Annual Report 2019
Sierra Wireless is the preferred IoT solutions provider for leading
brands, combining devices, software and services to accelerate
your digital transformation.
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,
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 (loss)
Net earnings (loss) per share (in dollars)
Basic
Diluted
Free cash flow
Revenue by segment
IoT Solutions
Embedded Broadband
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
2019
2018
2017
As adjusted(1)
$
$
$
$
$
$
$
$
$
713,513
30.8%
278,011
(58,021)
(70,538)
$
793,602
33.3%
282,846
(18,275)
(24,610)
690,727
33.9%
234,139
100
4,518
(1.95) $
(1.95) $
(0.68) $
(0.68) $
0.14
0.14
$
30.9%
217,739
2,414
21,077
(305)
(0.01) $
(0.01) $
(13,411)
33.4%
229,719
35,306
55,881
32,427
0.90
0.90
26,131
377,808
335,705
713,513
$
$
373,937
419,665
793,602
$
$
$
$
$
42%
21%
37%
100%
40%
21%
39%
100%
34.0%
195,087
39,636
54,653
34,519
1.07
1.05
(16,734)
303,057
387,670
690,727
33%
24%
43%
100%
2019
2018
2017
As adjusted(1)
$
$
$
75,454
43,774
381,325
36,233,361
$
$
$
89,076
43,250
444,130
36,067,415
$
$
$
65,003
36,637
467,520
35,861,510
(1) 2017 has 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
In 2019, we made strong progress in transforming Sierra Wireless into the global leader in IoT Solutions. We
delivered our plan of achieving $99.1 million in recurring and other services revenue in 2019 and we are projecting
this to grow by approximately 25% in 2020 (which includes our acquisition of the M2M Group in Australia). Our
corporate goal is to double our recurring and other services revenue run-rate to $200 million by mid-2022 and
then double that again to $400 million by mid-2024.
During 2019, we secured important design wins for future annual recurring revenue of more than $90 million. The
energy that we have been putting into the flywheel of IoT solutions design wins is starting to deliver and we expect
this will continue to accelerate. Another leading indicator in our IoT Solutions transformation is that we increased
our ‘net new’ IoT connected devices in 2019 to more than 400,000 devices, growing our base by 13% to end the
year with more than 3.6 million in global connections. The key contributor to that growth was the strong uptake in
Sierra SmartSIMs which accelerated during the year and reflected our higher-value wins with devices combined
with subscription-based recurring revenue.
We also strengthened our portfolio in 2019 to support strong IoT Solutions wins in the market:
• we successfully launched our Octave all-in-one, edge-to-cloud IoT platform with advanced data
orchestration and had our first dozen design wins as customers benefit from reduced development costs
and faster time to market;
• we rolled-out our Ready-To-Connect technology with out-of-the-box connectivity and cloud platform
across all our new HL and WP series embedded modules; and
• we started to ramp-up sales of our LPWA ("Low Power Wide Area") modules bundled with our
subscription-based connectivity services and have started advanced work on 5G embedded modules.
With record recurring revenue wins in 2019 and a strong opportunities pipeline in place, we are focused on
delivering higher margin subscription-based services revenue in 2020. To help accomplish this, we are (i) adding
new talent to our IoT Solutions team; (ii) driving better regional alignment in our Go-To-Market teams; and (iii)
investing in better tools and processes to boost sales optimization and efficiency.
Additionally, we continue to strengthen our preferred partnership with Microsoft as our Octave solution is now
included in the Microsoft Azure IoT marketplace and we have secured several joint design wins. Octave’s edge-to-
cloud data orchestration integrates perfectly with Azure’s IoT cloud analytical capabilities.
In 2020, we expect revenue to be between $690 to $710 million (excluding any potential impact from COVID-19).
On a reporting segment basis, we expect the IoT Solutions segment revenue will grow with improving gross
margins and the Embedded Broadband segment revenue will decrease year-over-year due to an expected decline
in PC-OEM, resulting in expected total revenue being slightly down in 2020 compared to the prior year.
In conclusion, while we are only one year into our company’s transformation program, we have made strong
progress. And we remain focused on creating long-term shareholder value by growing our higher-value IoT
Solutions business and increasing our subscription-based recurring revenue.
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.
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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 2019 compared to Fiscal Year 2018
Fiscal Year 2018 compared to Fiscal Year 2017
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
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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, 2019, 2018 and 2017 and up to and including March 10,
2020. This MD&A should be read together with our audited consolidated financial statements and the
accompanying notes for the year ended December 31, 2019 (“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.
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Cautionary Note Regarding Forward-looking Statements
This MD&A contain 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 2019 corporate update; financial guidance for our fiscal year
2020; expectations regarding the Company's cost savings initiatives; expectations regarding expected earnings of
the M2M Group and ability to expand our market presence in Australia and Southern Asia; the potential impact of
the coronavirus on customer demand, our supply chain, manufacturing capacity and our ability to meet customer
demand; our business outlook for the short and long term; statements regarding our strategy, plans, goals,
objectives, expectations and future operating performance; the Company's liquidity and capital resources; the
Company's financial and operating objectives and strategies to achieve them; general economic conditions;
estimates of our expenses, future revenues, non-GAAP earnings per share and capital requirements; our
expectations regarding the legal proceedings we are involved in; statements with respect to the Company's
estimated working capital; expectations with respect to the adoption of Internet of Things ("IoT") solutions;
expectations regarding trends in the IoT market and wireless module market; expectations regarding product and
price competition from other wireless device manufacturers and solution providers; our ability to implement
effective control procedures; and expectations regarding the launch of fifth generation cellular embedded modules.
Forward-looking statements are provided to help you understand our views of our short and long term plans,
expectations and prospects. We caution you that forward-looking statements may not be appropriate for other
purposes.
Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans,
projections, objectives, assumptions or future events or performance (often, but not always, identified by words or
phrases such as "outlook", “expects”, “is expected”, “anticipates”, “believes”, “plans”, “projects”, “estimates”,
“assumes”, “intends”, “strategy”, “goals”, “objectives”, “potential”, “possible”, or variations thereof, or stating that
certain actions, events, conditions or results “may”, “could”, “would”, “should”, “might” or “will” be taken, occur or
be achieved, or the negative of any of these terms and similar expressions) are not statements of historical fact and
may be forward-looking statements. Forward-looking statements are not promises or guarantees of future
performance. They represent our current views and may change significantly. Forward-looking statements are
based on a number of material assumptions, including, but not limited to, those listed below, which could prove to
be significantly incorrect:
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expected component supply constraints and manufacturing capacity;
our ability to continue to sell our products and services in the expected quantities at the expected prices
and expected times;
our ability to effect and to realize the anticipated benefits of our business transformation initiatives, and
the timing thereof;
our ability to develop, manufacture and sell new products and services that meet the needs of our
customers and gain commercial acceptance;
expected macro-economic business conditions;
expected cost of sales;
our ability to win new business;
our ability to integrate acquired businesses and realize expected benefits;
our ability to renew or obtain credit facilities when required;
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;
expected tax and foreign exchange rates; and
our ability to recruit a new Chief Financial Officer.
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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:
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competition from new or established competitors or from those with greater resources;
natural catastrophes or public health epidemics could impact customer demand, result in production
disruption and impact our ability to meet customer demand or capacity to continue critical operations;
the loss of, or significant demand fluctuations from, any of our significant customers;
our financial results being subject to fluctuation;
our business transformation initiatives may result in disruptions to our business and may not achieve the
anticipated benefits;
our ability to respond to changing technology, industry standards and customer requirements;
failures of our products or services due to design flaws and errors, component quality issues,
manufacturing defects, network service interruptions, cyber-security vulnerabilities or other quality issues;
deterioration in macro-economic conditions could adversely affect our operating results and financial
conditions;
our ability to attract or retain key personnel and the impact of organizational change on our business;
cyber-attacks or other breaches of our information technology security;
risks related to the transmission, use and disclosure of user data and personal information;
disruption of, and demands on, our ongoing business and diversion of management's time and attention
in connection with acquisitions or divestitures;
risks that the acquisition of M2M Group (as defined below) or our investments and partnerships may fail
to realize the expected benefits;
risks related to infringement on intellectual property rights of others;
our ability to obtain necessary rights to use software or components supplied by third parties;
our ability to enforce our intellectual property rights;
our reliance on single source suppliers for certain components used in our products;
our dependence on a limited number of third party manufacturers;
unanticipated costs associated with litigation or settlements;
our dependence on mobile network operators to promote and offer acceptable wireless data services;
risks related to contractual disputes with counterparties;
risks related to governmental regulation;
risks inherent in foreign jurisdictions; 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.
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OVERVIEW
Business Overview
Sierra Wireless is an Internet of Things ("IoT") pioneer that empowers businesses and industries to transform and
thrive in the connected economy.
We provide integrated Device-to-Cloud IoT solutions that are comprised of our recurring connectivity services, our
IoT cloud platform, and our embedded cellular modules and gateways. Enterprises, industrial companies and
Original Equipment Manufacturers ("OEMs") worldwide rely on our expertise to deliver fully-integrated IoT
solutions to reduce complexity, gather intelligent edge data and enable connected IoT products and services.
To accelerate our transformation to a fully-integrated Device-to-Cloud IoT solutions company, we launched certain
strategic and organizational structure changes in late 2018. Since then, we have designed and commenced
implementation of a variety of cost reduction initiatives broadly across the Company, including moving certain
positions to lower cost geographies, outsourcing a variety of finance, human resources, IT and operations
functions, exiting numerous facilities, as well as the renegotiation of certain supplier contracts. Organizationally,
we have combined three development teams into a single research and development ("R&D") entity to improve
efficiency. Similarly, we have combined product management into one centralized team. We also re-organized our
Go-To-Market team with a strong focus on leveraging our IoT device leadership position to focus on Device-to-
Cloud IoT solutions and driving recurring revenue. In conjunction with this cost reduction and organizational
activity, we have also made investments in people, products, processes and systems designed to underpin and
accelerate our transformation to a IoT solutions company.
Based on the organizational changes we made in the first quarter of fiscal 2019, our segments have changed from
those reported at December 31, 2018, when we previously reported three segments. Our new organizational
structure clearly delineates our Device-to-Cloud IoT solutions activities and we now have two reportable segments
effective the first quarter of 2019: (i) the IoT Solutions segment and (ii) the Embedded Broadband segment. We
have adjusted our comparative information to align with this new segmentation.
IoT Solutions
Our IoT Solutions segment is focused on integrated end-to-end IoT solutions that include recurring connectivity
services, cloud management software, and cellular modules and gateways targeted primarily at enterprises and
OEMs in the IoT space. Our primary focus is on three key markets: (i) Industrial Edge for manufacturing asset
monitoring; (ii) Mobile Edge for mobile asset tracking; and (iii) Infrastructure Edge for commercial infrastructure
and building monitoring. We believe the IoT opportunities we are focusing on have a high potential to generate
recurring services to the customer along with our cloud platform, devices and management tools. This segment is
comprised of our former IoT Services and Enterprise Solutions segments, as well as a portion of our former OEM
Solutions segment.
In this segment, we provide Device-to-Cloud IoT solutions that include: (i) our global cellular connectivity services,
which are subscription-based and include our flexible Smart SIM and core network platforms; (ii) our cloud
platform services, which provide a secure and scalable cloud platform for deploying and managing IoT
subscriptions, over-the-air updates, devices and applications; and (iii) our managed broadband cellular services,
which include a combination of hardware, managed high speed connectivity and cloud services. We also provide
unified data orchestration to provide enhanced data management from the edge of the network to the cloud. This
service, which is called Octave, securely integrates edge device, network and cloud application programming
interfaces into a single platform.
Our embedded devices in this reporting segment are comprised of IoT embedded cellular wireless modules that
include Low Power Wide Area technologies ("LPWA"), second generation ("2G"), third generation ("3G"), and
fourth generation ("4G") Long-Term Evolution ("LTE") products. We are currently working on the development of
fifth generation ("5G") cellular embedded modules for anticipated launch in 2020. We also provide 3G and 4G
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cellular gateways and routers that are complemented by cloud-based services and on-premise software for secure
device and network management.
Our gateway solutions address a broad range of vertical market applications within the mobility, industrial and
enterprise market segments. Our AirLink gateways and routers have strong brand recognition with network
operators, distributors, value added resellers and end customers. Our products are known for their high reliability
and technical capability in mission-critical applications. These gateways and routers leverage our expertise in
wireless technologies and offer the latest capabilities in LTE networking, including FirstNet solutions as well as Wi-
Fi, Bluetooth and Global Navigation Satellite System ("GNSS") technologies. We also provide our customers with
AirLink Management Services through our IoT platform and have introduced new advanced reporting and analytics
to our portfolio.
Embedded Broadband
Our Embedded Broadband segment is comprised of our high-speed cellular embedded modules that are typically
used in non-industrial applications, namely Automobile, Mobile Computing and Enterprise Networking markets.
The products in this segment are typically high-speed 4G LTE and LTE-Advanced cellular modules that are ordered
in larger volumes. In this segment, we have limited opportunities to provide connectivity services or fully-
integrated IoT solutions to the OEM customer. We have a strong customer base in the Embedded Broadband
business that is expected to transition over time from 4G LTE to 5G cellular technology.
As a leading embedded module vendor, we make it simple for our customers to embed high-speed cellular
technologies and manage these devices through our IoT cloud platform. The design cycles in this business
segment can range from two to three years in the Automotive market to 12 to 18 months in the Mobile Computing
market. We are currently working on a number of potential 5G design opportunities with existing customers and
new customers. Our portfolio also includes cloud-based remote device and data management capability, as well
as support for our embedded application framework called Legato, which is an open source, Linux-based platform.
Additionally, we continue to seek opportunities to partner, acquire or invest in businesses, products and
technologies that will help us drive our growth strategy forward and expand our position in the IoT market.
Our Mission, Vision and Values
Our mission is to be the preferred IoT solutions provider for leading brands, combining devices, software and
services to accelerate digital transformation and our vision is to enable the connected world with intelligent
wireless solutions and enable businesses to reimagine their future in the connected world.
Our core values are:
•
Innovation: We develop intelligent IoT 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.
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
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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.
We are widely recognized as an innovation leader in the 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 and accordingly, 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 2019, we continued to deliver on our corporate strategy by:
• Continuing to deploy our first embedded cellular modules for the Low Power Wide Area ("LPWA') market;
• Deploying our Smart SIM technology to enable the delivery of highly differentiated connectivity services;
Launching our Octave all-in-one, edge-to-cloud data orchestration solution for connecting IoT industrial
•
assets;
Launching our Ready-To-Connect technology that equips our wireless cellular modules with out-of-the-box
connectivity;
•
• Securing new recurring revenue wins with Industrial and Enterprise customers primarily in Europe and
North America;
•
Increasing our total number of IoT connected devices, including our cloud management platform;
• Completing significant restructuring activities in the first year of a two-year restructuring program;
• Combining our R&D function into a centralized group and re-organizing our Go To Market group into a
single organization;
• Securing new ecosystem partners, including a preferred partnership with Microsoft Azure to collaborate
on IoT solutions; and
• Continuing to invest in leading edge embedded modules, gateways and routers, including cellular
embedded 5G technology.
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Annual Overview — Financial Highlights
Our 2019 revenue was $713.5 million compared to $793.6 million in 2018, a decrease of 10.1%. The decrease in
revenue was driven by lower revenues from our Embedded Broadband segment, which experienced weaker
demand from mobile computing and networking customers as we complete certain programs with these
customers, partially offset by higher automotive revenue. IoT Solutions segment revenue improved as a result of
stronger sales of Enterprise gateway products, as well as growth in recurring and other services revenue, partially
offset by lower revenue from Integrated IoT solutions modules.
Product revenue was $614.4 million in 2019 and $699.2 million in 2018, representing a year-over-year decrease of
12.1%. Recurring and other services revenue was $99.1 million in 2019 and $94.4 million in 2018, representing a
year-over-year increase of 5.0%. Recurring and other services revenue represented 13.9% of our total revenue in
2019, compared to 11.9% in 2018.
Gross margin was 30.8% in 2019 compared to 33.3% in 2018. The decrease was primarily due to unfavorable
product and customer mix in our Embedded Broadband segment, which resulted in lower sales of higher margin
mobile computing and networking embedded modules and greater sales of lower margin automotive embedded
modules. Our automotive embedded module gross margins were also negatively affected by certain warranty and
inventory provisions expensed during 2019. Gross margin percentage of 37.1% in our IoT Solutions segment in
2019 was consistent with 2018.
Net loss was $70.5 million in 2019 compared to $24.6 million in 2018. The increase in net loss of $45.9 million was
primarily attributable to lower revenue and gross margin, higher restructuring expense, higher income tax
expense, partially offset by lower administration and R&D expense due to various cost initiatives, as well as lower
acquisition-related and integration expense.
