Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands USD, except share amounts)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations.
KORE Group Holdings, Inc. and Subsidiaries (“the Company”) uses the same accounting policies in preparing quarterly and annual financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K.
All significant intercompany balances and transactions have been eliminated. In the opinion of management, the accompanying condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, comprehensive loss and stockholders’ equity and cash flows for the interim periods but are not necessarily indicative of the results of operations to be anticipated for the full year 2022 or any future period.
Stock-Based Compensation
The Company has had several stock-based compensation plans, which are more fully described in “Note 9, Stock-Based Compensation”, to the condensed consolidated financial statements. Stock-based compensation is generally recognized as an expense following straight-line attribution method over the requisite service period. The fair value of stock-based compensation is measured on the grant date based on the grant-date fair value of the awards.
Leases
At the beginning of the first quarter of fiscal 2022, the Company adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), and additional ASUs issued to clarify and update the guidance in ASU 2016-02 (collectively, the “new leases standard”).
The Company leases real estate, computer hardware and vehicles for use in our operations under both operating and finance leases. The Company assesses whether an arrangement is a lease or contains a lease at inception. For arrangements considered leases or that contain a lease that is accounted for separately, we determine the classification and initial measurement of the right-of-use asset and lease liability at the lease commencement date, which is the date that the underlying asset becomes available for use.
For both operating and finance leases, we recognize a right-of-use asset, which represents our right to use the underlying asset for the lease term, and a lease liability, which represents the present value of our obligation to make payments arising over the lease term. The present value of our obligation to make payments is calculated using the incremental borrowing rate for operating and finance leases. The incremental borrowing rate is determined using a portfolio approach based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. Management uses the unsecured borrowing rate and risk-adjusts that rate to approximate a collateralized rate, which will be updated on an annual basis for the measurement of new lease liabilities.
In those circumstances where the Company is the lessee, we have elected to account for non-lease components associated with our leases (e.g., common area maintenance costs) and lease components as a single lease component for all of our asset classes.
Operating lease cost for operating leases is recognized on a straight-line basis over the term of the lease and is included in selling, general and administrative expense in our consolidated statements of operations, based on the use of the facility on which rent is being paid. Operating leases with a term of 12 months or less are not recorded on the balance sheet; we recognize a rent expense for these leases on a straight-line basis over the lease term.
The Company recognizes the amortization of the right-of-use asset for our finance leases on a straight-line basis over the shorter of the term of the lease or the useful life of the right-of-use asset in depreciation and amortization expense in our consolidated statements of operations. The interest expense related to finance leases is recognized using the effective interest method based on the discount rate determined at lease commencement and is included within interest expense in our consolidated statements of operations.
Recently Adopted Accounting Pronouncements
The Company considers the applicability and impact of all ASUs issued by the FASB. ASUs not listed below were assessed and determined to be either not applicable or did not have a material impact on the Company's condensed consolidated financial statements. The following ASUs have been adopted by the Company since the Company’s last Annual Report on Form 10-K.
ASU 2016-02, ASU 2018-10, ASU 2018-11, ASU 2020-03 and ASU 2020-05, Leases (Topic 842)
In February 2016, the FASB issued ASU 2016-02, Leases, to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. In July 2018, ASU 2018-10, Codification Improvements to ASC 2016-02, Leases, was issued to provide more detailed guidance and additional clarification for implementing ASU 2016-02. Furthermore, in July 2018, the FASB issued ASU 2018-11, Leases: Targeted Improvements, which provides an optional transition method in addition to the existing modified retrospective transition method by allowing a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. Furthermore, on June 3, 2020, the FASB deferred by one year the effective date of the new leases standard for private companies, private
not-for-profits and public not-for-profits that have not yet issued (or made available for issuance) financial statements reflecting the new standard. Additionally, in March 2020, ASU 2020-03, Codification Improvements to Financial Instruments, Leases, was issued to provide more detailed guidance and additional clarification for implementing ASU 2016-02. Furthermore, in June 2020, ASU 2020-05, Revenue from Contracts with Customers and Leases, was issued to defer effective dates of adoption of the new leasing standard beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. These new leasing standards (collectively “ASC 842” or “the new standard”) are effective for the Company beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted.
