Sierra Wireless, Inc.
Financial Highlights
(Expressed in thousands of United States dollars, except as otherwise stated)
(Prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP"))
Consolidated Statement of Operations Data
Years ended December 31,
2018
2017
2016
As adjusted(1)
As adjusted(1)
GAAP results
Revenue
Gross margin percentage
Total expenses
Earnings (loss) from operations
Net earnings (loss)
Net earnings (loss) per share (in dollars)
Basic
Diluted
Non-GAAP results(2)
Gross margin percentage
Total expenses
Earnings from operations
Adjusted EBITDA
Net earnings
Net earnings (loss) per share (in dollars)
Basic
Diluted
Free cash flow
Revenue by segment
OEM Solutions
Enterprise Solutions
IoT Services
Revenue by geographical region
Americas
Europe, Middle East and Africa
Asia-Pacific
Consolidated Balance Sheet Data
December 31,
Cash and cash equivalents
Long-term obligations
Shareholders' equity
Number of common shares outstanding
$
$
$
34.0%
195,087
39,636
54,653
34,519
$
1.07
1.05
(16,734) $
554,537
101,535
34,655
690,727
$
$
33%
24%
43%
100%
615,015
35.3%
195,621
21,670
15,646
0.49
0.48
33.3%
174,217
30,449
44,241
22,230
0.69
0.69
28,648
515,925
71,486
27,604
615,015
35%
23%
42%
100%
$
793,602
33.3%
282,846
(18,275)
(24,610)
690,727
33.9%
234,139
100
4,518
(0.68) $
(0.68)
0.14
0.14
$
$
$
$
$
$
$
$
$
$
$
$
33.4%
229,719
35,306
55,881
32,427
0.90
0.90
26,131
583,214
119,927
90,461
793,602
40%
21%
39%
100%
2018
2017
2016
As adjusted(1)
As adjusted(1)
$
$
$
89,076
43,250
444,130
36,067,415
$
$
$
65,003
36,637
467,520
35,861,510
$
$
$
102,772
32,654
361,804
31,859,960
(1) 2017 and 2016 have been adjusted to reflect the adoption of ASC606 - Revenue from Contracts with Customers.
(2) Our 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 or losses on forward contracts and certain tax adjustments. 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 nonrecurring 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. Free cash flow is defined as cash flow from operating activities less capital expenditures and increases in intangibles. 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. For further information, refer to "Non-GAAP Financial Measures" of the Management's Discussion and Analysis in this Annual Report.
Report to Shareholders
We had a solid year in 2018 as we strengthened our position as the market leader in IoT modules and gateways for
the Internet of Things (‘IoT’). Revenue in 2018 increased 15% to $793.6 million with Services and other revenue
growing 108% to $94.3 million primarily due to the acquisition of Numerex in December 2017. Services and other
revenue was 12% of total revenue in 2018. Adjusted EBITDA was $55.9 million in 2018 compared to $54.7 million
in the prior year, and we ended 2018 with a strong cash position of $89.1 million and no debt.
As the new President & CEO of Sierra Wireless, I am very excited to be leading this premier company that is
entirely focused on providing innovative solutions for the IoT market. Sierra Wireless has 25 years of cellular
expertise and we have been expanding our core service capabilities through our mobile virtual network operation,
smart SIM, embedded software platform and integrated security.
Strategically, it is my intent to accelerate the transformation of Sierra Wireless to become the leading global IoT
solutions and services provider. I have been taking action, and together with the Board of Directors, we are
making strategic and organizational changes to transition the business and invest in the future of the company.
We recently centralized our three development teams into a single R&D entity to improve efficiency, and we also
re-organized our Go To Market team with a strong focus on IoT solutions under a unified sales force. Our plan is to
leverage our strong cellular device position into capturing market share in two significant growth cycles: (i) the
mass deployment of LPWA Cat M1 and NB1 technology globally which started in 2018; and (ii) the deployment of
5G-LTE and 5G-New Radio that will begin in the next couple of years. We believe that LPWA modules will lead to
mass IoT adoption with industry volumes growing several hundred million units annually over the next 3 to 5
years. And our fully integrated Device To Cloud solution simplifies the customers’ journey and helps to drive
greater adoption.
In addition, we have been implementing a program to both invest in key activities to accelerate growth in high
value solutions capabilities and technologies as well as drive cost reduction programs to fund these initiatives. We
are also divesting some smaller operating assets that are non-core to our strategic IoT initiatives.
Overall, we are accelerating the transformation of Sierra Wireless to provide our customers with a fully integrated
end-to-end IoT solution that is a differentiated with greater network edge intelligence, security, and device
management. In doing so, we expect to significantly grow our recurring, subscription-based revenue over time,
improve our operating business model and in turn, generate sustainable long-term shareholder value.
Kent P. Thexton
President and Chief Executive Officer
Cautionary Note Regarding Forward-Looking Statements
Certain statements in this letter constitute forward-looking statements or forward-looking information and, in this regard, you should read
carefully the "Cautionary Note Regarding Forward-Looking Statements" in the attached Management's Discussion & Analysis.
1
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
OVERVIEW
Business Overview
Our Mission, Vision and Values
Our Strategy
Annual Overview - Financial Highlights
Outlook
CONSOLIDATED ANNUAL RESULTS OF OPERATIONS
Fiscal Year 2018 compared to Fiscal Year 2017
Fiscal Year 2017 compared to Fiscal Year 2016
SEGMENTED INFORMATION
FOURTH QUARTER OVERVIEW
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
NON-GAAP FINANCIAL MEASURES
OFF-BALANCE SHEET ARRANGEMENTS
TRANSACTIONS BETWEEN RELATED PARTIES
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
OUTSTANDING SHARE DATA
IMPACT OF ACCOUNTING PRONOUNCEMENTS AFFECTING CURRENT PERIOD
IMPACT OF ACCOUNTING PRONOUNCEMENTS AFFECTING FUTURE PERIODS
DISCLOSURE CONTROLS AND PROCEDURES
INTERNAL CONTROL OVER FINANCIAL REPORTING
LEGAL PROCEEDINGS
FINANCIAL RISK MANAGEMENT
RISKS AND UNCERTAINTIES
CONSOLIDATED FINANCIAL STATEMENTS
2
3
4
6
6
7
8
9
15
17
17
21
23
26
28
30
33
36
36
37
43
43
43
44
45
46
47
48
59
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 years ended December 31, 2018, 2017 and 2016 and up to and including March 8,
2019. This MD&A should be read together with our audited consolidated financial statements and the
accompanying notes for the year ended December 31, 2018 (“the consolidated financial statements”). The
consolidated financial statements have been prepared in accordance with generally accepted accounting principles
in the United States (“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.
3
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 Q4'18 corporate update; financial guidance for the first quarter
of 2019 and our fiscal year 2019, 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 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; and our ability to implement
effective control procedures. 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 develop, manufacture and sell new products and services that meet the needs of our
customers and gain commercial acceptance;
our ability to continue to sell our products and services in the expected quantities at the expected prices
and expected times;
expected macro-economic business conditions;
expected cost of sales;
expected component supply constraints;
our ability to win new business;
our ability to fully integrate the business, operations and workforce of Numerex and to return the
Numerex business to profitable growth and realize the expected benefits of the acquisition;
our ability to integrate other 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;
disruption of, and demands on, our ongoing business and diversion of management's time and attention
in connection with acquisitions or divestitures;
the loss of, or significant demand fluctuations from, any of our significant customers;
4
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our ability to attract or retain key personnel and the impact of organizational change on our business;
deterioration in macro-economic conditions and resulting reduced demand for our products and services;
risks related to the acquisition and ongoing integration of Numerex;
cyber-attacks or other breaches of our information technology security;
our financial results being subject to fluctuation;
our ability to respond to changing technology, industry standards and customer requirements;
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;
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;
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 related to the transmission, use and disclosure of user data and personal information;
risks inherent in foreign jurisdictions; and
risks related to tariffs or other trade restrictions.
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.
5
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. Sierra Wireless provides an integrated device-to-cloud solution comprised of
embedded and networking solutions seamlessly connected with our IoT platform and connectivity services.
Original Equipment Manufacturers ("OEMs") and enterprises worldwide rely on our expertise in delivering fully-
integrated IoT solutions to reduce complexity, get their connected IoT products and services to market faster, and
improve intelligence at the edge of the network.
We operate our business under three reportable segments: (i) OEM Solutions; (ii) Enterprise Solutions; and (iii) IoT
Services. In the fourth quarter of 2017, our former Cloud and Connectivity Services segment was renamed IoT
Services.
OEM Solutions
As a leading embedded module vendor, we provide standards-based wireless technologies and support open
source initiatives that enable OEMs and system integrators to get their IoT solutions to market faster. We make it
simple to embed cellular, Wi-Fi, Bluetooth and Global Navigation Satellite System ("GNSS") technologies, as well as
manage devices, connectivity services and data through our IoT cloud platform. Our OEM Solutions segment
includes embedded cellular modules, short range wireless modules, GNSS modules, software and tools for OEM
customers who integrate wireless connectivity into their products and solutions across a broad range of industries
and applications. Within our OEM Solutions segment, our embedded cellular wireless module product portfolio
spans second generation ("2G"), third generation ("3G"), fourth generation ("4G") Long-Term Evolution ("LTE") and
Low Power Wide Area ("LPWA") technologies. Our broad product 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.
Enterprise Solutions
Our Enterprise Solutions segment provides networking solutions comprised of cellular gateways and routers that
are complemented by cloud-based services and on-premise software for secure device and network management.
Our networking 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 deployed in hostile environmental conditions. 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 GNSS technologies. We also provide our customers with AirLink Management
Services through our IoT platform and have introduced new advanced reporting and analytics software to our
portfolio. Our AirLink products and services are sold through worldwide channel partners in a two-tier distribution
model.
IoT Services
Our IoT Services segment enables the digital transformation of enterprises through integrated IoT cloud and
connectivity services. This segment is comprised of four main areas of operation: (i) our global cellular
connectivity services, which are subscription-based and include our flexible Smart SIM and core network
platforms; (ii) our cloud services, which provide a secure and scalable cloud-based platform for deploying and
managing IoT subscriptions, over-the-air updates, devices and applications; (iii) our managed broadband cellular
services, which include a combination of hardware, high speed connectivity and cloud services; and (iv) specific
6
vertical market IoT solutions that include segments such as security, asset tracking and asset optimization. These
cloud, connectivity and managed broadband services comprise our integrated device-to-cloud strategy and enable
worldwide IoT deployments by our customers. Our integrated solution makes it simpler to rapidly build and scale
IoT applications while de-risking the deployment process. Sierra Wireless offers a broad array of cloud and
connectivity services that enable customers to connect to the mobile network and manage their devices and data
communications.
In December 2017, we acquired all of the outstanding shares of U.S.-based Numerex in a stock-for-stock merger
transaction. This acquisition added a portfolio of managed end-to-end IoT solutions, including smart devices,
network connectivity and service applications, addressing a wide spectrum of vertical markets and industrial
customers.
We continue to seek opportunities to 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.
Our Mission, Vision and Values
Our mission is to be the IoT partner of choice for integrated device-to-cloud IoT solutions and our vision is to
empower businesses to reimagine their future in the connected world. Our core values are:
•
Innovation: We develop intelligent wireless solutions based on superior technology that provides value to
our customers.
• Execution: We deliver on our commitments together as a team, and focus on quality and excellence in
everything we do.
• Trust: We are responsive and collaborative with our customers to help them grow their businesses.
7
Our Strategy
The global IoT market is growing significantly and new IoT applications are helping people and organizations to
lower operating costs and generate new revenue streams by providing new or evolved value-added services to
their customers. An integral factor in the growth of IoT applications is cellular connectivity, which enables the
transmission of data from connected devices (things) at the edge, through advanced mobile networks to cloud
services such as advanced analytics and enterprise applications. Cellular connectivity supports applications such
as the connected car, connected industrial assets, smart buildings and cities, and the smart electrical grid, to name
just a few. Adoption of IoT solutions is driven by a number of factors, including lower wireless connectivity costs,
higher wireless connection speeds, new wireless technologies designed specifically for the IoT, lower
computational and data storage costs, new tools to simplify application development and higher levels of focus on
data analytics, artificial intelligence and machine learning.
We believe these factors will continue to create attractive growth opportunities for the Company going forward.
Based on third-party industry research, we are the global leader in embedded cellular wireless modules as
measured by share of global revenue (source: ABI Research, 2018) and we are widely recognized as an innovation
leader in the cellular IoT sector. We are also a leading provider of gateway and router solutions for industrial,
enterprise and mobile applications.
We are seeking to leverage our strong position in cellular embedded modules and gateways to grow and enhance
our IoT connectivity and services business:
Our corporate strategy is to drive growth and value creation by:
• Solidifying our leadership position in IoT devices;
• Accelerating our IoT connectivity and cloud businesses by growing subscription-based recurring revenue
globally, and
Leveraging our leading position in IoT devices to build and scale our device-to-cloud solutions business.
•
In 2018, we continued to deliver on our corporate strategy by:
• Strengthening our organizational capabilities, including new leadership in both the CEO and COO positions;
• Deploying our first embedded cellular modules for the Low Power Wide Area ("LPWA') market;
• Delivering our Smart SIM technology to enable the delivery of highly differentiated connectivity services;
• Commencing the delivery of our Ready-To-Connect technology that equips our wireless cellular modules
with out-of-the-box connectivity (continuing to the rest of our applicable module line-up in 2019);
Integrating the Numerex business into our IoT connectivity business; and
•
• Securing new customer wins with global OEMs and enterprises to expand our customer program pipeline.
We will continue to invest in businesses, products and technologies that accelerate our strategy and growth.
8
Annual Overview — Financial Highlights
Our 2018 revenue was $793.6 million, up from $690.7 million in 2017. The increase in revenue was driven by solid
year-over-year growth in each of our three reportable segments: our OEM Solutions segment experienced strong
demand from automotive, networking and distribution customers; our Enterprise Solutions segment revenues
grew as a result of strong sales of AirLink gateway products; and our IoT Services segment revenues grew as a
result of the acquisition of Numerex, completed in December 2017, as well as organic subscriber growth in cloud
and cellular connectivity services.
Product revenue was $699.3 million in 2018 and $645.4 million in 2017, up 8.4%. Services and other revenue was
$94.3 million in 2018 and $45.3 million in 2017, up 108.0%. Services and other revenue represented 11.9% of our
total revenue in 2018, compared to 6.6% in 2017.
Gross margin was 33.3% in 2018 compared to 33.9% in 2017. In 2018, gross margin decreased slightly compared
to 2017, due to unfavorable product and customer mix in our OEM Solutions segment, partially offset by improved
sales of higher margin gateways in our Enterprise Solutions segment, and proportional growth in our higher
margin cloud and connectivity services in our IoT Services segment.
Net earnings decreased in 2018 compared to the prior year due to higher operating expenses combined with
higher restructuring expense, consulting fees, separation costs on the retirement of our former CEO, loss on
disposal of our remote tank monitoring business ("iTank") and the unfavorable impact of foreign exchange.
Foreign exchange rate changes impact our foreign currency denominated revenue and operating expenses. We
estimate that changes in foreign exchange rates in 2018 positively impacted our gross margin by $0.8million and
negatively impacted our operating expenses by $1.8 million, resulting in a negative impact on operating income of
$1.0 million.
GAAP
• Revenue was $793.6 million, up 14.9%, compared to $690.7 million in 2017.
• Gross margin was 33.3% compared to 33.9% in 2017.
•
Loss from operations was $18.3 million compared to earnings from operations of $0.1 million in 2017.
• Net loss was $24.6 million, or $0.68 per diluted share, compared to net earnings of $4.5 million, or $0.14
per diluted share, in 2017.
• Cash and cash equivalents were $89.1 million at the end of 2018, an increase of $24.1 million, compared
to December 31, 2017.
Non-GAAP(1)
• Gross margin was 33.4%, compared to 34.0% in 2017.
• Earnings from operations were $35.3 million, down 10.9%, compared to $39.6 million in 2017.
• Adjusted EBITDA was $55.9 million, up 2.2%, compared to $54.7 million in 2017.
• Net earnings were $32.4 million, or $0.90 per diluted share, compared to net earnings of $34.5 million or
$1.05 per diluted share, in 2017.
We adopted the new accounting standard for revenue recognition effective January 1, 2018. Our 2017 and 2016
financial results reflect the adoption of this new standard and prior periods have been adjusted accordingly. See
Note 2 and Note 3 of our audited annual consolidated financial statements for more details.
In addition, as of the first quarter of 2018, we have included a breakout of our revenue and cost of sales into
product revenue and cost of sales, and services and other revenue and cost of sales. Product revenue and cost of
sales includes all revenues and costs associated with the sale of our embedded cellular modules, intelligent routers
and gateways, asset tracking, vertical market smart devices, antennas and accessories, and Smart SIMs. Services
and other revenue and cost of sales includes all revenues and costs associated with our cloud services, cellular
9
connectivity services, managed connectivity and application services, software licenses, technical support services,
extended warranty services, solution design and consulting services.
(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.
10
Select Annual Consolidated Financial Highlights
(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 or 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.
11
Selected Annual Consolidated Financial information:
(In thousands of U.S. dollars, except where otherwise stated)
Statement of Operations data:
Revenue
Gross Margin
- GAAP
- Non-GAAP (1)
Gross Margin %
- GAAP
- Non-GAAP (1)
Earnings (loss) from operations
- GAAP
- Non-GAAP (1)
Adjusted EBITDA
Net earnings (loss)
- GAAP
- Non-GAAP (1)
Revenue by Segment:
OEM Solutions
Enterprise Solutions
IoT Services
Share and per share data:
Diluted earnings (loss) per share (in dollars)
- GAAP
- Non-GAAP (1)
Common shares (in thousands)
At period-end
Weighted average - basic
Weighted average - diluted
Balance sheet data (end of period):
Cash and cash equivalents
Total assets
Total long-term obligations
2018
2017
As adjusted
2016
As adjusted
$
$
$
$
$
$
$
$
$
793,602
690,727
264,571
265,025
$
234,239
234,723
33.3%
33.4%
(18,275)
35,306
55,881
(24,610)
32,427
583,214
119,927
90,461
$
$
$
$
33.9%
34.0%
100
39,636
54,653
4,518
34,519
554,537
101,535
34,655
(0.68)
0.90
$
$
0.14
1.05
36,067
36,019
36,019
35,862
32,356
32,893
89,076
683,916
43,250
$
65,003
694,644
36,637
$
$
$
$
$
$
$
$
$
615,015
217,291
204,666
35.3%
33.3%
21,670
30,449
44,241
15,646
22,230
515,925
71,486
27,604
0.48
0.69
31,860
32,032
32,335
102,772
581,457
32,654
(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 or 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 Annual Results of Operations” for factors that have caused period to period
variations.
12
Key highlights for the year ended December 31, 2018:
• On May 31, 2018, Jason Cohenour retired from his position as President and Chief Executive Officer
("CEO") and stepped down as a Director of the Company. Concurrently, Kent Thexton, Chair of the Board
of Directors, was appointed Interim Chief Executive Officer and Greg Aasen, an independent Director since
1997, was named Lead Independent Director.
• We announced the appointment of Russell N. Jones, CPA, CA, to our Board of Directors. Mr. Jones is an
accomplished business and technology executive, bringing more than 37 years of international operational
and leadership experience with leading technology companies, including Canadian e-commerce leader
Shopify, Mitel Corporation, Newbridge Networks, Watchfire and Quake Technologies. Mr. Jones replaces
outgoing Director Charles Levine, who stepped down from the Board of Directors effective October 24,
2018.
• We announced the appointment of Joy Chik to our Board of Directors. Ms. Chik is Corporate Vice
President for Identity Division in Microsoft's Cloud + AI group. Since joining Microsoft in 1998, as a
software engineer, Ms. Chik has risen as an established leader of some of the industry's most impactful
engineering teams. She is a member of the Anita Borg Institute and is also active in charities focused on
encouraging women and girls to pursue careers in technology.
• On October 16, 2018, the Board of Directors announced the appointment of Kent Thexton as CEO. Mr.
Thexton had been serving as interim President & CEO since May 31, 2018 and assumed the permanent
role on November 1, 2018. Mr. Thexton has held prominent roles as Founding Chief Marketing Officer and
board member of O2 plc in the U.K. (now part of Telefonica); Chief Operating Officer of Rogers Cantel in
Canada; and co-founded a Mobile Virtual Network Operator (MVNO) business in the United States.
Immediately prior to his appointment, Mr. Thexton was the Co-founder and General Partner at ScaleUp
Ventures.
• Also on October 16, 2018, Robin Abrams, who has served on our Board of Directors since 2010, was
appointed to be the new Board Chair, replacing Mr. Thexton who joined the Board of Directors in March
2005 and has served as Board Chair since February 2016. Mr. Thexton continues to serve as a non-
independent director of the Company.
• We announced the appointment of Jason Krause to the position of Chief Operating Officer of the
Company. Mr. Krause is responsible for all aspects of our product and services, including: product portfolio
strategy; product management; research and development; supply chain; quality; and global MNVO
network and service operations. Prior to Mr. Krause's new appointment, he was Senior Vice President and
General Manager of the Enterprise Solutions business unit and before that he was Senior Vice President of
Marketing, Strategy, and Corporate Development.
OEM Solutions
• KDDI Corporation, a Japanese telecommunications and system integration provider, selected our
AirPrime® HL78 cellular modules for LTE-M IoT applications in a low power gas meter deployment. KDDI
will be the world's first carrier to certify and provide its customers with our HL78 modules.
•
International Vending Alliance ("IVA"), the largest global network with 1.9 million vending machines in
more than 70 countries, selected our Smart SIM and AirVantage IoT Platform to revolutionize vending
service delivery. IVA is using a single Sierra Smart SIM for global connectivity across its network of
machines and our AirVantage platform is enabling them to manage their subscriptions and monitor
connectivity services.
13
• Building on the success of mangOH® Red and Green, we released alpha samples of our next-generation
mangOH® open source hardware platform, mangOH® Yellow, inviting the IoT developer community to
influence the final product. Being smaller and lighter, mangOH® Yellow is targeted at IoT applications
where compactness and low-power consumption are essential.
• Our AirPrime® HL78 modules have been certified to operate on both KDDI Corporation's LTE-M network in
Japan and AT&T's LTE-M network in the United States. These certifications pave the way for our LPWA
customers to support large-scale IoT deployments in smart energy, tracking, industrial asset management,
home security and other applications requiring low power and extended coverage.
• Our AirPrime® EM7565 LTE-Advanced Pro Embedded Module has been granted FCC approval and is the
first embedded module available for Citizens Broadband Radio Service (CBRS) networks in the U.S. This
enables organizations to operate their own LTE networks in areas such as college, corporate campuses,
arenas, airports, ports and warehouses.
• We announced the industry's first 5G mechanical module sample at Mobile World Congress. Based on the
M.2 form factor, the connectorized AirPrime® module will enable original equipment manufacturers and
system integrators requiring the highest possible speeds to deploy 5G on their mobile computing,
networking and IoT platforms worldwide.
Enterprise Solutions
• We launched our AirLink® LX60, the industry's first cloud-managed LPWA cellular router for commercial
and enterprise IoT applications. The LX60, with LTE and LTE-M/NB-IoT variants, extends the AirLink®
Networking Solutions portfolio into new applications, including building automation, digital signage, taxis,
automated teller machines, kiosks and point-of-sale terminals for both primary and backup connectivity.
• Our AirLink® MG90 High-Performance Multi-Network Vehicle Router, based on our AirPrime® EM7511
embedded module, has been certified and approved for operation on FirstNet in the United States.
FirstNet is the nationwide public safety communications platform dedicated to America's first responders.
The AirLink MG90 is purpose-built to provide secure, always-on connectivity for mission-critical
applications in public safety, transit and field services.
• We launched AirLink® LX40, the industry's most compact cellular router optimized for the IoT, providing
secure, managed connectivity out of the box for business-critical IoT enterprise applications.
• We launched AirLink® Management Service - Advanced Reporting and Analytics providing customers with
operational insight for vehicle fleet operations using our secure, cloud-based device management
platform.
• We launched AirLink® RV55 LTE-Advanced Pro router, the industry's most compact, rugged LTE-A Pro
router to simplify and lower the cost of connecting critical remote assets, infrastructure and mobile
workforces in utility, energy, smart city and public safety applications.
IoT Services
•
Intellinium selected our device-to-cloud IoT solution for its smart safety shoe, designed to improve worker
safety in remote, dangerous or noisy workplaces, such as construction sites, factories, mines, oil platforms,
and commercial fishing and agriculture operations.
• Girbau, a leading manufacturer of industrial laundry equipment, selected our device-to-cloud IoT solution
to enable Sapphire, its new remote monitoring service for commercial laundry machines.
14
• XSun selected our device-to-cloud IoT solution, including AirLink® RV50 gateways, multi-operator smart
connectivity services and the AirVantage IoT platform, for its solar-powered Unmanned Aerial Vehicle.
• Atlas Copco, a world-leading provider of sustainable productivity solutions, selected our device-to-cloud
IoT solution to transform its industrial compressor business. By deploying our FX30 programmable
gateways and cloud platform, Atlas Copco is leveraging machine intelligence on the factory floor to provide
preventive maintenance, improve uptime and drive operating efficiencies.
• We opened a new Global Service Center in Atlanta, Georgia to support our existing and rapidly growing IoT
service customer base. More than 140 employees will be based at the location, monitoring millions of
Sierra's connected devices around the world and providing 24/7/365 global customer support.
