KORE Group Holdings, Inc.（以下简称“公司”）于2024年11月19日提交了修订档案第1号表格10-Q/A（以下简称“修订表格10-Q”），以修改并重述公司截至2024年6月30日季度的10-Q季度报告中的某些条款，该报告最初于2024年8月14日提交给证券交易委员会（以下简称“SEC”）（以下简称“原始表格10-Q”）。
KORE Group Holdings, Inc.（及其子公司，“KORE”或“公司”）提供用于业务市场物联网技术开发和支持中使用的高级连接服务、基于位置的服务、设备解决方案、托管和专业服务。该公司的Iot平台与全球最大的移动网络运营商合作提供安全可靠的无线连接，适用于移动和固定设备。该技术使公司能够通过在新旧垂直市场之间转移能力来扩展其全球技术平台，并向渠道合作伙伴和全球经销商提供互补产品。
截至2024年9月30日，公司的估值政策和流程与2023年12月31日结束的合并基本报表中所描述的没有变化，包含在10-K表格年度报告的第二部分，第8项，注释11 — 公允价值计量， with the exception of the valuation of the Mandatorily Redeemable Preferred Stock Due to Affiliate. As of June 30, 2024, the Company determined that a lattice model indicated a more accurate approximation of the fair value of this debt for disclosure purposes rather than the discounted cash flow model previously used. The Company noted that the value derived from a discounted cash flow model was not significantly different than the fair value approximation as determined by a lattice model; however, a lattice model was considered to be more relevant to the inputs used in determining the Company’s implied fair value of debt as a significant input to the Company’s impairment testing, which occurred during the quarter ended June 30, 2024, as a triggering event was deemed to have occurred (see Note 5 — 商誉). This debt was not in existence at previous impairment testing dates.
Financial Instruments Measured at Fair Value
The Company is required to measure its warrant liabilities at fair value for the Penny Warrants and Private Placement Warrants, which are both included in “warrant liabilities to affiliates” on the condensed consolidated balance sheets.
The range of loss in this matter described above includes anticipation of recoveries from third parties at the low end, and no recoveries from third parties anticipated at the high end of the range, with interest and penalties assessed at both the low and high ends of the range, with penalties reduced in states where the Company intends to seek a “voluntary disclosure arrangement” as described further below. Although the Company’s contracts with customers generally state that the customer must later pay associated taxes if such taxes become an issue, there is always a risk of customer non-payment. Due to the complexities involved in its number of customers, use cases, and jurisdictions in which it does business, along with the treatment of potential indirect taxes varying in each jurisdiction, and collectability estimates, this estimate may ultimately be resolved at either a greater or lesser amount than the estimated range.
Additionally, mitigating factors may exist, such as good-faith reseller certificates, which the Company has previously obtained in instances where the use case indicates that the customer is a reseller, private letter rulings that the Company may request from certain states where the specific tax law is unclear but may be resolved in the Company’s favor, and voluntary disclosure arrangements whereby the Company may determine that it is probable that tax would be owed and enter into an agreement with a taxing jurisdiction to pay back taxes and avoid penalties that would otherwise likely apply.
在2024年8月14日，公司宣布了一项重组计划，以简化运营和降低成本。该重组计划影响了大约 240 名员工和各功能领域的承包商。公司在2024年三个月和九个月期间与该计划相关 incurred restructuring charges of approximately $2.0 百万美元。这些费用主要与遣散付款和员工福利有关。公司已基本完成与该计划相关的所有行动。
The cost of IoT Connectivity increased by $1.0 million for the three months ended September 30, 2024, compared to the three months ended September 30, 2023. The increase in the cost of IoT Connectivity was primarily due to additional carrier costs associated with the growth in connections across multiple carriers and increased connectivity consumption across those carriers from our existing customers.
The cost of IoT Solutionsdecreased by $1.3 million for the three months ended September 30, 2024, compared to the three months ended September 30, 2023. The decrease in the cost of IoT Solutions was primarily due to decreased costs associated with lower IoT Solutions revenue from existing customers.
The cost of IoT Connectivity increased by $13.5 million for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. The increase in the cost of IoT Connectivity was primarily due to additional carrier costs driven by the acquisition of Twilio’s IoT business along with growth in connections across multiple carriers and increased connectivity consumption across those carriers from our existing customers.
The cost of IoT Solutions decreased by $12.4 million for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. The decrease in the cost of IoT Solutions was primarily due to decreased costs associated with lower IoT Solutions revenue from existing customers.
25
Selling, general, and administrative expenses
The following tables set forth the Company’s selling, general, and administrative expenses incurred during the three and nine months ended September 30, 2024 and 2023:
Three Months Ended September 30,
Year-over-Year Increase / (Decrease)
($ in thousands)
2024
2023
$
%
Selling, general, and administrative expenses
$
29,458
$
32,610
$
(3,152)
(10)
%
Nine Months Ended September 30,
Year-over-Year Increase / (Decrease)
($ in thousands)
2024
2023
$
%
Selling, general, and administrative expenses
$
99,702
$
95,040
$
4,662
5
%
Selling, general, and administrative (“SG&A”) expenses relate primarily to expenses for general management, sales and marketing, finance, audit, legal fees, and other general operating expenses.
SG&A decreased by approximately $3.2 million for the three months ended September 30, 2024, compared to the three months ended September 30, 2023. The decrease in SG&A expenses was primarily driven by decreases in rent expense due to office closures occurring during the comparative periods, as well as in professional service fees.
SG&A increased by $4.7 million for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. The increase in SG&A expenses was primarily driven by an increase in personnel-related costs, including salaries and benefits, partially offset by decreases in professional service fees.
Selling, general, and administrative expenses incurred with affiliates
The following table sets forth the Company’s sales, general, and administrative expenses incurred with affiliates during the three and nine months ended September 30, 2024 and 2023:
Three Months Ended September 30,
Year-over-Year Increase / (Decrease)
($ in thousands)
2024
2023
$
%
Selling, general, and administrative expenses incurred with affiliates
$
155
$
168
*
*
Nine Months Ended September 30,
Year-over-Year Increase / (Decrease)
($ in thousands)
2024
2023
$
%
Selling, general, and administrative expenses incurred with affiliates
$
484
$
830
*
*
* Not meaningful
For the three and nine months ended September 30, 2024, selling, general, and administrative (“SG&A”) expenses incurred with affiliates related solely to fees paid to HealthEZ, an ABRY Partners, LLC (“ABRY”) portfolio company. HealthEZ is the Company’s current third-party administrator (“TPA”) for its self-insured health insurance claims. ABRY beneficially owned approximately 29% of the Company’s outstanding common stock. ABRY is therefore considered an affiliate of the Company, and two of the Company’s Board members are employed by ABRY.
The Company has contracted with a new, unaffiliated, TPA for 2025, which will result in a reduction of administration costs on a per-employee per month basis.
For the three and nine months ended September 30, 2023, SG&A expenses incurred with affiliates related to expenses incurred to HealthEZ for administration of our health insurance plan, along with technical assistance services, rent, and professional services to two companies controlled by a key member of our subsidiary’s management team. We terminated the technical assistance services agreement on February 14, 2023 and terminated the office lease and professional services agreement on June 29, 2023.
Non-GAAP Financial Measures
In conjunction with net income (loss) calculated in accordance with GAAP, we also use EBITDA and Adjusted EBITDA, free cash flow, and Non-GAAP profit and Non-GAAP margin to evaluate our ongoing operations and for internal planning and forecasting purposes. Non-GAAP
26
financial information is presented for supplemental informational purposes only, should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP, and may be different from similarly-titled non-GAAP measures used by other companies. We believe that along with our GAAP financial information, our non-GAAP financial information when taken collectively and evaluated appropriately, is helpful to investors in assessing our operating performance.
EBITDA and Adjusted EBITDA
EBITDA is defined as net income (loss) before interest expense, income tax expense or benefit, and depreciation and amortization.
Adjusted EBITDA is defined as EBITDA adjusted for certain unusual and other significant items and removes the volatility associated with non-cash items and operational income and expenses that are not expected to be ongoing. Such adjustments include goodwill impairment charges, changes in the fair value of certain of our warrants required by GAAP to be accounted for at fair value, gains or losses on debt extinguishment, “transformation expenses” as defined below, acquisition costs, integration-related restructuring costs, stock-based compensation, and foreign currency gains and losses.
The following tables set forth a reconciliation of net loss to EBITDA and Adjusted EBITDA for the three and nine months ended September 30, 2024 and 2023:
Three Months Ended September 30,
Nine Months Ended September 30,
(in thousands)
2024
2023
2024
2023
Net loss
$
(19,408)
$
(95,361)
$
(120,628)
$
(133,350)
Income tax benefit
(412)
(3,093)
(2,486)
(3,957)
Interest expense, net
13,059
10,615
38,349
31,217
Depreciation and amortization
14,214
14,457
42,243
43,094
EBITDA
7,453
(73,382)
(42,522)
(62,996)
Goodwill impairment
—
78,255
65,864
78,255
Change in fair value of warrant liability
337
(14)
(6,349)
(14)
Transformation expenses
—
1,876
—
5,434
Acquisition costs
—
—
—
1,776
Integration-related restructuring costs
5,574
3,011
14,262
8,333
Stock-based compensation
532
3,435
7,202
9,010
Foreign currency loss
(1,003)
781
1,199
1,018
Other (1)
93
197
(494)
910
Adjusted EBITDA
$
12,986
$
14,159
$
39,162
$
41,726
(1) “Other” adjustments are comprised of adjustments for certain indirect or non-income based taxes.
Transformation expenses are related to the implementation of our strategic transformation plan and include the costs of a re-write of our core technology platform, expenses incurred to design certain new IoT Solutions, and “go-to-market” capabilities. These expenses were completed in 2023.
Integration-related restructuring costs for the three and nine months ended September 30, 2024 were primarily comprised of severance costs associated with the restructuring program previously announced in August 2024, as well as retention bonuses, severances, license and subscription fees, and professional services related to integration of previously acquired businesses. For the three and nine months ended September 30, 2023, these costs were primarily associated with legal, accounting diligence, quality of earnings, valuation, and search expenses related to the acquisition of the Twilio IoT business.
Free Cash Flow
Free cash flow is defined as net cash provided by operating activities reduced by capital expenditures consisting of purchases of property and equipment, purchases of intangible assets and capitalization of internal use software. We believe free cash flow is an important liquidity measure of the cash that is available for operational expenses, investments in our business, strategic acquisitions, and for certain other activities such as repaying debt obligations and stock repurchases.
The following table sets forth a reconciliation of net cash provided by operating activities to free cash flow for the nine months ended September 30, 2024 and 2023:
27
Nine Months Ended September 30,
(in thousands)
2024
2023
Net cash provided by operating activities
$
7,066
$
4,493
Purchases of property and equipment
(1,944)
(3,410)
Additions to intangible assets
(10,233)
(12,186)
Free cash flow
$
(5,111)
$
(11,103)
Non-GAAP Profit and Non-GAAP Margin
Gross profit and gross margin as calculated in accordance with GAAP include depreciation and amortization as part of a cost of revenue, which is shown separately for convenience in the below GAAP reconciliation.
Non-GAAP Margin is a non-GAAP measure defined as non-GAAP gross profit divided by revenue, expressed as a percentage. Non-GAAP gross profit is a non-GAAP measure defined as gross profit excluding certain (i) inventory adjustments that may not be indicative of ongoing operations, (ii) depreciation and (iii) amortization.
The table below sets forth gross profit and gross margin calculated in accordance with GAAP, based upon the categories of revenue and associated costs disaggregated by “cost of services” and “cost of products,” reconciled to Non-GAAP profit and Non-GAAP margin, disaggregated by “cost of services” and “cost of products,” as well as overall:
Three Months Ended September 30,
Nine Months Ended September 30,
($ in thousands)
2024
2023
2024
2023
Services
$
%
$
%
$
%
$
%
Revenue
$
58,204
$
57,046
$
175,162
$
155,619
Cost of revenue, excluding depreciation and amortization
22,951
22,794
69,816
57,405
Depreciation and amortization in cost of revenue (1)
12,458
11,435
35,520
36,551
Gross profit $ / margin %
$
22,795
39.2
%
$
22,817
40.0
%
$
69,826
39.9
%
$
61,663
39.6
%
Exclude: Inventory adjustments
—
—
—
—
Exclude: Depreciation and amortization
12,458
11,435
35,520
36,551
Non-GAAP profit $ / margin %
$
35,253
60.6
%
$
34,252
60.0
%
$
105,346
60.1
%
$
98,214
63.1
%
Products
Revenue
$
10,716
$
11,587
$
37,601
$
48,525
Cost of revenue, excluding depreciation and amortization
7,768
8,202
24,361
35,624
Depreciation and amortization in cost of revenue (1)
1,345
895
3,230
3,129
Gross profit $ / margin %
$
1,603
15.0
%
$
2,490
21.5
%
$
10,010
26.6
%
$
9,772
20.1
%
Exclude: Inventory adjustments
886
103
886
103
Exclude: Depreciation and amortization
1,345
895
3,230
3,129
Non-GAAP profit $ / margin %
$
3,834
35.8
%
$
3,488
30.1
%
$
14,126
37.6
%
$
13,004
26.8
%
Overall profit $ / margin %
$
24,398
35.4
%
$
25,307
36.9
%
$
79,836
37.5
%
$
71,435
35.0
%
Non-GAAP profit $ / margin %
$
39,087
56.7
%
$
37,740
55.0
%
$
119,472
56.2
%
$
111,218
54.5
%
(1) Depreciation and amortization as included in cost of revenue for GAAP. Separately shown for recalculation purposes.
28
The table below sets forth gross profit and gross margin calculated in accordance with GAAP, based upon the categories of revenue and associated costs disaggregated by “IoT Connectivity” and “IoT Solutions,” reconciled to Non-GAAP profit and Non-GAAP margin, disaggregated by “IoT Connectivity” and “IoT Solutions”:
Three Months Ended September 30,
Nine Months Ended September 30,
($ in thousands)
2024
2023
2024
2023
IoT Connectivity
$
%
$
%
$
%
$
%
Revenue
$
56,721
$
55,169
$
170,377
$
147,042
Cost of revenue, excluding depreciation and amortization
22,153
21,151
66,638
53,122
Depreciation and amortization in cost of revenue (1)
12,458
11,435
35,520
36,551
Gross profit $ / margin %
$
22,110
39.0
%
$
22,583
40.9
%
$
68,219
40.0
%
$
57,369
39.0
%
Exclude: Inventory adjustments
—
—
—
—
Exclude: Depreciation and amortization
12,458
11,435
35,520
36,551
Non-GAAP profit $ / margin %
$
34,568
60.9
%
$
34,018
61.7
%
$
103,739
60.9
%
$
93,920
63.9
%
IoT Solutions
Revenue
$
12,199
$
13,464
$
42,386
$
57,102
Cost of revenue, excluding depreciation and amortization
8,566
9,845
27,539
39,907
Depreciation and amortization in cost of revenue (1)
1,345
895
3,230
3,129
Gross profit $ / margin %
$
2,288
18.8
%
$
2,724
20.2
%
$
11,617
27.4
%
$
14,066
24.6
%
Exclude: Inventory adjustments
886
103
886
103
Exclude: Depreciation and amortization
1,345
895
3,230
3,129
Non-GAAP profit $ / margin %
$
4,519
37.0
%
$
3,722
27.6
%
$
15,733
37.1
%
$
17,298
30.3
%
Overall profit $ / margin %
$
24,398
35.4
%
$
25,307
36.9
%
$
79,836
37.5
%
$
71,435
35.0
%
Non-GAAP profit $ / margin %
$
39,087
56.7
%
$
37,740
55.0
%
$
119,472
56.2
%
$
111,218
54.5
%
(1) Depreciation and amortization as included in cost of revenue for GAAP. Separately shown for recalculation purposes.
