What changed in this filing

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Item 1. Financial Statements

2021-02-05 compared with 2020-08-07 · 202 added, 256 removed, 422 unchanged (52% of the section changed)

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three months ended June 30, Nine months ended June 30,

2020 2019 2020 2019

Three months ended December 31,

(in thousands, except per share data)

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General and administrative 14,415 8,555

Restructuring charge (reversal) 91 ( 20 ) 129 ( 87 )

Restructuring charge 733 —

Total operating expenses 41,165 30,947

Operating income 2,855 1,621 6,096 7,964

Other (expense) income, net:

Operating loss ( 146 ) ( 483 )

Other expense, net:

Interest income — 231

Interest expense ( 402 ) ( 432 )

Other (expense) income, net ( 67 ) ( 174 ) ( 214 ) 131

Total other (expense) income, net ( 945 ) 31 ( 2,977 ) 594

Income before income taxes 1,910 1,652 3,119 8,558

Income tax expense (benefit) 144 4 ( 859 ) 886

Net income $ 1,766 $ 1,648 $ 3,978 $ 7,672

Net income per common share:

Other expense, net ( 192 ) ( 236 )

Total other expense, net ( 594 ) ( 437 )

Loss before income taxes ( 740 ) ( 920 )

Income tax benefit ( 433 ) ( 1,128 )

Net (loss) income $ ( 307 ) $ 208

Net (loss) income per common share:

Basic $ ( 0.01 ) $ 0.01

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three months ended June 30, Nine months ended June 30,

2020 2019 2020 2019

Three months ended December 31,

(in thousands)

Net income $ 1,766 $ 1,648 $ 3,978 $ 7,672

Other comprehensive income (loss), net of tax:

Net (loss) income $ ( 307 ) $ 208

Other comprehensive income:

Foreign currency translation adjustment 1,872 2,660

Change in net unrealized gain on investments — 4 — 18

Less income tax expense — ( 1 ) — ( 5 )

Other comprehensive income (loss), net of tax 681 535 857 ( 1,107 )

Other comprehensive income 1,872 2,660

Comprehensive income $ 1,565 $ 2,868

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CONDENSED CONSOLIDATED BALANCE SHEETS

June 30, 2020 September 30, 2019

December 31, 2020 September 30, 2020

(in thousands, except share data)

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Unearned revenue 11,979 7,691

Contingent consideration on acquired businesses 4,228 5,407

Contingent consideration on acquired business 10,000 4,228

Current portion of operating lease liabilities 2,776 2,527

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Total liabilities 151,146 157,182

Contingencies (see Note 15)

Commitments and Contingencies (see Note 14)

Stockholders' equity:

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months ended June 30,

Three months ended December 31,

(in thousands)

Operating activities:

Net income $ 3,978 $ 7,672

Adjustments to reconcile net income to net cash provided by operating activities:

Net (loss) income $ ( 307 ) $ 208

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:

Depreciation of property, equipment and improvements 1,089 1,169

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Deferred income tax provision 750 234

Gain on sale of property and equipment — ( 4,458 )

Change in fair value of contingent consideration 5,772 259

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Provision for inventory obsolescence 600 455

Restructuring charge (reversal) 129 ( 87 )

Restructuring charge 733 —

Other 118 161

Changes in operating assets and liabilities (net of acquisitions) ( 5,631 ) ( 28,651 )

Net cash provided by operating activities 19,153 22,528

Net cash provided by (used in) operating activities 8,312 ( 22,067 )

Investing activities:

Proceeds from maturities and sales of marketable securities — 2,500

Acquisition of business, net of cash acquired — ( 136,098 )

Proceeds from sale of property and equipment — 10,047

Purchase of property, equipment, improvements and certain other intangible assets ( 777 ) ( 196 )

Net cash (used in) provided by investing activities ( 136,791 ) 3,947

Net cash used in investing activities ( 777 ) ( 136,294 )

Financing activities:

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Payments on long-term debt ( 15,625 ) —

Payments for contingent consideration ( 4,698 ) ( 3,748 )

Proceeds from stock option plan transactions 3,944 4,160

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Purchases of common stock ( 1,446 ) ( 1,577 )

Net cash provided by financing activities 78,221 90

Net cash (used in) provided by financing activities ( 12,793 ) 112,869

Effect of exchange rate changes on cash and cash equivalents 392 1,772

Net (decrease) increase in cash and cash equivalents ( 37,707 ) 26,080

Net decrease in cash and cash equivalents ( 4,866 ) ( 43,720 )

Cash and cash equivalents, beginning of period 54,129 92,792

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Contingent consideration recognized related to acquisition of business $ — $ ( 9,100 )

Tenant improvement allowance $ ( 1,000 ) $ —

Accrual for purchase of property, equipment, improvements and certain other intangible assets $ ( 452 ) $ —

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Net income 208 208

Other comprehensive loss ( 1,107 ) ( 1,107 )

Other comprehensive income 2,660 2,660

Employee stock purchase plan issuances ( 25 ) 214 72 286

Repurchase of common stock 92 ( 1,051 ) ( 1,051 )

Taxes paid for net share settlement of share-based payment awards 89 ( 1,577 ) ( 1,577 )

Issuance of stock under stock award plans 618 6 4,154 4,160

Stock-based compensation expense 1,600 1,600

Balances, June 30, 2019 34,511 $ 345 6,386 $ ( 54,494 ) $ 264,225 $ 159,633 $ ( 24,633 ) $ 345,076

Balances, December 31, 2019 35,226 $ 352 6,431 $ ( 55,702 ) $ 272,393 $ 162,127 $ ( 22,855 ) $ 356,315

Balances, September 30, 2020 35,513 $ 355 6,353 $ ( 55,109 ) $ 279,741 $ 170,330 $ ( 23,817 ) $ 371,500

Net income 3,978 3,978

Net loss ( 307 ) ( 307 )

Other comprehensive income 1,872 1,872

Employee stock purchase plan issuances ( 25 ) 222 112 334

Repurchase of common stock 96 ( 1,692 ) ( 1,692 )

Taxes paid for net share settlement of share-based payment awards 84 ( 1,446 ) ( 1,446 )

Issuance of stock under stock award plans 577 6 3,938 3,944

Stock-based compensation expense 1,745 1,745

Balances, June 30, 2020 35,405 $ 354 6,373 $ ( 55,248 ) $ 276,960 $ 165,897 $ ( 24,658 ) $ 363,305

Balances, December 31, 2020 36,090 $ 361 6,412 $ ( 56,333 ) $ 285,536 $ 170,023 $ ( 21,945 ) $ 377,642

The accompanying notes are an integral part of the condensed consolidated financial statements.