• Security Alarms & Co., a Swiss developer of intelligent home security solutions, selected our IoT Services
to enable highly resilient cellular connectivity for its ARHUB home security hub. ARHUB connects
intelligent home security devices to the Internet with Wi-Fi, LAN and cellular. Using our SIM, ARHUB
intelligently analyzes networks and connects to the most available network in the region.
• We added solar power to our satellite-enabled asset tracking managed service, which allows agencies to
connect, track and manage thousands of relief assets and respond to emergencies more effectively. We
use Globalstar Inc.'s SmartOneSolar device to extend battery power and provide reliable satellite
connectivity.
•
In early 2019, we announced mass production of our award-winning Ready-to-Connect solutions. Ready-
to-Connect delivers all the key elements needed for an IoT application - cellular module, integrated SIM
that's pre-connected to global mobile networks and IoT platform for device and subscription management
and simplified operations - in one integrated bundle.
• MANN + HUMMEL, a leading global expert for filtration solutions, selected our Smart SIMs and
AirVantage® IoT Platform to connect and mange global deployments of Senzit, MANN + HUMMEL's new
predictive maintenance platform developed to increase uptime for industrial and agricultural fleets.
• Unimar, a worldwide supplier of tower and obstruction lighting products, has selected our device-to-cloud
solution, including AirLink® RV50 industrial LTE gateways and SIMs, configured and managed over the air
using the AirVantage® IoT Platform, to connect and manage critical lighting and control systems along
flight paths.
Outlook
Given the current macro-economic environment and some weakness that we are experiencing in the automotive,
enterprise networking and mobile computing markets, we provide the following quarterly and full year guidance
for 2019 (see below). The company is undertaking a cost reduction program over the next 18 to 24 months while
also investing in new solutions and technologies including LPWA, 5G, embedded SIM, security, and edge
networking software.
For the year ended December 31, 2019, we expect revenue to be flat year-over-year and Adjusted EBITDA is
expected to be approximately $35.0 million. Non-GAAP net earnings per share is expected to be approximately
$0.30 for full year 2019.
For the first quarter of 2019, we expect revenue to be in the range of $170.0 million to $174.0 million and
Adjusted EBITDA to be in the range of $2.0 million to $4.0 million. Non-GAAP net loss per share is expected to be
approximately $0.02 to $0.06 in the first quarter of 2019. See "Non-GAAP Financial Measures".
15
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 in our regulatory filings. See "Cautionary Note Regarding
Forward-Looking Statements" below.
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.
Key factors that we expect will affect our results in the near term are:
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;
•
•
• our ability to continue to integrate Numerex's business, operations and workforce with ours and our ability
to return the Numerex business to profitable growth and to realize the anticipated benefits of the
acquisition;
contributions to our operating results from the acquisitions we completed in 2015, 2016 and 2017;
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;
•
• 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.
the end-of-life of existing customer programs;
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 experience volatility in our
results on a quarter-to-quarter basis. 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".
16
CONSOLIDATED ANNUAL RESULTS OF OPERATIONS
(In thousands of U.S. dollars, except where
otherwise stated)
2018
2017 As adjusted
2016 As adjusted
$
% of
Revenue
$
% of
Revenue
$
% of
Revenue
88.1 %
11.9 %
100.0 %
61.0 %
5.7 %
66.7 %
33.3 %
11.2 %
11.8 %
7.8 %
0.9 %
0.5 %
— %
0.3 %
3.3 %
35.6 %
(2.3)%
Revenue
Product
Services and other
Cost of sales
Product
Services and other
Gross margin
Expenses
Sales and marketing
Research and development
Administration
Restructuring
Acquisition-related and integration
Impairment
Loss on disposal of iTank business
Amortization
Earnings (loss) from operations
Foreign exchange gain (loss)
Other income
Earnings (loss) before income taxes
Income tax expense
Net earnings (loss)
Net earnings (loss) per share - basic (in
dollars)
Net earnings (loss) per share - diluted
(in dollars)
699,332
94,270
793,602
484,051
44,980
529,031
264,571
88,587
93,707
61,582
7,115
3,962
—
2,064
25,829
282,846
(18,275)
(5,470)
51
(23,694)
916
(24,610)
(0.68)
(0.68)
645,402
45,325
690,727
434,843
21,645
456,488
234,239
75,135
82,653
42,904
1,076
8,195
3,668
—
20,508
234,139
100
7,550
67
7,717
3,199
4,518
0.14
0.14
93.4%
6.6%
100.0%
63.0%
3.1%
66.1%
33.9%
10.9%
12.0%
6.2%
0.2%
1.2%
0.5%
—%
3.0%
33.9%
—%
578,253
36,762
615,015
379,602
18,122
397,724
217,291
63,870
72,675
40,956
—
843
—
—
17,277
195,621
21,670
(1,736)
83
20,017
4,371
15,646
0.49
0.48
94.0%
6.0%
100.0%
61.7%
2.9%
64.7%
35.3%
10.4%
11.8%
6.7%
—%
0.1%
—%
—%
2.8%
31.8%
3.5%
Fiscal Year 2018 Compared to Fiscal Year 2017
Revenue
Revenue increased by $102.9 million, or 14.9%, in 2018 compared to 2017. This increase was driven by organic
growth in each of our three reportable segments, which all experienced solid year-over-year growth, as well as
growth resulting from the acquisition of Numerex:
• OEM Solutions experienced notable year-over-year increases in revenue earned from automotive,
networking and distribution customers;
17
• Enterprise Solutions experienced a strong contribution from our Airlink gateway products and related
•
services; and
IoT Services experienced strong growth owing to the addition of Numerex, acquired in December 2017, as
well as solid subscriber growth in cloud and connectivity services.
Product revenue increased by $53.9 million, or 8.4%, in 2018 compared to 2017. The increase was primarily driven
by growth in both OEM and Enterprise product revenue. Services and other revenue increased by $48.9 million,
or 108.0%, in 2018 compared to 2017, primarily driven by contribution from Numerex as well as organic growth in
subscribers.
Our geographic revenue mix for the years ended December 31, 2018 and 2017 was as follows:
During the years ended December 31, 2018 and 2017, no customer accounted for more than 10% of our
aggregated revenue.
Gross margin
Gross margin was 33.3% of revenue in 2018 compared to 33.9% in 2017. In 2018, gross margin was impacted by
unfavorable product and customer mix in our OEM Solutions segment, offset by improved sales of higher margin
gateways in our Enterprise Solutions segment and the addition of higher margin services contributed by Numerex
in our IoT Services segment. Gross margin included stock-based compensation expense and related social taxes of
$0.5 million in each of 2018 and 2017.
Sales and marketing
Sales and marketing expenses increased by $13.5 million, or 17.9%, in 2018 compared to 2017, primarily driven by
costs added as a result of the Numerex acquisition, higher revenue, and the unfavorable impact of foreign
exchange, partly offset by lower professional fees. Sales and marketing expenses include stock-based
compensation and related social taxes of $2.9 million in 2018 compared to $2.5 million in 2017.
18
Research and development
Research and development ("R&D") expenses increased by $11.1 million, or 13.4%, in 2018 compared to 2017.
This increase was mainly driven by costs added as a result of the Numerex acquisition and unfavorable impact of
foreign exchange, offset partly by lower development and certification costs.
R&D expenses included stock-based compensation and related social taxes of $2.4 million in 2018 compared to
$2.0 million in 2017. R&D expenses also included acquisition-related amortization of $0.3 million in 2018
compared to $0.4 million in 2017.
Administration
Administration expenses increased by $18.7 million, or 43.5%, in 2018 compared to 2017. This increase was
mainly driven by 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, higher consulting fees, as well as
costs added as a result of the Numerex acquisition. Administration expenses included stock-based compensation
expense and related social taxes of $7.2 million in 2018 compared to $5.3 million in 2017.
Restructuring
In the first quarter of 2018, we commenced various efficiency and effectiveness initiatives focused on capturing
synergies as we integrate Numerex into our business as well as efficiency gains in other areas of our business. In
2018, we recorded $4.8 million in severance and other related costs associated with this initiative.
In the fourth quarter of 2018, we initiated certain organizational changes to accelerate our transformation to a
device-to-cloud IoT solutions company. In the three months and year ended December 31, 2018, we recorded
$2.3 million in severance and other related costs associated with this initiative.
Restructuring costs of $1.1 million in 2017 were related to the relocation of our IoT Services customer support
operations from Sweden to France and the United States.
Acquisition-related and integration
In 2018, acquisition-related and integration costs decreased by $4.2 million, or 51.7%, in 2018 compared to 2017.
Higher expenses in 2017 reflect the Numerex acquisition and accruals of acquisition-related contingent
consideration.
Loss on disposal
On December 31, 2018, we completed the sale of substantially all of the assets and liabilities of our remote tank
monitoring business, for total proceeds of $6.0 million. We received $5.0 million in cash consideration at closing
with the remaining $1.0 million held in escrow. The amount in escrow will be held for up to the next 12 months
with $0.8 million contingent on meeting certain milestone events and the remaining $0.2 million to secure the
purchaser's rights of indemnification under the asset sale agreement. We recognized a loss on disposal of $2.1
million.
Impairment
No impairment charges were recorded in 2018. The impairment charge of $3.7 million recorded in 2017 related to
an intangible asset recorded on our acquisition of Wireless Maingate AB. The charge was recorded due to the
decision to terminate a service offering that was superseded by a more technologically advanced offering in our
integrated IoT Services segment.
Amortization
Amortization expense increased by $5.3 million, or 25.9%, in 2018 compared to 2017 primarily due to higher
acquisition-related amortization. Amortization expense in 2018 included $18.3 million of acquisition-related
amortization compared to $15.1 million in 2017.
19
Foreign exchange gain (loss)
Foreign exchange loss was $5.5 million in 2018 compared to a gain of $7.6 million in 2017. The loss in 2018 was
primarily driven by a decrease in the value of the Euro compared to the U.S. dollar.
Income tax expense (recovery)
Income tax expense was $0.9 million in 2018 compared to $3.2 million in 2017. This decrease was primarily driven
by a shift of earnings between jurisdictions, offset by changes in the realizability of certain tax assets.
Net earnings (loss)
We incurred a net loss of $24.6 million in 2018 compared to net earnings $4.5 million in 2017. The decrease in
earnings reflected higher operating expenses combined with higher restructuring expense, consulting fees,
separation costs on the retirement of our former CEO, loss on disposal of our remote tank monitoring business,
the unfavorable impact of foreign exchange, offset by lower acquisition costs, absence of impairment loss, and
lower income tax expense.
Net loss in 2018 included stock-based compensation expense and related social taxes of $13.0 million and
acquisition-related amortization of $18.6 million. Net earnings in 2017 included stock-based compensation
expense and related social taxes of $10.4 million and acquisition-related amortization of $15.1 million.
Weighted average number of shares
The weighted average basic and diluted shares outstanding were 36.0 million for the year ended December 31,
2018 and 32.4 million and 32.9 million, respectively, for the year ended December 31, 2017.
The number of shares outstanding was 36.1 million at December 31, 2018, compared to 35.9 million at
December 31, 2017. The increase in the number of shares outstanding was primarily due to the issuance of
common shares as a result of stock option exercises and restricted share unit releases offset by the impact of share
repurchases made under our Normal Course Issuer Bid ("NCIB") program (see "Liquidity and Capital Resources"
section below).
20
Fiscal Year 2017 Compared to Fiscal Year 2016
Revenue
Revenue increased by $75.7 million, or 12.3%, in 2017 compared to 2016. The increase was driven by
contributions from each of our three reportable segments which all experienced solid year-over-year growth:
• OEM Solutions experienced notable year-over-year increases in automotive and enterprise segment
module sales;
• Enterprise Solutions experienced a strong contribution from fleet management products and other mobile
•
and industrial gateway products; and
IoT Services experienced solid subscriber additions and contribution from Numerex which was acquired
late in the year.
Product revenue increased by $67.1 million, or 11.6%, in 2017 compared to 2016. The increase was primarily
driven by growth in both OEM and Enterprise product revenue. Services and other revenue increased by $8.6
million, or 23.3%, in 2017 compared to 2016, primarily driven by increased subscriber growth in cloud and
connectivity.
Our geographic revenue mix for the years ended December 31, 2017 and 2016 was as follows:
During the years ended December 31, 2017 and 2016, no customer accounted for more than 10% of our
aggregated revenue.
Gross margin
Gross margin was 33.9% of revenue in 2017 compared to 35.3% in 2016. In 2016, gross margin was favorably
impacted by a change in estimate of our Intellectual Property ("IP") royalty accrual ("Change in Estimate") (see
Royalty obligations under "Critical Accounting Policies and Estimates" below) and two legal settlements. On a
comparable year-over-year basis these items added 210 basis points to gross margin in 2016 compared to 2017. In
2017, gross margin benefited from product cost reductions that were partially offset by unfavorable product mix.
Gross margin included stock-based compensation expense and related social taxes of $0.5 million and $0.4 million
in 2017 and 2016, respectively.
21
Sales and marketing
Sales and marketing expenses increased by $11.3 million, or 17.6%, in 2017 compared to 2016, primarily as a
result of targeted investments in our go-to-market capabilities to drive growth, costs added as a result of
acquisitions and the unfavorable impact of foreign exchange. Sales and marketing expenses included stock-based
compensation and related social taxes of $2.5 million in 2017 compared to $1.7 million in 2016.
Research and development
R&D expenses increased by $10.0 million, or 13.7%, in 2017 compared to 2016. The increase in R&D expenses was
primarily due to costs associated with new product development programs, the unfavorable impact of foreign
exchange and additional expenses added as a result of acquisitions.
R&D expenses included stock-based compensation and related social taxes of $2.0 million in 2017 compared to
$1.4 million in 2016. R&D expenses also included acquisition-related amortization of $0.4 million in 2017
compared to $0.5 million in 2016.
Administration
Administration expenses increased by $1.9 million, or 4.8%, in 2017 compared to 2016, primarily due to higher
stock-based compensation expense and the unfavorable impact of foreign exchange, partially offset by lower bad
debt expense. Administration expenses included stock-based compensation expense and related social taxes of
$5.3 million in 2017 compared to $4.1 million in 2016.
Restructuring
Restructuring costs were $1.1 million in 2017. These costs are related to the relocation of our IoT Services
customer support operations from Sweden to France and the United States.
Acquisition-related and integration
Acquisition-related and integration costs increased by $7.4 million in 2017 compared to 2016. The increase was
primarily due to the acquisition of Numerex, integration activities and higher accruals of acquisition-related
contingent consideration.
Impairment
We recorded an impairment of $3.7 million related to an intangible asset recorded on the acquisition of Maingate.
The resulting change, which was recorded in the first quarter of 2017, was due to the decision to terminate a
service offering that has now been superseded by a more technologically advanced offering in our integrated IoT
Services business.
Amortization
Amortization expense increased by $3.2 million, or 18.7%, in 2017 compared to 2016 primarily due to higher
acquisition-related amortization. Amortization expense in 2017 included $15.1 million of acquisition-related
amortization compared to $11.6 million in 2016.
Foreign exchange gain (loss)
Foreign exchange gain was $7.6 million in 2017 compared to a loss of $1.7 million in 2016. This gain was primarily
the result of an increase in the value of the Euro compared to the U.S. dollar.
Income tax expense (recovery)
Income tax expense was $3.2 million in 2017 compared to $4.4 million in 2016. This decrease was due to a
recovery related to the impairment charge in the first quarter of 2017 and a shift of earnings between
jurisdictions.
Net earnings (loss)
Net earnings were $4.5 million in 2017 compared to $15.6 million in 2016. The decrease of $11.1 million in net
earnings reflected decreased earnings from operations as a result of higher operating expenses driven by growth
in the business, the added cost structure of acquired businesses, transaction and integration costs associated with
22
acquisitions and an asset impairment, partially offset by foreign exchange gains on balance sheet items and lower
income tax expense.
Net earnings in 2017 included stock-based compensation expense and related social taxes of $10.4 million and
acquisition-related amortization of $15.1 million. Net earnings in 2016 included stock-based compensation
expense and related social taxes of $7.6 million and acquisition-related amortization of $12.1 million.
Weighted average number of shares
The weighted average basic and diluted shares outstanding were 32.4 million and 32.9 million, respectively, for the
year ended December 31, 2017 and 32.0 million and 32.3 million, respectively, for the year ended December 31,
2016.
The number of shares outstanding was 35.9 million at December 31, 2017, compared to 31.9 million at
December 31, 2016. The increase in the number of shares outstanding was primarily due to the shares issued for
the acquisition of Numerex.
SEGMENTED INFORMATION
OEM Solutions
(In thousands of U.S. dollars, except where
otherwise stated)
Revenue
Cost of goods sold
Gross margin
Gross margin %
Non-GAAP (1)
Gross Margin
Gross Margin %
$
$
2018
583,214
417,645
165,569
28.4%
2017
As adjusted
2016
As adjusted
$
$
$
$
554,537
384,230
170,307
30.7%
515,925
349,781
166,144
32.2%
% change
2018 vs
2017
5.2 %
8.7 %
(2.8)%
2017 vs
2016
7.5%
9.8%
2.5%
$
165,899
$
170,694
$
154,536
(2.8)%
10.5%
28.4%
30.8%
30.0%
(1) See section titled "Non-GAAP Financial Measures" for additional details and a reconciliation to the applicable U.S. GAAP financial measure.
Fiscal Year 2018 compared to 2017
Revenue increased by $28.7 million, or 5.2%, in 2018, compared to 2017. This increase was primarily due to
strong demand from automotive, networking and distribution customers, partially offset by weaker demand from
transportation, sales and payment and mobile computing customers.
Gross margin for OEM Solutions was 28.4% in 2018 compared to 30.7% in 2017. This decrease was mainly driven
by unfavorable product and customer mix, including the effects of higher automotive volumes at lower gross
margin.
Fiscal Year 2017 compared to 2016
Revenue increased by $38.6 million, or 7.5%, in 2017, compared to 2016. This increase was primarily due to
strong demand from automotive and enterprise customers and programs.
In 2016, gross margin was favorably impacted by the Change in Estimate and a legal settlement. On a comparable
year over year basis these items added 190 basis points to gross margin in 2016 compared to 2017. In 2017, gross
margin benefited from product cost reductions that were partly offset by unfavorable product mix.
Gross margin percentage of 30.7% increased in comparison to 2016 reflecting the impact of cost reduction
programs, including lower manufacturing and component costs, partially offset by unfavorable product mix
23
principally driven by the ramp up of a new high volume automotive program at lower gross margin which replaced
an existing program that went end of life.
Enterprise Solutions
(In thousands of U.S. dollars, except where
otherwise stated)
Revenue
Cost of goods sold
Gross margin
Gross margin %
Non-GAAP (1)
Gross Margin
Gross Margin %
2018
119,927
58,796
$
$
2017
As adjusted
101,535
$
2016
As adjusted
71,486
$
53,014
61,131
$
48,521
$
51.0%
47.8%
31,537
39,949
55.9%
% change
2018 vs
2017
18.1%
10.9%
26.0%
2017 vs
2016
42.0%
68.1%
21.5%
$
61,202
$
48,593
$
38,913
25.9%
24.9%
51.0%
47.9%
54.4%
(1) See section titled "Non-GAAP Financial Measures" for additional details and a reconciliation to the applicable U.S. GAAP financial measure.
Fiscal Year 2018 compared to 2017
Revenue increased by $18.4 million, or 18.1%, in 2018 compared to 2017 mainly driven by strong sales of AirLink
gateway products, including the RV50, MG90 and MP70 gateway products, and support and services revenue,
partly offset by lower sales of our mid-tier telematics gateways.
Gross margin for Enterprise Solutions was 51.0% in 2018 compared to 47.8% in 2017. This increase in gross margin
was mainly due to favorable product mix related to increased sales of higher margin AirLink gateway products and
related services, and lower sales of our mid-tier telematics gateways.
Fiscal Year 2017 compared to 2016
Revenue increased by $30.0 million, or 42.0%, in 2017 compared to 2016 mainly driven by revenue from fleet
management products acquired from GenX Mobile Incorporation ("GenX") in 2016 and the growth in sales of
gateway products, including the RV50 and MG90, which were launched in the latter half of 2016 and ramped up
during 2017.
Gross margin of 47.8% in 2017 decreased compared to 55.9% in 2016. In 2016, gross margin was favorably
impacted by the Change in Estimate and two legal settlements. On a comparable year-over-year basis, these items
added 390 basis points to gross margin in 2016 compared to 2017. In 2017, gross margin percentage was
unfavorably impacted by the inclusion of lower margin fleet management revenues from GenX, partially offset by
product cost reductions.
24
IoT Services
(In thousands of U.S. dollars, except
where otherwise stated)
Revenue
Cost of goods sold
Gross margin
Gross margin %
Non-GAAP (1)
Gross Margin
Gross Margin %
2018
90,461
52,590
$
$
2017
As adjusted
34,655
$
2016
As adjusted
27,604
$
37,871
$
15,411
$
19,244
16,406
11,198
% change
2018 vs
2017
161.0%
173.3%
145.7%
2017 vs
2016
25.5%
17.3%
37.6%
41.9%
44.5%
40.6%
$
37,924
$
15,436
$
11,217
145.7%
37.6%
41.9%
44.5%
40.6%
(1) See section titled "Non-GAAP Financial Measures" for additional details and a reconciliation to the applicable U.S. GAAP financial measure.
Fiscal Year 2018 compared to 2017
Revenue increased by $55.8 million, or 161.0%, in 2018 compared to 2017. This growth was mostly driven by the
addition of Numerex, acquired in December 2017, as well as organic subscriber growth in cloud and cellular
connectivity services.
Gross margin for IoT Services was 41.9% in 2018 compared to 44.5% in 2017. The addition of Numerex revenue
reduced gross margin percentage in 2018 within the segment, partly as a result of network upgrade costs incurred
in the first quarter of 2018 as well as contractual minimums incurred in 2018.
Fiscal Year 2017 compared to 2016
Revenue increased by $7.1 million, or 25.5%, in 2017 compared to 2016 as a result of continuing subscriber growth
and the inclusion of Numerex revenue which was acquired late in the year.
Gross margin increased in 2017 due to favorable mix from cloud and connectivity services and the fact that there
were several one-time charges to cost of sales in 2016 that reduced gross margin compared to 2017.
25
FOURTH QUARTER OVERVIEW
Consolidated Results of Operations:
(in thousands of U.S. dollars, except where otherwise stated)
2018
2017 As adjusted
Three months ended December 31,
Revenue
Product
Services and other
Cost of goods sold
Product
Services and other
Gross margin
Expenses
Sales and marketing
Research and development
Administration
Restructuring
Acquisition-related and integration
Loss on disposal of iTank business
Amortization
Earnings (loss) from operations
Foreign exchange gain (loss)
Other income (expense)
Earnings (loss) before income taxes
Income tax expense (recovery)
Net earnings (loss)
Net earnings (loss) per share - Basic and diluted (in
dollars)
GAAP:
% of
Revenue
88.5 %
11.5 %
100.0 %
61.8 %
5.5 %
67.3 %
32.7 %
11.1 %
11.0 %
7.2 %
1.2 %
0.3 %
1.0 %
3.0 %
34.8 %
(2.1)%
$
178,205
23,190
201,395
124,395
11,105
135,500
65,895
22,353
22,230
14,516
2,345
613
2,064
5,971
70,092
(4,197)
(2,378)
(19)
(6,594)
(2,768)
(3,826)
(0.11)
% of
Revenue
92.2 %
7.8 %
100.0 %
62.6 %
3.7 %
66.3 %
33.7 %
11.1 %
11.9 %
6.2 %
0.1 %
2.6 %
— %
3.3 %
35.3 %
(1.6)%
$
169,309
14,224
183,533
114,952
6,767
121,719
61,814
20,436
21,828
11,379
245
4,792
—
6,073
64,753
(2,939)
1,267
38
(1,634)
1,880
(3,514)
(0.11)
• Revenue was $201.4 million, up 9.7%, compared to $183.5 million in the fourth quarter of 2017. This
increase was primarily driven by strong growth in module sales to automotive, networking and energy
customers, AirLink gateway products and contribution from Numerex, partially offset by lower sales of our
mid-tier telematics gateways.
• Gross margin was 32.7% compared to 33.7% in the fourth quarter of 2017. In the fourth quarter of 2018,
gross margin decreased compared to the same period in 2017 due to unfavorable product and customer
mix in our OEM Solutions segment, offset by improved sales of higher margin gateways in our Enterprise
Solutions segment and higher cloud and connectivity services in our IoT Services segment. In the fourth
quarter, our gross margins were negatively impacted by tariff costs of approximately $1.1 million in our
Enterprise Solutions segment. Excluding the tariff impact, our gross margin in the fourth quarter of 2018
would have been 33.3%, slightly lower than the same period of 2017.
26
•
Loss from operations in the fourth quarter of 2018 was $4.2 million compared to a loss of $2.9 million in
the comparable period of 2017 as a result higher operating expenses combined with higher restructuring
expenses and the loss on disposal of our iTank business, offset by lower acquisition related costs.
• Net loss in the fourth quarter was $3.8 million compared to a loss of $3.5 million in the same period of
2017. The increase in net loss was mainly due to higher loss from operations and unfavorable foreign
exchange movement, partially offset by tax recoveries.
• Cash and cash equivalents at the end of the fourth quarter of 2018 were $89.1 million, an increase of
$21.6 million compared to $67.5 million at the end of the third quarter of 2018. The increase in cash was
mainly due to lower working capital requirements, proceeds from sale of our iTank business, and the
absence of Numerex acquisition-related costs.