A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. We early adopted the new standard on January 1, 2022, which is the date as of our date of initial application. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided for dates and periods ending before January 1, 2022.
The cumulative after-tax effect of the changes made to our condensed consolidated balance sheet for the adoption of ASC 842 were as follows:
| | | | | | | | | | | | | | | | | | | | |
(In thousands, USD) | | At December 31, 2021 | | Adjustments due to ASC 842 | | At January 1 2022 |
Operating lease right-of-use assets | | $ | — | | | $ | 9,278 | | | $ | 9,278 | |
Current portion of operating lease liabilities | | — | | | 2,121 | | | 2,121 | |
Non-current portion of operating lease liabilities | | — | | | 7,483 | | | 7,483 | |
Current portion of capital lease liabilities included in Accrued liabilities | | 191 | | | (191) | | | — | |
Current portion of finance lease liabilities included in Accrued liabilities | | — | | | 191 | | | 191 | |
Non-current portion of capital lease liabilities included in Other long-term liabilities | | 264 | | | (264) | | | — | |
Non-current portion of finance lease liabilities included in Other long-term liabilities | | — | | | 264 | | | 264 | |
Accrued liabilities | | 21,311 | | | (326) | | | 20,985 | |
In addition to the increase to the operating lease liabilities and right-of-use assets, ASC 842 also resulted in reclassifying the presentation of accrued liabilities and deferred rent to operating lease right-of-use assets.
We elected the package of practical expedients permitted under the transition guidance within the new standard. Accordingly, we have adopted these practical expedients and did not reassess: (1) whether an expired or existing contract is a lease or contains an embedded lease; (2) lease classification of an expired or existing lease; or (3) capitalization of initial direct costs for an expired or existing lease.
See Note 3 for additional information related to leases, including disclosure required under ASC 842.
ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40)
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”) to simplify accounting for certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. ASU 2020-06 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted, for fiscal years (including interim periods) beginning after December 15, 2020.
The Company early adopted ASU 2020-06 on January 1, 2022, using a modified retrospective transition approach. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided for dates and periods ending before January 1, 2022. Refer to “Note 6 –Short Term and Long-Term Debt”, to the condensed consolidated financial statements for further detail.
The cumulative after-tax effect of the changes made to our condensed consolidated balance sheet for the adoption of ASU 2020-06 were as follows:
| | | | | | | | | | | | | | | | | | | | |
(In thousands, USD) | | At December 31, 2021 | | Adjustments due to ASU 2020-06 | | At January 1, 2022 |
Long-term debt and other borrowings, net | | $ | 399,115 | | | $ | 15,163 | | | $ | 414,278 | |
Additional paid-in capital | | 413,646 | | | (11,613) | | | 402,033 | |
Deferred tax liabilities | | 36,722 | | | (3,849) | | | 32,873 | |
Accumulated deficit | | (138,179) | | | 299 | | | (137,880) | |
ASU 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options
In May 2021, the FASB issued ASU 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options, which provides guidance on modifications or exchanges of a freestanding equity-classified written call option that is not within the scope of another Topic. An entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as an exchange of the original instrument for a new instrument and provides further guidance on measuring the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. ASU 2021-04 also provides guidance on the recognition of the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange on the basis of the substance of the transaction, in the same manner as if cash had been paid as consideration. ASU 2021-04 was effective for the Company beginning on January 1, 2022, and we will apply the amendments prospectively through December 31, 2022. There was no impact to our condensed consolidated financial statements for the current period as a result of adopting this standard update.
Recently Issued Accounting Pronouncements
The Company considers the applicability and impact of all ASUs issued by the FASB. ASUs not listed below were assessed and determined to be either not applicable or are not expected to have a material impact on the Company's consolidated financial statements.