Foreign exchange rate changes impact our foreign currency denominated revenue and operating expenses. We
estimate that changes in foreign exchange rates in 2019 negatively impacted our gross margin by $0.9 million and
positively impacted our operating expenses by $3.7 million, resulting in a net positive impact on operating income
of approximately $2.8 million.
On April 30, 2019, we announced two initiatives related to the acceleration of our transformation to a Device-to
Cloud IoT solutions company:
1) Consolidation of engineering resources and the transfer of certain functions to lower cost locations resulting in
a significant reduction in our engineering team in Issy-Les-Moulineaux, outside of Paris, France. Following a
detailed process, the majority of employees impacted by this program have been notified. The program was
substantially completed by the end of 2019. Our sales and customer support capability in Issy-Les-Moulineaux will
remain unchanged and our teams in Toulouse and Sophia Antipolis will continue to provide key technical capability
for our cloud and services offerings; and
2) Outsourcing of a select group of general and administrative transaction-based activities to a global outsourcing
partner. Transition activities commenced in the third quarter of 2019 and we expect the activities to be fully
transitioned by mid-2020.
These two initiatives have impacted approximately 128 positions, of which 97 positions were in France. In 2019,
we recorded $18.6 million in severance and $7.9 million in transitional costs relating to these two initiatives.
GAAP
• Revenue was $713.5 million compared to $793.6 million in 2018.
• Gross margin was 30.8% compared to 33.3% in 2018.
•
• Net loss was $70.5 million, or $1.95 per diluted share compared to $24.6 million, or $0.68 per diluted
Loss from operations was $58.0 million compared to $18.3 million in 2018.
share, in 2018.
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• Cash and cash equivalents were $75.5 million at the end of 2019 compared to $89.1 million in December
31, 2018.
Non-GAAP(1)
• Gross margin was 30.9% compared to 33.4% in 2018.
• Operating expenses were $217.7 million compared to $229.7 million in 2018.
• Earnings from operations were $2.4 million compared to $35.3 million in 2018.
• Adjusted EBITDA was $21.1 million compared to $55.9 million in 2018.
• Net Loss was $0.3 million, or $0.01 per diluted share, compared to net earnings of $32.4 million or $0.90
per diluted share, in 2018.
(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.
We adopted the new accounting standard for revenue recognition effective January 1, 2018. Our 2017 financial
results reflect the adoption of this new standard and prior periods have been adjusted accordingly. See Note 3 of
our audited annual consolidated financial statements for the year ended December 31, 2018 for more details.
We adopted the new accounting standard for lease accounting effective January 1, 2019. See "Impact of
Accounting Pronouncements Affecting Current Periods" and Note 2 and 19 of our audited annual consolidated
financial statements for the year ended December 31, 2019 for more details.
Acquisition of M2M Group
On January 7, 2020, we completed the acquisition of M2M group of companies ("M2M Group") in Australia. Total
cash consideration paid to the shareholders of M2M Group was $19.6 million for 100% of the equity plus
approximately $1.4 million for the retirement of certain obligations, subject to normal working capital
adjustments. The M2M Group is focused on IoT connectivity services and cellular devices in Australia, and the
acquisition expands the Company's IoT Solutions business in the Asia-Pacific region. We believe that the business
is an excellent strategic fit with our IoT Solutions business with slightly more than half of the M2M Group’s
revenue comprised of subscription-based recurring revenue, and representing a segment of the business that has
been growing rapidly over the last several years. The M2M Group’s revenue in the last twelve months was US$17.9
million, of which $9.2 million was recurring subscription-based revenue. We expect the acquisition to be accretive
to earnings immediately following closing. We believe the M2M Group has a solid platform for us to increase our
IoT services and solutions in Australia and Southeast Asia.
The Company has not disclosed its purchase price allocation as it has not had sufficient time between the
acquisition date and the date these financial statements were issued to obtain and review information regarding
the completeness and measurement of the identifiable assets acquired and liabilities assumed.
10
Select Annual Consolidated Financial Highlights
Revenue ($ millions)
800.0
Gross margin (%)
34.0%
700.0
600.0
500.0
400.0
300.0
2017
As adjusted
Revenue
690.7
33.0%
32.0%
31.0%
30.0%
29.0%
2017
As adjusted
2018
793.6
2019
713.5
GAAP
NON‐GAAP(1)
33.9%
34.0%
2018
33.3%
33.4%
2019
30.8%
30.9%
Earnings (loss) from operations ($ millions)
Net earnings (loss) ($ millions)
35.0
15.0
(5.0)
(25.0)
(45.0)
(65.0)
2017
As adjusted
GAAP
NON‐GAAP(1)
0.1
39.6
2018
(18.3)
35.3
2019
(58.0)
2.4
40.0
20.0
‐
(20.0)
(40.0)
(60.0)
(80.0)
2017
As adjusted
GAAP
NON‐GAAP(1)
4.5
34.5
Adjusted EBITDA ($ millions)
Free Cash Flow ($ millions)
60.0
50.0
40.0
30.0
20.0
10.0
0.0
2017
As adjusted
Adjusted EBITDA(1)
54.7
2018
55.9
2019
21.1
30.0
20.0
10.0
‐
(10.0)
(20.0)
2017
As adjusted
Free Cash Flow(1)
(16.7)
2018
(24.6)
32.4
2019
(70.5)
(0.3)
2018
26.1
2019
(13.4)
(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:
IoT Solutions
Embedded Broadband
Revenue by Type:
Product
Recurring and other 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
2019
2018
2017
As adjusted
$
$
$
$
$
$
$
$
$
$
713,513
$
793,602
219,990
220,153
$
264,571
265,025
30.8%
30.9%
(58,021)
2,414
21,077
(70,538)
(305)
377,808
335,705
614,384
99,129
$
$
$
$
$
33.3%
33.4%
(18,275)
35,306
55,881
(24,610)
32,427
373,937
419,665
699,158
94,444
$
$
$
$
$
$
$
690,727
234,239
234,723
33.9%
34.0%
100
39,636
54,653
4,518
34,519
303,057
387,670
645,402
45,325
(1.95)
(0.01)
$
$
(0.68)
0.90
$
$
0.14
1.05
36,233
36,166
36,166
36,067
36,019
36,019
35,862
32,356
32,893
75,454
639,340
43,774
$
89,076
683,916
43,250
$
65,003
694,644
36,637
(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, 2019:
Corporate
• We continued with our cost reduction initiatives we announced in late 2018 and commenced various
initiatives in 2019, including consolidation of engineering resources, the transfer of certain functions to
lower cost locations and outsourcing of a select group of business processes in finance, IT and human
resources. In addition, we continued to work on purchasing initiatives and have renegotiated certain
supplier agreements with contract manufacturers in an effort to better manage our costs.
• Mr. Jim Ryan was appointed Senior Vice President, Strategic Partner Growth, focusing on acquiring,
aligning and maximizing the impact of our strategic partnerships in the Cloud, Analytics and System
Integrator ecosystem. Mr. Ryan has more than 20 years of senior leadership experience in global telecoms
and early stage IoT environments, including Zipit Wireless and AT&T and Sprint in the United States and O2
in Europe.
• Ms. Lori O'Neill was appointed to the Company's Board of Directors. Ms. O'Neill is an experienced
independent corporate director, financial executive and advisor to growth-oriented companies. She
started her career with Deloitte & Touche LLP in 1988 and served as Audit Partner from 1996 to 2012. She
is a board member for Constellation Software, as well as a board member and chair of the Audit
Committee for the Ontario Lottery and Gaming Corporation, Hydro Ottawa and the University of Ottawa
Heart Institute. Ms. O'Neill also serves as chair of the Board of Governors for Ashbury College. She
graduated from Carleton University with a Bachelor of Commerce (Highest Honors).
• Mr. David McLennan has decided to retire from his position as Chief Financial Officer after 16 years of
dedicated service. By providing a lengthy notice period, Mr. McLennan will be assisting the Company's
transition to a new Chief Financial Officer. The Company has engaged a global executive search firm and a
formal process has commenced to recruit a replacement. The Company expects to complete the
transition by the middle of 2020.
• The Company has completed the previously announced acquisition of the M2M Group in Australia. See
"Annual Overview" for details.
IoT Solutions
•
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.
• Together with Duke Energy and Open Energy Solutions, we have developed a next-generation intelligent
edge platform to run more complex, centrally managed and containerized edge applications to enable
more resilient, efficient and secure smart grids.
13
• Nimb selected our Ready-to-Connect cellular modules for its smart safety ring, designed to alert
emergency contacts with a press of a hidden panic button, to develop a fully autonomous safety system
that does not need to be paired with another mobile device.
• Annexia International Inc., an expert in ultra-low-power asset devices, selected our Smart IoT Connectivity
for global deployment of its NStarTM asset tracking and management solution to turn traditional
equipment into connected, data-rich transportation assets that generate additional revenue for their
customers, as well as deploy their solutions globally without having to manage multiple carrier
agreements.
• AirLink® Complete is a new comprehensive management and support service that delivers a best-in-class
experience by combining cloud-based management, security monitoring, 24/7 technical support and
extended warranty. Every purchase of eligible AirLink routers and gateways will now include one
complimentary year of AirLink Complete.
• NurtureWatch selected our IoT connectivity solution to enable tracking and communication for its
NurtureWatch, a wearable device that helps elderly people stay safe, healthy and independent.
• Stone Technologies, a supplier of intelligent monitoring solutions, chose our Uplink remote monitoring
solution and connectivity services to expand its traditional monitoring business with a managed service for
industrial monitoring.
• We commenced a strategic collaboration with Microsoft to develop one of the industry's first full-stack IoT
solutions. We believe our new Octave edge data orchestration solution integrated with Microsoft Azure IoT
Central will simplify and accelerate time-to-value for enterprise IoT projects.
• We announced general availability of our Octave all-in-one edge-to-cloud solution for connecting industrial
assets to the cloud. Octave integrates edge devices, network, and interfaces to all major cloud service
providers into an all-in-one solution that securely extracts, orchestrates and acts on data from remote
assets at the edge to the cloud. Octave will help industrial companies accelerate IoT development, de-risk
their IoT deployments and free them to focus on their IoT data rather than the infrastructure.
• We released our Omnilink OM500 ankle bracelet, an advanced offender monitoring solution with LTE
connectivity and voice commands that enables law enforcement agencies to better manage pre-trial
detainees, individuals under house arrest, probationers and parolees.
• Our smart IoT connectivity solution is enabling global communications for France Televisions, the main
public broadcaster in France, ensuring global connectivity for its broadcast journalists around the world.
Sierra's smart IoT connectivity solution automatically connects to the best available 2G, 3G, or LTE network
in a given region, without the need for installing a local SIM card and configuring the equipment.
• We launched our AirLink Managed Network Service with embedded FirstNet connectivity. This bundled
solution will help public safety agencies of all sizes take advantage of the benefits and capabilities enabled
by FirstNet-connected solutions.
• Our AirLink® MG90 High Performance Multi-Network Vehicle Router is now certified and approved for use
on the UK's Emergency Services Network, a dedicated network for emergency services that provides
secure and resilient mobile broadband data for routine and mission-critical emergency services use and is
expected to be the future platform for communications in the emergency services.
• We announced our Ready-to-Connect RC Series of embedded modules to simplify IoT development,
reduce costs and accelerate time to market. The RC Series modules deliver all of the key elements needed
14
for an IoT application - cellular module, integrated SIM that's pre-connected to global mobile networks,
IoT management platform and end-to-end security - in one integrated bundle.
Embedded Broadband:
• We unveiled the industry's first 5G mechanical module sample at Mobile World Congress 2019. Based on
the M.2 form factor, the connectorized AirPrime module will enable OEMs and system integrators
requiring the highest possible speeds to deploy 5G on their mobile computing, networking and IoT
platforms worldwide.
• We expanded our portfolio of mobile broadband embedded modules for mobile computing, routers,
gateways, industrial automation, and new IoT applications, such as robotics, drones and private networks.
Sierra's first-to-market 5G EM919x and 4G LTE Cat-20 EM769x embedded modules are sampling to OEMs
and system integrators requiring secure connectivity and the highest possible speeds to deploy cellular on
their mobile computing, networking and IoT platforms worldwide.
Outlook
In 2020, we expect annual revenue to be between $690 million to $710 million and Adjusted EBITDA to be
between $10 million and $15 million. On a reporting segment basis, our expectation is that IoT Solutions revenue
will grow 7% to 10% year-over-year and Embedded Broadband revenue will decline by 12% to 15% year-over-year.
See "Non-GAAP Financial Measures".
This non-GAAP guidance constitutes "forward-looking statements" within the meaning of applicable securities
laws and reflects current business indicators and expectations. These statements are based on management's
current beliefs and assumptions, which could prove to be significantly incorrect. Forward-looking statements,
particularly those that relate to longer periods of time, are subject to substantial known and unknown risks and
uncertainties that could cause actual events or results to differ significantly from those expressed or implied by our
forward-looking statements, including those described under "Cautionary Note Regarding Forward-Looking
Statements" and "Risks and Uncertainties".
We believe that the market for wireless IoT solutions has strong long-term growth prospects. We anticipate strong
long-term growth in the number of devices being wirelessly connected, driven by key enablers, such as lower
wireless connectivity costs, faster wireless connection speeds, new wireless technologies designed specifically for
the IoT, new devices and tools to simplify the development of IoT applications, and increased focus and investment
from large ecosystem players. More importantly, we see emerging customer demand in many of our target
verticals driven by increasing recognition of the value created by deploying IoT solutions, such as new revenue
streams and cost efficiencies.
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;
contributions to our operating results from our acquisitions;
the level of success our customers achieve with sales of connected solutions;
fluctuations in customer demand and inventory levels, particularly large customers;
• our ability to manage component supply issues when they arise;
• manufacturing capacity at our various manufacturing sites;
• our ability to achieve the anticipated benefits of our business transformation initiatives;
•
•
•
•
•
• general economic conditions in the markets we serve;
• our ability to successfully integrate M2M Group and realize the anticipated benefits of the acquisition
• our ability to attract and retain effective channel partners;
the timely launch and ramp up of new customer programs;
•
15
the end-of-life of existing customer programs;
• our ability to secure future design wins with both existing and new customers;
•
• our ability to manage component and product quality compliance;
•
•
•
fluctuations in foreign exchange rates;
tariffs and other trade restrictions; and
seasonality in demand.
We expect that product and price competition from other wireless device manufacturers and solution providers
will continue to play a role in the IoT market. As a result of these factors, we may continue to experience volatility
in our results on a quarter-to-quarter basis. For example, our gross margin percentage may fluctuate from
quarter-to-quarter depending on product and customer mix, average selling prices and product costs.
See "Cautionary Note Regarding Forward-Looking Statements" and "Risks and Uncertainties".
16
CONSOLIDATED ANNUAL RESULTS OF OPERATIONS
(In thousands of U.S. dollars, except where
otherwise stated)
2019
2018
2017 As adjusted
$
% of
Revenue
$
% of
Revenue
$
% of
Revenue
Revenue
IoT Solutions
Embedded Broadband
Cost of sales
IoT Solutions
Embedded Broadband
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 (expense)
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)
377,808
335,705
713,513
237,650
255,873
493,523
219,990
92,093
86,473
48,827
28,160
974
877
—
20,607
278,011
(58,021)
(1,296)
(301)
(59,618)
10,920
(70,538)
(1.95)
(1.95)
43.9%
56.1%
100.0%
28.3%
37.7%
66.1%
33.9%
10.9%
12.0%
6.2%
0.2%
1.2%
0.5%
—%
3.0%
33.9%
—%
47.1 %
52.9 %
100.0 %
29.5 %
37.1 %
66.7 %
33.3 %
11.2 %
11.8 %
7.8 %
0.9 %
0.5 %
— %
0.3 %
3.3 %
35.6 %
(2.3)%
373,937
419,665
793,602
234,335
294,696
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)
303,057
387,670
690,727
195,815
260,673
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
53.0 %
47.0 %
100.0 %
33.3 %
35.9 %
69.2 %
30.8 %
12.9 %
12.1 %
6.8 %
3.9 %
0.1 %
0.1 %
— %
2.9 %
39.0 %
(8.1)%
17
Fiscal Year 2019 Compared to Fiscal Year 2018
Revenue
Revenue decreased by $80.1 million, or 10.1%, in 2019 compared to 2018. This decrease was primarily
attributable to reduced revenue from our Embedded Broadband segment, partially offset by modest growth in our
IoT Solutions segment:
• Embedded Broadband experienced weaker demand from mobile computing and networking customers as
we completed certain programs with these customers, partially offset by slightly higher revenue from
automotive customers.
•
IoT Solutions experienced strong contributions from our recurring and other services, as well as our
Enterprise gateway products, partially offset by lower revenue from 2G/3G Integrated IoT solutions
modules as these technologies are preparing for sunset.
Product revenue decreased by $84.8 million, or 12.1%, in 2019 compared to 2018. The decrease was primarily
due to lower revenue from mobile computing and networking customers and lower revenue from 2G/3G
Integrated IoT solutions modules, offset by higher revenue from Enterprise gateway products. Recurring and other
services revenue increased by $4.7 million, or 5.0% ($6.8 million, or 7.4%, excluding iTank which was sold at the
end of 2018), in 2019 compared to 2018.
