Overview
The following discussion should be read together with the Consolidated Financial Statements and the related Notes thereto and other financial information appearing elsewhere in this Form 10-K. All references herein to the term "fiscal year" shall mean a year endedMarch 31 of the year specified. As noted above, the Company's reporting obligations with theSEC were suspended beginning with the fiscal year that commenced onApril 1, 2021 ; therefore, this Form 10-K will be the last Company financial document filed with theSEC unless circumstances change and reporting obligations are re-activated. The Company intends to file future quarterly, unaudited results on the OTC Market website beginning with quarter endingJune 30, 2021 , but could reassess in the future.Westell Technologies, Inc. (Pink: WSTL) trades on the OTC Pink Open Market and the Westell financial information can be found at: www.otcmarkets.com/stock/WSTL/financials.Westell Technologies, Inc. , (the "Company") was incorporated inDelaware in 1980 and is headquartered at750 North Commons Drive ,Aurora, Illinois 60504. The Company is a leading provider of high-performance network infrastructure solutions focused on innovation and differentiation at the edge of communication networks where end users connect. The Company's portfolio of products and solutions enable service providers and network operators to improve performance and reduce operating expenses. With millions of products successfully deployed worldwide, the Company is a trusted partner for transforming networks into high-quality reliable systems. Reverse/Forward Stock Split and Deregistration/Delisting of Class A Common Stock OnSeptember 29, 2020 , the Company filed amendments to its amended and restated certificate of incorporation to effect a 1-for-1,000 reverse stock split of the Company's Class A and Class B Common Stock, followed immediately by a 1,000-for-1 forward stock split (the "Transaction"). The Company's stockholders approved the Transaction at the Annual Meeting of Stockholders held onSeptember 29, 2020 . The effective date of the Transaction wasOctober 1, 2020 . As a result of the Transaction, the Company paid$7.2 million to repurchase approximately 4.9 million shares of the Class A Common Stock at a purchase price of$1.48 per share. InOctober 2020 , the Company filed a Form 25 and Form 15 with theSEC to delist and deregister our Class A Common Stock. As a result, our Class A Common Stock is no longer listed on the Nasdaq Capital Market and trading in our Class A Common Stock will only occur in privately negotiated sales and on the OTC Pink Open Market, if one or more brokers continues to choose to make a market for our Class A Common Stock there and complies with applicable regulatory requirements; however, there can be no assurances regarding any such trading. COVID-19 Impact InMarch 2020 , theWorld Health Organization declared the spread of COVID-19 a pandemic. COVID-19 continues to mutate throughout theU.S. and around the world. As a result, throughout fiscal year 2021 and into fiscal year 2022, authorities continue to implement numerous measures to try to contain the virus, including restrictions on travel, quarantine recommendations, and various business restrictions. The Company is considered an "essential business" due to the industries and customers we serve, including critical telecommunications infrastructure. Accordingly, we have followed recommendations of theCenters for Disease Control (the "CDC") and have continued operations with enhanced safety precautions throughout the pandemic. To support the health and well-being of our workforce, customers, partners and communities, all of our employeeswho do not have critical in-person functions have been working remotely to lower the number of people working on-site at any given time. For those employees working in our facilities, we have instituted mediation measures including increased distancing of workstations, more frequent cleanings, face mask requirements, restricting access to our premises, and other safety precautions. We continue to monitor and followCDC and State COVID-19 guidelines and will revise our mediation efforts and protocols based on those guidelines. We have experienced and may continue to experience the adverse impact of the pandemic on our financial results. There remains significant uncertainty with respect to future customer demand, supply chain availability, and transportation costs going forward. These uncertainties depend on the duration of the pandemic and containment measures as well as how our compliance with these measures will impact our operations as well as those of our customers, contract manufacturers and other supply chain partners. We are continuing to monitor developments related to the pandemic on our own operations as well as on our suppliers, contract manufacturers and customers. We intend to adapt to the changing environment while acting to ensure the health and safety of our employees. -17- -------------------------------------------------------------------------------- Table of Contents OnApril 14, 2020 , the Company received$1.6 million pursuant to a loan under the Paycheck Protection Program (the "PPP") of the 2020 Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") administered by theSmall Business Association . OnMarch 16, 2021 , JPM notified the Company that the SBA provided forgiveness for the full amount of the PPP Loan, plus all related accrued interest. The gain associated with the forgiveness is presented on the Statements of Operations as Gain on forgiveness of first draw PPP loan. OnMarch 15, 2021 , the Company obtained an unsecured second draw PPP loan throughSt. Charles Bank & Trust Company, N.A. ("Wintrust") in the amount of$1.6 million (the "PPP2 Loan"). The PPP2 Loan was made through the SBA pursuant to the Consolidated Appropriations Act, 