What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-11-24 compared with 2020-11-25 · 84 added, 100 removed, 254 unchanged (42% of the section changed)

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Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions.

Among others, these include risks related to the ongoing COVID-19 pandemic and efforts to mitigate the same, risks related to the global economic downturn that commenced during the COVID-19 pandemic and the ability of companies like us to operate a global business in such conditions, the highly competitive market in which our company operates, rapid changes in technologies that may displace products sold by us, declining prices of networking products, our reliance on distributors and other third parties to sell our products, the potential for significant purchase orders to be canceled or changed, delays in product development efforts, uncertainty in user acceptance of our products, the ability to integrate our products and services with those of other parties in a commercially accepted manner, potential liabilities that can arise if any of our products have design or manufacturing defects, our ability to defend or settle satisfactorily any litigation, uncertainty in global economic conditions and economic conditions within particular regions of the world which could negatively affect product demand and the financial solvency of customers and suppliers, the impact of natural disasters and other events beyond our control that could negatively impact our supply chain and customers, potential unintended consequences associated with restructuring, reorganizations or other similar business initiatives that may impact our ability to retain important employees or otherwise impact our operations in unintended and adverse ways, the ability to achieve the anticipated benefits and synergies associated with acquisitions or divestitures and changes in our level of revenue or profitability which can fluctuate for many reasons beyond our control.

Among others, these include risks related to the ongoing COVID-19 pandemic and efforts to mitigate the same, risks related to the global economic downturn that commenced during the COVID-19 pandemic and the ability of companies like us to operate a global business in such conditions, the impacts of the present global supply chain and transportation difficulties affecting business globally, the highly competitive market in which our company operates, rapid changes in technologies that may displace products sold by us, declining prices of networking products, our reliance on distributors and other third parties to sell our products, the potential for significant purchase orders to be canceled or changed, delays in product development efforts, uncertainty in user acceptance of our products, the ability to integrate our products and services with those of other parties in a commercially accepted manner, potential liabilities that can arise if any of our products have design or manufacturing defects, our ability to defend or settle satisfactorily any litigation, uncertainty in global economic conditions and economic conditions within particular regions of the world which could negatively affect product demand and the financial solvency of customers and suppliers, the impact of natural disasters and other events beyond our control that could negatively impact our supply chain and customers, potential unintended consequences associated with restructuring, reorganizations or other similar business initiatives that may impact our ability to retain important employees or otherwise impact our operations in unintended and adverse ways, the ability to achieve the anticipated benefits and synergies associated with acquisitions or divestitures and changes in our level of revenue or profitability which can fluctuate for many reasons beyond our control.

These and other risks, uncertainties and assumptions identified from time to time in our filings with the United States Securities and Exchange Commission, including without limitation, those set forth in Item 1A, Risk Factors, of this Annual Report on Form 10-K and subsequent other quarterly filings on Form 10-Q and other filings, could cause our actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf.

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Additionally, Adjusted EBITDA does not reflect our cash expenditures, the cash requirements for the replacement of depreciated and amortized assets, or changes in or cash requirements for our working capital needs.

We believe that providing historical and adjusted net income and adjusted net income per diluted share, respectively, exclusive

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

of such items as reversals of tax reserves, discrete tax benefits, restructuring charges and reversals, intangible amortization, stock-based compensation, other non-operating income/expense, adjustments to estimates of contingent consideration, acquisition-related expenses, interest expense related to acquisition and gains from the disposition of our former corporate headquarters permits investors to compare results with prior periods that did not include these items.

We believe that providing historical and adjusted net income and adjusted net income per diluted share, respectively, exclusive of such items as reversals of tax reserves, discrete tax benefits, restructuring charges and reversals, intangible amortization, stock-based compensation, other non-operating income/expense, adjustments to estimates of contingent consideration, acquisition-related expenses and interest expense related to acquisition permits investors to compare results with prior periods that did not include these items.

Management uses the aforementioned non-GAAP measures to monitor and evaluate ongoing operating results and trends and to gain an understanding of our comparative operating performance.

In addition, certain of our stockholders have expressed an interest in seeing financial performance measures exclusive of the impact of these matters, which while important, are not central to the core operations of our business.

Management believes that Adjusted EBITDA, defined as EBITDA adjusted for stock-based compensation expense, acquisition-related expenses, restructuring charges and reversals, and gains from the disposition of our former corporate headquarters is useful to investors to evaluate our core operating results and financial performance because it excludes items that are significant non-cash or non-recurring expenses reflected in the Consolidated Statements of Operations.

Management believes that Adjusted EBITDA, defined as EBITDA adjusted for stock-based compensation expense, acquisition-related expenses, restructuring charges and reversals and changes in fair value of contingent consideration is useful to investors to evaluate our core operating results and financial performance because it excludes items that are significant non-cash or non-recurring expenses reflected in the consolidated statements of operations.

We believe that the presentation of Adjusted EBITDA as a percentage of revenue is useful because it provides a reliable and consistent approach to measuring our performance from year to year and in assessing our performance against that of other companies.

We believe this information helps compare operating results and corporate performance exclusive of the impact of our capital structure and the method by which assets were acquired.

We are a leading global provider of business and mission-critical and Internet-of-Things ("IoT") connectivity products, services and solutions.

We are a leading global provider of business and mission-critical IoT connectivity products, services and solutions.

Our business is comprised of two reporting segments:

IoT Products & Services and IoT Solutions.

In fiscal 2021, our key operating objectives include:

In fiscal 2021, our key operating objectives included:

• continued growth of our SmartSense by Digi ® business that is the base of our IoT Solutions segment;

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• identification of strategic growth initiatives through acquisition.

• optimizing our reduced fixed cost footprint with third-party manufacturing.

During the course of fiscal 2021, the supply chain difficulties presently impacting businesses globally began to affect our business significantly.

We devoted significant time and resources towards mitigating these impacts during the fiscal year.

Below is a summary of our fiscal 2021 results:

• Consolidated revenue was $308.6 million, an increase of 11% over fiscal 2020.

This increase was driven by incremental revenue from our December 2019 acquisition of Opengear.

This was partially offset by large sales to certain customers in the prior year that did not reoccur in fiscal 2020 for our RF products, infrastructure management and cellular products.

In addition, revenues from Smartsense by Digi ® declined due to delays in customer rollouts, expansions and equipment upgrades largely as a result of COVID-19.

• Consolidated gross profit was $144.0 million, an increase of 20.9% percent over fiscal 2019.

This increase was driven by increased revenue and incremental gross profit from our December 2019 acquisition of Opengear.

This increase was partially offset by unfavorable customer and product mix.

• Consolidated operating income was $11.3 million, an increase of 12.4% percent.

• Net income was $8.4 million, compared to net income of $10.0 million for fiscal 2019, a decrease of 15.5%.

• Diluted earnings per share was $0.28, compared to $0.35, a decrease of 20%.

Included in fiscal 2019 was a gain on the sale of our corporate headquarters building that contributed $0.12 (net of tax) per diluted share.

This increase was driven by incremental revenue from console servers, embedded products, subscription services and hardware installations.

• Consolidated gross profit was $166.7 million, an increase of 16% over fiscal 2020.

This increase was driven by increased revenue and incremental gross profit from Console Server and favorable changes in customer and product mix.

• Consolidated operating income was $10.5 million, compared to $11.3 million for fiscal 2020, a decrease of 7%.

• Net income was $10.4 million, compared to net income of $8.4 million for fiscal 2020, an increase of 23%.

• Diluted earnings per share was $0.31, compared to $0.28, an increase of 11%.

• Adjusted EBITDA was $48.3 million , or, 15.6% of revenue, compared to $40.2 million or 14.4% of revenue in fiscal 2020 .

• Adjusted net income and adjusted income per share were $29.0 million, or $0.98 per diluted share, compared to $19.0 million, or $0.66 per diluted share, an increase of 52.7%.

• Adjusted net income and adjusted net income per share was $36.1 million , or $1.08 per diluted share, compared to $29.0 million , or $0.98 per diluted share, an increase of 10% .

• The acquisition of Haxiot and Ctek were completed and Ventus was confirmed as an actionable acquisition target in fiscal 2021.

We completed the acquisition of Ventus in the first quarter of 2022.

Key trends regarding our existing business

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• As recurring revenue from subscription and cloud monitoring services becomes a greater portion of our overall revenue, we expect gross margins to increase as the revenue of incremental subscriptions is not offset at the same rate as expected increases in costs associated with implementing new subscribers.

• We expect revenues from our infrastructure product offerings within our IoT Products & Services business will decrease over time as many of these products are in the mature phase of their product life cycles.

CONSOLIDATED RESULTS OF OPERATIONS

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The 5.9% increase in IoT Products & Services revenue in fiscal 2021 from fiscal 2020 primarily was the result of:

• incremental revenue from Opengear, which we acquired in December 2019 (see Note 2 to our consolidated financial statements);

• increased sales of our support services.

This increase partially was offset by:

• large sales to certain customers in the prior year that did not reoccur in fiscal 2020 for our RF products, infrastructure management and cellular products.

This segment has many large project-based customer deployments that were deferred or delayed due to the COVID-19 pandemic;

• decreased sales of our wireless design services.

The 23.6% percent decrease in IoT Solutions revenue in fiscal 2020 from fiscal 2019 primarily was the result of:

• delays in customer rollouts, expansions and equipment upgrades which occurred primarily as a result of COVID-19 and the economic downturn;

• increased sales of our console servers and embedded products.

This increase was partially was offset by:

• decreased sales of our cellular routers in the government transit sector primarily related to an existing customer in the prior year that was not repeated this year.

The 49.5% increase in IoT Solutions revenue in fiscal 2021 from fiscal 2020 primarily was the result of:

• new hardware installations with new and existing customers;

• increased in recurring revenue from subscription and cloud monitoring services as we served nearly 81,000 sites at September 30, 2021 compared to just over 70,000 sites at September 30, 2020.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

• large enterprise deals in fiscal 2019 that did not reoccur in fiscal 2020;

• equipment upgrades from existing customers in fiscal 2019 that did not reoccur in fiscal 2020.

This decrease partially was offset by:

• increase in recurring revenue from our subscription services as we served over 70,000 sites at September 30, 2020 compared to just over 63,000 sites at September 30, 2019.

COST OF GOODS SOLD AND GROSS PROFIT

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The 290 basis point increase in IoT Products & Services gross profit primarily was the result of:

• incremental gross profit from our acquisition of Opengear in December 2019, which has higher gross margins than many of our other products;

• increased sales of our support services, which typically has higher gross margins.

This increase partially was offset by:

• unfavorable product mix as we experienced lower sales of RF and certain infrastructure management products, which typically have higher gross margins.

• incremental gross profit;

• favorable product and customer mix within and among our cellular router, embedded and infrastructure management products.

These increases were partially was offset by:

• increased material and overhead expenses associated with the production and distribution of our products as a result of global supply chain challenges.

The 70 basis point increase in IoT Solutions gross profit primarily was the result of:

• one-time non-recurring revenue and increased recurring revenue from our subscription services, which typically have higher gross margins.

• increased recurring revenue from our subscription services and changes in product mix.

This increase was partially was offset by:

• increased material and overhead expenses associated with the production and distribution of our products as a result of global supply challenges.

OPERATING EXPENSES

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The $23.5 million increase in operating expenses in fiscal 2021 from fiscal 2020 primarily was the result of:

• incremental operating expenses for Opengear;

• a $4.4 million gain on the sale of our corporate headquarters building recorded in the first quarter of fiscal 2019;

• a $1.4 million increase in acquisition expenses.

• an increase of $5.9 million in earn-out expenses primarily as a result of revenue from the Opengear exceeding our previous estimate;

• an increase of $12.0 million in compensation expenses;

• other increases primarily related to outside services, bad debt expense, restructuring and depreciation and amortization.

This increase partially was offset by:

• a reduction in compensation related expenses of $3.2 million, primarily related to a reduction in incentive compensation;

• a reduction $1.3 million in acquisition earnout expenses primarily related to earnout expenses recorded in fiscal 2019;

• a decrease in trade shows and related travel expenses of $1.6 million as events and travel were restricted due to the COVID-19 pandemic.

• a decrease of $1.6 million in travel related expenses as events and travel were restricted due to the pandemic.