Our geographic revenue mix for the years ended December 31, 2019 and 2018 was as follows:
During the years ended December 31, 2019 and 2018, no customer accounted for more than 10% of our
aggregated revenue.
Gross margin
Gross margin was 30.8% of revenue in 2019 compared to 33.3% in 2018. In 2019, gross margin was impacted by
unfavorable product and customer mix in our Embedded Broadband segment which resulted in lower sales of
higher margin mobile computing and networking embedded modules and greater sales of lower margin
automotive embedded modules. Our automotive embedded module gross margins were also negatively affected
18
by certain warranty and inventory provisions beyond routine levels which were expensed in 2019. Gross margin
percentage of our IoT Solutions segment was consistent year-over-year.
Gross margin included stock-based compensation expense and related social taxes of $0.2 million and $0.5 million
in 2019 and 2018, respectively.
Sales and marketing
Sales and marketing expense increased by $3.5 million, or 4.0%, in 2019 compared to 2018, primarily driven by
higher investments in our sales force and corporate marketing initiatives to accelerate our transformation to a
Device-to-Cloud IoT solutions company.
Sales and marketing expense included stock-based compensation and related social taxes of $3.9 million in 2019
compared to $2.9 million in 2018.
Research and development
Research and development ("R&D") expense decreased by $7.2 million, or 7.7%, in 2019 compared to 2018. This
decrease was mainly driven by various cost reduction initiatives we commenced in the fourth quarter of 2018 and
through 2019 to accelerate our transformation to a Device-to-Cloud IoT solutions company, combined with lower
certification costs and the completion of certain large development projects in 2019.
R&D expense included stock-based compensation and related social taxes of $2.9 million in 2019 compared to $2.4
million in 2018. R&D expense also included acquisition-related amortization of $0.3 million in each of 2019 and
2018.
Administration
Administration expense decreased by $12.8 million, or 20.7%, in 2019 compared to 2018. Administration expense
in 2018 included one-time separation costs related to our former CEO's retirement, including higher stock-based
compensation in connection with accelerated vesting of equity awards and higher consulting fees.
Administration expense included stock-based compensation and related social taxes of $6.3 million in 2019
compared to $7.2 million in 2018.
Restructuring
In late 2018 and the second quarter of 2019, we commenced various initiatives to accelerate our transformation to
a Device-to-Cloud IoT solutions company, including consolidation of our engineering programs and sites,
consolidation of product management resources, outsourcing activities of certain general and administrative
functions, and certain organizational structure changes. In 2019, we recorded $28.2 million in severance and
other related costs associated with these initiatives. In 2018, we recorded $2.3 million in severance and other
related costs associated with these initiatives.
In the first quarter of 2018, we commenced various efficiency and effectiveness initiatives focused on capturing
synergies related to the integration of Numerex into our business as well as other initiatives designed to produce
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.
Acquisition-related and integration
Acquisition-related and integration costs decreased by $3.0 million, or 75.4%, in 2019 compared to 2018. The
decrease in integration costs reflect lower levels of integration activities for Numerex as we substantially
completed the integration in the second quarter of 2019. In the fourth quarter of 2019, we recorded acquisition
costs of $0.1 million related to the acquisition of M2M Group which we completed in January 2020.
19
Impairment
We recorded a right-of-use asset impairment of $0.9 million in 2019 related to an office lease in France as we
cease to use and then sublease part of the building. No impairment charges were recorded in 2018.
Loss on disposal
In 2018, we recorded a loss on disposal of $2.1 million from the sale of our remote tank monitoring business,
iTank.
Amortization
Amortization expense decreased by $5.2 million, or 20.2%, in 2019 compared to 2018 due to completion of
amortization on certain older acquisition-related intangible assets and other assets. Amortization expense in 2019
included $14.3 million of acquisition-related amortization compared to $18.3 million in 2018.
Foreign exchange gain (loss)
Foreign exchange loss was $1.3 million in 2019 compared to $5.5 million in 2018. The foreign exchange loss
decreased in 2019 due to strengthening of the value of the Euro compared to the U.S. dollar compared to 2018.
Income tax expense (recovery)
Income tax expense increased by $10.0 million in 2019 compared to 2018 due to changes in the realizability of tax
assets in certain jurisdictions.
Net earnings (loss)
Net loss was $70.5 million in 2019 compared to $24.6 million in 2018. This increase was primarily attributable to
lower revenue and gross margin, higher restructuring expense and higher income tax expense, partially offset by
lower administration and R&D expense.
Net loss in 2019 included stock-based compensation expense and related social taxes of $13.2 million and
acquisition-related amortization of $14.5 million. 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.
Weighted average number of shares
The weighted average basic and diluted shares outstanding were 36.2 million for the year ended December 31,
2019 and 36.0 million for the year ended December 31, 2018.
The number of shares outstanding was 36.2 million at December 31, 2019, compared to 36.1 million at
December 31, 2018.
20
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 both of our reportable segments, which experienced solid year-over-year growth, as well as growth
resulting from the acquisition of Numerex:
• Embedded Broadband experienced notable year-over-year increases in revenue earned from automotive,
networking and distribution customers;
•
IoT Solutions experienced strong growth from our Airlink gateway products and related services;
contribution from the addition of Numerex, acquired in December 2017, as well as solid subscriber growth
in cloud and connectivity services.
Product revenue increased by $53.8 million, or 8.3%, in 2018 compared to 2017. The increase was primarily driven
by growth in revenue from automotive, networking and distribution customers and Airlink gateway products.
Recurring and other services revenue increased by $49.1 million, or 108.4%, 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, including the effects of higher automotive volumes at lower gross margin,
offset by improved sales of higher margin gateway products and related services and the addition of higher margin
services contributed by Numerex in our IoT Solutions segment.
Gross margin included stock-based compensation expense and related social taxes of $0.5 million in each of 2018
and 2017.
21
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.
Research and development
Research and development 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 integrated 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 Solutions customer support
operations from Sweden to France and the United States.
Acquisition-related and integration
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 was to 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. In 2019, we received $0.5 million of escrow payments. As of December 31, 2019, $0.5 million continues to
be held in escrow; however, the release of a portion of this amount is under dispute with the purchaser.
22
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.
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. For the year ended December 31, 2017, the weighted average basic and diluted shares outstanding were
32.4 million and 32.9 million, respectively.
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).
23
SEGMENTED INFORMATION
IoT 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 %
$
$
2019
377,808
237,650
140,158
37.1%
$
$
2018
373,937
234,335
139,602
37.3%
2017
As adjusted
$
$
303,057
195,815
107,242
35.4%
% change
2019 vs
2018
1.0%
1.4%
0.4%
2018 vs
2017
23.4%
19.7%
30.2%
$
140,222
$
139,818
$
107,454
0.3%
30.1%
37.1%
37.4%
35.5%
(1) See section titled "Non-GAAP Financial Measures" for additional details and a reconciliation to the applicable U.S. GAAP financial measure.
Fiscal Year 2019 compared to 2018
Revenue increased by $3.9 million, or 1.0%, in 2019 compared to 2018. This increase was primarily due to strong
contributions from our recurring and other services, as well as our Enterprise gateway products, partially offset by
lower revenue from 2G/3G Integrated IoT solutions modules. Within the IoT Solutions segment, excluding iTank,
which was sold at the end of 2018, recurring and other services revenue was up $6.8 million, or $7.4%.
Gross margin for IoT Solutions of 37.1% in 2019 was comparable to the same period in 2018.
Fiscal Year 2018 compared to 2017
Revenue increased by $70.9 million, or 23.4%, in 2018, compared to 2017. This increase was primarily driven by
the addition of Numerex, acquired in December 2017, organic subscriber growth in cloud and cellular connectivity
services, strong sales of AirLink gateway products, including RV50, MG90 and MP70 gateway products, and related
support and services revenue, partly offset by lower sales of mid-tier telematics gateways.
Gross margin for IoT Solutions was 37.3% in 2018 compared to 35.4% in 2017. This increase in gross margin was
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. 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.
24
Embedded Broadband
(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 %
$
$
2019
335,705
255,873
79,832
23.8%
$
$
2018
419,665
294,696
124,969
29.8%
2017
As adjusted
$
$
387,670
260,673
126,997
32.8%
% change
2019 vs
2018
(20.0)%
(13.2)%
(36.1)%
2018 vs
2017
8.3 %
13.1 %
(1.6)%
$
79,931
$
125,207
$
127,269
(36.2)%
(1.6)%
23.8%
29.8%
32.8%
(1) See section titled "Non-GAAP Financial Measures" for additional details and a reconciliation to the applicable U.S. GAAP financial measure.
Fiscal Year 2019 compared to 2018
Revenue decreased by $84.0 million, or 20.0%, in 2019 compared to 2018, primarily due to weaker demand from
mobile computing and networking customers as we complete certain programs with these customers, partially
offset by slightly higher revenue from automotive customers.
Gross margin for Embedded Broadband was 23.8% in 2019 compared to 29.8% in 2018. This decrease was mainly
driven by unfavorable product and customer mix, in particular, lower revenue from higher margin mobile
computing and networking and higher automotive sales at lower gross margin. Gross margin in 2019 also included
the unfavorable effects of specific automotive related warranty and inventory provisions beyond routine levels.
Fiscal Year 2018 compared to 2017
Revenue increased by $32.0 million, or 8.3%, in 2018 compared to 2017, mainly driven by 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 Embedded Broadband was 29.8% in 2018 compared to 32.8% in 2017. The decrease was mainly
driven by unfavorable product and customer mix, including the effects of higher automotive volumes at lower
gross margin.
25
FOURTH QUARTER OVERVIEW
Consolidated Results of Operations:
(in thousands of U.S. dollars, except where otherwise stated)
2019
2018
Three months ended December 31,
Revenue
IoT Solutions
Embedded Broadband
Cost of goods sold
IoT Solutions
Embedded Broadband
Gross margin
Expenses
Sales and marketing
Research and development
Administration
Restructuring
Acquisition-related and integration
Impairment
Loss on disposal of iTank business
Amortization
Loss from operations
Foreign exchange gain (loss)
Other expense
Loss before income taxes
Income tax expense (recovery)
Net Loss
Net earnings (loss) per share - Basic and diluted (in
dollars)
GAAP:
% of
Revenue
52.2 %
47.8 %
100.0 %
32.9 %
37.7 %
70.5 %
29.5 %
12.8 %
12.1 %
6.7 %
1.3 %
0.2 %
0.5 %
— %
3.1 %
36.6 %
(7.1)%
$
90,937
83,364
174,301
57,272
65,661
122,933
51,368
22,309
21,015
11,600
2,309
274
877
—
5,369
63,753
(12,385)
1,666
(109)
(10,828)
90
(10,918)
(0.30)
% of
Revenue
47.5 %
52.5 %
100.0 %
29.3 %
37.9 %
67.3 %
32.7 %
11.1 %
11.0 %
7.2 %
1.2 %
0.3 %
— %
1.0 %
3.0 %
34.8 %
(2.1)%
$
95,728
105,667
201,395
59,077
76,423
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)
• Revenue was $174.3 million in the fourth quarter of 2019, down 13.5% compared to $201.4 million in the
fourth quarter of 2018, driven by lower revenues from our Embedded Broadband and IoT Solutions
segments.
•
•
In the fourth quarter of 2019, compared to the same period of 2018, Embedded Broadband segment
revenue decreased by $22.3 million, or 21.1%, due to weaker sales from mobile computing and
networking customers, offset by a modest increase in sales from automotive customers.
IoT Solutions segment revenue decreased by $4.8 million, or 5.0%, in the fourth quarter quarter of 2019,
compared to the same period of 2018 due primarily to lower Integrated IoT solutions module revenue,
partially offset by stronger recurring and other services revenue. Within the IoT Solutions segment,
26
recurring and other services revenue was up 16.3%, in the fourth quarter of 2019 compared to the same
period of 2018, excluding iTank, which was sold at the end of 2018.
• Gross margin was 29.5% in the fourth quarter of 2019 compared to 32.7% in the same period of 2018,
driven by unfavorable product and customer mix in our Embedded Broadband and IoT Solutions segment
and certain inventory and warranty provisions related to defective third party printed circuit boards.
These unusual warranty and inventory expenses negatively impacted gross margin by approximately $1.7
million or 100 basis points.
•
Loss from operations in the fourth quarter of 2019 was $12.4 million compared to a loss of $4.2 million in
the comparable period of 2018 as a result of lower revenue and gross margin, offset by lower operating
expenses reflecting various cost reduction initiatives we commenced in the fourth quarter of 2018 and
which continued throughout 2019, and the absence of a $2.1 million loss on disposal of our iTank business
which was sold at the end of 2018.
• Net loss in the fourth quarter was $10.9 million compared to a loss of $3.8 million in the same period of
2018. The increase in net loss was mainly due to lower revenue and gross margin and higher income tax
expense, offset by lower operating expenses and favorable foreign exchange movement.
• Cash and cash equivalents at the end of the fourth quarter of 2019 were $75.5 million, a decrease of $11.4
million compared to $86.9 million at the end of the third quarter of 2019. The decrease in cash was
mainly due to working capital requirements, partially offset by sales of receivables under our receivable
purchase agreement ("RPA") program and proceeds from sale of an investment.
NON-GAAP(1):
• Gross margin was 29.5% in the fourth quarter of 2019, compared to 32.7% in the fourth quarter of 2018.
The decrease was mainly due to unfavorable product and customer mix in our Embedded Broadband and
IoT Solutions segment and certain inventory and warranty provisions related to defective third party
printed circuit boards. These unusual warranty and inventory expenses negatively impacted gross margin
by approximately $1.7 million or 100 basis points.
•
Loss from operations was $2.7 million in the fourth quarter of 2019 compared to earnings from operations
of $10.2 million in the comparable period in 2018 mainly due to lower revenue and gross margin, offset by
lower operating expenses reflecting various cost reduction initiatives we commenced in the fourth quarter
of 2018 and which continued through 2019.
• Adjusted EBITDA was $2.3 million in the fourth quarter of 2019 compared to $15.3 million in the same
period of 2018. This decrease in Adjusted EBITDA mainly reflects lower earnings from operations in the
fourth quarter of 2019. Adjusting for the unusual warranty and inventory expenses incurred during the
fourth quarter of 2019, Adjusted EBITDA would have been $4.0 million.
• Net loss was $2.9 million in the fourth quarter of 2019 compared to net earnings of $9.0 million in the
same period of 2018 due to loss from operations, offset by lower income tax expense. Adjusting for the
unusual warranty and inventory expenses incurred during the fourth quarter of 2019, net loss would have
been $1.2 million.
(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, 2019. 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. These results are not
necessarily indicative of results for any future period. You should not rely on these results to predict future
performance.
(In thousands of U.S. dollars,
except where otherwise stated)
2019
2018
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Revenue
$ 174,301
$ 174,025
$191,374
$ 173,813
$201,395
$203,426
$201,903
$186,878
Cost of goods sold
122,933
118,982
132,425
119,183
135,500
136,159
132,594
124,778
Gross margin
Gross margin %
Expenses
Sales and marketing
Research and development
Administration
Restructuring
Acquisition-related and
integration
Impairment
Loss on disposal of iTank
business
51,368
29.5%
55,043
58,949
31.6%
30.8%
54,630
31.4%
65,895
67,267
69,309
62,100
32.7%
33.1%
34.3%
33.2%
22,309
21,015
11,600
2,309
274
877
—
23,523
20,550
11,937
6,274
291
—
—
23,755
22,111
12,893
18,180
314
—
—
22,506
22,797
12,397
1,397
95
—
—
22,353
22,230
14,516
2,345
613
—
—
21,743
22,621
14,998
227
570
—
—
22,066
24,391
19,804
952
22,425
24,465
12,264
3,591
1,014
1,765
—
—
—
—
Amortization
5,369
5,027
4,967
5,244
5,971
6,255
6,137
7,466
63,753
67,602
82,220
64,436
70,092
66,414
74,364
71,976
Earnings (loss) from
operations
Foreign exchange gain (loss)
Other income (expense)
Earnings (loss) before income
taxes
(12,385)
(12,559)
(23,271)
(9,806)
1,666
(109)
(2,964)
(121)
854
(102)
(852)
31
(10,828)
(15,644)
(22,519)
(10,627)
Income tax expense (recovery)
90
4,577
5,657
596
(4,197)
(2,378)
(19)
(6,594)
(2,768)
853
(159)
7
701
1,738
(5,055)
(4,048)
8
(9,876)
1,115
55
(9,095)
(8,706)
2,289
(343)
Net earnings (loss)
$ (10,918)
$ (20,221)
$ (28,176)
$ (11,223)
$ (3,826)
$ (1,037)
$ (11,384)
$ (8,363)
Earnings (loss) per share - in
dollars
Basic
Diluted
$
$
(0.30)
(0.30)
$
$
(0.56)
(0.56)
$
$
(0.78)
(0.78)
$
$
(0.31)
(0.31)
$
$
(0.11)
(0.11)
$
$
(0.03)
(0.03)
$
$
(0.32)
(0.32)
$
$
(0.23)
(0.23)
Weighted average number of
shares (in thousands)
Basic
Diluted
36,222
36,222
36,179
36,179
36,156
36,156
36,106
36,106
36,057
36,057
36,085
36,085
36,021
36,021
35,912
35,912
28
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, 2019 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 2019, net loss was $10.9 million compared to $20.2 million in the third quarter of
2019 due to lower gross margin, offset by lower restructuring costs, lower income tax expense and
favorable foreign exchange.
