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TMCNet:  TELULAR CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands except when referring to ARPUs, units or share data)

[February 11, 2013]

TELULAR CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands except when referring to ARPUs, units or share data)

(Edgar Glimpses Via Acquire Media NewsEdge) Forward Looking Information This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Telular includes certain estimates, projections and other forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934 in its reports and in other publicly available material.



Statements regarding expectations, including performance assumptions and estimates relating to capital requirements, as well as other statements that are not historical facts, are forward-looking statements. These statements reflect management's judgments based on currently available information and involve a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. With respect to these forward-looking statements, management has made assumptions regarding, among other things, customer growth and retention, pricing, operating costs and the economic environment.

The words "estimate", "project", "intend", "expect", "believe", "target" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are found throughout Management's Discussion and Analysis. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Except as required by law, Telular is not obligated to publicly release any revisions to forward-looking statements to reflect events after the date of this report or unforeseen events.

Introduction The following management's discussion and analysis is intended to help the reader understand the results of operations and financial condition of Telular Corporation. This discussion is provided as a supplement to, and should be read in conjunction with, our Annual Report on Form 10-K for the year ended September 30, 2012 and our financial statements and accompanying notes.

Telular develops products and services that utilize wireless networks to provide data connectivity among people and machines. Telular's software-as-a-service ("SaaS") offerings are created through Telular's competence in developing complex software systems and wireless electronics that utilize the data transport capabilities of today's commercial wireless networks. To enable these services, Telular is a significant reseller of such commercial wireless services.

We generate a majority of our revenue through the delivery of machine-to-machine ("M2M") services such as event monitoring and asset tracking services through our Telguard, SkyBitz and TankLink business lines. A portion of our revenue comes from the sale of specialty wireless hardware products designed by Telular for use exclusively with its M2M services. Our operating expense levels are based in large part on our expectations for our future revenues. If anticipated sales in any quarter do not occur as expected, expenditure and inventory levels could be disproportionately high, and our operating results for that quarter, and potentially for future quarters, could be adversely affected. Certain factors that could significantly impact expected results are described in Item 1A, Risk Factors.

The market for Telular's products is primarily in North and South America and consists of a number of vertical applications including Telguard security alarm conveyance, SkyBitz asset tracking; and TankLink storage tank level monitoring.

These markets are addressed primarily through indirect channels consisting of third party agents, Value Added Resellers ("VARs") and distributors along with in-house sales and customer support teams. A direct sales model is utilized for certain large customers in each line of business. Fabrication of Telular's products is accomplished through contract manufacturers located in China, Mexico and the United States.

The following details areas of product delivery and research either recently undertaken or anticipated in fiscal 2013.

Telguard - Telular's engineering team perpetually updates the Telguard product and service portfolio through incremental feature development, both in hardware devices and software functionality. In fiscal 2012, Telular completed and launched the conversion of the entire Telguard hardware product line to 3G/4G capability. Product innovation within this space is important for the long-term success of Telguard and we expect to continue to enhance our Telguard software platform and underlying hardware products going forward. In fiscal 2012, the Telguard Message Center ("TMC"), which contains the underlying core software for the Telguard service, was enhanced such that Telular can offer service to security dealers in Canada. Furthermore, the architecture of TMC will be updated so that it can support newly developed features and even more end-users and increased traffic volumes in the future. During fiscal 2013 we plan to enhance dramatically the interactive services and home automation features of our Telguard service line and continue to enhance the capabilities of TMC.

19 -------------------------------------------------------------------------------- SkyBitz - On February 1, 2012, SkyBitz released to the market its newest hardware device, the GTP series, which for the first time provides global satellite tracking capability via the Iridium satellite network. Subsequent to the release of the first GTP model, additional work was undertaken to complete variations of that device that allowed for GPS location capability, remote antenna mounting and cargo sensing capability. For fiscal 2013, we upgraded the SkyBitz terrestrial device to operate on 3G/4G networks and are developing internally a terrestrial device that is expected to deliver superior cellular service at a lower cost than the current terrestrial solution. In 2013, we are also working on updating the version of SkyBitz's InSight SaaS application.

TankLink - In fiscal 2013, we released the TankLink 90, the industry's first 3G/4G wireless tank monitoring solution. Telular plans to further enhance all elements of the TankLink portfolio during fiscal 2013 to update the hardware as well as support additional customer use cases for the solution.

