What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-04 compared with 2023-05-05 · 54 added, 55 removed, 209 unchanged (34% 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 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.

Among others, these include risks related to the ongoing supply chain and transportation challenges impacting businesses globally, risks related to ongoing inflationary pressures around the world 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 as well as negative effects on product demand and the financial solvency of customers and suppliers 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, 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, 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, subsequent filings, as well as 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.

Many of such factors are beyond our ability to control or predict.

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We disclaim any intent or obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

CRITICAL ACCOUNTING ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.

The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, the disclosure of contingent assets and liabilities and the values of purchased assets and assumed liabilities in acquisitions.

We base our estimates on historical experience and various other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making

judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

We base our estimates on historical experience and various other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates.

A description of our critical accounting policies and estimates was provided in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.

A description of our critical accounting estimates was provided in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.

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

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

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

• Consolidated revenue was $112 million, an increase of 8%.

• Gross profit margin was 56.6% versus 54.9%.

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

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

• Gross profit margin was 56.9%, an increase of 140 basis points.

Gross profit margin excluding amortization was 57.7%, an increase of 100 basis points.

• Net income per diluted share was $0.18, compared to $0.12, an increase of 50%.

• Adjusted net income and adjusted net income per share was $18.5 million, or $0.50 per diluted share, compared to $15.9 million, or $0.45 per diluted share, an increase of 11%.

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

Three months ended March 31, % incr.

Six months ended March 31, % incr.

Three months ended June 30, % incr.

Nine months ended June 30, % incr.

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

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Income before income taxes 5,888 5.2 4,582 4.4 28.5 17,726 5.3 6,621 2.3 167.7

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

Income tax (benefit) expense (839) (0.7) 456 0.4 NM (679) (0.2) (1,539) (0.5) NM

Net income $ 6,727 6.0 % $ 4,126 4.0 % 63.0 % $ 18,405 5.5 % $ 8,160 2.9 % 125.6 %

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REVENUE BY SEGMENT

Three months ended March 31, % incr.

Six months ended March 31, % incr.

Three months ended June 30, % incr.

Nine months ended June 30, % incr.

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

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Total revenue $ 112,236 100.0 % $ 103,517 100.0 % 8.4 % $ 332,686 100.0 % $ 282,487 100.0 % 17.8 %

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 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 Products & Services revenue increased 9.5% for the three months ended June 30, 2023, as compared to the same period in the prior fiscal year.

This increase is attributable to growth in our OEM & IM product lines.

IoT Products & Services revenue increased 18.8% for the nine months ended June 30, 2023, as compared to the same period in the prior fiscal year.

This increase is attributable to growth in each of our product lines.

IoT Solutions

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.

IoT Solutions revenue increased 4.7% for the three months ended June 30, 2023, as compared to the same period in the prior fiscal year.

This increase is primarily attributable to growth in SmartSense.

IoT Solutions revenue increased 14.4% for the nine months ended June 30, 2023, as compared to the same period in the prior fiscal year.

This increase is attributable to growth in each of our SmartSense and Ventus offerings, as well as fiscal 2022 results excluding October 2021 Ventus revenues that preceded the acquisition.

ARR was $104 million as of June 30, 2023, compared to $92 million as of June 30, 2022.

IoT Products & Services ARR was $22 million as of June 30, 2023, compared to $15 million as of June 30, 2022.

IoT Solutions ARR was over $82 million as of June 30, 2023, compared to $77 million as of June 30, 2022.

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

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

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

Three months ended June 30, Basis point Nine months ended June 30, Basis point

($ in thousands) 2023 2022 inc.

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Total cost of goods sold $ 48,417 43.1 % $ 46,091 44.5 % (140) $ 144,474 43.4 % $ 125,196 44.3 % (90)

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

Three months ended June 30, Basis point Nine months ended June 30, Basis point

($ in thousands) 2023 2022 inc.

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IoT Product & Services

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.

IoT Products & Services gross profit margin increased 60 basis points for the three months ended June 30, 2023 as compared to the same period in the prior fiscal year.

IoT Products & Services gross profit margin increased 70 basis points for the nine months ended June 30, 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 increased 450 basis points for the three months ended March 31, 2023 as compared to the same period in the prior fiscal year.

The IoT Solutions gross profit margin increased 450 basis points for the three months ended June 30, 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.

The IoT Solutions gross profit margin increased 200 basis points for the nine months ended June 30, 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.

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

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

Three months ended June 30, $ % Nine months ended June 30, $ %

($ in thousands) 2023 2022 incr.

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Total operating expenses $ 51,343 45.7 % $ 47,452 45.8 % $ 3,891 8.2 $ 151,598 45.6 % $ 135,954 48.1 % $ 15,644 11.5 %

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.

The $3.9 million increase in operating expenses in the third quarter of fiscal 2023 from the third quarter of fiscal 2022 was the result of incremental operating expenses, primarily from investments in Opengear and SmartSense, an increase in stock-based compensation and costs associated with ongoing litigation.

The $15.6 million increase in operating expenses in the nine months ended June 30, 2023 from the nine months ended June 30, 2022 was the result of incremental operating expenses, primarily from the acquisition of Ventus, investments in Opengear and SmartSense and an increase in stock-based compensation.

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

OPERATING INCOME

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

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

($ in thousands) 2023 2022 incr.

(decr.) 2023 2022 incr.

(decr.) incr.

Operating Income (Loss)

IoT Products & Services $ 12,096 $ 10,881 $ 1,215 11.2 $ 37,744 $ 24,046 $ 13,698 57.0

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

IoT Solutions 380 (907) $ 1,287 NM (1,130) (2,709) $ 1,579 NM

Total gross profit $ 12,476 $ 9,974 $ 2,502 25.1 $ 36,614 $ 21,337 $ 15,277 71.6

NM means not meaningful

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

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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, $ %

Three months ended June 30, $ % Nine months ended June 30, $ %

($ in thousands) 2023 2022 incr.

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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.

Other expense, net, increased $1.2 million for the three months ended June 30, 2023, as compared to the same period in the prior fiscal year.

Other expense, net, increased $4.2 million for the nine months ended June 30, 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).

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(In thousands)

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

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

2023 2022 2023 2022

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(In thousands, except per share amounts)

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

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

2023 2022 2023 2022

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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 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.

(2) For the three and nine months ended June 30, 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 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.

As of June 30, 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.

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

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,

Our condensed consolidated statements of cash flows for the nine months ended June 30, 2023 and 2022 is summarized as follows:

Nine months ended June 30,

($ in thousands) Restated (1)

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Cash flows from operating activities decreased $3.4 million primarily as a result of:

• 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.

• an increase in operating assets and liabilities (net of acquisitions) in the nine months ended June 30, 2023 of $17.3 million compared to an increase of $15.4 million in the nine months ended June 30, 2022, and

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

These changes were partially offset by:

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Cash flows used in investing activities decreased $347.9 million primarily as a result of:

• 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.

• no amounts used for the acquisition of businesses in the nine months ended June 30, 2023 compared to $347.6 million used for acquisitions in the nine months ended June 30, 2022, primarily related to our November 2021 acquisition of Ventus, and

• a $0.3 million decrease in purchases of property, equipment, improvements and certain other intangible assets.

Cash flows from financing activities decreased $237.5 million primarily as a result of:

• 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

• no proceeds from debt in the nine months ended June 30, 2023 compared to $350.0 million in proceeds from the Term Loan issued in the nine months ended June 30, 2022, and

• a $3.5 million decrease in proceeds from stock issuances.

These changes were partially offset by:

• 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),

• debt payments of $29.4 million in the nine months ended June 30, 2023 compared to $129.4 million the nine months ended June 30, 2022 (see Note 7 to the condensed consolidated financial statements),

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

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CONTRACTUAL OBLIGATIONS

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

The following table summarizes our contractual obligations at June 30, 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 March 31, 2023.

Our reserve for uncertain tax positions, including accrued interest and penalties, was $2.8 million as of June 30, 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