In the third quarter of 2019, net loss was $20.2 million compared to $28.2 million in the second quarter of
2019, primarily driven by lower restructuring costs, R&D and income tax expenses, offset by unfavorable
foreign exchange losses.
In the second quarter of 2019, net loss was $28.2 million compared to $11.2 million in the first quarter of
2019, mainly due to higher restructuring costs related to the consolidation of our engineering programs
and sites, outsourcing activities and other organizational changes we implemented in late 2018 and higher
income tax expenses, partially offset by higher revenue and gross margins.
In the first quarter of 2019, net loss was $11.2 million compared to $3.8 million in the fourth quarter of
2018, primarily due to lower revenue and gross margins, higher tax expense, partially offset by the
absence of loss on disposal of iTank business, lower administration and restructuring expenses, and lower
foreign exchange losses.
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 and a 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 and higher restructuring
charges, offset by lower acquisition costs and lower income tax expenses.
29
LIQUIDITY AND CAPITAL RESOURCES
Selected Financial Information:
(in thousands of U.S. dollars)
Cash flows provided (used) before changes in non-cash working capital:
$
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
Proceeds from sale of investment
Proceeds from sale of iTank business
Capital expenditures and increase in intangible assets
Acquisitions, net of cash acquired
Financing activities
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
$
$
$
2019
(12,503)
$
2018
34,231
2017
As adjusted
41,292
$
37,965
(3,712)
(8,611)
(12,069)
5,792
19,365
6,862
(16,372)
3,303
500
(20,273)
—
$
$
$
(1,662)
488
—
(674)
(941)
—
(5,526)
1,508
(3,525)
21,944
(1,402)
12,999
47,230
(16,006)
—
5,000
(21,099)
—
(5,927)
2,636
(3,120)
(2,808)
(1,878)
(130)
$
$
$
(12,665)
(6,806)
(5,334)
(17,750)
335
(42,220)
(928)
(37,641)
—
—
(15,806)
(21,870)
(271)
5,708
(2,779)
—
(1,367)
(1,397)
Free Cash Flow (1)
$
(13,411)
$
26,131
$
(16,734)
(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 decreased by $40.4 million in 2019 compared to 2018, mainly due to lower
profitability and higher working capital requirements for accounts payable, inventory and prepaids, partly offset by
sale of receivables under our RPA. In 2019, we sold and de-recognized approximately $86.9 millions in trade
accounts receivable, and collected and remitted to Canadian Imperial Bank of Commerce ("CIBC") approximately
$68.7 million under our RPA.
Investing Activities
Cash used in investing activities increased by $0.4 million in 2019 compared to 2018. In 2019, we received $3.3
million proceeds from the sale of a small share investment and $0.5 million escrow payment from the sale of our
iTank business in 2018. In 2018, we received cash consideration of $5.0 million from the sale of our iTank business.
Capital expenditures of $20.3 million and $21.1 million in 2019 and 2018, respectively, were consistent. In 2019,
capital expenditures were primarily for production, tooling and R&D equipment while cash used for intangible
assets was primarily for capitalized software costs.
30
Financing Activities
Net cash used for financing activities decreased by $4.3 million in 2019 compared to 2018, mainly due to the
absence of share purchases under the NCIB, lower purchase of treasury shares for Restricted Share Unit ("RSU")
distribution and lower taxes paid related to net settlement of equity awards, partly offset by lower proceeds
received from stock option exercises.
Free Cash Flow
Our free cash flow decreased by $39.4 million in 2019 compared to 2018, mainly as a result of lower profitability
and higher working capital requirements, in particular related to restructuring, partially offset by sale of
receivables. See "Non-GAAP Financial Measures".
Cash Requirements
Our near-term cash requirements are primarily related to funding our operations, including restructuring
expenditures, inventory and other working capital items, capital expenditures and other obligations summarized in
the table below. Cash may also be used to finance acquisitions of businesses in line with our strategy and share
repurchases. We continue to believe our cash and cash equivalents balance of $75.5 million at December 31,
2019, undrawn availability under our revolving credit facility, receivable purchase facility, and cash generated from
operations will be sufficient to fund our expected working capital, capital expenditure, restructuring and
acquisition requirements for at least the next twelve months based on current business plans. However, we
cannot be certain that our actual cash requirements will not be greater than we currently expect. In addition, our
ability to achieve our business and cash generation plans is based on a number of assumptions which involve
significant judgment and estimates of future performance, borrowing capacity and credit availability which cannot
at all times be assured. See "Cautionary Note Regarding Forward-Looking Statements".
The following table presents the aggregate amount of future cash outflows for contractual obligations as of
December 31, 2019.
Payments due by period
(In thousands of U.S. dollars)
Total
2020
2021
2022
2023
2024
Thereafter
Operating lease obligations
$ 34,665 $
6,069
$
6,340
$
4,985
$
3,066
$
2,191
$
12,014
Finance lease obligations
Purchase obligations - Contract
Manufacturers (1)
Purchase obligations - Mobile
Network Operators (2)
Purchase obligations - Cloud
Computing Services (3)
Other long-term liabilities
Total(4)
598
331
128,146
128,146
248
—
7,110
5,314
1,334
3,192
413
1,321
16
1,321
12
8
—
462
550
385
8
—
—
—
3
—
—
—
—
—
—
—
$ 174,124 $ 141,197
$
9,255
$
6,390
$
3,074
$
2,194
$
12,014
(1) Purchase obligations represent obligations with certain contract manufacturers and suppliers to buy a minimum amount of designated
products between January 2020 and June 2020. 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 2020 and October 2022.
(3) Purchase obligation represents obligation with a supplier to purchase a minimum amount of cloud computing services between January
2020 and May 2022.
(4) Also see Acquisition of M2M Group under Annual Overview section.
31
Normal Course Issuer Bid
On August 1, 2018, we received approval from the Toronto Stock Exchange ("TSX") of our Notice of Intention to
make a NCIB. Pursuant to the NCIB, we were permitted to purchase for cancellation up to 3,580,668 of our
common shares, or approximately 9.9% of common shares outstanding as of the date of the announcement,
representing 10% of the public float. The NCIB commenced on August 8, 2018 and terminated on August 7, 2019.
In 2019, we did not repurchase any common shares. 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 in 2018.
Capital Resources
The source of funds for our future capital expenditures and commitments includes cash, accounts receivable, cash
from operations and borrowings under our committed credit facilities.
2019
2018
(In thousands of U.S. dollars)
Cash and cash equivalents
Dec 31
$ 75,454
Sept 30
$ 86,900
June 30
$ 84,769
Mar 31
$ 74,143
Dec 31
$ 89,076
Sept 30
$ 67,460
June 30
$ 73,411
Mar 31
$ 70,588
Unused credit facilities
30,000
30,000
30,000
30,000
30,000
30,000
10,000
10,000
Total
$105,454
$116,900
$114,769
$104,143
$119,076
$ 97,460
$ 83,411
$ 80,588
We also have access to funds through our uncommitted accounts receivables purchase agreement as discussed
below.
At December 31, 2019, we have committed capital expenditures of $5.8 million (Dec 31, 2018 - $4.9 million). Our
capital expenditures during the first quarter of 2020 are expected to be primarily for R&D and production
equipment and software licenses. We are also committed to the purchase price of $21.0 million relating to the
acquisition of M2M Group, comprised of $19.6 million cash consideration and approximately $1.4 million for the
retirement of certain obligations, subject to normal working capital adjustments.
Credit Facilities
We have a committed $30 million senior secured revolving credit facility (the "Revolving Facility") with CIBC as sole
lender and as Administrative Agent. The Revolving Facility is secured by a pledge against substantially all of our
assets and includes an accordion feature, which permits the Company to increase the aggregate revolving loan
commitments thereunder on an uncommitted basis subject to certain conditions. The Revolving Facility matures
on July 31, 2021 and will be used for general corporate purposes, including, but not limited to, capital
expenditures, working capital requirements and/or certain acquisitions permitted under the Revolving Facility. As
at December 31, 2019, there were no borrowings under the Revolving Facility.
Letters of Credit
We have access to a standby letter of credit facility of $1.5 million from Toronto Dominion Bank. The letter of
credit facility is used for the issuance of letters of credit and guarantees and is guaranteed by Export Development
Canada. As of December 31, 2019, there were two letters of credit issued against the revolving standby letter of
credit facility for a total value of $0.1 million.
Accounts Receivable Purchase Agreement
On June 26, 2019, we entered into an uncommitted Receivables Purchase Agreement (the “RPA”) with CIBC to
improve our liquidity during high working capital periods. Under the RPA, up to $75.0 million of Receivables may
be sold and remain outstanding at any time. Eligible trade receivables are sold at 100% face value less discount
with a 10% limited recourse to us arising from certain repurchase events. The RPA is on an uncommitted basis
with no expiry date and carries a discount rate of CDOR (for purchased receivables in Canadian dollars) and LIBOR
(for purchased receivables in U.S. dollars) plus an applicable margin. After the sale, we do not retain any interest
32
in the Receivables, but continue to service and collect, in an administrative capacity, the outstanding receivables
on behalf of CIBC.
We account for the sold Receivables as a sale in accordance with Financial Accounting Standards Board ("FASB")
ASC 860, Transfers and Servicing. Net proceeds from the sale reflect the face value of the Receivables less
discount fees charged by CIBC and one time legal costs and are classified under operating activities in the
consolidated statements of cash flows.
Pursuant to the RPA, the Company sold and de-recognized $36.1 million and $86.9 million Receivables during the
three and twelve months ended December 31, 2019. As at December 31, 2019, $18.2 million remained
outstanding to be collected from customers and remitted to CIBC. Discount fees of $0.4 million are included in
Other income (expense) and legal costs of $0.1 million are included in Administration expense in the consolidated
statements of operations. As at December 31, 2019, we collected $3.4 million from Receivables that we previously
sold and that have not been remitted to CIBC due to timing of settlement dates. We recorded the amount in
Restricted cash in the consolidated balance sheets with a corresponding increase in accrued liabilities.
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 non-recurring 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 non-
recurring 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.
33
Adjusted EBITDA is defined as net earnings (loss) plus stock-based compensation expense and related social taxes,
acquisition-related and integration costs, restructuring cost, impairment, certain other non-recurring costs or
recoveries, amortization, foreign exchange gains or losses on translation of certain balance sheet accounts,
unrealized foreign exchange gains or losses on forward contracts, interest and income tax expense. Adjusted
EBITDA is a metric used by investors and analysts for valuation purposes and is an important indicator of our
operating performance and our ability to generate liquidity through operating cash flow that will fund future
working capital needs and fund future capital expenditures.
Free cash flow is defined as cash flow from operating activities less capital expenditures and increases in
intangibles. We believe that disclosure of free cash flow provides a good measure of our ability to internally
generate cash that can be used for investment in the business and is an important indicator of our financial
strength and performance. We also believe that certain investors and analysts use free cash flow to assess our
business.
We disclose these non-GAAP financial measures as we believe they provide useful information to investors and
analysts to assist them in their evaluation of our operating results and to assist in comparisons from one period to
another. Readers are cautioned that non-GAAP financial measures do not have any standardized meaning
prescribed by U.S. GAAP and therefore may not be comparable to similar measures presented by other companies.
We strongly encourage investors to review our financial information in its entirety and not to rely on a single
financial measure. We therefore believe that despite these limitations, it is appropriate to supplement the U.S.
GAAP measures with certain non-GAAP measures defined in this section of our MD&A.
34
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)
2019
2018
2017
As adjusted
Gross margin - GAAP
Stock-based compensation and related social taxes
Realized gains (losses) on hedge contracts
Other nonrecurring costs
Gross margin - Non-GAAP
Earnings (loss) from operations - GAAP
Stock-based compensation and related social taxes
Acquisition-related and integration
Restructuring
Other nonrecurring costs
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 and other nonrecurring costs
(recoveries)
Amortization
Interest and other, net
Foreign exchange losses (gains)
Income tax expense
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)
$
$
$
$
$
$
$
$
$
219,990
$
264,571
$
234,239
167
(4)
—
479
(30)
5
461
23
—
220,153
$
265,025
$
234,723
(58,021) $
(18,275) $
13,194
974
28,160
2,903
877
(187)
14,514
13,006
3,962
7,115
11,485
—
(562)
18,575
2,414
$
35,306
$
100
10,374
8,195
1,076
318
3,668
419
15,486
39,636
(70,538) $
(24,610) $
4,518
46,108
33,177
301
1,109
10,920
35,568
39,150
(51)
4,908
916
21,077
$
55,881
$
(18,663)
(301)
(2,418)
(20,575)
51
(2,930)
(305) $
32,427
$
23,631
30,503
(67)
(7,131)
3,199
54,653
(15,017)
67
(5,184)
34,519
(1.95) $
(0.01) $
(0.68) $
0.90
$
0.14
1.05
35
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
2019
2018
Gross margin - GAAP
$ 51,368
$ 55,043
$ 58,949
$ 54,630
$ 65,895
$ 67,267
$ 69,309
$ 62,100
Stock-based compensation and related
social taxes
Realized gains (losses) on hedge contracts
Other nonrecurring costs
Gross margin - Non-GAAP
20
1
—
44
—
—
44
(2)
—
59
(3)
—
58
(13)
5
57
(11)
—
57
—
—
307
(6)
—
$ 51,389
$ 55,087
$ 58,991
$ 54,686
$ 65,945
$ 67,313
$ 69,366
$ 62,401
Earnings (loss) from operations - GAAP
$(12,385) $(12,559) $(23,271) $ (9,806)
$ (4,197) $
853
$ (5,055) $ (9,876)
Stock-based compensation and related
social taxes
Acquisition-related and integration
Restructuring
Impairment
Realized gains (losses) on hedge contracts
Other nonrecurring costs
Acquisition-related amortization
1,802
274
2,309
877
81
795
3,593
3,876
291
4,102
314
3,414
95
6,274
18,180
1,397
—
24
279
3,610
—
(183)
662
3,624
—
(109)
1,167
3,687
2,743
613
2,345
—
(296)
4,761
4,261
3,473
570
227
—
(201)
1,583
4,354
3,950
1,014
952
—
(14)
5,141
4,426
2,840
1,765
3,591
—
(51)
—
5,534
Earnings from operations - Non-GAAP
$ (2,654) $ 1,795
$ 3,428
$
(155)
$ 10,230
$ 10,859
$ 10,414
$ 3,803
Net earnings (loss) - GAAP
$(10,918) $(20,221) $(28,176) $(11,223)
$ (3,826) $ (1,037) $(11,384) $ (8,363)
Stock-based compensation and related
social taxes, restructuring, impairment,
acquisition-related, integration and other
nonrecurring costs (recoveries)
Amortization
Interest and other, net
Foreign exchange loss (gain)
Income tax expense (recovery)
6,057
8,573
109
(1,585)
90
10,720
23,258
8,115
121
2,988
4,577
8,118
102
(1,037)
5,657
6,073
8,371
(31)
743
596
10,462
9,308
19
2,082
5,853
9,483
(7)
(42)
(2,768)
1,738
11,057
8,196
9,651
10,708
(8)
(55)
4,034
2,289
(1,166)
(343)
Adjusted EBITDA
$ 2,326
$ 6,300
$ 7,922
$ 4,529
$ 15,277
$ 15,988
$ 15,639
$ 8,977
Amortization (exclude acquisition-related
amortization)
(4,980)
(4,505)
(4,494)
(4,684)
(5,047)
(5,129)
(5,225)
(5,174)
Interest and other, net
Income tax expense - Non-GAAP
(109)
(176)
(121)
(653)
(102)
(859)
31
(19)
7
8
(730)
(1,245)
(352)
(769)
55
(564)
Net earnings - Non-GAAP
$ (2,939) $ 1,021
$ 2,467
$
(854)
$ 8,966
$ 10,514
$ 9,653
$ 3,294
Diluted earnings (loss) per share
GAAP - (in dollars)
Non-GAAP - (in dollars)
$
$
(0.30) $ (0.56) $
(0.78) $
(0.31)
$ (0.11) $
(0.03) $
(0.32) $
(0.23)
(0.08) $
0.03
$
0.07
$
(0.02)
$
0.25
$
0.29
$
0.27
$
0.09
36
The following table provides a reconciliation of segmented gross margin:
(In thousands of U.S. dollars)
IoT 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
Embedded Broadband
Gross margin - GAAP
Stock-based compensation and related social taxes
Realized gains (losses) on hedge contracts
Other nonrecurring recoveries
Gross margin - Non-GAAP
Total
Gross margin - GAAP
Stock-based compensation and related social taxes
Realized gains (losses) on hedge contracts
Other nonrecurring costs (recoveries)
Gross margin - Non-GAAP
2019
2018
2017
As adjusted
140,158
$
139,602
$
107,242
88
(2)
(22)
226
(14)
4
202
10
—
140,222
$
139,818
$
107,454
79,832
$
124,969
$
126,997
79
(2)
22
253
(16)
1
259
13
—
79,931
$
125,207
$
127,269
219,990
$
264,571
$
234,239
167
(4)
—
479
(30)
5
461
23
—
220,153
$
265,025
$
234,723
$
$
$
$
$
$
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
2019
6,862
(20,273)
(13,411)
$
$
2018
47,230
(21,099)
26,131
$
$
2017
(928)
(15,806)
(16,734)
$
$
OFF-BALANCE SHEET ARRANGEMENTS
We have the RPA in place that allows us to sell, with limited recourse, qualifying receivables. Details are outlined
in the "Liquidity and Capital Resources - Accounts Receivable Purchase Agreement" section.