2021 (the "CAA") that was signed into law inDecember 2020 . All or a portion of this loan may be forgiven if certain requirements are met. The Company intends to adhere to the requirement and apply for loan forgiveness, but no assurance can be given that the Company will obtain forgiveness of the PPP2 Loan, in whole or in part. Segments The Company has three reportable operating segments:In-Building Wireless ("IBW"), Intelligent Site Management ("ISM"), and Communications Network Solutions ("CNS"). IBW Segment IBW segment solutions enable cellular and public safety coverage in stadiums, arenas, malls, buildings, and other indoor areas not served well or at all by the existing "macro" outdoor cellular network. For cellular service, solutions include indoor distributed antenna systems ("DAS"), DAS conditioners and digital repeaters. For the public safety market, solutions include Class A repeaters, Class B repeaters, and battery backup units. IBW also offers ancillary products that consist of passive system components and antennas for both the cellular service and public safety markets. ISM Segment ISM segment solutions include a suite of remote units, which provide machine-to-machine ("M2M") communications that enable operators to remotely monitor, manage, and control physical site infrastructure and support systems. Remote units can be and often are combined with the Company's Optima management software system. ISM also offers support services (i.e., maintenance agreements) and deployment services (i.e., installation). CNS Segment CNS segment solutions include a broad range of hardened network infrastructure offerings suitable for both indoor and outdoor use. The offerings consist of integrated cabinets, power distribution products, copper and fiber network connectivity products, fiber access products and T1 network interface units ("NIUs"). Customers The Company's customer base for its products includes communication service providers, systems integrators, neutral host operators, and distributors. Communication service providers include wireless and wireline service providers, multiple systems operators ("MSOs"), and Internet service providers ("ISPs"). Due to stringent customer quality specifications and the regulated environment in which customers operate, the Company must undergo lengthy approval and procurement processes prior to selling most of its products. Accordingly, the Company must make significant up-front investments in product and market development prior to actual commencement of sales of new products. Prices for the Company's products vary based upon volume, customer specifications, and other criteria, and they are subject to change for a variety of reasons, including cost and competitive factors. To remain competitive, the Company must continue to invest in new product development and in targeted sales and marketing efforts to launch new product features and lines. Failure to increase revenues from new products, whether due to lack of market acceptance, competition, technological changes, purchasing decisions, meeting technical specifications or otherwise, could have a material adverse effect on the Company's business and results of operations. The Company expects to continue to evaluate new product opportunities and invest in product research and development activities. In view of the Company's reliance on the telecommunications market for revenues, the project nature of the business, the unpredictability of orders, and pricing pressures, the Company believes that period-to-period comparisons of its financial results should not be relied upon as an indication of future performance. The Company has experienced quarterly fluctuations in customer ordering and purchasing activity due primarily to the project-based nature of the business and to budgeting and procurement patterns toward the end of the calendar year or the beginning of a new year. While these factors can result in the greatest fluctuations in the Company's third and fourth fiscal quarters, this is not always consistent and may not always correlate to financial results. -18- -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Estimates The preparation of financial statements in accordance with GAAP requires management to make use of certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and that affect the reported amounts of revenue and expenses during the reported periods. The Company bases estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances. These estimates and assumptions form the basis for judgments about carrying values of assets and liabilities that may not be readily apparent from other sources. Actual results could differ from the amounts reported. In Note 2 to the Consolidated Financial Statements, the Company includes a discussion of its significant accounting policies. The Company believes the following are the most critical accounting policies and estimates used in the preparation of the financial statements. The Company considers an accounting policy or estimate to be critical if it requires assumptions to be made concerning uncertainties, and if changes in these assumptions could have a material impact on financial condition or results of operations. Inventories and Inventory Valuation Inventories are stated at the lower of first-in, first-out ("FIFO") cost or net realizable value. Net realizable value is based upon an estimated average selling price reduced by estimated costs of disposal. Should actual market conditions differ from the Company's estimates, the Company's future results of operations could be materially affected. Reductions in inventory valuation are included in Cost of revenue in the accompanying Consolidated Statements of Operations. The Company reviews inventory for excess quantities and obsolescence based on its best estimates of future demand, product lifecycle status and product development plans. The Company uses historical information along with these future estimates to reduce the inventory cost basis. Subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. Prices anticipated for future inventory demand are compared to current and committed inventory values. Intangible Assets Intangible assets with determinable lives are amortized over the useful lives of the assets. If the Company were to determine that a change to the remaining estimated useful life of an intangible asset was necessary, then the remaining carrying amount of the intangible asset would be amortized prospectively over that revised remaining useful life. On an ongoing basis, intangible assets and other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset's carrying amount over its fair value. Income Taxes The Company accounts for income taxes under the provisions of ASC Topic 740, Income Taxes ("ASC 740"). ASC 740 requires an asset and liability based approach in accounting for income taxes. Deferred income tax assets, including net operating loss ("NOL") and certain tax credit carryovers and liabilities, are recorded based on the differences between the financial statement and tax bases of assets and liabilities, applying enacted statutory tax rates in effect for the year in which the tax differences are expected to reverse. Valuation allowances are provided against deferred tax assets that are assessed as not likely to be realized. On a quarterly basis, management evaluates the recoverability of deferred tax assets and the need for a valuation allowance. This evaluation requires the use of estimates and assumptions and considers all positive and negative evidence and factors, such as the scheduled reversal of temporary differences, the mix of earnings in the jurisdictions in which the Company operates, and prudent and feasible tax planning strategies. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the dates of enactment. The Company accounts for unrecognized tax benefits based upon its assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. The Company reports a liability for unrecognized tax benefits resulting from unrecognized tax benefits taken or expected to be taken in a tax return and recognizes interest and penalties, if any, related to its unrecognized tax benefits in income tax expense. Revenue Recognition and Deferred Revenue The Company records revenue based on a five-step model in accordance with ASC Topic 606, Revenue From Contracts With Customers ("ASC 606"). The Company's revenue is derived from the sale of products, software, and services identified in contracts. A contract exists when both parties have an approved agreement that creates enforceable rights and obligations, identifies performance obligations and payment terms and has commercial substance. The Company records revenue from these contracts when control of the products or services transfer to the customer. The amount of revenue to be recognized is based upon the consideration, including the impact of any variable consideration that the Company expects to be entitled to receive in exchange for these products and services. The majority of the Company's revenue is recorded at a point in time from the sale of tangible products. Revenue is recorded when control of the products passes to the customer, dependent upon the terms of the underlying contract. For right-to-use -19- -------------------------------------------------------------------------------- Table of Contents software, revenue is recognized at the point in time the customer has the right to use and can substantially benefit from use of the software. Products regularly include warranties that include bug fixes and minor updates so that the products continue to function as promised in a dynamic environment, and phone support. These standard warranties are assurance type warranties that do not offer any services beyond the assurance that the product will continue working as specified. Therefore, warranties are not considered separate performance obligations. Instead, the Company accrues the expected cost of warranty. Extended warranties are sold separately with a post-contract support ("PCS") agreement. PCS revenue is recognized over time during the support period. Revenue from installation services is recognized when the services have been completed or transferred as this is when the customer has obtained control. The Company has contracts with multiple performance obligations. When the sales agreement involves multiple performance obligations, each obligation is separately identified and the transaction price is allocated based on the amount of consideration the Company expects to be entitled to in exchange for transferring the promised good or service to the customer. In most cases, the Company allocates the consideration to each performance obligation based on the relative stand-alone selling price ("RSP") of the distinct performance obligation. In circumstances where RSP is not observable, the Company allocates the consideration for the performance obligations by utilizing the residual approach. For performance obligations that the Company satisfies over time, revenue is recognized by consistently applying a method of measuring progress toward complete satisfaction of that performance obligation. The Company utilizes the method that most accurately depicts the progress toward completion of the performance obligation. If the measure of remaining rights exceeds the measure of the remaining performance obligations, the Company records a contract asset. Conversely, if the measure of the remaining performance obligations exceeds the measure of the remaining rights, the Company records a contract liability. Contract assets and liabilities related to product returns will be recorded as contract assets and liabilities and presented on the Consolidated Balance Sheets in Prepaid expenses and other current assets and Deferred revenue, respectively. Customer billings for services not yet rendered are deferred and recognized as revenue as the services are rendered. The associated deferred revenue is included in Deferred revenue or Deferred revenue non-current, as appropriate, in the Consolidated Balance Sheets. The Company records revenue net of taxes. Results of Operations Fiscal Years EndedMarch 31, 2021 and 2020 Revenue by segment Fiscal Year Ended March 31, Increase (Decrease) 2021 vs. (in thousands) 2021 2020 2020 IBW$ 9,683 $ 10,021 $ (338) ISM 9,352 10,101 (749) CNS 10,912 9,834 1,078 Consolidated revenue$ 29,947 $ 29,956 $ (9) IBW IBW segment revenue decreased$0.3 million in fiscal year 2021 when compared to fiscal year 2020. The following is a more detailed analysis of the IBW product revenue in fiscal year 2021, compared to the prior year and anticipated trends: • The Company recognized revenue of approximately$0.9 million from the new Crossfire Cellular DAS product line that was introduced in fiscal year 2021. The Company has a$2.0 million Crossfire product backlog that is expected to ship in the second or third quarter of fiscal year 2022. The Crossfire system is a digital transport system extending cellular signals throughout buildings where existing cellular coverage is poor. Due to the project-based nature of this revenue, it is difficult to make a determination on future trends, but we anticipate the new Crossfire product line is a growth opportunity. • Sales of DAS conditioners, which include our Universal DAS Interface Tray ("UDIT") active conditioner, were down approximately$0.3 million in fiscal year 2021, compared to the prior year. During fiscal year 2020, sales of DAS conditioners also decreased compared to prior years due to network architecture shifts to alternative solutions in large venues such as stadiums and arenas, as well as integration of RF signal power attenuation (the primary function of conditioners) into larger network elements. Going forward, we do not anticipate sales of conditioners to rebound to previous levels, but we do expect on-going demand where customers may add capacity to the existing -20- -------------------------------------------------------------------------------- Table of Contents embedded base of large-venue DAS networks, as well as in smaller in-building DAS deployments that require a stand-alone conditioner. • Sales of cellular repeaters were down approximately$0.4 million in fiscal year 2021, compared to the prior year. While still a reliable and proven solution for amplifying cellular coverage inside a building, lower sales of cellular repeaters are reflective of the continuing downward-demand trend as our larger customers have had a stronger preference for small cells to provide in-building cellular coverage. We expect the cellular repeater market to decline as customers continue to shift to other forms of commercial in-building coverage, such as small cells. • Despite the slowdown of installations due to COVID-19 during fiscal year 2021, sales were relatively flat for our public safety products, which include Class A Repeaters, ClassB Repeaters and battery backup units, compared to the prior year. These public safety repeaters perform similarly to cellular repeaters and extend public safety radio signals inside buildings where existing radio coverage does not reach. The products are dedicated only to public safety frequency bands and meet the strictNational Fire Protection Association ("NFPA") regulatory requirements. We expect the market for public safety products to grow as more local municipalities pass and enforce ordinances that require in-building wireless communication coverage for first responders and emergency personnel. The Company recently launched two new UL2524 compliant public safety products: an Enhanced Class B repeater inJuly 2020 and ProtectLink Class A/B repeater inApril 2021 . • Ancillary products (passive RF system components and antennas) sales decreased by$0.6 million in fiscal year 2021, compared to the prior year. Future ancillary product revenue could potentially increase with the increase in public safety revenue, but may follow the same flat-to-down trend as DAS conditioners and cellular repeaters. Many IBW products are installed during new construction projects and major renovations. Restricted travel to customer worksites or government regulations and economic impacts due to COVID-19 have and may continue to reduce or delay construction projects impacting the amount and timing of IBW product revenue.
ISM
ISM segment revenue decreased by$0.7 million in fiscal year 2021, compared to the prior year. The decrease was primarily driven by demand for sales of remote units, offset in part by small increases in deployment and support revenue. The RMM-300, a new monitoring product, was launched inMarch 2021 . The RMM-300 includes 40 input/output ports and a built-in processor core with an Ethernet port to backhaul alarms to a Network Operating Center ("NOC"). A Tier 1 carrier started purchasing the product inMarch 2021 and is installing the product as they upgrade their 3G cellular sites. Due to the project-based nature of our ISM business, it is difficult to make a determination on future trends. COVID-19-related travel restrictions are expected to continue to impact timing of new installations while government and customer restrictions remain in place. Although it is uncertain, we may see increased demand for our ISM remote monitoring equipment and software given the current market conditions and, customers may choose to accurately monitor remote locations so they dispatch the correct repair personnel, especially in areas where there are limited personnel, local travel restrictions, and a need to limit face-to-face interactions; however, we cannot provide any assurances.