NON-GAAP(1):
• Gross margin was 32.7% in the fourth quarter of 2018, compared to 33.8% in the fourth quarter of 2017.
In the fourth quarter of 2018, gross margin decreased compared to the same period in 2017 due to
unfavorable product and customer mix in our OEM Solutions segment, offset by improved sales of higher
margin gateways in our Enterprise Solutions segment and cloud and connectivity services in our IoT
Services segment. In the fourth quarter of 2018, our gross margins were impacted by tariff costs of
approximately $1.1 million in our Enterprise Solutions segment. Excluding the tariff impact, our gross
margin in the fourth quarter of 2018 would have been 33.3%, slightly lower than the same period of 2017.
• Earnings from operations increased by $0.7 million in the fourth quarter of 2018 compared to the same
period of 2017 due to higher revenues, partially offset by higher operating expenses mainly as a result of
contribution from Numerex.
• Adjusted EBITDA increased by $1.3 million in the fourth quarter of 2018 compared to the same period of
2017. This increase mainly reflects higher earnings from operations and higher amortization expense in
the fourth quarter of 2018.
• Net earnings decreased by $0.2 million in the fourth quarter of 2018 compared to the same period of
2017. This decrease was mainly due to higher income tax expense, partially offset by higher earnings from
operations.
(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.
27
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. 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)
2018
2017 As adjusted
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Revenue
$ 201,395
$ 203,426
$201,903
$ 186,878
$183,533
$172,560
$173,416
$161,218
Cost of goods sold
135,500
136,159
132,594
124,778
121,719
115,266
113,780
105,723
65,895
32.7%
67,267
33.1%
69,309
34.3%
61,814
33.7%
57,294
33.2%
59,636
34.4%
55,495
34.4%
Gross margin
Gross margin %
Expenses
Sales and marketing
Research and development
Administration
Restructuring
Acquisition-related and
integration
Loss on disposal of iTank
business
Impairment
Amortization
Earnings (loss) from
operations
Foreign exchange gain (loss)
Other income (expense)
Earnings (loss) before income
taxes
Income tax expense (recovery)
22,353
22,230
14,516
2,345
613
2,064
—
5,971
70,092
(4,197)
(2,378)
(19)
(6,594)
(2,768)
21,743
22,621
14,998
227
570
—
—
22,066
24,391
19,804
952
—
—
6,255
66,414
6,137
74,364
853
(159)
7
701
1,738
(5,055)
(4,048)
8
(9,095)
2,289
62,100
33.2%
22,425
24,465
12,264
3,591
—
—
7,466
71,976
(9,876)
1,115
55
(8,706)
(343)
20,436
21,828
11,379
245
17,975
21,044
10,560
199
18,699
20,470
10,579
259
875
—
—
—
—
—
—
6,073
64,753
5,049
56,904
4,760
55,642
(2,939)
1,267
38
(1,634)
1,880
390
1,667
32
2,089
735
3,994
3,517
(12)
7,499
729
18,025
19,311
10,386
373
451
—
3,668
4,626
56,840
(1,345)
1,099
9
(237)
(145)
(92)
Net earnings (loss)
$ (3,826)
$ (1,037)
$ (11,384)
$ (8,363)
$ (3,514)
$ 1,354
$
6,770
$
Earnings (loss) per share -
GAAP in dollars
Basic
Diluted
$
$
(0.11)
(0.11)
$
$
(0.03)
(0.03)
$
$
(0.32)
(0.32)
$
$
(0.23)
(0.23)
$
$
(0.11)
(0.11)
$
$
0.04
0.04
$
$
0.21
0.21
$
$
—
—
Weighted average number of
shares (in thousands)
Basic
Diluted
36,057
36,057
36,085
36,085
36,021
36,021
35,915
35,912
33,136
33,136
32,200
32,735
32,167
32,766
31,909
31,909
28
1,014
1,765
4,792
2,077
Our quarterly results may fluctuate from quarter-to-quarter, driven by variation in sales volume, product mix and
the combination of variable and fixed operating expenses, as well as from the impact of acquisitions completed in
the quarter. The impact of significant items incurred during the first three interim periods of the year ended
December 31, 2018 are discussed in more detail and disclosed in our quarterly reports and management’s
discussion and analysis. Certain of the factors that affected our quarterly results are listed below.
•
•
•
•
•
•
•
•
In the fourth quarter of 2018, net loss was $3.8 million compared to $1.0 million in the third quarter of
2018, primarily due to higher restructuring costs, loss on disposal of our remote tank monitoring business,
partially offset by income tax recoveries.
In the third quarter of 2018, net loss was $1.0 million compared to $11.4 million in the second quarter of
2018. In the second quarter of 2018, we recorded separation costs related to our former CEO's
retirement, higher foreign exchange losses, income tax expenses, restructuring charges and acquisition
related and integration costs.
In the second quarter of 2018, net loss was $11.4 million compared to $8.4 million in the first quarter of
2018, driven by one-time separation costs related to our former CEO's retirement, unfavorable foreign
exchange losses and higher income tax expenses, offset by higher gross margin and lower restructuring
charges.
In the first quarter of 2018, net loss was $8.4 million compared to $3.5 million in the fourth quarter of
2017, mainly driven by costs added as a result of the Numerex acquisition, higher restructuring charges,
offset by lower acquisition costs and lower income tax expenses.
In the fourth quarter of 2017, net earnings decreased by $4.9 million compared to the third quarter of
2017, primarily due to lower earnings from operations as a result of increased operating expenses,
Numerex related acquisition costs and integration related expenses, as well as higher income tax
expenses.
In the third quarter of 2017, net earnings decreased by $5.4 million compared to the second quarter of
2017, driven by a combination of lower earnings from operations and lower foreign exchange gains.
In the second quarter of 2017, net earnings increased by $6.9 million compared to the first quarter of
2017. The increase in the second quarter of 2017 was attributable to higher earnings from operations and
foreign exchange gains, partially offset by higher income tax expenses compared to the first quarter of
2017.
In the first quarter of 2017, net loss was $0.1 million compared to net earnings of $15.7 million in the
fourth quarter of 2016, driven by seasonally lower revenue, lower gross margin primarily due to the $13.0
million reduction of cost of goods sold related to the change in estimate of our IP royalty accrual recorded
in the fourth quarter of 2016 and higher operating expenses, as well as the impact of the impairment in
the first quarter of 2017 of $3.7 million related to an intangible asset, partially offset by foreign exchange
gains in the first quarter of 2017.
29
LIQUIDITY AND CAPITAL RESOURCES
Selected Financial Information:
(in thousands of U.S. dollars)
2018
2017
As adjusted
2016
As adjusted
Cash flows provided (used) before changes in non-cash working capital:
$
34,231
$
41,292
$
32,313
Changes in non-cash working capital
Accounts receivable
Inventories
Prepaids and other
Accounts payable and accrued liabilities
Deferred revenue
Cash flows provided by (used in):
Operating activities
Investing activities
Proceeds from sale of iTank business
Acquisitions, net of cash acquired
Capital expenditures and increase in intangible assets
(5,526)
1,508
(3,525)
21,944
(1,402)
12,999
47,230
(16,006)
5,000
—
(21,099)
$
$
(12,665)
(6,806)
(5,334)
(17,750)
335
(42,220)
(928)
(37,641)
—
(21,870)
(15,806)
$
$
(28,945)
(5,833)
6,598
40,248
2,124
14,192
46,505
(26,636)
—
(8,782)
(17,857)
$
$
Financing activities
$
(5,927)
$
(271)
$
(13,689)
Issue of common shares, net of issuance costs
Repurchase of common shares for cancellation
Purchase of treasury shares for RSU distribution
Taxes paid related to net settlement of equity awards
Payment for contingent consideration
2,636
(3,120)
(2,808)
(1,878)
(130)
5,708
(2,779)
—
(1,367)
(1,397)
2,048
(10,203)
(4,214)
(909)
(16)
Free Cash Flow (1)
$
26,131
$
(16,734)
$
28,648
(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 $48.2 million in 2018 compared to 2017, primarily due to lower
working capital requirements for accounts payable, inventory and accounts receivable, offset by deferred revenue
working capital requirements.
Investing Activities
Cash used in investing activities decreased by $21.6 million in 2018 compared to 2017. In 2018, we received cash
consideration of $5.0 million from the sale of our iTank business. In 2017, we incurred $21.9 million in acquisition
costs, driven by increased business acquisition activity, including the acquisitions of Numerex and GlobalTop
Technology Inc.
Capital expenditures of $21.1 million in 2018 were higher compared to 2017 mainly as a result of the addition of
Numerex-related capital expenditures. Capital expenditures in 2018 were primarily for production and tooling
equipment, R&D equipment, monitoring equipment while cash used for intangible assets was primarily for
capitalized software costs.
30
Financing Activities
Net cash used for financing activities increased by $5.7 million in 2018 compared to 2017, mainly due to lower
proceeds received from stock option exercises, the purchase of treasury shares for RSU distribution, higher taxes
paid related to net settlement of equity awards, partly offset by payments for acquisition-related earn-out
arrangements in 2017.
Free Cash Flow
Our free cash flow improved by $42.9 million in 2018 compared to 2017, mainly as a result of stronger operating
cash flow, partially offset by higher capital expenditures. 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 $89.1 million at December 31, 2018
and cash generated from operations will be sufficient to fund our expected working capital and capital expenditure
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.
The following table presents the aggregate amount of future cash outflows for contractual obligations as of
December 31, 2018.
Payments due by period
(In thousands of U.S. dollars)
Total
2019
2020
2021
2022
2023
Thereafter
Operating lease obligations
$ 21,457 $
7,557
$
6,617
$
4,986
$
1,619
$
674
$
Capital lease obligations
1,095
538
Purchase obligations - Contract
Manufacturers (1)
Purchase obligations - Mobile
Network Operators (2)
Other long-term liabilities
147,029
147,029
8,952
463
3,481
54
394
—
3,728
17
163
—
1,303
13
—
—
440
379
—
—
—
—
Total
$ 178,996 $ 158,659
$ 10,756
$
6,465
$
2,438
$
674
$
4
—
—
—
—
4
(1) Purchase obligations represent obligations with certain contract manufacturers and suppliers to buy a minimum amount of designated products
between January 2019 and June 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 January 2019 and October 2022.
Normal Course Issuer Bid
On August 1, 2018, we received approval from the TSX of our Notice of Intention to make a new NCIB. Pursuant to
the NCIB, we may 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 will terminate on the earlier of: i) August 7, 2019; (ii) the date we complete
our purchases pursuant to the notice of intention filed with the TSX; or (iii) the date of notice by us of termination
of the NCIB.
In 2018, we repurchased and canceled 161,500 common shares at an average price of $19.32 per share. The
excess purchase price over and above the average carrying value in the amount of $1,187 was charged to retained
earnings.
31
Capital Resources
The source of funds for our future capital expenditures and commitments includes cash, accounts receivables,
cash from operations and borrowings under our credit facilities.
2018
2017
(In thousands of U.S. dollars)
Dec 31
Sept 30
June 30
Mar 31
Dec 31
Sept 30
June 30
Mar 31
Cash and cash equivalents
$ 89,076
$ 67,460
$ 73,411
$ 70,588
$ 65,003
$ 74,206
$ 89,012
$ 92,545
Unused credit facilities
30,000
30,000
10,000
10,000
10,000
10,000
10,000
10,000
Total
$119,076
$ 97,460
$ 83,411
$ 80,588
$ 75,003
$ 84,206
$ 99,012
$102,545
At December 31, 2018, we have committed capital expenditures of $4.9 million (Dec 31, 2017 - $4.3 million). Our
capital expenditures during the first quarter of 2019 are expected to be primarily for production and R&D
equipment.
Credit Facilities
On July 31, 2018, we entered into a new committed $30 million senior secured revolving credit facility (the
"Revolving Facility") with the Canadian Imperial Bank of Commerce as sole lender and as Administrative Agent.
The new Revolving Facility replaced the Company’s previous $10 million uncommitted revolving credit facility. 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 December 31, 2018, there were no
borrowings under the Revolving Facility.
Letters of Credit
During the second quarter of 2018, we reduced our revolving standby letter of credit facility with Toronto
Dominion Bank from $10 million to $1.5 million in connection with the Revolving Facility. The credit facility is used
for the issuance of letters of credit and guarantees and is guaranteed by Export Development Canada. As of
December 31, 2018, there were two letters of credit issued against the revolving standby letter of credit facility for
a total value of $0.1 million.
32
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.
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.
33
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.
The following table provides a reconciliation of the non-GAAP financial measures to U.S. GAAP results for years
ended December 31:
(In thousands of U.S. dollars, except where otherwise stated)
Gross margin - GAAP
Stock-based compensation and related social taxes
Realized gains (losses) on hedge contracts
Other nonrecurring costs (recoveries)
Gross margin - Non-GAAP
Earnings (loss) from operations - GAAP
Stock-based compensation and related social taxes
Acquisition-related and integration
Restructuring
Loss on disposal of iTank business
Other nonrecurring costs (recoveries)
Impairment
Realized gains (losses) on hedge contracts
Acquisition-related amortization
Earnings from operations - Non-GAAP
Net earnings (loss)- GAAP
Stock-based compensation and related social taxes, restructuring,
impairment, acquisition-related, integration, loss on disposal of iTank
business, and other nonrecurring costs (recoveries)
Amortization
Interest and other, net
Foreign exchange losses (gains)
Income tax expense (recovery)
Adjusted EBITDA
Amortization (exclude acquisition-related amortization)
Interest and other, net
Income tax expense - Non-GAAP
Net earnings - Non-GAAP
Diluted earnings (loss) per share
GAAP - (in dollars)
Non-GAAP - (in dollars)
34
2018
2017
As adjusted
2016
As adjusted
264,571
$
234,239
$
217,291
479
(30)
5
461
23
—
265,025
$
234,723
$
(18,275) $
13,006
3,962
7,115
2,064
9,421
—
(562)
18,575
100
$
10,374
8,195
1,076
—
318
3,668
419
15,486
35,306
$
39,636
$
420
—
(13,045)
204,666
21,670
7,596
843
—
—
(11,762)
—
—
12,102
30,449
(24,610) $
4,518
$
15,646
35,568
39,150
(51)
4,908
916
23,631
30,503
(67)
(7,131)
3,199
55,881
$
54,653
$
(20,575)
51
(2,930)
(15,017)
67
(5,184)
32,427
$
34,519
$
(3,323)
25,894
(83)
1,736
4,371
44,241
(13,792)
83
(8,302)
22,230
(0.68) $
0.90
$
0.14
1.05
$
$
0.48
0.69
$
$
$
$
$
$
$
$
$
The following table provides a quarterly reconciliation of the non-GAAP financial measures to our most directly
comparable U.S. GAAP results:
(In thousands of U.S. dollars, except where
otherwise stated)
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
2018
2017 As adjusted
Gross margin - GAAP
$ 65,895
$ 67,267
$ 69,309
$ 62,100
$ 61,814
$ 57,294
$ 59,636
$ 55,495
Stock-based compensation and related
social taxes
Realized gains (losses) on hedge contracts
Other nonrecurring costs
Gross margin - Non-GAAP
58
(13)
5
57
(11)
—
57
—
—
307
(6)
—
122
11
—
123
12
—
108
—
—
108
—
—
$ 65,945
$ 67,313
$ 69,366
$ 62,401
$ 61,947
$ 57,429
$ 59,744
$ 55,603
Earnings (loss) from operations - GAAP
$ (4,197) $
853
$ (5,055) $ (9,876)
$ (2,939) $
390
$ 3,994
$ (1,345)
Stock-based compensation and related
social taxes
Acquisition-related and integration
Restructuring
Loss on disposal of iTank business
Impairment
2,743
613
2,345
2,064
—
3,473
570
227
—
—
Realized gains (losses) on hedge contracts
(296)
(201)
3,950
1,014
952
—
—
(14)
Other nonrecurring costs
Acquisition-related amortization
2,697
4,261
1,583
4,354
5,141
4,426
2,840
1,765
3,591
—
—
(51)
—
2,869
4,792
245
—
—
209
—
2,780
2,077
199
—
—
210
—
2,577
2,148
875
259
—
—
42
451
373
—
3,668
276
3,641
5,534
4,306
3,845
3,694
Earnings from operations - Non-GAAP
$ 10,230
$ 10,859
$ 10,414
$ 3,803
$ 9,482
$ 9,501
$ 11,441
$ 9,212
Net earnings (loss) - GAAP
$ (3,826) $ (1,037) $(11,384) $ (8,363)
$ (3,514) $ 1,354
$ 6,770
$
(92)
Stock-based compensation and related
social taxes, restructuring, impairment,
acquisition-related, integration, loss on
disposal of iTank business, and other
nonrecurring costs (recoveries)
Amortization
Interest and other, net
Foreign exchange loss (gain)
10,462
9,308
19
2,082
5,853
9,483
(7)
(42)
Income tax expense (recovery)
(2,768)
1,738
11,057
8,196
9,651
10,708
7,906
8,764
5,056
7,548
(8)
(55)
(38)
(32)
3,753
7,194
12
6,916
6,997
(9)
4,034
2,289
(1,166)
(1,058)
(1,457)
(3,517)
(1,099)
(343)
1,880
735
729
(145)
Adjusted EBITDA
$ 15,277
$ 15,988
$ 15,639
$ 8,977
$ 13,940
$ 13,204
$ 14,941
$ 12,568
Amortization (exclude acquisition-related
amortization)
Interest and other, net
(5,047)
(5,129)
(5,225)
(5,174)
(4,458)
(3,703)
(3,500)
(3,356)
Income tax expense - Non-GAAP
(1,245)
(352)
(769)
(19)
7
8
55
(564)
38
32
(12)
9
(312)
(1,816)
(1,615)
(1,441)
Net earnings - Non-GAAP
$ 8,966
$ 10,514
$ 9,653
$ 3,294
$ 9,208
$ 7,717
$ 9,814
$ 7,780
Diluted earnings (loss) per share
GAAP - (in dollars)
Non-GAAP - (in dollars)
$
$
(0.11) $ (0.03) $
(0.32) $
(0.23)
$ (0.11) $
0.25
$
0.29
$
0.27
$
0.09
$
0.28
$
0.04
0.24
$
$
0.21
0.30
$
$
—
0.24
35
The following table provides a reconciliation of segmented gross margin:
(In thousands of U.S. dollars)
OEM Solutions:
Gross margin - GAAP
Stock-based compensation and related social taxes
Realized gains (losses) on hedge contracts
Other nonrecurring costs (recoveries)
Gross margin - Non-GAAP
Enterprise Solutions:
Gross margin - GAAP
Stock-based compensation and related social taxes
Realized gains (losses) on hedge contracts
Other nonrecurring recoveries
Gross margin - Non-GAAP
IoT Services:
Gross margin - GAAP
Stock-based compensation and related social taxes
Realized gains (losses) on hedge contracts
Gross margin - Non-GAAP
2018
2017
As adjusted
2016
As adjusted
165,569
$
170,307
$
166,144
349
(24)
5
370
17
—
165,899
$
170,694
$
352
—
(11,960)
154,536
61,131
$
48,521
$
39,949
74
(3)
—
68
4
—
61,202
$
48,593
$
49
—
(1,085)
38,913
37,871
$
15,411
$
11,198
56
(3)
23
2
19
—
37,924
$
15,436
$
11,217
$
$
$
$
$
$
The following table provides a reconciliation of free cash flow:
(In thousands of U.S. dollars)
Cash flows from operating activities
Capital expenditures and increase in intangible assets
Free Cash Flow
2018
47,230
(21,099)
26,131
$
$
2017
(928)
(15,806)
(16,734)
$
$
2016
46,505
(17,857)
28,648
$
$
OFF-BALANCE SHEET ARRANGEMENTS
We did not have any off-balance sheet arrangements during the years ended December 31, 2018 and 2017.
TRANSACTIONS BETWEEN RELATED PARTIES
We did not undertake any transactions with related parties during the years ended December 31, 2018 and 2017.
36
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. Note 2, Summary of significant accounting policies, in the December 31, 2018
consolidated financial statements includes a summary of the significant accounting policies used in the
preparation of our consolidated financial statements. While all of the significant accounting policies are important
to the annual consolidated financial statements, some of these policies may be viewed as involving a high degree
of judgment.
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, income taxes, useful lives of long-lived 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 materially from our estimates.
The following critical accounting policies require management’s most difficult, subjective and complex judgments,
and are subject to measurement uncertainty.
Business combinations
We account for our business combinations using the acquisition method. Under this method, estimates we make
to determine the fair values of acquired assets and liabilities assumed include judgments in our determinations of
acquired intangible assets and assessment of the fair value of existing property and equipment. Assumed
liabilities can include litigation and other contingency reserves existing at the time of the acquisition. Goodwill is
recognized as of the acquisition date as the excess of the fair value of consideration transferred over the estimated
fair values of net identifiable assets acquired and liabilities assumed at their acquisition date. Acquisition related
expenses are separately recognized from business combination and are expensed as incurred.
When establishing fair values, we make significant estimates and assumptions, especially with respect to
intangible assets. Intangible assets acquired and recorded by us may include patents, intellectual property,
customer relationships, brand, backlog and in-process research and development. Estimates include but are not
limited to the forecasting of future cash flows and discount rates. From time to time, we may engage third-party
firms to assist us in determining the fair value of assets and liabilities assumed. Our estimates of fair values are
based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. As a
result, actual results may differ from estimates impacting our earnings.
Revenue recognition
Product revenue includes sales from embedded cellular modules, short range wireless modules, intelligent routers
and gateways, asset tracking devices, antennas and accessories, and Smart SIMs. Service and other revenue
includes sales from cloud services, cellular connectivity services, managed connectivity and application services,
software licenses, technical support services, extended warranty services, solution design and consulting services.
We recognize revenues when we satisfy performance obligations by transferring the control of promised products
or services to customers. Product revenue is recognized at a point in time when a good is shipped or delivered to
the customer. Service revenue is recognized over time as the service is rendered or at a point in time upon
completion of a service. Our customer contracts can include various combinations of products and services, which
are generally capable of being distinct and accounted for as separate performance obligations. Revenue is
recognized net of allowances for returns and any taxes collected from customers.
37
Our products are generally highly dependent on, and interrelated with, the underlying firmware and cannot
function without the firmware. In these cases, the hardware and the firmware are accounted for as a single
performance obligation and revenue is recognized at the point in time when control is transferred to resellers and
distributors, OEMs, or directly to end customers.
Certain customers may receive cash-based incentives or credits, which are accounted for as variable consideration.
We estimate the amount of incentives or credits to be provided to customers and reduce revenue recognized. The
variable consideration is included in the transaction price to the extent that a significant reversal in the amount of
cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is
subsequently resolved.
The expected costs associated with assurance-type warranty are recognized as expense when products are sold.
Warranty service that is in addition to the assurance that the product complies with agreed upon specifications is a
separate performance obligation; its revenue is recognized ratably over the service period.
Cloud and connectivity services are provided on either a subscription or consumption basis. Revenue related to
cloud and connectivity services provided on a subscription basis is recognized ratably over the contract period.
Revenue related to cloud and connectivity services provided on a consumption basis is recognized based on the
customer utilization of such resources. Revenues from SIM activation and initial application setup are deferred
and recognized over the estimated customer life on a straight-line basis.
Licenses for on-premise software provide the customer with a right to use the software as it exists when made
available to the customer. Revenue from distinct on-premise licenses are recognized upfront at the point in time
when the software is made available to the customer. Revenue from software maintenance, unspecified upgrades
and technical support contracts are recognized over the period such items are delivered or services are provided.
Technical support contracts extending beyond the current period are deferred and revenue is recognized over the
applicable earning period.
Revenue from solution design and consulting services are recognized as services are being provided.
Contract acquisition and fulfillment costs
We recognize an asset for the incremental costs of obtaining or fulfilling a contract with a customer if we expect
the benefit of those costs to be longer than one year. We have determined that certain sales incentive bonuses
and initial setup costs of managed IoT services meet the requirements to be capitalized. We applied a practical
expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization
period would have been one year or less.
The incremental costs of obtaining or fulfilling a contract with a customer are deferred and amortized over the
estimated life of the customer relationship. We classify these deferred contract costs as current or non-current
based on the timing of when we expect to recognize the expense. The current and non-current portions of
deferred contract costs are included in prepaid expenses and other current assets and other assets respectively in
our consolidated balance sheets.
Significant judgment
We determine the transaction price of a customer contract by multiplying the unit price of a good or service with
the committed order volume or service period.
Certain customers may receive cash-based incentives or credits, which are accounted for as variable consideration.
We estimate the expected amount to be provided to customers and exclude it from the transaction price.
Our customer contracts can include various combinations of products and services. When a customer contract
includes multiple performance obligations, we allocate the transaction price to each performance obligation on a
38
relative standalone selling price basis. We generally determine standalone selling prices based on the price
charged to customers or a combination of expected cost, plus a margin and residual methods.
Product revenue is recognized at a point in time when a good is shipped or delivered to the customer as it
represents the transfer of control of the promised good to a customer. Cloud, connectivity, and managed service
revenues are recognized over time as the customer simultaneously receives and consumes the benefits provided
by our performance as we perform. Other service revenue is recognized at a point in time upon completion of a
service.
Contract Balances
Receivables - We recognize a right to consideration as a receivable when only the passage of time is required
before payment of that consideration is due.