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The quarterly results of operations are not necessarily indicative of the results to be expected for the full year.

As described in Note 8, effective with the reorganization announcement on October 7, 2020, the measure of segment operating income (loss) used by our chief operating decision maker ("CODM") changed.

As a result, our disclosed measure of segment operating income (loss) has been updated.

Potential Impacts of COVID-19 on our Business

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Due to the inherent uncertainty of the unprecedented and rapidly evolving situation, we are unable to predict with any confidence the likely impact of the COVID-19 pandemic on our future operations.

For a more detailed discussion see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of this Form 10-Q.

For a more detailed discussion see Part I, Item 1 in our Annual Report on Form 10-K for the year ended September 30, 2020 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of this Form 10-Q.

Recently Issued Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842) , which provides for comprehensive changes to lease accounting.

The standard requires that a lessee recognize a lease obligation liability and a right-to-use asset for virtually all leases, subsequently amortized over the lease term.

We adopted this standard in the first quarter of fiscal 2020, following the modified retrospective application approach that applies the new standard to all applicable leases existing at the date of initial application and not restating comparative periods.

We have completed our implementation efforts.

These efforts included identification and analysis of our lease portfolio, analysis and evaluation of the new reporting and disclosure requirements of the new guidance, and an evaluation of our lease-related processes and internal controls.

The adoption of this standard resulted in the recognition of a right-of-use asset included in other non-current assets of approximately $ 14.1 million.

It also resulted in a lease liability of approximately $ 17.9 million included in other current liabilities and other non-current liabilities.

Both of these were recorded on our condensed consolidated balance sheet in the first quarter of fiscal 2020.

In adopting the new standard, we elected the package of practical expedients permitted under the transition guidance, as well as the practical expedient not to separate non-lease components from lease components.

We also elected the practical expedient to use hindsight in determining the lease term when considering options to extend or terminate a lease, options to purchase the underlying asset, and in assessing the impairment of right-of-use assets.

The adoption of this standard did not have a significant impact on our condensed consolidated results of operations or condensed consolidated statements of cash flows.

We have identified new and updated existing internal controls and processes to support measurement, recognition and disclosure under this new standard.

Such changes were not deemed to be material to our overall system of internal control over financial reporting.

Not Yet Adopted

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820).

In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820).

The updated guidance changes the disclosure requirements on fair value measurements.

The updated guidance is effective for us beginning

BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

with the quarter ending December 31, 2020.

Early adoption is permitted for any removed or modified disclosures.

We are evaluating the impact of adopting ASU 2018-13 on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments .

We adopted this standard in the first quarter of fiscal 2021.

This standard did not have a material impact on our consolidated financial statements.

In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments .

The amendments in this update replace the incurred loss impairment methodology in current U.S.

GAAP with a methodology that reflects expected credit losses.

This update is intended to provide financial statement users with more decision-useful information about the expected credit losses.

ASU 2016-13 is effective for us beginning with the quarter ending December 31, 2020.

Entities may early adopt beginning after December 15, 2018.

We are evaluating the impact of adopting ASU 2016-13 on our consolidated financial statements.

This update is intended to provide financial statement users with more decision-useful information about expected credit losses.

We adopted this standard in the first quarter of fiscal 2021, following the modified-retrospective approach.

This standard did not have a material impact on our consolidated financial statements.

Acquisition of Opengear, Inc.

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("Opengear"), a New Jersey-based provider of secure IT infrastructure products and software.

Opengear results are included in our condensed consolidated financial statements within our IoT Products & Services segment.

The terms of the acquisition included an upfront cash payment as well as contingent consideration comprised of future earn-out payments.

We funded the closing of the acquisition with cash of $ 148.1 million comprised of cash on hand and proceeds from our credit facility (see Note 8 to the condensed consolidated financial statements).

The earn-out payments are based on revenue performance from Opengear for the twelve-month periods ended December 31, 2019 and ending December 31, 2020.

The cumulative amount of these earn-outs for the periods ended December 31, 2019 and December 31, 2020, will not exceed $ 5.0 million and $ 10.0 million, respectively.

We paid the first installment of $ 0.9 million for the period ended December 31, 2019 during the third quarter of fiscal 2020.

The fair value of this contingent consideration was $ 5.1 million at the date of acquisition and the remaining fair value was $ 4.2 million at June 30, 2020 (see Note 5 to the condensed consolidated financial statements).

For tax purposes, this acquisition is treated as a stock acquisition.

The goodwill therefore is not deductible.

We believe this is a complementary acquisition for us as it significantly enhances our IoT Products and Services segment by providing secure, resilient access and automation to critical IT infrastructure.

The Opengear acquisition has been accounted for using the acquisition method of accounting.

This requires, among other things, that assets acquired and liabilities assumed pursuant to the purchase agreement be recognized at fair value as of the acquisition date.

The following table summarizes the preliminary values of Opengear assets acquired and liabilities assumed as of the acquisition date (in thousands):

Opengear results have been included in our condensed consolidated financial statements within our IoT Products & Services segment since the date of acquisition.

During the first quarter of fiscal 2021, we recorded an out-of-period adjustment in connection with the purchase price accounting of Opengear.

This balance sheet adjustment resulted in a decrease in fair value of net tangible assets acquired of $ 1.1 million , a decrease of $ 0.3 million to non-current deferred tax liability and an increase to goodwill of $ 0.8 million .