During the three months ended September 30, 2024, IoT Connectivity Non-GAAP Margin decreased 0.8% compared to three months ended September 30, 2023, primarily driven by the inclusion of the lower margin IoT Connectivity revenue from the acquisition of Twilio’s IoT business.
During the three months ended September 30, 2024, IoT Solutions Non-GAAP Margin increased 9.4% as compared to the three months ended September 30, 2023, primarily driven by the volume mix of hardware sourced at a lower cost base as compared to prior year. Additional benefits have been realized from growth in residual partner agreements.
During the nine months ended September 30, 2024, IoT Connectivity Non-GAAP Margin decreased 3.0% compared to the nine months ended September 30, 2023, primarily driven by the inclusion of the lower margin IoT Connectivity revenue from the acquisition of Twilio’s IoT business.
During the nine months ended September 30, 2024, IoT Solutions non-GAAP Margin increased 6.8% compared to the nine months ended September 30, 2023, primarily driven by the volume mix of hardware sourced at a lower cost base as compared to prior year. Additional benefits have been realized from growth in residual partner agreements.
Key Operational Metrics
We review a number of operational metrics to measure our performance, identify trends affecting our business, prepare financial projections, and make strategic decisions. The operational metrics identified by management as key operational metrics are Total Number of Connections, Average Connections, Dollar-Based Net Expansion Rate, Total Contract Value, and Average Revenue per User.
Total Number of Connections and Average Connections
29
Our “Total Number of Connections at period end” constitutes the total of all our IoT Connectivity services connections, which includes the contribution of eSIMs but excludes certain connections where mobile carriers license our subscription management platform from us.The “Average Connections Count” is the simple average of the total connections during the relevant fiscal period(s) presented.
These metrics are the principal measures used by management to assess the growth of the business on a periodic basis, on a SIM and / or device-based perspective. We believe that investors also use these metrics for similar purposes.
The table below sets forth our Total Number of Connections as of September 30, 2024 and December 31, 2023:
September 30, 2024
December 31, 2023
Total Number of Connections at period end
18.8
million
18.5
million
The table below sets forth our Average Connections Count for the three and nine months ended September 30, 2024 and 2023:
September 30, 2024
September 30, 2023
Average Connections Count for the three months ended
18.6
million
18.7
million
Average Connections Count for the nine months ended
18.4
million
16.8
million
Total number of connections at period end as of September 30, 2024 and December 31, 2023 presented above included an approximate increase of 3.7 million and 3.3 million, respectively, related to the acquisition of Twilio’s IoT business. Average connections count for the three and nine months ended September 30, 2024 presented above included an approximate increase of 3.7 million and 3.5 million, respectively, related to the acquisition of Twilio’s IoT business. Average connections count for the three and nine months ended September 30, 2023 presented above included an approximate increase of 3.1 million related to the acquisition of Twilio’s IoT business.
Dollar Based Net Expansion Rate (“DBNER”)
DBNER tracks the combined effect of cross-sales of IoT Solutions to KORE’s existing customers, its customer retention and the growth of its existing business. KORE calculates DBNER by dividing the revenue for a given period (“given period”) from existing go-forward customers by the revenue from the same customers for the same period measured one year prior (“base period”).
The revenue included in the current period excludes revenue from (i) customers that are “non-go-forward” customers, meaning customers that have either communicated to KORE before the last day of the current period their intention not to provide future business to KORE or customers that KORE has determined are transitioning away from KORE based on a sustained multi-year time period of declines in revenue and (ii) new customers that started generating revenue after the end of the base period. For the purposes of calculating DBNER, if KORE acquires a company during the given period or the base period, then the revenue of a customer before the acquisition but during either the given period or the base period is included in the calculation. For example, to calculate our DBNER for the trailing 12 months ended September 30, 2024, we divide (i) revenue, for the trailing 12 months ended September 30, 2024, from go-forward customers that started generating revenue on or before September 30, 2023, by (ii) revenue, for the trailing 12 months ended September 30, 2023, from the same cohort of customers.
It is often difficult to ascertain which customers should be deemed not to be go-forward customers for purposes of calculating DBNER. Customers are not required to give notice of their intention to transition off of the KORE platform, and a customer’s exit from the KORE platform can take months or longer, and total connections of any particular customer can at any time increase or decrease for any number of reasons, including pricing, customer satisfaction or product fit—accordingly, a decrease in total connections may not indicate that a customer is intending to exit the KORE platform, particularly if that decrease is not sustained over a period of several quarters. DBNER would be lower if it were calculated using revenue from non-go-forward customers.
DBNER is used by management as a measure of growth of KORE’s existing customers (i.e., “same store” growth) and as a measure of customer retention, from a revenue perspective. It is not intended to capture the effect of either new customer wins or the declines from non-go-forward customers on KORE’s total revenue growth. This is because DBNER excludes new customers who started generating revenue after the base period and also excludes any customers who are non-go-forward customers on the last day of the current period. Revenue increases from new customer wins, and a decline in revenue from non-go-forward customers are also important factors in assessing KORE’s revenue growth, but these factors are independent of DBNER.