CNS
CNS segment revenue increased$1.1 million in fiscal year 2021, compared to fiscal year 2020. The increase was primarily due to increased sales from integrated cabinets. Sales of integrated cabinets, which are heavily project-based, are likely to remain uneven. While we expect sales of power distribution products and copper/fiber connectivity panels to remain steady, we anticipate revenue from T1 NIUs and TMAs, which are older technology with declining use, to continue to decrease over time. COVID-19 restrictions on travel could increase demand for our CNS integrated cabinets used in rural broadband, which is expected to expand to support a larger number of people working remotely. However, customers could also feel pressure to delay their capital spending to preserve cash. -21- -------------------------------------------------------------------------------- Table of Contents Gross profit and gross margin Fiscal Year Ended March 31, Increase (Decrease) 2021 vs. (in thousands) 2021 2020 2020 IBW$ 2,524 $ 2,613 $ (89) 26.1 % 26.1 % - % ISM$ 5,244 $ 5,236 $ 8 56.1 % 51.8 % 4.3 % CNS$ 2,304 $ 1,798 $ 506 21.1 % 18.3 % 2.8 % Consolidated gross profit$ 10,072 $ 9,647 $ 425 Consolidated gross margin 33.6 % 32.2 % 1.4 % In fiscal year 2021, consolidated gross margin increased 1.4% compared to fiscal year 2020. The primary factors that caused year-over-year changes within each segment are as follows: •IBW segment gross margin remained steady primarily due to a shift to lower margin from public safety products and increased freight and tariff costs, offset by lower excess and obsolete costs. The fiscal year 2021 provision for excess and obsolete inventory included approximately$0.3 million related to the decision to discontinue future production of products under the license agreement. See Long-lived assets impairment below. •ISM segment gross margin increased, by 4.3%, due primarily to lower excess and obsolete inventory, offset in part by lower revenue against fixed costs. •CNS segment gross margin increased, by 2.8%, due primarily to lower excess and obsolete inventory costs. Other factors contributed broadly to impact gross margins. Increased tariffs on products and components imported fromChina have caused cost increases over fiscal year 2020 costs. In fiscal year 2021, we experienced delivery delays, shortages and increased transportation costs due to the global impact of COVID-19. Supply shortages have required us to purchase parts from suppliers at higher costs that were not passed along to our customers. We expect these trends to continue well into fiscal year 2022. Research and development ("R&D") Fiscal Year Ended March 31, Increase (Decrease) 2021 vs. (in thousands) 2021 2020 2020 IBW$ 1,596 $ 1,757 $ (161) ISM 1,623 2,237 (614) CNS 813 1,352 (539) Consolidated R&D expense$ 4,032 $ 5,346 $ (1,314) Percentage of revenue 13 % 18 % In fiscal year 2021, R&D expense decreased$1.3 million compared to fiscal year 2020. The decrease was primarily attributable to a lower expense structure resulting from the Company's overall cost reduction efforts across all three reporting segments, including the restructuring in the quarter endedDecember 31, 2019 and included a temporary salary reduction during the first quarter of fiscal year 2021 in response to COVID-19. The IBW segment recently launched two new UL2524 compliant public safety products: an Enhanced Class B repeater inJuly 2020 , and ProtectLink Class A/B repeater inApril 2021 . Sales and marketing ("S&M") Fiscal Year Ended March 31, Increase (Decrease) 2021 vs. (in thousands) 2021 2020 2020 Consolidated S&M expense$ 5,207 $ 7,592 $ (2,385) Percentage of revenue 17 % 25 % In fiscal year 2021, sales and marketing expense decreased by$2.4 million , compared to fiscal year 2020. The decrease was largely attributable to a lower expense structure from the restructuring in the quarter endedDecember 31, 2019 , and the Company's overall cost reduction efforts. The decrease also reflects lower travel and entertainment expenses primarily due to COVID-19 restricted travel and included a temporary salary reduction during the first quarter of fiscal year 2021 in response to COVID-19. -22- -------------------------------------------------------------------------------- Table of Contents General and administrative ("G&A") Fiscal Year Ended March 31, Increase (Decrease) 2021 vs. (in thousands) 2021 2020 2020 Consolidated G&A expense$ 4,086 $ 4,757 $ (671) Percentage of revenue 14 % 16 % In fiscal year 2021, general and administrative expense decreased by$0.7 million , compared to fiscal year 2020. The decrease was largely attributable to a lower expense structure from the restructuring in the quarter endedDecember 31, 2019 , and the Company's overall cost reduction efforts. Fiscal year 2021 includes approximately$0.3 million of non-recurring transactions costs related to the reverse/forward stock split, offset in part by a temporary salary reduction during the first quarter of fiscal year 2021 in response to COVID-19. Intangibles amortization Acquisition-related amortization Fiscal Year Ended March 31, Increase (Decrease) 2021 vs. (in thousands) 2021 2020 2020 Consolidated intangibles amortization $ 903$ 1,233 $ (330) Amortization amounts in the fiscal years 2021 and 2020, were non-cash expenses related to ISM intangible assets established through prior acquisition. These intangible assets consist of product technology, customer