UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: MarchDecember 31, 2018
OR
o 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: 1-34033
digilogoregistered.jpgdigilogoregistered2a01.jpg
DIGI INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 41-1532464
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
11001 Bren Road East9350 Excelsior Blvd., Suite 700  
Minnetonka,Hopkins, Minnesota 55343
(Address of principal executive offices) (Zip Code)
(952) 912-3444
(Registrant’s telephone number, including area code)
11001 Bren Road East, Minnetonka, Minnesota
(Registrant’s former address, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 þ No o
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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ
Non-accelerated filer 
o(Do not check if a smaller reporting company)
 Smaller reporting company o
Emerging growth company o    
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
On April 26, 2018,January 31, 2019, there were 27,151,22527,675,003 shares of the registrant’s $.01 par value Common Stock outstanding.
 



INDEX
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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DIGI INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended March 31, Six months ended March 31,Three months ended December 31,
2018 2017 2018 20172018 2017 (as adjusted)*
(in thousands, except per share data)(in thousands, except per share data)
Revenue:          
Product$47,588
 $41,766
 $86,042
 $84,939
$50,812
 $38,454
Services and solutions7,203
 3,849
 13,946
 5,851
11,501
 6,501
Total revenue54,791
 45,615
 99,988
 90,790
62,313
 44,955
Cost of sales:          
Cost of product23,080
 21,398
 42,290
 43,735
25,813
 19,210
Cost of services and solutions4,287
 2,003
 7,730
 3,177
5,977
 3,179
Amortization of intangibles770
 312
 1,377
 523
740
 607
Total cost of sales28,137
 23,713
 51,397
 47,435
32,530
 22,996
Gross profit26,654
 21,902
 48,591
 43,355
29,783
 21,959
Operating expenses:          
Sales and marketing11,175
 8,731
 20,935
 17,053
11,657
 9,760
Research and development8,617
 6,979
 16,368
 13,884
9,518
 7,751
General and administrative6,359
 4,680
 12,908
 8,484
3,117
 6,447
Restructuring reversal(67) 
Total operating expenses26,151
 20,390
 50,211
 39,421
24,225
 23,958
Operating income (loss)503
 1,512
 (1,620) 3,934
5,558
 (1,999)
Other (expense) income, net:       
Other income, net:   
Interest income38
 120
 246
 279
208
 208
Interest expense(4) (10) (7) (43)(92) (3)
Other (expense) income, net(527) (143) (572) 431
Total other (expense) income, net(493) (33) (333) 667
Other income (expense), net48
 (45)
Total other income, net164
 160
Income (loss) before income taxes10
 1,479
 (1,953) 4,601
5,722
 (1,839)
Income tax provision367
 148
 2,973
 913
1,040
 2,648
Net (loss) income$(357) $1,331
 $(4,926) $3,688
Net income (loss)$4,682
 $(4,487)
          
Net (loss) income per common share:       
Net income (loss) per common share:   
Basic$(0.01) $0.05
 $(0.18) $0.14
$0.17
 $(0.17)
Diluted$(0.01) $0.05
 $(0.18) $0.14
$0.17
 $(0.17)
Weighted average common shares:          
Basic27,084
 26,477
 26,914
 26,324
27,513
 26,748
Diluted27,084
 27,252
 26,914
 27,134
28,075
 26,748
*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which we adopted on October 1, 2018.

The accompanying notes are an integral part of the condensed consolidated financial statements.


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DIGI INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
 Three months ended March 31, Six months ended March 31,
 2018 2017 2018 2017
 (in thousands)
Net (loss) income$(357) $1,331
 $(4,926) $3,688
Other comprehensive income (loss), net of tax:       
Foreign currency translation adjustment1,787
 1,277
 2,058
 (2,478)
Change in net unrealized (loss) gain on investments(19) 14
 (40) (10)
Less income tax benefit (expense)5
 (5) 8
 4
Reclassification of realized loss on investments included in net income (1)31
 
 31
 
Less income tax benefit (2)(8) 
 (8) 
Other comprehensive income (loss), net of tax1,796
 1,286
 2,049
 (2,484)
Comprehensive income (loss)$1,439
 $2,617
 $(2,877) $1,204
 Three months ended December 31,
 2018 2017 (as adjusted)*
 (in thousands)
Net income (loss)$4,682
 $(4,487)
Other comprehensive (loss) income, net of tax:   
Foreign currency translation adjustment(1,569) 271
Change in net unrealized gain (loss) on investments5
 (21)
Less income tax (provision) benefit(2) 3
Other comprehensive (loss) income, net of tax(1,566) 253
Comprehensive income (loss)$3,116
 $(4,234)
(1) Recorded in Other (expense) income, net*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which we adopted on our Condensed Consolidated Statements of Operations.
(2) Recorded in Income tax provision in our Condensed Consolidated Statements of Operations.October 1, 2018.
The accompanying notes are an integral part of the condensed consolidated financial statements.




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DIGI INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, 2018 September 30, 2017December 31, 2018 September 30, 2018
(as adjusted)*
(in thousands, except share data)(in thousands, except share data)
ASSETS      
Current assets:      
Cash and cash equivalents$52,391
 $78,222
$72,222
 $58,014
Marketable securities4,757
 32,015
4,247
 4,736
Accounts receivable, net39,789
 28,855
46,371
 49,819
Inventories39,670
 30,238
47,036
 41,644
Receivable from sale of business
 1,998
Other3,694
 3,032
3,814
 2,613
Assets held for sale
 5,220
Total current assets140,301
 174,360
173,690
 162,046
Marketable securities, long-term2,489
 4,753
Property, equipment and improvements, net12,145
 12,801
11,827
 8,354
Identifiable intangible assets, net44,301
 11,800
36,772
 39,320
Goodwill155,982
 131,995
153,578
 154,535
Deferred tax assets3,576
 9,211
5,503
 6,600
Other542
 269
357
 1,291
Total assets$359,336
 $345,189
$381,727
 $372,146
LIABILITIES AND STOCKHOLDERS’ EQUITY      
Current liabilities:      
Accounts payable$11,024
 $6,240
$16,021
 $12,911
Accrued compensation6,121
 4,325
6,672
 8,190
Accrued warranty1,348
 987
Accrued professional fees896
 928
Accrued restructuring636
 1,656
Unearned revenue4,339
 1,343
7,812
 3,177
Contingent consideration on acquired businesses3,759
 388
5,944
 5,890
Other2,858
 2,113
4,322
 5,405
Total current liabilities30,981
 17,980
40,771
 35,573
Income taxes payable692
 877
785
 851
Deferred tax liabilities455
 534
566
 334
Contingent consideration on acquired businesses4,504
 6,000
4,203
 4,175
Other non-current liabilities676
 654
392
 720
Total liabilities37,308
 26,045
46,717
 41,653
Contingencies (see Note 12)
 