Contract Assets - We recognize a right to consideration in exchange for goods or service that we have transferred
to a customer as contract assets. Contract assets is comprised mainly of accrued revenue related to monthly IoT
service subscriptions, which may include connectivity, cloud applications, and managed services.
Deferred Revenue - We recognize an obligation to transfer goods or services to a customer for which we have
received consideration from the customer as deferred revenue. Deferred revenue consists of advance payments
and billings in excess of revenue recognized, which includes support, extended warranty, and cloud application
services.
Allowance for doubtful accounts
We maintain an allowance for doubtful accounts for estimated losses that may arise if any of our customers are
unable to make required payments. We consider the following factors when determining whether collection is
reasonably assured: customer credit-worthiness, past transaction history with the customer, insured amounts, if
any, current economic industry trends and changes in customer payment terms. If we have no previous
experience with the customer, we typically obtain reports from credit organizations to ensure that the customer
has a history of paying its creditors. We may also request financial information, including financial statements, to
ensure that the customer has the means of making payment. If these factors indicate collection is not reasonably
assured, revenue is deferred until collection becomes reasonably assured, which is generally upon receipt of cash.
If the financial condition of any of our customers deteriorates, we may increase our allowance.
As at December 31, 2018, accounts receivable comprised 25.1% of total assets. Included in this balance was a
provision of $3.0 million for doubtful accounts, or 1.7% of accounts receivable compared to $1.8 million for
doubtful accounts, or 1.1% of accounts receivable as at December 31, 2017. We believe our allowance for
doubtful accounts as at December 31, 2018 is adequate to provide for probable losses existing in accounts
receivable.
Inventory
We value our inventory at the lower of cost, determined on a first-in-first-out basis, and estimated net realizable
value. We assess the need for an inventory write-down and/or an accrual for estimated losses on inventory
purchase commitments based on our assessment of estimated market value using assumptions about future
demand and market conditions. Our reserve requirements generally increase as our projected demand
requirements decrease, due to market conditions, technological and product life cycle changes and longer than
previously expected usage periods. If market conditions are worse than our projections, we may further write-
down the value of our inventory or increase the accrual for estimated losses on inventory purchase commitments.
39
Goodwill and intangible assets
Goodwill and intangible assets are assessed for impairment on an annual basis and between annual tests
whenever circumstances indicate that the carrying value of the goodwill and intangible assets might be impaired.
We performed our annual test on October 1, 2018. Circumstances may include an adverse change in business
climate, legal factors, operating performance indicators, competition or sale or disposition of a significant portion
of a reporting unit. On at least a quarterly basis, we assess whether such circumstances exist. An evaluation of
recoverability of goodwill requires judgment, including the identification of reporting units, assigning assets and
liabilities to reporting units, assigning goodwill to reporting units, and determining the estimated fair value of each
reporting unit. Significant judgments that are required on our part to estimate the fair value of reporting units
include estimating future cash flows, determining appropriate discount rates, consideration of appropriate control
premium, market conditions, and other assumptions. Changes in these estimates and assumptions could
materially affect the determination of fair value for each reporting unit and may result in impairment charges in
future periods.
At December 31, 2018, our goodwill balance was $211.1 million. We determined that there was no impairment as
the fair values of each of our reporting units exceeded their respective carrying values as at October 1, 2018. Our
analysis took into consideration an income valuation approach using the expected discounted cash flows for each
reporting unit. The principal factors used in the discounted cash flow analysis were the projected results of
operations, the discount rate based on our estimated weighted average cost of capital, and terminal value
assumptions for each reporting unit. The discounted cash flow model used was based on our business plan. For
years subsequent to those contained in our business plan, we analyzed third party forecasts and other macro-
economic indicators that impact our reporting units to provide a reasonable estimate of revenue growth in future
periods. Our gross margins and operating expense estimates reflect anticipated changes in our business mix as we
transform to incorporate more recurring services in our business mix. We also developed assumptions for the
amount of working capital and capital expenditures needed to support each reporting unit.
In addition to the discounted cash flow valuation approach noted above, we reconciled the implied enterprise
value from the discounted cash flow analysis to our market capitalization, which was approximately $711 million at
October 1, 2018. We then prepared an alternative valuation analysis based on revenue multiples. As there were
minimal transactions that were directly comparable to the IoT Services reporting unit, we carried forward the
transaction multiples used in the prior year and prepared an analysis based on indicated trading multiples of
comparable companies. Both analysis confirmed our conclusion that the fair value exceeded the carrying value of
$444.1 million.
Income taxes
We recognize and measure each tax position related to income tax positions taken or expected to be taken in a tax
return. We have reviewed our tax positions to determine which should be recognized and measured according to
the more likely than not threshold requirement. The tax benefits recognized in the financial statements are
measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon
ultimate resolution. If the realization of a tax position is not considered more likely than not, we provide for a
valuation allowance. The ultimate realization of our deferred tax assets is dependent upon the generation of
future taxable income during the periods in which temporary differences become deductible. We consider
projected future taxable income from operations, tax planning strategies and transactions in making our
assessment. If our assessment of our ability to realize our deferred tax assets changes, we may make an
adjustment to our deferred tax assets that would be charged to income (loss).
We do not provide for taxes on foreign earnings as it is our intention to indefinitely reinvest undistributed earnings
of our foreign subsidiaries. It is not practical to estimate the income tax liability that might be incurred if there is a
change in management’s intention in the event that a remittance of such earnings occurs in the future.
40
The ultimate amount of future income taxes and income tax provision could be materially different from those
recorded, as it is influenced by our future operating results and our tax interpretations.
Amortization
Amortization of property and equipment and intangible assets incorporates estimates of useful lives and residual
values. These estimates may change as more experience is obtained or as general market conditions change
impacting the operation of property and equipment and intangible assets.
Warranty costs
We accrue product warranty costs in accrued liabilities to provide for the repair or replacement of defective
products. Our accrual is based on an assessment of historical experience, product quality and management’s
estimates. If there is a change in these factors, we adjust our accrual accordingly.
Royalty obligations
Under certain license agreements we are committed to royalty payments based on the sales of products using
certain technologies. We recognize royalty obligations as determinable in accordance with agreement terms.
Where agreements are not in place, we recognize our current best estimate of the royalty obligation in accrued
liabilities and long-term liabilities. Historically (prior to October 1, 2016), in determining this estimate, we based
our calculations on an assumption that royalty calculations could be based on a percentage of the entire value of
an end-product (i.e., revenue). This conformed with our legacy license agreements.
Significant legal precedent now exists in the United States supporting the smallest saleable unit (“SSU”) principle
(i.e., the principle that any royalty obligations should be no more than a portion of the profits for a component
within the product that implements the patented technology) as the appropriate methodology for determining
FRAND standard essential patent (“SEP”) royalties. Using this principle, the royalty accrual on our products is
based on the value of the patented technology in the chipset, representing the SSU that implements the
technology, and not on the entire value of the end-product.
The cumulative effect of these legal changes to the licensing landscape, combined with supportive legislative
initiatives and broad industry support for the SSU principle, at the time of the expiry of one of our significant
legacy IP licenses, prompted management to reassess its contingent royalty obligation estimate during the fourth
quarter of 2016. The use of the SSU principle as the basis to determine the estimate, as opposed to value of end-
product, resulted in a reduction of $13.0 million to our estimated royalty obligation effective October 1, 2016.
Contingencies
We are from time to time involved in litigation, certain other claims and arbitration matters arising in the ordinary
course of our business, including IP matters. We accrue for a liability when it is both probable that a liability has
been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both
the determination of probability and the determination as to whether an amount of a loss is reasonably estimable.
These accruals are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements,
rulings, advice of legal counsel and technical experts and other information and events pertaining to the particular
matter. To the extent there is a reasonable possibility (within the meaning of ASC 450, Contingencies) that the
losses could exceed the amounts already accrued, management believes that the amount of any such additional
loss would not be material to our results of operations or financial condition.
In some instances, we are unable to reasonably estimate any potential loss or range of loss. The nature and
progression of litigation can make it difficult to predict the impact a particular lawsuit will have on the company.
There are many reasons why we cannot make these assessments, including, among others, one or more of the
41
following: in the early stage of a proceeding related to IP matters, the claimant is not required to specifically
identify the patent that has allegedly been infringed; damages sought that are unspecified, unsupportable,
unexplained or uncertain; discovery not having been started or being incomplete; the complexity of the facts that
are in dispute (e.g., once a patent is identified, the analysis of the patent and a comparison to our activities is a
labour-intensive and highly technical process); the difficulty of assessing novel claims; the parties not having
engaged in any meaningful settlement discussions; the possibility that other parties may share in any ultimate
liability; and the often slow pace of patent litigation.
We are required to apply judgment with respect to any potential loss or range of loss in connection with litigation.
While we believe we have meritorious defenses to the claims asserted against us in our currently outstanding
litigation, and intend to defend ourselves vigorously in all cases, in light of the inherent uncertainties in litigation
there can be no assurance that the ultimate resolution of these matters will not significantly exceed the reserves
currently accrued by us for those cases for which an estimate can be made. Losses in connection with any
litigation for which we are not presently able to reasonable estimate any potential loss or range of loss could be
material to our results of operations and financial condition.
Stock-based compensation
We recognize stock-based compensation expense for all stock-based compensation awards based on the fair value
at grant date. We recognize stock-based compensation expense on a straight-line basis over the requisite service
period of the award and account for forfeitures as they occur.
Determining the appropriate fair value model and calculating the fair value of share-based payment awards
requires subjective assumptions. The assumptions used in calculating the fair value of share-based payment
awards represent management’s best estimates, but these estimates involve inherent uncertainties and the
application of management’s judgment. As a result, if factors change and we use different assumptions, our stock-
based compensation expense could be materially different in the future.
Fair value measurement
We measure our short-term investments at fair value, defined as the price that would be received from selling an
asset or that would be paid to transfer a liability in an orderly transaction between market participants at the
measurement date. When determining fair value measurements, we consider the principal or most advantageous
market in which it would transact and consider assumptions that market participants would use when pricing the
asset or liability, such as inherent risk, transfer restrictions and risk of non-performance.
An established fair value hierarchy requires the company to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair
value hierarchy is based upon the lowest level of input that is both available and significant to the fair value
measurement. Three levels of inputs may be used to measure fair value as detailed below.
•
Level 1 - Quoted prices in active markets for identical assets or liabilities.
•
Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities,
such as quoted prices for identical or similar assets or liabilities in markets that are not active, or other
inputs that are observable or can be corroborated by observable market data for substantially the full term
of the assets or liabilities.
•
Level 3 - Inputs that are generally unobservable and are supported by little or no market activity and that
are significant to the fair value determination of the assets or liabilities.
The determination of fair value requires judgments, assumptions and estimates and may change over time.
42
OUTSTANDING SHARE DATA
As of March 6, 2019, we had 36,145,063 common shares issued and outstanding, 1,683,844 stock options
exercisable into common shares at a weighted average exercise price of $18.28 and 931,632 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 1,097,836 common shares.
IMPACT OF ACCOUNTING PRONOUNCEMENTS AFFECTING CURRENT PERIOD
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with
Customers (ASC 606). The update is intended to clarify the principles of recognizing revenue, and to develop a
common revenue standard for U.S. GAAP and International Financial Reporting Standards ("IFRS") that would
remove inconsistencies in revenue requirements, leading to improved comparability of revenue recognition
practices across entities and industries. ASC 606 contains a single model that applies to contracts with customers
and two approaches to recognizing revenue: at a point in time or over time. The model features a contract-based
five-step analysis of transactions to determine whether, how much, and when revenue is recognized. New
estimates and judgmental thresholds have been introduced, which may affect the amount and/or timing of
revenue recognized. We adopted the standard as of January 1, 2018 using the full retrospective transition
method. Refer to Note 3 of the interim consolidated financial statements for the effect the adoption of ASC 606 on
previously reported financial statement line items.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash
Receipts and Cash Payments. The update addresses eight specific cash flow issues with the objective of reducing
diversity in practice. The standard is effective for fiscal years beginning after December 15, 2017, and interim
periods within those fiscal periods. We adopted the standard in the first quarter of 2018 and it did not have a
material impact to our consolidated statements of cash flows.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash. This
update addresses diversity in the classification and presentation of changes in restricted cash on the statement of
cash flows. This requires that a statement of cash flows explain the change during the period in the total of cash,
cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents by including
restricted cash and restricted cash equivalents when reconciling the beginning-of-period and end-of-period total
amounts shown on the statement of cash flows. The standard is effective for fiscal years beginning after
December 15, 2017, and interim periods within those fiscal periods. Early adoption is permitted, and any
adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. In the
fourth quarter of 2017, we early adopted ASU 2016-18 and there was no material impact to our financial
statements and business.
IMPACT OF ACCOUNTING PRONOUNCEMENTS AFFECTING FUTURE PERIODS
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 and ASU 2018-11 (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. Early application is permitted. The Company will
adopt Topic 842 in its first quarter of 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 of January 1, 2019, rather than as of the first date of the earliest period
presented. In adopting the new standard, we are electing the package of practical expedients provided under the
guidance, which applies to expired or existing leases and allows the Company not to reassess whether a contract
contains a lease, the lease classification, and any initial direct costs incurred. The Company is also electing the
practical expedient to expense short term leases (12 months or less) on a straight-line basis over the lease term,
and not separate the lease and non-lease components for all of its leases. The Company’s implementation team is
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completing the determination of the completeness and accuracy of the Company’s leasing information and is in
the final stages of identifying and effecting the internal process changes and controls necessary to assist with the
recording, reporting and disclosure requirements under the standard. The adoption of the new lease standard is
anticipated to have a material impact on our balance sheet, primarily related to leases of our business premises.
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 are in the process of evaluating the impact 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 and early adoption is permitted. We are in the process of evaluating the impact on our
financial statements.
DISCLOSURE CONTROLS AND PROCEDURES
Our management is responsible for establishing and maintaining adequate disclosure controls and procedures for
the Company. Our disclosure controls and procedures are designed to ensure that information required to be
disclosed in our reports filed with securities regulatory authorities is recorded, processed, summarized and
reported within time periods specified in applicable securities regulations, and is accumulated and communicated
to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
We conducted an evaluation of the effectiveness of our disclosure controls and procedures, which was carried out
under the supervision of, and with the participation of, our management, including our Chief Executive Officer and
our Chief Financial Officer, as of December 31, 2018. Based on that evaluation, our Chief Executive Officer and our
Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of
December 31, 2018 to ensure that information required to be disclosed by us in the reports we file or submit
under applicable securities laws and regulations is recorded, processed, summarized, and reported within the time
periods specified thereby.
We do not expect that our disclosure controls and procedures will prevent all errors and all fraud. Control
procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control procedures are met. Because of the inherent limitations in all control
procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud,
if any, within our company have been detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by
management override of the control. We considered these limitations during the development of our disclosure
controls and procedures and will periodically re-evaluate them to ensure they provide reasonable assurance that
such controls and procedures are effective.
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INTERNAL CONTROL OVER FINANCIAL REPORTING
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the U.S. Securities Exchange Act of 1934
and has designed such internal control over financial reporting to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with U.S. GAAP.
Our internal control over financial reporting includes those policies and procedures that: (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements on a timely basis. Also, projections of any evaluation of effectiveness of internal control over
financial reporting to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer,
management conducted an evaluation of the effectiveness of our internal control over financial reporting, as of
December 31, 2018, based on the framework set forth in Internal Control-Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on its evaluation under
this framework, management concluded that our internal control over financial reporting was effective as of that
date.
Ernst & Young LLP ("EY"), an independent registered public accounting firm, who audited and reported on our
consolidated financial statements as at and for the year ended December 31, 2018, has issued an attestation
report on our internal control over financial reporting as of December 31, 2018. Their attestation report is
included with our consolidated financial statements.
There were no changes in our internal control over financial reporting during the year ended December 31, 2018
that materially affected, or 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. There can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions, regardless of how remote.
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LEGAL PROCEEDINGS
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. A
petition for Inter Partes Review of the patent-in-suit with the United States Patent and Trial Appeal Board has been
instituted and a decision is expected in June 2019. In March 2018, the Court granted our motion to dismiss the
plaintiff's claims in the lawsuit. The plaintiff has indicated its intention to appeal this decision once a final decision
is issued in respect of our counterclaims alleging that the plaintiff has breached its commitments to standard
setting organizations. The lawsuit is in the discovery phase with respect to our counterclaims against the plaintiff.
The lawsuit is coordinated with several other cases involving this plaintiff for the purposes of scheduling, with the
trial date for the first of these coordinated cases currently scheduled for September 2019.
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 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. Trial for our co-defendant has been scheduled for December 2020,
and trial in our case has been scheduled for January 2021.
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.
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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 to reduce our exposure to
future foreign exchange fluctuations. Foreign currency forward contracts are recorded in Accounts receivable or
Account payable and accrued liabilities. As of December 31, 2018, we had foreign currency forward contracts
totaling $50.1 million Canadian dollars with an average forward rate of 1.3167, maturing between January to
December 2019.
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.
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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
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:
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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.
Acquisitions and divestitures of businesses or technologies may result in disruptions to our business or may not
achieve the anticipated benefits.
The growth of our company through the successful acquisition and integration of complementary businesses is an
important and active component of our business strategy. We continue to seek opportunities to acquire or invest
in businesses, products and technologies that expand, complement or otherwise relate to our business. Any
acquisitions, investments or business combinations by us may be accompanied by risks commonly encountered
including, but not limited to, the following:
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exposure to unknown liabilities or risks of acquired companies, including unknown litigation related to acts
or omissions of an acquired company and/or its directors and officers prior to the acquisition, deficiencies
in disclosure controls and procedures of the acquired company and deficiencies in internal controls over
financial reporting of the acquired company;
higher than anticipated acquisition and integration costs and expenses;
the difficulty and expense of integrating the operations and personnel of the acquired companies;
use of cash to support the operations of an acquired business;
increased foreign exchange translation risk depending on the currency denomination of the revenue and
expenses of the acquired business;
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disruption of, and demands on, our ongoing business as a result of integration activities including diversion
of management's time and attention from the ongoing business;
failure to maximize our financial and strategic position by the successful incorporation of acquired
technology;
the inability to implement uniform standards, disclosure controls and procedures, internal controls over
financial reporting and other procedures and policies in a timely manner;
the potential loss of key employees and customers;
decrease in our share price if the market perceives that an acquisition does not fit our strategy, the price
paid is excessive in light of other similar transactions or that the terms of the acquisition are not favorable
to our earnings growth;
failure to anticipate or adequately address regulatory requirements that may need to be satisfied as part
of a business acquisition or disposition;
litigation and settlement costs if shareholders bring lawsuits triggered by acquisition or divestiture
activities;
decrease in our share price, if, as a result of our acquisition strategy or growth, we decide to raise
additional capital through an offering of securities; and
dilution to our shareholders if the purchase price is paid in common shares or securities convertible into
common shares.
In addition, geographic distances and cultural differences may make integration of businesses more difficult. We
may not be successful in overcoming these risks or any other problems encountered in connection with any
acquisitions. If realized, these risks could reduce shareholder value.
As business circumstances dictate, we may also decide to divest assets, technologies or businesses. In a
divestiture, we may not be successful in identifying or managing the risks commonly encountered, including:
higher than anticipated costs; disruption of, and demands on, our ongoing business; diversion of management's
time and attention; adverse effects on existing business relationships with suppliers and customers and employee
issues. These risks or any other problems encountered in connection with a divestiture of assets, technologies or
businesses, if realized, could reduce shareholder value.
In addition, we may be unsuccessful at bringing to conclusion proposed transactions. Negotiations and closing
activities, including regulatory review, of transactions are complex functions subject to numerous unforeseen
events that may impede the speed at which a transaction is closed or even prevent a transaction from closing.
Failure to conclude transactions in an efficient manner may prevent us from advancing other opportunities or
introduce unanticipated transition costs.
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, discontinues their relationship with
us, reduces or postpones current or expected purchase orders for products, reduces or postpones initiation or
usage of our services or suffers 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.
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We may be unable to attract or retain key personnel which may harm our ability to compete effectively.
Our success depends in large part on the skills and experience of our executive officers and other key employees.
Competition for highly skilled management, technical, research and development and other key employees is
intense in the wireless communications industry. We may not be able to retain our current executive officers or
key employees and may not be able to hire and transition in a timely manner experienced and highly qualified
additional executive officers and key employees as needed to achieve our business objectives. The loss of key
employees or deterioration in overall employee morale and engagement as a result of organizational change could
have an adverse impact on our growth, operations and profitability.
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. As a result there could be a higher rate
of organizational and business process change which may have an impact on the effectiveness of certain business
functions as the transformation proceeds. Our operations may not be able to recalibrate business processes in a
timely and efficient manner thereby impacting 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 proposed changes to our organization.
We do not have fixed-term employment agreements with our key personnel. As well, from time to time we may
undertake transitions in our executive leadership. The loss of executive officers and key employees could disrupt
our operations and our ability to compete effectively could be adversely affected.
Continued difficult or uncertain global economic conditions could adversely affect our operating results and
financial condition.
A significant portion of our business is in the United States, Europe and the Asia-Pacific region and we are
particularly exposed to the downturns and current uncertainties that impact the wireless communications industry
in those economies. Economic uncertainty may cause an increased level of commercial and consumer
delinquencies, lack of consumer confidence resulting in delayed purchases or reduced volumes by our customers,
credit tightening by lenders, increased market volatility, fluctuations in foreign exchange rates and widespread
reduction of business activity generally. To the extent that we experience further economic uncertainty, or
deterioration in one of our large markets in the United States, Europe or the Asia-Pacific region, the resulting
economic pressure on our customers may cause them to end their relationship with us, reduce or postpone
current or expected orders for our products or services, or suffer from business failure, resulting in a material
adverse impact to our revenues, profitability, cash flow and bad debt expense.
It is difficult to estimate or project the level of economic activity, including economic growth, in the markets we
serve. As our budgeting and forecasting is based on the demand for our products and services, these economic
uncertainties may result in difficulties in estimating future revenue and expenses.
Our acquisition of Numerex is subject to certain risks and uncertainties
On December 7, 2017, we acquired Numerex (the "Transaction"). In connection with our deliberations relating to
the Transaction, we considered potential risks and negative factors concerning the Transaction and the other
transactions contemplated by the merger agreement, including, but not limited to, the following:
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the potential distraction to our current business and specific initiatives;
the difficulties and management challenges inherent in integrating the business, operations and workforce
of Numerex with those of Sierra Wireless;
the difficulties and management challenges inherent in returning the Numerex business to profitable
growth;
the risk that the anticipated benefits of the Transaction will not be realized in full or in part, including the
risk that expected synergies, expected growth and expected cost savings will not be achieved or not
achieved in the expected time frame;
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the risk of diverting the attention of our senior management from other strategic priorities to implement
the Transaction and make arrangements for integration of Sierra Wireless’ and Numerex’s operations and
infrastructure following the Transaction;
risks associated with managing the technology transitions; and
other risks relating to acquisitions generally described below under “Risk Factors - Acquisitions and
divestitures of other businesses or technologies may result in disruptions to our business or may not
achieve the anticipated benefits”.
Cyber-attacks or other breaches of information technology security could have an adverse impact on our
business.
We rely on certain internal processes, infrastructure and information technology systems, including infrastructure
and systems operated by third parties to efficiently operate our business in a secure manner. The inability to
continue to enhance or prevent a failure of these internal processes, infrastructure or information technology
systems could negatively impact our ability to operate our business. Our IoT services depend on very high levels of
network reliability and availability in order to provide our customers with the ability to continuously monitor and
receive data from their devices.
Cyber-attacks or other breaches of network or IT systems security may cause disruptions to our operations
including the ability to provide connectivity, device management and other cloud-based services to our customers.
Our industry is prone to cyber-attacks by third parties seeking unauthorized access to our data or our customers'
data, or by third parties seeking to exploit our technology and devices to conduct denial of service attacks. The
prevalence and sophistication of these types of threats are increasing and our frequently evolving security
measures may not be sufficient to prevent the damage that such threats can inflict on our assets and information.
The theft, unauthorized use or publication of our intellectual property and/or confidential business information
could harm our competitive position, reduce the value of our investment in research and development and other
strategic initiatives and/or otherwise adversely affect our business. Our security measures may also be breached
due to employee error, malfeasance, system errors or vulnerabilities, including vulnerabilities of our vendors,
suppliers, their products or otherwise. To the extent that any security breach results in inappropriate disclosure of
our customers' confidential information or disruption of service to our customers, we may incur liability, be subject
to legal action and suffer damage to our reputation. Our insurance may not be adequate to fully reimburse us for
these costs and losses.
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:
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price and product competition which may result in lower selling prices for some of our products and
services or lost market share;
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;
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possible delays in the manufacture 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 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.
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 products and services that keep pace with the
continuing changes in technology, evolving industry standards and changing customer and end-user preferences
and requirements. Our products embody complex technology that may not meet those standards, preferences
and requirements. Our ability to design, develop and commercially launch new products and services depends on
a number of factors including, but not limited to, the following:
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our ability to design and manufacture products or implement solutions and services at an acceptable cost
and quality;
our ability to attract and retain skilled technical employees;
the availability of critical components from third parties;
our ability to successfully complete the development of products in a timely manner; and
the ability of third parties to complete and deliver on outsourced product development engagements.
A failure by us, or our suppliers, in any of these areas or a failure of new products or services to obtain commercial
acceptance, could mean we generate less revenue than we anticipate and we may be unable to recover our
research and development expenses.