TRANSACTIONS BETWEEN RELATED PARTIES
We did not undertake any transactions with related parties during the years ended December 31, 2019 and 2018.
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, 2019
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
37
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 and GNSS wireless modules,
intelligent routers and gateways, asset tracking and vertical market smart devices, antennas and accessories, and
Smart SIMs. Recurring and other services 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. Recurring and other services 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
38
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 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 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 simultaneously receives and consumes the benefits provided
39
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.
Allowance for doubtful accounts
We maintain an allowance for doubtful accounts for estimated losses that may result from our customers’ inability
to pay. 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, 2019, accounts receivable comprised 20.6% of total assets. Included in this balance was a
provision of $3.2 million for doubtful accounts, or 2.4% of accounts receivable compared to $3.0 million for
doubtful accounts, or 1.7% of accounts receivable as at December 31, 2018. We believe our allowance for
doubtful accounts as at December 31, 2019 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.
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.
40
We performed our annual test on October 1, 2019. 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, 2019, our goodwill balance was $207.6 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, 2019. 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 $375 million at
October 1, 2019. We then prepared an alternative valuation analysis based on transaction and trading revenue
multiples. The analysis confirmed our conclusion that the fair value exceeded the carrying value of $341.7 million
at October 1, 2019 and $381.3 million at December 31, 2019.
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.
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.
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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 cost of
goods sold, accrued liabilities and long-term liabilities. We base our estimate on 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.
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
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
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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.
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OUTSTANDING SHARE DATA
As of March 9, 2020, we had 36,335,547 common shares issued and outstanding, 1,453,096 stock options
exercisable into common shares at a weighted average exercise price of $16.56 and 749,380 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 915,584 common shares.
IMPACT OF ACCOUNTING PRONOUNCEMENTS AFFECTING CURRENT PERIOD
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and subsequent amendments to the initial
guidance: ASU 2017-13, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively, Topic 842). This
update is to improve transparency and comparability among organizations by requiring lessees to recognize right-
of-use assets and lease liabilities on the balance sheet and requiring additional disclosure about leasing
arrangements. The standard is effective for fiscal years beginning after December 15, 2018. We adopted the
standard effective January 1, 2019, applying the optional transition method permitted under ASU 2018-11, which
relieves entities from restating comparative financial statements, allowing entities to apply and adopt the new
lease standard as at the effective date, rather than as of the first date of the earliest period presented. We elected
the package of practical expedients provided under the guidance, which applies to expired or existing leases and
allows us not to reassess whether a contract contains a lease, the lease classification, and any initial direct costs
incurred. We also elected the practical expedient to expense short term leases (12 months or less) on a straight-
line basis over the lease term, and to not separate the lease and non-lease components for all of our leases. Refer
to Note 12 Leases of our interim financial statements.
Upon adoption of Topic 842 effective January 1, 2019, we recognized operating lease liabilities of $31.5 million and
corresponding right-of-use assets of $27.0 million. The $4.5 million difference between operating lease liabilities
and right-of-use assets recognized is due to deferred rent and exit cost accruals recorded under prior lease
accounting standards. Topic 842 requires such balances to be reclassified against right-of-use assets at transition.
In future periods such balances will not be presented separately. Our accounting for finance leases remains
substantially unchanged.
IMPACT OF ACCOUNTING PRONOUNCEMENTS AFFECTING FUTURE PERIODS
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). This update will
replace the incurred loss impairment methodology for credit losses on financial instruments with a methodology
that requires consideration of a broader range of reasonable and supportable information to inform credit loss
estimates. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods
within those fiscal years. We will adopt the new standard in the first quarter of 2020. We are currently assessing
the impact of the new standard on our financial statements.
In January 2017, FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment. This new guidance simplifies the subsequent measurement of goodwill by eliminating Step
2 from the goodwill impairment test. Under the new guidance, entities will perform goodwill impairment tests by
comparing fair value of a reporting unit with its carrying amount and recognize an impairment charge for the
amount by which the carrying amount exceeds the reporting unit’s fair value. The standard is effective after
December 15, 2019. We will adopt this standard in the first quarter of 2020. After the adoption of this standard,
which will be applied prospectively, we will follow a one-step model for goodwill impairment. We do not anticipate
this pronouncement to have a significant impact on our consolidated financial statements.
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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, 2019. 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, 2019 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.
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
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December 31, 2019, 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, 2019, has issued an attestation
report on our internal control over financial reporting as of December 31, 2019. 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, 2019
that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
During 2019, we initiated outsourcing of a select group of general and administrative transaction-based activities
to a global outsourcing partner. Transition activities commenced in the third quarter of 2019 and we expect the
activities to be fully transitioned by mid-2020. Management has concluded that this outsourcing has not
materially affected the Company’s internal controls in 2019. As the transition proceeds over the coming months,
management will continually assess its impact on the Company’s internal controls 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.
LEGAL PROCEEDINGS
In November 2019, Stormborn Technologies LLC filed a patent infringement lawsuit in the United States District
Court for the District of Delaware, which lawsuit makes certain allegations concerning our FX and GL series
devices. The lawsuit is in the initial pleadings stage.
In June 2019, Inventergy LBS, LLC filed a patent infringement lawsuit in the United States District Court of the
Northern District of Georgia, which lawsuit makes certain allegations concerning our Uplink GPS Asset Tracking
devices. The lawsuit has been dismissed with prejudice.
In January 2017, Koninklijke KPN N.V. filed a patent infringement lawsuit in the United States District Court for the
District of Delaware asserting patent infringement by us and our U.S. subsidiary. The lawsuit makes certain
allegations concerning the alleged use of data transmission error checking technology in our wireless products. In
March 2018, the Court granted our motion for judgment on the pleadings that the plaintiff’s patent is invalid. The
plaintiff appealed this invalidity ruling to the Federal Circuit, and in November 2019, the Federal Circuit reversed
the District Court’s invalidity ruling. In District Court, we are continuing to pursue our counterclaims alleging that
the plaintiff has breached its commitments to standard setting organizations. A summary judgement hearing has
occurred, and a decision of the court is pending. Following the reversal of the invalidity ruling, the District Court
has scheduled the matter for trial, coordinating the case with several other pending cases involving the plaintiff
and the patent-in-suit and setting the first trial with an unspecified defendant for January 2021. In April 2019, the
United States Patent and Trial Appeal Board rendered its final decision in our petition for Inter Partes Review of the
patent-in-suit, and the instituted claims were not proved to be unpatentable.
In August 2014, M2M Solutions LLC filed a patent infringement lawsuit against us in District Court for the District of
Delaware asserting patent infringement by us and our US subsidiary. The lawsuit makes certain allegations
concerning our wireless products with respect to US Patent No. 8,648,717. In March 2017, the United States
Patent and Trial Appeal Board issued its decisions in the instituted Inter Partes Review proceedings filed by us and
other defendants, invalidating all independent claims and several dependent claims in the single patent-in-suit. In
April 2017, M2M Solutions assigned the patent-in-suit to Blackbird Tech LLC (“Blackbird”), and they became a
plaintiff in the lawsuit in June of that year. In September 2018, the court denied a motion to dismiss the lawsuit.
Blackbird was granted leave to identify additional asserted claims and accused products with respect to the
patent-in-suit. In November 2019, the Judge issued a claim construction order finding two of the remaining five
46
claims in the patent-in-suit to be indefinite and therefore invalid. The lawsuit is currently nearing the end of the
discovery stage. Trial in our case has been scheduled for January 2021.
Intellectual Property Indemnification Claims
We have been notified by certain of our customers in the following matter that we may have an obligation to
indemnify them in respect of the products we supply to them:
In June 2019, Sisvel International S.A. and 3G Licensing S.A. (together, “Sisvel”), filed patent infringement lawsuits
in the United States District Court for the District of Delaware against one or more of our customers alleging
patent infringement with respect to a portfolio of 12 patents purportedly owned by Sisvel and obtained from
Nokia Corporation (5 patents) and Blackberry, Ltd. (7 patents), that Sisvel alleges relate to technology for cellular
communications networks including, but not limited to 2G, 3G and 4G/LTE. The allegations have been made in
relation to certain of our customer’s products, which may include products which utilize modules sold to them by
us. The lawsuits are in the initial pleadings stage. Several defendants have filed motions to dismiss the lawsuits for
failure to state a claim for which relief can be granted, which motions have been granted in February 2020 with
leave given to the plaintiff to amend its pleadings.
Although there can be no assurance that an unfavorable outcome would not have a material adverse effect on our
operating results, liquidity or financial position, we believe the claims made in the foregoing legal proceedings are
without merit and intend to defend ourselves and our products vigorously in all cases.
We are engaged in certain other claims, legal actions and arbitration matters, all in the ordinary course of
business, and believe that the ultimate outcome of these claims, legal actions and arbitration matters will not have
a material adverse effect on our operating results, liquidity or financial position.
FINANCIAL RISK MANAGEMENT
Financial instruments consist primarily of cash and cash equivalents, accounts receivable, derivatives such as
foreign currency forward and option contracts, accounts payable and accrued liabilities.
We have exposure to the following business risks:
We maintain substantially all of our cash and cash equivalents with major financial institutions or invest in
government instruments. Our deposits with banks may exceed the amount of insurance provided on such
deposits.
We outsource manufacturing of our products to third parties and, accordingly, we are dependent upon the
development and deployment by third parties of their manufacturing abilities. The inability of any supplier or
manufacturer to fulfill our supply requirements could impact future results. We have supply commitments to our
contract manufacturers based on our estimates of customer and market demand. Where actual results vary from
our estimates, whether due to execution on our part or market conditions, we are at risk.
Financial instruments that potentially subject us to concentrations of credit risk are primarily accounts receivable.
We perform on-going credit evaluations of our customer’s financial condition and require letters of credit or other
guarantees whenever deemed appropriate.
Although a significant portion of our revenues are in U.S. dollars, we incur operating costs that are denominated in
other currencies. Fluctuations in the exchange rates between these currencies could have a material impact on
our business, financial condition and results of operations.
To manage our foreign currency risks, we enter into foreign currency forward contracts and options contracts to
reduce our exposure to future foreign exchange fluctuations. Foreign currency forward and options contracts are
recorded in Accounts receivable or Account payable and accrued liabilities. As of December 31, 2019, we had
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foreign currency forward contracts totaling $8.4 million Canadian dollars with an average forward rate of 1.347
maturing between January to June 2020. As at December 31, 2019, we did not have foreign currency options
contracts outstanding.
We are subject to risks typical of an international business including, but not limited to, differing economic
conditions, changes in political climate, differing tax structures other regulations and restrictions and foreign
exchange rate volatility. Accordingly, our future results could be materially affected by changes in these or other
factors.
RISKS AND UNCERTAINTIES
Our business is subject to significant risks and uncertainties and past performance is no guarantee of future
performance. The risks and uncertainties described below are those which we currently believe to be material, and
do not represent all of the risks that we face. Additional risks and uncertainties, not presently known to us, may
become material in the future or those risks that we currently believe to be immaterial may become material in the
future. If any of the following risks actually occur, alone or in combination, our business, financial condition and
results of operations, as well as the market price of our common shares, could be materially adversely affected.
Competition from new or established IoT, cloud services and wireless services companies or from those with
greater resources may prevent us from increasing or maintaining our market share and could result in price
reductions and/or loss of business with resulting reduced revenues and gross margins.
The market for IoT products and services is highly competitive and rapidly evolving. We have experienced and
expect to continue to experience the impact of intense competition on our business, including:
•
competition from more established and larger companies with strong brands and greater financial,
technical and marketing resources or companies with different business models;
• business combinations or strategic alliances by our competitors which could weaken our competitive
•
•
•
position;
introduction of new products or services by us that put us in direct competition with major new
competitors;
existing or future competitors who may be able to respond more quickly to technological developments
and changes and introduce new products or services before we do; and
competitors who may independently develop and patent technologies and products that are superior to
ours or achieve greater acceptance due to factors such as more favorable pricing, more desired or better-
quality features or more efficient sales channels.
If we are unable to compete effectively with our competitors' pricing strategies, technological advances and other
initiatives, we may lose customer orders and market share and we may need to reduce the price of our products
and services, resulting in reduced revenue and reduced gross margins. In addition, new market entrants or
alliances between customers and suppliers could emerge to disrupt the markets in which we operate through
disintermediation of our modules business or other means. There can be no assurance that we will be able to
compete successfully and withstand competitive pressures.
The loss of any of our significant customers could adversely affect our revenue and profitability, and therefore
shareholder value.
We sell our products and services to OEMs, enterprises, government agencies, distributors, resellers and network
operators, and we are occasionally party to sales agreements with customers comprising a significant portion of
our revenue. Accordingly, our business and future success depends on our ability to maintain and build on existing
relationships and develop new relationships with OEMs, enterprises, government agencies, distributors, resellers
and network operators. If certain of our significant customers, for any reason, discontinue their relationship with
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us, reduce or postpone current or expected purchase orders for products, reduce or postpone initiation or usage
of our services or suffer from business loss, our revenues and profitability could decline materially.
In addition, our current customers purchase our products under purchase orders. Our customers have no
contractual obligation to continue to purchase our products following our fulfillment of current purchase orders
and if they do not continue to make purchases, our revenue and our profitability could decline materially.
Natural catastrophes or public health epidemics could result in production disruption and impact our
capacity to continue critical operations.
Our business operations are subject to interruption by natural disasters and catastrophic events beyond our
control, including, but not limited to, earthquakes, hurricanes, typhoons, tropical storms, floods, tsunamis, fires,
droughts, tornadoes, public health issues and pandemics, severe changes in climate, war, terrorism, and geo-
political unrest and uncertainties. In particular, the current outbreak of the novel coronavirus (COVID-19) that was
first reported in Wuhan, China, on December 31, 2019, is impacting production by our contract manufacturers in
China. The outbreak of coronavirus may also impact customer demand, the availability of key components
sourced from China, logistics flows and the availability of other resources to support critical operations in the Asia
Pacific region. If we are unable to mitigate the impacts of the novel coronavirus outbreak on our operations, we
may be unable to fulfill our product delivery obligations to customers, our costs may increase, and our revenue
and margins could decrease.
Our financial results are subject to fluctuations that could have a material adverse effect on our business and
that could affect the market price of our common shares.
Our revenue, gross margin, operating earnings and net earnings may vary from quarter-to-quarter and could be
significantly impacted by a number of factors, including but not limited to the following:
• price and product competition which may result in lower selling prices for some of our products and
services or lost market share;
• price and demand pressure on our products and services from our customers as they experience pressure
in their businesses;
• demand fluctuation based on the success of our customers in selling their products and solutions which
incorporate our wireless products, services and software;
• development and timing of the introduction of our new products including the timing of sales orders, OEM
and distributor customer sell through and design win cycles in our embedded wireless module business;
transition periods associated with the migration to new technologies;
•
• potential commoditization and saturation in certain markets;
• our ability to accurately forecast demand in order to properly align the purchase of components and the
appropriate level of manufacturing capability;
• product mix of our sales (our products have different gross margins - for example the embedded wireless
module product line has lower gross margins than the higher margin rugged mobile product line);
• possible delays or shortages in component supplies;
• possible delays in the manufacturing or shipment of current or new products and the introduction of new
services;
• possible product or service quality or factory yield issues that may increase our cost of sales;
•
•
•
• possible fluctuations in certain foreign currencies relative to the U.S. dollar that may affect foreign
concentration in our customer base;
seasonality in demand;
amount of inventory held by our channel partners;
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
•
•
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• operating expenses that are generally fixed in the short-term and therefore difficult to rapidly adjust to
different levels of business.
Any of the factors listed above, or others, could cause significant variations in our revenues, gross margin and
earnings in any given quarter. Therefore, our quarterly results are not necessarily indicative of our overall
business, results of operations, and financial condition.