ASU 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments, which requires the use of a new current expected credit loss (“CECL”) model in estimating allowances for doubtful accounts with respect to accounts receivable and notes receivable. Receivables from revenue transactions, or trade receivables, are recognized when the corresponding revenue is recognized under ASC 606, Revenue from Contracts with Customers. The CECL model requires that the Company estimate its lifetime expected credit loss with respect to these receivables and record allowances when deducted from the balance of the receivables, which represent the estimated net amounts expected to be collected. Given the
generally short-term nature of trade receivables, the Company does not expect to apply a discounted cash flow methodology. However, the Company will consider whether historical loss rates are consistent with expectations of forward-looking estimates for its trade receivables. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses to clarify that operating lease receivables recorded by lessors are explicitly excluded from the scope of ASU 2016-13. This ASU (collectively “ASC 326”) is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The Company does not expect adoption of this ASU to have a material impact on the condensed consolidated financial statements.
ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting, to provide guidance on easing the potential burden in accounting for reference rate reform on financial reporting. ASU 2020-04 is effective from March 12, 2020 and may be applied prospectively through December 31, 2022. The Company does not expect adoption of this ASU to have a material impact on the condensed consolidated financial statements.
ASU 2020-03, Codification Improvements to Financial Instruments
In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments, which clarifies specific issues raised by stakeholders. Specifically, the ASU:
•Clarifies that all entities are required to provide the fair value option disclosures in ASC 825, Financial Instruments.
•Clarifies that the portfolio exception in ASC 820, Fair Value Measurement, applies to nonfinancial items accounted for as derivatives under ASC 815, Derivatives and Hedging.
•Clarifies that for purposes of measuring expected credit losses on a net investment in a lease in accordance with ASC 326, Financial Instruments—Credit Losses, the lease term determined in accordance with ASC 842, Leases, should be used as the contractual term.
•Clarifies that when an entity regains control of financial assets sold, it should recognize an allowance for credit losses in accordance with ASC 326.
•Aligns the disclosure requirements for debt securities in ASC 320, Investments—Debt Securities, with the corresponding requirements for depository and lending institutions in ASC 942, Financial Services—Depository and Lending.
The amendments in the ASU have various effective dates and transition requirements, some depending on whether an entity has previously adopted ASU 2016-13 about measurement of expected credit losses. The Company will adopt the guidance in ASU 2020-03 as it adopts the related ASUs effected by these codification improvements.
NOTE 2 – REVENUE RECOGNITION
Contract Balances
Deferred revenue primarily relates to revenue that is recognized over time for IoT Connectivity monthly recurring charges, the changes in balance of which are related to the satisfaction or partial satisfaction of these contracts. The balance also contains a deferral for goods that are in-transit at period end for which control transfers to the customer upon delivery. The deferred revenue balance as of December 31, 2021 was recognized as revenue during the three months ended March 31, 2022.
Disaggregated Revenue Information
The Company has presented the disaggregated disclosures below which are useful to understand the composition of the Company’s revenue during the respective reporting periods shown below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(In thousands, USD) | | September 30, | | September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
IoT Connectivity* | | $ | 42,911 | | | $ | 40,738 | | | $ | 129,714 | | | $ | 122,444 | |
Hardware Sales | | 16,807 | | | 19,221 | | | 56,747 | | | 40,602 | |
Hardware Sales—bill-and-hold | | 3,423 | | | 229 | | | 7,493 | | | 3,451 | |
Deployment services, professional services, and other | | 3,499 | | | 7,690 | | | 11,980 | | | 17,422 | |
Total | | $ | 66,640 | | | $ | 67,878 | | | $ | 205,934 | | | $ | 183,919 | |
| | | | | | | | |
*Includes connectivity-related revenues from IoT Connectivity services and IoT Solutions services
Significant Customer
The Company has one customer representing 6.5% and 28.0% of the Company’s total revenue for the three months ended September 30, 2022 and September 30, 2021, respectively. The Company has one customer representing 12.0% and 21.0% of the Company’s total revenue for the nine months ended September 30, 2022 and September 30, 2021, respectively.