We develop products and services to meet our customers' requirements. OEM customers award design wins for
the integration of wide area embedded wireless modules on a platform by platform basis. Current design wins do
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not guarantee future design wins. If we are unable or choose not to meet our customers' needs, we may not win
their future business and our revenue and profitability may decrease.
In addition, wireless communications service providers require that wireless data systems deployed on their
networks comply with their own standards, which may differ from the standards of other providers. We may be
unable to successfully address these developments on a timely basis or at all. Our failure to respond quickly and
cost-effectively to new standards through the development of new products or enhancements to existing products
could cause us to be unable to recover significant research and development expenses and reduce our revenues.
We may be found to infringe on the intellectual property rights of others.
The industry has many participants that own, or claim to own, proprietary intellectual property. We license
technology, intellectual property and software from third parties for use in our products and may be required to
license additional technology, intellectual property and software in the future. In some cases, these licenses
provide us with certain pass-through rights for the use of other third-party intellectual property, which pass-
through rights may be unilaterally adjusted, limited or removed under the terms of such licenses. Some licensors
have instituted policies limiting the products they will cover under their licenses to end products only, which limits
our ability to obtain new licenses from such licensors, where required, for our wireless embedded module
products. There is no assurance that we will be able to maintain our third-party licenses or obtain new licenses
when required and this inability could materially adversely affect our business and operating results and the
quality and functionality of our products.
In the past we have received, and in the future, we are likely to continue to receive, assertions or claims from third
parties alleging that our products violate or infringe their intellectual property rights. We may be subject to these
claims directly or through indemnities against these claims which we have provided to certain customers and
other third parties. Our component suppliers and technology licensors do not typically indemnify us against these
claims and therefore we do not have recourse against them in the event a claim is asserted against us or a
customer we have indemnified. This potential liability, if realized, could materially adversely affect our operating
results and financial condition.
Activity in the wireless communications area by third parties, particularly those with tenuous claims, is prevalent.
In the past, patent claims have been brought against us by third parties whose primary (or sole) business purpose
is to acquire patents and other intellectual property rights, and not to manufacture and sell products and services.
These entities aggressively pursue patent litigation, resulting in increased litigation costs for us. Infringement of
intellectual property can be difficult to verify and litigation may be necessary to establish if we have infringed the
intellectual property rights of others. In many cases, these third parties are companies with substantially greater
resources than us, and they may choose to pursue complex litigation to a greater degree than we could.
Regardless of whether these infringement claims have merit or not, we may be subject to the following:
• we may be found to be liable for potentially substantial damages, liabilities and litigation costs, including
attorneys' fees;
• we may be prohibited from further use of intellectual property because of an injunction and may be
required to cease selling our products that are subject to the claim;
• we may have to license third party intellectual property, incurring royalty fees that may or may not be on
commercially reasonable terms; in addition, there is no assurance that we will be able to successfully
negotiate and obtain such a license from the third party;
• we may have to develop a non-infringing alternative, which could be costly and delay or result in the loss
of sales; in addition, there is no assurance that we will be able to develop such a non-infringing
alternative;
• management attention and resources may be diverted;
•
• we may be required to indemnify our customers for certain costs and damages they incur in respect of
our relationships with customers may be adversely affected; and
such a claim.
53
In addition to potentially being found to be liable for substantial damages in the event of an unfavorable outcome
in respect of such a claim and if we are unable to either obtain a license from the third party on commercially
reasonable terms or develop a non-infringing alternative, we may have to cease the sale of certain products and
restructure our business and, as a result, our operating results and financial condition may be materially adversely
affected.
Misappropriation of our intellectual property could place us at a competitive disadvantage.
Our intellectual property is important to our success. We rely on a combination of patent protection, copyrights,
trademarks, trade secrets, licenses, non-disclosure agreements and other contractual agreements to protect our
intellectual property. Third parties may attempt to copy aspects of our products and technology or obtain
information we regard as proprietary without our authorization. If we are unable to protect our intellectual
property against unauthorized use by others it could have an adverse effect on our competitive position. Our
strategies to deter misappropriation could be inadequate due to the following risks:
•
•
•
•
non-recognition of the proprietary nature or inadequate protection of our methodologies in the United
States, Canada, France or other foreign countries;
undetected misappropriation of our intellectual property;
the substantial legal and other costs of protecting and enforcing our rights in our intellectual property; and
development of similar technologies by our competitors.
In addition, we could be required to spend significant funds and management resources could be diverted to
defend our rights, which could disrupt our operations.
We depend on single source suppliers for some components used in our products and if these suppliers are
unable to meet our demand, the delivery of our products to our customers may be interrupted.
From time to time, certain components used in our products have been, and may continue to be, in short supply.
Such shortages in allocation of components may result in a delay in filling orders from our customers, which may
adversely affect our business. In addition, our products are comprised of components, some of which are
procured from single source suppliers, including where we have licensed certain software embedded in a
component. Our single source suppliers may experience damage or interruption in their operations due to
unforeseen events, become insolvent or bankrupt, or experience claims of infringement, all of which could delay
or stop their shipment of components to us, which may adversely affect our business, operating results and
financial condition. If there is a shortage of any such components and we cannot obtain an appropriate substitute
from an alternate supplier of components, we may not be able to deliver sufficient quantities of our products to
our customers. If such shortages occur, we may lose business or customers and our operating results and financial
condition may be materially adversely affected.
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 that may result in
product liability claims and product recalls could lead to unanticipated costs or otherwise harm our business.
Our products are comprised of hardware and software that is technologically complex, and we are reliant on third
parties to provide important components for our products. It is possible that our products and IoT services may
contain undetected errors, defects or cyber-security vulnerabilities. As a result, our products or IoT services may
be rejected by our customers or our services may be unavailable to our customers leading to loss of business, loss
of revenue, additional development and customer service costs, unanticipated warranty claims, payment of
monetary damages under contractual provisions and damage to our reputation.
In addition, our IoT services, including information systems and telecommunications infrastructure, could be
disrupted by technological failures or cyber-attacks which could result in the inability of our customers to receive
our services for an indeterminate period of time. Third parties seeking unauthorized access to our products may
attempt to take advantage of the fact that we do not have a direct relationship with, and therefore may not know
54
the identity of , certain end users of our products, and these end users may not upgrade their software, apply
security patches or otherwise monitor steps we take to address any cyber-security vulnerabilities. Any disruption
to our services, such as failure of our network operations centers to function as required, or extended periods of
reduced levels of service could cause us to lose customers or revenue, result in delays or cancellations of future
implementations of our products and services, result in failure to attract customers, require customer service or
repair work that would involve substantial costs, result in loss of customer data, result in litigation, payment of
monetary damages under contractual provisions and distract management from operating our business.
We depend on a limited number of third parties to manufacture our products. If they do not manufacture our
products properly or cannot meet our needs in a timely manner, we may be unable to fulfill our product delivery
obligations and our costs may increase, our revenue and margins could decrease.
We outsource the manufacturing of our products to several contract manufacturers and depend on these
manufacturers to meet our needs in a timely and satisfactory manner at a reasonable cost. Third party
manufacturers, or other third parties to which such third-party manufacturers in turn outsource our
manufacturing requirements, may not be able to satisfy our manufacturing requirements on a timely basis,
including by failing to meet scheduled production and delivery deadlines or to meet our product quality
requirements or the product quality requirements of our customers. Insufficient supply or an interruption or
stoppage of supply from such third-party manufacturers or our inability to obtain additional or substitute
manufacturers when and if needed, and on a cost-effective basis, could have a material adverse effect on our
business, results of operations and financial condition. Our reliance on third party manufacturers subjects us to a
number of risks, including but not limited to the following:
•
•
•
•
•
•
potential business interruption due to unexpected events such as natural disasters, labor unrest, cyber-
attacks, technological issues or geopolitical events;
the absence of guaranteed or adequate manufacturing capacity;
potential violations of laws and regulations by our manufacturers that may subject us to additional costs
for duties, monetary penalties, seizure and loss of our products or loss of our import privileges, and
damage to our reputation;
reduced control over delivery schedules, production levels, manufacturing yields, costs and product
quality;
the inability of our contract manufacturers to secure adequate volumes of components in a timely manner
at a reasonable cost; and
unexpected increases in manufacturing costs.
If we are unable to successfully manage any of these risks or to locate alternative or additional manufacturers or
suppliers in a timely and cost-effective manner, we may not be able to deliver products in a timely manner. In
addition, our results of operations could be harmed by increased costs, reduced revenues and reduced margins.
Under our manufacturing agreements, in many cases we are required to place binding purchase orders with our
manufacturers well in advance of our receipt of binding purchase orders from our customers. In these situations,
we consider our customers' good faith, non-binding forecasts of demand for our products. As a result, if the
number of actual products ordered by our customers is materially different from the number of products we have
instructed our manufacturer to build (and to purchase the required components to complete such build
instruction), then, if too many components have been purchased by our manufacturer, we may be required to
purchase such excess component inventory, or, if an insufficient number of components have been purchased by
our manufacturer, we may not be in a position to meet all of our customers' requirements. If we are unable to
successfully manage our inventory levels and respond to our customers' purchase orders based on their forecasted
quantities, our business, operating results and financial condition could be adversely affected.
55
We have been subject to certain class action lawsuits and may in the future be subject to class action or
derivative action lawsuits, which if decided against us, could require us to pay substantial judgments,
settlements or other penalties.
In addition to being subject to litigation in the ordinary course of business, we may be subject to class actions,
derivative actions and other securities litigation and investigations. We expect that this type of litigation will be
time consuming, expensive and will distract us from the conduct of our daily business. It is possible that we will be
required to pay substantial judgments, settlements or other penalties and incur expenses that could have a
material adverse effect on our operating results, liquidity or financial position. Expenses incurred in connection
with these lawsuits, which include substantial fees of lawyers and other professional advisors and our obligations
to indemnify officers and directors who may be parties to such actions, could materially adversely affect our
reputation, operating results, liquidity or financial position. Furthermore, we do not know with certainty if any of
this type of litigation and resulting expenses will be fully or even partially covered by our insurance. In addition,
these lawsuits may cause our insurance premiums to increase in future periods.
We depend on mobile network operators to promote and offer acceptable wireless data services.
Our products and our wireless connectivity services can only be used over wireless data networks operated by
third parties. Our business and future growth depends, in part, on the successful deployment by mobile network
operators of next generation wireless data networks and appropriate pricing of wireless data services. We also
depend on successful strategic relationships with our mobile network operator partners and our operating results
and financial condition could be harmed if they increase the price of their services or experience operational
issues with their networks. In certain cases, our mobile network operator partners may also offer services that
compete with our IoT Services business.
Contractual disputes could have a material adverse effect on our business.
Our business is exposed to the risk of contractual disputes with counterparties and as a result we may be involved
in complaints, claims and litigation. We cannot predict the outcome of any complaint, claim or litigation. If a
dispute cannot be resolved favorably, it may delay or interrupt our operations and may have a material adverse
effect on our operating results, liquidity or financial position.
Government regulations could result in increased costs and inability to sell our products and services.
Our products and services are subject to certain mandatory regulatory approvals in the United States, Canada, the
European Union, the Asia-Pacific region and other regions in which we operate. For example, in the United States
the Federal Communications Commission regulates many aspects of communications devices. In Canada, similar
regulations are administered by the Ministry of Industry, through Industry Canada. European Union directives
provide comparable regulatory guidance in Europe. Although we have obtained all the necessary Federal
Communications Commission, Industry Canada and other required approvals for the products we currently sell, we
may not receive approvals for future products on a timely basis, or at all. In addition, regulatory requirements may
change, or we may not be able to receive regulatory approvals from countries in which we may desire to sell
products in the future. If we fail to comply with the applicable regulatory requirements, we may be subject to
regulatory and civil liability, additional costs (including fines), reputational harm, and in severe cases, we may be
prevented from selling our products in certain jurisdictions.
Environmental regulations or changes in the supply, demand or available sources of energy or other natural
resources may affect the availability or cost of goods and services, including natural resources, necessary to
manufacture our products and run our business.
We may also incur additional expenses or experience difficulties selling our products associated with complying
with the SEC rules and reporting requirements related to conflict minerals. In August 2012, the SEC adopted new
disclosure requirements implementing Section 1502 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 for manufacturers of products containing certain minerals that may originate from the
56
Democratic Republic of Congo and adjoining countries. As a result, since 2013 we have been required to conduct
certain country of origin and due diligence procedures to meet the SEC reporting requirements. The impact of the
regulations may limit the sourcing and availability, or may increase the costs, of some of the metals used in the
manufacture of our products. Also, since our supply chain is complex, we may be unable to sufficiently verify the
origins for all metals used in our products through our supplier due diligence procedures. As governments change
in any of the markets in which we operate, there could be further uncertainties with respect to certain of our
regulatory obligations in the near term, including with respect to fiscal and trade-related matters.
The transmission, use and disclosure of user data and personal information could give rise to liabilities or
additional costs as a result of laws, governmental regulations and mobile network operator and other customer
requirements or differing views of personal privacy rights.
Our products and services are used to transmit a large volume of data and potentially including personal
information. This information is increasingly subject to legislation and regulations in numerous jurisdictions
around the world that is intended to protect the privacy and security of personal information, as well as the
collection, storage, transmission, use and disclosure of such information.
The interpretation of privacy and data protection laws in a number of jurisdictions is unclear and in a state of flux.
There is a risk that these laws may be interpreted and applied in conflicting ways from country to country.
Complying with these varying international requirements could cause us to incur additional costs and change our
business practices. In addition, because our products and services are sold and used worldwide, certain foreign
jurisdictions may claim that we are required to comply with their laws, even where we have no local entity,
employees, or infrastructure.
We could be adversely affected if legislation or regulations are expanded to require changes in our products,
services or business practices, if governmental authorities in the jurisdictions in which we do business interpret or
implement their legislation or regulations in ways that negatively affect our business or if end users allege that
their personal information was misappropriated because of a defect or vulnerability in our products or services. If
we are required to allocate significant resources to modify our products, services or our existing security
procedures for the personal information that our products and services transmit, our business, results of
operations and financial condition may be adversely affected. The European Union General Data Protection
Regulation ("GDPR"), which is designed to harmonize data privacy laws across Europe, became effective on May
25, 2018. We have made and continue to make improvements to our systems and processes to ensure that we are
compliant with the GDPR. The development and maintenance of these measures combined with ongoing
monitoring of changes may result in increased costs and may impact our ability to sell our products and services.
We are subject to risks inherent in foreign operations.
Sales outside North America represented approximately 62% of our revenues in 2018, and approximately 68% and
67% of our revenue in fiscal 2017 and 2016, respectively. We maintain offices in a number of foreign jurisdictions.
We have limited experience conducting business in some of the jurisdictions outside North America and we may
not be aware of all the factors that may affect our business in foreign jurisdictions. We are subject to a number of
risks associated with our international business operations that may increase liabilities, costs, lengthen sales cycles
and require significant management attention. These risks include:
•
•
•
•
•
•
compliance with the laws of the United States, Canada and other countries that apply to our international
operations, including import and export legislation, lawful access and privacy laws;
compliance with existing and emerging anti-corruption laws, including the Foreign Corrupt Practices Act of
the United States, the Corruption of Foreign Public Officials Act of Canada and the UK Bribery Act;
increased reliance on third parties to establish and maintain foreign operations;
the complexities and expense of administering a business abroad;
complications in compliance with, and unexpected changes in, foreign regulatory requirements, including
requirements relating to content filtering and requests from law enforcement authorities;
trading and investment policies;
57
•
•
•
•
•
•
•
•
•
•
•
•
consumer protection laws that impose additional obligations on us or restrict our ability to provide limited
warranty protection;
instability in economic or political conditions, including inflation, recession and actual or anticipated
military conflicts, social upheaval or political uncertainty;
foreign currency fluctuations;
foreign exchange controls and cash repatriation restrictions;
emerging protectionist trends in certain countries leading to new or higher tariffs and other trade barriers;
difficulties in collecting accounts receivable;
potential adverse tax consequences, including changes in tax policies in various jurisdictions that may
render our tax planning strategy less effective than planned;
uncertainties of laws and enforcement relating to the protection of intellectual property or secured
technology;
litigation in foreign court systems;
cultural and language differences;
difficulty in managing a geographically dispersed workforce in compliance with local laws and customs that
vary from country to country; and
other factors, depending upon the country involved.
There can be no assurance that the policies and procedures implemented by us to address or mitigate these risks
will be successful, that our personnel will comply with them, that we will not experience these factors in the future
or that they will not have a material adverse effect on our business, results of operations and financial condition.
Increases in tariffs or other trade restrictions may have an adverse impact on our business.
The United States and other countries have recently levied tariffs and taxes on certain goods manufactured in China
and other jurisdictions. General trade tensions between the U.S. and China have been escalating in 2018 and early
2019. Certain of our components that we source from suppliers in China and import into the U.S. are included in the
announced and implemented tariffs. At this point, we do not expect these tariffs to have a material impact on our
business or results of operations. However, if the U.S. were to impose additional tariffs on components that we or
our suppliers source from China, our costs of such components would increase and our gross margins may decrease.
We may also incur additional operating costs from our efforts to mitigate the impact of tariffs on our customers and
our operations.
58
MANAGEMENT’S STATEMENT OF RESPONSIBILITIES
The accompanying consolidated financial statements have been prepared by management and approved by the
Board of Directors of Sierra Wireless, Inc. The consolidated financial statements were prepared in accordance with
accounting principles generally accepted in the United States and, where appropriate, reflect management’s best
estimates and judgments. Where alternative accounting methods exist, management has chosen those methods
deemed most appropriate in the circumstances. Management is responsible for the accuracy, integrity and
objectivity of the consolidated financial statements within reasonable limits of materiality. Financial information
provided elsewhere in the Annual Report is consistent with that in the consolidated financial statements.
To assist management in the discharge of these responsibilities, the Company maintains a system of internal
controls over financial reporting as described in Management’s Annual Report on Internal Control Over Financial
Reporting on page 45 of Management’s Discussion and Analysis.
The Company’s Audit Committee is appointed by the Board of Directors annually and is comprised exclusively of
outside, independent directors. The Audit Committee meets with management as well as with the independent
auditors to satisfy itself that management is properly discharging its financial reporting responsibilities and to
review the consolidated financial statements and the independent auditors’ report. The Audit Committee reports
its findings to the Board of Directors for consideration in approving the consolidated financial statements for
presentation to the shareholders. The Audit Committee considers, for review by the Board of Directors and
approval by the shareholders, the engagement or reappointment of the independent auditors. Ernst & Young LLP
has direct access to the Audit Committee of the Board of Directors.
The consolidated financial statements have been independently audited by Ernst & Young LLP, Chartered
Professional Accountants, on behalf of the shareholders, in accordance with the standards of the Public Company
Accounting Oversight Board (United States) with respect to the consolidated financial statements for the year
ended December 31, 2018. Their report outlines the nature of their audit and expresses their opinion on the
consolidated financial statements of the Company.
Kent P. Thexton
President and
Chief Executive Officer
March 8, 2019
Vancouver, Canada
David G. McLennan
Chief Financial Officer
59
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Sierra Wireless, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Sierra Wireless, Inc. (the Company) as of
December 31, 2018 and 2017, the related consolidated statements of operations and comprehensive earnings
(loss), equity and cash flows for each of the three years in the period ended December 31, 2018, and the related
notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company at December 31,
2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based
on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework), and our report dated March 8, 2019 expressed an
unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is
to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are
free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess
the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable
basis for our opinion.
Chartered Professional Accountants
We have served as the Company’s auditor since 2016.
Vancouver, Canada
March 8, 2019
60
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Sierra Wireless, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Sierra Wireless, Inc.’s internal control over financial reporting as of December 31, 2018, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Sierra Wireless,
Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the consolidated balance sheets of Sierra Wireless, Inc. as of December 31, 2018 and
2017, the related consolidated statements of operations and comprehensive earnings (loss), equity and cash flows
for each of the three years in the period ended December 31, 2018, and the related notes and our report dated
March 8, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting
firm registered with the PCAOB and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting
was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other procedures as
we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
61
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Chartered Professional Accountants
Vancouver, Canada
March 8, 2019
62
SIERRA WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE EARNINGS (LOSS)
(In thousands of U.S. dollars, except where otherwise stated)
Years ended December 31,
2018
2017
2016
As adjusted(1)
As adjusted(1)
Revenue
Product
Services and other
Cost of Sales
Product
Services and other
Gross margin
Expenses
Sales and marketing
Research and development (note 7)
Administration
Restructuring (note 8)
Acquisition-related and integration
Impairment (note 17)
Loss on disposal of iTank business (note 5(a))
Amortization
Earnings (loss) from operations
Foreign exchange gain (loss)
Other income (note 9)
Earnings (loss) before income taxes
Income tax expense (note 10)
Net earnings (loss)
Other comprehensive income (loss):
Foreign currency translation adjustments, net of taxes of $nil
Comprehensive earnings (loss)
Net earnings (loss) per share (in dollars) (note 12)
Basic
Diluted
Weighted average number of shares outstanding (in thousands) (note 12)
Basic
Diluted
$
$
699,332
94,270
793,602
$
645,402
45,325
690,727
578,253
36,762
615,015
484,051
44,980
529,031
264,571
88,587
93,707
61,582
7,115
3,962
—
2,064
25,829
282,846
(18,275)
(5,470)
51
(23,694)
916
(24,610) $
434,843
21,645
456,488
234,239
75,135
82,653
42,904
1,076
8,195
3,668
—
20,508
234,139
100
7,550
67
7,717
3,199
4,518
(6,670)
(31,280) $
11,950
16,468
(0.68) $
(0.68)
36,019
36,019
0.14
0.14
32,356
32,893
$
$
$
379,602
18,122
397,724
217,291
63,870
72,675
40,956
—
843
—
—
17,277
195,621
21,670
(1,736)
83
20,017
4,371
15,646
(6,448)
9,198
0.49
0.48
32,032
32,335
$
$
$
(1) See note 3
The accompanying notes are an integral part of the consolidated financial statements.
63
SIERRA WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars, except where otherwise stated)
Assets
Current assets
Cash and cash equivalents
Restricted cash
Accounts receivable (note 13)
Inventories (note 14)
Prepaids and other (note 15)
Property and equipment (note 16)
Intangible assets (note 17)
Goodwill (note 18)
Deferred income taxes (note 10)
Other assets
Liabilities
Current liabilities
Accounts payable and accrued liabilities (note 19)
Deferred revenue
Long-term obligations (note 20)
Deferred income taxes (note 10)
Equity
Shareholders’ equity
As at December 31,
2018
2017
As adjusted(1)
$
$
$
$
$
$
89,076
221
171,725
50,779
11,703
323,504
39,842
84,890
211,074
11,751
12,855
683,916
184,220
6,213
190,433
43,250
6,103
239,786
65,003
221
173,054
53,143
8,221
299,642
42,977
108,599
218,516
12,197
12,713
694,644
175,367
7,275
182,642
36,637
7,845
227,124
Common stock: no par value; unlimited shares authorized; issued and outstanding:
36,067,415 shares (December 31, 2017 — 35,861,510 shares)
432,552
427,748
Preferred stock: no par value; unlimited shares authorized; issued and outstanding: nil
shares
Treasury stock: at cost; 119,584 shares (December 31, 2017 — 222,639 shares)
Additional paid-in capital
Retained earnings (deficit)
Accumulated other comprehensive loss (note 21)
—
(1,965)
30,984
(8,295)
(9,146)
444,130
683,916
$
—
(3,216)
27,962
17,502
(2,476)
467,520
694,644
$
(1) See note 3
Commitments and contingencies (note 26)
The accompanying notes are an integral part of the consolidated financial statements.
On behalf of the Board:
Robin A. Abrams
Director
Paul G. Cataford
Director
64
—
—
—
—
—
—
(10,203)
2,048
7,629
(4,214)
(909)
15,646
—
—
—
—
—
—
(2,779)
5,840
10,341
(1,367)
77,213
4,518
SIERRA WIRELESS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands of U.S. dollars, except where otherwise stated)
Common Stock
Treasury Shares
# of shares
$
# of shares
$
Additional
paid-in
capital
Retained
earnings
(deficit)
Accumulated
other
comprehensive
income (loss)
Total
Balance as at December 31, 2015
As adjusted(1)
32,337,201
$ 346,453
240,613
$
(4,017) $
23,998
$
(201) $
(7,978) $ 358,255
Common share cancellation (note 22)
(809,872)
(8,696)
Stock option exercises (note 11)
231,704
2,906
Stock-based compensation (note 11)
Purchase of treasury shares for RSU
distribution
—
—
—
—
—
—
—
—
—
—
(858)
7,629
—
(1,507)
305,629
(4,214)
—
Distribution of vested RSUs
100,927
1,787
(190,771)
3,097
(5,793)
Net earnings
Foreign currency translation
adjustments, net of tax
—
—
—
—
—
—
—
—
—
—
Balance as at December 31, 2016
As adjusted(1)
31,859,960
$ 342,450
355,471
$
(5,134) $
24,976
$
13,938
$
(14,426) $ 361,804
—
(6,448)
(6,448)
Common share cancellation (note 22)
(170,217)
(1,825)
Stock option exercises (note 11)
Stock-based compensation (note 11)
500,184
—
8,122
—
—
—
—
—
—
—
(2,282)
10,341
—
(954)
Distribution of vested RSUs
90,751
1,788
(132,832)
1,918
(5,073)
Issue of shares on Numerex acquisition,
net of share issue cost of $132 (note
5(b))
Net earnings
Foreign currency translation
adjustments, net of tax
3,580,832
77,213
—
—
—
—
—
—
—
—
—
—
—
—
—
—
11,950
11,950
Balance as at December 31, 2017
As adjusted(1)
35,861,510
$ 427,748
222,639
$
(3,216) $
27,962
$
17,502
$
(2,476) $ 467,520
Common share cancellation (note 22)
(161,500)
(1,933)
Stock option exercises (note 11)
221,262
3,621
Stock-based compensation (note 11)
Purchase of treasury shares for RSU
distribution
—
—
—
—
—
—
—
—
—
—
(985)
13,060
—
(1,187)
161,000
(2,808)
—
Distribution of vested RSUs
146,143
3,116
(264,055)
4,059
(9,053)
Net loss
Foreign currency translation
adjustments, net of tax
Balance as at December 31, 2018
—
—
—
—
—
—
—
—
—
—
(24,610)
—
—
—
—
—
—
(3,120)
2,636
13,060
(2,808)
(1,878)
(24,610)
(6,670)
(6,670)
(1)See note 3
The accompanying notes are an integral part of the consolidated financial statements.