Quarterly variations in operating results or any of the other factors listed above, changes in financial estimates by
securities analysts, failure to meet any guidance provided by us or any change in guidance provided by us, or other
events or factors may result in wide fluctuations in the market price of our common shares. Broad market
fluctuations or any failure of our operating results in a particular quarter to meet market expectations may
adversely affect the market price of our common shares. Over the past several years, following volatility in the
market price of a company's securities, class action litigation has often been commenced against the affected
company. Any litigation of this type brought against us could result in substantial costs which could materially and
adversely affect our business, financial position, results of operation or cash flows.
Our business transformation initiatives may result in disruptions to our business or may not achieve the
anticipated benefits.
The Company is currently undertaking steps to transform the business in order to provide better alignment with
our Device-to-Cloud strategy and drive greater automation and efficiency. Key initiatives include implementing a
new go-to-market operating model, introduction of integrated online customer experience, consolidation of
engineering sites, outsourcing of a select group of general and administration activities, optimization of terms with
our third party manufacturers and re-organizing the product team to combine responsibilities for both devices and
services. These changes will involve departure of skilled personnel, employees changing roles, adding new talent,
realignment of teams, on-boarding of new partners, additional costs and working capital investments. Successfully
executing these changes will be a significant factor in enabling future revenue growth.
The anticipated benefits of these transformations may not be obtained if circumstances prevent us from taking
advantage of the strategic and business opportunities that we expect they may afford us. As the transformation
proceeds, there will be impact on costs and liquidity. Further, there could be a higher rate of organizational and
business process change and our operations may not be able to recalibrate business processes in a timely and
efficient manner thereby impacting the effectiveness of certain business processes, our ability to design, develop
and commercially launch new products and services in a timely manner, and the delivery of our products and
services to our customers. Our employees may not fully understand the plans to change the business and
therefore staff morale and engagement may deteriorate as we implement the changes to our organization.
We may have difficulty responding to changing technology, industry standards and customer requirements, and
therefore be unable to develop new products or services in a timely manner which meet the needs of our
customers.
The wireless communications industry is subject to rapid technological change, including evolving industry
standards, frequent new product inventions, constant improvements in performance characteristics and short
product life cycles. Our business and future success will depend, in part, on our ability to accurately predict and
anticipate evolving wireless technology standards and develop 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:
• 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;
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• 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
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.
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 may not operate as intended, 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.
Certain components in our products provided by a third-party supplier may have been affected by a Global
Positioning System ("GPS") week number rollover event which occurred on November 3, 2019. If our customers
have not deployed the supplier-provided software update or an alternate remedy prior to the GSP week number
rollover event, or such update or remedy is not effective to address the rollover, then the customer’s application
may not function correctly to the extent it is reliant on the GPS time, date or location data generated from such
component.
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
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.
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,
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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.
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.
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.
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.
52
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. In addition, in the United States, the California Consumer Privacy Act ("CCPA") recently
became effective on January 1, 2020. The CCPA gives California residents expanded rights to access and delete
their personal information, opt out of certain personal information sharing and receive detailed information about
how their personal information is used by requiring covered companies to provide new disclosures to California
consumers (as that term is broadly defined) and provide such consumers new ways to opt-out of certain sales of
personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for
data breaches that is expected to increase data breach litigation. Like the GDPR and other evolving privacy and
data protection laws worldwide, the CCPA may result in increased costs and may impact our ability to sell our
products and services. A determination that we have violated any of these privacy or data protection laws could
result in significant damage awards, fines and other penalties that could, individually or in the aggregate,
materially harm our business and reputation.
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 component of our business strategy. We continue to evaluate opportunities to acquire or invest in
businesses, products and technologies that expand, complement or otherwise relate to our business. For
example, on January 7, 2020, we acquired M2M Group and expanded our IoT solutions business in the Asia-Pacific
region. Any acquisitions, investments or business combinations by us may be accompanied by risks commonly
encountered including, but not limited to, the following:
•
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;
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• 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;
• 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; claims or litigation from the counterparties; 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.
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
54
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;
• our relationships with customers may be adversely affected; and
• we may be required to indemnify our customers for certain costs and damages they incur in respect of
such a claim.
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;
•
• development of similar technologies by our competitors.
the substantial legal and other costs of protecting and enforcing our rights in our intellectual property; and
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.
55
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, be impacted by natural catastrophes or public health epidemics illnesses, including
coronavirus, 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.
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, public health epidemic
illnesses, such as coronavirus, 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
56
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.
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.
57
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
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.
We are subject to risks inherent in foreign operations.
Sales outside North America represented approximately 60% of our revenues in 2019, and approximately 62% and
68% of our revenues in fiscal 2018 and 2017, 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;
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.
58
Increases in tariffs or other trade restrictions may have an adverse impact on our business.
The United States and other countries have currently levied tariffs and taxes on certain goods manufactured in
China and other jurisdictions. General trade tensions between the U.S. and China continue to be high. 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, our business may be impacted by retaliatory trade measures taken by China or
other countries in response to existing or future tariffs. 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.
59
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, 2019. 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 10, 2020
Vancouver, Canada
David G. McLennan
Chief Financial Officer
60
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, 2019 and 2018, 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, 2019, 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,
2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2019, 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, 2019, 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 10, 2020 expressed an
unqualified opinion thereon.
Adoption of New Accounting Standard
As discussed in Note 3 to the consolidated financial statements, the Company changed its method for accounting
for leases in 2019.
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 10, 2020
61
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, 2019, 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, 2019, 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, 2019 and
2018, 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, 2019, and the related notes and our report dated
March 10, 2020 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.
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
62
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 10, 2020
63
SIERRA WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE EARNINGS (LOSS)
(In thousands of U.S. dollars, except where otherwise stated)
Revenue (note 6)
loT Solutions
Embedded Broadband
Cost of Sales
loT Solutions
Embedded Broadband
Gross margin
Expenses
Sales and marketing
Research and development (note 7)
Administration
Restructuring (note 8)
Acquisition-related and integration
Impairment (note 19, 17)
Loss on disposal of iTank business (note 5(a))
Amortization
Earnings (loss) from operations
Foreign exchange gain (loss)
Other income (expense) (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
Years ended December 31,
2019
2018
$
377,808 $
335,705
713,513
$
373,937
419,665
793,602
237,650
255,873
493,523
219,990
234,335
294,696
529,031
264,571
92,093
86,473
48,827
28,160
974
877
—
20,607
278,011
(58,021)
(1,296)
(301)
(59,618)
10,920
(70,538) $
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) $
2017
303,057
387,670
690,727
195,815
260,673
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
$
$
$
(4,070)
(74,608) $
(6,670)
(31,280) $
11,950
16,468
(1.95) $
(1.95)
(0.68) $
(0.68)
36,166
36,166
36,019
36,019
0.14
0.14
32,356
32,893
The accompanying notes are an integral part of the consolidated financial statements.
64
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, net (note 16)
Operating lease right-of-use assets (note 19)
Intangible assets, net (note 17)
Goodwill (note 18)
Deferred income taxes (note 10)
Other assets
Liabilities
Current liabilities
Accounts payable and accrued liabilities (note 20)
Deferred revenue
Long-term obligations (note 21)
Operating lease liabilities (note 19)
Deferred income taxes (note 10)
Equity
Shareholders’ equity
Common stock: no par value; unlimited shares authorized; issued and outstanding:
36,233,361 shares (December 31, 2018 — 36,067,415 shares)
Preferred stock: no par value; unlimited shares authorized; issued and outstanding: nil shares
Treasury stock: at cost; 44,487 shares (December 31, 2018 — 119,584 shares)
Additional paid-in capital
Retained deficit
Accumulated other comprehensive loss (note 22)
Commitments and contingencies (note 27)
Subsequent event (note 28)
The accompanying notes are an integral part of the consolidated financial statements.
On behalf of the Board:
As at December 31,
2019
2018
$
$
$
75,454
3,629
131,432
54,291
19,256
284,062
39,924
25,609
70,072
207,595
2,096
9,982
639,340 $
$
173,556 $
10,610
184,166
43,774
25,154
4,921
258,015
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
435,532
—
(370)
38,212
(78,833)
(13,216)
381,325
639,340 $
432,552
—
(1,965)
30,984
(8,295)
(9,146)
444,130
683,916
$
Robin A. Abrams
Director
Paul G. Cataford
Director
65
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, 2016
31,859,960
$ 342,450
355,471
$
(5,134) $
24,976
$ 13,938
$
(14,426) $
361,804
Common share cancellation
(170,217)
(1,825)
Stock option exercises (note 11)
500,184
8,122
Stock-based compensation (note 11)
—
—
—
—
—
—
—
—
Distribution of vested RSUs
90,751
1,788
(132,832)
1,918
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
Balance as at December 31, 2017
3,580,832
77,213
—
—
—
—
—
—
—
—
—
—
35,861,510
$ 427,748
222,639
$
(3,216) $
27,962
$ 17,502
$
(2,476) $
467,520
—
11,950
11,950
—
(954)
—
—
—
—
4,518
—
(1,187)
—
—
—
—
(24,610)
(2,282)
10,341
(5,073)
—
—
—
(985)
13,060
—
(9,053)
—
—
—
—
—
—
—
—
(2,779)
5,840
10,341
(1,367)
77,213
4,518
—
—
—
—
—
—
(3,120)
2,636
13,060
(2,808)
(1,878)
(24,610)
—
—
(674)
2,269
—
—
(202)
12,930
—
(5,500)
—
—
—
—
—
—
(70,538)
—
—
—
—
—
488
12,930
(674)
(941)
(70,538)
—
(4,070)
(4,070)
—
—
—
(2,808)
4,059
—
—
Common share cancellation (note 23)
(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
—
—
—
—
—
—
—
161,000
Distribution of vested RSUs
146,143
3,116
(264,055)
Net loss
Foreign currency translation
adjustments, net of tax
Balance as at December 31, 2018
—
—
—
—
—
—
Stock option exercises (note 11)
47,231
Stock-based compensation (note 11)
Purchase of treasury shares for RSU
distribution
—
—
690
—
—
—
—
68,500
Distribution of vested RSUs
118,715
2,290
(143,597)
Net loss
Foreign currency translation
adjustments, net of tax
Balance as at December 31, 2019
—
—
—
—
—
—
The accompanying notes are an integral part of the consolidated financial statements.
66
36,067,415
$ 432,552
119,584
$
(1,965) $
30,984
$ (8,295) $
(9,146) $
444,130
—
(6,670)
(6,670)
36,233,361
$ 435,532
44,487
$
(370) $
38,212
$ (78,833) $
(13,216) $
381,325
SIERRA WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
Years ended December 31,
2019
2018
2017
$
(70,538) $
(24,610) $
4,518
33,177
12,930
8,711
877
—
1,122
1,218
37,965
(3,712)
(8,611)
(12,069)
5,792
6,862
(16,494)
(3,779)
98
3,303
500
—
—
(16,372)
488
—
(674)
(941)
—
(535)
(1,662)
958
(10,214)
89,297
79,083
$
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
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 (note 10)
Impairment (note 19, 17)
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
Cash flows provided by (used in) operating activities
Investing activities
Additions to property and equipment
Additions to intangible assets
Proceeds from sale of property and equipment
Proceeds from sale of investment
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))
Cash flows used in investing activities
Financing activities
Issuance of common shares, net of issuance cost
Repurchase of common shares for cancellation (note 23)
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, cash equivalents and restricted cash, increase (decrease) in the year
Cash, cash equivalents and restricted cash, beginning of year
Cash, cash equivalents and restricted cash, end of year
$
Supplemental cash flow information (note 24)
The accompanying notes are an integral part of the consolidated financial statements.
67
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
Note 27
Note 28
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 (Expense)
Income Taxes
Stock-based Compensation Plans
Earnings (Loss) Per Share
Accounts Receivable
Inventories
Prepaids and Other
Property and Equipment
Intangible Assets
Goodwill
Leases
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
Subsequent Event
68
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78
79
82
83
83
85
85
88
92
92
93
93
93
94
95
96
97
98
98
98
99
99
101
102
105
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 integrated Device-To-Cloud IoT solutions that are comprised
of our recurring connectivity services, our IoT cloud platform, and our embedded cellular modules and
gateways. Enterprises, industrial companies and Original Equipment Manufacturers (“OEMs”) worldwide
rely on our expertise to deliver fully-integrated IoT solutions to reduce complexity, gather intelligent edge
data and enable connected loT products and services.
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.
Our segments have changed from those reported at December 31, 2018 when we previously reported three
segments. We implemented a new organizational structure during the first quarter of 2019 to clearly delineate
our Device-to-Cloud IoT solutions activities and now have two reportable segments effective first quarter of
2019: (i) the IoT Solutions segment and (ii) the Embedded Broadband segment. We have adjusted our
comparative information to align with this new segmentation.
IoT Solutions
Integrated end-to-end IoT solutions that include recurring connectivity services,
cloud management software, cellular modules and gateways targeted primarily
at enterprises and OEMs in the IoT space.
Embedded Broadband High-speed cellular embedded modules that are typically used in non-industrial
applications, namely Automobile, Mobile Computing and Enterprise Networking
markets.
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
accounts receivable; income taxes; restructuring costs; contingent consideration and commitments
69
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
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. Recurring and other services 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. Recurring and other services 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
extending beyond the current period are deferred and revenue is recognized over the applicable
earning period.
70
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
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 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
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.
71
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
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
2019
2018
Contract assets
Deferred revenue - current
Deferred revenue - noncurrent
$
1,688 $
10,610
8,078
1,953 $
6,213
6,317
(265)
4,397
1,761
For the year ended December 31, 2019, $6,085 of deferred revenue was recognized in revenue
that was included in the contract liability balance as of December 31, 2018 (2018 - $5,476).
(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.
(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. We base our estimate
on the smallest saleable unit (“SSU”) principle (i.e., the principle that any royalty obligations
72
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
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.
(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
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
73
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
awards' vesting period using the straight-line method. Compensation cost for performance-based
restricted share units is measured using a Monte Carlo valuation model. We account for
forfeitures in compensation expense when they occur.
(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.
(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 22, 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.
74
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
(n)
Financing receivables
We lease certain hardware devices to a small number of hardware distributors under sales-type
leases which have terms ranging from 10 months to 48 months 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
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
75
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
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
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 (expense).
(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,
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
— over the shorter of the term of the license or an
estimate of their useful life, ranging from three
to ten years
Intellectual property and customer
relationships
Brand
In-process research and
development
— 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)
Leases
At inception of a contract, we apply judgment in assessing whether a contract is or contains a
lease. This assessment involves determining whether we have control over the identified asset for
a period of time in exchange for consideration. Operating leases are included in Operating lease
right-of-use ("ROU") assets, Accounts payable and accrued liabilities, and Operating lease liabilities
in our consolidated balance sheets. Finance leases are included in Property and equipment,
Accounts payable and accrued liabilities, and Long-term obligations in our consolidated balance
sheets.
76
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
ROU assets represent our right to use an underlying asset for the lease term. Lease liabilities
represent our obligation to make lease payments arising from the lease. We recognize operating
lease right-of-use assets and liabilities at commencement date based on the present value of lease
payments over the lease term. We use the incremental borrowing rate as the discount rate for
leases as the rates implicit in our leases are not readily determinable. Our incremental borrowing
rate is estimated to approximate the interest on a collateralized basis with similar terms and
payments and in economic environments where the leased asset is located. The operating lease
ROU asset also includes any prepaid lease payments, initial direct costs and lease incentives. Our
lease terms include non-cancelable periods and include options to renew the lease when it is
reasonably certain that we will exercise that option.
Operating lease cost for lease payments is recognized on a straight-line basis over the term of the
lease. Our lease agreements have lease and non-lease components, which we have elected to
account for as a single lease cost.
We have elected not to record right-of-use assets and lease liabilities for short-term leases with a
term of 12 months or less and recognize these short term leases to profit or loss on a straight-line
basis over the lease term.
(t)
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, on October 1 of every year, at the reporting unit level. Goodwill is tested for
impairment between annual tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying value. 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.
(u)
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
for impairment and in interim periods if certain events occur indicating that the carrying value of
the intangible assets may be impaired.
77
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
(v)
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.
(w)
Investment tax credits
In Canada and the United States, 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. In France, the investment tax credits are reported as a reduction
of cost as the credits are refundable irrespective of taxable income.
(x)
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 February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and subsequent amendments to the
initial guidance: ASU 2017-13, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively,
Topic 842). This update is to improve transparency and comparability among organizations by requiring
lessees to recognize ROU assets and lease liabilities on the balance sheet and requiring additional
disclosure about leasing arrangements. The standard is effective for fiscal years beginning after December
15, 2018. We adopted the standard effective January 1, 2019, applying the optional transition method
permitted under ASU 2018-11, which relieves entities from restating comparative financial statements,
allowing entities to apply and adopt the new lease standard as at the effective date, rather than as of the
first date of the earliest period presented. We elected the package of practical expedients provided under
the guidance, which applies to expired or existing leases and allows the Company not to reassess whether
a contract contains a lease, the lease classification, and any initial direct costs incurred. We also elected
the practical expedient to expense short term leases (12 months or less) on a straight-line basis over the
lease term, and to not separate the lease and non-lease components for all of our leases. Refer to Note 19
Leases.