Management assessed the impact of this adjustment and believes, after considering both quantitative and qualitative factors, that it is not material to our current or previously issued consolidated financial statements.

The following table summarizes the final fair values of Opengear assets acquired and liabilities assumed as of the acquisition date (in thousands):

Cash $ 148,058

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Total $ 153,158

The condensed consolidated balance sheet as of June 30, 2020 reflects the preliminary allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition.

The estimated fair value of the net tangible assets acquired is preliminary and remains subject to change due to the finalization of the net working capital adjustment and related escrow.

Included in the fair value of net tangible assets acquired are $ 1.4 million of right-of-use assets

ACQUISITIONS (CONTINUED)

included in other non-current assets and $ 1.7 million of lease liability included in other current and non-current liabilities associated with Opengear's operating leases.

The preliminary weighted average useful life for all the identifiable intangibles listed above is estimated to be 13.4 years.

For purposes of determining fair value, the existing customer relationships identified above are assumed to have a useful life of 14.5 years, purchased and core technology is assumed to have useful life of 9.0 years and trademarks are assumed to have a useful life of 12.0 years.

Useful lives for identifiable intangible assets are estimated at the time of acquisition based on the periods of time from which we expect to derive benefits from the identifiable intangible assets.

The identifiable intangible assets are amortized using the straight-line method.

This reflects the pattern in which the assets are expected to be consumed.

Costs directly related to the acquisition of $ 0.3 million incurred in the fourth quarter of fiscal 2019 and $ 2.6 million incurred in fiscal 2020 have been charged directly to operations and are included in general and administrative expenses in our condensed consolidated statements of operations.

These acquisition costs include legal, accounting, valuation and investment banking fees.

The following consolidated pro forma information is presented as if the acquisition had occurred on October 1, 2018 (in thousands):

Three months ended June 30, Nine months ended June 30,

2020 2019 2020 2019

Net sales $ 70,338 $ 74,946 $ 220,998 $ 229,831

Net income $ 2,411 $ 3,064 $ 9,847 $ 7,901

Net income per share - basic $ 0.08 $ 0.11 $ 0.34 $ 0.28

Net income per share - diluted $ 0.08 $ 0.11 $ 0.33 $ 0.28

Pro forma net income has been adjusted to include interest expense related to debt incurred as a result of the acquisition as well as amortization on the fair value of the intangibles acquired.

It also has been adjusted to assume the acquisition-related costs of $ 3.0 million were incurred as of the first quarter of fiscal 2019.

Given the efforts to rapidly integrate the workforce, customer offerings, technology, and reporting capabilities of Opengear with that of our other components in our IoT Products & Services business, along with the inherent complementary synergies gained from doing so, it is impractical for us to present Opengear specific results otherwise required by GAAP.

The Condensed Consolidated Balance Sheet as of December 31, 2020 reflects the final allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition.

EARNINGS PER SHARE

The following table is a reconciliation of the numerators and denominators in the net income per common share calculations (in thousands, except per common share data):

Three months ended June 30, Nine months ended June 30,

2020 2019 2020 2019

Net income $ 1,766 $ 1,648 $ 3,978 $ 7,672

Denominator for basic net income per common share — weighted average shares outstanding 28,972 28,072 28,772 27,816

Basic net (loss) income per common share is calculated based on the weighted average number of common shares outstanding during the period.

Diluted net income per common share is computed by dividing net income by the weighted average number of common shares and potentially dilutive common shares outstanding during the period.

Potentially dilutive common shares result from dilutive common stock options and restricted stock units.

Diluted net loss per common share is computed by dividing net loss by the weighted average number of common shares.

All potentially dilutive common equivalent shares are excluded from the calculations of net loss per diluted share due to their anti-dilutive effect for the three months ended December 31, 2020.

EARNINGS PER SHARE (CONTINUED)

The following table is a reconciliation of the numerators and denominators in the net (loss) income per common share calculations (in thousands, except per common share data):

Three months ended December 31,

Net (loss) income $ ( 307 ) $ 208

Denominator for basic net (loss) income per common share — weighted average shares outstanding 29,374 28,467

Effect of dilutive securities:

Stock options and restricted stock units — 1,147

Denominator for diluted net income per common share — adjusted weighted average shares 29,187 28,589 29,477 28,414

Net income per common share, basic $ 0.06 $ 0.06 $ 0.14 $ 0.28

Net income per common share, diluted $ 0.06 $ 0.06 $ 0.13 $ 0.27

EARNINGS PER SHARE (CONTINUED)

For the three months ended June 30, 2020 and 2019, there were 2,241,860 and 617,841 potentially dilutive shares, respectively.

For the nine months ended June 30, 2020 and 2019, there were 1,146,581 and 667,841 potentially dilutive shares, respectively.

Denominator for diluted net (loss) income per common share — adjusted weighted average shares 29,374 29,614

Net (loss) income per common share, basic $ ( 0.01 ) $ 0.01

Net (loss) income per common share, diluted $ ( 0.01 ) $ 0.01

For the three months ended December 31, 2020 and 2019, there were 547,045 and 594,447 potentially dilutive shares, respectively.

These potentially dilutive shares were related to stock options to purchase common shares that were not included in the above computation of diluted earnings per common share since the options' exercise prices were greater than the average market price of our common shares.

In addition, due to the net loss for the three months ended December 31, 2020, there were 1,157,727 common stock options and restricted stock units that were not included in the above computation of diluted earnings per share.

SELECTED BALANCE SHEET DATA

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Raw materials $ 14,695 $ 14,009

Work in process — 565

Finished goods 40,062 37,559

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and Level 3 (unobservable inputs that cannot be corroborated by observable market data).