36,067,415
$ 432,552
119,584
$
(1,965) $
30,984
$
(8,295) $
(9,146) $ 444,130
65
—
—
—
—
15,646
—
—
—
—
4,518
—
—
—
—
SIERRA WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
Years ended December 31,
2018
2017
2016
As adjusted(1)
As adjusted(1)
$
(24,610) $
4,518
$
15,646
Cash flows provided by (used in):
Operating activities
Net earnings (loss)
Items not requiring (providing) cash
Amortization
Stock-based compensation (note 11(a))
Deferred income taxes
Reduction in accrued royalty obligation
Impairment
Loss on disposal of iTank business (note 5(a))
Unrealized foreign exchange loss (gain)
Other
Changes in non-cash working capital
Accounts receivable
Inventories
Prepaids and other
Accounts payable and accrued liabilities
Deferred revenue and credits
Cash flows provided by (used in) operating activities
Investing activities
Additions to property and equipment
Additions to intangible assets
Proceeds from sale of property & equipment
Proceeds from sale of iTank business (note 5(a))
Acquisitions, net of cash acquired:
Numerex Corp. (note 5(b))
GNSS business of GlobalTop (note 5(c))
Blue Creation (note 5(d))
GenX Mobile Inc. (note 5(e))
Cash flows used in investing activities
Financing activities
Issuance of common shares, net of issuance cost
Repurchase of common shares for cancellation (note 22)
Purchase of treasury shares for RSU distribution
Taxes paid related to net settlement of equity awards
Payment for contingent consideration
Decrease in other long-term obligations
Cash flows used in financing activities
Effect of foreign exchange rate changes on cash and cash equivalents
Cash and cash equivalents and restricted cash, increase (decrease) in the year
Cash and cash equivalents and restricted cash, beginning of year
Cash, cash equivalents and restricted cash, end of year
(1)See note 3
Supplemental cash flow information (note 23)
$
The accompanying notes are an integral part of the consolidated financial statements.
66
39,150
13,060
(1,685)
—
—
2,064
5,973
279
(5,526)
1,508
(3,525)
21,944
(1,402)
47,230
(18,166)
(2,933)
93
5,000
—
—
—
—
(16,006)
2,636
(3,120)
(2,808)
(1,878)
(130)
(627)
(5,927)
(1,224)
24,073
65,224
89,297
$
30,503
10,341
824
—
3,668
—
(8,507)
(55)
(12,665)
(6,806)
(5,334)
(17,750)
335
(928)
(14,100)
(1,706)
35
—
(18,725)
(3,145)
—
—
(37,641)
5,708
(2,779)
—
(1,367)
(1,397)
(436)
(271)
1,292
(37,548)
102,772
65,224
$
25,894
7,629
(2,646)
(13,045)
—
—
(862)
(303)
(28,945)
(5,833)
6,598
40,248
2,124
46,505
(16,957)
(900)
3
—
—
—
(2,882)
(5,900)
(26,636)
2,048
(10,203)
(4,214)
(909)
(16)
(395)
(13,689)
2,656
8,836
93,936
102,772
SIERRA WIRELESS, INC.
TABLE OF CONTENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1
Note 2
Note 3
Note 4
Note 5
Note 6
Note 7
Note 8
Note 9
Note 10
Note 11
Note 12
Note 13
Note 14
Note 15
Note 16
Note 17
Note 18
Note 19
Note 20
Note 21
Note 22
Note 23
Note 24
Note 25
Note 26
Nature of Operations
Summary of Significant Accounting Policies
Recently Implemented Accounting Standards
Changes in Future Accounting Standards
Acquisitions and Disposals
Segmented Information
Research and Development
Restructuring
Other Income
Income Taxes
Stock-based Compensation Plans
Earnings (Loss) Per Share
Accounts Receivable
Inventories
Prepaids and Other
Property and Equipment
Intangible Assets
Goodwill
Accounts Payable and Accrued Liabilities
Long-term Obligations
Accumulated Other Comprehensive Loss
Share Capital
Supplemental Cash Flow Information
Fair Value Measurement
Financial Instruments
Commitments and Contingencies
67
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68
68
77
79
80
84
86
86
87
87
91
95
95
96
96
97
98
99
99
100
100
100
100
101
102
103
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
1.
NATURE OF OPERATIONS
Sierra Wireless, Inc., together with its subsidiaries (collectively, "the company", "we", "our") was
incorporated under the Canada Business Corporations Act on May 31, 1993. Sierra Wireless is an Internet
of Things (“IoT”) pioneer that empowers businesses and industries to transform and thrive in the
connected economy. Sierra Wireless provides an integrated device-to-cloud solution comprised of
embedded and networking solutions seamlessly connected with our IoT platform and connectivity
services. Original Equipment Manufacturers (“OEMs”) and enterprises worldwide rely on our expertise in
delivering fully-integrated IoT solutions to reduce complexity, get their connected loT products and
services to market faster, and improve intelligence at the edge of the network.
We have sales, engineering, and research and development teams located in offices around the world. The
primary markets for our products are North America, Europe and Asia Pacific.
We operate our business under three reportable segments:
OEM Solutions
Embedded cellular modules, short range wireless modules, Global Navigation
Satellite System ("GNSS"), software and tools for OEM customers who integrate
wireless connectively into their products and solutions.
Enterprise Solutions
Intelligent routers and gateways, and management solutions that enable cellular
connectivity.
IoT Services
Internet services including a cloud-based platform for deploying and managing
IoT applications, Smart SIM supported by our mobile core networks, managed
wireless broadband services to enable worldwide customer IoT deployments
and managed end-to-end IoT solutions, including smart devices, network
connectivity and service applications, addressing a wide spectrum of vertical
markets and industrial customers.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our consolidated financial statements and accompanying notes are prepared in accordance with
accounting principles generally accepted in the United States of America ("U.S. GAAP").
(a)
Basis of consolidation
Our consolidated financial statements include the accounts of the company and its subsidiaries, all
of which are wholly-owned, from their respective dates of acquisition of control. All inter-
company transactions and balances have been eliminated on consolidation.
(b)
Use of estimates
The consolidated financial statements have been prepared in conformity with U.S. GAAP, which
requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the year. On an ongoing
basis, management reviews its estimates, including those related to revenue recognition, such as
determining the nature and timing of satisfaction of performance obligations, determining the
standalone selling price of performance obligations, and variable consideration; inventory
obsolescence; estimated useful lives of long-lived assets; valuation of intangible assets; goodwill;
royalty and warranty accruals; other liabilities; stock-based compensation; allowance for doubtful
68
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
accounts receivable; income taxes; restructuring costs; contingent consideration and commitments
and contingencies, based on currently available information. Actual amounts could differ from
estimates.
(c)
Revenue recognition
Product revenue includes sales from embedded cellular modules, short range and GNSS, wireless
modules, intelligent routers and gateways, asset tracking and vertical market smart devices,
antennas and accessories, and Smart SIMs. Service and other revenue includes sales from cloud
services, cellular connectivity services, managed connectivity and application services, software
licenses, technical support services, extended warranty services, solution design and consulting
services.
We recognize revenues when we satisfy performance obligations by transferring the control of
promised products or services to customers. Product revenue is recognized at a point in time
when a good is shipped or delivered to the customer. Service revenue is recognized over time as
the service is rendered or at a point in time upon completion of a service. Our customer contracts
can include various combinations of products and services, which are generally capable of being
distinct and accounted for as separate performance obligations. Revenue is recognized net of
allowances for returns and any taxes collected from customers.
Our products are generally highly dependent on, and interrelated with, the underlying firmware
and cannot function without the firmware. In these cases, the hardware and the firmware are
accounted for as a single performance obligation and revenue is recognized at the point in time
when control is transferred to resellers and distributors, OEMs, or directly to end customers.
Certain customers may receive cash-based incentives or credits, which are accounted for as
variable consideration. We estimate the amount of incentives or credits to be provided to
customers and reduce revenue recognized. The variable consideration is included in the
transaction price to the extent that a significant reversal in the amount of cumulative revenue
recognized is not expected to occur when the uncertainty associated with the variable
consideration is subsequently resolved.
The expected costs associated with assurance-type warranty are recognized as expense when
products are sold. Warranty service that is in addition to the assurance that the product complies
with agreed upon specifications is a separate performance obligation; its revenue is recognized
ratably over the service period.
Cloud and connectivity services are provided on either a subscription or consumption basis.
Revenue related to cloud and connectivity services provided on a subscription basis is recognized
ratably over the contract period. Revenue related to cloud and connectivity services provided on a
consumption basis is recognized based on the customer utilization of such resources. Revenues
from SIM activation and initial application setup are deferred and recognized over the estimated
customer life on a straight-line basis.
Licenses for on-premise software provide the customer with a right to use the software as it exists
when made available to the customer. Revenue from distinct on-premise licenses are recognized
upfront at the point in time when the software is made available to the customer. Revenue from
software maintenance, unspecified upgrades and technical support contracts are recognized over
the period such items are delivered or services are provided. Technical support contracts
69
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
extending beyond the current period are deferred and revenue is recognized over the applicable
earning period.
Revenue from solution design and consulting services are recognized as services are being
provided.
Remaining performance obligations
We do not disclose the value of remaining performance obligations for (i) contracts with an
original expected length of one year or less and (ii) contracts for which we recognize revenue at
the amount to which we have the right to invoice for services performed.
As of December 31, 2018, we had $20,820 of remaining performance obligations to be recognized,
of which we expect to recognize approximately 44% in 2019, 29% in 2020, and 27% in subsequent
years.
Contract acquisition and fulfillment costs
We recognize an asset for the incremental costs of obtaining or fulfilling a contract with a
customer if we expect the benefit of those costs to be longer than one year. We have determined
that certain sales incentive bonuses and initial setup costs of managed IoT services meet the
requirements to be capitalized. We applied a practical expedient to expense costs as incurred for
costs to obtain a contract with a customer when the amortization period would have been one
year or less.
The incremental costs of obtaining or fulfilling a contract with a customer are deferred and
amortized over the estimated life of the customer relationship. We classify these deferred
contract costs as current or non-current based on the timing of when we expect to recognize the
expense. The current and non-current portions of deferred contract costs are included in Prepaids
and other current assets and Other assets respectively in our consolidated balance sheets.
Significant judgment
We determine the transaction price of a customer contract by multiplying the unit price of a good
or service with the committed order volume or service period.
Certain customers may receive cash-based incentives or credits, which are accounted for as
variable consideration. We estimate the expected amount to be provided to customers and
exclude it from the transaction price. Sales credits are included in accounts payable and accrued
liabilities in our consolidated balance sheets.
Our customer contracts can include various combinations of products and services. When a
customer contract includes multiple performance obligations, we allocate the transaction price to
each performance obligation on a relative standalone selling price basis. We generally determine
standalone selling prices based on the price charged to customers or a combination of expected
cost, plus a margin and residual methods.
Product revenue is recognized at a point in time when a good is shipped or delivered to the
customer as it represents the transfer of control of the promised good to a customer. Cloud,
connectivity, and managed service revenues are recognized over time as the customer
70
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
simultaneously receives and consumes the benefits provided by our performance as we perform.
Other service revenue is recognized at a point in time upon completion of a service.
Contract Balances
Receivables - We recognize a right to consideration as a receivable when only the passage of time
is required before payment of that consideration is due.
Contract Assets - We recognize a right to consideration in exchange for goods or service that we
have transferred to a customer as contract assets. Contract assets are comprised mainly of
accrued revenue related to monthly IoT service subscriptions, which may include connectivity,
cloud applications, and managed services. Contract assets are included in Accounts receivable in
our consolidated balance sheet.
Deferred Revenue - We recognize an obligation to transfer goods or services to a customer for
which we have received consideration from the customer as deferred revenue. Deferred revenue
consists of advance payments and billings in excess of revenue recognized, which includes support,
extended warranty, cloud application services, and activation fees.
Payment terms and conditions vary by contract type, although terms generally include a
requirement of payment within 30 to 60 days.
The following table provides the changes in contract balances:
As at December 31,
Change
2018
2017
Contract assets
Deferred revenue - current
Deferred revenue - noncurrent
$
1,953 $
6,213
6,317
852 $
7,275
3,346
1,101
(1,062)
2,971
For the year ended December 31, 2018, $6,073 of deferred revenue was recognized in revenue
that was included in the contract liability balance as of December 31, 2017 (2017 — $5,009 ).
(d)
Research and development costs
Research and development costs are expensed as they are incurred, with the exception of certain
software development costs principally related to software coding, designing system interfaces
and installation, and testing of the software, that we capitalize once technological feasibility is
reached.
We follow the cost reduction method of accounting for certain agreements, including government
research and development funding, whereby the benefit of the funding is recognized as a
reduction in the cost of the related expenditure when certain criteria stipulated under the terms of
those funding agreements have been met, and there is reasonable assurance the research and
development funding will be received.
71
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
(e)
Warranty costs
Warranty costs are accrued upon the recognition of related revenue, based on our best estimates,
with reference to past and expected future experience. Warranty obligations are included in
accounts payable and accrued liabilities in our consolidated balance sheet.
(f)
Royalty costs
We have intellectual property license agreements which generally require us to make royalty
payments based on a combination of fixed fees and percentage of the revenue generated by sales
of products incorporating the licensed technology. We recognize royalty obligations in accordance
with the terms of the respective royalty agreements. Royalty costs are recorded as a component
of cost of goods sold in the period when incurred.
Where agreements are not in place, we recognize our current best estimate of the royalty
obligation in cost of goods sold, accrued liabilities and long-term liabilities. Historically (prior to
October 1, 2016), in determining this estimate, we based our calculations on an assumption that
royalty calculations could be based on a percentage of the entire value of an end-product (i.e.,
revenue). This conformed with our legacy license agreements.
Significant legal precedent exists in the United States supporting the smallest saleable unit (“SSU”)
principle (i.e., the principle that any royalty obligations should be no more than a portion of the
profits for a component within the product that implements the patented technology) as the
appropriate methodology for determining FRAND standard essential patent (“SEP”) royalties.
Using this principle, the royalty accrual on our products is based on the value of the patented
technology in the chipset, representing the SSU that implements the technology, and not on the
entire value of the end-product.
The cumulative effect of these legal changes to the licensing landscape, combined with supportive
legislative initiatives and broad industry support for the SSU principle, at the time of the expiry of
one of our significant legacy IP licenses, prompted management to reassess its contingent royalty
obligation estimate during the fourth quarter of the year ended December 31, 2016. The use of
the SSU principle as the basis to determine the estimate, as opposed to value of end-product,
resulted in a reduction of $13.0 million to our estimated royalty obligation effective October 1,
2016.
(g)
Market development costs
Market development costs are charged to sales and marketing expense to the extent that the
benefit is separable from the revenue transaction and the fair value of that benefit is
determinable. To the extent that such costs either do not provide a separable benefit, or the fair
value of the benefit cannot be reliably estimated, such amounts are recorded as a reduction of
revenue.
(h)
Income taxes
Income taxes are accounted for using the asset and liability method. Deferred income tax assets
and liabilities are based on temporary differences (differences between the accounting basis and
the tax basis of the assets and liabilities), non-capital loss, capital loss, and tax credits carry-
forwards are measured using the enacted tax rates and laws expected to apply when these
72
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
differences reverse. Deferred tax benefits, including non-capital loss, capital loss, and tax credits
carry-forwards, are recognized to the extent that realization of such benefits is considered more
likely than not. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in earnings in the period that enactment occurs.
We include interest and penalties related to income taxes, including unrecognized tax benefits, in
Income tax expense.
Liabilities for uncertain tax positions are recorded based on a two-step process. The first step is to
evaluate the tax position for recognition by determining if the weight of available evidence
indicates that it is more likely than not that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any. The second step is to measure the tax
benefit as the largest amount that is more than 50% likely of being realized upon settlement. We
regularly assess the potential outcomes of examinations by tax authorities in determining the
adequacy of our provision for income taxes. We continually assess the likelihood and amount of
potential adjustments and adjust the income tax provision, income taxes payable and deferred
taxes in the period in which the facts that give rise to a revision become known.
We recognize the tax effects related to share-based payments at settlement or expiration in
Income tax expense.
(i)
Stock-based compensation and other stock-based payments
Stock options and restricted share units granted to the company’s key officers, directors and
employees are accounted for using the fair value-based method. Under this method,
compensation cost for stock options is measured at fair value at the date of grant using the Black-
Scholes valuation model, and is expensed over the awards' vesting period using the straight-line
method. Any consideration paid by plan participants on the exercise of stock options or the
purchase of shares is credited to common stock together with any related stock-based
compensation expense. Compensation cost for restricted share units is measured at fair value at
the date of grant which is the market price of the underlying security, and is expensed over the
awards' vesting period using the straight-line method. Compensation cost for performance-based
restricted share units is measured using a Monte Carlo valuation model. In the third quarter of
2016, we early adopted ASU 2016-09 and elected to make an entity-wide election to account for
forfeitures in compensation expense when they occur. The application of this election did not
have a material impact on our financial statements.
(j)
Earnings (loss) per common share
Basic earnings (loss) per share is computed by dividing net earnings (loss) for the period by the
weighted average number of company common shares outstanding during the reporting period.
Diluted earnings (loss) per share is computed using the treasury stock method. When the effect of
options and other securities convertible into common shares is anti-dilutive, including when the
company has incurred a loss for the period, basic and diluted earnings (loss) per share are the
same.
Under the treasury stock method, the number of dilutive shares, if any, is determined by dividing
the average market price of shares for the period into the net proceeds of in-the-money options.
73
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
(k)
Translation of foreign currencies
Our functional and reporting currency is the U.S. dollar.
Revenue and expense items denominated in foreign currencies are translated at exchange rates
prevailing during the period. Monetary assets and liabilities denominated in foreign currencies are
translated at the period-end exchange rates. Non-monetary assets and liabilities are translated at
exchange rates in effect when the assets are acquired or the obligations are incurred. Foreign
exchange gains and losses are reflected in Net earnings (loss) for the period.
We have foreign subsidiaries that are considered self-contained and integrated within their foreign
jurisdiction, and accordingly, use the respective local currency as their functional currency. The
assets and liabilities of the foreign subsidiaries, including goodwill and fair value adjustments
arising on acquisition, are translated at exchange rates at the balance sheet dates, equity is
translated at historical rates, and revenue and expenses are translated at exchange rates prevailing
during the period. The foreign exchange gains and losses arising from the translation are reported
as a component of other comprehensive income (loss), as presented in note 21, Accumulated
other comprehensive loss.
(l)
Cash and cash equivalents
Cash and cash equivalents include cash and short-term deposits with original maturities of three
months or less. The carrying amounts approximate fair value due to the short-term maturities of
these instruments.
(m)
Allowance for doubtful accounts receivable
We maintain an allowance for our accounts receivable for estimated losses that may result from
our customers’ inability to pay. We determine the amount of the allowance by analyzing known
uncollectible accounts, aged receivables, economic conditions, historical losses, insured amounts,
if any, and changes in customer payment cycles and credit-worthiness. Amounts later determined
and specifically identified to be uncollectible are charged against this allowance.
If the financial condition of any of our customers deteriorates resulting in an impairment of their
ability to make payments, we may increase our allowance.
(n)
Financing receivables
We lease certain hardware devices to a small number of hardware distributors under sales-type
leases which have terms ranging from two to four years and bear interest at 2%.
We evaluate the credit quality of our financing receivables on an ongoing basis utilizing an aging of
the accounts and write-offs, customer collection experience, the customer’s financial condition,
known risk characteristics impacting the respective customer base, and other available economic
conditions, to determine the appropriate allowance.
(o)
Derivatives
Derivatives, such as foreign currency forward contracts, may be used to hedge the foreign
exchange risk on cash flows from commitments denominated in a foreign currency. Derivatives
are recorded in Accounts receivable or Accounts payable and accrued liabilities and measured at
74
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
fair value at each balance sheet date. Any resulting gains and losses from changes in the fair value
are recorded in Foreign exchange gain (loss).
(p)
Inventories
Inventories consist of electronic components and finished goods and are valued at the lower of
cost or estimable realizable value, determined on a first-in-first-out basis. Cost is defined as all
costs that relate to bringing the inventory to its present condition and location under normal
operating conditions.
We review the components of our inventory and our inventory purchase commitments on a
regular basis for excess and obsolete inventory based on estimated future usage and sales. Write-
downs in inventory value or losses on inventory purchase commitments depend on various items,
including factors related to customer demand, economic and competitive conditions, technological
advances and new product introductions that vary from current expectations. We believe that the
estimates used in calculating the inventory provision are reasonable and properly reflect the risk of
excess and obsolete inventory. If customer demands for our inventory are substantially less than
our estimates, additional inventory write-downs may be required.
(q)
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. We
amortize our property and equipment on a straight-line basis over the following estimated
economic lives:
Furniture and fixtures
Research and development equipment
Production equipment
Tooling
Computer equipment
Software
Office equipment
Monitoring equipment
Network equipment
3-5 years
3-10 years
2-7 years
1.5-3 years
1-5 years
1-5 years
3-5 years
3-5 years
3-7 years
Research and development equipment related amortization is included in research and
development expense. Tooling, production, monitoring and certain network equipment related
amortization is included in cost of goods sold. All other amortization is included in amortization
expense.
Leasehold improvements and leased vehicles are amortized on a straight-line basis over the lesser
of their expected average service life or term of the lease.
When we sell property and equipment, we net the historical cost less accumulated depreciation
and amortization against the sale proceeds and include the difference in Other income.
(r)
Intangible assets
The estimated useful life of intangible assets with definite lives is the period over which the assets
are expected to contribute to our future cash flows. When determining the useful life, we
consider the expected use of the asset, useful life of any related intangible asset, any legal,
75
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
regulatory or contractual provisions that limit the useful life, any legal, regulatory, or contractual
renewal or extension provisions without substantial costs or modifications to the existing terms
and conditions, the effects of obsolescence, demand, competition and other economic factors,
and the expected level of maintenance expenditures relative to the cost of the asset required to
obtain future cash flows from the asset.
We amortize our intangible assets on a straight-line basis over the following specific periods:
Patents and trademarks
— 3-5 years
Licenses
Intellectual property and customer
relationships
Brand
In-process research and
development
— over the shorter of the term of the license or an
estimate of their useful life, ranging from three
to ten years
— 3-13 years
— over the estimated life
— over the estimated life
In-process research and development (“IPRD”) are intangible assets acquired as part of business
combinations. Prior to their completion, IPRD are intangible assets with indefinite life and they are
not amortized but subject to impairment test on an annual basis.
Research and development related amortization is included in research and development expense.
All other amortization is included in Amortization expense.
(s)
Goodwill
Goodwill represents the excess of the purchase price of an acquired business over the fair value
assigned to assets acquired and liabilities assumed in a business combination.
Goodwill has an indefinite life, is not amortized, and is subject to a two-step impairment test on an
annual basis. The first step compares the fair value of the reporting unit to its carrying amount,
which includes the goodwill. When the fair value of a reporting unit exceeds its carrying amount,
goodwill of the reporting unit is considered not to be impaired and the second step of the
impairment test is unnecessary. If the carrying amount exceeds the implied fair value of the
goodwill, the second step measures the amount of the impairment loss. If the carrying amount
exceeds the fair value of the goodwill, an impairment loss is recognized equal to that excess.
(t)
Impairment of long-lived assets
Long-lived assets, including property and equipment, and intangible assets other than goodwill,
are assessed for potential impairment when there is evidence that events or changes in
circumstances indicate that the carrying amount of an asset may not be recovered. An impairment
loss is recognized when the carrying amount of the long-lived asset is not recoverable and exceeds
its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of
the undiscounted cash flows expected to result from the use and eventual disposition of the asset.
Any required impairment loss is measured as the amount by which the carrying amount of a long-
lived asset exceeds its fair value and is recorded as a reduction in the carrying value of the related
asset and a charge to operating results. Intangible assets with indefinite lives are tested annually
76
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
for impairment and in interim periods if certain events occur indicating that the carrying value of
the intangible assets may be impaired.
(u)
Comprehensive income (loss)
Comprehensive income (loss) includes net earnings (loss) as well as changes in equity from other
non-owner sources. The other changes in equity included in comprehensive income (loss) are
comprised of foreign currency cumulative translation adjustments.
(v)
Investment tax credits
Investment tax credits are accounted for using the flow-through method whereby such credits are
accounted for as a reduction of income tax expense in the period in which the credit arises.
(w)
Comparative figures
Certain figures presented in the consolidated financial statements have been reclassified to
conform to the current year presentation.
3.
RECENTLY IMPLEMENTED ACCOUNTING STANDARDS
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash.
This update addresses diversity in the classification and presentation of changes in restricted cash on the
statement of cash flows. This requires that a statement of cash flows explain the change during the period
in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash
equivalents by including restricted cash and restricted cash equivalents when reconciling the beginning-of-
period and end-of-period total amounts shown on the statement of cash flows. The standard is effective
for fiscal years beginning after December 15, 2017, and interim periods within those fiscal periods. Early
adoption is permitted, and any adjustments should be reflected as of the beginning of the fiscal year that
includes that interim period. In the fourth quarter of 2017, we early adopted ASU 2016-18 and there was
no material impact to our financial statements and business.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of
Certain Cash Receipts and Cash Payments. The update addresses eight specific cash flow issues with the
objective of reducing diversity in practice. The standard is effective for fiscal years beginning after
December 15, 2017, and interim periods within those fiscal periods. We adopted the standard in the first
quarter of 2018 and it did not have a material impact to our consolidated statements of cash flows.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606). The
update is intended to clarify the principles of recognizing revenue, and to develop a common revenue
standard for U.S. GAAP and IFRS that would remove inconsistencies in revenue requirements, leading to
improved comparability of revenue recognition practices across entities and industries. ASC 606 contains a
single model that applies to contracts with customers and two approaches to recognizing revenue: at a
point in time or over time. The model features a contract-based five-step analysis of transactions to
determine whether, how much, and when revenue is recognized. New estimates and judgmental
thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. We
adopted the standard as of January 1, 2018 using the full retrospective transition method.
77
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
The following tables summarize the effects of adopting the accounting standard on our Statement of
Operations and Comprehensive Earnings (Loss):
Year ended December 31, 2017
As previously
reported
Effect of adoption of
ASC 606
As adjusted
$
692,077
$
(1,350) $
Revenue
Cost of sales
Sales and marketing
Research and development
Income tax expense
Revenue
Cost of sales
Sales and marketing
Research and development
Income tax expense
Basic net earnings per share (in dollars)
$
Diluted earnings per share (in dollars)
$
0.13
0.13
Year ended December 31, 2016
As previously
reported
Effect of adoption of
ASC 606
As adjusted
$
615,607
$
(592) $
457,130
75,594
83,361
3,123
397,864
64,242
73,077
4,310
(642)
(459)
(708)
76
0.01
0.01
$
(140)
(372)
(402)
61
0.01
0.01
$
690,727
456,488
75,135
82,653
3,199
0.14
0.14
615,015
397,724
63,870
72,675
4,371
0.49
0.48
Basic net earnings per share (in dollars)
$
Diluted earnings per share (in dollars)
$
0.48
0.48
The following table summarizes the effects of adopting the accounting standard on our Balance Sheet:
As of December 31, 2017
As previously
reported
Effect of adoption of
ASC 606
As adjusted
Assets
Accounts receivable
Inventories
Prepaids and other
Other assets
Liabilities
Accounts payable and accrued liabilities
Deferred revenue
Deferred income tax liability
Equity
Retained earnings
$
168,503
$
4,551
$
53,026
8,006
12,058
172,395
5,455
7,702
117
215
655
2,972
1,820
143
173,054
53,143
8,221
12,713
175,367
7,275
7,845
16,899
603
17,502
78
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
4.
CHANGES IN FUTURE ACCOUNTING STANDARDS
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 and ASU 2018-11 (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. Early
application is permitted. The Company will adopt Topic 842 in its first quarter of 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 of January 1, 2019, rather than as of the first date of the earliest period presented. In
adopting the new standard, we are electing the package of practical expedients provided under the
guidance, which applies to expired or existing leases and allows the Company not to reassess whether a
contract contains a lease, the lease classification, and any initial direct costs incurred. The Company is also
electing the practical expedient to expense short term leases (12 months or less) on a straight-line basis
over the lease term, and not separate the lease and non-lease components for all of its leases. The
Company’s implementation team is completing the determination of the completeness and accuracy of
the Company’s leasing information and is in the final stages of identifying and effecting the internal
process changes and controls necessary to assist with the recording, reporting and disclosure
requirements under the standard. The adoption of the new lease standard is anticipated to have a
material impact on our balance sheet, primarily related to leases of our business premises.
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 are in the process of
evaluating the impact 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 and early adoption is permitted. We are in
the process of evaluating the impact on our financial statements.
79
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
5.
ACQUISITIONS AND DISPOSALS
(a)
Disposal of Remote Tank Monitoring Business
On December 31, 2018, we completed the sale of substantially all of the assets and liabilities of our
remote tank monitoring business ("iTank") for total proceeds of $6.0 million, as it was not deemed to be
either a core business or part of our strategic focus. The Company received $5.0 million in cash
consideration at closing with the remaining $1.0 million held in escrow. The amount in escrow will be held
up to 12 months with $0.8 million contingent on meeting certain milestone events and the remaining $0.2
million to secure the purchaser's rights of indemnification under the asset sale agreement.
The Company recognized a loss of $2.1 million, which is included in Loss on disposal of iTank business in
the company's consolidated statements of operations, net of $0.2 million in transaction related costs.
Prior to the disposal, iTank was part of our IoT Services reporting segment and $2.1 million of goodwill was
de-recognized and included within the net assets disposed of.
The financial results of iTank operations are included in the Company's consolidated financial statements
through December 31, 2018.
(b)
Acquisition of Numerex Corp.
On December 7, 2017, we completed the stock-for-stock merger transaction to acquire Numerex Corp.
("Numerex"). In accordance with the Agreement and Plan of Merger dated August 2, 2017, by and among
the company, Numerex and Wireless Acquisition Sub, Inc. we issued 3,580,832 common shares as merger
consideration in exchange for all of the outstanding shares of Numerex common stock and certain
outstanding Numerex equity awards and warrants. Additionally, approximately $20.2 million in aggregate
was paid at closing to retire outstanding Numerex debt.
Total consideration for the acquisition is as follows:
Issuance of common shares
Debt extinguishment
$
$
77,346
20,155
97,501
We accounted for the transaction using the acquisition method and accordingly, recorded the tangible and
intangible assets acquired and liabilities assumed on the basis of our estimates of their respective fair
values as at December 7, 2017. The excess of the purchase price over the final value assigned to the net
assets acquired was recorded as goodwill.
The allocation of the purchase price to goodwill was completed as of September 30, 2018.
80
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
The following table summarizes the final values assigned to the assets acquired and liabilities assumed at
the acquisition date:
Cash
Deferred income tax asset
Property and equipment
Identifiable intangible assets
Goodwill
Other working capital
Long-term obligations
Fair value of net assets acquired
$
$
1,430
1,049
7,244
45,890
51,658
(8,623)
(1,147)
97,501
Goodwill of $51.7 million resulting from the acquisition consists largely of the expectation that the
acquisition will expand our position as a leading global IoT pure-play and significantly increase our
subscription-based recurring services revenue. Goodwill is assigned to the IoT Services segment and
approximately $4.0 million is deductible for tax purposes.
The following table provides the components of the identifiable intangible assets acquired that are subject
to amortization:
Customer relationships
Existing technology
Brand
Estimated
useful life
9 years
3 years
13 years
Amount
26,390
10,220
9,280
45,890
$
$
The following table presents the unaudited pro forma results for the year ended December 31, 2017 and
2016. The pro forma financial information combines the results of operations of Sierra Wireless, Inc. and
Numerex as though the businesses had been combined as of the beginning of fiscal 2016. The pro forma
financial information is presented for informational purposes only and is not indicative of the results of
operations that would have been achieved if the acquisition had taken place at the beginning of fiscal
2016. The unaudited pro forma financial information presented includes amortization charges for
acquired tangible and intangible assets, and related tax effects.
Pro forma information
Revenue
Loss from operations
Net loss
Basic and diluted loss per share (in dollars)
Year ended December 31,
2017
2016
$
$
$
747,719
(8,973)
(3,577)
686,252
(5,205)
(7,334)
(0.10) $
(0.21)
81
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
(c)
Acquisition of GNSS business of GlobalTop
On March 31, 2017, we completed the acquisition of substantially all of the assets of the Global Navigation
Satellite System ("GNSS") embedded module business of GlobalTop Technology Inc. ("GlobalTop") for total
cash consideration of $3.1 million. GlobalTop is a Taiwan-based business that specializes in the
development and manufacture of a wide variety of GNSS modules and serves customers around the world.
The acquisition builds on our strategy to expand our product offerings beyond cellular, Wi-Fi and
Bluetooth, servicing customers in the automotive, telematics and asset tracking markets.
We accounted for the transaction using the acquisition method and accordingly, we have recorded the
tangible and intangible assets acquired and liabilities assumed on the basis of their respective fair values as
at March 31, 2017. The excess of the purchase price over the final value assigned to the net assets
acquired was recorded as goodwill.
The following table summarizes the final values assigned to the assets acquired at the acquisition date:
Assets acquired
Inventory
Property and equipment
Identifiable intangible assets
Goodwill
Fair value of net assets acquired
$
$
604
175
1,160
1,206
3,145
Goodwill of $1.2 million resulting from the acquisition consists largely of the expectation that the
acquisition will expand our embedded solution portfolio for OEM customers in the key markets we serve.
Goodwill is deductible for tax purposes.
The following table provides the components of the identifiable intangible assets acquired:
Customer Relationships
Existing Technology
Backlog
Estimated
useful life
5 years
3 years
11 months
Amount
640
410
110
1,160
$
$
The amount of revenue and net earnings from the GNSS business included in our consolidated statements
of operations from the acquisition date, through the year ended December 31, 2017, was $3.4 million and
$nil, respectively. There was no significant impact on the Company's revenue and net earnings on a pro
forma basis for all periods presented.
(d)
Acquisition of Blue Creation
On November 2, 2016, we completed the acquisition of all of the outstanding shares of the parent
company and sole owner of Blue Creation for total cash consideration of $6.4 million ($2.9 million, net of
cash acquired), plus a maximum contingent consideration of $0.5 million under a performance-based earn-
out formula.
82
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
We accounted for the transaction using the acquisition method and accordingly, recorded the tangible and
intangible assets acquired and liabilities assumed on the basis of their respective fair values as at
November 2, 2016.
In accordance with ASC 805, Business Combinations, the earn-out has been recognized as acquisition-
related costs over the earn-out period.
The following table summarizes the values assigned to the assets acquired and liabilities assumed at the
acquisition date:
Assets acquired
Cash
Accounts receivable
Other assets
Identifiable intangible assets
Goodwill
Liabilities assumed
Accounts payable and accrued liabilities
Deferred income taxes
Fair value of net assets acquired
$
$
$
$
3,563
237
111
2,540
920
7,371
392
534
6,445
Goodwill of $0.9 million resulting from the acquisition will strengthen our strategic position within our
OEM Solutions segment. Goodwill is not deductible for tax purposes.
The following table provides the components of the identifiable intangible assets acquired:
Customer relationships
Existing technology
(e)
Acquisition of GenX Mobile Inc.
Estimated
useful life
3.5 years
4 years
Amount
2,090
450
2,540
$
$
On August 3, 2016, we completed the acquisition of all of the outstanding shares of GenX Mobile
Incorporated ("GenX") for total cash consideration of $7.8 million ($5.9 million, net of cash acquired), plus
contingent consideration for inventory consumption in excess of $1.0 million, up to a maximum of $1.4
million.
At acquisition date, we recognized the fair value of the contingent consideration at $1.4 million based on a
probability estimate of consumption of acquisition date inventory within the specified 12 month period of
the contingent consideration.
We accounted for the transaction using the acquisition method and accordingly, recorded the tangible and
intangible assets acquired and liabilities assumed on the basis of their respective fair values as at August 3,
2016. The excess of the purchase price over the value assigned to the net assets acquired was recorded as
goodwill.
83
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
Total consideration for the acquisition is as follows:
Cash
Contingent consideration
$
$
7,752
1,375
9,127
The following table summarizes the values assigned to the assets acquired and liabilities assumed at the
acquisition date:
Assets acquired
Cash
Accounts receivable
Inventory
Other assets
Identifiable intangible assets
Goodwill
Liabilities assumed
Accounts payable and accrued liabilities
Deferred income taxes
Fair value of net assets acquired
$
$
$
$
1,852
1,754
2,375
124
3,926
1,782
11,813
1,458
1,228
9,127
Goodwill of $1.8 million resulting from the acquisition consists largely of the expectation that the
acquisition will further strengthen our Enterprise Solutions segment. Goodwill is not deductible for tax
purposes.
The following table provides the components of the identifiable intangible assets acquired:
Customer relationships
Existing technology
In-process research and development
6.
SEGMENTED INFORMATION
Estimated
useful life
5 years
4 years
Amount
2,640
973
313
3,926
$
$
As our chief operating decision maker does not evaluate the performance of our operating segments
based on segment assets, management does not classify asset information on a segmented basis. Despite
the absence of discrete financial information, we do measure our revenue based on other forms of
categorization such as by the geographic distribution in which our products are sold.
84
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
REVENUE AND GROSS MARGIN BY SEGMENT
Revenue
Cost of sales
Gross margin
Gross margin %
Expenses
Loss from operations
Total assets
Revenue
Cost of sales
Gross margin
Gross margin %
Expenses
Earnings from operations
Total assets
Revenue
Cost of sales
Gross margin
Gross margin %
Expenses
Earnings from operations
Total assets
REVENUE BY GEOGRAPHICAL REGION
Americas
Europe, Middle East and Africa
Asia-Pacific
Year ended December 31, 2018
OEM
Solutions
Enterprise
Solutions
IoT Services
Total
$
$
$
$
$
$
$
$
119,927
58,796
61,131
51.0%
$
$
90,461
52,590
37,871
41.9 %
Year ended December 31, 2017
Enterprise
Solutions
IoT Services
101,535
53,014
48,521
47.8%
$
$
34,655
19,244
15,411
44.5 %
Year ended December 31, 2016
Enterprise
Solutions
IoT Services
$
$
71,486
31,537
39,949
55.9%
27,604
16,406
11,198
40.6 %
$
$
$
$
$
$
$
$
$
$
$
$
$
793,602
529,031
264,571
33.3%
282,846
(18,275)
683,916
Total
690,727
456,488
234,239
33.9%
234,139
100
694,644
Total
615,015
397,724
217,291
35.3%
195,621
21,670
581,457
2018
2017
314,169
$
227,905 $
167,812
311,621
168,400
294,422
793,602
$
690,727 $
2016
213,633
141,932
259,450
615,015
$
$
$
$
$
$
583,214
417,645
165,569
28.4%
OEM
Solutions
554,537
384,230
170,307
30.7%
OEM
Solutions
515,925
349,781
166,144
32.2%
85
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
PROPERTY AND EQUIPMENT BY GEOGRAPHICAL REGION
Americas
Europe, Middle East and Africa
Asia-Pacific
2018
26,045
$
9,027
4,770
39,842
$
2017
26,608
11,136
5,233
42,977
$
$
7.
RESEARCH AND DEVELOPMENT
The components of research and development costs consist of the following:
Gross research and development
Government tax credits
2018
94,352
(645)
93,707
$
$
2017
83,538 $
(885)
82,653 $
2016
73,293
(618)
72,675
$
$
8.
RESTRUCTURING
2018
In the first quarter of 2018, we commenced various initiatives focused on capturing synergies related to
the integration of Numerex into the existing operations and efficiency gains in other areas of the business.
In total, these initiatives affected 61 employees in various locations and functions within the Company.
During the year ended December 31, 2018, we recorded $4.8 million in severance and other related costs
associated with this initiative. Additional restructuring costs of approximately $0.2 million will be accrued
as employees provide remaining service. As at December 31, 2018, outstanding liability of $0.8 million is
included in Accounts payable and accrued liabilities and is expected to be paid by March 2019.
To accelerate our transformation to a Device-to-Cloud IoT solutions company, we initiated certain
organizational structure changes during November 2018. This initiative affected 76 employees in various
locations and functions within the Company. During the three and twelve months ended December 31,
2018, we recorded $2.3 million in severance and other related costs associated with this initiative.
Additional restructuring costs of approximately $0.3 million will be accrued as employees provide
remaining services. As at December 31, 2018, outstanding liability of $1.6 million is included in Accounts
payable and accrued liabilities and is expected to be paid by July 2019.
2017
In February 2017, we made a decision to relocate the customer support and network operations within the
IoT Services segment from Sweden to France and the United States to achieve operational efficiencies. As
a result, 19 employees were impacted and we recorded $1.1 million in restructuring costs for the year
ended December 31, 2017. No additional costs related to this initiative were recorded in 2018.
86
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
The following table provides the activity in the restructuring liability:
Balance, beginning of period
Expensed in period
Disbursements
Foreign exchange
Classification:
Accounts payable and accrued liabilities (note 19)
By restructuring initiative:
February 2017
March 2018
November 2018
9.
OTHER INCOME
2018
540
7,115
(5,081)
(88)
2,486
2,486
2,486
$
$
$
— $
842
1,644
2,486
$
$
$
$
$
$
$
$
2017
—
1,076
(592)
56
540
540
540
540
—
—
540
The components of other income for the years ended December 31 were as follows:
Interest income
Interest expense
Other
10.
INCOME TAXES
2018
253
$
(156)
(46)
2017
245 $
(159)
(19)
51
$
67 $
2016
163
(71)
(9)
83
$
$
The components of earnings (loss) before income taxes consist of the following:
Canadian
Foreign
Earnings (loss) before income taxes
2018
10,880
$
(34,574)
(23,694) $
$
$
2017
As adjusted
2016
As adjusted
7,205
512
7,717
$
$
15,480
4,537
20,017
87
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
The income tax expense (recovery) consists of:
Canadian:
Current
Deferred
Foreign:
Current
Deferred
Total:
Current
Deferred
2018
2017
As adjusted
2016
As adjusted
$
$
$
$
$
$
101
$
(4,508)
(4,407) $
2,500
2,823
5,323
2,601
(1,685)
916
$
$
$
$
28 $
1,665
1,693 $
2,347 $
(841)
1,506 $
2,375 $
824
3,199 $
(287)
401
114
7,304
(3,047)
4,257
7,017
(2,646)
4,371
The reconciliation of income taxes calculated at the statutory rate to the actual income tax provision for
the years ended December 31 was as follows:
Income tax expense (recovery) at Canadian statutory income
tax rates of 26.99% (2017 - 26.01%; 2017 - 26.01%)
Increase (decrease) in income taxes for:
Permanent and other differences
Change in statutory/foreign tax rates and foreign exchange
rates
Change in valuation allowance
Stock-based compensation expense
Adjustment to prior years
Income tax expense (recovery)
2018
2017
As adjusted
2016
As adjusted
$
(6,330) $
1,979 $
5,183
2,173
4,238
1,041
1,973
(2,179)
(1,452)
1,049
1,571
1,633
(1,581)
$
916
$
3,199 $
(2,192)
11,581
(11,403)
1,039
163
4,371
88
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
Deferred tax assets and liabilities
The tax effects of temporary differences that give rise to significant deferred tax assets and deferred tax
liabilities were as follows at December 31:
2018
2017
As adjusted
Deferred income tax assets (liabilities)
Property and equipment
Non capital loss carry-forwards
Capital loss carry-forwards
Scientific research and development expenses and credits
Reserves and other
Investments
Acquired intangibles
Valuation allowance
Classification:
Assets
Non-current
Liabilities
Non-current
$
1,289
$
89,499
3,195
20,004
16,044
(801)
(10,022)
119,208
113,560
5,648
$
1,470
87,854
3,166
23,829
14,784
(471)
(13,761)
116,871
112,519
4,352
2018
2017
As adjusted
11,751
$
12,197
(6,103)
5,648
$
(7,845)
4,352
$
$
$
At December 31, 2018, we have provided for a valuation allowance on our deferred tax assets of $113,560
(2017 — $112,519).
At December 31, 2018, we have Canadian allowable capital loss carry-forwards of $11,519 that are
available, indefinitely, to be deducted against future Canadian taxable capital gains. In addition, we have
investment tax credits of $19,669 and $7,957 available to offset future Canadian federal and provincial
income taxes payable, respectively. The investment tax credits expire between 2021 and 2038. At
December 31, 2018, our U.S. subsidiary has $6,445 of California research & development tax credits which
may be carried forward indefinitely.
At December 31, 2018, net operating loss carry-forwards for our foreign subsidiaries were $68,902 for U.S.
income tax purposes that expire between 2021 and 2037, $7 for Brazil income tax purposes, $11,109 for
Sweden income tax purposes, $21 for Norway income tax purposes, $60,203 for Luxembourg income tax
purposes, and $209,202 for French income tax purposes. The Brazil, Sweden, Norway, Luxembourg and
French net operating loss carry-forward may be carried forward indefinitely. Our foreign subsidiaries may
be limited in their ability to use foreign net operating losses in any single year depending on their ability to
generate significant taxable income. In addition, the utilization of the U.S. net operating losses is also
subject to ownership change limitations provided by U.S. federal and specific state income tax legislation.
The amount of Brazil net operating losses deducted each year is limited to 30% of each year's taxable
income. The amount of French net operating losses deducted each year is limited to €1.0 million plus 50%
89
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
of French taxable income in excess of €1.0 million. Our French net operating losses carry-forward is subject
to the “continuity of business” requirement. Our French subsidiaries also have research tax credit carried
forward of $3,458 and employment tax credit carried forward of $287 as at December 31, 2018. The
French tax credits may be used to offset against corporate income tax and if any tax credits are not fully
utilized within a three year period following the year the tax credits are earned, it may be refunded by the
French tax authorities. Tax loss and tax credits carry-forwards are denominated in the currency of the
countries in which the respective subsidiaries are located and operate. Fluctuations in currency exchange
rates could reduce the U.S. dollar equivalent value of these tax loss and research tax credit carry forwards
in future years.
In assessing the realizability of our deferred tax assets, management considers whether it is more likely
than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income during periods in which
temporary differences become deductible and the loss carry-forwards or tax credits can be utilized.
Management considers projected future taxable income and tax planning strategies in making our
assessment.
No provision for taxes have been provided on undistributed foreign earnings, as it is the company’s
intention to indefinitely reinvest undistributed earnings of its foreign subsidiaries. It is not practical to
estimate the income tax liability that might be incurred if there is a change in management’s intention in
the event that a remittance of such earnings occur in the future.
Accounting for uncertainty in income taxes
At December 31, 2018, we had gross unrecognized tax benefits of $4,482 (2017 — $4,418). Of this total,
$652 (2017 — $747) represents the amount of unrecognized tax benefits that, if recognized, would
favorably impact our effective tax rate.
Below is a reconciliation of the total amounts of unrecognized tax benefits for the years ended
December 31:
Unrecognized tax benefits, beginning of year
Increases — tax positions taken in prior periods
Increases — tax positions taken in current period
Settlements and lapses of statute of limitations
Unrecognized tax benefits, end of year
2018
2017
As adjusted
4,418
$
4,329
3
—
61
36
61
(8)
4,482
$
4,418
$
$
We recognize interest expense and penalties related to unrecognized tax benefits within the provision for
income tax expense on the consolidated statement of operations. At December 31, 2018, we had
increased $29 (2017 — reversed $642) for accruals of interest and penalties.
In the normal course of business, we are subject to audit by the Canadian federal and provincial taxing
authorities, by the U.S. federal and various state taxing authorities and by the taxing authorities in various
foreign jurisdictions. Tax years ranging from 2005 to 2018 remain subject to examination in Canada, the
United States, the United Kingdom, France, Germany, Australia, China, Hong Kong, Brazil, South Africa,
Japan, Korea, Taiwan, Italy, Sweden, Norway, India, Spain, and Luxembourg.
The Company regularly engages in discussions and negotiations with tax authorities regarding tax matters
in various jurisdictions. The Company believes it is reasonably possible that certain tax matters may be
90
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
concluded in the next 12 months. The Company estimates that the unrecognized tax benefits at December
31, 2018 could increase by approximately $97 in the next 12 months.
Deferred taxes on foreign earnings
No provision for taxes have been provided on undistributed foreign earnings, as it is the company’s
intention to indefinitely reinvest undistributed earnings of its foreign subsidiaries. It is not practical to
estimate the income tax liability that might be incurred if there is a change in management’s intention in
the event that a remittance of such earnings occur in the future.
11.
STOCK-BASED COMPENSATION PLANS
(a)
Stock-based compensation expense:
Cost of goods sold
Sales and marketing
Research and development
Administration
Stock option plan
Restricted stock plan
(b)
Stock option plan
2018
491
2,784
2,274
7,511
13,060
3,350
9,710
13,060
$
$
$
2017
461 $
2,503
2,038
5,339
10,341 $
3,297
7,044
10,341 $
$
$
$
2016
420
1,714
1,375
4,120
7,629
2,170
5,459
7,629
Under the terms of our Stock Option Plan (the “Plan”), our Board of Directors may grant options to
employees, officers and directors. The maximum number of shares issuable pursuant to the Plan is the
lesser of 8.1% of the number of issued and outstanding common shares from time to time or 7,000,000
common shares. In addition, the maximum number of shares issuable pursuant to the Plan, together with
any shares issuable pursuant to other security-based compensation arrangements, shall not exceed 8.1%
of the number of issued and outstanding common shares from time to time. Based on the number of
shares outstanding as at December 31, 2018, stock options exercisable into 1,138,266 common shares are
available for future allocation under the Plan.
The Plan provides that the exercise price of an option will be determined on the date of grant and will not
be less than the closing market price of our stock at that date. Options generally vest over four years, with
the first 25% vesting at the first anniversary date of the grant and the balance vesting in equal amounts at
the end of each month thereafter. We determine the expiry date of each option at the time it is granted,
which cannot be more than five years after the date of the grant.