Upon adoption of Topic 842 effective January 1, 2019, we recognized operating lease liabilities of $31.5
million and corresponding ROU assets of $27.0 million. The $4.5 million difference between operating
lease liabilities and right-of-use assets recognized is due to deferred rent and exit cost accruals recorded
under prior lease accounting standards. Topic 842 requires such balances to be reclassified against ROU
assets at transition. In future periods such balances will not be presented separately. Our accounting for
finance leases remains substantially unchanged.
4.
CHANGES IN FUTURE ACCOUNTING STANDARDS
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. The Company will adopt the new standard in its first
quarter of 2020. We are currently assessing the impact of the new standard on our financial statements.
78
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
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. The Company will adopt this standard in the
first quarter of 2020. After the adoption of this standard, which will be applied prospectively, we will
follow a one-step model for goodwill impairment. We do not anticipate this pronouncement to have a
significant impact on our consolidated financial statements.
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 was to 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.
In 2018, 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 Solutions reporting segment and $2.1 million of
goodwill was de-recognized and included within the net assets disposed of.
During the year ended December 31, 2019, we received $0.5 million of escrow payments. As of December
31, 2019, $0.5 million continues to be held in escrow. However, the release of a portion of this amount is
under dispute with the purchaser.
(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.
79
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
The allocation of the purchase price to goodwill was completed as of September 30, 2018.
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 Solutions 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)
80
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.
81
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
6.
SEGMENTED INFORMATION
Our segments have changed from those reported at December 31, 2018 when we previously reported
three segments. We implemented a new organizational structure during the first quarter of 2019 to
clearly delineate our Device-to-Cloud IoT solutions activities and now have two reportable segments
effective the first quarter of 2019. We have reclassified our comparative information.
IoT Solutions
Our IoT Solutions segment is focused on integrated end-to-end IoT solutions that include recurring
connectivity services, cloud platform, software and devices (cellular modules or cellular gateways) targeted
primarily at enterprises and OEM in the IoT space. In this segment, we have the opportunity to provide
connectivity services and solutions to the customer along with our cloud platform, devices and
management tools.
Embedded Broadband
Our Embedded Broadband segment is comprised of our high-speed cellular embedded modules that are
typically used in non-industrial applications, namely Automobile, Mobile Computing and Enterprise
Networking markets. The products in this segment are typically high-speed fourth generation ("4G") Long-
Term Evolution ("LTE") and LTE-Advanced cellular modules. In this segment, we do not have the
opportunity to provide connectivity services or fully-integrated IoT solutions to the OEM customer. Our
Embedded Broadband business is expected to transition over time from 4G LTE to fifth generation ("5G")
technology.
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.
We disaggregate our revenue from contracts with customers into reportable segments, type and
geographical region.
REVENUE BY TYPE
Revenue
Product
Recurring and other services
2019
2018
2017
$
$
614,384 $
699,158 $
99,129
94,444
713,513 $
793,602 $
645,402
45,325
690,727
82
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
REVENUE BY GEOGRAPHICAL REGION
Americas
Europe, Middle East and Africa
Asia-Pacific
2019
2018
300,104
$
314,169
$
147,091
266,318
167,812
311,621
713,513
$
793,602
$
$
$
PROPERTY AND EQUIPMENT BY GEOGRAPHICAL REGION
Americas
Europe, Middle East and Africa
Asia-Pacific
2019
27,168
$
5,594
7,162
39,924
$
$
$
2017
227,905
168,400
294,422
690,727
2018
26,045
9,027
4,770
39,842
7.
RESEARCH AND DEVELOPMENT
The components of research and development costs consist of the following:
Gross research and development
Government tax credits
8.
RESTRUCTURING
April 2019
2019
86,726
(253)
86,473
$
$
2018
94,352 $
(645)
93,707 $
2017
83,538
(885)
82,653
$
$
On April 30, 2019, we announced two initiatives related to the acceleration of our transformation to a
Device-to-Cloud IoT solutions company:
1) Consolidation of engineering resources and the transfer of certain functions to lower cost locations
resulting in a significant reduction in our engineering team in Issy-Les-Moulineaux, outside of Paris, France.
Following a detailed process, the majority of employees impacted by this program have been notified and
the program was largely completed by the end of 2019. Our sales and customer support capability in Issy-
Les-Moulineaux will remain unchanged and our teams in Toulouse and Sophia Antipolis will continue to
provide key technical capability for our cloud and services offerings; and
2) Outsourcing of a select group of general and administrative transaction-based activities to a global
outsourcing partner. Transition activities commenced in the third quarter of 2019 and we expect the
activities to be fully transitioned by mid-2020.
These two initiatives have impacted approximately 128 positions of which 97 positions were in France.
During the year ended December 31, 2019, we recorded $18.6 million in severance and $7.9 million in
transitional costs related to these two initiatives. As at December 31, 2019, outstanding liability of $8.7
million relating to these initiatives is included in Accounts payable and accrued liabilities and the majority
of the amount is expected to be paid by the end of June 2020.
83
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
November 2018
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.
In 2019, we continued with certain organizational structure changes within various locations and functions
of the Company that we initiated during November 2018, including the realignment of our sales resources
into a single sales organization to enable a unified approach to sales. During the year ended December 31,
2019, we recorded $1.5 million in severance and other related costs (2018 - $2.3 million). As at December
31, 2019, we have incurred total costs of $3.8 million. As at December 31, 2019, there was no liability
outstanding related to this initiative.
March 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, 2019, we recorded $0.1 million in severance and other related costs
associated with this initiative (2018 - $4.8 million). As at December 31, 2019, we have incurred total costs
of $5.0 million related to this initiative and do not expect to incur any additional costs. As at December 31,
2019, there was no liability outstanding related to this initiative.
The following table provides the activity in the restructuring liability:
Balance, beginning of period
Reclassification from long-term obligations
Expensed in period
Disbursements
Foreign exchange
Classification:
Accounts payable and accrued liabilities (note 20)
By restructuring initiative:
March 2018
November 2018
April 2019
2019
2,486
1,617
28,160
(23,424)
(184)
8,655
8,655
8,655
$
$
$
— $
—
8,655
8,655
$
$
$
$
$
$
2018
540
—
7,115
(5,081)
(88)
2,486
2,486
2,486
842
1,644
—
2,486
84
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
9.
OTHER INCOME (EXPENSE)
The components of other income (expense) for the years ended December 31 were as follows:
Interest income
Interest expense
Discount fees (note 25(d))
Other
10.
INCOME TAXES
2019
429
$
(263)
(347)
(120)
(301) $
2018
253 $
(156)
—
(46)
51 $
$
$
The components of earnings (loss) before income taxes consist of the following:
Canadian
Foreign
Earnings (loss) before income taxes
The income tax expense (recovery) consists of:
Canadian:
Current
Deferred
Foreign:
Current
Deferred
Total:
Current
Deferred
2019
(23,901) $
(35,717)
(59,618) $
2018
10,880 $
(34,574)
(23,694) $
2019
126
8,706
8,832
2,083
5
2,088
2,209
8,711
10,920
$
$
$
$
$
$
2018
101 $
(4,508)
(4,407) $
2,500 $
2,823
5,323 $
2,601 $
(1,685)
916 $
$
$
$
$
$
$
$
$
2017
245
(159)
—
(19)
67
2017
7,205
512
7,717
2017
28
1,665
1,693
2,347
(841)
1,506
2,375
824
3,199
85
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
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% (2018 - 26.99%; 2017 - 26.01%)
$
(16,080) $
(6,330) $
1,979
2019
2018
2017
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
Deferred tax assets and liabilities
(1,363)
1,073
26,741
1,287
(738)
2,173
4,238
1,041
1,973
(2,179)
$
10,920
$
916 $
(1,452)
1,049
1,571
1,633
(1,581)
3,199
The tax effects of temporary differences that give rise to significant deferred tax assets and deferred tax
liabilities were as follows at December 31:
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
Lease liabilities
Valuation allowance
Classification:
Assets
Non-current
Liabilities
Non-current
2019
(3,320) $
93,729
3,314
25,437
19,869
(1,106)
(6,591)
6,144
137,476
140,301
(2,825) $
2018
1,289
89,499
3,195
20,004
16,044
(801)
(10,022)
—
119,208
113,560
5,648
2019
2018
2,096
$
11,751
(4,921)
(2,825) $
(6,103)
5,648
$
$
$
$
At December 31, 2019, we have provided for a valuation allowance on our deferred tax assets of $140,301
(2018 - $113,560).
At December 31, 2019, we have Canadian net operating loss carry-forwards of $1,808 that expire in 2039
to offset future Canadian taxable income, and allowable capital loss carry-forwards of $11,917 that are
86
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
available, indefinitely, to be deducted against future Canadian taxable capital gains. In addition, we have
investment tax credits of $22,585 and $10,109 available to offset future Canadian federal and provincial
income taxes payable, respectively. The investment tax credits expire between 2030 and 2039. At
December 31, 2019, our U.S. subsidiary has $6,445 of California research & development tax credits which
may be carried forward indefinitely.
At December 31, 2019, net operating loss carry-forwards for our foreign subsidiaries were $65,489 for U.S.
income tax purposes, of which, $9,860 may be carried forward indefinitely, and $55,629 expires between
2021 and 2037, $6,531 for Sweden income tax purposes, $25 for Norway income tax purposes, $60,294 for
Luxembourg income tax purposes, and $231,025 for French income tax purposes. The 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 French net operating losses deducted each year is limited to €1.0 million plus
50% 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 $3,627 and employment tax credit carried forward of $184 as at December 31, 2019.
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.
Accounting for uncertainty in income taxes
At December 31, 2019, we had gross unrecognized tax benefits of $4,628 (2018 — $4,482). Of this total,
$447 (2018 — $652) 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
2019
4,482
$
49
—
97
4,628
$
2018
4,418
3
—
61
4,482
$
$
87
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
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, 2019, we had
increased $56 (2018 - increased $29) 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 2006 to 2019 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
concluded in the next 12 months. The Company estimates that the unrecognized tax benefits at December
31, 2019 could reduce by approximately $234 in the next 12 months.
Deferred taxes on foreign earnings
No provision for taxes has 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
2019
167
3,750
2,752
6,261
2018
$
491 $
2,784
2,274
7,511
2017
461
2,503
2,038
5,339
12,930
$
13,060 $
10,341
2,890
10,040
3,350
9,710
12,930
$
13,060 $
3,297
7,044
10,341
$
$
$
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, 2019, stock options exercisable into 1,064,026 common shares are
available for future allocation under the Plan.
88
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
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.
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)
2019
2.03%
Nil
54%
4.0
$5.38
2018
2.22%
Nil
55%
4.0
$7.02
2017
1.37%
Nil
55%
4.0
$11.09
There is no dividend yield because we do not pay, and do not plan to pay, cash dividends on our common
shares. The expected stock price volatility is based on the historical volatility of our average monthly stock
closing prices over a period equal to the expected life of each option grant. The risk-free interest rate is
based on yields from risk-free instruments with a term equal to the expected term of the options being
valued. The expected life of options represents the period of time that the options are expected to be
outstanding based on historical data of option holder exercise and termination behavior. Forfeitures are
accounted for in compensation expense as they occur.
The following table presents stock option activity for the years ended December 31:
Outstanding, December 31, 2016
Granted
Exercised
Forfeited
Outstanding, December 31, 2017
Granted
Exercised
Forfeited
Number of
Options
1,315,623
685,936
(500,184)
(37,894)
1,463,481
343,173
(221,262)
(207,044)
Outstanding, December 31, 2018
1,378,348
Granted
Exercised
Forfeited
462,937
(47,231)
(205,911)
Outstanding, December 31, 2019
1,588,143
Weighted Average
Exercise Price
Weighted
Average
Remaining
Contractual Life
Aggregate
Intrinsic Value
Cdn.$
U.S.$
In Years
U.S.$
19.65
32.16
14.91
24.58
26.38
21.47
16.10
34.24
26.79
16.07
13.58
26.45
23.62
14.61
25.58
11.86
19.55
20.98
15.75
11.81
25.10
19.64
12.34
10.43
20.31
18.14
2.9
3.2
2.8
2.6
4,687
6,997
4,788
1,222
822
80
30
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, 2019, the aggregate intrinsic value of stock options exercised was $80 (2018 -
$1,222).
89
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, 2019:
Range of
Exercise Prices
$8.46 - $12.21 U.S.
$11.01 - $15.90 Cdn
$12.22 - $13.02 U.S.
$15.91 - $16.95 Cdn
$13.03 - $16.37 U.S.
$16.96 - $21.31 Cdn
$16.38 - $25.23 U.S.
$21.32 - $32.85 Cdn
$25.24 - $32.29 U.S.
$32.86 - $42.03 Cdn
Options Outstanding
Weighted
Average
Remaining
Option Life
Weighted
Average
Exercise Price
Options Exercisable
Number
of Options
Weighted
Average
Exercise Price
(years)
Cdn.$
U.S.$
Exercisable
Cdn.$
U.S.$
1.9
4.1
3.2
2.1
1.5
2.6
13.79
10.59
201,595
13.98
10.74
16.45
12.64
—
—
—
20.50
15.75
139,133
20.70
15.90
30.56
23.48
163,836
30.46
23.40
35.24
23.62
27.07
18.14
319,509
824,073
35.85
26.87
27.54
20.64
Number
of
Options
278,373
356,236
319,452
232,072
402,010
1,588,143
The options outstanding at December 31, 2019 expire between March 3, 2020 and November 8, 2024.
As at December 31, 2019, the unrecognized stock-based compensation cost related to the non-vested
stock options was $4,548 (2018 — $5,451; 2017 — $7,879), which is expected to be recognized over a
weighted average period of 2.6 years (2018 — 2.3 years; 2017 — 2.8 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,
2019, 282,733 share units are available for future allocation under the treasury based restricted share unit
plan. With respect to the two market based RSPs, independent trustees purchase Sierra Wireless common
shares over the facilities of the Toronto Stock Exchange ("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 (market condition) 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.
90
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
In February 2019, the Board of Directors approved the issuance of PSUs that are measured against an
internal performance benchmark based on achieving service revenue targets or cost savings initiatives as
well as PSUs measured against a benchmark index. The fair value of the PSUs (performance condition)
that are measured against an internal performance benchmark based on achieving service revenue targets
or cost savings initiatives is the Company's stock price on the date of grant. The fair value of the PSUs that
are measured against a benchmark index at date of grant is determined using the Monte Carlo simulation
model. These outstanding PSUs have a performance-based three year cliff-vesting criteria measured
against a benchmark index, service revenue or cost savings targets and the associated performance
conditions are probable of being achieved.
Generally, non-performance based RSUs vest over three years, in equal one-third amounts on each
anniversary date of the grant and some cliff vest in 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:
Number of
Weighted Average
Grant Date Fair Value
Weighted
Average
Remaining
Contractual Life
RSUs
Cdn.$
U.S.$
In years
Outstanding, December 31, 2016
Granted
Vested / settled
Forfeited
Outstanding, December 31, 2017
Granted
Vested / settled
Forfeited
Outstanding, December 31, 2018
Granted
Vested / settled
Forfeited
Outstanding, December 31, 2019
Outstanding – vested and not settled
Outstanding – unvested
Outstanding, December 31, 2019
22.59
32.02
22.86
21.10
26.80
23.78
25.69
25.73
26.23
16.20
23.71
19.80
20.08
16.81
25.47
18.18
16.77
21.31
17.44
18.84
18.86
19.24
12.44
18.22
15.20
15.42
745,974
454,685
(284,888)
(39,030)
876,741
754,452
(520,660)
(64,258)
1,046,275
1,222,131
(333,865)
(118,782)
1,815,759
165,409
1,650,350
1,815,759
Aggregate
Intrinsic
Value
U.S.$
11,689
6,098
2.1
2.1
17,919
8,876
2.6
13,289
4,607
2.3
17,310
As at December 31, 2019, the total remaining unrecognized compensation cost associated with the RSUs
totaled $14,871 (2018 — $11,530; 2017 — $9,346), which is expected to be recognized over a weighted
average period of 1.9 years (2018 — 1.9 years; 2017 — 1.6 years).