Contingencies (see Note 14)
 
Stockholders’ equity:      
Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued and outstanding
 

 
Common stock, $.01 par value; 60,000,000 shares authorized; 33,581,353 and 33,007,993 shares issued336
 330
Common stock, $.01 par value; 60,000,000 shares authorized; 34,076,394 and 33,812,838 shares issued341
 338
Additional paid-in capital251,366
 245,528
258,010
 255,936
Retained earnings145,519
 150,478
156,643
 151,961
Accumulated other comprehensive loss(20,610) (22,659)(25,092) (23,526)
Treasury stock, at cost, 6,430,128 and 6,436,578 shares(54,583) (54,533)
Treasury stock, at cost, 6,435,618 and 6,385,336 shares(54,892) (54,216)
Total stockholders’ equity322,028
 319,144
335,010
 330,493
Total liabilities and stockholders’ equity$359,336
 $345,189
$381,727
 $372,146
*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which we adopted on October 1, 2018.
The accompanying notes are an integral part of the condensed consolidated financial statements.



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DIGI INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended March 31,Three months ended December 31,
2018 20172018 2017 (as adjusted)*
(in thousands)(in thousands)
Operating activities:      
Net (loss) income$(4,926) $3,688
Adjustments to reconcile net (loss) income to net cash used in operating activities:   
Net income (loss)$4,682
 $(4,487)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:   
Depreciation of property, equipment and improvements1,406
 1,449
1,133
 759
Amortization of identifiable intangible assets4,287
 941
2,540
 1,694
Stock-based compensation2,378
 2,328
1,414
 1,053
Excess tax benefits from stock-based compensation
 (315)
Deferred income tax provision2,682
 242
1,333
 2,995
Gain on sale of property and equipment(4,396) 
Change in fair value of contingent consideration(425) (684)243
 (407)
Bad debt/product return provision395
 296
206
 14
Inventory obsolescence900
 600
450
 450
Restructuring reversal(67) 
Other30
 51
113
 57
Changes in operating assets and liabilities (net of acquisitions)(11,708) (9,473)(1,540) (3,456)
Net cash used in operating activities(4,981) (877)
Net cash provided by (used in) operating activities6,111
 (1,328)
Investing activities:      
Purchase of marketable securities
 (33,470)
Proceeds from maturities and sales of marketable securities29,513
 57,039
491
 4,296
Proceeds from sale of Etherios2,000
 3,000

 2,000
Acquisition of businesses, net of cash acquired(56,588) (29,994)
 (40,084)
Proceeds from sale of property and equipment10,047
 
Purchase of property, equipment, improvements and certain other identifiable intangible assets(785) (984)(1,775) (453)
Net cash used in investing activities(25,860) (4,409)
Net cash provided by (used in) investing activities8,763
 (34,241)
Financing activities:      
Acquisition earn-out payments
 (518)(161) 
Excess tax benefits from stock-based compensation
 315
Proceeds from stock option plan transactions3,427
 3,246
662
 2,972
Proceeds from employee stock purchase plan transactions618
 479
289
 380
Purchases of common stock(681) (587)(964) (636)
Net cash provided by financing activities3,364
 2,935
Net cash (used in) provided by financing activities(174) 2,716
Effect of exchange rate changes on cash and cash equivalents1,646
 (1,481)(492) 241
Net decrease in cash and cash equivalents(25,831) (3,832)
Net increase (decrease) in cash and cash equivalents14,208
 (32,612)
Cash and cash equivalents, beginning of period78,222
 75,727
58,014
 78,222
Cash and cash equivalents, end of period$52,391
 $71,895
$72,222
 $45,610
      
Supplemental schedule of non-cash investing and financing activities:      
Liability related to acquisition of businesses$(2,300) $(1,310)
Transfer of inventory to property, equipment and improvements$(200) $(312)
Accrual for purchase of property, equipment, improvements and certain other identifiable intangible assets$(27) $(66)$(2,883) $(27)
*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which we adopted on October 1, 2018.
The accompanying notes are an integral part of the condensed consolidated financial statements.



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DIGI INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)

              Accumulated  
          Additional   Other Total
  Common Stock Treasury Stock Paid-In Retained Comprehensive Stockholders’
(in thousands) Shares Par Value Shares Value Capital Earnings* Loss Equity
Balances, September 30, 2017 33,008
 $330
 6,437
 $(54,533) $245,528
 $150,363
 $(22,659) $319,029
Cumulative-effect adjustment from adoption of ASU 2016-09         52
 (33)   19
Net loss           (4,487)   (4,487)
Other comprehensive income             253
 253
Employee stock purchase plan issuances     (46) 389
 (9)     380
Repurchase of common stock     64
 (636)       (636)
Issuance of stock under stock award plans 473
 5
     2,967
     2,972
Stock-based compensation expense         1,053
     1,053
Balances, December 31, 2017 33,481
 $335
 6,455
 $(54,780) $249,591
 $145,843
 $(22,406) $318,583
                

Balances, September 30, 2018 33,813
 $338
 6,385
 $(54,216) $255,936
 $151,961
 $(23,526) $330,493
Net income           4,682
   4,682
Other comprehensive loss             (1,566) (1,566)
Employee stock purchase plan issuances     (33) 288
 1
     289
Repurchase of common stock     84
 (964)       (964)
Issuance of stock under stock award plans 263
 3
     659
     662
Stock-based compensation expense         1,414
     1,414
Balances, December 31, 2018 34,076
 $341
 6,436
 $(54,892) $258,010
 $156,643
 $(25,092) $335,010
*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which we adopted on October 1, 2018.
The accompanying notes are an integral part of the condensed consolidated financial statements.