KORE’s DBNER was 95% for the twelve months ended September 30, 2024, as compared to 96% for the twelve months ended September 30, 2023. This decrease was primarily due to decreased IoT solutions revenue from certain IoT Solutions customers.
30
Total Contract Value (“TCV”)
TCV represents our estimated value of a revenue opportunity. TCV for an IoT Connectivity opportunity is calculated by multiplying by 40 the estimated revenue expected to be generated during the twelfth month of production. TCV for an IoT Solutions opportunity is either the actual total expected revenue opportunity, or if it is a longer-term “programmatically recurring revenue” program, calculated for the first 36 months of the delivery period. TCV is used by management as a measure of the revenue opportunity of KORE’s sales funnel, which we define as opportunities our sales team is actively pursuing, potentially leading to future revenue.
As of September 30, 2024, our sales funnel included over 1,082 opportunities with an estimated potential TCV of over $317 million. As of September 30, 2023, our sales funnel included over 1,700 opportunities with an estimated potential TCV of $740 million.
Average Revenue per User (“ARPU”)
ARPU is used by management as a measure to assess the revenue generated per connection. It is calculated by dividing the total IoT connectivity revenue during the period by the total number of connections during that same period. We believe that ARPU is an important metric for both management and investors to help in understanding the financial performance and effectiveness of the Company’s monetization per connection. ARPU is calculated on a three-month (current quarter) basis only, as longer periods are not meaningful.
ARPU was $1.01 and $0.98 for the three months ended September 30, 2024 and 2023, respectively.
31
Liquidity and Capital Resources
Overview
Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund our operating costs, and satisfy other general business needs. Our liquidity requirements have historically arisen from our working capital needs, obligations to make scheduled payments of interest and principal on our indebtedness, and capital expenditures to facilitate the growth and expansion of the business, which was historically accomplished via acquisitions. We do not plan on any acquisitions in the foreseeable future.
Going forward, we may continue to utilize borrowings, including bank credit facilities and lines of credit, to fund our liquidity requirements. We are highly leveraged, and such borrowings may not be available with attractive terms or at all. We may also seek to raise additional capital through public or private offerings of equity, equity-related, or debt securities, depending upon market conditions. The use of any particular source of capital and funds will depend on market conditions and the availability, if any, of these sources.
We cannot meet our short-term liquidity needs solely through cash generated from operational activities, though we believe the non-operational sources of financing identified above will be adequate for purposes of meeting our short‑term (within one year) liquidity needs, solely because of our ability to defer the payment of preferred dividends (reflected as “accrued interest” on our condensed consolidated balance sheets due to the character of the underlying instrument for accounting purposes) due to Searchlight. Our ability to meet our longer‑term liquidity needs beyond one year, with our current capital structure, is uncertain. We cannot predict with certainty the specific transactions we will undertake to generate sufficient liquidity to meet our obligations as they come due. We will adjust our plans as appropriate in response to changes in our expectations and any potential changes in market conditions.
Summary and Description of Financing Arrangements
The table below sets forth a summary of the Company’s outstanding long-term debt as of September 30, 2024 and December 31, 2023:
(in thousands)
September 30, 2024
December 31, 2023
Term Loan - Whitehorse
$
183,613
$
185,000
Backstop Notes
120,000
120,000
Other borrowings
—
561
Total
$
303,613
$
305,561
Less: current portion of long-term debt
(1,850)
(2,411)
Less: debt issuance costs, net of accumulated amortization of $1.2 million and $0.8 million, respectively
(2,502)
(2,911)
Less: original issue discount
(3,500)
(4,130)
Total long-term debt and other borrowings, net
$
295,761
$
296,109
Term Loan and Revolving Credit Facility — WhiteHorse Capital Management, LLC (“WhiteHorse”)
On November 9, 2023, the Company, only with respect to certain limited sections thereof, and certain subsidiaries of the Company entered into a credit agreement with WhiteHorse that consisted of a senior secured term loan of $185.0 million (“Term Loan”) as well as a senior secured revolving credit facility of $25.0 million (the “Revolving Credit Facility” and, together with the Term Loan, the “Credit Facilities”). Borrowings under the Term Loan and the Revolving Credit Facility bear interest at a rate at the Company’s option of either (1) Term SOFR for a specified interest period (at the Company’s option) of one to three months plus an applicable margin of up to 6.50% or (2) a base rate plus an applicable margin of up to 5.50%. The Term SOFR rate is subject to a “floor” of 1.0%. The applicable margins for Term SOFR rate and base rate borrowings are each subject to a reduction to 6.25% and 6.00% if the Company maintains a first lien net leverage ratio of less than 2.25:1.00 and greater than or equal to 1.75:1.00 and less than 1.75:1.00, respectively. Interest is paid on the last business day of each quarterly interest period except at maturity. The credit agreement became effective on November 15, 2023.
Principal payments of approximately $0.5 million are due on the last business day of each quarter. The maturity date of the Credit Facilities is November 15, 2028.
As of September 30, 2024 and December 31, 2023, there were no amounts outstanding on the Revolving Credit Facility.
The Credit Facilities are secured by substantially all of the Company’s subsidiaries’ assets. The Term Loan agreement restricts cash dividends and other distributions from the Company’s subsidiaries to the Company and also restricts the Company’s ability to pay cash dividends to its stockholders.
The Credit Facilities are subject to customary financial covenants including to the Total Net Leverage Ratio, defined as, with respect to any period end, the ratio of (a) Consolidated Total Debt to (b) Consolidated EBITDA (as defined in the credit agreement, as discussed below); and
32
First Lien Net Leverage Ratio defined as, with respect to any period end, the ratio of (a) Consolidated First Lien Debt to (b) Consolidated EBITDA. “Consolidated EBITDA” as defined by the credit agreement is equivalent to our Adjusted EBITDA, as presented in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures.”
The Total Net Leverage Ratio is set at 6.25:1.00 for quarterly periods ending March 31, 2024 and June 30, 2024; 5.75:1.00 for the quarterly periods ending September 30, 2024 and December 31, 2024; 5.50:1.00 for the quarterly periods ending March 31, 2025, June 30, 2025, and September 30, 2025; and 5.25:1.00 for periods ending December 31, 2025 and thereafter. The First Lien Net Leverage Ratio is set at 3.50:1.00 for quarterly periods ending March 31, 2024 and June 30, 2024; 3.00:1.00 for the quarterly periods ending September 30, 2024 and December 31, 2024; 2.75:1.00 for the quarterly periods ending March 31, 2025, June 30, 2025, and September 30, 2025; and 2.50:1.00 for periods ending December 31, 2025 and thereafter.
Backstop Notes
On September 30, 2021, a subsidiary of the Company issued the first tranche of the Backstop Notes, consisting of $95.1 million in senior unsecured exchangeable notes due 2028 to a lender and its affiliates. On October 28, 2021, the Company’s subsidiary issued a second and final tranche of Backstop Notes in the amount of $24.9 million. The Backstop Notes are guaranteed by the Company and are due September 30, 2028.
The Backstop Notes were issued at par and bear interest at a rate of 5.50% per annum which is paid semi-annually on March 30 and September 30 of each year. The Backstop Notes are exchangeable into common stock of the Company at $12.50 per share (the “Base Exchange Rate”) at any time at the option of the lender. At the Base Exchange Rate, the Notes are exchangeable for approximately 9.6 million shares of the Company’s common stock. The Base Exchange Rate may be adjusted for certain dilutive events or change in control events as defined by the Indenture (the “Adjusted Exchange Rate”).
After September 30, 2023, if the Company’s shares are trading at a defined premium to the Base Exchange Rate or applicable Adjusted Exchange Rate, the Company may redeem the Backstop Notes for cash, force an exchange into shares of its common stock at an amount per share based on a time-value make whole table, or settle with a combination of cash and its common stock.
The Backstop Notes were issued pursuant to an indenture which contains financial covenants related to the Company’s maximum total debt to Adjusted EBITDA ratio.
Other borrowings
The Company’s “other borrowings” as set forth on the foregoing table regarding the Company’s long-term debt related solely to a premium finance agreement entered into on August 3, 2022, to purchase a Directors and Officers insurance policy with a two-year policy term. The original amount borrowed was approximately $3.6 million at a fixed rate of 4.6% per annum, amortized over twenty months. The premium finance agreement required 20 fixed monthly principal and interest payments of approximately $0.2 million per month from August 15, 2022 to March 15, 2024. The balance was paid off during the nine months ended September 30, 2024.
Mandatorily Redeemable Preferred Stock
The Company has authorized 35,000,000 shares of preferred stock and has issued to a single investor (Searchlight) who is currently the sole holder thereof, 152,857 shares of Series A-1 preferred stock, $0.0001 par value per share (the “Series A-1 preferred stock”), which is mandatorily redeemable for cash payable to the holder on November 15, 2033. The number of issued and outstanding shares are currently the same. The Series A-1 preferred stock has a liquidation preference of $1,000 per share.
The following table sets forth the number of shares and the carrying amounts of Series A-1 preferred stock as of September 30, 2024 and December 31, 2023:
Carrying amount
($ in thousands)
Shares
September 30, 2024
December 31, 2023
Preferred stock issued November 15, 2023
150,000
$
150,000
$
150,000
Preferred stock issued December 13, 2023
2,857
2,857
2,857
Preferred stock issuance costs
N/A
(5,485)
(5,936)
Allocation of proceeds to preferred stock
N/A
(4,881)
(5,327)
Preferred stock, end of period
152,857
$
142,491
$
141,594
The Series A-1 preferred stock accrues dividends at a rate of 13% per year, compounded and payable quarterly, though cash payment of dividends must be declared by the Board, and are otherwise accrued, as further described below:
33
Searchlight, as the current sole owner of the Series A-1 preferred stock, is solely owed the accrued interest arising from the Series A-1 preferred stock outstanding, which interest is referred to in the preferred stock Certificate of Designations as “Dividends”. The “dividend rate” means, initially, 13% per annum, and dividends on each share of Series A-1 preferred stock shall (i) accrue on the liquidation preference of such share and on any accrued dividends on such share, on a daily basis from and including the issuance date of such share, whether or not declared, whether or not the Company has earnings and whether or not the Company has assets legally available to make payment thereof, at a rate equal to the dividend rate, (ii) compound quarterly and (iii) be payable quarterly in arrears, in accordance with the section, below, on each dividend payment date, commencing on December 31, 2023. Dividends on the Series A-1 preferred stock shall accrue on the basis of a 365-day year based on actual days elapsed. The amount of dividends payable with respect to any share of Series A-1 preferred stock for any dividend payment period shall equal the sum of the daily dividend amounts accrued with respect to such share during such dividend payment period.
Dividends on the Series A-1 preferred stock shall be payable in cash only if, as and when declared by the Board, and, if not declared by the Board, the amount of accrued Dividends shall be automatically increased, without any action on the part of the Company or any other person, in an amount equal to the amount of the Dividend to be paid. For further clarity, if the Board does not declare and pay in cash, or the Company otherwise for any reason fails to pay in cash, on any dividend payment date, the full amount of any accrued and unpaid Dividend on the Series A-1 preferred stock since the most recent dividend payment date, then the amount of such unpaid Dividend shall automatically be added to the amount of accrued Dividends on such share on the applicable dividend payment date without any action on the part of the Company or any other person.
Cash Flows
Nine Months Ended September 30,
(in thousands)
2024
2023
Net cash provided by operating activities
$
7,066
$
4,493
Net cash used in investing activities
$
(12,177)
$
(15,596)
Net cash used in financing activities
$
(3,386)
$
(3,759)
Cash flows from operating activities
Cash provided by operating activities for the nine months ended September 30, 2024 increased from 2023 primarily due to the accrual of interest payable to affiliate remaining unpaid.
Cash flows from investing activities
Cash used in investing activities for the nine months ended September 30, 2024 and 2023 was primarily used for investments in internally developed software and purchases of property and equipment.
Cash flows from financing activities
Cash used in financing activities for the nine months ended September 30, 2024, was primarily due to scheduled principal payments on the Term Loan and repurchase of common stock. During 2023, cash used in financing activities was primarily due to scheduled principal payments on the prior term loan.
Cash Availability
We have the ability to defer the cash payment of dividends (which are accounted for under GAAP as interest due to the debt-like features of the underlying instrument) due on the Series A-1 preferred stock, and plan to defer such payments in order to preserve cash for other purposes. As of September 30, 2024, we owed approximately $18.2 million in such dividend liability, which is due to an affiliate (Searchlight). We had a total of $43.7 million of purchase commitments payable that were not recorded as liabilities on our condensed consolidated balance sheet as of September 30, 2024, of which $9.2 million is expected to be purchased through the remainder of 2024.
As of September 30, 2024, we had approximately $18.6 million of cash on hand.
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. A discussion of critical accounting policies and estimates is included in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” in the Annual Report on Form 10-K. Our critical accounting policies and estimates have not materially changed since December 31, 2023.
34
Management discusses the ongoing development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors.
We expect quarter-to-quarter GAAP earnings volatility from our business activities. This volatility can occur for a variety of reasons, particularly changes in assessments of indicators of impairment regarding goodwill. In addition, the amount or timing of our reported earnings may be impacted by technical accounting issues and estimates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide this information.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure controls and procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company conducted an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) of the Company’s disclosure controls and procedures as defined in Rule 13(a)-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were not effective as of September 30, 2024 due to the material weaknesses in the Company’s internal control over financial reporting as reported in its Annual Report on Form 10-K and also as further described below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
On November 11, 2024, the Company’s Chief Executive Officer and Chief Financial Officer concluded that there was an additional material weaknesses in the Company’s internal control over financial reporting as described below.
Subsequent to the filing of its original Form 10-Q for the quarterly period ended June 30, 2024, the Company concluded that it did not design effective management review controls related to the calculation of, and disclosure of, goodwill impairment. This continued material weakness in the Company’s Financial Statement Close Process resulted in a material error in the Company’s previously issued Unaudited Condensed Consolidated Financial Statements as of and for the three and six month periods ended June 30, 2024 included in the original Form 10-Q leading to the restatement of those financial statements in an Amendment No. 1 on Form 10-Q/A.
The Company continues the process of designing and implementing effective internal control measures to improve its internal control over financial reporting and remediate these material weaknesses.
Changes in internal control over financial reporting
During the quarter ended September 30, 2024, except for the changes related to a further material weakness in the Financial Close Process noted above and the remediation of certain other material weaknesses as noted in the Company’s Annual Report on Form 10-K, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
35
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are subject to various legal proceedings, lawsuits, disputes and claims arising in the ordinary course of our business. Although the outcome of these and other claims cannot be predicted with certainty, there are currently no pending legal proceedings that are expected to be material to us.
ITEM 1A. RISK FACTORS
For a discussion of potential risks and uncertainties applicable to us, see the information under Part I, Item 1A. “Risk Factors” in the Annual Report on Form 10-K. The risks described in the Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or future results.
As of the date of this Quarterly Report on Form 10-Q, there have been no material changes with regard to the Risk Factors disclosed in the Annual Report on Form 10-K except as set forth below.
The ultimate effect of the 1-for-5 reverse stock split on the market price of our common stock cannot be predicted with any certainty and shares of our common stock have likely experienced decreased liquidity as a result of such reverse stock split.
On July 1, 2024, the Company effected a 1-for-5 reverse stock split of its common stock. The liquidity of our common stock may be adversely affected given the reduced number of shares of our common stock that are now outstanding following the reverse stock split. As a result of the lower number of shares outstanding following the reverse stock split, the market for our common stock may also become more volatile, which may lead to reduced trading and a smaller number of market makers for our common stock. Our share price may not attract new investors, including institutional investors. In addition, the market price of our common stock may not satisfy the investing requirements of those investors. The trading liquidity of our common stock may not improve. All the foregoing risks may result in a material adverse effect to our stockholders.
Our liabilities exceed our assets, which may have a material adverse effect on our ability to raise further equity capital, refinance our debt on favorable terms or at all, or issue new debt.
The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q reflect that the book value of our liabilities exceeds the book value of our assets. Further, the fair value of our debt reflects a discount to its par (or principal) value. We may therefore face constraints on ability to raise further equity capital, refinance our debt on favorable terms or at all, or issue new debt, all of which could have a material adverse effect on our business.
We face risks related to the restatement of our previously issued condensed consolidated financial statements and financial information for the interim financial period for the second quarter of 2024, which may adversely impact our business.
As described in Item 4.02 of our Current Report on Form 8-K filed with the SEC on November 12, 2024, during the preparation of our condensed consolidated financial statements for the quarter ended September 30, 2024, we concluded that the Company’s previously issued unaudited condensed consolidated financial statements contained within the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2024, which was originally filed with the SEC on August 14, 2024, should no longer be relied upon, and that such financial statements should be restated. It was concluded that the Company’s goodwill impairment expense was materially misstated in the second quarter of 2024. The conclusion was based on management’s determination that it miscalculated its goodwill impairment for the quarter ending June 30, 2024 by deducting debt issuance costs from the fair value of the debt which was then used to determine the value of the Company’s goodwill impairment at that time. The debt issuance costs should not have been deducted from the fair value of the associated debt.
As a result of the restatement, we are subject to a number of additional risks and uncertainties which may affect investor confidence in the accuracy of our financial disclosures and may raise reputational issues for our business. We expect to continue to face many risks and challenges related to the restatement, including the risk that the processes undertaken to effect the restatement may not have been adequate to identify and correct all errors in our historical financial statements and, as a result, we may discover additional errors and our financial statements remain subject to the risk of future restatement. We are also at risk of potential litigation or other disputes which may include, among others, claims invoking the federal and state securities laws, or other claims arising from the restatement. As of the date of this Quarterly Report, we are not aware of any such disputes arising out of the restatement. If one or more of the foregoing risks or challenges persist, our business, operations and financial condition are likely to be materially and adversely affected.
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table sets forth information with respect to our repurchases of common stock in each month of the third quarter of 2024:
36
Period
Total Number of Shares Purchased (1) (2)
Average Price Paid per Share (1) (2)
Total Number of Shares Purchased as Part of Publicly Announced Programs
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program
July 1, 2024 - July 31, 2024
—
$
—
—
$
—
August 1, 2024 - August 31, 2024
—
$
—
—
$
—
September 1, 2024 - September 30, 2024
202,532
$
3.73
—
$
—
(1) During the third quarter of 2024, 9,795 shares of common stock were surrendered by employees vesting in RSUs in order to pay for applicable tax withholding. Under the KORE Group Holdings, Inc. 2021 Long-Term Stock Incentive Plan (“Incentive Plan”), participants may surrender shares as payment of applicable tax withholding on the vesting of equity awards. Shares so surrendered by participants in the Incentive Plan are repurchased pursuant to the terms of the Incentive Plan and / or applicable inducement award agreement and not pursuant to publicly announced share repurchase programs. The average price per share deemed paid for these shares is calculated using the closing stock price on the vesting date. The price per share deemed paid for these shares ranged between $2.95 and $4.00 per share. These shares of common stock have been cancelled.
(2) On September 17, 2024, we purchased 183,099 shares and 9,638 shares of our common stock from The Northwestern Mutual Life Insurance Company and The Northwestern Mutual Life Insurance Company for its Group Annuity Separate Account, respectively, at the price of $2.24 per share, which was equal to the previous day’s closing price. This purchase was not made pursuant to a publicly announced share repurchase program. These shares of common stock have been retained by us as treasury stock.
Working Capital Restrictions and Limitations Upon the Payment of Dividends
The Company’s ability to pay cash dividends to its stockholders is restricted by the terms of its financing agreements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Preferred Dividend Arrearage
The Company’s Series A-1 preferred stock, ranking in priority to the Company’s common stock, allows for payment of dividends in arrears. As of November 19, 2024, the total amount of unpaid Series A-1 preferred stock dividends in arrears was $21.2 million.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Rule 10b5-1 trading plan(s)
During the quarter ended September 30, 2024, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K of the Securities Act.
Inline XBRL Instance Document—the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.
Cover Page Interactive Data File (embedded within the Inline XBRL document)
* Filed herewith.
** Exhibit is being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
†This document has been identified as a compensatory agreement.
+ Exhibit is included to correct an inaccurate hyperlink included in the Exhibit Index to the Company’s Annual Report on Form 10-K.
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:
KORE Group Holdings, Inc.
Date: November 19, 2024
By:
/s/ Ronald Totton
Ronald Totton
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 19, 2024
By:
/s/ Paul Holtz
Paul Holtz
Executive Vice President Chief Financial Officer and Treasurer