91
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:
Net earnings (loss)
Weighted average shares used in computation of:
Basic
Assumed conversion
Diluted
Net earnings (loss) per share (in dollars):
Basic
Diluted
$
$
2019
(70,538) $
2018
(24,610) $
2017
4,518
36,166
—
36,166
36,019
—
36,019
(1.95) $
(1.95)
(0.68) $
(0.68)
32,356
537
32,893
0.14
0.14
As the Company incurred losses for the years ended December 31, 2019 and 2018, all equity awards for
those years 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
2019
118,349 $
(3,170)
115,179
3,739
3,816
959
1,688
6,051
131,432 $
2018
154,593
(2,968)
151,625
3,016
3,783
1,876
1,953
9,472
171,725
$
$
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
2019
2018
$
2,968
$
1,827 $
490
(285)
(3)
3,170
$
1,159
9
(27)
2,968 $
$
2017
2,486
(535)
(194)
70
1,827
92
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
$
$
$
$
$
$
2019
30,149
24,142
54,291
2019
10,418
309
2,231
1,529
4,769
2018
28,849
21,930
50,779
2018
3,851
846
1,921
880
4,205
$
19,256
$
11,703
In 2019, $357 of deferred contract acquisition and fulfillment costs were expensed to Sales and marketing
and Cost of sales (2018 - $959).
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
2019
Accumulated
amortization
$
$
1,948
30,309
29,549
8,044
7,727
5,124
560
1,195
1,117
4,314
Cost
3,189
42,596
46,637
9,592
9,854
7,319
584
1,408
1,852
6,780
$
129,811
$
89,887
$
Net book
value
1,241
12,287
17,088
1,548
2,127
2,195
24
213
735
2,466
39,924
93
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
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
Accumulated
amortization
1,634
$
$
28,361
26,427
7,464
6,287
4,489
688
1,162
905
3,083
Cost
3,089
38,761
43,860
9,099
8,180
6,754
983
1,533
1,821
6,262
$
120,342
$
80,500
$
Net book
value
1,455
10,400
17,433
1,635
1,893
2,265
295
371
916
3,179
39,842
Amortization expense relating to property and equipment was $16,257, $18,204, and $14,032 for the
years ended December 31, 2019, 2018, and 2017, respectively.
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
2019
Accumulated
amortization
13,540
48,912
$
$
22,326
69,883
3,727
8,760
$
Cost
15,416
52,517
27,824
116,576
14,613
10,274
$
237,220
$
167,148
$
2018
Cost
Accumulated
amortization
$
15,163 $
13,328 $
50,740
28,277
118,741
14,854
10,521
238,296 $
49,112
18,671
61,993
2,536
7,766
153,406 $
$
Net book
value
1,876
3,605
5,498
46,693
10,886
1,514
70,072
Net book
value
1,835
1,628
9,606
56,748
12,318
2,755
84,890
94
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
Estimated annual amortization expense for the next 5 years ended December 31 are as follows:
2020
2021
2022
2023
2024
13,590
9,360
8,311
8,009
7,960
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 IoT Solutions business.
Amortization expense relating to intangible assets was $16,920, $20,946, and $16,471 for the years ended
December 31, 2019, 2018, and 2017, respectively.
The weighted-average remaining useful lives of intangible assets was 5.9 years as at December 31, 2019.
At December 31, 2019 and 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.
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(c) and 5(d))
Disposal of assets of a business unit
Foreign currency translation adjustments
IoT Solutions
Embedded Broadband
2019
211,074 $
—
—
(3,479)
207,595 $
121,429 $
86,166
207,595 $
2018
218,516
1,016
(2,073)
(6,385)
211,074
123,213
87,861
211,074
$
$
$
$
During the first quarter of 2019, the Company implemented certain strategic and organizational structure
changes that resulted in the change of our reporting units. Effective March 31, 2019, we have two
reportable segments and two reporting units: (a) IOT Solutions and (b) Embedded Broadband. As a result,
we reassigned our assets and liabilities and goodwill to the two new reporting units. Goodwill has been
reassigned to the new reporting units using a fair value allocation approach, i.e. discounted cash flow
analysis. We have reclassified our comparative information.
We assessed the recoverability of goodwill as at October 1, 2019 for each of the identified reporting units
and determined that the fair value of each of the two 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, 2019, 2018 and 2017.
95
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
19.
LEASES
The components of lease expenses were as follows:
Operating lease cost
Finance lease cost
Short-term lease cost
ROU asset impairment
Sublease income
Total lease expenses
$
$
2019
9,610
345
1,961
877
(1,032)
11,761
We have operating leases for offices, data centers and certain office equipment. Our leases have
remaining lease terms of 0.2 year to 12.0 years. We sublease certain offices to third parties.
In the fourth quarter of 2019, we recorded a right-of-use asset impairment related to our office in France
that we partially cease to use and sublease.
Supplemental Balance Sheet information related to leases was as follows:
Operating Leases
Operating lease right-of-use assets
Accounts payable and accrued liabilities
Operating lease liabilities
Total operating lease liabilities
Finance Leases
Property and equipment, gross
Accumulated depreciation
Property and equipment, net
Accounts payable and accrued liabilities
Long-term obligations
Total finance lease liabilities
Weighted Average Remaining Lease Term
Operating leases
Finance leases
Weighted Average Discount Rate
Operating leases
Finance leases
96
$
$
$
$
$
$
$
2019
25,609
5,933
25,154
31,087
1,383
(1,194)
189
379
208
587
7.1
1.6
2.6%
3.5%
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
Supplemental cash flow information related to leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Financing cash flow from finance leases
New lease assets obtained in exchange for lease liabilities (non-cash):
Operating leases
Financing leases
Maturities of lease liabilities were as follows:
$
$
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less: imputed interest
Total lease liabilities
Operating
Leases
6,069 $
6,340
Finance
Leases
331 $
248
4,985
3,066
2,191
12,014
34,665
(3,578)
31,087 $
8
8
3
—
598
(11)
587 $
$
$
20.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The components of accounts payable and accrued liabilities at December 31 were as follows:
Trade payables and accruals
Inventory commitment reserve
Accrued royalties
Accrued payroll and related liabilities
Professional services
Taxes payable (including sales taxes)
Product warranties (note 27(a)(iii))
Sales credits
Restructuring liability (note 8)
Operating lease liabilities (note 19)
Finance lease liabilities (note 19)
Other
97
$
$
2019
75,057
1,430
11,870
15,093
4,481
4,904
8,927
8,814
8,655
5,933
379
28,013
$
173,556 $
2019
7,860
535
6,782
38
Total
6,400
6,588
4,993
3,074
2,194
12,014
35,263
(3,589)
31,674
2018
95,701
843
14,348
18,115
6,702
4,957
7,914
7,055
2,486
—
533
25,566
184,220
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
21.
LONG-TERM OBLIGATIONS
The components of long-term obligations at December 31 were as follows:
Accrued royalties
Deferred revenue
Finance lease liabilities (note 19)
Other
Remaining performance obligations
$
$
2019
30,988
$
8,078
208
4,500
43,774
$
2018
28,181
6,317
558
8,194
43,250
As of December 31, 2019, we had $24,173 of remaining performance obligations to be recognized
(December 31, 2018 - $20,820), of which we expect to recognize approximately 41% in 2020, 31% in 2021,
and 28% in subsequent years.
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.
22.
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
Loss on long term intercompany balances
Balance, end of period
23.
SHARE CAPITAL
2019
(9,146) $
(3,241)
(829)
(13,216) $
$
$
2018
(2,476)
(4,226)
(2,444)
(9,146)
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
terminated on August 7, 2019. During the year ended December 31, 2019, we did not repurchase any
common shares. During the year ended December 31, 2018, we purchased and canceled 161,500
common shares at an average price of $19.32 per share under the NCIB. The excess purchase price over an
above the average carrying value in the amount of $1,187 was charged to retained earnings in 2018.
98
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
24.
SUPPLEMENTAL CASH FLOW INFORMATION
The following table summarizes supplemental cash flow information and non-cash activities:
Net income taxes paid
Net Interest (received) paid
Discount fees paid (note 25 (d))
Non-cash property and equipment additions
Non-cash additions related to asset retirement obligations
2019
2018
$
616
$
1,105
$
(202)
347
485
—
118
—
231
—
2017
6,100
105
—
—
75
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
2019
75,454
3,629
$
2018
89,076 $
221
2017
65,003
221
79,083
$
89,297 $
65,224
$
$
As at December 31, 2019, restricted cash of $221 is held in escrow related to certain vendor obligations.
We collected $3,408 from trade receivables sold to CIBC under our Accounts Receivable Purchase
Agreement which have not been remitted to CIBC as at December 31, 2019. See note 25(d).
25.
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.
99
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
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, 2019, we were committed to foreign currency forward contracts totaling $8.4 million
Canadian dollars with an average forward rate of 1.3447, maturing between January to June 2020. We
recorded unrealized gain of $1,421 in Foreign exchange gain (loss) for those outstanding contracts in the
year ended December 31, 2019 (2018 — Foreign exchange loss of $1,201).
(b) Credit Facilities
In July, 2018, we entered into a 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 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, 2019, there were no borrowings under the Revolving Facility (2018 — nil).
(c) Letters of credit
We have access to a standby letter of credit facility of $1.5 million from Toronto Dominion Bank. The credit
facility is used for the issuance of letters of credit and guarantees and is guaranteed by Export
Development Canada. As at December 31, 2019, there were two letters of credit issued against the
revolving standby letter of credit facility for a total value of $0.1 million (2018 — $0.1 million).
(d) Accounts Receivable Purchase Agreement
On June 26, 2019, the Company entered into an uncommitted Receivables Purchase Agreement (the
“RPA”) with CIBC, as Purchaser, to improve its liquidity during high working capital periods. Under the RPA,
the Company may offer to sell certain eligible accounts receivable (the “Receivables”) to CIBC, which may
accept such offer, and purchase the offered Receivables. Under the RPA, up to $75.0 million of Receivables
may be sold and remain outstanding at any time. Eligible trade receivables are sold at 100% face value less
discount with a 10% limited recourse to the Company arising from certain repurchase events. The RPA is
on an uncommitted basis with no expiry date and carries a discount rate of CDOR (for purchased
receivables in CAD) and LIBOR (for purchased receivables in USD) plus an applicable margin. After the sale,
the Company does not retain any interests in the Receivables, but continues to service and collect, in an
administrative capacity, the outstanding receivables on behalf of CIBC.
The Company accounts for the sold Receivables as a sale in accordance with FASB ASC 860, Transfers and
Servicing. Proceeds from the sale reflect the face value of the Receivables less discount fees charged by
CIBC and one-time legal costs. The discount fees are recorded in Other income (expense) in the Company’s
consolidated statements of operations. Net proceeds are classified under operating activities in the
consolidated statements of cash flows.
100
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
Pursuant to the RPA, the Company sold and de-recognized $86,856 Receivables in 2019. As at December
31, 2019, $18,174 remained outstanding to be collected from customers and remitted to CIBC. Discount
fees of $347 are included in Other income (expense) and legal costs of $129 are included in Administration
expense in the consolidated statements of operations. As at December 31, 2019, we collected $3,408 from
Receivables that we previously sold and that have not been remitted to CIBC due to timing of settlement
dates. We recorded the amount in Restricted cash in the consolidated balance sheets with a corresponding
increase in accrued liabilities.
26.
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.
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.
101
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
27.
COMMITMENTS AND CONTINGENCIES
(a) 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.
(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
Provisions
Expenditures
Balance, end of year
(b) Other commitments
2019
7,914
3,686
(2,673)
8,927
$
$
$
$
2018
8,159
3,351
(3,596)
7,914
We have purchase commitments totaling approximately $128,146 net of related electronic
components inventory of $7,207 (December 31, 2018 — $147,029, net of electronic components
inventory of $5,008), with certain contract manufacturers and suppliers under which we have
committed to buy a minimum amount of designated products between January 2020 and June 2020.
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 also have purchase commitments totaling approximately $7,110 (December 31, 2018 — $8,952)
with certain mobile network operators, under which we have committed to buy a minimum amount of
wireless data and wireless data services between January 2020 and October 2022.
During the second quarter of 2019, we entered into a purchase commitment totaling approximately
$3,192 with a supplier under which we have committed to buy a minimum amount of cloud computing
services between January 2020 and May 2022.
(c) 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
102
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
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
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 November 2019, Stormborn Technologies LLC filed a patent infringement lawsuit in the United
States District Court for the District of Delaware, which lawsuit makes certain allegations concerning
our FX and GL series devices. The lawsuit is in the initial pleadings stage.
In June 2019, Inventergy LBS, LLC filed a patent infringement lawsuit in the United States District Court
of the Northern District of Georgia, which lawsuit makes certain allegations concerning our Uplink GPS
Asset Tracking devices. The lawsuit has been dismissed with prejudice.
In January 2017, Koninklijke KPN N.V. filed a patent infringement lawsuit in the United States District
Court for the District of Delaware asserting patent infringement by us and our U.S. subsidiary. The
lawsuit makes certain allegations concerning the alleged use of data transmission error checking
technology in our wireless products. In March 2018, the Court granted our motion for judgment on
the pleadings that the plaintiff’s patent is invalid. The plaintiff appealed this invalidity ruling to the
Federal Circuit, and in November 2019, the Federal Circuit reversed the District Court’s invalidity ruling.
In District Court, we are continuing to pursue our counterclaims alleging that the plaintiff has breached
its commitments to standard setting organizations. A summary judgement hearing has occurred, and a
decision of the court is pending. Following the reversal of the invalidity ruling, the District Court has
scheduled the matter for trial, coordinating the case with several other pending cases involving the
plaintiff and the patent-in-suit and setting the first trial with an unspecified defendant for January
2021. In April 2019, the United States Patent and Trial Appeal Board rendered its final decision in our
103
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
petition for Inter Partes Review of the patent-in-suit, and the instituted claims were not proved to be
unpatentable.
In August 2014, M2M Solutions LLC filed a patent infringement lawsuit against us in the District Court
for the District of Delaware asserting patent infringement by us and our US subsidiary. The lawsuit
makes certain allegations concerning our wireless products with respect to US Patent No. 8,648,717.
In March 2017, the United States Patent and Trial Appeal Board issued its decisions in the instituted
Inter Partes Review proceedings filed by us and other defendants, invalidating all independent claims
and several dependent claims in the single patent-in-suit. In April 2017, M2M Solutions assigned the
patent-in-suit to Blackbird Tech LLC (“Blackbird”), and they became a plaintiff in the lawsuit in June of
that year. In September 2018, the court denied a motion to dismiss the lawsuit. Blackbird was granted
leave to identify additional asserted claims and accused products with respect to the patent-in-suit. In
November 2019, the Judge issued a claim construction order finding two of the remaining five claims
in the patent-in-suit to be indefinite and therefore invalid. The lawsuit is currently nearing the end of
the discovery stage. Trial in our case has been scheduled for January 2021.
Intellectual Property Indemnification Claims
We have been notified by certain of our customers in the following matter that we may have an
obligation to indemnify them in respect of the products we supply to them:
In June 2019, Sisvel International S.A. and 3G Licensing S.A. (together, “Sisvel”), filed patent
infringement lawsuits in the United States District Court for the District of Delaware against one or
more of our customers alleging patent infringement with respect to a portfolio of 12 patents
purportedly owned by Sisvel and obtained from Nokia Corporation (5 patents) and Blackberry, Ltd. (7
patents), that Sisvel alleges relate to technology for cellular communications networks including, but
not limited to 2G, 3G and 4G/LTE. The allegations have been made in relation to certain of our
customer’s products, which may include products which utilize modules sold to them by us. The
lawsuits are in the initial pleadings stage. Several defendants have filed motions to dismiss the lawsuits
for failure to state a claim for which relief can be granted, which motion have been granted in February
2020 with leave given to the plaintiff to amend its pleadings.
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.
104
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
28.
SUBSEQUENT EVENT
On January 7, 2020, we completed the acquisition of M2M group of companies ("M2M Group") in
Australia. Total cash consideration paid to the shareholders of M2M Group was $19.6 million for 100% of
the equity plus approximately $1.4 million for the retirement of certain obligations, subject to normal
working capital adjustments. The M2M Group is focused on IoT connectivity services and cellular devices
in Australia, and the acquisition expands the Company's IoT Solutions business in the Asia-Pacific region.
The Company has not disclosed its purchase price allocation as it has not had sufficient time between the
acquisition date and the date these financial statements were issued to obtain and review information
regarding the completeness and measurement of the identifiable assets acquired and liabilities assumed.
105
Executive Officers
Kent P. Thexton
President and Chief Executive Officer
Jason L. Krause
Chief Operating Officer
Directors
Gregory D. Aasen (3)
Corporate Director
Robin A. Abrams (2)
Chair of the Board
David G. McLennan
Chief Financial Officer, Chief Transformation Officer & Corporate Secretary
Paul G. Cataford (1), (3)
Corporate Director
Philippe Guillemette
Chief Technology Officer
Rene Link
Chief Marketing Officer & Senior Vice President, Corporate Strategy
Marc Overton
Chief Solutions Officer & Senior Vice President, EMEA Sales
James P. Ryan
Senior Vice President, Strategic Partnerships & Senior Vice President,
APAC Sales
Joy Chik (3)
Corporate Director
Russell N. Jones (1),(2)
Corporate Director
Lori M. O'Neill (1)(3)
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
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.
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