolidated financial statements for more details.


(1) Non-GAAP financial measures exclude the impact of stock-based compensation expense and related social taxes, acquisition-related amortization, impairment, acquisition-related costs, integration costs, restructuring costs, certain other nonrecurring costs or recoveries, foreign exchange gains or losses on translation of balance sheet accounts, unrealized foreign exchange gains and losses on forward contracts and certain tax adjustments.  Refer to the section titled “Non-GAAP Financial Measures” for additional details and reconciliations to the applicable U.S. GAAP financial measures.

6


Acquisition of M2M Group
On November 5, 2019, we signed an agreement to purchase the M2M group of companies ("M2M Group") in Australia to expand our IoT Solutions business in the Asia-Pacific region. The M2M Group is focused on connectivity services and IoT cellular devices with a strong history of IoT leadership and solid carrier relations in the region. The purchase price of $19.8 million is based on cash consideration of $18.8 million for 100% of the equity plus approximately $1.0 million for the retirement of certain obligations, subject to normal working capital adjustments. The business is an excellent strategic fit with our IoT Solutions business with slightly more than half of the M2M Group’s revenue coming from subscription-based recurring revenue. This segment of the business has been growing rapidly over the last several years. The M2M Group’s revenue in the last twelve months was US$17.9 million, of which $9.2 million was recurring subscription-based revenue. We expect the acquisition to be accretive to earnings immediately following closing in early 2020. The M2M Group has a solid platform for us to increase our IoT services and solutions in Australia and Southeast Asia. We expect the transaction to close early in January 2020, subject to the satisfaction of customary closing conditions.

 


































7


Selected Consolidated Financial Information:
(in thousands of U.S. dollars, except where otherwise stated)
2019
 
 
2018
Q3
Q2
Q1
 
 
Total
Q4
Q3
Q2
Q1
Statement of Operations data:
 
 
 
 
 
 
 
 

 

 

Revenue
$
174,025

$
191,374

$
173,813

 
 
$
793,602

$
201,395

$
203,426

$
201,903

$
186,878

 
 
 
 
 
 
 
 
 
 
 
Gross Margin
 
 
 
 
 
 
 
 
 
 
   - GAAP
$
55,043

$
58,949

$
54,630

 
 
$
264,571

$
65,895

$
67,267

$
69,309

$
62,100

   - Non-GAAP (1)
55,087

58,991

54,686

 
 
265,025

65,945

67,313

69,366

62,401

 
 
 
 
 
 
 
 
 
 
 
Gross Margin %
 
 
 
 
 
 
 
 
 
 
   - GAAP
31.6
%
30.8
%
31.4
%
 
 
33.3
%
32.7
%
33.1
%
34.3
%
33.2
%
   - Non-GAAP (1)
31.7
%
30.8
%
31.5
%
 
 
33.4
%
32.7
%
33.1
%
34.4
%
33.4
%
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) from operations
 
 
 
 
 
 
 
 
 
 
   - GAAP
$
(12,559
)
$
(23,271
)
$
(9,806
)
 
 
$
(18,275
)
$
(4,197
)
$
853

$
(5,055
)
$
(9,876
)
   - Non-GAAP (1)
1,795

3,428

(155
)
 
 
35,306

10,230

10,859

10,414

3,803

 
 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA (1)
$
6,300

$
7,922

$
4,529

 
 
$
55,881

$
15,277

$
15,988

$
15,639

$
8,977

 
 
 
 
 
 
 
 
 
 
 
Net earnings (loss)
 
 
 
 
 
 
 
 
 
 
   - GAAP
$
(20,221
)
$
(28,176
)
$
(11,223
)
 
 
$
(24,610
)
$
(3,826
)
$
(1,037
)
$
(11,384
)
$
(8,363
)
   - Non-GAAP (1)
1,021

2,467

(854
)
 
 
32,427

8,966

10,514

9,653

3,294

 
 
 
 
 
 
 
 
 
 
 
Revenue by Segment:
 
 
 
 
 
 
 
 
 
 
IoT Solutions
$
93,439

$
99,145

$
94,287

 
 
$
373,937

$
95,728

$
95,487

$
93,274

$
89,448

Embedded Broadband
80,586

92,229

79,526

 
 
419,665

105,667

107,939

108,629

97,430

Revenue by Type:
 
 
 
 
 
 
 
 
 
 
Product
$
149,396

$
166,348

$
150,880

 
 
$
699,158

$
178,031

$
179,390

$
178,806

$
162,931

Subscription, support and other services
24,629

25,026

22,933

 
 
94,444

23,364

24,036

23,097

23,947

Share and per share data:
 
 
 
 
 
 
 
 
 
 
Basic net earnings (loss) per share (in dollars)
 
 
 
 
 
 
 
 
 
 
   - GAAP
$
(0.56
)
$
(0.78
)
$
(0.31
)
 
 
$
(0.68
)
$
(0.11
)
$
(0.03
)
$
(0.32
)
$
(0.23
)
   - Non-GAAP (1)
$
0.03

$
0.07

$
(0.02
)
 
 
$
0.90

$
0.25

$
0.29

$
0.27

$
0.09

Diluted net earnings (loss) per share (in dollars)
 
 
 
 
 
 
 
 
 
 
   - GAAP
$
(0.56
)
$
(0.78
)
$
(0.31
)
 
 
$
(0.68
)
$
(0.11
)
$
(0.03
)
$
(0.32
)
$
(0.23
)
   - Non-GAAP (1)
$
0.03

$
0.07

$
(0.02
)
 
 
$
0.90

$
0.25

$
0.29

$
0.27

$
0.09

 
 
 
 
 
 
 
 
 
 
 
Common shares (in thousands)
 
 
 
 
 
 
 
 
 
 
   At period-end
36,197

36,165

36,150

 
 
36,067

36,067

36,048

36,095

35,979

   Weighted average - basic
36,179

36,156

36,106

 
 
36,019

36,057

36,085

36,021

35,912

Weighted average - diluted
36,179

36,156

36,106

 
 
36,019

36,057

36,085

36,021

35,912

 
 
 
 
 
 
 
 
 
 
 
(1) Non-GAAP financial measures exclude the impact of stock-based compensation expense and related social taxes, acquisition-related amortization, impairment, acquisition-related costs, integration costs, restructuring costs, certain other nonrecurring costs or recoveries, foreign exchange gains or losses on translation of balance sheet accounts, unrealized foreign exchange gains and losses on forward contracts and certain tax adjustments.  Refer to the section titled “Non-GAAP Financial Measures” for additional details and reconciliations to the applicable U.S. GAAP financial measures.

See discussion under “Consolidated Results of Operations” for factors that have caused period-to-period variations.


8


Business highlights for the third quarter of 2019:     
We continued with our cost reduction initiatives we announced in the previous quarters, including consolidation of engineering resources and the transfer of certain functions to lower cost locations, outsourcing of a select group of business processes in finance, IT and human resources. In addition, during the third quarter, we continued to work on purchasing initiatives and have renegotiated certain supplier agreements with contract manufacturers to manage our costs.

We announced general availability of our Octave all-in-one edge-to-cloud solution for connecting industrial assets to the cloud. Octave integrates edge devices, network, and interfaces to all major cloud service providers into an all-in-one solution that securely extracts, orchestrates and acts on data from remote assets at the edge to the cloud. Octave will help industrial companies accelerate IoT development, de-risk their IoT deployments and free them to focus on their IoT data rather than the infrastructure.

We released our Omnilink OM500 ankle bracelet, an advanced offender monitoring solution with LTE connectivity and voice commands that enables law enforcement agencies to better manage pre-trial detainees, individuals under house arrest, probationers and parolees.

Ms. Lori O'Neill was appointed to the Company's Board of Directors. Ms. O'Neill is an experienced independent corporate director, financial executive and advisor to growth-oriented companies. She started her career with Deloitte & Touche LLP in 1988 and served as Audit Partner from 1996 to 2012. She is a board member for Constellation Software, as well as a board member and chair of the Audit Committee for the Ontario Lottery and Gaming Corporation, Hydro Ottawa and the University of Ottawa Heart Institute. Ms. O'Neill also serves as chair of the Board of Governors for Ashbury College. She graduated from Carleton University with a Bachelor of Commerce (Highest Honors).
Outlook
For our full year 2019 outlook, we now expect IoT Solutions segment revenue to increase approximately 3% to 4% year-over-year and Embedded Broadband segment revenue to decrease approximately 22% to 23% year-over-year. We expect this will result in full year 2019 revenue in the range of $708 million to $712 million. We are adjusting our profitability guidance of Adjusted EBITDA to be approximately $23 million and non-GAAP EPS to be in the range of zero to 3 cents. See "Non-GAAP Financial Measures".