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DIGI INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


1. BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation
The interim unaudited condensed consolidated financial statements included in this Form 10-Q have been prepared by Digi International Inc. (the “Company,” “Digi,” “we,” “our,” or “us”) pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto, including (but not limited to) the summary of significant accounting policies presented in our Annual Report on Form 10-K for the year ended September 30, 2017, as2018, filed with the SEC (“20172018 Financial Statements”).
Effective October 1, 2018, we adopted Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) as discussed below. All amounts and disclosures set forth in this Form 10-Q have been updated to comply with the new standards, as indicated by the “as adjusted” footnote.
The condensed consolidated financial statements presented hereinin this Form 10-Q reflect, in the opinion of management, all adjustments which consist only of normal, recurring adjustments necessary for a fair presentation of the condensed consolidated balance sheets and condensed consolidatedfinancial statements of operations, comprehensive income and cash flows for the periods presented. All adjustments consist only of normal, recurring adjustments. The condensed consolidated results of operations for any interim period are not necessarily indicative of results for the full year. The year-end condensed consolidated balance sheet data werewas derived from our 20172018 Financial Statements, but do not include all disclosures required by U.S. GAAP.
Summary of Significant Accounting Policies
Except for the accounting policy for revenue recognition that was updated as a result of adopting ASU 2014-09, there have been no other changes to our significant accounting policies described in our 2018 Financial Statements.
Revenue Recognition
We recognize hardware product revenue upon transfer of control of goods or services to customers in an amount that reflects the consideration we expect to receive in exchange for those goods or services. We determine the amount of revenue to be recognized through application of the following steps:
Identification of the contract, or contracts with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when or as we satisfy the performance obligations.
Hardware Product Revenue and SmartSense by Digi Equipment Revenue and Associated Installation Fees
Our hardware product revenue is derived primarily from the sale of wired and wireless hardware products to our distributors and Direct/Original Equipment Manufacturer (“OEM”) customers. Product revenue generally is recognized upon shipment of product to customers. Sales to authorized domestic distributors and Direct/OEM customers are made with certain rights of return and price adjustment provisions. Estimated reserves for future returns and pricing adjustments are established by us based on an analysis of historical patterns of returns and price adjustments as well as an analysis of authorized returns compared to received returns and distribution sales for the current period. Estimated reserves for future returns and price adjustments are charged against revenue in the same period as the corresponding sales are recorded.
Our SmartSense by Digi equipment revenue is recorded as an up-front sale at its stand-alone selling price because the customer could utilize our equipment with other monitoring services or could use our monitoring services with hardware purchased from other vendors. Our installation charges are recorded when the product is installed.


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1. BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Subscription and Support Services Revenue
Our SmartSense by Digisubscription revenue is recorded on a monthly basis. These subscriptions are generally in a range from one to five years, and may contain an evergreen renewal provision. Generally, our subscription renewal charges per month are the same as the original contract term.
We also derive service revenue from our Digi Remote Manager®, a platform-as-a-service (“PaaS”) offering, whereby customers pay for services consumed based on the number of devices being managed or monitored. This revenue is recognized over the life of the service term. 
Digi Support Services revenues are recognized over the life of the support contract. Some of Digi Support Services revenue is for training and this revenue is recognized as the services are performed.
Professional Services Revenue
Professional services revenue is derived from our Digi Wireless Design Services contracts on either on a time-and-materials or a fixed-fee basis. These revenues are recognized as the services are performed for time-and-materials contracts, or when milestones are achieved and accepted by the customer for fixed-fee contracts.
Contracts with Multiple Performance Obligations
SmartSense by Digirevenues typically are derived from contracts with multiple performance obligations. These obligations may include: delivery of monitoring equipment that the customer either purchases out-right or uses while we retain ownership, monitoring services, providing condition alerts of assets being monitored, and recertification of sensor equipment. When we retain ownership of the equipment, we charge an implementation fee to the customer so they can begin using the equipment. In these instances, all revenue derived from the above obligations is recognized over the subscription term of the contract. If the customer purchases the equipment out-right, that portion of the revenue is recognized at the stand-alone selling price at the time the equipment is shipped and all other revenue is recognized over the subscription term of the contract.
We have made an accounting policy election to exclude from the measurement of our revenues any sales or similar taxes we collect from customers.
Recently Issued Accounting Pronouncements
Not Yet Adopted
In May 2017, FASB issued ASU 2017-09, "Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting." ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. This ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017, which for us is the first quarter ending December 31, 2018. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact to our consolidated financial statements.
In January 2017, FASB issued ASU 2017-04, "Intangibles-GoodwillIntangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment."Impairment. ASU 2017-04 eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The standard, which should be applied prospectively, is effective for fiscal years beginning after December 15, 2019, which for us is our fiscal year ending September 30, 2021. Early adoption is permitted. WeThis ASU was early adopted by us on October 1, 2018 and did not have an impact on our Condensed Consolidated Financial Statements.
In May 2017, FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provided guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this update are currently evaluating the impact ofto be applied prospectively to an award modified on or after the adoption ofdate. This ASU 2017-04was effective for us this first fiscal quarter ending December 31, 2018. This ASU was adopted by us on October 1, 2018 and did not have an impact on our consolidated financial statements.Condensed Consolidated Financial Statements.
In August 2016, FASB issued ASU 2016-15, "StatementStatement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments."Payments. The amendments in this update provide guidance on eight specific cash flow issues, thereby reducing the diversity in practice in how certain transaction are classified in the statement of cash flows. This ASU was effective for us this first fiscal quarter ending December 31, 2018. This ASU was adopted by us on October 1, 2018 and did not have an impact on our Condensed Consolidated Financial Statements.

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1. BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In January 2016, FASB issued ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. The amendments in this update also simplify the impairment assessment of equity investments without readily determinable fair values.

This ASU also has changed the presentation and disclosure requirements for financial instruments. In addition, this ASU has clarified the guidance related to valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The amendments in this ASU were effective for our first fiscal quarter ending December 31, 2018. This ASU was adopted by us on October 1, 2018 and did not have an impact on our Condensed Consolidated Financial Statements.
In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”). This standard requires that revenue is recognized for the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. It also establishes timing associated with recognizing revenues and amortizing costs associated with contracts. FASB has issued several amendments to ASU 2014-09, including clarifications on disclosure of prior-period performance obligations and remaining performance obligations. The guidance permits two methods of adoption, one of which is to retrospectively adjust results for each prior reporting period presented. We elected to adopt the standard using this method effective October 1, 2018.
We have described how we recognize revenue in the aforementioned revenue recognition policy. Relative to the amortization of costs there are two impacts to our financial statements. First, in instances where we retain ownership of equipment a customer uses, we charge an implementation fee to the customer so they can begin using the equipment. We amortize this cost of the equipment over its useful life (typically three years). Second, we capitalize and amortize commissions paid to sales personnel or agents on service contracts. If the commissions earned during an accounting period exceed our capitalization threshold, they will be amortized over the calculated average expected life of the pool of contracts closed during that period.
In order to ease our transition in the adoption of Topic 606, we have elected to take the following permitted actions under the standard relative to certain transactions (i.e. the following practical expedients):
We have not disclosed the remaining transaction price for reporting periods prior to the first quarter of fiscal 2019.
For completed contracts that have variable consideration, we will use the as-invoiced amount for all of our time and materials contracts and contracts relating to Digi Remote Manager® in instances where the contracts do not include free service.
We will expense incremental costs of obtaining a contract when incurred if the amortization period of the asset is one year or less.

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1. BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The adoption of the standard related to the new revenue recognition impacted our reported results as follows:
  Three months ended December 31, 2017
(in thousands, except per common share data) As Reported Impact of Adoption As Adjusted
Revenue:      
Hardware product $38,454
 $
 $38,454
Services and solutions 6,743
 (242) 6,501
Total revenue 45,197
 (242) 44,955
Cost of sales:      
Cost of hardware product 19,210
 
 19,210
Cost of services and solutions 3,443
 (264) 3,179
Amortization 607
 
 607
Total cost of sales 23,260
 (264) 22,996
Gross profit 21,937
 22
 21,959
Operating expenses 24,060
 (102) 23,958
Operating loss $(2,123) $124
 $(1,999)
Net loss $(4,569) $82
 $(4,487)
Diluted loss per share $(0.17) $
 $(0.17)

  September 30, 2018
(in thousands) As Reported Impact of Adoption As Adjusted
Accounts receivable, net $50,817
 (998) $49,819
Property, equipment and improvements, net $6,270
 $2,084
 $8,354
Deferred tax assets $6,665
 (65) $6,600
Unearned revenue current $2,579
 598
 $3,177
Other non-current liabilities $510
 210
 $720
Retained earnings $151,748
 213
 $151,961
Adoption of the standards related to revenue recognition had no impact to total cash provided by or used in operating, financing or investing on our historical Condensed Consolidated Statements of Cash Flows.
Not Yet Adopted
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for annual periods and interim periods for those annual periods beginning after December 15, 2017, which for us isin the first quarter ending December 31, 2018.2020. Early adoption is permitted. We are currently evaluating when to adopt, and the impact of the adopting, ASU 2018-15 on our Condensed Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820).  The updated guidance improves the disclosure requirements on fair value measurements. The updated guidance is effective for us in the first quarter ending December 31, 2020. Early adoption is permitted for any removed or modified disclosures. We are evaluating when to adopt and the impact of adopting, ASU 2018-13 on our Condensed Consolidated Financial Statements.
In March 2017, FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments in this update shorten the amortization period for certain callable debt securities that are held at a premium. The amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount, which would be amortized to maturity. This ASU is effective for us in the first quarter ending December 31, 2019. Early adoption is permitted. We do not expect the adoption of ASU 2016-15this guidance to have a material impact on our consolidated financial statements.Condensed Consolidated Financial Statements.

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1. BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 2016, FASB issued ASU 2016-13, "FinancialFinancial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments."Instruments. The amendments in this update replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses. This update is intended to provide financial statement users with more decision-useful information about the expected credit losses. This ASU is effective for annual periods and interim periods for those annual periods beginning after December 15, 2019, which for us isin the first quarter ending December 31, 2020. Entities may early adopt beginning after December 15, 2018. We are currently evaluating the impact of the adoption ofadopting ASU 2016-13 on our consolidated financial statements.Condensed Consolidated Financial Statements.

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1. BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In February 2016, FASB issued ASU 2016-02, "LeasesLeases (Topic 842)", which amends the existing guidance to requireand requires lessees to recognize lease assets and lease liabilities from operating leases on the balance sheet. Thissheet for leases with a term longer than 12 months that are classified as operating leases under previous authoritative guidance. The lease liability will be equal to the present value of lease payments and the right-of-use asset will be based on the lease liability, subject to adjustment for certain items. In July 2018, FASB issued two additional amendments that affect this guidance described in the following updates ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases (Topic 842): Targeted Improvements. The amendments in ASU 2018-10 affect narrow aspects of the guidance issued in ASU 2016-02. The amendments in ASU 2018-11 provide an alternative (and optional) transition method that allows entities to apply the transition provisions in ASU 2016-02 at the adoption date instead of at the earliest comparative period presented in the financial statements. ASU 2016-02 is effective for us, using the modified retrospective approach, for annual periods and interim periods within those annual periods beginning after December 15, 2018, which for us is the first fiscal quarter ending December 31, 2019. Early adoption is permitted. As noted above, ASU 2018-11 provides for an additional and optional transition method. We plan to apply the optional transition method at the adoption date and are currently evaluating the impact of the adoption ofadopting ASU 2016-02 on our consolidated financial statements.
In January 2016, FASB issued ASU 2016-01, "Financial Instruments - Overall: Recognition and Measurement ofCondensed Consolidated Financial Assets and Financial Liabilities." ASU 2016-01 will require equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. The amendments in this update will also simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, eliminate the requirement for public business entities to disclose the method and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet and require these entities to use the exit price notion when measuring fair value of financial instruments for disclosure purposes. This ASU would also change the presentation and disclosure requirements for financial instruments. In addition, this ASU clarifies the guidance related to valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, which for us is the first fiscal quarter ending December 31, 2018. Early adoption is permitted for financial statements of fiscal years and interim periods that have not been issued. We are currently evaluating the impact of the adoption of ASU 2016-01.
In May 2014, FASB issued ASU 2014-09, "Revenue from Contracts with Customers." This guidance provides a five-step analysis in determining when and how revenue is recognized so that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods and services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, FASB issued ASU 2015-14 "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date" which approved a one-year deferral of the effective date of ASU 2014-09. As a result of this deferral, ASU 2014-09 is effective for our fiscal year ending September 30, 2019, including interim periods within that reporting period. In addition, FASB issued ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2017-14, to provide interpretive clarifications on the new guidance in ASC Topic 606. We are currently working through an adoption plan and have identified our revenue streams and completed a preliminary analysis of how we currently account for revenue transactions compared to the revenue accounting required under the new standard.  We intend to complete our adoption plan during the fourth quarter of fiscal 2018.  This plan includes a review of transactions supporting each revenue stream to determine the impact of accounting treatment under ASC 606, evaluation of the method of adoption, and completing a rollout plan for implementation of the new standard with affected functions in our organization.  Because of the nature of the work that remains, at this time we are unable to reasonably estimate the impact of adoption on our consolidated financial statements.  We plan to adopt the new guidance beginning with our fiscal quarter ending December 31, 2018.Statements.
2. ACQUISITIONS
Acquisition of Accelerated Concepts, Inc.
On January 22, 2018, we purchased all the outstanding stock of Accelerated Concepts, Inc. (“Accelerated”), a Tampa-based provider of secure, enterprise-grade, cellular (LTE) networking equipment for primary and backup connectivity applications. This acquisition is included withwithin our IoT Products and Services segment.
The terms of the acquisition includeincluded an upfront cash payment together with future earn-out payments. Cash of $16.8$16.4 million (excluding cash acquired of $0.3$0.2 million) was paid at the time of closing. The earn-out payments are scheduled to be paid in two installments and the payment amount, if any, will be calculated based on the revenue performance of Accelerated products. The first installment will be based on revenues from January 22, 2018 through January 21, 2019 (the “2018 period”) and the second installment will be based on revenues from January 22, 2019 through January 21, 2020 (the “2019 period”). TheIf certain revenue thresholds are met, the cumulative amount of these earn-outs will be $4.5 million, if certain revenue thresholds are met.million. Additional payments, not to exceed $2.0 million for both installments, may also be due depending on revenue performance. The fair value of this contingent consideration was $2.3 million at the date of acquisition and $4.7 million at MarchDecember 31, 2018 (see Note 7 to the Condensed Consolidated Financial Statements). We have determined that the fair value of the earn-out on the acquisition date will be considered as part of the purchase price consideration as there are no continuing employment requirements associated with the earn-out.

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2. ACQUISITIONS (CONTINUED)
The purchase price was allocated to the estimated fair value of assets and liabilities assumed. The purchase price allocation resulted in the recognition of $6.1$5.7 million of goodwill. For tax purposes, this acquisition was treated as a stock acquisition. The goodwill therefore was not deductible. We believe this iswas a complementary acquisition for us as it significantly enhancesenhanced our existing cellular product lines and immediately extendsextended our market reach with a line of commercial routers and network appliance products. This acquisition will further enhanceenhanced and expandexpanded the capabilities of the IoT Products and Services segment (see Note 910 to our Condensed Consolidated Financial Statements).
The Accelerated acquisition has been accounted for using the acquisition method of accounting which requires, among other things, that assets acquired and liabilities assumed pursuant to the purchase agreement be recognized at fair value as of the acquisition date.
The following table summarizes the preliminary values of Accelerated assets acquired and liabilities assumed as of the acquisition date (in thousands):
Cash$16,759
Fair value of contingent consideration on acquired business2,300
Total purchase price consideration$19,059
  
Fair value of net tangible assets acquired$697
Fair value of identifiable intangible assets acquired: 
Customer relationships6,500
Purchased and core technology3,000
Trade name and trademarks1,000
Order backlog1,800
Goodwill6,062
Total$19,059
Operating results for Accelerated after January 22, 2018 are included in our Condensed Consolidated Statements of Operations. The Condensed Consolidated Balance Sheet as of MarchDecember 31, 2018 reflects the preliminaryfinal allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The net working capital values are preliminary and we expect to finalize them inwere finalized during the fourth quarter of fiscal 2018.
The weighted average useful life for all the identifiable intangibles listed above is 5.5 years. For purposes of determining fair value, the purchased and core technology identified above is assumed to have a useful life of five years, the customer relationships are assumed to have useful lives of seven years, the trade name and trademarks are assumed to have useful lives of five years and the order backlog is assumed to have a useful life of one year. Useful lives for identifiable intangible assets are estimated at the time of acquisition based on the periods of time from which we expect to derive benefits from the identifiable intangible assets.
The amounts of revenue and net income included in the Condensed Consolidated Statements of Operations from the acquisition date of January 22, 2018 were $6.2 million and $1.4 million, respectively. Costs directly related to the acquisition of $0.3 million incurred in the first six months of fiscal 2018 have been charged directly to operations and are included in general and administrative expense in our Condensed Consolidated Statements of Operations. These acquisition costs include legal, accounting and valuation fees.
Acquisition of TempAlert LLC
On October 20, 2017, we purchased all the outstanding interests of TempAlert LLC (“TempAlert”), a Boston-based provider of automated, real-time temperature monitoring and task management solutions. The purchase price was $45.0 million in cash

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2. ACQUISITIONS (CONTINUED)
adjusted for certain net working capital adjustments. We believe this iswas a complementary acquisition for us as the acquired technology will continue to be supported to further enhance and expand the capabilities of the IoT Solutions segment (see Note 910 to our Condensed Consolidated Financial Statements).
The terms of the acquisition included an upfront cash payment together with future earn-out payments. Cash of $40.7 million (excluding cash acquired of $0.6 million) was paid at the time of closing. The earn-out payments are scheduled to be paid after December 31, 2018 and December 31, 2019 which is the end of the earn-out periods. The cumulative amount of these earn-

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2. ACQUISITIONS (CONTINUED)
outsearn-outs for the periods ended December 31, 2018 and December 31, 2019, will not exceed $35.0 million and $45.0 million, respectively. The fair value of this contingent consideration was zero at the date of acquisition and at MarchDecember 31, 2018 (see Note 7 to the Condensed Consolidated Financial Statements).
The purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed. The purchase price allocation resulted in the recognition of $17.6 million of goodwill. For tax purposes, this acquisition iswas treated as an asset acquisition, therefore the goodwill iswas deductible. We believe that the acquisition resulted in the recognition of goodwill because this iswas a complementary acquisition for us and will provideprovided a source of recurring revenue in a new vertically focused solutions business.
The TempAlert acquisition has been accounted for using the acquisition method of accounting which requires, among other things, that assets acquired and liabilities assumed pursuant to the purchase agreement be recognized at fair value as of the acquisition date.
The following table summarizes the preliminary values of TempAlert assets acquired and liabilities assumed as of the acquisition date (in thousands):
Cash$40,741
Fair value of contingent consideration on acquired business
Total purchase price consideration$40,741
  
Fair value of net tangible assets acquired$(1,111)
Fair value of identifiable intangible assets acquired: 
Customer relationships18,300
Purchased and core technology4,000
Trade name and trademarks2,000
Goodwill17,552
Total$40,741
Operating results for TempAlert after October 20, 2017 are included in our Condensed Consolidated Statements of Operations. The Condensed Consolidated Balance Sheet as of MarchDecember 31, 2018 reflects the preliminaryfinal allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The net working capital values are preliminary and we expect to finalize them in the fourth fiscal quarter of 2018.
The weighted average useful life for all the identifiable intangibles listed above is 6.5 years. For purposes of determining fair value, the purchased and core technology identified above is assumed to have a useful life of five years, the customer relationships are assumed to have useful lives of seven years and the trade name and trademarks are assumed to have useful lives of five years. Useful lives for identifiable intangible assets are estimated at the time of acquisition based on the periods of time from which we expect to derive benefits from the identifiable intangible assets.
The amounts of revenue and net loss included in the Condensed Consolidated Statements of Operations from the acquisition date of October 20, 2017 were $5.7 million and $3.1 million, respectively. Costs directly related to the acquisition of $1.4 million incurred in the first six months of fiscal 2018 and $0.4 million incurred in fiscal 2017 have been charged directly to operations and are included in general and administrative expense in our Condensed Consolidated Statements of Operations. These acquisition costs include legal, accounting, valuation and success fees.
Pro Forma Financial Information
The following consolidated pro forma information is as if these acquisitions had occurred on October 1, 2016 (in thousands):
 Three months ended March 31, Six months ended March 31,
 2018 2017 2018 2017
Revenue$54,791
 $50,963
 $105,411
 $105,349
Net loss$(340) $(867) $(4,916) $(1,842)

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2. ACQUISITIONS (CONTINUED)
Pro forma net loss was adjusted to exclude interest expense related to debt that was paid off prior to acquisition, interest income related to promissory note that was settled prior to acquisition, adjust amortization to the fair value of the intangibles acquired and remove any costs associated with the sale transaction.
3. DISCONTINUED OPERATIONSSALE OF BUSINESS
On October 23, 2015, we sold all the outstanding stock of our wholly owned subsidiary, Etherios Inc. (“Etherios”) to West Monroe Partners, LLC. We sold Etherios as part of a strategy to focus on providing highly reliable machine connectivity solutions for business and mission-critical application environments. Etherios was included in our single operating segment prior to fiscal 2017.
The terms of the sale agreement provided that West Monroe Partners, LLC would pay us $3.0 million on October 23, 2016 and $2.0 million on October 23, 2017. The present value of these amounts was included within the total fair value of consideration received. These receivable amounts were unsecured and non-interest bearing. We received $3.0 million in October 2016 and $2.0 million in October 2017.

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4. EARNINGS PER SHARE
Basic net income (loss) income per common share is calculated based on the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares result from dilutive common stock options and restricted stock units. Diluted net loss per common share is computed by dividing net loss by the weighted average number of common shares. All potentially dilutive common equivalent shares are excluded from the calculations of net loss per diluted share due to their anti-dilutive effect for the three and six month periodsperiod ended MarchDecember 31, 2018.2017.
The following table is a reconciliation of the numerators and denominators in the net income (loss) income per common share calculations (in thousands, except per common share data):
 Three months ended March 31, Six months ended March 31,
 2018 2017 2018 2017
Numerator:       
Net (loss) income$(357) $1,331
 $(4,926) $3,688
        
Denominator:       
Denominator for basic net (loss) income per common share — weighted average shares outstanding27,084
 26,477
 26,914
 26,324
Effect of dilutive securities:       
Stock options and restricted stock units
 775
 
 810
Denominator for diluted net (loss) income per common share — adjusted weighted average shares27,084
 27,252
 26,914
 27,134
        
Net (loss) income per common share, basic$(0.01) $0.05
 $(0.18) $0.14
Net (loss) income per common share, diluted$(0.01) $0.05
 $(0.18) $0.14
 Three months ended December 31,
 2018 2017 (as adjusted)*
Numerator:   
Net income (loss)$4,682
 $(4,487)
    
Denominator:   
Denominator for basic net income (loss) per common share — weighted average shares outstanding27,513
 26,748
Effect of dilutive securities:   
Stock options and restricted stock units562
 
Denominator for diluted net income (loss) per common share — adjusted weighted average shares28,075
 26,748
    
Net income (loss) per common share, basic$0.17
 $(0.17)
Net income (loss) per common share, diluted$0.17
 $(0.17)
*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which we adopted on October 1, 2018.
For the three months ended MarchDecember 31, 2018 and 2017, there were 1,458,2971,241,964 and 730,400 potentially dilutive shares, respectively, and for the six months ended March 31, 2018 and 2017, there were 1,988,673 and 1,077,1501,998,740 potentially dilutive shares, respectively, related to stock options to purchase common shares that were not included in the above computation of diluted earnings per common share. This is becauseshare since the options’ exercise prices were greater than the average market price of our common shares. In addition, due to the net loss for the three and six month periodsperiod ended MarchDecember 31, 2018,2017, there were 275,522 and 333,801331,021 common stock options and restricted stock units, respectively, that were not included in the above computation of diluted earnings per share.

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5. SELECTED BALANCE SHEET DATA
The following table shows selected balance sheet data (in thousands):
March 31,
2018
 September 30, 2017December 31,
2018
 September 30, 2018
(as adjusted)*
Accounts receivable, net:      
Accounts receivable$42,778
 $31,365
$49,698
 $52,792
Less allowance for doubtful accounts566
 341
797
 413
Less reserve for future returns and pricing adjustments2,423
 2,169
2,530
 2,560
Accounts receivable, net$39,789
 $28,855
$46,371
 $49,819
Inventories:      
Raw materials$24,804
 $24,050
$19,427
 $22,047
Work in process634
 484
807
 525
Finished goods14,232
 5,704
26,802
 19,072
Inventories$39,670
 $30,238
$47,036
 $41,644
*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which we adopted on October 1, 2018.
Inventories are stated at the lower of cost or net realizable value, with cost determined using the first-in, first-out method.

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6. MARKETABLE SECURITIES
Our marketable securities may consist of certificates of deposit, commercial paper, corporate bonds and government municipal bonds. We analyze our available-for-sale marketable securities for impairment on an ongoing basis. When we perform this analysis, we consider factors such as the length of time and extent to which the securities have been in an unrealized loss position and the trend of any unrealized losses. We also consider whether an unrealized loss is a temporary loss or an other-than-temporary loss based on factors such as: (a) whether we have the intent to sell the security, (b) whether it is more likely than not that we will be required to sell the security before its anticipated recovery, or (c) permanent impairment due to bankruptcy or insolvency.
In order to estimate the fair value for each security in our investment portfolio, we obtain quoted market prices and trading activity for each security where available. We obtain relevant information from our investment advisor and, if warranted, also may review the financial solvency of certain security issuers. As of MarchDecember 31, 2018, 28all of our29 securities that we held were trading below our amortized cost basis. We determined each decline in value to be temporary based upon the above described factors. We expect to realize the fair value of these securities, plus accrued interest, either at the time of maturity or when the security is sold. All of our current holdings are classified as available-for-sale marketable securities and are recorded at fair value on our consolidated balance sheet with the unrealized gains and losses recorded in accumulated other comprehensive income (loss). All of our current marketable securities will mature in less than one year and our non-current marketable securities will mature in less than two years.year. Our balance sheet classification of available for sale securities is based on our best estimate of when we expect to liquidate such investments and, presently, is consistent with the stated maturity dates of such investments. However, we are not committed to holding these investments until their maturity and may determine to liquidate some or all of these investments earlier based on our liquidity and other needs. During the sixthree months ended MarchDecember 31, 2018 and 2017, we received proceeds from our available-for-sale marketable securities of $29.5$0.5 million and $57.0$4.3 million, respectively.
At MarchDecember 31, 2018 our marketable securities were (in thousands):
Amortized
Cost (1)
 
Unrealized
Gains
 
Unrealized
Losses
 Fair Value (1)
Amortized
Cost (1)
 
Unrealized
Gains
 
Unrealized
Losses
 Fair Value (1)
Current marketable securities:              
Certificates of deposit$4,766
 $
 $(9) $4,757
$4,262
 $
 $(15) $4,247
Non-current marketable securities:       
Certificates of deposit2,509
 
 (20) 2,489
Total marketable securities$7,275
 $
 $(29) $7,246
$4,262
 $
 $(15) $4,247
(1)
Included in amortized cost and fair value is purchased and accrued interest of $2512.

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6. MARKETABLE SECURITIES (CONTINUED)
At September 30, 20172018 our marketable securities were (in thousands):
Amortized
Cost (1)
 
Unrealized
Gains
 
Unrealized
Losses
 Fair Value (1)
Amortized
Cost (1)
 
Unrealized
Gains
 
Unrealized
Losses
 Fair Value (1)
Current marketable securities:              
Corporate bonds$28,275
 $
 $(20) $28,255
Certificates of deposit3,756
 4
 
 3,760
Current marketable securities32,031
 4
 (20) 32,015
Non-current marketable securities:       
Certificates of deposit4,757
 
 (4) 4,753
$4,756
 
 $(20) $4,736
Total marketable securities$36,788
 $4
 $(24) $36,768
$4,756
 $
 $(20) $4,736
(1)
Included in amortized cost and fair value is purchased and accrued interest of $2116.
The following tables show the fair values and gross unrealized losses of our available-for-sale marketable securities that have been in a continuous unrealized loss position deemed to be temporary, aggregated by investment category (in thousands):
March 31, 2018December 31, 2018
Less than 12 Months More than 12 MonthsLess than 12 Months More than 12 Months
Fair Value Unrealized Losses Fair Value Unrealized LossesFair Value Unrealized Losses Fair Value Unrealized Losses
Certificates of deposit6,745
 (28) 250
 (1)$
 $
 $4,247
 $(15)
Total$6,745
 $(28) $250
 $(1)$
 $
 $4,247
 $(15)

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6. MARKETABLE SECURITIES (CONTINUED)
September 30, 2017September 30, 2018
Less than 12 Months More than 12 MonthsLess than 12 Months More than 12 Months
Fair Value Unrealized Losses Fair Value Unrealized LossesFair Value Unrealized Losses Fair Value Unrealized Losses
Corporate bonds$26,196
 $(20) $
 $
Certificates of deposit3,751
 (4) 
 
$
 $
 $4,736
 $(20)
Total$29,947
 $(24) $
 $
$
 $
 $4,736
 $(20)
7. FAIR VALUE MEASUREMENTS
Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. This standard also establishes a hierarchy for inputs used in measuring fair value. This standard maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability based upon the best information available in the circumstances.
The categorization of financial assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable for the asset or liability and their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 may also include certain investment securities for which there is limited market activity or a decrease in the observability of market pricing for the investments, such that the determination of fair value requires significant judgment or estimation.
Fair value is applied to financial assets such as our marketable securities, which are classified and accounted for as available-for-sale and to financial liabilities for contingent consideration. These items are stated at fair value at each reporting period

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7. FAIR VALUE MEASUREMENTS (CONTINUED)
using the above guidance. The following tables provide information by level for financial assets and liabilities that are measured at fair value on a recurring basis (in thousands):
Total Fair
Value at
 
Fair Value Measurements Using
 Inputs Considered as
Total Fair
Value at
 
Fair Value Measurements Using
 Inputs Considered as
March 31, 2018 Level 1 Level 2 Level 3December 31, 2018 Level 1 Level 2 Level 3
Assets:              
Money market$17,632
 $17,632
 $
 $
$28,010
 $28,010
 $
 $
Certificates of deposit7,246
 
 7,246
 
4,247
 
 4,247
 
Total assets measured at fair value$24,878
 $17,632
 $7,246
 $
$32,257
 $28,010
 $4,247
 $
Liabilities:              
Contingent consideration on acquired businesses$8,263
 $
 $
 $8,263
$10,147
 $
 $
 $10,147
Total liabilities measured at fair value$8,263
 $
 $
 $8,263
$10,147
 $
 $
 $10,147
Total Fair
Value at
 
Fair Value Measurements Using
 Inputs Considered as
Total Fair
Value at
 
Fair Value Measurements Using
 Inputs Considered as
September 30, 2017 Level 1 Level 2 Level 3September 30, 2018 Level 1 Level 2 Level 3
Assets:              
Money market$39,524
 $39,524
 $
 $
$24,318
 $24,318
 $
 $
Corporate bonds28,255
 