NOTE 3 – RIGHT-OF USE ASSETS AND LEASE LIABILITIES
The Company leases real estate, computer hardware and vehicles for use in our operations under both operating and finance leases. Our leases have remaining lease terms ranging from 1 year to 10 years, some of which include options to extend the term for up to 10 years, and some of which include options to terminate the leases. The Company includes options to extend or terminate the lease when it is reasonably certain that we will exercise that option. For the majority of leases entered into during the current period, we have concluded it is not reasonably certain that we would exercise the options to extend the lease or terminate the lease early. Therefore, as of the lease commencement date, our lease terms generally do not include these options. Leasehold improvements are depreciated using the straight-line method over the shorter of the estimated useful life or the remaining term of the lease. Our leasehold improvements have lives ranging from 1 year to 10 years. Operating and finance lease cost for the three and nine months ended September 30, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | |
(In thousands, USD) | | Classification in Statement of operations | | Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 |
Operating lease cost | | Selling, general and administrative | | $ | 951 | | | $ | 2,669 | |
Finance lease cost | | | | | | |
Amortization of leased assets | | Depreciation and amortization | | 93 | | | 289 | |
Interest on lease liabilities | | Interest expense | | 4 | | | 14 | |
Total lease cost | | | | $ | 1,048 | | | $ | 2,972 | |
Rent expense for the three and nine months ended September 30, 2021, was $0.6 million and $2.0 million, respectively.
Supplemental disclosure for the balance sheet related to finance leases were as follows:
| | | | | | | | |
(In thousands, USD) | | At September 30, 2022 |
Assets | | |
Finance lease right-of-use assets included in property and equipment, net | | $ | 262 | |
Liabilities | | |
Current portion of finance lease liabilities included in accrued liabilities | | $ | 120 | |
Non-current portion of finance lease liabilities included in other long-term liabilities | | 142 | |
Total finance lease liabilities | | $ | 262 | |
The weighted-average remaining lease term and the weighted-average discount rate of our leases were as follows:
| | | | | | | | |
| | At September 30, 2022 |
Weighted average remaining lease term (in years) | | |
Operating leases | | 7.80 |
Finance leases | | 2.29 |
Weighted average discount rate: | | |
Operating leases | | 7.5 | % |
Finance leases | | 5.4 | % |
The future minimum lease payments under operating and finance leases at September 30, 2022 for the next five years are as follows:
| | | | | | | | | | | | | | |
| | Operating Leases | | Finance Leases |
(In thousands, USD) | | Amount | | Amount |
From October 1, 2022 to December 31, 2022 | | $ | 637 | | | $ | 24 | |
2023 | | 2,532 | | | 126 | |
2024 | | 1,843 | | | 106 | |
2025 | | 1,664 | | | 23 | |
2026 | | 1,370 | | | — | |
Thereafter | | 7,494 | | | — | |
Total minimum lease payments | | 15,540 | | | 279 | |
Interest expense | | (4,167) | | | (17) | |
Total | | $ | 11,373 | | | $ | 262 | |
NOTE 4 – ACQUISITIONS AND DIVESTITURES
BMP Business Combination
On February 16, 2022, the Company acquired 100% of the outstanding share capital of Business Mobility Partners, Inc. and Simon IoT LLC ("Simon IoT"), collectively, the “Acquired Companies” or “BMP Acquisition” which are industry-leading mobility service providers, to expand the Company’s services and solutions within the healthcare and life sciences industries (the “BMP Business Combination Agreement”).
The transaction was funded by available cash and the issuance of the Company’s shares. Transaction costs for legal consulting, accounting, and other related costs incurred in connection with the acquisition of the Acquired Companies were $1.7 million. Included
in the three and nine months ended September 30, 2022, were $0 million and $1.4 million, respectively, of transaction costs, which were included in selling, general and administrative expenses in the Company's consolidated statements of operations.