Other M2M Solutions -Telular continues to evaluate additional M2M markets to determine the viability of creating or acquiring M2M service in these markets.

Competition Telular believes our advantages over the competition include: Greater Focus -Telular is focused on creating M2M solutions, which we develop by combining our historical competency in designing wireless networking electronics and real-time transaction processing software with the data transport capabilities of commercial wireless networks. This focus allows us to develop high functioning software and products best suited to our customers' needs, resulting in products that are easier to install and maintain and are more reliable. Our primary competitors have the bureaucracy normally associated with large companies and the management distraction associated with overseeing a broad array of products and services; many of which are unrelated to one another.

More Experience - Telular has been in the wireless electronics business for over 20 years. We have been creating and operating real-time transaction processing software for over a decade and understands the importance of high reliability in that regard. We have deployed products in more than 130 countries worldwide, reflecting the quality, reliability and innovation of our product portfolio.

Broader Product line -Telguard, our largest line of business, includes targeted software features and a more diverse set of hardware products than any of our competitors and we believe this gives our customers a greater selection of features and hardware devices from which to choose. Similarly, SkyBitz has an array of satellite and terrestrial wireless radio devices that support the asset tracking services it provides, which we believe encompasses a wider selection of application-specific devices than most of its competitors.

Economies of Scale -Telguard's fully integrated end-to-end wireless solution is now utilized by over 622,000 individual subscribers, which helps to minimize costs on a per user basis. This large customer base also reflects our significant experience and demonstrates credibility to the market.

Service and Support - Telular provides customers with comprehensive customer service and product support. We believe that our commitment and ability to provide superior service differentiates us from our competition.

There are several firms that compete with Telular's Telguard products and services. These primary competitors include: Honeywell, Alarm.com, DSC and Numerex. Based on internal estimates, we believe it has a portion of the market share for all currently active cellular alarm communicators in the United States, having introduced the first such device for digital cellular networks in April 2005 and the first such device for 3G/4G networks in November 2012. Demand for cellular communicators has increased markedly over the past few years. We believe this is due to consumers eliminating traditional telephone lines and therefore, requiring an alternative communication method to enable a home security system. If this trend continues, we believe that we and our competitors will continue to see substantial demand for products and related services.

Telular's Telguard hardware products will only interface with Telular's proprietary message center, which interprets and forwards any alarms received to our security monitoring customers in near real-time. We believe its competitive advantages for this service are the fact that our hardware products interface with the vast majority of alarm panels on the market and that installers can quickly activate the hardware and service.

20 -------------------------------------------------------------------------------- Telular's SkyBitz offering has several primary competitors in asset tracking for truck trailers. These include: ID Systems, Qualcomm and FleetLocate. In addition, there are a number of other, smaller competitors making the market for truck trailer asset tracking increasingly competitive. Telular differentiates its SkyBitz solutions by providing advanced features on the web portal through which its customers receive tracking data, maximizing battery life on the tracking units to minimize the frequency of changing batteries and through efficient design and manufacturing of our products to enable a low cost solution for our customers. Positively, we are seeing new demand for SkyBitz's services in other sectors, including oil/gas field services and intermodal transportation.

There are numerous, small competitors to Telular's TankLink offering. The most significant of these is Centeron, a division of Robertshaw Industries, which in turn is a subsidiary of Invensys, Inc. More often, the TankLink offering competes against the pre-existing, manual methods utilized by tank owners to determine the fill level and reorder timing for products held within tank vessels. Telular believes the key to growing our TankLink revenue is lowering our prices to the greatest extent possible in order to cost justify implementation of the TankLink solution. While we have lowered prices somewhat to spur demand, we may further test the price elasticity of our TankLink solution in fiscal 2013.

OUTLOOK The statements contained in this outlook are based on current expectations.

These statements are forward looking, and actual results may differ materially.

We expect to expend most of our marketing and product development resources on the M2M space, including continuing to capitalize on our favorable market position in the domestic security alarm market by virtue of our well-regarded Telguard offering, as well as continuing to improve overall penetration in the asset tracking and tank level monitoring markets through SkyBitz and TankLink, respectively.

UNIT SALES During the first quarter of fiscal 2013, Telular sold approximately 37,300 Telguard units, compared with approximately 30,800 Telguard units for the same period in fiscal 2012. This increase was primarily due to continued demand for Telguard's 3G/4G products and for increased sales of the Personal Emergency Response System ("PERS") units. On a consolidated basis for the first quarter of fiscal 2013, Telular sold approximately 50,800 monitoring and asset tracking units with an average selling price ("ASP") of $204 compared with 32,100 units sold with an ASP of $152 in the same period of fiscal 2012. This increase is primarily due to product mix. We expect Telguard sales of between 30,000 and 40,000 units on a quarterly basis throughout fiscal 2013.

SERVICE REVENUE Service revenues have grown consistently, increasing to $13,979 in the first quarter of fiscal 2013 compared to $8,286 of the same period in fiscal 2012.

This increase is due to increased activations in the event monitoring segment and the inclusion of the services revenues of the asset tracking segment, which is represented by SkyBitz. Service revenues represent 56% of total sales in the first quarter of fiscal 2013compared to 61% for the same period of fiscal 2012.

Telguard service average revenue per unit ("ARPU") was $4.45 for the first quarter of fiscal 2013 as compared to $4.30 for the same period of fiscal 2012.

The increase in ARPU was due to the combination of adding new subscribers and customer mix. Specifically, new customers are being activated with a higher ARPU as compared to those customers who are being deactivated. Our Telguard subscriber base rose in the quarter to approximately 621,800, from 617,500 subscribers at the end of the fourth quarter of fiscal 2012. This increase was due primarily to a strong overall demand of our Telguard products. Telular, on a company-wide basis, ended the first quarter of fiscal 2013 with approximately 851,000 billable units, with an ARPU of $5.51 as compared to 593,000 billable units and an ARPU of $4.69 for the same period of fiscal 2012.

RECENT DEVELOPMENTS On January 31, 2013, Telular announced the declaration of a regular quarterly dividend of $0.12 per share, payable on February 26, 2013 to shareholders of record at the closing of business on February 19, 2013. Telular estimates the cost of this dividend to be approximately $2,100 depending on the number of shares outstanding at the time of the dividend.

21 --------------------------------------------------------------------------------RESULTS OF OPERATIONS First quarter fiscal year 2013 compared to first quarter fiscal year 2012 Revenues and Cost of Sales Change 2013 2012 Amount Percentage Revenues by Segment: Event monitoring $ 15,578 $ 13,705 $ 1,873 14% Asset tracking 9,204 - 9,204 >100% Total revenues $ 24,782 $ 13,705 $ 11,077 81% Change 2013 2012 Amount Percentage Revenues M2M service revenue $ 13,979 $ 8,286 $ 5,693 69% M2M hardware sales 10,789 5,031 5,758 114% Subtotal M2M 24,768 13,317 11,451 86% Other product sales 14 388 (374 ) -96% Total revenue 24,782 13,705 11,077 81% Cost of sales M2M service cost of sales 4,024 2,310 1,714 74% M2M hardware cost of sales 8,323 3,233 5,090 157% Subtotal M2M 12,347 5,543 6,804 123% Other product cost of sales 12 648 (636 ) -98% Total cost of sales 12,359 6,191 1,078 17% Gross margin $ 12,423 $ 7,514 $ 9,999 133% Revenues Segment Event Monitoring ("EM") revenues increased 14% primarily due to the 23% increase in EM hardware sales, which was driven primarily by Telguard hardware sales.

Asset Tracking ("AT") revenues were $9,204 for the first quarter of fiscal 2013.

SkyBitz is the sole line of business in the AT segment. Because Telular purchased SkyBitz on February 1, 2012, there were no revenues for the AT segment in the first quarter of fiscal 2012.

Type M2M service revenues increased 69% showing steady growth as a result of an increase in activations, an overall higher ARPU and the inclusion of asset tracking services revenues. Telguard activated approximately 35,400 new subscribers during the first three months of fiscal 2013 increasing its subscriber base to approximately 621,800. Telguard's ARPU increased to $4.45 for the first three months of fiscal 2013, compared to $4.30 for the same period of fiscal 2012. This increase was due to a more favorable customer mix. New customers are being activated with a higher ARPU as compared to those customers who are being deactivated.

M2M hardware sales increased 114% primarily due to the inclusion of SkyBitz in the first quarter of fiscal 2013 and an increase in sales of Telguard units.

Telular sold approximately 37,300 Telguard units during the first three months of fiscal 2013, compared to 30,800 units during the same period of fiscal 2012.

This increase was primarily due to stronger overall demand of our Telguard 3G/4G and PERS products. The ASP for Telguard units increased slightly to $137 for the first three months of fiscal 2013 compared to $134 for the same period of fiscal 2012 due to a more favorable product mix. TankLink hardware revenues increased 22% for the first quarter of fiscal 2013 as compared to the same period of fiscal 2012. This increase is primarily due to increased unit volume. TankLink is focusing efforts to increase its revenue through its indirect sales channels which should result in increased unit sales, possibly at a lower ASP. Other product sales, which were primarily terminal products, decreased 96% because Telular is no longer selling these products.

22 --------------------------------------------------------------------------------Cost of Sales M2M service cost of sales increased 74% primarily as a result of including SkyBitz. As a percentage of service revenue, service cost was 29% for the first quarter of fiscal 2013 and 28% for the same period of fiscal 2012. Gross margin for M2M service was 71% for the first quarter of fiscal 2013 and 72% for the same period of fiscal 2012.

M2M hardware cost of sales increased 157% primarily as a result of including SkyBitz and an increase in sales volume for both Telguard and TankLink.

Contributing to an increase in hardware costs was the higher per unit cost to manufacture the 3G/4G units. Gross margin for monitoring hardware was approximately 23% for the first quarter of fiscal 2013, compared to 28% for the same period of fiscal 2012. The decrease in gross margin was primarily due to increased per unit production costs for the 3G/4G units and due to reduced ASPs related to favorable pricing for important high volume customers.

Other product cost of sales decreased primarily as a result of decreased sales of other products.

Operating Expenses Change % of Revenues 2013 2012 Amount Percentage 2013 2012 Engineering and development $ 2,095 $ 1,287 $ 808 63 % 8 % 9 % Selling and marketing 3,165 1,785 1,380 77 % 13 % 13 % General and administrative 3,531 1,874 1,657 88 % 14 % 14 % $ 8,791 $ 4,946 $ 3,845 35 % 36 % Engineering and Development The increase of $808 (63%) in engineering and development was primarily due to the inclusion of SkyBitz's expenses in the first quarter of fiscal 2013 of $782 and the increase of $26 for Telular's Telguard business line and TankLink, primarily related to an increase in expenses for prototype builds.

Selling and Marketing The increase in selling and marketing of $1,380 (77%) was primarily due to the inclusion of SkyBitz's expenses of $1,253 in the first quarter of fiscal 2013, and the following increases in selling and marketing expenses for Telular's Telguard business line and TankLink: $51 increase in payroll expenses primarily due to increase in salaries and commission expense; $27 increase in facility related expenses. These expenses are allocated between departments and selling and marketing allocation percentage increased in fiscal 2013; $21 increase in marketing expenditures such as tradeshows and related collateral; $28 increase in outside services and travel.

General and Administrative The increase of $1,657 (88%) was primarily due to the inclusion of SkyBitz's expenses in the first quarter of 2013 of $1,678 and the decrease of $21 of general and administrative expenses related to Telular's Telguard business line and TankLink, primarily due to reduction of allowance for bad debts.

Other Expense Other expense for the three months ended December 31, 2012 increased $215 compared to the same period of fiscal 2012. This increase was primarily due to interest expense related to the Second Amended Loan Agreement with SVB entered into in connection with the acquisition of SkyBitz on February 1, 2012.

Income Taxes The provision for income taxes increased $276 to $1,220 for the first quarter of fiscal 2013 as compared to $944 for the same period of fiscal 2012 primarily as a result of increased net income before taxes.

23 --------------------------------------------------------------------------------LIQUIDTY AND CAPITAL RESOURCES Management regularly reviews net working capital in addition to available cash to determine if it has enough cash to operate the business. On December 31, 2012, Telular had $9,160 of cash and cash equivalents and working capital of $16,906, compared to cash and cash equivalents of $12,676 and working capital of $16,630 on September 30, 2012. Simultaneous with the acquisition of SkyBitz on February 1, 2012, Telular executed a Second Amended and Restated Loan and Security Agreement (the "Second Amended Loan Agreement") with SVB. Under the Second Amended Loan Agreement, Telular borrowed $30,000 in the form of a term loan that was applied as a portion of the cash consideration for the acquisition of SkyBitz. The term loan matures on February 1, 2017, the 5th anniversary of the amendment. The loan requires quarterly payments of interest and principal, with annual principal amortization of 10%, 15%, 20%, 20% and 25% in each of the first five years, respectively, with the final 10% due on the maturity date. At the option of Telular, interest will be incurred based on a rate ranging from 2.25% to 2.75% (depending on the calculation of the senior leverage ratio) above the published LIBOR rates, or at a rate of .25% to .75% above the Prime interest rate. The interest rate was 3% as of December 31, 2012. The Second Amended Loan Agreement requires Telular to comply with certain financial covenants such as maintaining a maximum senior leverage ratio and a minimum fixed charge coverage ratio. As long as the senior leverage ratio is greater than 1.0 to 1.0 as of any fiscal year-end, Telular must make additional principal payments based on excess cash flow, as defined, calculated on an annual basis. During January 2013, Telular repaid $1,612 of principal based on this excess cash flow calculation. The loan is secured by substantially all of the assets of Telular.

The loan is secured by substantially all of the assets of Telular. At December 31, 2012 the outstanding loan balance was $27,750 and Telular was in compliance with all financial covenants. Loan fees and related costs of $338 are being amortized over the term of the loan.

Management expects trade accounts receivable and inventory to turn into cash in short periods of time. As such, given Telular's level of cash and cash equivalents, trade accounts receivable and inventory, management believes Telular has adequate resources to fund current and planned operations in a manner consistent with historical practices.

Operations Telular used $1,040 of cash from operations during the first three months of fiscal year 2013 compared to cash generated of $2,603 during the same period of fiscal year 2012. The decrease in cash generated was primarily due to a payment of prepaid licensing fees of $2,500 and the payment of certain accrued liabilities. The components of cash generated for the first three months of fiscal 2013 are as follows: $ 2,197 Net income for the period The increase in trade accounts receivable is due to primarily (65 ) increased sales.

(1,837 ) The increase in inventory reflects the minimum purchase requirements of one of Telular's contract manufacturers and an increase in certain products to facilitate increased Telguard sales volumes.

614 The increase in trade accounts payable reflects increased purchasing levels from Telular's contract manufacturers to facilitate increased Telguard sale volumes.

(2,435 ) The decrease in accrued liabilities was primarily due to payments made in the first quarter of fiscal 2013 for bonuses earned in the prior fiscal year, a decrease in accrued payroll andvacation, a decrease in accrued warranty related to the expiration of extended warranty and the decrease of accrued legal and accounting fees as a result of payments made in the first quarter of fiscal 2013.

2,761 Non-cash expenses: $323 from stock based compensation; $386 depreciation expense; $1,571 of amortization expense, $9 related to loss on disposal of operating assets and $472 related to the decrease in deferred tax assets.

(2,275 ) Net cash used by other working capital items is primarily as a result of the prepayment of licensing fees and development related to a strategic vendor and the prepayment of company insurance policies which are renewed on October 1. The expenseassociated with Telular's insurance policies is recognized ratably over the fiscal year.

$ (1,040 ) Total cash provided by continuing operations 24--------------------------------------------------------------------------------Investing Activities Investing activities used $803 of cash for the first three months of fiscal 2013 for the acquisition of capital equipment. This compares to cash used by investing activities of $252 for the same period of fiscal 2012 for the purchase of capital equipment. The capital equipment purchases for the first quarter of fiscal 2013 were primarily for the re-architecture of the Telguard website, the establishment of the Telguard message center at a secure offsite location and improvements in Telular's internal technology network.

Financing Activities Financing activities used $1,673 of cash for the first three months of fiscal 2013 as a result of the payment of a cash dividend of $2,036 and the repayment of loan principal of $750. Offsetting these payments was $1,113 of cash received from the exercise of stock options. For the same period of fiscal year 2013, cash of $1,660 was used for the payment of dividends and $10 was generated from the exercise of stock options. Telular expects to use approximately $2,100 of cash per quarter going forward for dividend payments, dependent on the number of shares of common stock outstanding.

Critical Accounting Policies Telular's financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. Telular believes that the following represent the critical accounting policies that currently affect the presentation of Telular's financial condition and results of operations.

Revenue Recognition Telular's revenue is primarily generated from three sources: · The sale of hardware units, under non-recurring agreements; · The provision of monitoring services, under recurring agreements; and, · The provision of ancillary services such as installation and non-warranty repairs and royalty revenue.

Revenue is recognized when persuasive evidence of an agreement exists, the hardware unit or the service has been delivered, fees and prices are fixed and determinable and collectability is probable when all other significant obligations have been fulfilled.

Telular recognizes revenue and associated costs from hardware unit sales at the time of shipment of products which is when title transfers. Hardware unit discounts are recorded as a reduction in revenue in the same period that the revenue is recognized. Telular offers customers the right to return hardware units that do not function properly within a limited time after delivery, see the section entitled "Reserve for Warranty" below. Telular continuously monitors and tracks such hardware unit returns and records a provision for the estimated amount of such future returns, based on historical experience. While such returns have historically been within expectations, Telular cannot guarantee that it will continue to experience the same return rates that it has experienced in the past. Any significant increase in hardware unit failure rates and the resulting credit returns could have a material adverse impact on operating results for the period or periods in which such returns materialize.

Monitoring service revenue is recognized at the time the service is provided. Payments received in advance of providing monitoring services are deferred and recognized over the period in which the service is delivered. Costs associated with providing the monitoring service are recorded when the service is provided.

For those arrangements that include multiple deliverables, Telular follows the guidance in Accounting Standard Codification ("ASC") Subtopic 605-25, as amended by Accounting Standards Update ("ASU") 2009-13. ASC Subtopic 605-25 established criteria for determining if a revenue arrangement has multiple deliverables. ASU 2009-13 amended the multiple-element revenue guidance to (1) modify the separation criteria by eliminating the criterion that requires objective and reliable evidence of fair value for the undelivered item, and (2) eliminate the use of the residual method of allocation and instead required that arrangement consideration be allocated, at the inception of the arrangement, to all deliverables based on their relative selling price. Certain multiple-element revenue arrangements include both product and monitoring services. Telular has determined that the revenue from multiple-deliverable arrangements has met the criteria for treating each revenue source as a separate element. Consideration is allocated to the deliverables at inception of an arrangement using the relative selling price method, based on Telular's best estimate of selling price. Key factors that are considered when establishing a selling price are the industry segment to which the products and services are sold, estimated selling price of our competitors, where available, and an internally established gross margin range. Product revenue is billed and recognized upon shipment to the customer while monitoring services revenue is billed periodically, usually monthly, and recognized when the service is provided.

25 -------------------------------------------------------------------------------- Telular recognizes ancillary service revenues when the service is delivered. Costs associated with these services are recorded in the period the service is delivered. Royalty revenue, which is based on a percentage of sales by the licensee, is estimated by Telular, based upon historical data provided by the licensee, in the period in which management estimated the sales have taken place. Telular periodically reconciles these estimates to the actual payments received from the licensee, adjusting revenue accordingly. Historically, Telular's estimates have not been materially different than the payments received from the licensee.

Allowance for Doubtful Accounts Telular maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make payment for products and services. Telular evaluates the collectibility of customer receivables by considering the payment history and the financial stability of its customers. If Telular believes that an account receivable may not be collected, a charge is recorded to the allowance account. At December 31, 2012 and September 30, 2012, the allowance for doubtful accounts related to trade accounts receivable was $357 and $351, respectively.

Reserve for Obsolescence Significant management judgment is required to determine the reserve for obsolete or excess inventory. Telular currently considers inventory quantities greater than a one-year supply based on current year activity, to be excess unless that inventory has alternative uses. Telular also provides for the total value of inventories that are determined to be obsolete based on criteria such as customer demand and changing technologies. At December 31, 2012, and September 30, 2012, the inventory reserves were $411 and $283, respectively.

Changes in strategic direction, such as discontinuance or expansion of product lines, changes in technology or changes in market conditions, could result in significant changes in required reserves.

Reserve for Warranty Telular maintains a reserve for products that are returned within Telular's warranty period due to inoperability. Telular has different warranty periods for its different product groups: the security monitoring products has a 24 month warranty period; the asset tracking and tank monitoring products typically have a 12 month warranty period. Significant management judgment is required to determine the warranty reserve. Telular utilizes historical information regarding units returned within the appropriate warranty period and the costs incurred to repair returned units. Telular then estimates required warranty reserves for future products that may be returned. As of December 31 2012 and September 30, 2012, the warranty reserve was $1,430 and $1,542, respectively.

The decrease in the warranty reserve is primarily a result of the continued expiration of SkyBitz units that were sold under a five-year warranty. Telular is no longer offering such warranties for SkyBitz products.

.

Goodwill and Intangible Assets Telular evaluates the fair value and recoverability of its goodwill in accordance with Accounting Standards Update No. 2011-08, Intangibles - Goodwill and Other (Topic 350), at least annually or whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. In determining fair value and recoverability, Telular makes projections regarding future cash flows. These projections are based on assumptions and estimates of: · growth rates for net revenues, cost of sales and operating expenses for the monitoring businesses: · anticipated future economic conditions: · the assignment of discount rates relative to risk associated with companies in similar industries: and, · estimates of terminal values.

An impairment loss is assessed and recognized in operating earnings when the fair value of the asset is less than its carrying amount. As of December 31, 2012 and September 30, 2012, goodwill was not impaired.

Telular reviews for the impairment of intangible assets whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Telular evaluates recoverability of other intangible assets by comparing the carrying amount of the intangible asset to future net undiscounted cash flows generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets calculated using a discounted cash flow analysis.

26 --------------------------------------------------------------------------------Income Taxes In determining income for financial statement purposes, Telular must make certain estimates and judgments. These estimates and judgments affect the calculation of certain tax liabilities and the determination of the recoverability of certain of the deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense.

In evaluating the ability to recover its deferred tax assets, Telular considers all available positive and negative evidence including its past operating results, the existence of cumulative losses and its forecast of future taxable income. In estimating future taxable income, Telular developed assumptions including the amount of future federal and state pre-tax operating income, the reversal of temporary differences, the utilization of net operating loss ("NOLs") carryforwards to offset taxable income and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates Telular is using to manage the underlying business.

Telular has recorded significant valuation allowances that are intended to be maintained until it is more likely than not the deferred tax asset will be realized. The valuation allowance as of December 31, 2012 of $5,710 is primarily for state net operating losses that will expire before they can be realized. The realization of the remaining deferred tax assets is primarily dependent on future taxable income in the appropriate state jurisdiction. Significant factors that could negatively impact Telular's determination of the recognition of the net deferred tax assets would be changes in the ownership of Telular and changes in tax laws and rates. Based on Internal Revenue Code Section 382 ("Section 382"), changes in the ownership of Telular may limit the utilization of net operating loss carryforwards. Any Section 382 limitation may require that Telular record an additional valuation allowance against its deferred tax assets. Management is not aware, at this time, of any such ownership changes that would have a negative impact on the recognition of the net deferred tax assets. Any reduction in future taxable income may require that Telular record an additional valuation allowance against the deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in such period and could have a material impact on Telular's future earnings.

Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. The State of Illinois increased its corporate income tax rate from 7.3% to 9.5% in January 2011. The State also suspended the use of net operating losses to offset current taxable income for three years. Telular implemented a tax strategy that would lower taxable income apportioned to Illinois, thereby lowering the current state tax payable. This strategy reduced Telular's estimated use of future net operating losses in Illinois, resulting in the increase in the valuation allowance against the net deferred tax assets which increased Telular's deferred tax provision.

In December 2011, the State of Illinois passed tax legislation allowing for the utilization of $100,000 of NOLs per year for the period over which the State suspended use of NOLs.

Under the uncertain tax position provisions of ASC 740, Income Taxes, Telular would recognize liabilities for tax issues in the U.S based on Telular's estimate of whether, and the extent to which, additional taxes will be due. These tax liabilities would be recorded in income taxes in the Consolidated Balance Sheets. As of December 31, 2012, Telular has no uncertain tax positions recorded in its financial statements. Telular does not include interest and penalties related to income tax matters in income tax expense.

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