Year ended September 30,

($ in thousands) 2021 2020 $ increase (decrease) % Increase (decrease)

Other (expense) income, net:

Other expense, net:

Interest income $ 10 — $ 304 0.1 % $ (294) (96.7)

Interest expense (1,395) (0.5) % (3,592) (1.3) 2,197 (61.2)

Other (expense) income, net (566) (0.2) 442 0.2 (1,008) (228.1)

Total other (expense) income, net $ (3,854) (1.4) $ 1,073 0.4 $ (4,927) (459.2)

The $4.9 million increase in other (expense) income in fiscal 2020 from fiscal 2019 primarily was the result of:

• an increase in interest expense of $3.5 million related to the balance outstanding under the Credit Facility in connection with the acquisition of Opengear in December 2019 (see Note 8 to the consolidated financial statements);

• a $1.0 million increase in other expense primarily related to increased in foreign currency losses mostly related to the strengthening of the Euro against the U.S.

• interest income decreased $0.4 million, driven by higher balances of marketable securities, cash and cash equivalents in fiscal 2019 in addition to lower average interest rates in fiscal 2020.

Other expense, net (144) — (566) (0.2) 422 (74.6)

Total other expense, net $ (1,529) (0.5) % $ (3,854) (1.4) % $ 2,325 (60.3)

The $2.3 million decrease in other expense in fiscal 2021 from fiscal 2020 primarily was the result of:

• a decrease in interest expense of $2.2 million, due to lower debt balances in 2021 (see Note 7 to the consolidated financial statements);

• a $0.4 million decrease in other expense primarily related to decreases in foreign currency losses stemming from a strengthening of the Euro against the U.S.

Dollar in 2020;

• interest income decreased $0.3 million, driven by a decrease in cash and cash equivalents help in interest-bearing accounts in fiscal 2021.

Our effective income tax rates were (15.2)%, (12.7)% and 10.7% for fiscal 2021, 2020 and 2019, respectively.

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These include our overall profitability, the geographical mix of income before taxes and related statutory tax rate in each jurisdiction, and discrete events, such as settlement of audits (see Note 1 2 to our consolidated financial statements).

Management believes that during fiscal 2020, 2019 and 2018, inflation did not have a material effect on our Consolidated Statements of Operations or financial position.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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(In thousands)

Fiscal year ended September 30,

Year ended September 30,

revenue % of total

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Interest expense (income), net 1,385 3,288

Income tax (benefit) expense (948) 1,187

Income tax (benefit) (1,367) (948)

Depreciation and amortization 20,877 19,299

Stock-based compensation 8,135 7,237

Gain on sale of building — (4,396)

Restructuring charge (reversal) 117 (87)

Acquisition earnout expenses 5,772 —

Restructuring charge 995 117

Acquisition expense 2,098 2,772

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(In thousands, except per share amounts)

Fiscal year ended September 30,

Year ended September 30,

Net income and net income per diluted share 10,366 $ 0.31 $ 8,411 $ 0.28

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Acquisition earn-out adjustments 5,772 0.17 (128) —

Restructuring charge (reversal) 117 — (87) —

Restructuring charge 995 0.03 117 —

Interest expense related to acquisition 1,404 0.04 3,558 0.12

Gain on sale of building — — (4,396) (0.15)

Tax effect from above net income adjustments (1)

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Our liquidity requirements arise from our working capital needs, and to a lesser extent, our need to fund capital expenditures to support our current operations and facilitate growth and expansion.

In the first quarter of fiscal 2020, we incurred debt of $110 million associated with our acquisition of Opengear.

On March 15, 2021, we entered into an amended and restated credit agreement consisting of a $200 million revolving loan.

The $47.5 million term loan outstanding from a prior credit agreement was replaced by this new revolving loan along with additional proceeds of $0.6 million for a total of $48.1 million at June 30, 2021.

As of September 30, 2021, $151.9 million remained available under the Revolving Loan, which included $10 million available for a letter of credit subfacility and $10 million available under a swingline subfacility, the outstanding amounts of which decrease the available commitment.

During the last half of fiscal 2020, we repaid $45 million of the Revolving Loan.

During the first quarter of fiscal 2021, we repaid the final $15 million of the Revolving Loan under a prior credit agreement.

For additional information regarding the terms of our Credit Facility, including the Revolving Loan and its subfacilities, see Note 7 to our consolidated financial statements.

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 our evaluation of additional rules for the PPP established after the grant acceptance, on May 4, 2020 we voluntarily repaid the full amount of the loan of $9.0 million, plus interest.

On November 1, 2021, we entered into a second amended and restated credit agreement consisting of a $350 million term loan B secured loan and a $35 million revolving credit facility.

The $35 million revolving credit facility, which presently has no outstanding balance, includes a $10 million letter of credit subfacility and $10 million swingline subfacility.

During the first quarter of fiscal 2022, we repaid all outstanding balances under the credit facility entered into on March 21, 2021.

For additional information regarding the terms of our Credit Facility see Note 17 to our consolidated financial statements.

Additionally, during the second quarter of fiscal 2021 we sold 4,025,000 shares of our common stock and received net proceeds of $73.8 million.

We expect positive cash flows from operations.

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Effect of exchange rate changes on cash and cash equivalents (297) 253

Net (decrease) increase in cash and cash equivalents $ (38,663) $ 34,778

Net increase (decrease) in cash and cash equivalents $ 98,303 $ (38,663)

Cash flows from operating activities increased $23.2 million primarily as a result of:

• positive changes in non-cash adjustments $10.7 million, primarily related to depreciation and amortization and a gain on the sale of the building in the prior fiscal year;

• a partial offset to those increases by decreased net income of $1.5 million and decreased working capital of $3.7 million.

Working capital decreased $3.7 million primarily due to increased inventory and decreased income taxes payable primarily in fiscal 2020.

In addition there was a decrease in cash inflows related to accounts payable in fiscal 2020 compared to fiscal 2019.

These factors that lowered working capital were partially offset by a decrease in accounts receivable.

Cash flows from investing activities decreased $142.5 million primarily as a result of:

• positive changes in non-cash adjustments $21.3 million, primarily related to a decrease in working capital of $15.7 million from the prior fiscal year;

• an increase in the change in fair value of contingent consideration of $5.9 million;

• an increase in net income of $2.0 million in 2021.

Working capital decreased $15.7 million primarily due to decreased accounts receivable, inventory and accrued expenses and an increase in taxes payable from 2020.

These factors that lowered working capital were partially offset by increases in accounts payable and other assets.

Cash flows used in investing activities decreased $115.6 million primarily as a result of:

• $136.1 million net cash used for the purchase of Opengear during fiscal 2020;

• $10.0 million of proceeds from the sale of our corporate headquarters building and $4.8 million of proceeds from maturities of our marketable securities both in fiscal 2019;

• a partial offset to those decreases by $8.4 million of additional purchases in the prior fiscal year related to property, equipment and facility improvements (mostly related to the build-out of our new corporate headquarters space).

Cash flows from financing activities increased $62.5 million primarily as a result of:

• proceeds, net of payments, of long-term debt of $63.1 million from the Revolving Loan and Term Loan (see Note 8 to the consolidated financial statements);

• increases in proceeds from stock award plans of $0.3 million;

• a partial offset to these increases relates to additional contingent consideration payments.

• partial offsets to that decreases was $19.1 million of acquisitions in 2021;

• $1.4 million of additional purchases in 2021 related to property, equipment and facility improvements.

Cash flows from financing activities decreased $1.4 million primarily as a result of:

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

• proceeds, net of payments of long-term debt of $63.1 million from the Revolving Loan and Term Loan in 2020, and $15.0 million in net payment activity in 2021 (see Note 7 to the consolidated financial statements);

• an increase in taxes paid for share settlements of $0.3 million in fiscal 2021;

• a partial offset to this increases from proceeds from stock issuances of $73.8 million in fiscal 2021;

• partial offsets to these decreases related to additional proceeds from stock option and employee stock purchase plans.

CONTRACTUAL OBLIGATIONS

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Revolving loan 48,118 — — 48,118 —

Term loan 48,125 2,500 7,188 38,437 —

Interest on long-term debt 4,038 951 1,902 1,185 —

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We have not implemented a formal hedging strategy to reduce foreign currency risk.

During 2020, we had approximately $65.8 million of revenue related to foreign customers including export sales, of which $1.7 million was denominated in foreign currencies, predominantly the Euro and Canadian Dollar.

During 2021, we had approximately $80.7 million of revenue related to foreign customers including export sales, of which $0.8 million was denominated in foreign currencies, predominantly the Canadian Dollar.

During fiscal 2020 and 2019, we had approximately $65.8 million and $70.2 million, respectively, of revenue to foreign customers including export sales, of which $1.7 million and $3.4 million, respectively, were denominated in foreign currencies, predominantly the Euro and British Pound.