The following tables provide information by level for financial assets and liabilities that are measured at fair value on a recurring basis (in thousands):

FAIR VALUE MEASUREMENTS (CONTINUED)

The following tables provide information by level for financial liabilities that are measured at fair value on a recurring basis (in thousands):

Value at Fair Value Measurements Using

Inputs Considered as

June 30, 2020 Level 1 Level 2 Level 3

December 31, 2020 Level 1 Level 2 Level 3

Contingent consideration on acquired businesses $ 10,000 $ — $ — $ 10,000

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September 30, 2020 Level 1 Level 2 Level 3

Money market $ 56,700 $ 56,700 $ — $ —

Total assets measured at fair value $ 56,700 $ 56,700 $ — $ —

Contingent consideration on acquired businesses $ 4,228 $ — $ — $ 4,228

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We paid the final installment of $ 2.9 million during the third quarter of fiscal 2020.

FAIR VALUE MEASUREMENTS (CONTINUED)

In connection with our acquisition of Accelerated Concepts, Inc.

("Accelerated") in January 2018, we agreed to make contingent earn-out payments if specified revenue thresholds for sales of Accelerated products were achieved.

We made the first installment payment of $ 3.5 million in the third quarter of fiscal 2019.

We paid the first installment payment of $ 3.5 million in the third quarter of fiscal 2019.

The earn-out period for this acquisition ended on January 22, 2020.

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We paid the first installment of $ 0.9 million during the third quarter of fiscal 2020.

The fair value of the remaining liability for contingent consideration for the acquisition of Opengear was $ 4.2 million at June 30, 2020.

The fair value of the remaining liability for contingent consideration for the acquisition of Opengear was equal to the maximum payout of $ 10.0 million at December 31, 2020 due to a substantial increase in revenue over our previous expectations.

We expect to pay this amount during the second quarter of fiscal 2021.

The following table presents a reconciliation of the contingent consideration liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):

Three months ended June 30, Nine months ended June 30,

2020 2019 2020 2019

Three months ended December 31,

Fair value at beginning of period $ 4,228 $ 5,407

Contingent consideration recognized for acquired business — 9,100

Contingent consideration payments ( 6,151 ) ( 3,500 ) ( 6,151 ) ( 5,848 )

Change in fair value of contingent consideration 5,772 259

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The change in fair value of contingent consideration reflects our estimates of the probabilities of achieving the relevant targets and is discounted based on our estimated discount rate.

We have estimated the fair value of the contingent consideration at June 30, 2020 based on the probability of achieving the specified revenue thresholds at 49 % for Opengear.

A significant change in our estimates of achieving any relevant target could materially change the fair value of the contingent consideration liability.

The fair value of the contingent consideration at December 31, 2020 was based on the actual achievement of the specified revenue thresholds for Opengear.

GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Amortizable intangible assets were (in thousands):

June 30, 2020 September 30, 2019

December 31, 2020 September 30, 2020

amount Accum.

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Non-compete agreements 600 ( 480 ) 120 600 ( 450 ) 150

Order backlog 1,800 ( 1,800 ) — 1,800 ( 1,800 ) —

Total $ 225,926 $ ( 108,534 ) $ 117,392 $ 225,059 $ ( 103,811 ) $ 121,248

Amortization expense was $ 4.1 million and $ 2.1 million for the three months ended June 30, 2020 and 2019, respectively, and $ 10.7 million and $ 6.7 million for the nine months ended June 30, 2020 and 2019, respectively.

Amortization expense was $ 4.0 million and $ 2.4 million for the three months ended December 31, 2020 and 2019, respectively.

Amortization expense is recorded on our condensed consolidated statements of operations within cost of sales and in general and administrative expense.

GOODWILL AND OTHER INTANGIBLE ASSETS, NET (CONTINUED)

Estimated amortization expense related to intangible assets for the remainder of fiscal 2021 and the five succeeding fiscal years is (in thousands):

2020 (three months) $ 4,065

2021 $ 15,555

2021 (nine months) $ 11,616

2022 $ 14,720

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The changes in the carrying amount of goodwill by reportable segments are (in thousands):

Nine months ended June 30,

Three months ended December 31,

Products and Services IoT

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Balance on September 30, 2020 $ 160,365 $ 49,770 $ 210,135

Acquisitions 53,606 — 53,606

Adjustment (see Note 2) 846 — 846

Foreign currency translation adjustment 834 551 1,385

Balance at June 30, 2020 $ 157,145 $ 49,548 $ 206,693

Balance at December 31, 2020 $ 162,045 $ 50,321 $ 212,366

Goodwill represents the excess of cost over the fair value of net identifiable assets acquired.

Goodwill is tested for impairment on an annual basis as of June 30, or more frequently if events or circumstances occur which could indicate impairment.

Goodwill is quantitatively tested for impairment on an annual basis as of June 30, or more frequently if events or circumstances occur which could indicate impairment.

We continue to have two reportable segments, our IoT Products & Services segment and our IoT Solutions segment (see Note 8).

Effective with the reorganization announcement on October 7, 2020 (see Note 13), our IoT Products & Services business is now structured to include four operating segments, each with a segment manager:

Cellular Routers, Console Servers, OEM Solutions and Infrastructure Management.

We have concluded that these operating segments along with our IoT Solutions segment constitute separate reporting units and will be tested individually for impairment.

As of December 31, 2020, we have performed a qualitative assessment and concluded that there is no impairment or triggering events.

For our fiscal 2020 annual impairment test we concluded that the IoT Products & Services segment and the IoT Solutions segment constitute separate reporting units for purposes of the ASC 350-20-35 "Goodwill Measurement of Impairment" assessment and both units were tested individually for impairment.

For our quantitative goodwill impairment tests, we determine the estimated fair value of each reporting unit and compare it to the carrying value of the reporting unit, including goodwill.

If the carrying amount of a reporting unit is higher than its estimated fair value, then an impairment loss must be recognized for the excess.

Both of our operating segments constitute separate reporting units and both units were tested individually for impairments.

The fair value of each reporting unit is determined using a weighted combination of an income and market approach.

A discounted cash flow ("DCF") method is utilized for the income approach.

In developing the discounted cash flow analysis, our assumptions about future revenues, expenses, capital expenditures, and changes in working capital are based on management's projections, and assume a terminal growth rate thereafter.