The following table summarizes the allocation of the consideration transferred for the Acquired Companies, including the identified assets acquired and liabilities assumed as of the acquisition date. The purchase price allocation is preliminary and is subject to revision as additional information about the fair value of the assets acquired and liabilities assumed, including certain working capital and income taxes, become available.
| | | | | |
(In thousands, USD) | Fair Value |
Cash, (net of closing cash of $1,995) and working capital adjustments | $ | 46,002 | |
Fair value of KORE common stock issued to sellers (4,212,246 shares) | 23,295 | |
Total consideration | $ | 69,297 | |
Assets acquired: | |
Accounts receivable | 3,303 | |
Inventories | 1,323 | |
Prepaid expenses and other receivables | 976 | |
Property and equipment | 201 | |
Intangible assets | 28,664 | |
Total Assets acquired | 34,467 | |
Liabilities assumed: | |
Deferred tax liabilities | 7,391 | |
Accounts payable and accrued liabilities | 2,638 | |
Liabilities assumed | 10,029 | |
Net identifiable assets acquired | 24,438 | |
Goodwill (excess of consideration transferred over net identifiable assets acquired) | $ | 44,859 | |
During the nine months ended September 30, 2022, the Company paid a working capital adjustment of $0.9 million.
Goodwill represents the future economic benefits that we expect to achieve as a result of the acquisition of the Acquired Companies. A portion of the goodwill resulting from the acquisition is deductible for tax purposes.
The BMP Business Combination Agreement contains customary indemnification terms. Under the BMP Business Combination Agreement, a portion of the cash purchase price, approximately $3.45 million was paid at closing is to be held in escrow, for a maximum of 18 months from the closing date, to guarantee performance of general representations and warranties regarding closing amounts and to indemnify the Company against any future claims. During the three months ended September 30, 2022, $0.6 million of the $3.45 million was paid to the seller from the escrow account that did not result in any adjustments to the purchase price. The financial results of the Acquired Companies are included in the Company’s consolidated statements of operations from the date of acquisition. For the three months ended September 30, 2022, the amounts of revenue and net income included in the Company’s consolidated statements of operations were $14.6 million and $3.9 million, respectively. For the nine months ended September 30, 2022, the amounts of revenue and net income included in the Company’s consolidated statements of operations were $35.4 million and $8.5 million, respectively.
Unaudited pro forma information
Had the acquisition of the Acquired Companies been completed on January 1, 2021, net revenue would have been $66.6 million and $74.6 million and the net loss would have been $13.0 million and $4.2 million for the three months ended September 30, 2022 and 2021, respectively.
Had the acquisition of the Acquired Companies been completed on January 1, 2021, net revenue would have been $211.7 million and $203.6 million and the net loss would have been $33.4 million and $11.8 million for the nine months ended September 30, 2022 and 2021, respectively.
This unaudited pro forma financial information presented is not necessarily indicative of what the operating results actually would have been if the acquisition had taken place on January 1, 2021, nor is it indicative of future operating results. The pro forma amounts include the historical operating results of the Company prior to the acquisition, with adjustments factually supportable and directly attributable to the acquisition, primarily related to transaction costs, and the amortization of intangible assets.
The pro forma net loss for the three and nine months ended September 30, 2021 includes a non-recurring adjustment of $1.7 million for acquisition related costs.
NOTE 5 – GOODWILL
The Company’s goodwill consists of following:
| | | | | | | | | | | | | | |
(In thousands, USD) | | Amount | | |
At December 31, 2021 | | $ | 381,962 | | | |
Acquisitions | | 44,859 | | | |
Currency translation | | (1,217) | | | |
At September 30, 2022 | | $ | 425,604 | | | |
NOTE 6 – SHORT-TERM AND LONG-TERM DEBT
Senior Secured Term Loan —UBS
On December 21, 2018, the Company entered into a credit agreement with UBS that consisted of a term loan as well as a senior secured revolving credit facility.
The term loan agreement limits cash dividends and other distributions from the Company’s subsidiaries to the Company and restricts the Company’s ability to pay cash dividends to its shareholders. The term loan agreement contains, among other things, financial covenants related to maximum total debt to adjusted EBITDA ratio and a minimum total leverage ratio. The Company was in compliance with these covenants as of September 30, 2022 and December 31, 2021. The credit agreement is substantially secured by all the Company’s assets.
The Company’s principal outstanding balances on the Senior Secured UBS Term Loan were $303.4 million and $305.8 million as of September 30, 2022 and December 31, 2021, respectively.