91
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
The fair value of share options was estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions:
Risk-free interest rate
Annual dividends per share
Expected stock price volatility
Expected option life (in years)
Average fair value of options granted (in dollars)
2018
2.22%
Nil
55%
4.0
$7.02
2017
1.37%
Nil
55%
4.0
$11.09
2016
0.73%
Nil
51%
4.0
$4.40
There is no dividend yield because we do not pay, and do not plan to pay, cash dividends on our common
shares. The expected stock price volatility is based on the historical volatility of our average monthly stock
closing prices over a period equal to the expected life of each option grant. The risk-free interest rate is
based on yields from risk-free instruments with a term equal to the expected term of the options being
valued. The expected life of options represents the period of time that the options are expected to be
outstanding based on historical data of option holder exercise and termination behavior. Forfeitures are
accounted for in compensation expense as they occur.
The following table presents stock option activity for the years ended December 31:
Outstanding, December 31, 2015
Granted
Exercised
Forfeited
Outstanding, December 31, 2016
Granted
Exercised
Forfeited
Outstanding, December 31, 2017
Granted
Exercised
Forfeited
Outstanding, December 31, 2018
Number of
Options
965,911
651,357
(231,704)
(69,941)
1,315,623
685,936
(500,184)
(37,894)
1,463,481
343,173
(221,262)
(207,044)
1,378,348
Weighted Average
Exercise Price
Weighted
Average
Remaining
Contractual Life
Aggregate
Intrinsic Value
Cdn.$
U.S.$
In Years
U.S.$
21.47
14.72
11.76
19.25
19.65
32.16
14.91
24.58
26.38
21.47
16.10
34.24
26.79
15.44
10.95
8.75
14.32
14.61
25.58
11.86
19.55
20.98
15.75
11.81
25.10
19.64
2.5
2.9
3.2
2.8
3,541
1,608
4,687
6,997
4,788
1,222
822
The intrinsic value of outstanding and exercisable stock options is calculated as the quoted market price of
the stock at the balance sheet date, or date of exercise, less the exercise price of the option. For the year
ended December 31, 2018, the aggregate intrinsic value of stock options exercised was $1,222 (2017 —
$6,997).
92
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
The following table summarizes the stock options outstanding and exercisable at December 31, 2018:
Range of
Exercise Prices
$10.26 - $14.53 U.S.
$13.99 - $19.81 Cdn
$14.54 - $16.4 U.S.
$19.82 - $22.37 Cdn
$16.41 - $24.61 U.S.
$22.38 - $33.56 Cdn
$24.62 - $25.15 U.S.
$33.57 - $34.30 Cdn
$25.16 - $32.29 U.S.
$34.31 - $44.03 Cdn
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Option Life
(years)
Weighted
Average
Exercise Price
Cdn.$
U.S.$
Number
of Options
Exercisable
Weighted
Average
Exercise Price
Cdn.$
U.S.$
2.1
3.7
2.9
3.1
1.4
2.8
14.28
10.47
153,085
14.28
10.47
21.30
15.62
36,079
21.01
15.41
31.18
22.87
192,812
30.81
22.59
34.23
25.10
94,370
34.23
25.10
40.98
26.79
30.05
19.64
135,787
612,133
41.45
28.99
30.40
21.26
Number
of
Options
275,467
355,436
390,558
204,995
151,892
1,378,348
The options outstanding at December 31, 2018 expire between March 5, 2019 and November 13, 2023.
As at December 31, 2018, the unrecognized stock-based compensation cost related to the non-vested
stock options was $5,451 (2017 — $7,879; 2016 — $3,754), which is expected to be recognized over a
weighted average period of 2.3 years (2017 — 2.8 years; 2016 — 2.5 years).
(c)
Restricted share plans
We have two market based restricted share unit plans: one for U.S. employees and one for all non-U.S.
employees, and a treasury based restricted share unit plan (collectively, the “RSPs”). The RSPs support our
growth and profitability objectives by providing long-term incentives to certain executives and other key
employees and also encourage our objective of employee share ownership through the granting of
restricted share units (“RSUs”). There is no exercise price or monetary payment required from the
employees upon the grant of an RSU or upon the subsequent delivery of our common shares (or, in certain
jurisdictions, cash in lieu at the option of the Company) to settle vested RSUs. The form and timing of
settlement is subject to local laws.
The maximum number of shares issuable pursuant to outstanding awards under the treasury based
restricted share unit plan is 3.7% of the number of issued and outstanding shares and the maximum
number of shares issuable pursuant to all of our security-based compensation arrangements is 8.1% of the
number of issued and outstanding shares. Based on the number of shares outstanding as at December 31,
2018, 404,846 share units are available for future allocation under the Plan. With respect to the two
market based RSPs, independent trustees purchase Sierra Wireless common shares over the facilities of
the TSX and Nasdaq, which are used to settle vested RSUs. The existing trust funds are variable interest
entities and are included in these consolidated financial statements as treasury shares held for RSU
distribution.
In January 2018, the Board of Directors approved a proposal to include a performance-based component
to certain grants of units under our RSPs ("PSUs"). The current outstanding PSUs have a performance-
based three year cliff-vesting criteria measured against a benchmark index. The fair value of the PSUs at
date of grant are determined using the Monte Carlo simulation model.
93
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
On February 13, 2019, the Board of Directors approved the issuance of PSUs that are measured against an
internal performance benchmark based on achieving service revenue targets and cost savings initiatives, as
well as PSUs measured against a benchmark index. The fair value of these PSUs at date of grant are
determined using the Monte Carlo simulation model.
Generally, RSUs vest over three years, in equal one-third amounts on each anniversary date of the grant
and some vest at one year. RSU grants to employees who are resident in France for French tax purposes
will not vest before the second anniversary from the date of grant, and any shares issued are subject to an
additional two year tax hold period.
The intrinsic value of outstanding RSUs is calculated as the quoted market price of the stock at the balance
sheet date, or date of vesting.
The following table summarizes the RSU activity for the years ended December 31:
Outstanding, December 31, 2015
Granted
Vested / settled
Forfeited
Outstanding, December 31, 2016
Granted
Vested / settled
Forfeited
Outstanding, December 31, 2017
Granted
Vested / settled
Forfeited
Outstanding, December 31, 2018
Outstanding – vested and not settled
Outstanding – unvested
Outstanding, December 31, 2018
Weighted
Average
Remaining
Contractual Life
In years
Aggregate
Intrinsic
Value
U.S.$
1.8
12,219
4,477
2.1
11,689
6,098
2.1
17,919
8,876
2.6
13,289
Number of
RSUs
Weighted Average
Grant Date Fair Value
U.S.$
Cdn.$
25.08
15.08
19.57
21.85
22.59
32.02
22.86
21.10
26.80
23.78
25.69
25.73
26.23
18.04
11.21
14.56
16.26
16.81
25.47
18.18
16.77
21.31
17.44
18.84
18.86
19.24
778,233
354,517
(358,497)
(28,279)
745,974
454,685
(284,888)
(39,030)
876,741
754,452
(520,660)
(64,258)
1,046,275
117,557
928,718
1,046,275
As at December 31, 2018, the total remaining unrecognized compensation cost associated with the RSUs
totaled $11,530 (2017 — $9,346; 2016 — $5,408), which is expected to be recognized over a weighted
average period of 1.9 years (2017 — 1.6 years; 2016 — 1.6 years).
94
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
12.
EARNINGS (LOSS) PER SHARE
The following table provides the reconciliation between basic and diluted earnings (loss) per share:
2018
As adjusted
2017
2016
Net earnings (loss)
$
(24,610) $
4,518 $
Weighted average shares used in computation of:
Basic
Assumed conversion
Diluted
Net earnings (loss) per share (in dollars):
Basic
Diluted
36,019
—
36,019
32,356
537
32,893
$
(0.68) $
(0.68)
0.14 $
0.14
As adjusted
15,646
32,032
303
32,335
0.49
0.48
As the Company incurred a loss for the year ended December 31, 2018, all equity awards for that year
were anti-dilutive and were excluded from the diluted weighted average shares.
13.
ACCOUNTS RECEIVABLE
The components of accounts receivable at December 31 were as follows:
Trade receivables
Less: allowance for doubtful accounts
Sales taxes receivable
R&D tax credits
Financing receivables
Contract assets (note 2(c))
Other receivables
2018
As adjusted
$
154,593
$
142,514
2017
(2,968)
151,625
3,016
3,783
1,876
1,953
9,472
$
171,725
$
(1,827)
140,687
3,120
4,408
1,442
852
22,545
173,054
The movement in the allowance for doubtful accounts during the years ended December 31 were as
follows:
Balance, beginning of year
Bad debt expense (recovery)
Write-offs and settlements
Foreign exchange
2018
2017
$
1,827
$
2,486 $
1,159
9
(27)
(535)
(194)
70
2016
2,088
383
15
—
$
2,968
$
1,827 $
2,486
95
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
14.
INVENTORIES
The components of inventories at December 31 were as follows:
Electronic components
Finished goods
15.
PREPAIDS AND OTHER
The components of prepaids and other at December 31 were as follows:
Inventory advances
Insurance and licenses
Deposits
Contract acquisition and fulfillment costs
Other
2018
28,849
21,930
50,779
$
$
$
$
2017
As adjusted
32,753
20,390
53,143
2018
$
3,851
$
2017
As adjusted
93
846
1,921
880
4,205
$
11,703
$
608
2,161
1,053
4,306
8,221
In 2018, $959 of deferred contract acquisition and fulfillment costs were expensed to Sales and marketing
and Cost of sales (2017 — $399).
96
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
16.
PROPERTY AND EQUIPMENT
The components of property and equipment at December 31 were as follows:
Furniture and fixtures
Research and development equipment
Production equipment and tooling
Computer equipment
Software
Leasehold improvements
Leased vehicles
Office equipment
Monitoring equipment
Network equipment
Furniture and fixtures
Research and development equipment
Production equipment and tooling
Computer equipment
Software
Leasehold improvements
Leased vehicles
Office equipment
Monitoring equipment
Network equipment
2018
Cost
Accumulated
amortization
Net book
value
$
3,089
$
1,634
$
38,761
43,860
9,099
8,180
6,754
983
1,533
1,821
6,262
28,361
26,427
7,464
6,287
4,489
688
1,162
905
3,083
$
120,342
$
80,500
$
2017
Cost
Accumulated
amortization
$
2,495
$
1,477
$
35,589
39,426
9,611
6,859
6,399
1,122
1,460
3,881
5,503
25,831
23,229
7,279
4,346
3,950
752
971
106
1,427
$
112,345
$
69,368
$
1,455
10,400
17,433
1,635
1,893
2,265
295
371
916
3,179
39,842
Net book
value
1,018
9,758
16,197
2,332
2,513
2,449
370
489
3,775
4,076
42,977
Amortization expense relating to property and equipment was $18,204, $14,032, and $12,492 for the
years ended December 31, 2018, 2017, and 2016, respectively.
97
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
17.
INTANGIBLE ASSETS
The components of intangible assets at December 31 were as follows:
Patents and trademarks
Licenses
Intellectual property
Customer relationships
Brand
In-process research and development
Patents and trademarks
Licenses
Intellectual property
Customer relationships
Brand
In-process research and development
2018
Cost
Accumulated
amortization
Net book
value
$
15,163
$
13,328
$
50,740
28,277
118,741
14,854
10,521
49,112
18,671
61,993
2,536
7,766
$
238,296
$
153,406
$
2017
Cost
Accumulated
amortization
$
15,404 $
12,077 $
51,859
28,411
124,706
15,153
11,012
50,434
13,541
53,627
1,318
6,949
1,835
1,628
9,606
56,748
12,318
2,755
84,890
Net book
value
3,327
1,425
14,870
71,079
13,835
4,063
$
246,545 $
137,946 $
108,599
Estimated annual amortization expense for the next 5 years ended December 31 are as follows:
2019
2020
2021
2022
2023
17,263
13,605
9,750
8,699
8,452
In the first quarter of 2017, we recorded an impairment charge of $3,668 related to an intangible asset
recorded on the acquisition of Maingate as a result of a decision to terminate a service offering that was
superseded by a more technologically advanced offering in our integrated IoT Services business.
Amortization expense relating to intangible assets was $20,946, $16,471, and $13,402 for the years ended
December 31, 2018, 2017, and 2016, respectively.
The weighted-average remaining useful lives of intangible assets was 6.7 years as at December 31, 2018.
At December 31, 2018, all intangible assets were subject to amortization. At December 31, 2017, a net
carrying amount of $313 included in intangible assets was not subject to amortization.
98
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
18.
GOODWILL
The changes in the carrying amount of goodwill for the years ended December 31 were as follows:
Balance at beginning of year
Goodwill acquired (note 5(b) and 5(c))
Disposal of assets of a business unit
Foreign currency translation adjustments
OEM Solutions
Enterprise Solutions
IoT Services
2018
218,516
$
1,016
(2,073)
(6,385)
211,074
107,268
26,988
76,818
$
$
211,074
$
2017
154,114
51,848
—
12,554
218,516
111,348
27,405
79,763
218,516
$
$
$
$
We assessed the recoverability of goodwill as at October 1, 2018 for each of the identified reporting units
and determined that the fair value of each of the three reporting units exceeded its carrying value.
Therefore, the second step of the impairment test that measures the amount of an impairment loss by
comparing the implied fair market value with the carrying amount of goodwill for each reporting unit was
not required.
There was no impairment of goodwill during the years ended December 31, 2018, 2017 and 2016.
19.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The components of accounts payable and accrued liabilities at December 31 were as follows:
2018
As adjusted
2017
$
94,067
$
843
14,348
18,115
2,193
6,702
4,957
7,914
7,055
2,486
25,540
$
184,220
$
94,775
1,440
14,548
17,572
2,597
4,153
4,070
8,159
3,984
540
23,529
175,367
Trade payables and accruals
Inventory commitment reserve
Accrued royalties
Accrued payroll and related liabilities
Deferred rent
Professional services
Taxes payable (including sales taxes)
Product warranties (note 26(b)(iii))
Sales credits
Restructuring liability
Other
99
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
20.
LONG-TERM OBLIGATIONS
The components of long-term obligations at December 31 were as follows:
Accrued royalties
Deferred revenue
Other
$
$
2018
28,181
$
6,317
8,752
43,250
$
2017
As adjusted
24,318
3,346
8,973
36,637
21.
ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss at December 31, net of taxes, were as follows:
Balance, beginning of period
Foreign currency translation adjustments
Gain (loss) on long term intercompany balances
Balance, end of period
22.
SHARE CAPITAL
2018
2017
(2,476) $
(14,426)
(4,226)
(2,444)
(9,146) $
5,416
6,534
(2,476)
$
$
On August 1, 2018, we received approval from the TSX of our Notice of Intention to make a Normal Course
Issuer Bid ("NCIB"). Pursuant to the NCIB, we may purchase for cancellation up to 3,580,668 of our
common shares, or approximately 9.9% of the common shares outstanding as of the date of the
announcement (representing 10% of the public float). The NCIB commenced on August 8, 2018 and will
terminate on the earlier of: i) August 7, 2019, (ii) the date we complete our purchases pursuant to the
notice of intention filed with the TSX, or (iii) the date of notice by us of termination of the NCIB.
In 2018, we purchased and canceled 161,500 common shares (2017 — 170,217 common shares) at an
average price of $19.32 per share (2017 — $16.35). The excess purchase price over and above the average
carrying value in the amount of $1,187 (2017 — $954) was charged to retained earnings.
23.
SUPPLEMENTAL CASH FLOW INFORMATION
The following table summarizes supplemental cash flow information and non-cash activities:
Net income taxes paid
Interest paid
Non-cash property and equipment additions
Non-cash additions funded by obligation under capital leases
Non-cash additions related to asset retirement obligations
$
$
2018
1,105
118
231
246
—
$
2017
6,100
105
—
143
75
2016
4,181
127
200
544
520
As at December 31, 2018, restricted cash of $221 is held in escrow related to certain vendor obligations.
100
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within
the statement of financial position that sum to the total of the same such amounts shown in the statement
of cash flows:
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents, and restricted cash shown in the
statement of cash flows
2018
2017
2016
89,076
$
65,003 $
102,772
221
221
—
89,297
$
65,224 $
102,772
$
$
24.
FAIR VALUE MEASUREMENT
(a) Fair value presentation
An established fair value hierarchy requires the Company to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. A financial instrument’s
categorization within the fair value hierarchy is based upon the lowest level of input that is available and
significant to the fair value measurement. There are three levels of inputs that may be used to measure
fair value:
Level 1 -
Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices in active markets for identical assets and
liabilities, such as quoted prices for identical or similar assets or liabilities in markets that are
not active, or other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities.
Level 3 -
Inputs that are generally unobservable and are supported by little or no market activity and
that are significant to the fair value determination of the assets or liabilities.
The carrying value of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and
accrued liabilities approximate their fair value due to the immediate or short-term maturity of these
financial instruments. Based on borrowing rates currently available to us for loans with similar terms, the
carrying values of our obligations under capital leases, long-term obligations and other long-term liabilities
approximate their fair values.
Derivatives, such as foreign currency forward contracts, may be used to hedge the foreign exchange risk on
cash flows from commitments denominated in a foreign currency. Derivatives are recorded in Accounts
receivable or Accounts payable and accrued liabilities and measured at fair value at each balance sheet
date. Any resulting gains and losses from changes in the fair value are recorded in Foreign exchange gain
(loss).
Fair value of the foreign currency forward contracts are based on observable market inputs such as
forward rates in active markets, which represents a Level 2 measurement within the fair value hierarchy.
As at December 31, 2018, we were committed to foreign currency forward contracts totaling $50.1 million
Canadian dollars with an average forward rate of 1.3176, maturing between January to December 2019.
We recorded unrealized loss of $1,201 in Foreign exchange gain (loss) for those outstanding contracts in
the year ended December 31, 2018 (2017 — Foreign exchange gain of $307).
101
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
(b) Credit Facilities
On July 31, 2018, we entered into a new committed $30 million senior secured revolving term credit
facility ("Revolving Facility") with the Canadian Imperial Bank of Commerce as a sole lender and as
Administrative Agent. The new Revolving Facility replaced the Company’s previous $10 million
uncommitted revolving credit facility. 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 December 31, 2018, there were no borrowings under the Revolving
Facility.
(c) Letters of credit
During the second quarter of 2018, we reduced our revolving standby letter of credit facility with Toronto
Dominion Bank from $10 million to $1.5 million in connection with the Revolving Facility. The credit facility
is used for the issuance of letters of credit and guarantees and is guaranteed by Export Development
Canada. As at December 31, 2018, there were two letters of credit issued against the revolving standby
letter of credit facility for a total value of $0.1 million.
25.
FINANCIAL INSTRUMENTS
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.
102
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
To manage our foreign currency risks, we may enter into foreign currency forward and options contracts
should we consider it to be advisable to reduce our exposure to future foreign exchange fluctuations.
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.
26.
COMMITMENTS AND CONTINGENCIES
(a) Operating leases
We have entered into operating leases for property and equipment. The minimum future payments under
various operating leases for our continuing operations in each of the years ended December 31 is as
follows:
2019
2020
2021
2022
2023
Subsequent years
7,557
6,617
4,986
1,619
674
4
$
21,457
(b) Contingent liability on sale of products
(i)
(ii)
Under license agreements, we are committed to make royalty payments based on the sales of
products using certain technologies. We recognize royalty obligations as determinable in
accordance with agreement terms. Where agreements are not in place, we have recognized our
current best estimate of the obligation under accrued liabilities and long-term obligations. When
agreements are finalized or the obligation becomes statute barred, the estimate will be revised
accordingly.
We are a party to a variety of agreements in the ordinary course of business under which we may
be obligated to indemnify a third party with respect to certain matters. Typically, these obligations
arise as a result of contracts for sale of our products to customers where we provide
indemnification against losses arising from matters such as potential intellectual property
infringements and product liabilities. The impact on our future financial results is not subject to
reasonable estimation because considerable uncertainty exists as to whether claims will be made
and the final outcome of potential claims. To date, we have not incurred material costs related to
these types of indemnifications.
103
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
(iii) We accrue product warranty costs, when we sell the related products, to provide for the repair or
replacement of defective products. Our accrual is based on an assessment of historical experience
and on management’s estimates. Changes in the liability for product warranties were as follows:
Balance, beginning of year
Effect of adoption of ASC 606
Provisions
Expenditures
Balance, end of year
(c) Other commitments
2018
8,159
$
—
8,159
3,351
(3,596)
7,914
$
2017
As adjusted
7,637
(76)
7,561
4,431
(3,833)
8,159
$
$
We have entered into purchase commitments totaling approximately $147,029 net of related
electronic components inventory of $5,008 (December 31, 2017 — $133,407, net of electronic
components inventory of $5,206), with certain contract manufacturers and suppliers under which we
have committed to buy a minimum amount of designated products between January 2019 and
June 2019. In certain of these agreements, we may be required to acquire and pay for such products
up to the prescribed minimum or forecasted purchases.
We have also entered into purchase commitments totaling approximately $8,952 (December 31, 2017
— $33,122) with certain mobile network operators, under which we have committed to buy a
minimum amount of wireless data and wireless data services between January 2019 and October
2022.
(d) Legal proceedings
We are from time to time involved in litigation, certain other claims and arbitration matters arising in
the ordinary course of our business. We accrue for a liability when it is both probable that a liability
has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is
required in both the determination of probability and the determination as to whether a loss is
reasonably estimable. These accruals are reviewed at least quarterly and adjusted to reflect the
impacts of negotiations, settlements, rulings, advice of legal counsel and technical experts and other
information and events pertaining to a particular matter. To the extent there is a reasonable possibility
(within the meaning of ASC 450, Contingencies) that the losses could exceed the amounts already
accrued for those cases for which an estimate can be made, management believes that the amount of
any such additional loss would not be material to our results of operations or financial condition.
In some instances, we are unable to reasonably estimate any potential loss or range of loss. The
nature and progression of litigation can make it difficult to predict the impact a particular lawsuit will
have on the Company. For instance, in the case of patent litigation, there are many reasons why we
cannot make these assessments, including, among others, one or more of the following: in the early
stage of a proceeding, the claimant is not required to specifically identify the manner in which the
patent has allegedly been infringed; damages sought that are unspecified, unsupportable, unexplained
or uncertain; discovery not having been started or being incomplete; the complexity of the facts that
are in dispute (e.g., the analysis of the patent and a comparison to the activities of the Company is a
labor-intensive and highly technical process); the difficulty of assessing novel claims; the parties not
104
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
having engaged in any meaningful settlement discussions; the possibility that other parties may share
in any ultimate liability; and the often slow pace of patent litigation.
We are required to apply judgment with respect to any potential loss or range of loss in connection
with litigation. While we believe we have meritorious defenses to the claims asserted against us in our
currently outstanding litigation, and intend to defend ourselves vigorously in all cases, in light of the
inherent uncertainties in litigation there can be no assurance that the ultimate resolution of these
matters will not significantly exceed the reserves currently accrued by us for those cases for which an
estimate can be made. Losses in connection with any litigation for which we are not presently able to
reasonably estimate any potential loss or range of loss could be material to our results of operations
and financial condition.
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. A petition for Inter Partes Review of the patent-in-suit with the
United States Patent and Trial Appeal Board has been instituted and a decision is expected in June
2019. In March 2018, the Court granted our motion to dismiss the plaintiff's claims in the lawsuit. The
plaintiff has indicated its intention to appeal this decision once a final decision is issued in respect of
our counterclaims alleging that the plaintiff has breached its commitments to standard setting
organizations. The lawsuit is in the discovery phase with respect to our counterclaims against the
plaintiff. The lawsuit is coordinated with several other cases involving this plaintiff for the purposes of
scheduling, with the trial date for the first of these coordinated cases currently scheduled for
September 2019.
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 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.
Trial for our co-defendant has been scheduled for December 2020, and trial in our case has been
scheduled for January 2021.
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.
105
Executive Officers
Kent P. Thexton
President and Chief Executive Officer
Jason L. Krause
Chief Operating Officer
David G. McLennan
Chief Financial Officer, Chief Transformation Officer, and Corporate
Secretary
Philippe Guillemette
Chief Technology Officer
Rene Link
Chief Marketing Officer & Senior Vice President, Corporate Strategy
A. Daniel Schieler
Senior Vice President and General Manager, Automotive
Marc Overton
Chief Solutions Officer
Marc Osgoodby
Vice President, Global Sales
Directors
Gregory D. Aasen (3)
Corporate Director
Robin A. Abrams (1), (2)
Chair of the Board
Paul G. Cataford (1), (3)
Corporate Director
Joy Chik (3)
Corporate Director
Russell N. Jones (1),(2)
Corporate Director
Thomas Sieber (1), (2)
Corporate Director
Kent P. Thexton
President and Chief Executive Officer
Sierra Wireless, Inc.
(1) Audit Committee
(2) Governance and Nominating Committee
(3) Human Resources Committee
Head Office
Sierra Wireless, Inc.
13811 Wireless Way
Richmond
British Columbia
Canada V6V 3A4
Telephone :: 604 231 1100
Facsimile :: 604 231 1109
Website :: www.sierrawireless.com
Annual General Meeting
The Annual General Meeting for the
shareholders of Sierra Wireless, Inc. will be
held on May 23, 2019 at 3:00 p.m. (Pacific
Time) at the Company's head office in
Richmond, British Columbia.