A separate discount rate is determined for each reporting unit and these cash flows are then discounted to determine the fair value of the reporting unit.

The market approach determines a value derived from the guideline company method.

This market approach method estimates the price reasonably expected to be realized from the sale of the reporting unit based on comparable companies.

Fair values for both reporting units were each estimated on a standalone basis using a weighted combination of the income approach and market approach.

GOODWILL AND OTHER INTANGIBLE ASSETS, NET (CONTINUED)

The income approach indicates the fair value of a business based on the value of the cash flows the business or asset can be expected to generate in the future.

A commonly used variation of the income approach used to value a business is the discounted cash flow (“DCF”) method.

The DCF method is a valuation technique in which the value of a business is estimated on the earnings capacity, or available cash flow, of that business.

Earnings capacity represents the earnings available for distribution to stockholders after consideration of the reinvestment required for future growth.

Significant judgment is required to estimate the amount and timing of future cash flows for each reporting unit and the relative risk of achieving those cash flows.

The market approach indicates the fair value of a business or asset based on a comparison of the business or asset to comparable publicly traded companies or assets and transactions in its industry as well as our prior acquisitions.

This approach can be estimated through the guideline company method.

This method indicates fair value of a business by comparing it to publicly traded companies in similar lines of business.

After identifying and selecting the guideline companies, we make judgments about the comparability of the companies based on size, growth rates, profitability, risk, and return on investment in order to estimate market multiples.

These multiples are then applied to the reporting units to estimate a fair value.

Assumptions and estimates to determine fair values under the income and market approaches are complex and often subjective.

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They also include internal factors such as changes in our business strategy and our internal forecasts.

We believe we made a reasonable estimate with the assumptions used to calculate the fair values of our two reporting segments.

Changes in circumstances or a potential event could negatively affect the estimated fair values.

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As a result, the market capitalization reconciliation analysis proved support for the reasonableness of the fair values estimated for each individual reporting unit.

SALE OF BUILDING

On October 2, 2018, we sold a 130,000 square feet building that served as our corporate headquarters in Minnetonka, Minnesota to Minnetonka Leased Housing Associates II, LLLP.

The sale price was $ 10.0 million in cash adjusted for certain selling costs and an escrow for the leaseback of the building for four months.

As a result of this sale, we recorded a gain of $ 4.4 million ($ 3.4 million net of tax) in the first quarter of fiscal 2019, which was recorded in general and administrative expense.

In connection with our acquisition of Opengear, we entered into a syndicated credit agreement with BMO Harris Bank N.A.

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In addition to paying interest on the outstanding balance under the Credit Facility, we are required to pay a commitment fee on the non-utilized commitments thereunder which is also reported in interest expense.

Our weighted average interest rate at June 30, 2020 was 1.1 %.

Our weighted average interest rate at December 31, 2020 was 0.6 %.

We also incurred debt issuance costs under the Credit Facility of $ 2.6 million in the first quarter of fiscal 2020.

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The Revolving Loan is due in a lump sum payment at maturity on December 13, 2024.

The fair values of the Term Loan and Revolving Loan approximated carrying value at June 30, 2020.

The following table is a summary of our long-term indebtedness at June 30, 2020 (in thousands):

Revolving loan $ 30,000

The fair values of the Term Loan and Revolving Loan approximated carrying value at December 31, 2020.

INDEBTEDNESS (CONTINUED)

The following table is a summary of our long-term indebtedness at December 31, 2020 (in thousands):

Term loan $ 47,500

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Total long-term debt, net of current portion $ 43,483

The following table is a summary of future maturities of our aggregate long-term debt at June 30, 2020 (in thousands):

2020 (three months) $ 625

The following table is a summary of future maturities of our aggregate long-term debt at December 31, 2020 (in thousands):

2021 (nine months) $ 1,875

Total long-term debt $ 47,500

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Among other thing, these covenants require us to maintain a certain financial ratio (net leverage ratio and minimum fixed charge ratio).

At June 30, 2020, we were in compliance with our debt covenants.

At December 31, 2020, we were in compliance with our debt covenants.

Amounts borrowed under the Credit Facility are secured by substantially all of our assets.

DEBT (CONTINUED)

Paycheck Protection Program Loan

On April 14, 2020, we were granted a loan for $ 9.0 million under the Paycheck Protection Program ("PPP") established as part of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act").

Based on additional rules for the PPP established after the grant acceptance, we subsequently made the determination to pay back the full amount of the loan of $ 9.0 million, plus interest.

This payment was made on May 4, 2020.

SEGMENT INFORMATION

We have two reportable operating segments:

We have two reportable segments:

IoT Products & Services and IoT Solutions.

There four operating segments include:

• Cellular Routers - box devices (fully enclosed) that provide connectivity typically in a place where the device can be plugged in exclusively using cellular communications.

• Console Servers - similar to cellular routers except they are exclusively for edge computing installments and date center applications exclusively using cellular communications.

• OEM Solutions - Original Equipment Manufacturers ("OEM") will be a chip, rather than a boxed device.

This can come in the form of a stand-alone chip, or from a system on modules ("SOMs").

While cellular is used, other communication protocols can be used such as Zigbee, Bluetooth or Radio-Frequency ("RF") based on application.

• Infrastructure Management - includes connect sensors that will be cellular enabled devices that are battery operated, as well as other types of console server applications that are more DAL based compared to Console Servers.

They do have some products that are not using cellular communications, but a large part of the portfolio does use cellular communication.

We believe these four operating segments have similar qualitative and quantitative factors which allow us to aggregate them under the IoT Products & Services reportable segment.

The qualitative factors include similar nature of products and services, production process, type or class of customers and methods used to distribute the products.

The quantitative factors include similar operating income (loss).

Our CODM reviews and makes business decisions which includes a primary review of operating income (loss) but also includes gross profit.

Thus, our measure of segment measure of profit or loss used by our CODM changed.

The shared general and administrative costs are now allocated to each operating segment.

As a result, our disclosed measure of segment operating income (loss) has been updated for all periods presented.