This non-GAAP guidance constitutes "forward-looking statements" within the meaning of applicable securities laws and reflects current business indicators and expectations. These statements are based on management's current beliefs and assumptions, which could prove to be significantly incorrect. Forward-looking statements, particularly those that relate to longer periods of time, are subject to substantial known and unknown risks and uncertainties that could cause actual events or results to differ significantly from those expressed or implied by our forward-looking statements, including those described under "Cautionary Note Regarding Forward-Looking Statements" and "Risks and Uncertainties".

We believe that the market for wireless IoT solutions has strong long-term growth prospects. We anticipate strong long-term growth in the number of devices being wirelessly connected, driven by key enablers, such as lower wireless connectivity costs, faster wireless connection speeds, new wireless technologies designed specifically for the IoT, new devices and tools to simplify the development of IoT applications, and increased focus and investment from large ecosystem players. More importantly, we see emerging customer demand in many of our target verticals driven by increasing recognition of the value created by deploying IoT solutions, such as new revenue streams and cost efficiencies.




9


Key factors that we expect will affect our results in the near term are:

our ability to achieve the anticipated benefits of our business transformation initiatives;
the strength of our competitive position in the market;
the timely ramp up of sales of our new products recently launched or currently under development;
contributions to our operating results from our acquisitions;
the level of success our customers achieve with sales of connected solutions;
fluctuations in customer demand and inventory levels, particularly large customers;
general economic conditions in the markets we serve;
our ability to manage component supply issues when they arise;
our ability to attract and retain effective channel partners;
the timely launch and ramp up of new customer programs;
our ability to secure future design wins with both existing and new customers;
the end-of-life of existing customer programs;
manufacturing capacity at our various manufacturing sites;
our ability to manage component and product quality compliance;
fluctuations in foreign exchange rates;
tariffs and other trade restrictions; and
seasonality in demand.

We expect that product and price competition from other wireless device manufacturers and solution providers will continue to play a role in the IoT market. As a result of these factors, we may continue to experience volatility in our results on a quarter-to-quarter basis. For example, our gross margin percentage may fluctuate from quarter-to-quarter depending on product and customer mix, average selling prices and product costs.

See "Cautionary Note Regarding Forward-Looking Statements" and "Risks and Uncertainties".


10


CONSOLIDATED RESULTS OF OPERATIONS
 
Three months ended September 30
 
Nine months ended September 30
(in thousands of U.S. dollars, except where otherwise stated)
2019
 
2018
 
2019
 
2018
 
$
% of
Revenue
 
$
% of
Revenue
 
$
% of
Revenue

 
$
% of
Revenue

Revenue
 
 
 
 
 
 
 
 
 
 
 
IoT Solutions
93,439

53.7
 %
 
95,487

46.9
%
 
286,871

53.2
 %
 
278,209

47.0
 %
Embedded Broadband
80,586

46.3
 %
 
107,939

53.1
%
 
252,341

46.8
 %
 
313,998

53.0
 %
 
174,025

100.0
 %
 
203,426

100.0
%
 
539,212

100.0
 %
 
592,207

100.0
 %
Cost of sales
 
 
 
 
 
 
 
 
 
 
 
IoT Solutions
58,236

33.5
 %
 
59,428

29.2
%
 
180,378

33.4
 %
 
175,258

29.6
 %
Embedded Broadband
60,746

34.9
 %
 
76,731

37.7
%
 
190,212

35.3
 %
 
218,273

36.9
 %
 
118,982

68.4
 %
 
136,159

66.9
%
 
370,590

68.7
 %
 
393,531

66.5
 %
Gross margin
55,043

31.6
 %
 
67,267

33.1
%
 
168,622

31.3
 %
 
198,676

33.5
 %
 
 
 
 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing
23,523

13.5
 %
 
21,743

10.7
%
 
69,784

12.9
 %
 
66,234

11.2
 %
Research and development
20,550

11.8
 %
 
22,621

11.1
%
 
65,458

12.1
 %
 
71,477

12.1
 %
Administration
11,937

6.9
 %
 
14,998

7.4
%
 
37,227

6.9
 %
 
47,066

7.9
 %
Restructuring
6,274

3.6
 %
 
227

0.1
%
 
25,851

4.8
 %
 
4,770

0.8
 %
Acquisition-related and integration
291

0.2
 %
 
570

0.3
%
 
700

0.1
 %
 
3,349

0.6
 %
Amortization
5,027

2.9
 %
 
6,255

3.1
%
 
15,238

2.8
 %
 
19,858

3.4
 %
 
67,602

38.8
 %
 
66,414

32.6
%
 
214,258

39.7
 %
 
212,754

35.9
 %
Loss from operations
(12,559
)
(7.2
)%
 
853

0.4
%
 
(45,636
)
(8.5
)%
 
(14,078
)
(2.4
)%
Foreign exchange loss
(2,964
)
 
 
(159
)
 
 
(2,962
)
 
 
(3,092
)
 
Other (expense) income
(121
)
 
 
7

 
 
(192
)
 
 
70

 
Earnings (loss) before income taxes
(15,644
)
 
 
701

 
 
(48,790
)
 
 
(17,100
)
 
Income tax expense
4,577

 
 
1,738

 
 
10,830

 
 
3,684

 
Net loss
(20,221
)
 
 
(1,037
)
 
 
(59,620
)
 
 
(20,784
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss per share(in dollars) - basic and diluted
$
(0.56
)
 
 
$
(0.03
)
 
 
$
(1.65
)
 
 
$
(0.58
)
 
Weighted average number of shares (in thousands) - basic and diluted
36,179

 
 
36,085

 
 
36,147

 
 
36,007

 
 
 
 
 
 
 
 
 
 
 
 
 

Revenue
Revenue was $174.0 million in the third quarter of 2019 compared to $203.4 million in the same period of 2018. The decrease was primarily driven by weaker demand from mobile computing and networking customers in our Embedded Broadband segment, partially offset by growth in our IoT Solutions segment.

Revenue was $539.2 million in the first nine months of 2019 compared to $592.2 million in the same period of 2018. The decrease was mainly due to weaker demand from mobile computing and networking customers in the Embedded Broadband segment, partly offset by higher demand for Enterprise solutions in the IoT Solutions segment.

11


Gross margin
Gross margin was 31.6% in the third quarter of 2019 compared to 33.1% in the same period of 2018. The decrease was mainly driven by unfavourable product and customer mix in our Embedded Broadband segment, specifically lower sales of higher margin modules to mobile computing and networking customers, partly offset by improved sales of higher margin Enterprise solutions in our IoT Solutions segment.
Gross margin was 31.3% in the first nine months of 2019 compared to 33.5% in the same period of 2018. The decrease is mainly driven by unfavorable product and customer mix in our Embedded Broadband segment, specifically lower sales of higher margin modules to mobile computing and networking customers, combined with a specific provision related to a quality issue with an Asian automotive customer that we resolved in the second quarter of 2019, partly offset by improved sales of higher margin Enterprise solutions in our IoT Solutions segment.
Gross margin included stock-based compensation expense and related social taxes of $0.1 million in each of the third quarter of 2019 and 2018, respectively, and $0.2 million and $0.4 million in the first nine months of 2019 and 2018, respectively.

Sales and marketing
Sales and marketing expense increased by $1.8 million, or 8.2%, in the third quarter of 2019 and by $3.6 million, or 5.4%, in the first nine months of 2019 compared to the same periods of 2018. These increases were primarily driven by higher investments in our sales force and corporate marketing initiatives to accelerate our transformation to a Device-to-Cloud IoT solutions company.