Senior Secured Revolving Credit Facility —UBS
On December 21, 2018, the Company entered into a $30.0 million senior secured revolving credit facility with UBS.
As of September 30, 2022, and December 31, 2021, no amounts were drawn on the revolving credit facility.
Bank Overdraft Facility—BNP Paribas Fortis N.V.
On October 8, 2018, a Belgium subsidiary of the Company entered into a €250,000 bank overdraft facility with BNP Paribas Fortis.
As of September 30, 2022, and December 31, 2021, no amounts were drawn on the bank overdraft facility.
Backstop Agreement
On September 30, 2021, KORE Wireless Group Inc. issued $95.1 million in senior unsecured exchangeable notes due in 2028 (the “Backstop Notes”) to affiliates of Fortress Credit Corp. (“Fortress”) pursuant to the terms of the backstop agreement (the “Backstop Agreement”), dated July 27, 2021, by and among KORE Wireless Group Inc. and Fortress. The Backstop Notes were issued pursuant to an indenture (the “Indenture”), dated September 30, 2021, by and among the Company, KORE Wireless Group Inc. and Wilmington Trust, National Association, as trustee, as amended and restated on November 15, 2021. On October 28, 2021, KORE Wireless Group Inc. issued an additional $24.9 million in additional notes (the “Additional Notes” and together with the Backstop Notes, the “Notes”) to Fortress, pursuant to the terms of an exchangeable notes purchase agreement, dated October 28, 2021, by and among KORE Wireless Group Inc., the Company and Fortress. The Additional Notes were issued pursuant to the Indenture and contains identical terms to the Backstop Notes.
Prior to the implementation of ASU 2020-06, since the Company could use the Company option to potentially settle all or part of the Notes for the cash equivalent of the fair value of the common stock for which the Notes may be exchanged, a portion of the proceeds of the Notes were required to be allocated to equity, based on the estimated fair value of the Notes had they not contained the exchange features. ASU 2020-06, simplifies and amends the cash conversion guidance so that the Company is no longer required to allocate to equity the estimated fair value of the Notes had they not contained the exchange features. The unamortized discount and
issuance costs will be amortized through September 30, 2028. The effective interest rates after the adoption of ASU 2020-06 for the Backstop Notes and the Additional Notes are 5.9% and 6.1% respectively.
The table below outlines the principal balances and net carrying amounts outstanding of the Notes:
| | | | | | | | | | | | | | |
(In thousands, USD) | | Post ASU 2020-06 At September 30, 2022 | | Pre ASU 2020-06 At December 31, 2021 |
Principal balances outstanding | | $ | 120,000 | | | $ | 120,000 | |
Net of unamortized debt issuance costs | | 2,560 | | | 2,458 | |
Net of unamortized equity component costs | | — | | | 15,517 | |
Net carrying amount(1) | | $ | 117,440 | | | $ | 102,025 | |
(1)Due to the adoption of ASU 2020-06 the net carrying amount of the Notes changed. Refer to “Note 1-Summary of Significant Accounting policies – Recently Adopted Accounting Pronouncements” to the condensed consolidated financial statements for a summary of the effects of the adoption of ASU 2020-06.
The Indenture contains, among other things, financial covenants related to maximum total debt to adjusted EBITDA ratio. The Company was in compliance with these covenants as of September 30, 2022 and December 31, 2021.
Premium Finance Agreement
The Company entered into a Premium Finance Agreement (“Premium Agreement”) on August 3, 2022, to purchase a two year term directors and officers insurance policy. The Premium Agreement is for $3.6 million at a fixed rate of 4.6% per annum, amortized over twenty months. The Premium Agreement requires twenty fixed monthly principal and interest payments of $0.19 million from August 15, 2022 to March 15, 2024.
The Company’s principal outstanding balance on the Premium Agreement was $3.3 million as of September 30, 2022.