The change to the business segment operating income (loss) aligns with the update to how the CODM assesses performance and allocates resources for our business segments.

SEGMENT INFORMATION (CONTINUED)

Summary operating results for each of our segments were (in thousands):

Three months ended June 30, Nine months ended June 30,

2020 2019 2020 2019

Three months ended December 31,

IoT Products & Services $ 61,780 $ 54,613

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Total gross profit $ 41,019 $ 30,464

Operating Income (Loss)

IoT Products & Services $ 1,269 $ 4,397

IoT Solutions ( 1,415 ) ( 4,880 )

Total operating loss $ ( 146 ) $ ( 483 )

Depreciation and Amortization

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Total expended for property, plant and equipment was (in thousands):

Nine months ended June 30,

Expended for property, equipment and improvements

Three months ended December 31,

IoT Products & Services $ 777 $ 190

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Total expended for property, plant and equipment $ 777 $ 196

* Excluded from this amount is $ 1,202 and $ 921 of transfers of inventory to property plant and equipment for subscriber assets for the nine months ended June 30, 2020 and 2019, respectively.

* Excluded from this amount is $ 882 and $ 186 of transfers of inventory to property plant and equipment for subscriber assets for the three months ended December 31, 2020 and 2019, respectively.

Total assets for each of our segments were (in thousands):

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Total assets $ 528,788 $ 528,682

* Unallocated consists of cash and cash equivalents and current marketable securities.

* Unallocated consists of cash and cash equivalents.

Revenue Disaggregation

The following table summarizes our revenue by geographic location of our customers:

Three months ended June 30, Nine months ended June 30,

($ in thousands) 2020 2019 2020 2019

The following table summarizes our revenue by geographic location of our customers (in thousands):

Three months ended December 31,

North America, primarily the United States $ 54,018 $ 47,536

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Total revenue $ 73,146 $ 62,317

The following table summarizes our revenue by the timing of revenue recognition:

Three months ended June 30, Nine months ended June 30,

($ in thousands) 2020 2019 2020 2019

The following table summarizes our revenue by the timing of revenue recognition (in thousands):

Three months ended December 31,

Transferred at a point in time $ 64,188 $ 56,300

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In these cases, we retain the ownership of the equipment that the customer uses.

The total net book value of subscriber assets of $ 2.2 million and $ 2.1 million as of June 30, 2020 and September 30, 2019, respectively, are included in property, equipment and improvements, net.

Depreciation expense for these subscriber assets, which is included in cost of sales, was $ 0.4 million and $ 0.3 million for the three month periods ended June 30, 2020 and June 30, 2019, respectively and $ 1.1 million and $ 0.7 million for the nine month periods ended June 30, 2020 and June 30, 2019, respectively.

The total net book value of subscriber assets of $ 2.4 million and $ 2.0 million as of December 31, 2020 and September 30, 2020, respectively, are included in property, equipment and improvements, net.

Depreciation expense for these subscriber assets, which is included in cost of sales, was $ 0.5 million and $ 0.3 million for the three months ended December 31, 2020 and December 31, 2019, respectively.

We depreciate the cost of this equipment over its useful life (typically three years ).

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These pertain to our IoT Solutions segment and our Digi Remote Manager ® services in our IoT Products & Services segment.

Changes in unearned revenue were:

($ in thousands) Nine months ended

June 30, 2020

Changes in unearned revenue were (in thousands):

Three months ended December 31,

Unearned revenue, beginning of period $ 9,341 $ 5,025

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This includes unearned revenue and unbilled amounts that will be recognized as revenue in future periods.

As of June 30, 2020, approximately $ 14.4 million of revenue is expected to be recognized from remaining performance obligations for subscription contracts.

As of December 31, 2020, approximately $ 13.5 million of revenue is expected to be recognized from remaining performance obligations for subscription contracts.

We expect to recognize revenue on approximately $ 9.1 million of remaining performance obligations over the next twelve months .

Revenue from the remaining performance obligations we expect to recognize over a range of two to seven years .

Our income tax benefit was $ 0.9 million for the nine months ended June 30, 2020.

Included in this benefit was a net tax benefit discretely related to the nine months ended June 30, 2020 of $ 1.1 million.

Our income tax benefit was $ 0.4 million for the three months ended December 31, 2020.

Included in this benefit was a net tax benefit discretely related to the three months ended December 31, 2020 of $ 0.3 million.

This benefit primarily was the result of excess tax benefits recognized on stock compensation.

Income tax benefit was $ 1.1 million for the three months ended December 31, 2019.

Included in this benefit was a net tax benefit discretely related to the three months ended December 31, 2019 of $ 1.0 million.

This benefit primarily was the result of excess tax benefits recognized on stock compensation and an adjustment of our state deferred tax rate due to the Opengear acquisition.

For the nine months ended June 30, 2020, our effective tax rate before items discretely related to the period was less than the U.S.

For the three months ended December 31, 2019, our effective tax rate before items discretely related to the period was less than the U.S.

statutory rate.

This was primarily due to certain research and development tax credits generated in the U.S.

Income tax expense was $ 0.9 million for the nine months ended June 30, 2019.

Included in this expense was a net tax benefit discretely related to the nine months ended June 30, 2019 of $ 0.6 million.

This expense primarily was the result of expiring statute of limitations of uncertain tax benefits as well as excess tax benefits recognized on stock compensation.

For the nine months ended June 30, 2019, our effective tax rate before items discretely related to the period was less than the U.S.

statutory rate.

This primarily was due to certain income tax credits generated in the U.S.

Our effective tax rate will vary based on a variety of factors.

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Unrecognized tax benefits as of September 30, 2020 $ 2,600

Increases related to:

Prior year income tax positions 751

Decreases related to:

Settlements ( 7 )

Expiration of statute of limitations ( 54 )

Unrecognized tax benefits as of June 30, 2020 $ 2,199

The total amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate is $ 2.0 million, after considering the impact of interest and deferred benefit items.

Unrecognized tax benefits as of December 31, 2020 $ 2,546

The total amount of unrecognized tax benefits at December 31, 2020 that, if recognized, would affect our effective tax rate was $ 2.4 million, after considering the impact of interest and deferred benefit items.

We expect that the total amount of unrecognized tax benefits will decrease by approximately $ 0.1 million over the next 12 months.

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Balance at Warranties Settlements Balance at

Period April 1 issued made June 30

Three months ended June 30, 2020 $ 860 $ 123 $ ( 96 ) $ 887

Three months ended June 30, 2019 $ 1,109 $ 47 $ ( 101 ) $ 1,055

Balance at Warranties Settlements Balance at

Period October 1 issued made June 30

Nine months ended June 30, 2020 $ 1,012 $ 525 $ ( 650 ) $ 887

Nine months ended June 30, 2019 $ 1,172 $ 263 $ ( 380 ) $ 1,055

Our leases primarily consist of operating leases for office space.

All of our leases are operating leases.

Period October 1 issued made December 31

Three months ended December 31, 2020 $ 942 $ 123 $ ( 100 ) $ 965

Three months ended December 31, 2019 $ 1,012 $ 74 $ ( 87 ) $ 999

All of our leases are operating leases and primarily consist of leases for office space.

For any lease with an initial term in excess of twelve months, the related lease assets and lease liabilities are recognized on the condensed consolidated balance sheets as either operating or financing leases at the inception of an agreement where it is determined that a lease exists.

We have lease agreements that contain both lease and non-lease components.

We have elected to combine lease

LEASES (CONTINUED)

and non-lease components for all classes of assets.

We have elected to combine lease and non-lease components for all classes of assets.

Leases with an initial term of twelve months or less are not recorded on the condensed consolidated balance sheets.

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We recognize the related rent expense on a straight-line basis from the commencement date to the end of the lease term.

LEASES (CONTINUED)

The following table shows the supplemental balance sheet information related to our leases (in thousands):

Balance Sheet Location June 30, 2020

Balance Sheet Location December 31,

2020 September 30,

Operating leases Other non-current assets $ 16,665 $ 14,334

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Total lease liabilities $ 22,147 $ 18,720

The following were the components of our lease cost (in thousands):

Statement of Operations Location Three months ended

June 30, 2020 Nine months ended

June 30, 2020

Operating lease cost Cost of goods sold and SG&A $ 901 $ 2,584

Variable lease cost Cost of goods sold and SG&A 260 497

The following were the components of our lease cost which is recorded in both cost of goods sold and selling, general and administrative expense (in thousands):

Three months ended December 31,

Operating lease cost $ 861 $ 814

Variable lease cost 268 23

Short-term lease cost 32 38

Total lease cost $ 1,161 $ 875

The following table presents supplemental information related to operating leases (in thousands):

Nine months ended

June 30, 2020

Three months ended December 31,

Cash paid for amounts included in the measurement of operating lease liabilities $ 911 $ 416

Right-of-use assets obtained in exchange for new operating lease liabilities $ 2,892 $ —

June 30, 2020

Weighted average remaining lease term - operating leases 5.5 years

Weighted average discount rate - operating leases 4.80 %

LEASES (CONTINUED)

The table below reconciles the undiscounted cash flows for each of the first five years as well as all the remaining years to the operating lease liabilities recorded on the condensed consolidated balance sheet as of June 30, 2020 (in thousands):

Non-cash tenant improvement allowance $ 1,000 $ —

At December 31, 2020 the weighted average remaining lease term of our operating leases was 6.3 years and the weighted average discount rate for these leases was 4.6 %.

Fiscal year Amount

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Total reported lease liability $ 22,147

As follows, aggregate annual future minimum rental commitments under operating leases with noncancelable terms of more than one year at September 30, 2019 were reported under previous lease accounting standards (in thousands):

Fiscal year Amount

Thereafter 11,361

Total minimum payments required $ 22,997

RESTRUCTURING

In second quarter of fiscal 2020, we recorded and re-aligned our product management group within IoT Products and Services segment.

We recorded $ 38 thousand for employee termination charges.

This was fully paid during the second quarter of fiscal 2020.

In the third quarter of fiscal 2020, we recorded $ 95 thousand of restructuring for employee termination charges within both of our operating segments.

This restructuring is expected to be fully paid in the fourth quarter of fiscal 2020.

CONTINGENCIES

Q1 FY2021 Restructuring

On October 7, 2020, our Board of Directors approved a reorganization of our IoT Products & Services business segment.

The restructuring plan aligns the business segment's organization around product lines.

Under this plan, we recorded a charge of $ 0.7 million for employee termination charges and eliminated 19 employment positions primarily in the U.S.

during the three months ended December 31, 2020.

Below is a summary of the restructuring charges and other activity (in thousands):

Q1 2021 Restructuring

Employee Termination Costs

Balance at September 30, 2020 $ —

Restructuring charge 733

Payments ( 510 )

Foreign currency fluctuation ( 27 )

Balance at December 31, 2020 $ 196

COMMITMENTS AND CONTINGENCIES

We lease certain of our buildings and equipment under noncancelable lease agreements.

Please refer to Note 12 to our condensed consolidated financial statements for additional information.

In November 2018, DimOnOff Inc., a company headquartered in Quebec City, Quebec, Canada ("DimOnOff"), which sells control systems in the building automation and street lighting markets sued us and a former distributor from whom DimOnOff purchased certain of our products.

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Options under the 2020 Plan can be granted as either incentive stock options or non-statutory stock options.

The exercise price of options and the grant date price of RSUs is determined by our Compensation Committee but will not be less than the fair market value of our common stock based on the closing price as of the date of grant.

Upon exercise of options or settlement of vested restricted stock units, we issue new shares of stock.

As of June 30, 2020, there were approximately 1,198,802 shares available for future grants under the 2020 Plan.

Cash received from the exercise of stock options was $ 0.3 million and $ 5.1 million for the three and nine months ended June 30, 2020, respectively.