Sales and marketing expense included stock-based compensation expense and related social taxes of $1.2 million and $0.8 million in the third quarter of 2019 and 2018, respectively, and $3.5 million and $2.2 million in the first nine months of 2019 and 2018, respectively.

Research and development
R&D expense decreased by $2.1 million, or 9.2%, in the third quarter of 2019 and by $6.0 million, or 8.4%, in the first nine months of 2019 compared to the same periods of 2018. These decreases mainly reflected various cost reduction initiatives we commenced during the fourth quarter of 2018 and through 2019 to accelerate our transformation to a Device-to-Cloud IoT solutions company, combined with lower certification costs.

R&D expense included stock-based compensation expense and related social taxes of $0.8 million and $0.7 million in the third quarter of 2019 and 2018, respectively, and $2.5 million and $1.8 million in the first nine months of 2019 and 2018, respectively. In each of the third quarter of 2019 and 2018, R&D expense included acquisition amortization of $0.1 million, and $0.2 million in each of the first nine months of 2019 and 2018.

Administration
Administration expense decreased by $3.1 million, or 20.4%, in the third quarter of 2019 compared to the same period of 2018 mainly driven by lower consulting fees and cost reduction initiatives. Administration expense decreased by $9.8 million, or 20.9%, in the first nine months of 2019 compared to the same period of 2018. Administration expense in the first nine months of 2018 included one-time separation costs related to our former CEO's retirement, including higher stock-based compensation expense in connection with accelerated vesting of equity awards and higher consulting fees.

Administration expense included stock-based compensation expense and related social taxes of $1.8 million and $1.9 million in the third quarter of 2019 and 2018, respectively, and $5.2 million and $5.8 million in the first nine months of 2019 and 2018, respectively.

Restructuring
Restructuring expense of $6.3 million and $25.9 million in the third quarter and first nine months of 2019, respectively, related to the acceleration of our transformation to a Device-to-Cloud IoT solutions company which included consolidation of our engineering programs and sites, consolidation of product management resources

12


and outsourcing activities of certain general and administrative functions, and certain organizational changes we implemented in late 2018 and first quarter of 2019.

Restructuring expense in the first nine months of 2018 were related to initiatives focused on capturing synergies as we integrated our acquisition of Numerex Corp ("Numerex"). During the second quarter of 2019, we substantially completed the integration of Numerex. We recorded restructuring expense of $0.2 million and $4.8 million in the third quarter and first nine months of 2018, respectively.

Acquisition-related and integration
In the third quarter and first nine months of 2019, acquisition-related and integration costs decreased by $0.3 million and $2.6 million, respectively, compared to the same periods of 2018. The decrease in integration costs reflect a lower level of integration activities for Numerex as we substantially completed the integration in the second quarter of 2019.

Amortization
Amortization expense in the third quarter and first nine months of 2019 decreased by $1.2 million and $4.6 million, respectively, mainly as a result of fully depreciated acquisition-related and other assets. Amortization expense for the third quarter and first nine months of 2019 included $3.6 million and $10.9 million of acquisition-related amortization, respectively, compared to $4.3 million and $14.1 million in the same periods of 2018.

Foreign exchange loss
Foreign exchange loss was $3.0 million for the third quarter of 2019 compared to a loss of $0.2 million in the same period of 2018. For the first nine months of 2019, foreign exchange loss was $3.0 million compared to $3.1 million in the same period of 2018. The foreign exchange loss in the third quarter of 2019 was primarily driven by the decrease in the value of EURO compared to the U.S. dollar.

Income tax expense
Income tax expense increased by $2.8 million and $7.1 million in the third quarter and first nine months of 2019, respectively, compared to the same periods of 2018 primarily due to changes in the realizability of tax assets in certain jurisdictions.

Net loss
In the third quarter and first nine months of 2019, net loss was $20.2 million and $59.6 million, respectively compared to $1.0 million and $20.8 million in the same periods of 2018. The increase in net loss was mainly due to higher restructuring costs, lower revenue and gross margin and higher tax expense, partially offset by lower administration and R&D expense.

Net loss in the third quarter and first nine months of 2019 included stock-based compensation expense and related social taxes of $3.9 million and $11.4 million, respectively, and acquisition related amortization of $3.6 million and $10.9 million, respectively. Net loss in the third quarter and first nine months of 2018 included stock-based compensation expense and related social taxes of $3.5 million and $10.3 million, respectively, and acquisition related amortization of $4.3 million and $14.2 million, respectively.


13


SEGMENTED INFORMATION

We operate our business under two reportable segments: (i) the IoT Solutions segment; and (ii) the Embedded Broadband segment. In the first quarter of 2019, we transitioned to these two new reportable segments from the three segments we were reporting on previously. See "Business Overview" for more details.
IoT Solutions
(in thousands of U.S. dollars, except where otherwise stated)
 
 
 
 
 
% change
 
Q3, 2019

 
Q3, 2018

 
Q3 YTD,
2019

 
Q3 YTD,
2018

 
Q3, 2019 vs Q3, 2018

Q3 YTD, 2019 vs Q3 YTD, 2018

Revenue
 
93,439

 
95,487

 
286,871

 
278,209

 
(2.1
)%
3.1
%
Cost of sales
 
58,236

 
59,428

 
180,378

 
175,258

 
(2.0
)%
2.9
%
Gross margin
 
35,203

 
36,059

 
106,493

 
102,951

 
(2.4
)%
3.4
%
Gross margin %
 
37.7
%
 
37.8
%
 
37.1
%
 
37.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

In the third quarter, IoT Solutions revenue decreased by $2.0 million, or 2.1%, compared to the same period in 2018, driven by lower revenue from Integrated IoT solutions module revenue, partially offset by stronger subscription, support and other services revenue and stronger sales of Enterprise gateway products. Within the IoT Solutions segment, excluding iTank revenue of $0.6 million, which was sold at the end of 2018, subscription, support and other services revenue was up 4.9% and within this, recurring subscription revenue was up 6.7%.

In the first nine months, IoT Solutions revenue increased by $8.7 million, or 3.1%, compared to the same period of 2018, mainly driven by strong sales of Enterprise gateway products. Within the IoT Solutions segment, excluding iTank revenue of $1.6 million, which was sold at the end of 2018, subscription, support and other services revenue was up 4.4% and within this, recurring subscription, support and other services revenue was up 4.6%.

Gross margin for IoT Solutions of 37.7% in the third quarter of 2019 and 37.1% in the first nine months of 2019 were comparable to the same periods in 2018.
Embedded Broadband
(in thousands of U.S. dollars, except where otherwise stated)
 
 
 
 
 
% change
 
Q3, 2019

 
Q3, 2018

 
Q3 YTD,
2019

 
Q3 YTD,
2018

 
Q3, 2019 vs Q3, 2018

Q3 YTD, 2019 vs Q3 YTD, 2018

Revenue
 
80,586

 
107,939

 
252,341

 
313,998

 
(25.3
)%
(19.6
)%
Cost of sales
 
60,746

 
76,731

 
190,212

 
218,273

 
(20.8
)%
(12.9
)%
Gross margin
 
19,840

 
31,208

 
62,129

 
95,725

 
(36.4
)%
(35.1
)%
Gross margin %
 
24.6
%
 
28.9
%
 
24.6
%
 
30.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

In the third quarter, Embedded Broadband revenue decreased by $27.4 million, or 25.3%, compared to the same period in 2018, mainly due to weaker demand from mobile computing and networking customers as we complete certain programs with these customers; and weaker industry-wide demand in Automotive, combined with expected delays in the launch of new high-volume programs. In the first nine months of 2019, Embedded Broadband revenue decreased by $61.7 million, or 19.6%, compared to the same period of 2018. This decrease was primarily due to weaker demand from mobile computing and networking customers, partially offset by a modest increase in revenue from automotive customers.

Gross margin for Embedded Broadband was 24.6% in the third quarter and the first nine months of 2019, compared to 28.9% and 30.5%, respectively, in the same periods of 2018. These decreases were mainly driven by unfavorable product and customer mix, in particular, from lower revenue of higher margin mobile computing and

14


networking. In the first nine months of 2019, we also recorded a specific provision related to a quality issue with an Asian automotive customer which we resolved during the second quarter of 2019.