NOTE 7 – INCOME TAXES
The Company determines its estimated annual effective tax rate at the end of each interim period based on estimated pre-tax income (loss) and facts known at that time. The estimated annual effective tax rate is applied to the year-to-date pre-tax income (loss) at the end of each interim period with certain adjustments. The tax effects of significant unusual or extraordinary items are reflected as discrete adjustments in the periods in which they occur. The Company’s estimated annual effective tax rate can change based on the mix of jurisdictional pre-tax income (loss) and other factors. However, if the Company is unable to make a reliable estimate of its annual effective tax rate, then the actual effective tax rate for the year-to-date period may be the best estimate. For the three and nine months ended September 30, 2022, and 2021, the Company determined that its annual effective tax rate approach would provide for a reliable estimate and therefore used this method to calculate its tax provision.
The Company’s effective income tax rate was 16.3% and 45.1% for the three months ended September 30, 2022, and 2021, respectively. The Company’s effective income tax rate was 18.3% and 38.0% for the nine months ended September 30, 2022, and 2021, respectively. The effective income tax rate for the three and nine months ended September 30, 2022, and 2021 differed from the federal statutory rate primarily due to the geographical mix of earnings and related foreign tax rate differential, permanent differences, research and development tax credits, and the valuation allowance maintained against certain deferred tax assets.
The Company’s income tax benefit was $2.5 million and $3.7 million for the three months ended September 30, 2022, and 2021, respectively. The Company’s income tax benefit was $7.8 million and $7.6 million for the nine months ended September 30, 2022, and 2021, respectively. The change in the income tax benefit for the nine months ended September 30, 2022 compared to the nine months ended 2021 was primarily due to changes in the jurisdictional mix of earnings and the impact of the change in fair value of warrant liability which is not taxable.
NOTE 8 – REVERSE RECAPITALIZATION
The Company operates subject to the terms and conditions of the Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”) dated September 30, 2021. On March 12, 2021, Maple Holdings Inc. (“Maple” or “pre-combination KORE”) entered into a definitive merger agreement (the “Business Combination Agreement”) with Cerberus Telecom Acquisition Corp. (“CTAC”) ("the Business Combination”).
On September 30, 2021, pre-combination KORE and CTAC consummated the merger contemplated by the Business Combination Agreement. The Business Combination was accounted for as a reverse recapitalization whereby pre-combination KORE was determined to be the accounting acquirer and CTAC was treated as the “acquired” company for accounting purposes. Accordingly, for accounting purposes, the financial statements of the Company represent a continuation of the financial statements of pre-combination KORE with the acquisition being treated as the equivalent of pre-combination KORE issuing stock for the net assets of CTAC, accompanied by a recapitalization. The net assets of CTAC were stated at historical cost, with no goodwill or other intangible assets recorded. Pre-combination KORE was deemed to be the predecessor and the consolidated assets and liabilities and results of operations prior to September 30, 2021 are those of pre-combination KORE. Reported shares and earnings per share available to common stockholders, prior to the Business Combination, have been retroactively restated to reflect the exchange ratio established in the Business Combination Agreement. The number of shares of preferred stock was also retroactively restated based on the exchange ratio.
The most significant change in the post-combination Company’s reported financial position and results was an increase in cash, net of transactions costs paid at close, of $63.2 million including: $225.0 million in gross proceeds from the private placements (the “PIPE”), $20.0 million in proceeds from CTAC after redemptions, $95.1 million in proceeds from the Backstop Notes, and payments of $229.9 million to KORE’s preferred shareholders. Additionally, on the closing date, the Company repaid the senior secured revolving credit facility with UBS of $25.0 million. The Company also repaid the outstanding related party loans of $1.6 million.
The Company incurred $24.2 million in transaction costs relating to the Business Combination on the closing date, of which $24.1 million has been recorded against additional paid-in capital in the condensed consolidated balance sheet as of December 31, 2021.
Upon closing of the Business Combination, the shareholders of CTAC, including CTAC founders, were issued 10,356,593 shares of common stock of the Company. In connection with the closing, holders of 22,240,970 shares of common stock of CTAC were redeemed at a price per share of $10.00. In connection with the Closing, 22,500,000 shares of the Company were issued to PIPE investors at a price per share of $10.00.
The number of shares of Class A common stock issued immediately following the consummation of the Business Combination were: