Quarterly Report (10-q)

Date : 08/09/2019 @ 7:03PM
Source : Edgar (US Regulatory)
Stock : Westell Technologies (WSTL)
Quote : 0.9841  -0.0109 (-1.10%) @ 5:37PM

Quarterly Report (10-q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
x     
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
¨     
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to    
Commission File Number 0-27266
 
Westell Technologies, Inc.
(Exact name of registrant as specified in its charter)
 
DELAWARE
 
36-3154957
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification Number)
 
 
750 North Commons Drive, Aurora, IL
 
60504
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code (630) 898-2500
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange on Which Registered
Class A Common Stock, $.01 par value
WSTL
NASDAQ Capital Market
Indicate by check or mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
 
¨
  
Accelerated Filer
 
¨
 
 
 
 
Non-Accelerated Filer
 
x
  
Smaller Reporting Company
 
x
 
 
 
 
 
 
 
 
 
 
 
Emerging Growth Company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ¨
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.    Yes   ¨     No   x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of July 26, 2019 :
Class A Common Stock, $0.01 Par Value – 12,074,536 shares Class B Common Stock, $0.01 Par Value – 3,484,287 shares



WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-Q INDEX
 
Page No.
 
Item 1.
Financial Statements
 
 
 
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 6.
Cautionary Statement Regarding Forward-Looking Information
Certain statements contained herein that are not historical facts or that contain the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “may,” “will,” “plan,” “should,” or derivatives thereof and other words of similar meaning are forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those expressed in or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, product demand and market acceptance risks, customer spending patterns, need for financing and capital, economic weakness in the United States (“U.S.”) economy and telecommunications market, the effect of international economic conditions and trade, legal, social and economic risks (such as import, licensing and trade restrictions), the impact of competitive products or technologies, competitive pricing pressures, customer product selection decisions, product cost increases, component supply shortages, new product development, excess and obsolete inventory, commercialization and technological delays or difficulties (including delays or difficulties in developing, producing, testing and selling new products and technologies), the ability to successfully consolidate and rationalize operations, the ability to successfully identify, acquire and integrate acquisitions, effects of the Company’s accounting policies, retention of key personnel and other risks more fully described in the Company's Form 10-K for the fiscal year ended March 31, 2019 , under Item 1A - Risk Factors. The Company undertakes no obligation to publicly update these forward-looking statements to reflect current events or circumstances after the date hereof or to reflect the occurrence of unanticipated events or otherwise.
Trademarks
The following terms used in this filing are the Company's trademarks: ClearLink®, Kentrox®, Optima Management System®, UDIT®, WESTELL TECHNOLOGIES®, and Westell®. All other trademarks appearing in this filing are the property of their holders.

2




WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
 
(unaudited)
 
 
 
June 30,
2019
 
March 31,
2019
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
24,077

 
$
25,457

Accounts receivable (net of allowance of $100 and $100 at June 30, 2019 and March 31, 2019, respectively)
5,806

 
6,865

Inventories
9,943

 
9,801

Prepaid expenses and other current assets
1,673

 
1,706

Total current assets
41,499

 
43,829

Land, property and equipment, gross
8,123

 
8,109

Less accumulated depreciation and amortization
(6,954
)
 
(6,811
)
Land, property and equipment, net
1,169

 
1,298

Intangible assets, net
2,970

 
3,278

Right-of-use assets on operating leases, net
1,111

 

Other non-current assets
484

 
492

Total assets
$
47,233

 
$
48,897

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
2,250

 
$
2,313

Accrued expenses
4,046

 
3,567

Deferred revenue
950

 
1,217

Total current liabilities
7,246

 
7,097

Deferred revenue non-current
393

 
444

Other non-current liabilities
500

 
176

Total liabilities
8,139

 
7,717

Commitments and contingencies (Note 10)


 

Stockholders’ equity:
 
 
 
Class A common stock, par $0.01, Authorized – 109,000,000 shares
Outstanding – 12,073,010 and 11,909,979
shares at June 30, 2019, and March 31, 2019, respectively
121

 
119

Class B common stock, par $0.01, Authorized – 25,000,000 shares
Issued and outstanding – 3,484,287 shares at June 30, 2019, and March 31, 2019
35

 
35

Preferred stock, par $0.01, Authorized – 1,000,000 shares
Issued and outstanding – none

 

Additional paid-in capital
419,100

 
418,859

Treasury stock at cost – 5,203,350 and 5,122,414 shares at June 30, 2019, and March 31, 2019, respectively
(37,307
)
 
(37,135
)
Accumulated deficit
(342,855
)
 
(340,698
)
Total stockholders’ equity
39,094

 
41,180

Total liabilities and stockholders’ equity
$
47,233

 
$
48,897




The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

3


WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
Three months ended
 June 30,
 
 
2019
 
2018
 
Revenue
9,002

 
13,037

 
Cost of revenue
5,756

 
7,102

 
Gross profit
3,246

 
5,935

 
Operating expenses
 
 
 
 
Research and development
1,556

 
1,432

 
Sales and marketing
2,332

 
2,137

 
General and administrative
1,364

 
1,534

 
Intangible amortization
308

 
990

 
          Total operating expenses
5,560

 
6,093

 
Operating profit (loss)
(2,314
)
 
(158
)
 
Other income, net
164

 
119

 
Income (loss) before income taxes
(2,150
)
 
(39
)
 
Income tax benefit (expense)
(7
)
 

 
Net income (loss) (1)
$
(2,157
)
 
$
(39
)
 
Net income (loss) per share:
 
 
 
 
Basic
$
(0.14
)
 
$

 
Diluted
$
(0.14
)
 
$

 
Weighted-average number of common shares outstanding:
 
 
 
 
Basic
15,455

 
15,632

 
Effect of dilutive securities: restricted stock, restricted stock units, performance stock units and stock options (2)

 

 
Diluted
15,455

 
15,632

 

_______
 
(1) Net income (loss) and comprehensive income (loss) are the same for the periods reported.
(2) The Company had 1.0 million and 1.0 million shares represented by common stock equivalents for the three months ended June 30, 2019 , and June 30, 2018, respectively, which were not included in the computation of average dilutive shares outstanding because they were anti-dilutive. In periods with a net loss from continuing operations, the basic loss per share equals the diluted loss per share as all common stock equivalents are excluded from the per share calculation.

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


4


WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
  (Unaudited)
 
Common
Stock
Class A
 
Common
Stock
Class B
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
Balance, March 31, 2019
$
119

 
$
35

 
$
418,859

 
$
(37,135
)
 
$
(340,698
)
 
$
41,180

Net income (loss)

 

 

 

 
(2,157
)
 
(2,157
)
Common stock issued
3

 

 
(3
)
 

 

 

Purchase of treasury stock
(1
)
 

 

 
(172
)
 

 
(173
)
Stock-based compensation

 

 
244

 

 

 
244

Balance, June 30, 2019
$
121

 
$
35

 
$
419,100

 
$
(37,307
)
 
$
(342,855
)
 
$
39,094

 
 
 
 
 
 
 
 
 
 
 
 
 
Common
Stock
Class A
 
Common
Stock
Class B
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
Balance, March 31, 2018
$
121

 
$
35

 
$
417,691

 
$
(35,907
)
 
$
(329,645
)
 
$
52,295

Cumulative effect adjustment
ASC 606 adoption

 

 

 

 
329

 
329

Net income (loss)

 

 

 

 
(39
)
 
(39
)
Common stock issued
2

 

 
(2
)
 

 

 

Purchase of treasury stock
(1
)
 

 

 
(404
)
 

 
(405
)
Stock-based compensation

 

 
291

 

 

 
291

Balance, June 30, 2018
$
122

 
$
35

 
$
417,980

 
$
(36,311
)
 
$
(329,355
)
 
$
52,471



The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


5


WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)  
 
Three months ended June 30,
 
 
2019
 
2018
 
Cash flows from operating activities:
 
 
 
 
Net income (loss)
$
(2,157
)
 
$
(39
)
 
Reconciliation of net loss to net cash used in operating activities:
 
 
 
 
Depreciation and amortization
451

 
1,142

 
Stock-based compensation
244

 
291

 
Exchange rate loss (gain)
(3
)
 
10

 
Changes in assets and liabilities:
 
 
 
 
Accounts receivable
1,059

 
(1,705
)
 
Inventories
(142
)
 
(505
)
 
Prepaid expenses and other current assets
33

 
(467
)
 
Other assets
(1,103
)
 

 
Deferred revenue
(318
)
 
(192
)
(1)  
Accounts payable and accrued expenses
740

 
24

 
Net cash provided by (used in) operating activities
(1,196
)
 
(1,441
)
 
Cash flows from investing activities:
 
 
 
 
Maturities of other short-term investments

 
1,433

 
Purchases of property and equipment
(14
)
 
(50
)
 
Net cash provided by (used in) investing activities
(14
)
 
1,383

 
Cash flows from financing activities:
 
 
 
 
Purchases of treasury stock
(173
)
 
(405
)
 
Net cash provided by (used in) financing activities
(173
)
 
(405
)
 
Gain (loss) of exchange rate changes on cash
3

 
(3
)
 
Net increase (decrease) in cash and cash equivalents
(1,380
)
 
(466
)
 
Cash and cash equivalents, beginning of period
25,457

 
24,963

 
Cash and cash equivalents, end of period
$
24,077

 
$
24,497

 
_______
(1) Includes the cumulative effect adjustment of the ASC 606 adoption.

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

6


WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Note 1. Basis of Presentation
Description of Business
Westell Technologies, Inc. (the Company) is a holding company. Its wholly owned subsidiary, Westell, Inc., designs and distributes telecommunications products, which are sold primarily to major telephone companies.
Basis of Presentation and Reporting
The accompanying Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. The Condensed Consolidated Financial Statements have been prepared using generally accepted accounting principles (GAAP) in the United States for interim financial reporting, and consistent with the instructions of Form 10-Q and Article 10 of Regulation S-X and, accordingly, they do not include all of the information and footnotes required in the annual consolidated financial statements and accompanying footnotes. The Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2019 . All intercompany accounts and transactions have been eliminated in consolidation.
In the opinion of management, the unaudited interim financial statements included herein reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the Company’s condensed consolidated financial position and the results of operations, comprehensive income (loss) and cash flows at June 30, 2019 , and for all periods presented. The results of operations for the periods presented are not necessarily indicative of the results that may be expected for fiscal year 2020 .
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and that affect revenue and expenses during the periods reported. Estimates are used when accounting for the allowance for uncollectible accounts receivable, net realizable value of inventory, product warranty accrued, relative selling prices, stock-based compensation, intangible assets fair value, depreciation, income taxes, right-of-use lease assets and related lease liabilities, and contingencies, among other things. Actual results could differ from those estimates.
Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (ASU 2016-02). In September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842) (ASU 2017-13), which provides additional implementation guidance on ASU 2016-02. ASU 2016-02 requires lessees to recognize leases on the balance sheet as right-of-use assets, representing the right to use the underlying asset for the lease term, and a corresponding lease liability for leases with terms greater than one year. The liability will be equal to the present value of lease payments while the right-of-use asset will be based on the liability, subject to adjustment, such as prepaid lease payments.

In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 (Leases) , which provides narrow amendments to clarify how to apply certain aspects of the new lease standard. In July 2018, the FASB also issued ASU 2018-11, Targeted Improvements . The amendments in this ASU provide for an additional transition method in which an entity applying the lease standard at adoption date recognizes a cumulative-effect adjustment to the opening balance of retained earnings (deficit) in the period of adoption.

The Company adopted the lease standard on April 1, 2019, using the modified retrospective method. Under this method, the new guidance would apply to existing and new leases on the date of initial application while comparative prior periods would be reported in accordance with the Topic 840 guidance effective prior to April 1, 2019, and requiring no retrospective adjustments. Upon adoption, total assets and liabilities increased due to recording the right-of-use assets of $1.3 million and lease liabilities of $1.2 million . Refer to Note 2 for additional disclosures around leases.

In July 2018, the FASB issued ASU 2018-09, Codification Improvements (ASU 2018-09). ASU 2018-09 does not prescribe any new accounting guidance, but instead makes minor improvements and clarifications of several different FASB Accounting Standards Codification areas based on comments and suggestions made by various stakeholders. The Company adopted ASU

7


2018-09 effective April 1, 2019. The amendments had no impact to the Company's Condensed Consolidated Financial Statements.
Recently Issued Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (ASU 2018-13). This update modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. Certain disclosure requirements established in Topic 820 have been removed, some have been modified and new disclosure requirements were added. This new standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the impact that ASU 2018-13 may have on the Company’s Condensed Consolidated Financial Statements and related disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (ASU 2018-15). The main objective of ASU 2018-15 is to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments in this update require that a customer in a hosting arrangement that is a service contract follow the guidance in Subtopic 350-40 to determine which implementation costs should be capitalized as an asset and which costs should be expensed and states that any capitalized implementation costs should be expensed over the term of the hosting arrangement. This new standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the impact that ASU 2018-15 may have on the Company’s Condensed Consolidated Financial Statements.

In November 2018, the FASB issued ASU 2018-18 Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606 (ASU 2018-18). The update provides guidance on the interaction between Revenue Recognition (Topic 606) and Collaborative Arrangements (Topic 808) by aligning the unit of account guidance between the two topics and clarifying whether certain transactions between collaborative participants should be accounted for as revenue under Topic 606. ASU 2018-18 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the impact ASU 2018-18 may have on the Company's Condensed Consolidated Financial Statements.
Note 2 . Leases

The Company adopted ASC 842 effective April 1, 2019, which resulted in an increase to total assets of $1.3 million to record the right-of-use (ROU) assets for operating leases of facilities and an increase in total liabilities of $1.2 million to record the associated lease liabilities. The difference between operating lease liabilities and ROU assets recognized is primarily due to prepaid rent and deferred rent accruals recorded under prior lease accounting standards. ASC 842 requires such balances to be reclassified against ROU assets at transition. In future periods such balances will not be presented separately. The adoption did not have any impact on the Company's Condensed Consolidated Statements of Operations or the Condensed Consolidated Statements of Cash Flows.

ROU assets represent the Company's right to use an underlying asset during the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the net present value of remaining fixed lease payments over the lease term. Lease terms used to calculate the present value of the lease payments include any options to extend, renew, or terminate the lease, when it is reasonably certain that these options will be exercised. ROU assets also include any advance lease payments made and exclude any lease incentives. As the implicit interest rate for our leases is not readily determinable, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Lease expense is recognized on a straight-line basis over the lease term. The Company has lease arrangements with non-lease components that are not in-substance fixed and considered variable, which were not included in the carrying balances of the right-of-use asset and lease liability. The Company does not have any finance leases.

The Company elected the package of practical expedients, which among other things, allows the Company to carry forward historical lease classifications. Leases with an initial term of 12 months or less are not recorded on the Condensed Consolidated Balance Sheets. The Company also made the accounting policy election to account for each separate lease component and non-lease component associated with that lease component as a single lease component, thus causing all fixed payments to be capitalized. The Company determines at inception whether an arrangement is a lease.

The Company reviews the impairment ROU assets consistent with the approach applied to other long-lived assets. ROU assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount of such assets

8


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.

The Company's operating leases primarily include building leases for the corporate headquarters in Aurora, IL, an engineering and service center in Dublin, OH, and office space in Manchester, NH.

Future minimum lease payments as of June 30, 2019 , consisted of the following (in thousands):
Fiscal Year
 
Operating Leases
2020 (1)
 
$
608

2021
 
478

2022
 
73

Thereafter
 

Total lease payments (2)
 
1,159

Less: imputed interest
 
(38
)
Total operating lease liabilities
 
$
1,121

_______
(1) Represents the future minimum operating lease payments expected to be made over the remaining balance of the fiscal year.
(2) Assumes exercise of a two year option to extend the lease term for the Dublin lease.
As of June 30, 2019 , the weighted-average remaining lease term was 1.3 years and the weighted-average discount rate was 4.3% .
Lease expenses are included in Cost of revenue, Sales and marketing, Research and development, and General and administrative in the Company's Condensed Consolidated Statements of Operations. The components of lease expense are as follows:
(in thousands)
Three months ended June 30, 2019
Operating lease expense
$
204

Variable lease expense (1)
40

Total Lease expense (2)
$
244

_______
(1) Variable lease expense is related to our leased real estate in Ohio and New Hampshire and primarily includes labor and operational costs as well as taxes and insurance.
(2) Short-term lease expense is immaterial.
For the three months ended June 30, 2019 , cash paid for operating leases included in the measurement of lease liabilities was $0.1 million . All of these payments are presented in Operating activities cash flows on the Condensed Consolidated Statements of Cash Flows.

The following table summarizes the classification of ROU assets and lease liabilities as of June 30, 2019 :
(in thousands)
 
June 30, 2019
 
Balance Sheet Classification
Assets:
 
 
 
 
Total ROU assets
 
$
1,111

 
Right-of-use assets on operating leases, net
Liabilities:
 
 
 
 
  Current operating lease liability
 
785

 
Accrued expenses
  Non-current operating lease liabilities
 
336

 
Other non-current liabilities
Total lease liabilities
 
$
1,121

 
 


9


Note 3 . 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.

Disaggregation of revenue

The following table disaggregated our revenue by major source:
(In thousands)
Three months ended June 30,
 
2019
 
2018
Revenue:
 
 
 
    Products
$
7,815

 
$
11,789

    Software
19

 
416

    Services
1,168

 
832

Total revenue
$
9,002

 
$
13,037


The following is the expected future revenue recognition timing of deferred revenue as of June 30, 2019 :
 
< 1 year
 
1-2 years
 
> 2 years
Deferred Revenue
$
950

 
$
219

 
$
174


During the three months ended June 30, 2019 , and June 30, 2018, the Company recognized $0.4 million and $0.5 million of revenue, respectively, related to contract liabilities at the beginning of the periods.

The Company allows certain customers to return unused product under specified terms and conditions.  The Company estimates product returns based on historical sales and return trends and records a corresponding refund liability.  The refund liability is included within Accrued expenses on the accompanying Condensed Consolidated Balance Sheets.  Additionally, the Company records an asset based on historical experience for the amount of product we expect to return to inventory as a result of the return, which is recorded in Prepaid and other current assets in the Condensed Consolidated Balance Sheets.  The gross product return asset was $0.1 million and $0.1 million at June 30, 2019 , and June 30, 2018, respectively.
Note 4 . Interim Segment Information
Segment information is presented in accordance with a “management approach", which designates the internal reporting used by the chief operating decision-maker (CODM) for making decisions and assessing performance as the source of the Company's reportable segments. Westell’s Chief Executive Officer is the CODM. The CODM continues to define segment profit as gross profit less research and development expenses. The accounting policies of the segments are the same as those for Westell Technologies, Inc. described in the summary of significant accounting policies included in the Company's Annual Report on Form 10-K for year ended March 31, 2019, and as updated in this filing.
The Company’s three reportable segments are as follows:
In-Building Wireless (IBW) Segment
The IBW segment solutions enable cellular coverage in stadiums, arenas, malls, buildings, and other indoor areas not served well or at all by the existing "macro" outdoor cellular network. For commercial service, solutions include distributed antenna systems (DAS) conditioners and digital repeaters. For the public safety market, solutions include half-watt and two-watt repeaters and a battery backup unit. IBW also offers ancillary products that consist of passive system components and antennas for both the commercial and public safety markets. In addition, in fiscal year 2019, IBW, in partnership with ip.access, a leading small cell solutions partner based in the U.K., began developing an OnGo small cell for the private LTE market.

10


Intelligent Site Management (ISM) Segment
ISM segment solutions include a suite of remote units, which are network devices used for on-site processing. Remotes provide on-site machine-to-machine (M2M) communications that enable operators to remotely monitor, manage, and control site infrastructure and support systems. Remotes can be and often are combined with our Optima management software system. ISM also offers support services (i.e., maintenance agreements) and deployment services (i.e., installation).
Communications Network Solutions (CNS) Segment
CNS segment solutions include a broad range of outdoor network infrastructure offerings consisting of integrated cabinets, power distribution products, copper and fiber network connectivity panels, fiber access products, T1 network interface units (NIUs), and tower mounted amplifiers (TMAs).

11


Segment information for the three months ended June 30, 2019 , and 2018 , is set forth below:  
 
 
Three months ended June 30, 2019
(in thousands)
 
IBW
 
ISM
 
CNS
 
Total
Revenue
 
$
2,923

 
$
3,095

 
$
2,984

 
$
9,002

Cost of revenue
 
1,951


1,516

 
2,289

 
5,756

Gross profit
 
972

 
1,579

 
695

 
3,246

Gross margin
 
33.3
%
 
51.0
%
 
23.3
%
 
36.1
%
Research and development
 
399

 
701

 
456

 
1,556

Segment profit
 
$
573

 
$
878

 
$
239

 
1,690

Operating expenses:
 
 
 
 
 
 
 
 
Sales and marketing
 
 
 
 
 
 
 
2,332

General and administrative
 
 
 
 
 
 
 
1,364

Intangible amortization
 
 
 
 
 
 
 
308

Operating profit (loss)
 
 
 
 
 
 
 
(2,314
)
Other income, net
 
 
 
 
 
 
 
164

Income tax benefit (expense)
 
 
 
 
 
 
 
(7
)
Net income (loss)
 
 
 
 
 
 
 
$
(2,157
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2018
(in thousands)
 
IBW
 
ISM
 
CNS
 
Total
Revenue
 
$
3,557

 
$
5,744

 
$
3,736

 
$
13,037

Cost of revenue
 
1,895

 
2,796

 
2,411

 
7,102

Gross profit
 
1,662

 
2,948

 
1,325

 
5,935

Gross margin
 
46.7
%

51.3
%
 
35.5
%
 
45.5
%
Research and development
 
522

 
569

 
341

 
1,432

Segment profit (loss)
 
$
1,140

 
$
2,379

 
$
984

 
4,503

Operating expenses:
 
 
 
 
 
 
 
 
Sales and marketing
 
 
 
 
 
 
 
2,137

General and administrative
 
 
 
 
 
 
 
1,534

Intangible amortization
 
 
 
 
 
 
 
990

Operating profit (loss)
 
 
 
 
 
 
 
(158
)
Other income, net
 
 
 
 
 
 
 
119

Income tax benefit (expense)
 
 
 
 
 
 
 

Net income (loss)
 
 
 
 
 
 
 
$
(39
)

Segment asset information is not reported to or used by the CODM.
Note 5. Inventories
Inventories are stated at the lower of first-in, first-out cost or market value. The components of inventories are as follows:  
(in thousands)
June 30, 2019
 
March 31, 2019
Raw materials
$
3,382

 
$
3,445

Finished goods
6,561

 
6,356

    Total inventories
$
9,943

 
$
9,801


12


Note 6. Stock-Based Compensation
The Westell Technologies, Inc. 2015 Omnibus Incentive Compensation Plan (the 2015 Plan) was approved at the annual meeting of stockholders on September 16, 2015. If any award granted under the 2015 Plan is canceled, terminates, expires, or lapses for any reason, any shares subject to such award shall again be available for the grant of an award under the 2015 Plan. Shares subject to an award shall not again be made available for issuance under the Plan if such Shares are: (a) shares delivered to or withheld by the Company to pay the grant or purchase price of an award, or (b) shares delivered to or withheld by the Company to pay the withholding taxes related to an award. The stock options, restricted stock awards, and restricted stock units (RSUs) awarded under the 2015 Plan generally vest in equal annual installments over 3 years for employees and 1 year for non-employee directors. Performance stock units (PSUs) earned vest over the performance period. Certain awards provide for accelerated vesting if there is a change in control (as defined in the 2015 Plan), or when provided within individual employment contracts. The Company accounts for forfeitures as they occur. The Company issues new shares for stock awards under the 2015 Plan.
The following table is a summary of total stock-based compensation expense resulting from stock options, restricted stock, RSUs and PSUs, during the three months ended June 30, 2019 , and 2018 :  
 
Three months ended June 30,
(in thousands)
2019
 
2018
Stock-based compensation expense
$
244

 
$
291

Income tax benefit

 

Total stock-based compensation expense, after taxes
$
244

 
$
291

Stock Options
Stock option activity for the three months ended June 30, 2019 , is as follows:
 
Shares
 
Weighted-Average
Exercise Price Per
Share
 
Weighted-Average
Remaining
Contractual Term
(in years)
 
Aggregate
Intrinsic Value  (1)  (in
thousands)
Outstanding on March 31, 2019
293,478

 
$
4.28

 
4.4
 
$

Granted

 

 

 

Exercised

 

 

 

Forfeited

 

 

 

Expired
(7,500
)
 
8.58

 

 

Outstanding on June 30, 2019
285,978

 
$
4.17

 
4.2
 
$

 
_______
(1)  
The intrinsic value for the stock options is calculated based on the difference between the exercise price of the underlying awards and the Westell Technologies’ closing stock price as of the respective reporting date.
Restricted Stock
The following table sets forth restricted stock activity for the three months ended June 30, 2019 :  
 
Shares
 
Weighted-Average
Grant Date Fair
Value
Non-vested as of March 31, 2019
63,334

 
$
2.86

Granted
2,500

 
1.72

Vested

 

Forfeited

 

Non-vested as of June 30, 2019
65,834

 
$
2.82


13


RSUs
The following table sets forth the RSU activity for the three months ended June 30, 2019 :  
 
Shares
 
Weighted-Average
Grant Date Fair
Value
Non-vested as of March 31, 2019
665,127

 
$
3.03

Granted
153,037

 
2.12

Vested
(236,467
)
 
3.20

Forfeited
(75,168
)
 
2.61

Non-vested as of June 30, 2019
506,529

 
$
2.74

PSUs

PSUs will be earned primarily based upon achievement of performance goals tied to growing revenue and non-GAAP profitability targets for fiscal year 2020. Upon vesting, the PSUs convert into shares of Class A Common Stock of the Company on a one-for-one basis. 
The following table sets forth the PSU activity for the three months ended June 30, 2019 :  
 
Shares
 
Weighted-Average Grant Date Fair Value
Non-vested as of March 31, 2019 (at target)
5,000

 
$
3.14

Granted, at target
136,144

 
2.19

Vested
(5,000
)
 
3.14

Forfeited
(36,458
)
 
2.16

Non-vested as of June 30, 2019 (at target)
99,686

 
$
2.20

Note 7 . Product Warranties
The Company’s products carry a limited warranty ranging from one to five years for the products within the IBW segment, typically one year for products within the ISM segment (formerly ISMS), and one to seven years for products within the CNS segment. The specific terms and conditions of those warranties vary depending upon the customer and the products sold. Factors that affect the estimate of the Company’s warranty reserve include: the number of units shipped, anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the reserve as necessary. The current portions of the warranty reserve are $84,000 and $74,000 as of June 30, 2019 , and March 31, 2019 , respectively, and are presented on the Condensed Consolidated Balance Sheets in Accrued expenses. The non-current portions of the warranty reserves are $46,000 and $56,000 as of June 30, 2019 , and March 31, 2019 , respectively, and are presented on the Condensed Consolidated Balance Sheets in Other non-current liabilities.
The following table presents the changes in the Company’s product warranty reserve:
 
Three months ended June 30,
(in thousands)
2019
 
2018
Total product warranty reserve at the beginning of the period
$
130

 
$
300

Warranty expense to cost of revenue
12

 
20

Utilization
(12
)
 
(30
)
Total product warranty reserve at the end of the period
$
130

 
$
290

Note 8 . Variable Interest Entity and Guarantee
The Company has a 50% equity ownership in AccessTel 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 evaluated ASC 810, Consolidations , and concluded that AKA is a variable interest entity (VIE) and the Company has a variable interest in the VIE. The Company has concluded that it is not the primary beneficiary of AKA and, therefore, consolidation is not

14


required. The carrying amount of the Company's investment in AKA was approximately $0.1 million as of June 30, 2019 , and March 31, 2019 , which is presented on the Condensed Consolidated Balance Sheets within Other non-current assets.
The Company's revenue from sales to AKA for the three months ended June 30, 2019 , and 2018 , was $0.4 million and $0.6 million , respectively. Accounts receivable from AKA was $0.3 million and $0.3 million as of June 30, 2019 , and March 31, 2019 , respectively. Deferred revenue, which primarily relates to AKA maintenance contracts, was $0.7 million and $0.8 million as of June 30, 2019 , and March 31, 2019 , respectively. The Company also has provided an unlimited guarantee for the performance of the other 50% owner in AKA, which 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. The Company's exposure to loss as a result of its involvement with AKA, exclusive of lost profits, is limited to the items noted above.
Note 9 . Income Taxes
At the end of each interim period, the Company makes its best estimate of the effective tax rate expected to be applicable for the full fiscal year and uses that rate to provide for income taxes on a current year-to-date basis before discrete items. If a reliable estimate cannot be made, the Company may make a reasonable estimate of the annual effective tax rate, including use of the actual effective rate for the year-to-date. The impact of discrete items is recorded in the quarter in which they occur. The Company utilizes the liability method of accounting for income taxes and deferred taxes, which are determined based on the differences between the financial statements and tax basis of assets and liabilities given the enacted tax laws. The Company evaluates the need for valuation allowances on the net deferred tax assets under the rules of ASC 740, Income Taxes. In assessing the realizability of the Company's deferred tax assets, the Company considers whether it is more likely than not that some or all of the deferred tax assets will be realized through the generation of future taxable income. In making this determination, the Company assessed all of the evidence available at the time, including recent earnings, forecasted income projections and historical performance. The Company determined that the negative evidence outweighed the objectively verifiable positive evidence and previously recorded a full valuation allowance against deferred tax assets. The Company will continue to reassess realizability going forward.
As of June 30, 2019 , the Company had net deferred tax assets of approximately $39.0 million before a valuation allowance of $39.0 million . As of June 30, 2019, and March 31, 2019, the Company has $697,000 tax receivable associated with a prior AMT credit carryforward. The Company expects to recover the entire amount by 2022 via a tax refund.
The Company recorded $7,000 of income tax expense in the three months ended June 30, 2019 , using an effective income tax rate of (0.30)% plus discrete items. The Company recorded $0 of income tax expense in the three months ended June 30, 2018 , using an effective rate of (0.64)% plus discrete items. The effective rate in both periods is impacted by the intraperiod allocation as a result of income or loss from continuing operations, and states which base tax on gross margin and not pretax income.
Note 10 . Commitments and Contingencies
Litigation and Contingency Reserves
The Company and its subsidiaries are involved in various assertions, claims, proceedings and requests for indemnification concerning intellectual property, including patent infringement suits involving technologies that may be incorporated in the Company’s products, which are being handled and defended in the ordinary course of business. These matters are in various stages of investigation and litigation, and they are being vigorously defended. Although the Company does not expect that the outcome in any of these matters, individually or collectively, will have a material adverse effect on its financial condition or results of operations, litigation is inherently unpredictable. Therefore, judgments could be rendered, or settlements entered, that could adversely affect the Company’s operating results or cash flows in a particular period. The Company routinely assesses all of its litigation and threatened litigation as to the probability of ultimately incurring a liability, and it records its best estimate of the ultimate loss in situations where it assesses the likelihood of loss as probable.

In the ordinary course of operations the Company receives claims where the Company believes an unfavorable outcome is possible and/or for which is probable and no estimate of possible losses can currently be made.  A significant customer was a defendant in two patent infringement claims and is asserting possible indemnity rights under contracts with the Company.  The customer has settled one matter, and initially won summary judgment for all claims in the other, but on appeal the decision was

15


reversed. The customer has informed the Company that the customer intends to seek to recover from the Company a share of the settlement and defense costs. For the summary judgment case, the customer provided an initial allocation of their defense costs. During the fourth quarter of fiscal 2019, the Company obtained additional information to evaluate the facts for both cases and has agreed in principle to a combined settlement in the amount of $0.3 million . The parties have agreed to a settlement in which some indemnity rights are reserved, and under which payment is due by December 15, 2019. As of June 30, 2019, and March 31, 2019, the combined settlement is unpaid and accrued on the Condensed Consolidated Balance Sheets presented in Accrued expenses. Both of these claims relate to a business which was previously sold and therefore any future expense would be presented as discontinued operations.

Leases
The Company leases office space under operating leases, with various expiration dates through September 30, 2020. The terms of some of the Company’s office leases provide for rental payments on a graduated scale. Lease expense is recognized on a straight-line basis over the lease term. For further details, refer to Note 2 . Leases.
Note 11 . Fair Value Measurements
Fair value is defined by ASC 820, Fair Value Measurements and Disclosures (ASC 820) , as the price that would be received upon selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

Level 1 – Quoted prices in active markets for identical assets and liabilities.
Level 2 – Quoted prices in active markets for similar assets and liabilities, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The Company’s money market funds are measured using Level 1 inputs.
The following table presents available-for-sale securities measured at fair value on a recurring basis as of June 30, 2019 :
(in thousands)
Total Fair Value
of Asset or
Liability
 
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance Sheet
Classification
Assets:
 
 
 
 
 
 
 
 
 
Money market funds
$
23,425

 
$
23,425

 

 

 
Cash and cash
equivalents
The following table presents available-for-sale securities measured at fair value on a recurring basis as of March 31, 2019 :
(in thousands)
Total Fair Value
of Asset or
Liability
 
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance Sheet
Classification
Assets:
 
 
 
 
 
 
 
 
 
Money market funds
$
25,645

 
$
25,645

 

 

 
Cash and cash
equivalents
The fair value of the money market funds approximates their carrying amounts due to the short-term nature of these financial assets.
Note 12. Share Repurchases
In May 2017, the Board of Directors authorized a share repurchase program whereby the Company may repurchase up to an aggregate of $2.0 million of its outstanding Class A Common Stock (the 2017 authorization). The 2017 authorization is in addition to the $0.1 million that was remaining from the August 2011 $20.0 million authorization (the 2011 authorization). There were no shares repurchased under the 2017 authorization during the three months ended June 30, 2019. During the three

16


months ended June 30, 2018, 82,347 shares were repurchased under the 2017 authorization, at a weighted average purchase price of $2.85 per share. As of June 30, 2019 , there was approximately $0.7 million remaining for additional share repurchases under the 2017 authorization.
Additionally, in the three months ended June 30, 2019 , and June 30, 2018 , the Company repurchased 80,936 and 51,210 shares of Class A Common Stock, respectively, from certain employees that were surrendered to satisfy the minimum statutory tax withholding obligations on the vesting of restricted stock, RSUs and PSUs. These repurchases were not included in the authorized share repurchase programs and had a weighted-average purchase price of $2.15 and $3.32 per share, respectively.
Note 13. Intangible Assets

Intangible assets include customer relationships, trade names, developed technology and other intangibles. Intangible assets with determinable lives are amortized over their estimated useful lives. Intangible 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.

There was no intangible asset impairment during the three months ended June 30, 2019 , or the three months ended June 30, 2018.
Note 14. Accrued Expenses
The components of accrued expenses are as follows:
(in thousands)
June 30, 2019
 
March 31, 2019
 
Accrued compensation
$
532

 
$
656

 
Accrued contractual obligation
1,445

 
1,445

 
Current operating lease liability
785

 

 
Other accrued expenses
1,284

(1)  
1,466

(1)  
Total accrued expenses
$
4,046

(1)  
$
3,567

(1)  
_______
(1) Includes $0.3 million accrual for loss contingencies related to discontinued operations. See Note 10 .

Note 15. Land, Property, and Equipment

Long-lived assets consist of land, property and equipment. Long-lived assets that are held and used should be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the long-lived assets might not be recoverable. There was no long-lived asset impairment during the three months ended June 30, 2019 , or June 30, 2018.

The components of fixed assets are as follows:
(in thousands)
June 30, 2019
 
March 31, 2019
Land
$
672

 
$
672

Machinery and equipment
1,378

 
1,372

Office, computer and research equipment
5,269

 
5,267

Leasehold improvements
804

 
798

Land, property and equipment, gross
8,123

 
8,109

Less accumulated depreciation and amortization
(6,954
)
 
(6,811
)
Land, property and equipment, net
$
1,169

 
$
1,298




17



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following discussion should be read together with the Condensed Consolidated Financial Statements and the related Notes thereto and other financial information appearing elsewhere in this Form 10-Q. All references herein to the term “fiscal year” shall mean a year ended March 31 of the year specified.
Westell Technologies, Inc., (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, Westell is a trusted partner for transforming networks into high performance, reliable systems.
The Company’s three reportable segments are as follows:
In-Building Wireless (IBW) Segment
The IBW segment solutions enable cellular coverage in stadiums, arenas, malls, buildings, and other indoor areas not served well or at all by the existing "macro" outdoor cellular network. For commercial service, solutions include distributed antenna systems (DAS) conditioners and digital repeaters. For the public safety market, solutions include half-watt and two-watt repeaters and a battery backup unit. IBW also offers ancillary products that consist of passive system components and antennas for both the commercial and public safety markets.
Intelligent Site Management (ISM) Segment
ISM segment solutions include a suite of remote units, which are network devices used for on-site processing. Remotes provide on-site machine-to-machine (M2M) communications that enable operators to remotely monitor, manage, and control site infrastructure and support systems. Remotes can be and often are combined with our Optima management software system. ISM also offers support services (i.e., maintenance agreements) and deployment services (i.e., installation).
Communications Network Solutions (CNS) Segment
CNS segment solutions include a broad range of outdoor network infrastructure offerings consisting of integrated cabinets, power distribution products, copper and fiber network connectivity panels, fiber access products, T1 network interface units (NIUs), and tower mounted amplifiers (TMAs).
Customers
The Company’s customer base includes communications service providers, systems integrators, neutral-host operators, and distributors. Due to the stringent customer quality specifications and regulated environments in which many 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. The prices for the Company's products vary based upon volume, customer specifications, and other criteria, and 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/or in targeted sales and marketing efforts to launch new product lines and features. Failure to increase revenues from new products, whether due to lack of market acceptance, competition, technological change, 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 research and development activities.
In view of the Company’s reliance on the communications infrastructure 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 calendar 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


Results of Operations
Below is a table that compares revenue for the three months ended June 30, 2019 , and 2018 , by segment.
Revenue
 
Three months ended June 30,
(in thousands)
2019
 
2018
 
Change
IBW
$
2,923

 
$
3,557

 
$
(634
)
ISM
3,095

 
5,744

 
(2,649
)
CNS
2,984

 
3,736

 
(752
)
Consolidated revenue
$
9,002

 
$
13,037

 
$
(4,035
)
IBW revenue was $2.9 million in the three months ended June 30, 2019 , compared to $3.6 million in the same period in the prior year. The decrease in revenue in the three months ended June 30, 2019 , was primarily due to lower sales of repeaters and DAS conditioners, partly offset by increased ancillary product revenues. Sales of DAS conditioners have decreased due to network architecture shifts to alternative, non-DAS solutions in large venues such as stadiums and arenas, as well as integration of RF signal power attenuation (the conditioners primary function) 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 embedded base of large-venue DAS networks, as well as in smaller in-building DAS deployments that require a stand-alone conditioner. While we expect the commercial repeater market to decline further as customers continue to shift to other forms of commercial in-building coverage such as small cells, we expect the market for public safety repeaters to continue to grow as more local municipalities pass and enforce ordinances that require in-building cellular communication coverage for first responders and emergency personnel.
ISM revenue was $3.1 million in the three months ended June 30, 2019 , compared to $5.7 million in the same period in the prior year. The decrease in revenue in the three months ended June 30, 2019 , primarily due to decreased sales of remote units and lower software revenue. The decreased sales of remote units was driven by a slowdown in demand from two existing customers for additional remote site monitoring. The lower software revenue was due to large orders for Optima licenses from two existing customers in the quarter ended June 30, 2018. Due to the project-based nature of our ISM business, it is difficult to make a determination on future trends.
CNS revenue was $3.0 million in the three months ended June 30, 2019 , compared to $3.7 million in the same period in the prior year. The decrease in revenue in the three months ended June 30, 2019 , was predominately due to lower sales of two legacy product lines - T1 NIUs and TMAs. The three months ended June 30, 2019, also included revenue of our new fiber access product line introduced during last fiscal year. We expect fiber access revenue to grow as we develop a wider range of product offerings in the market. We expect sales of integrated cabinets, which are heavily project-based, to remain uneven, while sales of power distribution products and copper/fiber connectivity panels are expected to at least remain steady. We expect T1 NIUs and TMA revenue to continue to decrease over time as these products are in declining markets.
Gross Margin
   
 
Three months ended June 30,
 
 
2019
 
2018
 
Change
IBW
 
33.3
%
 
46.7
%
 
(13.4
)%
ISM
 
51.0
%
 
51.3
%
 
(0.3
)%
CNS
 
23.3
%
 
35.5
%
 
(12.2
)%
Consolidated gross margin
 
36.1
%
 
45.5
%
 
(9.4
)%

The consolidated gross margin decreased in the three months ended June 30, 2019 , compared to the same period in the prior year. The decrease was primarily due to the lower revenue and higher costs associated with excess and obsolete inventory.

19


Research and Development
 
Three months ended June 30,
(in thousands)
2019
 
2018
 
Change
IBW
$
399

 
$
522

 
$
(123
)
ISM
701

 
569

 
132

CNS
456

 
341

 
115

Consolidated research and
development expense
$
1,556

 
$
1,432

 
$
124

Research and development expenses increased by $0.1 million in the three months ended June 30, 2019 , compared to the same period in the prior year. The increase was due to additional expenses for new product developments within the ISM (the RMX-4000) and CNS (fiber access) segments, partly offset by lower expense for IBW due to lower payroll related expenses and prototype expenses.
Sales and Marketing
 
Three months ended June 30,
(in thousands)
2019
 
2018
 
Change
Consolidated sales and
marketing expense
$
2,332

 
$
2,137

 
$
195

Sales and marketing expense increased $0.2 million in the three months ended June 30, 2019 , compared to same period in the prior fiscal year. This increase was largely attributable to additional sales and marketing activities associated with new revenue growth opportunities across all three business segments.
General and Administrative
 
Three months ended June 30,
(in thousands)
2019
 
2018
 
Change
Consolidated general and
administrative expense
$
1,364

 
$
1,534

 
$
(170
)
Consolidated general and administrative expense decreased $0.2 million in the three months ended June 30, 2019 , compared to the same period in the prior fiscal year. This decrease was largely attributable to a lower expense structure as a part of the Company's prior overall resetting of cost and expense.
Intangible amortization
 
Three months ended June 30,
(in thousands)
2019
 
2018
 
Change
Consolidated intangible
amortization
$
308

 
$
990

 
$
(682
)

Amortization in both three months ended June 30, 2019 , and June 30, 2018 , were non-cash expenses related to intangible assets established through prior acquisitions. These intangible assets consist of product technology, customer relationships, and trade names derived from the acquisitions. The decrease of $0.7 million in three months ended June 30, 2019 , compared to the three months ended June 30, 2018 , resulted primarily from product and customer-related intangibles from the IBW segment becoming fully impaired during the fourth quarter of fiscal 2019 and from the CNS segment intangible assets becoming fully amortized in the first quarter of fiscal 2019. All remaining intangibles relate to the ISM segment.

Other income, net
 
Three months ended June 30,
(in thousands)
2019
 
2018
 
Change
Consolidated other
income (expense)
$
164

 
$
119

 
$
45



20


Other income, net contains (a) interest income earned on cash and cash equivalents and (b) foreign currency gains/losses related primarily to receivables and cash denominated in Australian and Canadian currencies. The increase during the three months ended June 30, 2019 , compared to the prior fiscal year, was primarily due to increased interest rates on investments.
Income tax expense
As of June 30, 2019, and March 31, 2019, the Company has $697,000 of federal alternative minimum tax ("AMT") credit carryforward. The Company expects to recover the entire amount by 2022 via a tax refund.
The Company recorded $7,000 of income tax expense in the three months ended June 30, 2019 , using an effective income tax rate of (0.30)% plus discrete items. The Company recorded $0 of income tax expense in the three months ended June 30, 2018 , using an effective rate of (0.64)% plus discrete items. The effective rate in both periods is impacted by the intraperiod allocation as a result of income or loss from continuing operations, and states which base tax on gross margin and not pretax income.
Net income (loss)
Net loss was $2.2 million in the three months ended June 30, 2019 . Net loss was $0.0 million in the three months ended June 30, 2018 . The changes were a result of the cumulative effects of the variances identified above.
Liquidity and Capital Resources
Overview
At June 30, 2019 , the Company had $24.1 million in cash and cash equivalents consisting of bank deposits and money market funds that invest only in government securities.
Cash Flows

The significant changes in cash flows were as follows:
 
Three months ended June 31,
(in thousands)
2019
 
2018
Net cash flow provided by (used in):
 
 
 
Operating activities
(1,196
)
 
(1,441
)
Investing activities
(14
)
 
1,383

Financing activities
(173
)
 
(405
)
Effect of exchange rate on changes on cash
3

 
(3
)
Net increase (decrease) in cash and cash equivalents
$
(1,380
)
 
$
(466
)
Net cash used by operating activities was $1.2 million in the three months ended June 30, 2019 , compared to $1.4 million used in the same period of the prior year. The change resulted primarily from the net loss in the current period adjusted for non-cash items and a decrease in cash used by working capital when compared to the same period in the prior year.
Net cash used by investing activities was $0.0 million in the three months ended June 30, 2019 , compared to $1.4 million provided in the same period of the prior year. The change was primarily due to the conversion of all short-term investments into cash equivalents during fiscal year 2019.
Net cash used by financing activities was $0.2 million in the three months ended June 30, 2019 , compared to $0.4 million used in the same period of the prior year. The decreased use of cash was due primarily from the decreased purchases of treasury stock.
As of June 30, 2019 , the Company had net deferred tax assets of approximately $39.0 million before a valuation allowance of $39.0 million . Also, as of June 30, 2019 , the Company had a $2.2 million tax contingency reserve related to uncertain tax positions, which is offset against deferred tax assets. The federal net operating loss carryforward begins 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.

21


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 in AccessTel 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 provided an unlimited guarantee for the performance of the other 50% owner in AKA, which 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.
Critical Accounting Policies
A complete description of the Company’s significant accounting policies is discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2019 . There have been no material changes in the Company's critical accounting policies from those disclosed in the Annual Report on Form 10-K for the year ended March 31, 2019 .
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.

Not applicable to smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s senior management, including the Company’s chief executive officer and chief financial officer, the Company conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end of the period covered by this quarterly report (the Evaluation Date). Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded as of the Evaluation Date that the Company’s disclosure controls and procedures were effective such that the information relating to the Company, including consolidated subsidiaries, required to be disclosed in the Company’s Securities and Exchange Commission (SEC) reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company’s management, including the Company’s chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
In connections with the adoption of ASC 842 effective April 1, 2019, the Company has made appropriate design and implementation updates to our business and internal controls to support the recognition and disclosure under the new standard.
There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2019 , other than as described above, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of operations the Company receives claims where the Company believes an unfavorable outcome is possible and/or for which is probable and no estimate of possible losses can currently be made.  A significant customer was a defendant in two patent infringement claims and is asserting possible indemnity rights under contracts with the Company.  The customer has settled one matter, and initially won summary judgment for all claims in the other, but on appeal the decision was reversed. The customer has informed the Company that the customer intends to seek to recover from the Company a share of the settlement and defense costs. For the summary judgment case, the customer provided an initial allocation of their defense costs. During the fourth quarter of fiscal 2019, the Company obtained additional information to evaluate the facts for both

22


cases and has agreed in principle to a combined settlement in the amount of $0.3 million . The parties have agreed to a settlement in which some indemnity rights are reserved, and under which payment is due by December 15, 2019. As of June 30, 2019, and March 31, 2019, the combined settlement is unpaid and accrued on the Condensed Consolidated Balance Sheets presented in Accrued expenses. Both of these claims relate to a business which was previously sold and therefore any future expense would be presented as discontinued operations.
ITEM 1A. RISK FACTORS
See “Risk Factors” in Part 1 – Item 1A of the Company's Annual Report on Form 10-K for the year ended March 31, 2019 , for information about risk factors. There have been no material changes in the Company's risk factors from those disclosed in the Company's Annual Report on Form 10-K for the year ended March 31, 2019 .
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table provides information about the Company’s repurchase activity for its Class A Common Stock during the three months ended June 30, 2019 .
Period
 
Total Number
of Shares
Purchased (a)
 
Average Price
Paid per Share
 
Total Number of Shares  Purchased as Part of Publicly Announced Programs (b)
 
Maximum Number (or Approximate Dollar Value) that May Yet Be Purchased Under the Programs (b)
April 2019
 
70,399

 
$
2.1706

 

 
$
680,957

May 2019
 
8,815

 
2.0589

 

 
680,957

June 2019
 
1,722

 
1.7700

 

 
680,957

Total
 
80,936

 
$
2.1499

 

 
$
680,957

 
(a)
In the three months ended June 30, 2019 , the Company repurchased 80,936 shares from employees that were surrendered to satisfy the minimum statutory tax withholding obligations on the vesting of restricted stock, restricted stock units and performance-based restricted stock units. These repurchases were not included in the authorized share repurchase program and had a weighted-average purchase price of $2.15 per share.
(b)
In May 2017, the Board of Directors authorized a share repurchase program whereby the Company may repurchase up to an aggregate of $2.0 million of its outstanding Class A Common Stock in addition to the $0.1 million remaining from the August 2011 authorization. The August 2011 authorization was exhausted during the first quarter of fiscal year 2018 and there was approximately $0.7 million remaining under the May 2017 authorization as of June 30, 2019 .

Items 3, 4 and 5 are not applicable and have been omitted.    


23


ITEM 6. EXHIBITS  
 
Exhibit Number
 
Description
 
 
 
 
 
Exhibit 10.1
 
 
 
 
 
 
Exhibit 10.2
 
 
 
 
 
 
Exhibit 10.3
 
 
 
 
 
 
Exhibit 31.1
 
 
 
 
 
Exhibit 31.2
 
 
 
 
 
Exhibit 32.1
 
 
 
 
 
Exhibit 101
 
The following financial information from the Quarterly Report on Form 10-Q for the period ended June 30, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Stockholders' Equity (iv) the Condensed Consolidated Statements of Cash Flows; and (v) the Notes to the Condensed Consolidated Financial Statements.


24


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
WESTELL TECHNOLOGIES, INC.
 
 
 
(Registrant)
 
 
 
DATE:
August 9, 2019
 
By:
/s/ Alfred S. John
 
 
 
 
Alfred S. John
 
 
 
 
Chief Executive Officer
 
 
 
 
 
 
By:
/s/ Thomas P. Minichiello
 
 
 
 
Thomas P. Minichiello
 
 
 
 
Chief Financial Officer


25

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