15


SUMMARY OF QUARTERLY RESULTS OF OPERATIONS

The following table highlights selected consolidated financial information for each of the eight most recent quarters that, in management’s opinion, have been prepared on a basis consistent with the audited consolidated financial statements for the year ended December 31, 2018, except as indicated in section "Impact of Accounting Pronouncements Affecting Current Period". The selected consolidated financial information presented below reflects all adjustments, consisting primarily of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of results for the interim periods. Prior quarters have been adjusted for the adoption of the new revenue standard.  These results are not necessarily indicative of results for any future period.  You should not rely on these results to predict future performance.

(in thousands of U.S. dollars, except where otherwise stated)
2019
2018
2017 As adjusted
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Revenue
$
174,025

$
191,374

$
173,813

$
201,395

$
203,426

$
201,903

$
186,878

$
183,533

Cost of sales
118,982

132,425

119,183

135,500

136,159

132,594

124,778

121,719

Gross margin
55,043

58,949

54,630

65,895

67,267

69,309

62,100

61,814

Gross margin %
31.6
%
30.8
%
31.4
%
32.7
%
33.1
%
34.3
%
33.2
%
33.7
%
 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
Sales and marketing
23,523

23,755

22,506

22,353

21,743

22,066

22,425

20,436

Research and development
20,550

22,111

22,797

22,230

22,621

24,391

24,465

21,828

Administration
11,937

12,893

12,397

14,516

14,998

19,804

12,264

11,379

Restructuring
6,274

18,180

1,397

2,345

227

952

3,591

245

Acquisition-related and integration
291

314

95

613

570

1,014

1,765

4,792

Loss on disposal of iTank business



2,064





Amortization
5,027

4,967

5,244

5,971

6,255

6,137

7,466

6,073

 
67,602

82,220

64,436

70,092

66,414

74,364

71,976

64,753

Earnings (loss) from operations
(12,559
)
(23,271
)
(9,806
)
(4,197
)
853

(5,055
)
(9,876
)
(2,939
)
Foreign exchange gain (loss)
(2,964
)
854

(852
)
(2,378
)
(159
)
(4,048
)
1,115

1,267

Other income (expense)
(121
)
(102
)
31

(19
)
7

8

55

38

Earnings (loss) before income tax
(15,644
)
(22,519
)
(10,627
)
(6,594
)
701

(9,095
)
(8,706
)
(1,634
)
Income tax expense (recovery)
4,577

5,657

596

(2,768
)
1,738

2,289

(343
)
1,880

Net earnings (loss)
$
(20,221
)
$
(28,176
)
$
(11,223
)
$
(3,826
)
$
(1,037
)
$
(11,384
)
$
(8,363
)
$
(3,514
)
Earnings (loss) per share - in dollars
 
 
 
 
 
 
 
 
Basic
$
(0.56
)
$
(0.78
)
$
(0.31
)
$
(0.11
)
$
(0.03
)
$
(0.32
)
$
(0.23
)
$
(0.11
)
Diluted
$
(0.56
)
$
(0.78
)
$
(0.31
)
$
(0.11
)
$
(0.03
)
$
(0.32
)
$
(0.23
)
$
(0.11
)
Weighted average number of shares (in thousands)
 
 
 
 
 
 
 
 
Basic
36,179

36,156

36,106

36,057

36,085

36,021

35,912

33,136

Diluted
36,179

36,156

36,106

36,057

36,085

36,021

35,912

33,136

 
 
 
 
 
 
 
 
 
See "Overview" and "Consolidated Results of Operations" in this MD&A, for details of our results for the third quarter of 2019 compared to results for the third quarter of 2018.
Our quarterly results may fluctuate from quarter to quarter, driven by variation in sales volume, product mix, the combination of variable and fixed operating expenses, as well as the impact of acquisitions completed in the current and prior quarters and other factors.

We adopted the new accounting standard for revenue recognition effective January 1, 2018. Prior periods have been adjusted accordingly. See Note 2 and 3 of our 2018 audited annual consolidated financial statements.

16


LIQUIDITY AND CAPITAL RESOURCES

Selected Consolidated Financial Information
(in thousands of U.S. dollars)
 
Three months ended September 30
 
Nine months ended September 30
 
2019

2018

Change

 
2019

2018

Change

Cash flows provided (used) before changes in non-cash working capital:
 
$
(353
)
$
13,395

$
(13,748
)
 
$
(12,355
)
$
27,034

$
(39,389
)
Changes in non-cash working capital
 
 
 
 
 
 
 
 
Accounts receivable
 
19,811

(5,070
)
24,881

 
37,809

(6,762
)
44,571

Inventories
 
(4,357
)
2,114

(6,471
)
 
(9,976
)
1,325

(11,301
)
Prepaid expense and other
 
(1,982
)
1,396

(3,378
)
 
(7,500
)
(4,322
)
(3,178
)
Accounts payable and accrued liabilities
 
(7,102
)
(9,401
)
2,299

 
497

9,025

(8,528
)
Deferred revenue
 
1,961

193

1,768

 
4,679

(1,496
)
6,175

 
 
8,331

(10,768
)
19,099

 
25,509

(2,230
)
27,739

Cash flows provided by (used in):
 
 
 
 
 
 
 
 
Operating activities
 
7,978

2,627

5,351

 
13,154

24,804

(11,650
)
 
 
 
 
 
 
 
 
 
Investing activities
 
(5,254
)
(5,082
)
(172
)
 
(14,194
)
(15,505
)
1,311

Proceeds from sale of iTank business
 



 
500


500

Capital expenditures and increase in intangible assets
 
(5,257
)
(5,096
)
(161
)
 
(14,781
)
(15,581
)
800

 
 
 
 
 
 
 
 
 
Financing activities
 
(200
)
(3,350
)
3,150

 
(1,259
)
(4,099
)
2,840

Issue of common shares
 
160

1,257

(1,097
)
 
327

2,535

(2,208
)
Repurchase of common shares for cancellation
 

(3,120
)
3,120

 

(3,120
)
3,120

Purchase of treasury shares for RSU distribution
 
(59
)
(1,085
)
1,026

 
(326
)
(1,085
)
759

Taxes paid related to net settlement of equity awards
 
(110
)
(334
)
224

 
(855
)
(1,788
)
933

Payment for contingent consideration
 



 

(130
)
130

 
 
 
 
 
 
 
 
 
Free Cash Flow (1)
 
$
2,721

$
(2,469
)
$
5,190

 
$
(1,627
)
$
9,223

$
(10,850
)
 
 
 
 
 
 
 
 
 
(1) See section titled "Non-GAAP Financial Measures" for additional details and a reconciliation to the applicable U.S. GAAP financial measure.

Operating Activities
Cash provided by operating activities increased by $5.4 million to $8.0 million in the third quarter of 2019, compared to the same period in 2018 mainly due to higher collections in accounts receivable, offset by lower profitability and higher working capital requirements for accounts payable and inventories. In the third quarter of 2019, we sold and de-recognized approximately $34.2 million of trade accounts receivable and collected and remitted to CIBC approximately $34.8 million under our receivable purchase agreement, which is reflected in cash flows provided by operating activities. See "Accounts Receivable Purchase Agreement" below for details.

Cash provided by operating activities decreased by $11.7 million in the first nine months of 2019 compared to the same period in 2018, mainly due to lower profitability and higher working capital requirements for inventory and accounts payable, partly offset by sale of receivables under our receivable purchase agreement. In the first nine months of 2019, we sold and de-recognized approximately $50.7 million of trade accounts receivable and collected and remitted to CIBC approximately $34.8 million under our RPA.


17


Investing Activities
Cash used in investing activities increased by $0.2 million in the third quarter of 2019 compared to the same period in 2018 due to higher capital expenditures.

Cash used in investing activities decreased by $1.3 million in the first nine months of 2019 compared to the same period of 2018, mainly due to lower capital expenditures and $0.5 million proceeds released from escrow related to the sale of our iTank business.
 
Capital expenditures of $5.3 million and $14.8 million in the third quarter and first nine months of 2019 were primarily for production, tooling and R&D equipment, while cash used for intangible assets was primarily for capitalized software costs.
Financing Activities
Net cash used in financing activities decreased by $3.2 million in the third quarter of 2019 compared to the same quarter of 2018. In the third quarter of 2018, we repurchased and canceled $3.1 million of common shares under the Normal Course Issuer Bid program in place at that time.
Net cash used in financing activities decreased by $2.8 million in the first nine months of 2019 compared to the same period of 2018, mainly due to to the absence of share repurchases, lower taxes paid related to net settlement of equity awards and lower purchases of treasury shares, offset by lower proceeds received from stock option exercises.
Free Cash Flow
Free cash flow for the third quarter increased by $5.2 million compared to the same period of 2018, primarily as a result of higher operating cash flow from sale of receivables offset by lower profitability.

Free cash flow for the first nine months of 2019 decreased by $10.9 million compared to the same period of 2018, primarily as a result of lower profitability and higher working capital requirements, partially offset by sale of receivables. See "Non-GAAP Financial Measures".

Cash Requirements
Our near-term cash requirements are primarily related to funding our operations, including restructuring expenditures, inventory and other working capital items, capital expenditures and other obligations summarized in the table below. Cash may also be used to finance acquisitions of businesses in line with our strategy and share repurchases. We continue to believe our cash and cash equivalents balance of $86.9 million at September 30, 2019, undrawn availability under our revolving credit facility, receivable purchase facility, and cash generated from operations will be sufficient to fund our expected working capital, capital expenditure, restructuring and acquisition requirements for at least the next twelve months based on current business plans. However, we cannot be certain that our actual cash requirements will not be greater than we currently expect.
See "Cautionary Note Regarding Forward-Looking Statements".

Our ability to achieve our business and cash generation plans is based on a number of assumptions which involve significant judgment and estimates of future performance, borrowing capacity and credit availability which cannot at all times be assured.


18


The following table presents the aggregate amount of future cash outflows for contractual obligations as of September 30, 2019.
Payments due by period
(in thousands of U.S. dollars)
Total

2019

2020

2021

2022

2023

Thereafter

Operating lease obligations
$
30,631

$
2,134

$
8,010

$
6,759

$
4,838

$
3,010

$
5,880

Finance lease obligations
726

59

396

252

8

8

3

Purchase obligations  - Contract Manufacturers(1)
137,734

137,734






Purchase obligations - Mobile Network Operators (2)
7,535

2,019

3,744

1,319

453



Purchase obligation - Cloud Computing Service (3)
3,523

331

1,321

1,321

550



Other long-term liabilities
440

51

16

12

361



Total (4)
$
180,589

$
142,328

$
13,487

$
9,663

$
6,210

$
3,018

$
5,883

 
 
 
 
 
 
 
 
(1) Purchase obligations represent obligations with certain contract manufacturers and suppliers to buy a minimum amount of designated products between October 2019 and December 2019.  In certain of these arrangements, we may be required to acquire and pay for such products up to the prescribed minimum or forecasted purchases.
(2) Purchase obligations represent obligations with certain mobile network operators to purchase a minimum amount of wireless data and wireless data services between October 2019 and October 2022.
(3) Purchase obligation represents obligation with a supplier to purchase a minimum amount of cloud computing services between October 2019 and May 2022.
(4) Also see Acquisition of M2M Group under Third Quarter Overview section.

Normal Course Issuer Bid
On August 1, 2018, we received approval from the Toronto Stock Exchange ("TSX") of our Notice of Intention to make a Normal Course Issuer Bid ("NCIB"). Pursuant to the NCIB, we were permitted to purchase for cancellation up to 3,580,668 of our common shares, or approximately 9.9% of common shares outstanding as of the date of the announcement, representing 10% of the public float. The NCIB commenced on August 8, 2018 and terminated on August 7, 2019. During the three and nine months ended September 30, 2019, we did not repurchase any common shares. We repurchased and canceled a total of 161,500 common shares at an average price of 19.32 per share under the NCIB.

Capital Resources
The source of funds for our future capital expenditures and commitments includes cash, cash from operations and borrowings under our credit facilities.
 
2019
 
 
2018
 
(in thousands of U.S. dollars)
Sep 30
Jun 30
Mar 31
 
 
Dec 31
 
Sep 30
 
Jun 30
 
Mar 31
 
Cash and cash equivalents
$
86,900

$
84,769

$
74,143

 
 
$
89,076

 
$
67,460

 
$
73,411

 
$
70,588

 
Unused committed credit facility
30,000

30,000

30,000

 
 
30,000

 
30,000

 
10,000

 
10,000

 
Total
$
116,900

$
114,769

$
104,143

 
 
$
119,076

 
$
97,460

 
$
83,411

 
$
80,588

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

At September 30, 2019, we have committed capital expenditures of $6.2 million (Dec 31, 2018 - $4.9 million). Our capital expenditures during the fourth quarter of 2019 are expected to be primarily for production equipment, R&D equipment and software.





19


Credit Facilities
We have a committed $30 million senior secured revolving credit facility (the "Revolving Facility") with the Canadian Imperial Bank of Commerce ("CIBC") as sole lender and as Administrative Agent. The Revolving Facility is secured by a pledge against substantially all of our assets and includes an accordion feature, which permits the Company to increase the aggregate revolving loan commitments thereunder on an uncommitted basis subject to certain conditions. The Revolving Facility matures on July 31, 2021 and will be used for general corporate purposes, including, but not limited to, capital expenditures, working capital requirements and/or certain acquisitions permitted under the Revolving Facility. As at September 30, 2019, there were no borrowings under the Revolving Facility.

Letters of Credit
We have access to a standby letter of credit facility of $1.5 million from Toronto Dominion Bank. The credit facility is used for the issuance of letters of credit and guarantees and is guaranteed by Export Development Canada. As of September 30, 2019, there were two letters of credit issued against the revolving standby letter of credit facility for a total value of $0.1 million.

Accounts Receivable Purchase Agreement
On June 26, 2019, we entered into an uncommitted Receivables Purchase Agreement (the “RPA”) with CIBC to improve our liquidity during high working capital periods. Under the RPA, up to $75.0 million of Receivables may be sold and remain outstanding at any time. Eligible trade receivables are sold at 100% face value less discount with a 10% limited recourse to us arising from certain repurchase events. The RPA is on an uncommitted basis with no expiry date and carries a discount rate of CDOR (for purchased receivables in Canadian dollars) and LIBOR (for purchased receivables in U.S. dollars) plus an applicable margin. After the sale, we do not retain any interests in the Receivables, but continue to service and collect, in an administrative capacity, the outstanding receivables on behalf of CIBC.

We account for the sold Receivables as a sale in accordance with Financial Accounting Standards Board ("FASB") ASC 860, Transfers and Servicing. Net proceeds from the sale reflect the face value of the Receivables less discount fees charged by CIBC and one time legal costs and are classified under operating activities in the consolidated statements of cash flows.

Pursuant to the RPA, the Company sold and de-recognized $34.2 million and $50.7 million Receivables during the three and nine months ended September 30, 2019, respectively. As at September 30, 2019, $15.9 million remained outstanding to be collected from customers and remitted to CIBC. Discount fees and legal costs totaling $0.1 million and $0.3 million for the three and nine months ended September 30, 2019, respectively, are included in Other expense and Administration, respectively, in the consolidated statements of operations.


NON-GAAP FINANCIAL MEASURES

Our consolidated financial statements are prepared in accordance with U.S. GAAP on a basis consistent for all periods presented.  In addition to results reported in accordance with U.S. GAAP, we use non-GAAP financial measures as supplemental indicators of our operating performance.  The term “non-GAAP financial measure” is used to refer to a numerical measure of a company’s historical or future financial performance, financial position or cash flows that: (i) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with U.S. GAAP in a company’s statement of earnings, balance sheet or statement of cash flows; or (ii) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented.


20


Our non-GAAP financial measures include non-GAAP gross margin, non-GAAP earnings (loss) from operations, non-GAAP net earnings (loss), non-GAAP basic and diluted net earnings (loss) per share, adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), and free cash flow. 

Non-GAAP gross margin excludes the impact of stock-based compensation expense and related social taxes and certain other nonrecurring costs or recoveries.

Non-GAAP earnings (loss) from operations includes allocation of realized gains or losses on forward contracts and excludes the impact of stock-based compensation expense and related social taxes, acquisition-related amortization, acquisition-related and integration costs, restructuring costs, impairment and certain other nonrecurring costs or recoveries.

Non-GAAP income tax expense includes certain tax adjustments and taxes on acquisition-related amortization, acquisition-related and integration costs, restructuring costs, other non-recurring costs and foreign exchange.

In addition to the above, non-GAAP net earnings (loss) and non-GAAP net earnings (loss) per share exclude the impact of foreign exchange gains or losses on translation of certain balance sheet accounts, foreign exchange gains or losses on forward contracts and certain tax adjustments.

We use the above-noted non-GAAP financial measures for planning purposes and to allow us to assess the performance of our business before including the impacts of the items noted above as they affect the comparability of our financial results. These non-GAAP measures are reviewed regularly by management and the Board of Directors as part of the ongoing internal assessment of our operating performance. We also use non-GAAP earnings from operations as one component in determining short-term incentive compensation for management employees.

Adjusted EBITDA is defined as net earnings (loss) plus stock-based compensation expense and related social taxes, acquisition-related and integration costs, restructuring cost, impairment, certain other non-recurring costs or recoveries, amortization, foreign exchange gains or losses on translation of certain balance sheet accounts, unrealized foreign exchange gains or losses on forward contracts, interest and income tax expense. Adjusted EBITDA is a metric used by investors and analysts for valuation purposes and is an important indicator of our operating performance and our ability to generate liquidity through operating cash flow that will fund future working capital needs and fund future capital expenditures.

Free cash flow is defined as cash flow from operating activities less capital expenditures and increases in intangibles. We believe that disclosure of free cash flow provides a good measure of our ability to internally generate cash that can be used for investment in the business and is an important indicator of our financial strength and performance. We also believe that certain investors and analysts use free cash flow to assess our business.

We disclose these non-GAAP financial measures as we believe they provide useful information to investors and analysts to assist them in their evaluation of our operating results and to assist in comparisons from one period to another. Readers are cautioned that non-GAAP financial measures do not have any standardized meaning prescribed by U.S. GAAP and therefore may not be comparable to similar measures presented by other companies.

We strongly encourage investors to review our financial information in its entirety and not to rely on a single financial measure. We therefore believe that despite these limitations, it is appropriate to supplement the U.S. GAAP measures with certain non-GAAP measures defined in this section of our MD&A.


21


The following table provides a reconciliation of the non-GAAP financial measures to our U.S. GAAP results:
(in thousands of U.S. dollars, except where otherwise stated)
2019
 
 
2018
 
Q3
Q2
Q1
 
 
Total
Q4
Q3
Q2
Q1
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross margin - GAAP
$
55,043

$
58,949

$
54,630

 
 
$
264,571

$
65,895

$
67,267

$
69,309

$
62,100

 
Stock-based compensation and related social taxes
44

44

59

 
 
479

58

57

57

307

 
Realized losses on hedge contracts

(2
)
(3
)
 
 
(30
)
(13
)
(11
)

(6
)
 
Other nonrecurring costs



 
 
5

5




 
Gross margin - Non-GAAP
$
55,087

$
58,991

$
54,686

 
 
$
265,025

$
65,945

$
67,313

$
69,366

$
62,401

 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) from operations - GAAP
$
(12,559
)
$
(23,271
)
$
(9,806
)
 
 
$
(18,275
)
$
(4,197
)
$
853

$
(5,055
)
$
(9,876
)
 
Stock-based compensation and related social taxes
3,876

4,102

3,414

 
 
13,006

2,743

3,473

3,950

2,840

 
Acquisition-related and integration
291

314

95

 
 
3,962

613

570

1,014

1,765

 
Restructuring
6,274

18,180

1,397

 
 
7,115

2,345

227

952

3,591

 
Other nonrecurring costs
279

662

1,167

 
 
11,485

4,761

1,583

5,141


 
Realized losses on hedge contracts
24

(183
)
(109
)
 
 
(562
)
(296
)
(201
)
(14
)
(51
)
 
Acquisition-related amortization
3,610

3,624

3,687

 
 
18,575

4,261

4,354

4,426

5,534

 
Earnings (loss) from operations - Non-GAAP
$
1,795

$
3,428

$
(155
)
 
 
$
35,306

$
10,230

$
10,859

$
10,414

$
3,803

 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss - GAAP
$
(20,221
)
$
(28,176
)
$
(11,223
)
 
 
$
(24,610
)
$
(3,826
)
$
(1,037
)
$
(11,384
)
$
(8,363
)
 
Stock-based compensation and related social taxes, restructuring, impairment, acquisition-related, integration and other non-recurring costs (recoveries)
10,720

23,258

6,073

 
 
35,568

10,462

5,853

11,057

8,196

 
Amortization
8,115

8,118

8,371

 
 
39,150

9,308

9,483

9,651

10,708

 
Interest and other, net
121

102

(31
)
 
 
(51
)
19

(7
)
(8
)
(55
)
 
Foreign exchange loss (gain)
2,988

(1,037
)
743

 
 
4,908

2,082

(42
)
4,034

(1,166
)
 
Income tax expense (recovery)
4,577

5,657

596

 
 
916

(2,768
)
1,738

2,289

(343
)
 
Adjusted EBITDA
6,300

7,922

4,529

 
 
55,881

15,277

15,988

15,639

8,977

 
Amortization (exclude acquisition-related amortization)
(4,505
)
(4,494
)
(4,684
)
 
 
(20,575
)
(5,047
)
(5,129
)
(5,225
)
(5,174
)
 
Interest and other, net
(121
)
(102
)
31

 
 
51

(19
)
7

8

55

 
Income tax expense - Non-GAAP
(653
)
(859
)
(730
)
 
 
(2,930
)
(1,245
)
(352
)
(769
)
(564
)
 
Net earnings (loss) - Non-GAAP
$
1,021

$
2,467

$
(854
)
 
 
$
32,427

$
8,966

$
10,514

$
9,653

$
3,294

 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted net earnings (loss) per share
 
 
 
 
 
 
 
 
 
 
 
GAAP - (in dollars per share)
$
(0.56
)
$
(0.78
)
$
(0.31
)
 
 
$
(0.68
)
$
(0.11
)
$
(0.03
)
$
(0.32
)
$
(0.23
)
 
Non-GAAP - (in dollars per share)
$
0.03

$
0.07

$
(0.02
)
 
 
$
0.90

$
0.25

$
0.29

$
0.27

$
0.09

 
 
 
 
 
 
 
 
 
 
 
 
 


22


The following table provides a reconciliation of free cash flow:
 
 
Three months ended September 30
 
Nine months ended September 30
(in thousands of U.S. dollars)
 
2019

2018

 
2019

2018

Cash flows from operating activities
 
$
7,978

$
2,627

 
$
13,154

$
24,804

Capital expenditures and increase in intangible assets
 
(5,257
)
(5,096
)
 
(14,781
)
(15,581
)
Free Cash Flow
 
$
2,721

$
(2,469
)
 
$
(1,627
)
$
9,223

 
 
 
 
 
 
 

OFF-BALANCE SHEET ARRANGEMENTS

We have the RPA in place that allows us to sell, with limited recourse, qualifying receivables. Details are outlined in the "Liquidity and Capital Resources - Accounts Receivable Purchase Agreement" section.

TRANSACTIONS BETWEEN RELATED PARTIES
We did not undertake any transactions with related parties during the three and nine months ended September 30, 2019.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in accordance with U.S. GAAP and we make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosure of contingent liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to business combinations, revenue recognition, adequacy of allowance for doubtful accounts, adequacy of inventory reserve, valuation of goodwill and intangible assets, leases, income taxes, useful lives of assets, adequacy of warranty reserve, royalty obligations, contingencies, stock-based compensation, and fair value measurement. We base our estimates on historical experience, anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ from our estimates.
The discussion on the accounting policies and estimates that require management's most difficult, subjective and complex judgments, and which are subject to a degree of measurement uncertainty, can be found in our 2018 annual MD&A, a copy of which is available on SEDAR at www.sedar.com and the SEC's website at www.sec.gov.

Additional information related to our critical accounting policies and estimates is below:

Leases
At inception of a contract, we apply judgment in assessing whether a contract is or contains a lease. This assessment involves determining whether we have control over the identified asset for a period of time in exchange for consideration. Operating leases are included in Operating lease right-of-use assets, Accounts payable and accrued liabilities, and Operating lease liabilities in our Consolidated Balance Sheets. Finance leases are included in Property and equipment, Accounts payable and accrued liabilities, and Long-term obligations in our Consolidated Balance Sheets.

Right-of-use assets represent our right to use an underlying asset for the lease term. Lease liabilities represent our obligation to make lease payments arising from the lease. We recognize operating lease right-of-use assets and liabilities at commencement date based on the present value of lease payments over the lease term. We use the incremental borrowing rate as the discount rate for leases as the rates implicit in our leases are not readily determinable. Our incremental borrowing rate is estimated to approximate the interest on a collateralized basis with similar terms and payments and in economic environments where the leased asset is located. The operating lease right-of-use asset also includes any prepaid lease payments, initial direct costs and lease incentives. Our lease terms include non-cancelable periods and include options to renew the lease when it is reasonably certain that we will exercise that option.

Operating lease cost for lease payments is recognized on a straight-line basis over the term of the lease. Our lease agreements have lease and non-lease components, which we have elected to account for as a single lease cost.

We have elected not to record right-of-use assets and lease liabilities for short-term leases with a term of 12 months or less and recognize these short term leases to profit or loss on a straight-line basis over the lease term.

OUTSTANDING SHARE DATA
As of November 7, 2019, we had 36,223,139 common shares issued and outstanding, 1,609,087 stock options exercisable into common shares at a weighted average exercise price of $18.44 and 881,284 restricted treasury share units (166,204 of which include performance-based vesting at a multiple not to exceed 200%) outstanding that could result in the issuance of up to 1,047,488 common shares.

IMPACT OF ACCOUNTING PRONOUNCEMENTS AFFECTING CURRENT PERIOD
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and subsequent amendments to the initial guidance: ASU 2017-13, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively, Topic 842).  This update is to improve transparency and comparability among organizations by requiring lessees to recognize right-of-use assets and lease liabilities on the balance sheet and requiring additional disclosure about leasing arrangements.  The standard is effective for fiscal years beginning after December 15, 2018.  We adopted the standard effective January 1, 2019, applying the optional transition method permitted under ASU 2018-11, which relieves entities from restating comparative financial statements, allowing entities to apply and adopt the new lease standard as at the effective date, rather than as of the first date of the earliest period presented.  We elected the package of practical expedients provided under the guidance, which applies to expired or existing leases and allows us not to reassess whether a contract contains a lease, the lease classification, and any initial direct costs incurred. We also elected the practical expedient to expense short term leases (12 months or less) on a straight-line basis over the lease term, and to not separate the lease and non-lease components for all of our leases. Refer to Note 12 Leases of our interim financial statements.

Upon adoption of Topic 842 effective January 1, 2019, we recognized operating lease liabilities of $31.5 million and corresponding right-of-use assets of $27.0 million. The $4.5 million difference between operating lease liabilities and right-of-use assets recognized is due to deferred rent and exit cost accruals recorded under prior lease accounting standards. Topic 842 requires such balances to be reclassified against right-of-use assets at transition. In future periods such balances will not be presented separately. Our accounting for finance leases remains substantially unchanged.

IMPACT OF ACCOUNTING PRONOUNCEMENTS AFFECTING FUTURE PERIODS
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). This update will replace the incurred loss impairment methodology for credit losses on financial instruments with a methodology that requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early application is permitted. We will adopt the new standard in the first quarter of 2020. We are currently assessing the impact of the new standard on on our financial statements.

In January 2017, FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This new guidance simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the new guidance, entities will perform goodwill impairment tests by comparing fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The standard is effective after December 15, 2019. We will adopt this standard in the first quarter of 2020. After the adoption of this standard, which will be applied prospectively, we will follow a one-step model for goodwill impairment. We do not anticipate this pronouncement to have a significant impact on our consolidated financial statements.

INTERNAL CONTROL OVER FINANCIAL REPORTING
We did not make any significant changes in our internal control over financial reporting during the three and nine months ended September 30, 2019 that materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting. The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of certain events occurring. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

LEGAL PROCEEDINGS
In June 2019, Inventergy LBS, LLC filed a patent infringement lawsuit in the United States District Court of the Northern District of Georgia, which lawsuit makes certain allegations concerning our Uplink GPS Asset Tracking devices. The lawsuit has been dismissed with prejudice.
In January 2017, Koninklijke KPN N.V. filed a patent infringement lawsuit in the United States District Court for the District of Delaware asserting patent infringement by us and our U.S. subsidiary.  The lawsuit makes certain allegations concerning the alleged use of data transmission error checking technology in our wireless products.  In March 2018, the Court granted our motion for judgment on the pleadings that the plaintiff’s patent is invalid. The plaintiff has appealed this invalidity ruling to the Federal Circuit, and a decision following oral argument is pending. In District Court, we are continuing to pursue our counterclaims alleging that the plaintiff has breached its commitments to standard setting organizations. A summary judgement hearing has occurred, and a decision of the court is pending. In April 2019, the United States Patent and Trial Appeal Board rendered its final decision in our petition for Inter Partes Review of the patent-in-suit, and the instituted claims were not proved to be unpatentable. We have appealed this decision to the Federal Circuit. A trial date has not yet been scheduled for this lawsuit.
In January 2012, a patent holding company, M2M Solutions LLC ("M2M Solutions"), filed a patent infringement lawsuit in the United States District Court for the District of Delaware asserting patent infringement by us, one of our US subsidiaries, and our competitors. The lawsuit makes certain allegations concerning the AirPrime embedded wireless module products, related AirLink products and related services sold by us for use in machine-to-machine ("M2M") communication applications. The claim construction order has determined one of the two patents-in-suit to be indefinite and therefore invalid. The lawsuit was dismissed with prejudice in April 2016. In August 2014, M2M Solutions filed a second patent infringement lawsuit against us in the same court with respect to a recently-issued patent held by M2M Solutions (US Patent No. 8,648,717), which patent is a continuation of one of the patents-in-suit in the original lawsuit filed against us by M2M Solutions. In March 2017, the United States Patent and Trial Appeal Board issued its decisions in the instituted proceedings, invalidating all independent claims and several dependent claims in the single patent-in-suit. In June 2017, Blackbird Tech LLC ("Blackbird") was joined as a plaintiff in the lawsuit. In September 2018, the court denied a motion to dismiss the lawsuit. The plaintiff has been granted leave to identify additional asserted claims and accused products with respect to the patent-in-suit. The lawsuit is currently in the discovery stage, and a claim construction hearing was held in October 2019. Trial for our co-defendant has been scheduled for December 2020, and trial in our case has been scheduled for January 2021.
Intellectual Property Indemnification Claims
We have been notified by certain of our customers in the following matter that we may have an obligation to indemnify them in respect of the products we supply to them:

In June 2019, Sisvel International S.A. and 3G Licensing S.A. (together, “Sisvel”), filed patent infringement lawsuits in the United States District Court for the District of Delaware against one or more of our customers alleging patent infringement with respect to a portfolio of 12 patents purportedly owned by Sisvel and obtained from Nokia Corporation (5 patents) and Blackberry, Ltd. (7 patents), that Sisvel alleges relate to technology for cellular communications networks including, but not limited to 2G, 3G and 4G/LTE.  The allegations have been made in

23


relation to certain of our customer’s products, which may include products which utilize modules sold to them by us.  The lawsuits are in the initial pleadings stage.
Although there can be no assurance that an unfavorable outcome would not have a material adverse effect on our operating results, liquidity or financial position, we believe the claims made in the foregoing legal proceedings are without merit and intend to defend ourselves and our products vigorously in all cases.
 
We are engaged in certain other claims, legal actions and arbitration matters, all in the ordinary course of business, and believe that the ultimate outcome of these claims, legal actions and arbitration matters will not have a material adverse effect on our operating results, liquidity or financial position.

FINANCIAL RISK MANAGEMENT
Financial instruments consist primarily of cash and cash equivalents, accounts receivable, derivatives such as foreign currency forward and option contracts, accounts payable and accrued liabilities.
We have exposure to the following business risks:
We maintain substantially all of our cash and cash equivalents with major financial institutions or invest in government instruments. Our deposits with banks may exceed the amount of insurance provided on such deposits.
We outsource manufacturing of our products to third parties and, accordingly, we are dependent upon the development and deployment by third parties of their manufacturing abilities. The inability of any supplier or manufacturer to fulfill our supply requirements could impact future results. We have supply commitments to our contract manufacturers based on our estimates of customer and market demand. Where actual results vary from our estimates, whether due to execution on our part or market conditions, we are at risk.
Financial instruments that potentially subject us to concentrations of credit risk are primarily accounts receivable. We perform on-going credit evaluations of our customer’s financial condition and require letters of credit or other guarantees whenever deemed appropriate.
Although a significant portion of our revenues are in U.S. dollars, we incur operating costs that are denominated in other currencies. Fluctuations in the exchange rates between these currencies could have a material impact on our business, financial condition and results of operations.
To manage our foreign currency risks, we enter into foreign currency forward contracts and options contracts to reduce our exposure to future foreign exchange fluctuations. Foreign currency forward and options contracts are recorded in Accounts receivable or Account payable and accrued liabilities. As of September 30, 2019, we had foreign currency forward contracts totaling $21.6 million Canadian dollars with an average forward rate of 1.3354, maturing between October 2019 to June 2020. As at September 30, 2019, we did not have foreign currency options contracts outstanding.
We are subject to risks typical of an international business including, but not limited to, differing economic conditions, changes in political climate, differing tax structures other regulations and restrictions and foreign exchange rate volatility. Accordingly, our future results could be materially affected by changes in these or other factors.
RISKS AND UNCERTAINTIES
Our business is subject to significant risks and uncertainties and past performance is no guarantee of future performance. The risks and uncertainties described below are those which we currently believe to be material, and do not represent all of the risks that we face.  Additional risks and uncertainties, not presently known to us, may

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become material in the future or those risks that we currently believe to be immaterial may become material in the future.  If any of the following risks actually occur, alone or in combination, our business, financial condition and results of operations, as well as the market price of our common shares, could be materially adversely affected.
Competition from new or established IoT, cloud services and wireless services companies or from those with greater resources may prevent us from increasing or maintaining our market share and could result in price reductions and/or loss of business with resulting reduced revenues and gross margins.

The market for IoT products and services is highly competitive and rapidly evolving. We have experienced and expect to continue to experience the impact of intense competition on our business, including:

competition from more established and larger companies with strong brands and greater financial, technical and marketing resources or companies with different business models;
business combinations or strategic alliances by our competitors which could weaken our competitive position;
introduction of new products or services by us that put us in direct competition with major new competitors;
existing or future competitors who may be able to respond more quickly to technological developments and changes and introduce new products or services before we do; and
competitors who may independently develop and patent technologies and products that are superior to ours or achieve greater acceptance due to factors such as more favorable pricing, more desired or better-quality features or more efficient sales channels.

If we are unable to compete effectively with our competitors' pricing strategies, technological advances and other initiatives, we may lose customer orders and market share and we may need to reduce the price of our products and services, resulting in reduced revenue and reduced gross margins. In addition, new market entrants or alliances between customers and suppliers could emerge to disrupt the markets in which we operate through disintermediation of our modules business or other means. There can be no assurance that we will be able to compete successfully and withstand competitive pressures.

The loss of any of our significant customers could adversely affect our revenue and profitability, and therefore shareholder value.
We sell our products and services to OEMs, enterprises, government agencies, distributors, resellers and network operators, and we are occasionally party to sales agreements with customers comprising a significant portion of our revenue. Accordingly, our business and future success depends on our ability to maintain and build on existing relationships and develop new relationships with OEMs, enterprises, government agencies, distributors, resellers and network operators. If certain of our significant customers, for any reason, discontinue their relationship with us, reduce or postpone current or expected purchase orders for products, reduce or postpone initiation or usage of our services or suffer from business loss, our revenues and profitability could decline materially.
In addition, our current customers purchase our products under purchase orders. Our customers have no contractual obligation to continue to purchase our products following our fulfillment of current purchase orders and if they do not continue to make purchases, our revenue and our profitability could decline materially.

Our financial results are subject to fluctuations that could have a material adverse effect on our business and that could affect the market price of our common shares.

Our revenue, gross margin, operating earnings and net earnings may vary from quarter-to-quarter and could be significantly impacted by a number of factors, including but not limited to the following:

price and product competition which may result in lower selling prices for some of our products and services or lost market share;

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price and demand pressure on our products and services from our customers as they experience pressure in their businesses;
demand fluctuation based on the success of our customers in selling their products and solutions which incorporate our wireless products, services and software;
development and timing of the introduction of our new products including the timing of sales orders, OEM and distributor customer sell through and design win cycles in our embedded wireless module business;
transition periods associated with the migration to new technologies;
potential commoditization and saturation in certain markets;
our ability to accurately forecast demand in order to properly align the purchase of components and the appropriate level of manufacturing capability;
product mix of our sales (our products have different gross margins - for example the embedded wireless module product line has lower gross margins than the higher margin rugged mobile product line);
possible delays or shortages in component supplies;
possible delays in the manufacturing or shipment of current or new products and the introduction of new services;
possible product or service quality or factory yield issues that may increase our cost of sales;
concentration in our customer base;
seasonality in demand;
amount of inventory held by our channel partners;
possible fluctuations in certain foreign currencies relative to the U.S. dollar that may affect foreign denominated revenue, cost of sales and operating expenses;
impairment of our goodwill or intangible assets which may result in a significant charge to earnings in the period in which an impairment is determined;
achievement of milestones related to our professional services contracts; and
operating expenses that are generally fixed in the short-term and therefore difficult to rapidly adjust to different levels of business.

Any of the factors listed above, or others, could cause significant variations in our revenues, gross margin and earnings in any given quarter.  Therefore, our quarterly results are not necessarily indicative of our overall business, results of operations, and financial condition.

Quarterly variations in operating results or any of the other factors listed above, changes in financial estimates by securities analysts, failure to meet any guidance provided by us or any change in guidance provided by us, or other events or factors may result in wide fluctuations in the market price of our common shares. Broad market fluctuations or any failure of our operating results in a particular quarter to meet market expectations may adversely affect the market price of our common shares. Over the past several years, following volatility in the market price of a company's securities, class action litigation has often been commenced against the affected company. Any litigation of this type brought against us could result in substantial costs which could materially and adversely affect our business, financial position, results of operation or cash flows.

Our business transformation initiatives may result in disruptions to our business or may not achieve the anticipated benefits.
The Company is currently undertaking steps to transform the business in order to provide better alignment with our Device-to-Cloud strategy and drive greater automation and efficiency. Key initiatives include implementing a new go-to-market operating model, introduction of integrated online customer experience, consolidation of engineering sites, outsourcing of a select group of general and administration activities, optimization of terms with our third party manufacturers and re-organizing the product team to combine responsibilities for both devices and services. These changes will involve departure of skilled personnel, employees changing roles, adding new talent, realignment of teams, on-boarding of new partners, additional costs and working capital investments. Successfully executing these changes will be a significant factor in enabling future revenue growth.

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The anticipated benefits of these transformations may not be obtained if circumstances prevent us from taking advantage of the strategic and business opportunities that we expect they may afford us. As the transformation proceeds, there will be impact on costs and liquidity. Further, there could be a higher rate of organizational and business process change and our operations may not be able to recalibrate business processes in a timely and efficient manner thereby impacting the effectiveness of certain business processes, our ability to design, develop and commercially launch new products and services in a timely manner, and the delivery of our products and services to our customers. Our employees may not fully understand the plans to change the business and therefore staff morale and engagement may deteriorate as we implement the changes to our organization.

We may have difficulty responding to changing technology, industry standards and customer requirements, and therefore be unable to develop new products or services in a timely manner which meet the needs of our customers.
The wireless communications industry is subject to rapid technological change, including evolving industry standards, frequent new product inventions, constant improvements in performance characteristics and short product life cycles. Our business and future success will depend, in part, on our ability to accurately predict and anticipate evolving wireless technology standards and develop produ