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Actual results may differ from these estimates.

We believe the following critical accounting policies impact our more significant judgments and estimates used in the preparation of our consolidated financial statements.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We believe the following critical accounting policies impact our more significant judgments and estimates used in the preparation of our consolidated financial statements.

REVENUE RECOGNITION

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Subscription and Support Services Revenue

Our SmartSense by Digi ® subscription revenue is recorded on a monthly basis.

Our SmartSense by Digi ® subscription revenue is based on contracts with at least an annual term and is recorded on a monthly basis.

These subscriptions are generally in a range from one to five years, and may contain an evergreen renewal provision.

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These obligations may include:

delivery of monitoring equipment that the customer either purchases out-right or uses while we retain ownership, monitoring services, providing condition alerts of assets being monitored, and recertification of sensor equipment.

When we retain ownership of the equipment, we charge an implementation fee to the customer so they can begin using the equipment.

delivery of monitoring equipment that the customer either purchases out-right or uses while we retain ownership,

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

these instances, all revenue derived from the above obligations is recognized over the subscription term of the contract.

monitoring services, providing condition alerts of assets being monitored, and recertification of sensor equipment.

When we retain ownership of the equipment, we charge an implementation fee to the customer so they can begin using the equipment.

In these instances, all revenue derived from the above obligations is recognized over the subscription term of the contract.

If the customer purchases the equipment out-right, that portion of the revenue is recognized at the stand-alone selling price at the time the equipment is shipped and all other revenue is recognized over the subscription term of the contract.

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

We have two reportable operating segments, our IoT Products & Services segment and our IoT Solutions segment.

Both operating segments constitute separate reporting units and both units were tested individually for impairment.

We have two reportable operating segments, our IoT Products & Services segment and our IoT Solutions segment (see Note 4 to the consolidated financial statements).

Effective with the reorganization announcement on October 7, 2020 (see Note 10 ), our IoT Products & Services business is now structured to include four reporting units under the IoT Products & Services segment, each with a reporting manager:

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

We have four reporting units along with our IoT Solutions segment that have been tested individually for impairment.

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

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If our future operating results do not meet current forecasts or if we experience a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of one or more of our reporting units, we may be required to record future impairment charges for goodwill.

Results of our Fiscal 2020 Annual Impairment Test

We had a total of $157.1 million of goodwill for the IoT Products & Services reporting unit and $49.6 million of goodwill for the IoT Solutions reporting unit as of June 30, 2020.

At June 30, 2020, fair value exceeded the carrying value by more than 10% for both reporting units.

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

The implied fair values of each reporting unit were added together to get an indicated value of total equity to which a range of indicated value of total equity was derived.

This range was compared to the total market capitalization of $338.2 million as of June 30, 2020.

This implied a range of control premiums of 17.0% to 29.1%.

This range of control premiums fell below the control premiums observed in the last five years in the communications equipment industry.

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

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of our Fiscal 2021 Annual Impairment Tests

Due to the reorganization on October 7, 2020, we performed an interim impairment test in addition to our annual test as of June 30, 2021.

Our goodwill impairment tests as of October 7, 2020 and June 30, 2021 indicated no impairment.

During the fourth quarter of fiscal 2021, we assessed various qualitative factors to determine whether or not an additional goodwill impairment assessment was required as of September 30, 2021, and we concluded that no additional impairment assessment was required.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CONTINGENT CONSIDERATION

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Valuations related to amounts owed and tax rates could be impacted by changes to tax codes and our interpretation thereof, changes in statutory rates, our future taxable income levels and the results of tax audits.

In general, we warrant our products to be free from defects in material and workmanship under normal use and service.

The warranty periods generally range from one to five years.

We typically have the option to repair or replace products we deem defective due to material or workmanship.

Estimated warranty costs are accrued in the period that the related revenue is recognized based upon an estimated average per unit repair or replacement cost applied to the estimated number of units under warranty.

These estimates are based upon historical warranty incidents and are evaluated on an ongoing basis to ensure the adequacy of the warranty accrual.

We also warrant our software or firmware incorporated into our products generally for a period of one year and offer to provide a bug fix or software patch within a reasonable period.

We have not accrued specifically for this warranty and have not had claims specifically related to software or firmware.

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-K

Item 7. Management’s Discussion and Analysis