Cash received from the exercise of stock options was $ 0.3 million and $ 4.1 million for the three and nine months ended June 30, 2019, respectively.

The exercise price of options and the grant date price of RSUs is determined by our Compensation Committee but will not be less

STOCK-BASED COMPENSATION (CONTINUED)

than the fair market value of our common stock based on the closing price as of the date of grant.

Upon exercise of options or settlement of vested restricted stock units or performance stock units, we issue new shares of stock.

As of December 31, 2020, there were approximately 648,815 shares available for future grants under the 2020 Plan.

Cash received from the exercise of stock options was $ 3.9 million and $ 4.2 million for the three months ended December 31, 2020 and December 31, 2019, respectively.

Our equity plans and corresponding forms of award agreements generally have provisions allowing employees to elect to satisfy tax withholding obligations through the delivery of shares.

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Tax with withholding obligations otherwise occur by the employee paying cash to us for the withholding.

During the nine months ended June 30, 2020 and 2019, our employees forfeited 95,997 shares and 91,580 shares, respectively, in order to satisfy respective withholding tax obligations of $ 1.7 million and $ 1.1 million.

During the three months ended December 31, 2020 and 2019, our employees forfeited 83,928 shares and 88,723 shares, respectively, in order to satisfy respective withholding tax obligations of $ 1.4 million and $ 1.6 million.

We sponsor an Employee Stock Purchase Plan as amended and restated as of December 10, 2019, October 29, 2013, December 4, 2009 and November 27, 2006 (the "ESPP"), covering all domestic employees with at least 90 days of continuous service and who are customarily employed at least 20 hours per week.

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The most recent amendments to the ESPP, ratified by our stockholders on January 29, 2020, increased the total number of shares to 3,425,000 that may be purchased under the plan.

ESPP contributions by employees were $ 0.3 million and $ 0.8 million and common shares issued were 37,333 and 90,418 during the three and nine months ended June 30, 2020, respectively.

ESPP contributions by employees were $ 0.3 million and $ 0.8 million and common shares issued were 26,898 and 90,592 during the three and nine months ended June 30, 2019, respectively.

ESPP contributions by employees were $ 0.3 million for both of the three-month periods ended December 31, 2020 and December 31, 2019, respectively.

Pursuant to the ESPP, 25,246 and 24,738 common shares were issued to employees during the three months ended December 31, 2020 and December 31, 2019, respectively.

Shares are issued under the ESPP from treasury stock.

As of June 30, 2020, 739,122 common shares were available for future issuances under the ESPP.

As of December 31, 2020, 686,468 common shares were available for future issuances under the ESPP.

The following table shows stock-based compensation expense that is included in the consolidated results of operations (in thousands):

Three months ended June 30, Nine months ended June 30,

2020 2019 2020 2019

Three months ended December 31,

Cost of sales $ 82 $ 64

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Stock-based compensation after income taxes $ 1,380 $ 1,268

STOCK-BASED COMPENSATION (CONTINUED)

Stock Options

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Forfeited / Canceled ( 69 ) 14.17

Balance at June 30, 2020 3,486 $ 12.15 4.2 $ 3,111

Exercisable at June 30, 2020 2,073 $ 10.69 3.0 $ 2,787

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $ 11.65 as of June 30, 2020, which would have been received by the option holders had all option holders exercised their options as of that date.

Balance at December 31, 2020 3,385 $ 12.86 4.2 $ 20,433

Exercisable at December 31, 2020 1,983 $ 11.28 3.1 $ 15,103

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $ 18.90 as of December 31, 2020, which would have been received by the option holders had all option holders exercised their options as of that date.

The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price.

The total intrinsic value of all options exercised during the nine months ended June 30, 2020 was $ 3.4 million and during the nine months ended June 30, 2019 was $ 1.7 million.

STOCK-BASED COMPENSATION (CONTINUED)

The total intrinsic value of all options exercised during the three months ended December 31, 2020 was $ 2.2 million and during the three months ended December 31, 2019 was $ 3.0 million.

The following table shows the weighted average fair value, which was determined based upon the fair value of each option on the grant date utilizing the Black-Scholes option-pricing model and the related assumptions:

Nine months ended June 30,

Three months ended December 31,

Weighted average per option grant date fair value $ 7.12 $ 6.56

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Treasury bond rate in effect at the time of the grant whose maturity equals the expected term of the option.

As of June 30, 2020, the total unrecognized compensation cost related to non-vested stock options was $ 6.7 million and the related weighted average period over which it is expected to be recognized is approximately 2.9 years.

STOCK-BASED COMPENSATION (CONTINUED)

Non-vested Restricted Stock Units

The following table presents a summary of our non-vested restricted stock units as of June 30, 2020 and changes during the nine months then ended (in thousands, except per common share amounts):

As of December 31, 2020, the total unrecognized compensation cost related to non-vested stock options was $ 7.9 million and the related weighted average period over which it is expected to be recognized is approximately 3.1 years.

Non-vested Stock Units

The following table presents a summary of our non-vested restricted stock as of December 31, 2020 and changes during the three months then ended (in thousands, except per common share amounts):

Number of Awards Weighted Average Grant Date Fair Value

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Canceled ( 46 ) $ 13.16

Nonvested at June 30, 2020 997 $ 13.20

As of June 30, 2020, the total unrecognized compensation cost related to non-vested restricted stock units was $ 10.7 million.

Nonvested at December 31, 2020 959 $ 14.26

As of December 31, 2020, the total unrecognized compensation cost related to non-vested stock units was $ 12.3 million.

The related weighted average period over which this cost is expected to be recognized is approximately 1.8 years.

SUBSEQUENT EVENT

On July 17, 2020, we entered into an agreement to lease new lease agreement to rent approximately 35,466 square feet of office space in Sandy, Utah.

The lease has an initial term of 10 years and is expected to comment in January 2021.

The base rent under the new facility lease agreement is approximately $ 438,360 for the first year, escalating 2 % annually thereafter.

The lease is subject to additional charges for property management, common area expenses and other costs.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements