What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-05 compared with 2023-02-03 · 80 added, 53 removed, 184 unchanged (42% of the section changed)

8 unchanged sentences

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

Among others, these include risks related to the ongoing supply chain and transportation challenges impacting businesses globally, the ongoing COVID-19 pandemic and efforts to mitigate the same, risks related to ongoing inflationary pressures as well as present concerns about a potential recession and the ability of companies like us to operate a global business in such conditions, risks arising from the present war in Ukraine, 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 integrate and realize the expected benefits of acquisitions, our ability to defend or settle satisfactorily any litigation such as, but not limited to, claims regarding intellectual property infringement that we face from time to time, 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, risks related to cybersecurity events, the potential for issues repaying outstanding debt if we experience a downturn in our business or encounter unexpected liabilities, 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 supply chain and transportation challenges impacting businesses globally, the ongoing COVID-19 pandemic and efforts to mitigate the same, risks related to ongoing inflationary pressures and the monetary policies of governments globally as well as present concerns about a potential recession and the ability of companies like us to operate a global business in such conditions, risks arising from the present war in Ukraine, 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 integrate and realize the expected benefits of acquisitions, our ability to defend or settle satisfactorily any litigation such as, but not limited to, claims regarding intellectual property infringement that we face from time to time, 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, risks related to cybersecurity events, the potential for issues repaying outstanding debt if we experience a downturn in our business or encounter unexpected liabilities, 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 our Annual Report on Form 10-K for the year ended September 30, 2022, this filing 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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We utilize many financial, operational, and other metrics to evaluate our financial condition and financial performance.

Below we highlight the metrics for the first quarter of fiscal 2023 that we feel are most important in these evaluations, with comparisons to the first quarter of fiscal 2022:

Below we highlight the metrics for the second quarter of fiscal 2023 that we feel are most important in these evaluations, with comparisons to the second quarter of fiscal 2022:

• Consolidated revenue was $111 million, an increase of 17%.

• Consolidated gross profit was $61.5 million, an increase of 28%.

• Gross profit margin was 56.6% versus 54.9%.

Gross profit margin excluding amortization was 57.4% compared to 56.3%.

• Consolidated operating income was $12.0 million, an increase of 215%.

• Net income was $5.8 million, an increase of 387%.

• Diluted earnings per share was $0.16, compared to $0.08, an increase of 100%.

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The following table sets forth selected information derived from our interim condensed consolidated statements of operations:

Three months ended December 31, % incr.

($ in thousands) 2022 2021 (decr.)

Three months ended March 31, % incr.

Six months ended March 31, % incr.

($ in thousands) 2023 2022 (decr.) 2023 2022 (decr.)

Revenue $ 111,144 100.0 % $ 94,713 100.0 % 17.3 % $ 220,450 100.0 % $ 178,970 100.0 % 23.2 %

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Other expense, net (6,346) (5.7) (4,324) (4.6) 46.8 (12,300) (5.6) (9,324) (5.2) 31.9

Income (loss) before income taxes 6,009 5.5 (1,201) (1.4) NM

Income tax expense (benefit) 230 0.2 (2,388) (2.8) NM

Income before income taxes 5,829 5.2 3,240 3.4 79.9 11,838 5.4 2,039 1.1 480.6

Income tax expense (benefit) (70) (0.1) 393 0.4 NM 160 0.1 (1,995) (1.1) NM

Net income $ 5,899 5.3 % $ 2,847 3.0 % 107.2 % $ 11,678 5.3 % $ 4,034 2.3 % 189.5 %

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REVENUE BY SEGMENT

Three months ended December 31, % incr.

($ in thousands) 2022 2021 (decr.)

Three months ended March 31, % incr.

Six months ended March 31, % incr.

($ in thousands) 2023 2022 (decr.) 2023 2022 (decr.)

IoT Products & Services $ 85,893 77.3 % $ 71,370 75.4 % 20.3 % $ 170,235 77.2 % $ 137,114 76.6 % 24.2 %

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Total revenue $ 111,144 100.0 % $ 94,713 100.0 % 17.3 % $ 220,450 100.0 % $ 178,970 100.0 % 23.2 %

ARR was $99 million as of March 31, 2023, compared to $90 million as of March 31, 2022.

IoT Products & Services ARR was $17 million as of March 31, 2023, compared to $14 million as of March 31, 2022.

IoT Solutions ARR was over $82 million as of March 31, 2023, compared to $76 million as of March 31, 2022.

IoT Products & Services

IoT Products & Services revenue increased 28.3% for the three months ended December 31, 2022, as compared to the same period in the prior fiscal year.

This primarily was a result of increased sales driven by higher demand for OEM, console server and cellular products.

IoT Products & Services revenue increased 20.3% for the three months ended March 31, 2023, as compared to the same period in the prior fiscal year.

IoT Products & Services revenue increased 24.2% for the six months ended March 31, 2023, as compared to the same period in the prior fiscal year.

These increases are attributable to growth in each of our product lines.

IoT Solutions

IoT Solutions revenue increased 34.8% for the three months ended December 31, 2022, as compared to the same period in the prior fiscal year.

This primarily was a result of increased sales of both SmartSense and Ventus (acquired in November 2021) offerings.

IoT Solutions revenue increased 8.2% for the three months ended March 31, 2023, as compared to the same period in the prior fiscal year.

IoT Solutions revenue increased 20.0% for the six months ended March 31, 2023, as compared to the same period in the prior fiscal year.

These increases are primarily a result of increased sales of both SmartSense and Ventus offerings.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

COST OF GOODS SOLD AND GROSS PROFIT BY SEGMENT

Below are our segments' cost of goods sold and gross profit as a percentage of their respective total revenue:

Three months ended December 31, Basis point

Three months ended March 31, Basis point Six months ended March 31, Basis point

($ in thousands) 2023 2022 inc.

(decr.) 2023 2022 inc.

Cost of Goods Sold

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Total cost of goods sold $ 48,272 43.4 % $ 42,729 45.1 % (170) $ 96,057 43.6 % $ 79,105 44.2 % (60)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Three months ended December 31, Basis point

Three months ended March 31, Basis point Six months ended March 31, Basis point

($ in thousands) 2023 2022 inc.

(decr.) 2023 2022 inc.

IoT Products & Services $ 47,117 54.9 % $ 38,461 53.9 % 100 $ 93,138 54.7 % $ 74,136 54.1 % 60

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IoT Product & Services

IoT Products & Services gross profit margin increased 30 basis points for the three months ended December 31, 2022 as compared to the same period in the prior fiscal year.

This increase primarily was a result of changes in product and customer mix.

IoT Products & Services gross profit margin increased 100 basis points for the three months ended March 31, 2023 as compared to the same period in the prior fiscal year.

IoT Products & Services gross profit margin increased 60 basis points for the six months ended March 31, 2023 as compared to the same period in the prior fiscal year.

These increases were primarily a result of changes in product and customer mix.

IoT Solutions

The IoT Solutions gross profit margin decreased 380 basis points for the three months ended December 31, 2022 as compared to the same period in the prior fiscal year.

This decrease primarily was a result of increased expenses for inventory reserves.

The IoT Solutions gross profit margin increased 450 basis points for the three months ended March 31, 2023 as compared to the same period in the prior fiscal year.

This increase primarily was a result of changes in product and customer mix.

The IoT Solutions gross profit margin increased 70 basis points for the six months ended March 31, 2023 as compared to the same period in the prior fiscal year.

This increase primarily was a result of changes in product and customer mix partially offset by increased expenses for inventory reserves.

OPERATING EXPENSES

Below are our operating expenses and operating expenses as a percentage of total revenue:

Three months ended December 31, $ %

Three months ended March 31, $ % Six months ended March 31, $ %

($ in thousands) 2023 2022 incr.

(decr.) incr.

(decr.) 2023 2022 incr.

(decr.) incr.

Operating Expenses

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Total operating expenses $ 50,697 45.6 % $ 44,420 46.9 % $ 6,277 14.1 $ 100,255 45.5 % $ 88,502 49.5 % $ 11,753 13.3 %

The $5.5 million increase in operating expenses in the first quarter of fiscal 2023 from the first quarter of fiscal 2022 primarily was the result of incremental operating expenses, primarily from the acquisition of Ventus and investments in SmartSense.

OPERATING INCOME

Operating income was $12.0 million for the three months ended December 31, 2022, compared to $3.8 million for the three months ended December 31, 2021.

IoT Product & Services provided operating income of $12.7 million for the three months ended December 31, 2022 compared to $4.1 million for the three months ended December 31, 2021, an increase of $8.6 million, or 208.1%.

Drivers for the changes in operating income for the period are described above in the revenue, gross profit and operating expenses details.

IoT Solutions had an operating loss of $0.7 million for the three months ended December 31, 2022 compared to an operating loss of $0.3 million for the three months ended December 31, 2021, an increase of $0.4 million, or 127.1%.

Primary drivers for the changes in operating loss for the period included higher inventory reserve expense and our investment in the SmartSense business.

The $6.3 million increase in operating expenses in the second quarter of fiscal 2023 from the second quarter of fiscal 2022 was the result of incremental operating expenses, primarily from investments in SmartSense.

The $11.8 million increase in operating expenses in the first half of fiscal 2023 from the first half of fiscal 2022 primarily was the result of incremental operating expenses, primarily from the acquisition of Ventus and investments in SmartSense.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Below are our other expenses, net and other expenses, net as a percentage of total revenue:

OPERATING INCOME

Three months ended March 31, $ % Six months ended March 31, $ %

($ in thousands) 2023 2022 incr.

(decr.) incr.

(decr.) 2023 2022 incr.

(decr.) incr.

Operating Income (Loss)

IoT Products & Services $ 12,965 $ 9,049 $ 3,916 0.432755000552547 43.3 $ 25,648 $ 13,165 $ 12,483 94.8

IoT Solutions (790) (1,485) $ 695 -0.468013468013468 (46.8) (1,510) (1,802) $ 292 (16.2)

Total gross profit $ 12,175 $ 7,564 $ 4,611 61.0 $ 24,138 $ 11,363 $ 12,775 112.4

Drivers for the changes in operating income for the periods presented are described above in the revenue, gross profit and operating expenses details.

OTHER EXPENSE, NET

Three months ended December 31, $ %

Below are our other expenses, net and other expenses, net as a percentage of total revenue:

Three months ended March 31, $ % Six months ended March 31, $ %

($ in thousands) 2023 2022 incr.

(decr.) incr.

(decr.) 2023 2022 incr.

(decr.) incr.

Other expense, net

Interest expense, net (6,393) (5.8) % (4,463) (4.7) % (1,930) 43.2 (12,364) (5.6) % (9,361) (5.2) % (3,003) 32.1

Other expense, net 17 — % (102) (0.1) % 119 (116.7)

Other expense, net 47 0.1 % 139 0.1 % (92) NM 64 — % 37 — % 27 NM

Total other expense, net $ (6,346) (5.7) % $ (4,324) (4.6) % $ (2,022) 46.8 $ (12,300) (5.6) % $ (9,324) (5.2) % $ (2,976) 31.9

Other expense, net, increased $1.0 million for the three months ended December 31, 2022, as compared to the same period in the prior fiscal year.

The increase was primarily a result of an increase to our interest expense due to an increase in our effective interest rate (see Note 7 to the condensed consolidated financial statements).

NM means not meaningful

Other expense, net, increased $2.0 million for the three months ended March 31, 2023, as compared to the same period in the prior fiscal year.

Other expense, net, increased $3.0 million for the six months ended March 31, 2023, as compared to the same period in the prior fiscal year.

The increases were primarily a result of an increase in our interest expense due to an increase in our effective interest rate (see Note 7 to the condensed consolidated financial statements).

See Note 10 to the condensed consolidated financial statements for discussion of income taxes.

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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.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

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.

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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.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Below are reconciliations from GAAP to non-GAAP information that we feel is important to our business:

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(In thousands)

Three months ended December 31,

Three months ended March 31, Six months ended March 31,

2023 2022 2023 2022

revenue % of total

Total revenue $ 111,144 100.0 % $ 94,713 100.0 % $ 220,450 100.0 % $ 178,970 100.0 %

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(In thousands, except per share amounts)

Three months ended December 31,

Three months ended March 31, Six months ended March 31,

2023 2022 2023 2022

Net income and net income per diluted share $ 5,899 $ 0.16 $ 2,847 $ 0.08 $ 11,678 $ 0.32 $ 4,034 $ 0.11

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Stock-based compensation 3,465 0.09 2,242 0.06 6,333 0.17 4,259 0.12

Other non-operating (expense) income (17) — 102 —

Other non-operating income (47) — (139) — (64) — (37) —

Acquisition expense 307 0.01 796 0.02 688 0.02 4,081 0.11

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(1) The tax effect from the above adjustments assumes an estimated effective tax rate of 18.0% for fiscal 2023 and fiscal 2022 based on adjusted net income.

(2) For the three months ended December 31, 2022 and 2021, discrete tax expenses (benefits) primarily are a result of changes in excess tax benefits recognized on stock compensation.

(2) For the three and six months ended March 31, 2023 and 2022, discrete tax expenses (benefits) primarily are a result of changes in excess tax benefits recognized on stock compensation.

(3) Adjusted net income per diluted share may not add due to the use of rounded numbers.

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

As of December 31, 2022, $35.0 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.

As of March 31, 2023, $35.0 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.

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

We expect positive cash flows from operations for the foreseeable future.

We believe that our current cash and cash equivalents balances, cash generated from operations and our ability to borrow under our credit facility will be sufficient to fund our business operations and capital expenditures for the next twelve months and beyond.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

As follows, our condensed consolidated statements of cash flows for the three months ended December 31, 2022 and 2021 is summarized:

Three months ended December 31,

Our condensed consolidated statements of cash flows for the six months ended March 31, 2023 and 2022 is summarized as follows:

Six months ended March 31,

($ in thousands) Restated (1)

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Net increase (decrease) in cash and cash equivalents $ (3,240) $ (111,046)

(1) We have restated the condensed consolidated statement of cash flows for the three months ended December 31, 2021.

(1) We have restated the condensed consolidated statement of cash flows for the six months ended March 31, 2022.

For additional information, see Note 2 to our condensed consolidated financial statements.

Cash flows from operating activities decreased $2.2 million primarily as a result of:

• an increase in operating assets and liabilities (net of acquisitions) in the three months ended December 31, 2022 of $18.3 million compared to an increase of $10.3 million in the three months ended December 31, 2021 and

• an increase in stock-based compensation expense.

• an increase in operating assets and liabilities (net of acquisitions) in the six months ended March 31, 2023 of $22.7 million compared to an increase of $18.5 million in the six months ended March 31, 2022, and

• decreases in the provisions for deferred income tax and amortization expense.

These changes were partially offset by:

• increases in net income and the provision for inventory obsolescence and decreases in the provisions for deferred income tax and bad debt and amortization expense.

• increases in net income and stock-based compensation expense.

Cash flows used in investing activities decreased $346.3 million primarily as a result of:

• no amounts used for the acquisition of businesses in the three months ended December 31, 2022 compared to $347.6 million used for acquisitions in the three months ended December 31, 2021, primarily related to our November 2021 acquisition of Ventus.

• no amounts used for the acquisition of businesses in the six months ended March 31, 2023 compared to $347.5 million used for acquisitions in the six months ended March 31, 2022, primarily related to our November 2021 acquisition of Ventus.

This change was partially offset by:

• a $1.3 million increase in purchases of property, equipment, improvements and certain other intangible assets.

Cash flows from financing activities decreased $237.2 million primarily as a result of:

• no proceeds from debt in the first fiscal quarter of 2023 compared to $350.0 million in proceeds from the Term Loan issued in the first fiscal quarter of 2022, and

• no proceeds from debt in the fiscal half of 2023 compared to $350.0 million in proceeds from the Term Loan issued in the first fiscal half of 2022, and

• a $3.4 million decrease in proceeds from stock issuances.

These changes were partially offset by:

• debt payments of $4.4 million in the first fiscal quarter of 2023 compared to $98.1 million in the first fiscal quarter of 2022 (see Note 7 to the condensed consolidated financial statements),

• debt payments of $9.4 million in the first fiscal half of 2023 compared to $109.4 million in 2022 (see Note 7 to the condensed consolidated financial statements),

• a decrease of $13.4 million in debt issuance cost payments, and

2 unchanged sentences

CONTRACTUAL OBLIGATIONS

The following table summarizes our contractual obligations at December 31, 2022:

The following table summarizes our contractual obligations at March 31, 2023:

Payments due by fiscal period

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The table above does not include possible payments for uncertain tax positions.

Our reserve for uncertain tax positions, including accrued interest and penalties, was $2.7 million as of December 31, 2022.

Our reserve for uncertain tax positions, including accrued interest and penalties, was $2.7 million as of March 31, 2023.

Due to the nature of the underlying liabilities and the extended time often needed to resolve income tax uncertainties, we cannot make reliable estimates of the amount or timing of future cash payments that may be required to settle these liabilities.

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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 2. Management’s Discussion and Analysis