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EX-32.1 - EXHIBIT 32.1 - WESTELL TECHNOLOGIES INCwstl-ex321x20191231.htm
EX-31.2 - EXHIBIT 31.2 - WESTELL TECHNOLOGIES INCwstl-ex312x20191231.htm
EX-31.1 - EXHIBIT 31.1 - WESTELL TECHNOLOGIES INCwstl-ex311x20191231.htm

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 December 31, 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 January 24, 2020:
Class A Common Stock, $0.01 Par Value – 12,222,806 shares Class B Common Stock, $0.01 Par Value – 3,484,287 shares



WESTELL TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-Q INDEX
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)
 
 
 
December 31,
2019
 
March 31,
2019
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
21,990

 
$
25,457

Accounts receivable (net of allowance of $100 at December 31, 2019, and March 31, 2019)
4,933

 
6,865

Inventories
7,622

 
9,801

Prepaid expenses and other current assets
1,703

 
1,706

Total current assets
36,248

 
43,829

Land, property and equipment, gross
8,146

 
8,109

Less accumulated depreciation and amortization
(7,073
)
 
(6,811
)
Land, property and equipment, net
1,073

 
1,298

Intangible assets, net
4,141

 
3,278

Right-of-use assets on operating leases, net
810

 

Other non-current assets
257

 
492

Total assets
$
42,529

 
$
48,897

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
2,821

 
$
2,313

Accrued expenses
3,422

 
3,567

Deferred revenue
1,314

 
1,217

Total current liabilities
7,557

 
7,097

Deferred revenue non-current
268

 
444

Other non-current liabilities
379

 
176

Total liabilities
8,204

 
7,717

Commitments and contingencies (Note 11)


 

Stockholders’ equity:
 
 
 
Class A common stock, par $0.01, Authorized – 109,000,000 shares
Outstanding – 12,222,806 and 11,909,979 shares at December 31, 2019,
and March 31, 2019, respectively
122

 
119

Class B common stock, par $0.01, Authorized – 25,000,000 shares
Issued and outstanding – 3,484,287 shares at December 31, 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
419,453

 
418,859

Treasury stock at cost – 5,214,597 and 5,122,414 shares at December 31, 2019, and March 31, 2019, respectively
(37,325
)
 
(37,135
)
Accumulated deficit
(347,960
)
 
(340,698
)
Total stockholders’ equity
34,325

 
41,180

Total liabilities and stockholders’ equity
$
42,529

 
$
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 December 31,
 
Nine months ended
 December 31,
 
 
2019
 
2018
 
2019
 
2018
 
Revenue
$
7,159

 
$
10,722

 
$
23,730

 
$
33,865

 
Cost of revenue
4,379

 
6,132

 
16,125

 
19,147

 
Gross profit
2,780

 
4,590

 
7,605

 
14,718

 
Operating expenses
 
 
 
 
 
 
 
 
Research and development
1,222

 
1,736

 
4,227

 
5,011

 
Sales and marketing
1,556

 
1,999

 
6,147

 
6,012

 
General and administrative
1,093

 
1,738

 
3,706

 
4,672

 
Intangible amortization
308

 
830

 
924

 
2,652

 
Restructuring
234

 

 
234

 

 
          Total operating expenses
4,413

 
6,303

 
15,238

 
18,347

 
Operating profit (loss)
(1,633
)
 
(1,713
)
 
(7,633
)
 
(3,629
)
 
Other income, net
109

 
158

 
398

 
442

 
Income (loss) before income taxes
(1,524
)
 
(1,555
)
 
(7,235
)
 
(3,187
)
 
Income tax benefit (expense)
(20
)
 
(1
)
 
(27
)
 
(11
)
 
Net income (loss) from continuing operations
(1,544
)
 
(1,556
)
 
(7,262
)
 
(3,198
)
 
Discontinued Operations:
 
 
 
 
 
 
 
 
Income from discontinued operations, net of tax (1)

 

 

 
(138
)
 
Net income (loss) (2)
$
(1,544
)
 
$
(1,556
)
 
$
(7,262
)
 
$
(3,336
)
 
Net income (loss) per share:
 
 
 
 
 
 
 
 
Basic net income (loss) from continuing operations
$
(0.10
)
 
$
(0.10
)
 
$
(0.47
)
 
$
(0.21
)
 
Basic net income (loss) from discontinued operations

 

 

 
(0.01
)
 
Basic
$
(0.10
)
 
$
(0.10
)
 
$
(0.47
)
 
$
(0.21
)
(3) 
Diluted net income (loss) per share:
 
 
 
 
 
 
 
 
Diluted net income (loss) from continuing operations
$
(0.10
)
 
$
(0.10
)
 
$
(0.47
)
 
$
(0.21
)
 
Diluted net income (loss) from discontinued operations

 

 

 
(0.01
)
 
Diluted
$
(0.10
)
 
$
(0.10
)
 
$
(0.47
)
 
$
(0.21
)
(3) 
Weighted-average number of common shares outstanding:
 
 
 
 
 
 
 
 
Basic
15,575

 
15,524

 
15,514

 
15,576

 
Effect of dilutive securities: restricted stock, restricted stock units, performance stock units and stock options (4)

 

 

 

 
Diluted
15,575

 
15,524

 
15,514

 
15,576

 

_______

(1) See Note 1 for additional information regarding discontinued operations.  
(2) Net income (loss) and comprehensive income (loss) are the same for the periods reported.
(3) Per share amounts may not sum to totals due to rounding.
(4) The Company had 1.0 million and 0.9 million shares represented by common stock equivalents for the three and nine months ended December 31, 2019, respectively, and 1.1 million and 1.0 million for the three and nine months ended December 31, 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

Net income (loss)

 

 

 

 
(3,561
)
 
(3,561
)
Common stock issued
1

 

 

 

 

 
1

Purchase of treasury stock

 

 

 
(16
)
 

 
(16
)
Stock-based compensation

 

 
201

 

 

 
201

Balance, September 30, 2019
122

 
35

 
419,301

 
(37,323
)
 
(346,416
)
 
35,719

Net income (loss)

 

 

 

 
(1,544
)
 
(1,544
)
Common stock issued

 

 

 

 

 

Purchase of treasury stock

 

 

 
(2
)
 

 
(2
)
Stock-based compensation

 

 
152

 

 

 
152

Balance, December 31, 2019
$
122

 
$
35

 
$
419,453

 
$
(37,325
)
 
$
(347,960
)
 
$
34,325

 
 
 
 
 
 
 
 
 
 
 
 
 
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

Net income (loss)

 

 

 

 
(1,741
)
 
(1,741
)
Common stock issued
1

 

 
(1
)
 

 

 

Purchase of treasury stock
(1
)
 

 

 
(199
)
 

 
(200
)
Stock-based compensation

 

 
295

 

 

 
295

Balance, September 30, 2018
122

 
35

 
418,274

 
(36,510
)
 
(331,096
)
 
50,825

Net income (loss)

 

 

 

 
(1,556
)
 
(1,556
)
Common stock issued

 

 

 

 

 

Purchase of treasury stock
(2
)
 

 

 
(431
)
 

 
(433
)
Stock-based compensation

 

 
303

 

 

 
303

Balance, December 31, 2018
$
120

 
$
35

 
$
418,577

 
$
(36,941
)
 
$
(332,652
)
 
$
49,139



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) 
 
Nine months ended December 31,
 
 
2019
 
2018
 
Cash flows from operating activities:
 
 
 
 
Net income (loss)
$
(7,262
)
 
$
(3,336
)
 
Reconciliation of net loss to net cash used in operating activities:
 
 
 
 
Depreciation and amortization
1,426

 
3,092

 
Stock-based compensation
597

 
889

 
Loss (gain) on sale of fixed assets
(11
)
 
1

 
Restructuring
234

 

 
Exchange rate loss (gain)
(2
)
 
3

 
Changes in assets and liabilities:
 
 
 
 
Accounts receivable
1,934

 
1,892

 
Inventories
2,179

 
(941
)
 
Prepaid expenses and other current assets
3

 
(353
)
 
Other assets
(575
)
 
11

 
Deferred revenue
(79
)
 
(1,114
)
(1) 
Accounts payable and accrued expenses
332

 
494

 
Net cash provided by (used in) operating activities
(1,224
)
 
638

 
Cash flows from investing activities:
 
 
 
 
Maturities of other short-term investments

 
2,779

 
Proceeds from sale of fixed assets
11

 

 
Purchase of product licensing rights
(1,950
)
(2) 

 
Purchases of property and equipment
(113
)
 
(273
)
 
Net cash provided by (used in) investing activities
(2,052
)
 
2,506

 
Cash flows from financing activities:
 
 
 
 
Purchases of treasury stock
(191
)
 
(1,038
)
 
Net cash provided by (used in) financing activities
(191
)
 
(1,038
)
 
Gain (loss) of exchange rate changes on cash

 
(4
)
 
Net increase (decrease) in cash and cash equivalents
(3,467
)
 
2,102

 
Cash and cash equivalents, beginning of period
25,457

 
24,963

 
Cash and cash equivalents, end of period
$
21,990

 
$
27,065

 
_______
(1) Includes the cumulative effect adjustment of the ASC 606 adoption.
(2) During the quarter ended September 30, 2019, the Company made a $950,000 payment for the purchase of product licensing rights. The remaining $1.0 million that is due is recorded in Accounts Payable as of December 31, 2019. The corresponding asset is recorded in intangible assets.


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 December 31, 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.
Discontinued Operations

During the quarter ended September 30, 2018, the Company recorded indemnification expense related to probable loss contingencies associated with a major customer contract related to a business which was previously sold and therefore is presented as discontinued operations. On July 24, 2019, the Company signed a settlement agreement related to this matter. The $0.3 million settlement, which was fully covered by the accrual on March 31, 2019, was paid in the quarter ended December 31, 2019. The Condensed Consolidated Statements of Cash Flows include discontinued operations. See Note 11 and Note 15 for additional information.
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 is equal to the present value of lease payments while the right-of-use asset is 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.

7



The Company adopted the lease standard on April 1, 2019, using the modified retrospective method. Under this method, the new guidance applied to existing and new leases on the date of initial application while comparative prior periods are 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 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 December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) (ASU 2019-12). The amendments in ASU 2019-12 seek to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application and simplify GAAP in other areas of Topic 740. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently evaluating the impact ASU 2019-12 may have on the Company's Condensed Consolidated Financial Statements.

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) (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.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments -Credit Losses (Topic 326) (ASU 2016-13). ASU 2016-13 will replace the current incurred loss approach with a new expected credit loss impairment model for trade receivables, loans, and other financial instruments. Under the new model, the estimate of expected credit losses will be based on historical experience, current conditions and reasonable and supportable forecasts. For the Company, ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Early adoption permitted. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. The Company is currently evaluating the impact of ASU 2016-13 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

8


reclassified against ROU assets at transition. 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 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 December 31, 2019, consisted of the following (in thousands):
Fiscal Year
 
Operating Leases
2020 (1)
 
$
184

2021
 
420

2022
 
67

2023
 
69

2024
 
70

Thereafter
 
66

Total lease payments
 
876

Less: imputed interest
 
(46
)
Total operating lease liabilities
 
$
830

_______
(1) Represents the future minimum operating lease payments expected to be made over the remaining balance of the fiscal year.
As of December 31, 2019, the weighted-average remaining lease term was 2.5 years and the weighted-average discount rate was 4.3%.

The Company is currently evaluating renewal and replacement lease options for the corporate headquarters in Aurora, IL which expires on September 30, 2020.

During the second quarter of fiscal year 2019, as a cost savings effort, the Company executed a new 63 month lease for the Dublin, OH design service center rather than executing the two year option to extend the existing lease as previously assumed. The new lease commenced on December 1, 2019 and has a reduced footprint which is more suitable to our current operation. The new lease includes a renewal option to extend the initial lease term for an additional three years. The lease also includes a termination option effective the last day of the 39th month of the lease term. The cost to terminate under this option would be

9


approximately $70,000. At this time, the Company does not expect to terminate the lease at the end of the 39th month of the lease term and so the cost to terminate is not included in the ROU asset and lease liability balance.

Our leases in Dublin and Manchester include variable lease payments that are not included in the lease liability balances as they are based on the expenses which can vary during the term of each lease. All rent payments in the Aurora lease are fixed and as such are included in the lease liability balance.
 
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 December 31, 2019
 
Nine months ended December 31, 2019
Operating lease expense
$
202

 
$
610

Variable lease expense (1)
25

 
88

Total lease expense (2)
$
227

 
$
698

_______
(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 nine months ended December 31, 2019, cash paid for operating leases included in the measurement of lease liabilities was $0.5 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 December 31, 2019:
(in thousands)
 
December 31, 2019
 
Balance Sheet Classification
Assets:
 
 
 
 
ROU assets
 
$
810

 
Right-of-use assets on operating leases, net
Liabilities:
 
 
 
 
  Current operating lease liability
 
566

 
Accrued expenses
  Non-current operating lease liabilities
 
264

 
Other non-current liabilities
Total lease liabilities
 
$
830

 
 
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.


10


Disaggregation of revenue

The following table disaggregates our revenue by major source:
(In thousands)
Three months ended December 31,
 
Nine months ended December 31,
 
2019
 
2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
    Products
$
5,842

 
$
9,400

 
$
19,974

 
$
30,230

    Software
92

 
408

 
272

 
982

    Services
1,225

 
914

 
3,484

 
2,653

Total revenue
$
7,159

 
$
10,722

 
$
23,730

 
$
33,865


The following is the expected future revenue recognition timing of deferred revenue as of December 31, 2019:
 
< 1 year
 
1-2 years
 
> 2 years
Deferred Revenue
$
1,314

 
$
145

 
$
123


During the nine months ended December 31, 2019, and December 31, 2018, the Company recognized $1.1 million and $1.6 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 $0.2 million at December 31, 2019, and March 31, 2019, respectively.
Note 4. Restructuring Charges

In the three and nine months ended December 31, 2019, the Company recorded a restructuring expense of $0.2 million related to employee termination costs that spanned all three segments. The Company did not record any restructuring expense in the nine months ended December 31, 2018.

Total liability for restructuring charges and their utilization for the three and nine months ended December 31, 2019, are summarized as follows:
 
Three months ended December 31, 2019
 
Nine months ended December 31, 2019
(in thousands)
Employee related
 
Other costs
 
Total
 
Employee related
 
Other costs
 
Total
Liability at beginning of period
$

 
$

 
$

 
$

 
$

 
$

Charged
234

 

 
234

 
234

 

 
234

Paid
(227
)
 

 
(227
)
 
(227
)
 

 
(227
)
Liability at end of period
$
7

 
$

 
$
7

 
$
7

 
$

 
$
7

Note 5. 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.

11


The Company’s three reportable segments are as follows:
In-Building Wireless (IBW) Segment
The 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 wireless 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 Class B repeaters, our Class A repeater product suite and battery backup units. 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 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 panels, fiber access products and T1 network interface units (NIUs).

12


Segment information for the three and nine months ended December 31, 2019, and 2018, is set forth below: 
 
 
Three months ended December 31, 2019
(in thousands)
 
IBW
 
ISM
 
CNS
 
Total
Revenue
 
$
2,466

 
$
2,456

 
$
2,237

 
$
7,159

Cost of revenue
 
1,657


991

 
1,731

 
4,379

Gross profit
 
809

 
1,465

 
506

 
2,780

Gross margin
 
32.8
%
 
59.6
%
 
22.6
%
 
38.8
%
Research and development
 
470

 
505

 
247

 
1,222

Segment profit
 
$
339

 
$
960

 
$
259

 
1,558

Operating expenses:
 
 
 
 
 
 
 
 
Sales and marketing
 
 
 
 
 
 
 
1,556

General and administrative
 
 
 
 
 
 
 
1,093

Intangible amortization
 
 
 
 
 
 
 
308

Restructuring
 
 
 
 
 
 
 
234

Operating profit (loss)
 
 
 
 
 
 
 
(1,633
)
Other income, net
 
 
 
 
 
 
 
109

Income tax benefit (expense)
 
 
 
 
 
 
 
(20
)
Net income (loss) from continuing operations
 
 
 
 
 
 
 
$
(1,544
)
 
 
 
 
 
 
 
 
 
 
 
Three months ended December 31, 2018
(in thousands)
 
IBW
 
ISM
 
CNS
 
Total
Revenue
 
$
2,794

 
$
5,116

 
$
2,812

 
$
10,722

Cost of revenue
 
1,725

 
2,217

 
2,190

 
6,132

Gross profit
 
1,069

 
2,899

 
622

 
4,590

Gross margin
 
38.3
%
 
56.7
%
 
22.1
%
 
42.8
%
Research and development
 
682

 
570

 
484

 
1,736

Segment profit
 
$
387

 
$
2,329

 
$
138

 
2,854

Operating expenses:
 
 
 
 
 
 
 
 
Sales and marketing
 
 
 
 
 
 
 
1,999

General and administrative
 
 
 
 
 
 
 
1,738

Intangible amortization
 
 
 
 
 
 
 
830

Operating profit (loss)
 
 
 
 
 
 
 
(1,713
)
Other income, net
 
 
 
 
 
 
 
158

Income tax benefit (expense)
 
 
 
 
 
 
 
(1
)
Net income (loss) from continuing operations
 
 
 
 
 
 
 
$
(1,556
)

13


 
 
Nine months ended December 31, 2019
(in thousands)
 
IBW
 
ISM
 
CNS
 
Total
Revenue
 
$
8,007

 
$
8,197

 
$
7,526

 
$
23,730

Cost of revenue
 
5,813


4,111

 
6,201

 
16,125

Gross profit
 
2,194

 
4,086

 
1,325

 
7,605

Gross margin
 
27.4
%
 
49.8
%
 
17.6
%
 
32.0
%
Research and development
 
1,272

 
1,825

 
1,130

 
4,227

Segment profit
 
$
922

 
$
2,261

 
$
195

 
3,378

Operating expenses:
 
 
 
 
 
 
 
 
Sales and marketing
 
 
 
 
 
 
 
6,147

General and administrative
 
 
 
 
 
 
 
3,706

Intangible amortization
 
 
 
 
 
 
 
924

Restructuring
 
 
 
 
 
 
 
234

Operating profit (loss)
 
 
 
 
 
 
 
(7,633
)
Other income, net
 
 
 
 
 
 
 
398

Income tax benefit (expense)
 
 
 
 
 
 
 
(27
)
Net income (loss) from continuing operations
 
 
 
 
 
 
 
$
(7,262
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended December 31, 2018
(in thousands)
 
IBW
 
ISM
 
CNS
 
Total
Revenue
 
$
9,997

 
$
13,506

 
$
10,362

 
$
33,865

Cost of revenue
 
5,574

 
6,237

 
7,336

 
19,147

Gross profit
 
4,423

 
7,269

 
3,026

 
14,718

Gross margin
 
44.2
%

53.8
%
 
29.2
%
 
43.5
%
Research and development
 
2,071

 
1,697

 
1,243

 
5,011

Segment profit (loss)
 
$
2,352

 
$
5,572

 
$
1,783

 
9,707

Operating expenses:
 
 
 
 
 
 
 
 
Sales and marketing
 
 
 
 
 
 
 
6,012

General and administrative
 
 
 
 
 
 
 
4,672

Intangible amortization
 
 
 
 
 
 
 
2,652

Operating profit (loss)
 
 
 
 
 
 
 
(3,629
)
Other income, net
 
 
 
 
 
 
 
442

Income tax benefit (expense)
 
 
 
 
 
 
 
(11
)
Net income (loss) from continuing operations
 
 
 
 
 
 
 
$
(3,198
)

Segment asset information is not reported to or used by the CODM.
Note 6. Inventories
Inventories are stated at the lower of cost, on a first-in, first-out basis, or net realizable value. The components of net inventories are as follows: 
(in thousands)
December 31, 2019
 
March 31, 2019
Raw materials
$
2,263

 
$
3,445

Finished goods
5,359

 
6,356

    Total inventories
$
7,622

 
$
9,801


The Company records provisions against inventory for excess and obsolete inventory, which are determined based on the Company's best estimates of future demand, product lifecycle status and product development plans. These provisions reduce the inventory cost basis. The Company recorded provision for excess and obsolete inventory with a charge of $2.0 million in the nine months ended December 31, 2019. The charges for the provision for excess and obsolete inventory for the three

14


months ended December 31, 2019, and three and nine months ended December 31, 2018, were negligible. These costs are presented in Cost of revenue on the Condensed Consolidated Statements of Operations. The Company believes the estimates and assumptions underlying its provisions are reasonable. However, there is risk that additional charges may be necessary if future demand is less than current forecasts due to rapid technological changes, uncertain customer requirements, or other factors.
Note 7. Stock-Based Compensation

The Westell Technologies, Inc. 2019 Omnibus Incentive Compensation Plan (the 2019 Plan) was approved at the annual meeting of stockholders on September 17, 2019. The 2019 Plan replaced the Westell Technologies, Inc. 2015 Omnibus Incentive Compensation Plan (the 2015 Plan). The 2019 Plan includes a total of 1,000,000 shares of Class A Common Stock (Shares) plus the number of Shares reserved for issuance under the 2015 Plan that have not been granted or reserved for issuance under an outstanding award that may be issued under the 2019 Omnibus Plan. If any award granted under the 2019 Plan or 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 2019 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. Any awards or portions thereof that are settled in cash and not in Shares shall not be counted against the foregoing Share limit.
The stock options, restricted stock awards, and restricted stock units (RSUs) awarded under both the 2019 Plan and 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 2019 Plan and 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 2019 Plan and 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 and nine months ended December 31, 2019, and 2018: 
 
Three months ended December 31,
 
Nine months ended December 31,
(in thousands)
2019
 
2018
 
2019
 
2018
Stock-based compensation expense
$
152

 
$
303

 
$
597

 
$
889

Income tax benefit

 

 

 

Total stock-based compensation expense, after taxes
$
152

 
$
303

 
$
597

 
$
889

Stock Options
Stock option activity for the nine months ended December 31, 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
150,000

 
1.35

 

 

Exercised

 

 

 

Forfeited
(66,667
)
 
3.14

 

 

Expired
(145,624
)
 
5.39

 

 

Outstanding on December 31, 2019
231,187

 
$
2.01

 
5.4
 
$

 
_______
(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.

15


Restricted Stock
The following table sets forth restricted stock activity for the nine months ended December 31, 2019: 
 
Shares
 
Weighted-Average
Grant Date Fair
Value
Non-vested as of March 31, 2019
63,334

 
$
2.86

Granted
128,584

 
1.39

Vested
(63,334
)
 
2.86

Forfeited

 

Non-vested as of December 31, 2019
128,584

 
$
1.39

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

 
$
3.03

Granted
301,037

 
1.73

Vested
(271,426
)
 
3.10

Forfeited
(239,879
)
 
2.69

Non-vested as of December 31, 2019
454,859

 
$
2.31

PSUs

PSUs will be earned primarily based upon achievement of performance goals tied to growing revenue and to 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 nine months ended December 31, 2019: 
 
Shares
 
Weighted-Average Grant Date Fair Value
Non-vested as of March 31, 2019 (at target)
5,000

 
$
3.14

Granted, at target
216,144

 
1.89

Vested
(5,000
)
 
3.14

Forfeited
(127,498
)
 
2.07

Non-vested as of December 31, 2019 (at target)
88,646

 
$
1.63

Note 8. 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, 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 $72,000 and $74,000 as of December 31, 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 $58,000 and $56,000 as of December 31, 2019, and March 31, 2019, respectively, and are presented on the Condensed Consolidated Balance Sheets in Other non-current liabilities.

16


The following table presents the changes in the Company’s product warranty reserve:
 
Three months ended December 31,
 
Nine months ended December 31,
(in thousands)
2019
 
2018
 
2019
 
2018
Total product warranty reserve at the beginning of the period
$
130

 
$
285

 
$
130

 
$
300

Warranty expense to cost of revenue
17

 
12

 
51

 
44

Utilization
(17
)
 
(22
)
 
(51
)
 
(69
)
Total product warranty reserve at the end of the period
$
130

 
$
275

 
$
130

 
$
275

Note 9. 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 required. The carrying amount of the Company's investment in AKA was approximately $0.1 million as of December 31, 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 December 31, 2019, and 2018, was $0.3 million and $0.5 million, respectively. The Company's revenue from sales to AKA for the nine months ended December 31, 2019, and 2018, was $1.0 million and $1.6 million, respectively. Accounts receivable from AKA was $0.2 million and $0.3 million as of December 31, 2019, and March 31, 2019, respectively. AKA deferred revenue, which primarily relates to maintenance contracts, was $0.6 million and $0.8 million as of December 31, 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 10. 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 December 31, 2019, the Company had net deferred tax assets of approximately $39.0 million before a valuation allowance of $39.0 million. As of December 31, 2019, and March 31, 2019, respectively, the Company has $348,000 and $697,000 tax receivables associated with a prior AMT credit carryforward. The Company expects to recover the entire amount by 2022 via tax refunds. The decrease in the tax receivable represents a tax refund received during the third quarter.
The Company recorded $20,000 and $27,000 of income tax expense in the three and nine months ended December 31, 2019, using an effective income tax rate of (0.10)% plus discrete items. The Company recorded $1,000 and $11,000 of income tax expense in the three and nine months ended December 31, 2018, respectively, using an effective rate of (0.32)% plus discrete items. The effective income tax 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.

17


Note 11. 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 it 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 its 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 executed a settlement agreement in which some indemnity rights are reserved. The Company paid the settlement amount in the quarter ended December 31, 2019. As of March 31, 2019, the combined settlement was 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 the related expense is presented as discontinued operations.

Leases
The Company currently occupies office space under operating leases, with various expiration dates through February 2025. The terms 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 12. 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 December 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
$
21,644

 
$
21,644

 

 

 
Cash and cash
equivalents

18


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 13. 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 nine months ended December 31, 2019. During the nine months ended December 31, 2018, 337,653 shares were repurchased under the 2017 authorization, at a weighted average purchase price of $2.51 per share. As of December 31, 2019, there was approximately $0.7 million remaining for additional share repurchases under the 2017 authorization.
Additionally, in the nine months ended December 31, 2019 and December 31, 2018, the Company repurchased 92,183 and 59,053 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 $2.07 and $3.24 per share, respectively.
Note 14. 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 nine months ended December 31, 2019, or the nine months ended December 31, 2018.
Product Licensing Rights
On July 31, 2019, the Company entered into a five year License and Service 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 (the "Agreement"). Under the terms of the Agreement, the Company made an up-front payment of $1.0 million during the quarter ended September 30, 2019, in connection with the execution of the agreement. The Company will pay an additional $1.0 million, which is presented in Accounts Payable on the Condensed Consolidated Balance Sheet as of December 31, 2019, upon the achievement of a certain milestone, as well as royalties on future sales. In addition to the product licensing rights, the initial $1.0 million up-front payment includes training. The newly acquired product licensing rights will be amortized straight-line over the term of the Agreement. The amortization related to this intangible asset is presented in Cost of revenue on the Condensed Consolidated Statements of Operations during the three and nine months ended December 31, 2019.
The Agreement also contains possible future product licensing rights for a product that is still being developed. Once development is complete, and the licensed know-how is transferred to our contract manufacturer, a third payment of $250,000 would be payable. Westell had not recorded this liability and related product licensing rights on the Condensed Consolidated Balance Sheet as of December 31, 2019 as recognition is contingent upon the future development of the product.

19


Acquisition-related Intangible Assets
During the quarter ended September 30, 2019, the Company determined there were indications of impairment on the ISM intangible assets primarily due to a significant decline in revenue. The decrease in revenue in the three months ended September 30, 2019, primarily was due to decreased sales of remote units driven by a slowdown in demand from two existing customers. The Company performed the recoverability test described above and concluded the carrying amount was recoverable. The Company concluded it was not necessary to perform a recoverability test during the quarter ended December 31, 2019.
Note 15. Accrued Expenses
The components of accrued expenses are as follows:
(in thousands)
December 31, 2019
 
March 31, 2019
 
Accrued compensation
$
499

 
$
656

 
Accrued contractual obligation
1,445

 
1,445

 
Current operating lease liability
566

 

 
Other accrued expenses
912

 
1,466

(1) 
Total accrued expenses
$
3,422

 
$
3,567

(1) 
_______
(1) Includes a $0.3 million accrual for loss contingencies related to discontinued operations. See Note 11.

Note 16. 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 nine months ended December 31, 2019, or December 31, 2018.
The components of fixed assets are as follows:
(in thousands)
December 31, 2019
 
March 31, 2019
Land
$
672

 
$
672

Machinery and equipment
1,367

 
1,372

Office, computer and research equipment
5,319

 
5,267

Leasehold improvements
788

 
798

Land, property and equipment, gross
8,146

 
8,109

Less accumulated depreciation and amortization
(7,073
)
 
(6,811
)
Land, property and equipment, net
$
1,073

 
$
1,298




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.

20


The Company’s three reportable segments are as follows:
In-Building Wireless (IBW) Segment
The 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 wireless 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 Class B repeaters, our Class A repeater product suite and battery backup units. 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 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 panels, fiber access products and T1 network interface units (NIUs).
Customers
The Company’s customer base includes communications service providers, systems integrators, neutral-host operators, and distributors. Due to 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.
Other Matters
The Westell Technologies, Inc. 2019 Omnibus Incentive Compensation Plan (the "2019 Plan") was approved at the annual meeting of stockholders on September 17, 2019. The 2019 Plan replaced the Westell Technologies, Inc. 2015 Omnibus Incentive Compensation Plan (the "2015 Plan"). The 2019 Plan includes a total of 1,000,000 shares of Class A Common Stock ("Shares") plus the number of Shares reserved for issuance under the 2015 Plan that have not been granted or reserved for issuance under an outstanding award that may be issued under the 2019 Omnibus Plan. If any award granted under the 2019 Plan or 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 2019 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. Any awards or portions thereof that are settled in cash and not in Shares shall not be counted against the foregoing Share limit.
On October 18, 2019, the Company approved a plan to restructure its business, including a reduction of headcount that spanned locations, functions, and segments. The restructuring was substantially completed on October 18, 2019. The restructuring is part of a plan to reduce ongoing expenses and focus the business on three areas for new product growth: in-building wireless, fiber deployment, and remote monitoring. The Company incurred charges totaling $0.2 million for the estimated cash payments related to employee separation benefits. Substantially all of the cash payments related to this matter were completed by December 31,

21


2019. The Company is still on track for expected efficiencies and annual cost savings in excess of $1.7 million as a result of the restructuring.
Results of Operations
Below is a table that compares revenue for the three and nine months ended December 31, 2019, and 2018, by segment.
Revenue
 
Three months ended December 31,
 
Nine months ended December 31,
(in thousands)
2019
 
2018
 
Change
 
2019
 
2018
 
Change
IBW
$
2,466

 
$
2,794

 
$
(328
)
 
$
8,007

 
$
9,997

 
$
(1,990
)
ISM
2,456

 
5,116

 
(2,660
)
 
8,197

 
13,506

 
(5,309
)
CNS
2,237

 
2,812

 
(575
)
 
7,526

 
10,362

 
(2,836
)
Consolidated revenue
$
7,159

 
$
10,722

 
$
(3,563
)
 
$
23,730

 
$
33,865

 
$
(10,135
)
IBW revenue was $2.5 million and $8.0 million in the three and nine months ended December 31, 2019, respectively, compared to $2.8 million and $10.0 million in the same respective periods in the prior year. The decrease in revenue in both periods ended December 31, 2019, was primarily due to lower sales of repeaters and DAS conditioners, partly offset by increased ancillary and public safety 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 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 embedded base of large-venue DAS networks, as well as in smaller in-building DAS deployments that require a stand-alone conditioner. 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 also expect the market for public safety repeaters to continue to grow as more local municipalities pass and enforce ordinances that require in-building wireless communication coverage for first responders and emergency personnel.
ISM revenue was $2.5 million and $8.2 million in the three and nine months ended December 31, 2019, respectively, compared to $5.1 million and $13.5 million in the same respective periods in the prior year. The decrease in revenue in the three and nine months ended December 31, 2019, primarily was 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 $2.2 million and $7.5 million in the three and nine months ended December 31, 2019, respectively, compared to $2.8 million and $10.4 million in the same respective periods in the prior year. The decrease in revenue in both periods ended December 31, 2019, was due to lower sales across each of the legacy product lines offset by a small increase in sales from our new fiber access product line which was 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 remain steady. We expect T1 NIUs and TMA revenue to continue to decrease over time as these products are old technology in declining use.
Gross Margin
  
Three months ended December 31,
 
Nine months ended December 31,
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
IBW
32.8
%
 
38.3
%
 
(5.5
)%
 
27.4
%
 
44.2
%
 
(16.8
)%
ISM
59.6
%
 
56.7
%
 
2.9
 %
 
49.8
%
 
53.8
%
 
(4.0
)%
CNS
22.6
%
 
22.1
%
 
0.5
 %
 
17.6
%
 
29.2
%
 
(11.6
)%
Consolidated gross margin
38.8
%
 
42.8
%
 
(4.0
)%
 
32.0
%
 
43.5
%
 
(11.5
)%

The consolidated gross margin decreased in the three and nine months ended December 31, 2019, compared to the same periods in the prior year. The decrease in the three month period was primarily due to product mix, as sales came from lower margin products along with lower revenue against fixed costs. The decrease in the nine month period was primarily due to higher costs associated with excess and obsolete inventory and the lower revenue against fixed costs. The Company recorded

22


provision for excess and obsolete inventory with a charge of $2.0 million in the nine months ended December 31, 2019. The charges for the provision for excess and obsolete inventory for the three months ended December 31, 2019, and three and nine months ended December 31, 2018, were negligible. The increase in inventory charges in fiscal year 2020 was a result of technology shifts and changing customer plans which lowered the sales outlook for certain legacy products. Going forward, we do not expect excess and obsolete inventory charges to continue at the recent levels. However, there is risk that additional charges may be necessary if future demand is less than current forecasts due to rapid technological changes, uncertain customer requirements, or other factors.
Research and Development
 
Three months ended December 31,
 
Nine months ended December 31,
(in thousands)
2019
 
2018
 
Change
 
2019
 
2018
 
Change
IBW
$
470

 
$
682

 
$
(212
)
 
$
1,272

 
$
2,071

 
$
(799
)
ISM
505

 
570

 
(65
)
 
1,825

 
1,697

 
128

CNS
247

 
484

 
(237
)
 
1,130

 
1,243

 
(113
)
Consolidated research and
development expense
$
1,222

 
$
1,736

 
$
(514
)
 
$
4,227

 
$
5,011

 
$
(784
)
Research and development expenses decreased by $0.5 million and $0.8 million in the three and nine months ended December 31, 2019, respectively, compared to the same periods in the prior year. The decreases were due primarily to additional expenses for new product developments in fiscal year 2019 within the IBW segment that were not repeated in fiscal year 2020. The decreases can also be attributed to decreased salary and compensation expenses in the fiscal 2020 periods.
Sales and Marketing
 
Three months ended December 31,
 
Nine months ended December 31,
(in thousands)
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Consolidated sales and
marketing expense
$
1,556

 
$
1,999

 
$
(443
)
 
$
6,147

 
$
6,012

 
$
135

Sales and marketing expense decreased $0.4 million and increased $0.1 million in the three and nine months ended December 31, 2019, respectively, compared to same periods in the prior fiscal year. The decrease in the three month period was due primarily to a decrease in salary and compensation expenses. The increase in the nine month period was due to increased consulting and professional services that occurred earlier in fiscal 2020.
General and Administrative
 
Three months ended December 31,
 
Nine months ended December 31,
(in thousands)
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Consolidated general and
administrative expense
$
1,093

 
$
1,738

 
$
(645
)
 
$
3,706

 
$
4,672

 
$
(966
)
Consolidated general and administrative expense decreased $0.6 million and $1.0 million in the three and nine months ended December 31, 2019, respectively, compared to the same periods in the prior fiscal year. These decreases were largely attributable to a lower expense structure from the restructuring in the quarter ended December 31, 2019 and the Company's overall cost reduction efforts.
Intangible amortization
Acquisition-related amortization
 
Three months ended December 31,
 
Nine months ended December 31,
(in thousands)
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Consolidated intangible
amortization
$
308

 
$
830

 
$
(522
)
 
$
924

 
$
2,652

 
$
(1,728
)

Amortization in the three and nine months ended December 31, 2019, and December 31, 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 $0.5 million and $1.7 million in three and nine months ended December 31, 2019, compared to the same periods in the prior fiscal year, resul