relationships, and trade names derived from the acquisition. The decrease of$0.3 million in fiscal year 2021, compared to the prior fiscal year, resulted primarily from trademark intangibles becoming fully amortized in the fourth quarter of fiscal year 2020. Product Licensing Rights OnJuly 31, 2019 , the Company entered into a five year License and Service Agreement (the "Agreement") with a public safety manufacturing company pursuant to which the Company obtained worldwide product licensing rights for existing products to be manufactured at our contract manufacturer for our IBW segment. Under the terms of the Agreement, the Company made an up-front payment of$1.0 million , in connection with the execution of the Agreement and was required to pay an additional$1.0 million upon the achievement of certain milestones, as well as royalties on future sales. As ofMarch 31, 2020 ,$0.3 million for the last milestone was unpaid and is presented in Accounts Payable on the Consolidated Balance Sheet. The product licensing rights are being amortized straight-line over the term of the Agreement. The amortization related to this intangible asset was$0.2 million and$0.3 million during fiscal years 2021 and 2020, respectively, and is presented in Cost of revenue on the Consolidated Statements of Operations. InFebruary 2021 , a small fire at a subcontractor destroyed inventory that was being used to produce some of Westell's products. Insurance policies are expected, but not guaranteed, to cover the replacement value of the assets that incurred losses or damages, less a$50,000 deductible. The loss of the inventory caused delays in delivering products and a decision to accelerate engineering efforts to develop a new replacement product. See Long-lived assets impairment below. Restructuring Fiscal Year Ended March 31, Increase (Decrease) 2021 vs. (in thousands) 2021 2020 2020 Consolidated restructuring expense $ - $ 234 $ (234) There were no restructuring expenses recorded in fiscal year 2021. In fiscal year 2020, the Company recorded a restructuring expense of$0.2 million related to employee termination costs that spanned all three segments. Long-lived assets impairment Fiscal Year Ended March 31, Increase (Decrease) 2021 vs. (in thousands) 2021 2020 2020 Consolidated long-lived assets impairment 525 1,007 $ (482) InFebruary 2021 , as previously mentioned, a small fire at a subcontractor destroyed inventory that was being used to produce product under the IBW license agreement. Due to long lead times, increased costs and new minimum order quantities on replacement components, the Company made a decision to accelerate engineering efforts to develop a new replacement product and abandon the production of product under the license agreement. As a result, during the quarter endedMarch 31, 2021 , the Company recorded a non-cash impairment loss of$0.5 million to fully impair the product licensing right intangible asset. During the quarter endedMarch 31, 2020 , the Company incurred an impairment charge of$1.0 million in connection with our product license, acquired under the Agreement, to produce and sell specific Public Safety products. This non-cash impairment of an intangible asset was triggered by the uncertainties caused by demand disruptions in part due to site access limitations and -23- -------------------------------------------------------------------------------- Table of Contents delayed project planning and approvals due to COVID-19. The potential deferral of revenues within a fixed license period created an impaired value. Gain on forgiveness of first draw PPP loan OnApril 14, 2020 , the Company obtained an unsecured first draw Paycheck Protection Program ("PPP") loan throughJPMorgan Chase Bank, N.A . ("JPM") in the amount of$1.6 million (the "PPP Loan"). The PPP Loan was made through theUnited States Small Business Administration (the "SBA") as part of the PPP under the 2020 Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"). OnMarch 16, 2021 , JPM notified the Company that the SBA provided forgiveness for the full amount of the PPP Loan, plus all related accrued interest. The gain associated with the forgiveness is presented on the Statements of Operations as Gain on forgiveness of first draw PPP loan. Other income (expense) Fiscal Year Ended March 31, Increase (Decrease) 2021 vs. (in thousands) 2021 2020 2020 Consolidated other income (expense) 288 456 $ (168) Other income (expense), net was income of$0.3 million and$0.5 million for fiscal years 2021 and 2020, respectively. Other income (expense), net contains interest income earned on cash and cash equivalents plus foreign currency gains and losses related primarily to receivables and investments denominated in Australian and Canadian currencies. The fiscal year 2021 also includes a$0.2 million gain on the sale of IPV4 addresses. The decrease during fiscal year 2021, compared to the prior fiscal year, was primarily due to decreased cash balances and lower interest rates on investments. Income tax (expense) benefit Income tax benefit in fiscal year 2021 was$22,000 and income tax expense in fiscal year 2020 was$36,000 . Income tax expense resulted from foreign tax and state tax based on gross margin and in fiscal year 2021 the reversal of a previously identified uncertain tax position following the closing of an audit. In fiscal years 2021 and 2020, the Company continued to maintain a full valuation allowance on deferred tax assets. As ofMarch 31, 2020 , the Company has a$0.3 million tax receivable associated with prior federal alternative minimum tax ("AMT") credit carryforward, which is recorded as a tax receivable within Prepaid and other non-current assets on the Consolidated Balance Sheets. OnMarch 27, 2020 , the CARES Act was signed into law. Among the changes to theU.S. federal income tax rules, the CARES Act accelerated the timeframe for refunds of AMT credits. The Company recovered the entire amount in fiscal year 2021 via tax refunds. Under the CARES Act, the Company is deferring the employer portion of social security taxes and will apply for a refund of its Alternative Minimum Tax credit. For the fiscal year 2021, the Company has deferred$0.4 million of payroll taxes. The payroll taxes will be deferred until the due dates ofDecember 31, 2021 andDecember 31, 2022 . The Company records a deferred tax asset for the payroll tax liability that is not deductible in fiscal year 2021 for income tax purposes. Also under the CARES Act, the PPP was established to provide loans to eligible businesses. Under the terms of the PPP, certain amounts of the loan may be forgiven if used for qualifying expenses, as described in the CARES Act. For fiscal year 2021, the Company is excluding$1.6 million of income related to the loan forgiveness from taxable income. Net income (loss) Net loss was$2.7 million and$10.1 million in fiscal years 2021 and 2020, respectively. The change was due to the cumulative effects of the variances identified above. Quarterly Results of Operations The Company has experienced, and may continue to experience, fluctuations in quarterly results of operations. Such fluctuations in quarterly results may correspond to substantial fluctuations in the market price of the Class A Common Stock. Some factors, which have had an influence on and may continue to influence the Company's results of operations in a particular quarter include, but are not limited to, the size and timing of customer orders and subsequent shipments, customer order deferrals in anticipation of new products, timing of product introductions or enhancements by the Company or its competitors, market acceptance of new products, technological changes in the telecommunications industry, competitive pricing pressures, accuracy of customer forecasts of end-user demand, write-offs for excess or obsolete inventory, impairments, changes in the Company's operating expenses, personnel changes, foreign currency fluctuations, changes in the mix of products sold, quality control of products sold, disruption in sources of supplies, regulatory changes, capital spending, delays of payments by customers, working capital deficits and general economic conditions, as well as the ongoing COVID-19 pandemic. -24- -------------------------------------------------------------------------------- Table of Contents Sales to the Company's customers typically involve long approval and procurement cycles and can involve large purchase commitments. Accordingly, cancellation or deferral of orders could cause significant fluctuations in the Company's quarterly results of operations. As a result, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and caution should be used when placing reliance upon such comparisons as indications of future performance. Liquidity and Capital Resources Overview Due to significant uncertainty around future customer demand, supply chain availability, transportation costs, and our ability to sustain our operations as the COVID-19 pandemic continues, we are proactively managing costs and working capital in order to protect our financial position and maintain our workforce. EffectiveApril 1, 2020 , we reduced operating expenses through director fee reductions, elimination of non-essential travel, and reduced discretionary spending. AtMarch 31, 2021 and 2020, the Company had$16.9 million and$20.9 million in cash and cash equivalents, respectively. To preserve cash and liquidity, we are delaying non-essential capital expenditures and will delay usage of funds authorized under our stock repurchase program. OnApril 14, 2020 , the Company obtained an unsecured first draw PPP loan throughJPMorgan Chase Bank, N.A . ("JPM") in the amount of$1.6 million . The PPP Loan was made through the SBA as part of the PPP under the CARES Act. OnMarch 16, 2021 , JPM notified the Company that the SBA provided forgiveness for the full amount of the PPP Loan, plus all related accrued interest. OnMarch 22, 2021 , the Company received funds pursuant to an unsecured second draw PPP loan throughSt. Charles Bank & Trust Company, N.A. ("Wintrust") in the amount of$1.6 million . The PPP2 Loan is presented on the Consolidated Balance Sheets as Note Payable- non-current. The PPP2 Loan was made through the SBA pursuant to the CAA that was signed into law inDecember 2020 . The PPP2 Loan has a five-year term, bears interest at a rate of 1.00% per annum, and may be prepaid at any time without incurring any prepayment charges. All or a portion of this loan may be forgiven if certain requirements are met. The Company intends to adhere to the requirement and apply for loan forgiveness, but no assurance can be given that the Company will obtain forgiveness of the PPP2 Loan, in whole or in part. Under the CARES Act, the Company is deferring the employer portion of social security taxes and will apply for a refund of its Alternative Minimum Tax credit. For the fiscal year endedMarch 31, 2021 , the Company has deferred$0.4 million of payroll taxes. The payroll taxes will be deferred until the due dates ofDecember 31, 2021 andDecember 31, 2022 . The Company continues to monitor government economic stabilization efforts and is awaiting furtherIRS clarification to determine eligibility for the calendar year 2021 employee retention credit ("ERC"). We expect our existing cash balance will be sufficient to meet our liquidity needs for the next twelve months. Cash Flows The Consolidated Statements of Cash Flows include discontinued operations. The significant changes in cash flows were as follows: Fiscal Year Ended March 31, (in thousands) 2021 2020
Net cash flow provided by (used in):
Operating activities $ 95 $ (2,272) Investing activities (72) (2,124) Financing activities (4,008) (192) Net increase (decrease) in cash and cash equivalents $ (3,985) $ (4,588) The Company's operating activities generated cash of$0.1 million and used cash of$2.3 million in fiscal years 2021 and 2020, respectively. The change resulted primarily from the decreased net loss in the current period adjusted for non-cash items, offset in part by a decrease in cash generated by working capital when compared to the prior year. The Company's investing activities used cash of$0.1 million and$2.1 million in fiscal years 2021 and 2020, respectively. The decreased usage was primarily due to the fiscal year 2020$2.0 million investment in IBW product licensing rights. The Company's financing activities used cash of$4.0 million and$0.2 million in fiscal years 2021 and 2020, respectively. The increased use of cash was primarily from the Transaction in the quarter endedDecember 31, 2020 where the Company paid$7.2 million to repurchase 4.9 million shares of Class A Common stock as part of the Transaction, offset in part by the$3.3 million in proceeds from the PPP and PPP2 loans. -25-
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Table of Contents As ofMarch 31, 2021 , the Company had net deferred tax assets of approximately$40.6 million before a valuation allowance of$40.6 million . The Company's ability to utilize NOL carryforwards and other tax attributes to reduce future federal taxable income is subject to potential limitations under Internal Revenue Code Section 382 ("Section 382") and its related tax regulations. The utilization of these attributes may be limited if certain ownership changes by 5% stockholders (as defined inTreasury regulations pursuant to Section 382) and the effects of stock issuances by the Company during any three-year period result in a cumulative change of more than 50% in the beneficial ownership of the Company. The Company completed the Section 382 analysis for fiscal year 2021 and has concluded there were no ownership changes during the fiscal year 2021 that triggered a Section 382 limitation. If it is determined that an ownership change has occurred under these rules, the Company would generally be subject to an annual limitation on the use of pre-ownership change NOL carryforwards and certain other losses and/or credits. In addition, certain future transactions regarding the Company's equity, including the cumulative effects of small transactions as well as transactions beyond the Company's control, could cause an ownership change and therefore a potential limitation on the annual utilization of the deferred tax assets. Also, as ofMarch 31, 2021 , the Company had a$0.8 million tax contingency reserve related to uncertain tax positions. Federal net operating loss carryforwards begin to expire in fiscal year 2022. Realization of deferred tax assets associated with the Company's future deductible temporary differences, net operating loss carryforwards and tax credit carryforwards is dependent upon generating sufficient taxable income prior to their expiration, among other factors. The Company weighed positive and negative evidence to assess the need for a valuation allowance against deferred tax assets and whether a tax benefit should be recorded when taxable losses are incurred. The existence of a valuation allowance does not limit the availability of tax assets to reduce taxes payable when taxable income arises. Management periodically evaluates the recoverability of the deferred tax assets and may adjust the valuation allowance against deferred tax assets accordingly. Off-Balance Sheet Arrangements The Company has a 50% equity ownership inAccessTel Kentrox Australia PTY LTD ("AKA"). AKA distributes network management solutions provided by the Company and the other 50% owner to one customer. The Company holds equal voting control with the other owner. All actions of AKA are decided at the board level by majority vote. The Company also has an unlimited guarantee for the performance of the other 50% owner in AKA,who primarily provides support and engineering services to the customer. This guarantee was put in place at the request of the AKA customer. The guarantee, which is estimated to have a maximum potential future payment of$0.7 million , will stay in place as long as the contract between AKA and the customer is in place. The Company would have recourse against the other 50% owner in AKA in the event the guarantee is triggered. The Company determined that it could perform on the obligation it guaranteed at a positive rate of return and, therefore, did not assign value to the guarantee.
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