 28,255
 
Certificates of deposit8,513
 
 8,513
 
4,736
 
 4,736
 
Total assets measured at fair value$76,292
 $39,524
 $36,768
 $
$29,054
 $24,318
 $4,736
 $
Liabilities:              
Contingent consideration on acquired businesses$6,388
 $
 $
 $6,388
$10,065
 $
 $
 $10,065
Total liabilities measured at fair value$6,388
 $
 $
 $6,388
$10,065
 $
 $
 $10,065

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7. FAIR VALUE MEASUREMENTS (CONTINUED)
Our money market funds, which have been determined to be cash equivalents, are measured at fair value using quoted market prices in active markets for identical assets and are therefore classified as Level 1 assets. We value our Level 2 assets using inputs that are based on market indices of similar assets within an active market. There were no transfers into or out of our Level 2 financial assets during the sixthree months ended MarchDecember 31, 2018.
The use of different assumptions, applying different judgment to matters that inherently are subjective and changes in future market conditions could result in different estimates of fair value of our securities or contingent consideration, currently and in the future. If market conditions deteriorate, we may incur impairment charges for securities in our investment portfolio. We may also incur changes to our contingent consideration liability as discussed below.
We are required to make contingent payments for our acquisitions. In connection with the October 2015 acquisition of Bluenica Corporation (“Bluenica”), we are required to make contingent payments over a period of up to four years, subject to achieving specified revenue thresholds for sales of Bluenica products. The fair value of the liability for contingent payments recognized upon acquisition was $10.4 million and was $5.7$5.5 million at MarchDecember 31, 2018. We paid $0.5 million forNo payments were made during the period ended September 30, 2016 and zero for the period ended September 30, 2017.first quarters of fiscal 2019 or 2018.
In connection with the November 2016 acquisition of FreshTemp, LLC (“FreshTemp”), we arewere required to make a contingent payment after June 30, 2018, for revenue related to specific customer contracts signed by June 30, 2017. The fair value of the liability recognized upon acquisition was $1.3 million. We paid $0.2 million and was $0.3 million at March 31, 2018.during the first quarter of fiscal 2019.
ForIn connection with the JanuaryOctober 2017 acquisition of SMART TempsTempAlert LLC (“SMART Temps”TempAlert”), we were required to make a contingent payment after December 31, 2017 based on achieving specified revenue thresholds. Since the revenue threshold was not met, no payment was made. The fair value of the liability for contingent payments recognized upon acquisition of SMART Temps was $10,000 and was zero at March 31, 2018.
For the TempAlert acquisition, we are required to make contingent payments for the twelve month periods ending December 31, 2018 and December 31, 2019 based on the total Digi IoT Solutions segment revenue. The fair value of the liability for contingent payments recognized upon acquisition of TempAlert and at MarchDecember 31, 2018 was zero.

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7. FAIR VALUE MEASUREMENTS (CONTINUED)
For the Accelerated, acquisition, we are required to make contingent payments for the twelve month periods ending January 21, 2019 and January 21, 2020, based upon certain thresholds. The fair values of the liability for contingent payments recognized upon acquisition of Accelerated and at MarchDecember 31, 2018 was $2.3 million.million and was $4.7 million, respectively. The increase is a result of Accelerated outperforming initial revenue expectations.
The fair value of these contingent payments was estimated by discounting to present value the probability-weighted contingent payments expected to be made. Assumptions used in these calculations include the discount rate and various probability factors. This liability is considered to be a Level 3 financial liability that is re-measured each reporting period as a charge or credit to general and administrative expense within the Condensed Consolidated Statements of Operations.
The following table presents a reconciliation of the contingent consideration liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):
Three months ended March 31, Six months ended March 31,Three months ended December 31,
2018 2017 2018 20172018 2017
Fair value at beginning of period$5,981
 $10,660
 $6,388
 $9,960
$10,065
 $6,388
Purchase price contingent consideration2,300
 10
 2,300
 1,310
Contingent consideration payments
 
 
 (518)(161) 
Change in fair value of contingent consideration(18) (602) (425) (684)243
 (407)
Fair value at end of period$8,263
 $10,068
 $8,263
 $10,068
$10,147
 $5,981
The change in fair value of contingent consideration relates to the acquisitions of Bluenica, FreshTemp and SMART TempsAccelerated and is included in general and administrative expense. The change in fair value of contingent consideration reflects our estimate of the probability of achieving the relevant targets and is discounted based on our estimated discount rate. We have estimated the fair value of the contingent consideration based on the probability of achieving the specified revenue thresholds at 93.5%a range of 98.6% to 98.5%100.0% for Bluenica, between 5% and 100% for FreshTemp, 0% for both SMART Temp and TempAlert, and 34.0%a range of 44.4% to 53.2%100.0% for Accelerated. A significant increase (decrease)change in our estimates of achieving the relevant targets could materially increase (decrease)change the fair value of the contingent consideration liability.

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8. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET
Amortizable identifiable intangible assets were (in thousands):
March 31, 2018 September 30, 2017December 31, 2018 September 30, 2018
Gross
carrying
amount
 
Accum.
amort.
 Net 
Gross
carrying
amount
 
Accum.
amort.
 Net
Gross
carrying
amount
 
Accum.
amort.
 Net 
Gross
carrying
amount
 
Accum.
amort.
 Net
Purchased and core technology$58,541
 $(47,787) $10,754
 $51,292
 $(46,304) $4,988
$57,821
 $(49,113) $8,708
 $58,102
 $(48,693) $9,409
License agreements102
 (32) 70
 18
 (17) 1
102
 (53) 49
 102
 (46) 56
Patents and trademarks15,542
 (11,701) 3,841
 12,484
 (11,280) 1,204
15,748
 (12,501) 3,247
 15,701
 (12,242) 3,459
Customer relationships46,918
 (19,082) 27,836
 21,914
 (16,817) 5,097
46,432
 (22,024) 24,408
 46,605
 (21,049) 25,556
Non-compete agreements600
 (150) 450
 600
 (90) 510
600
 (240) 360
 600
 (210) 390
Order backlog1,800
 (450) 1,350
 
 
 
1,800
 (1,800) 
 1,800
 (1,350) 450
Total$123,503
 $(79,202) $44,301
 $86,308
 $(74,508) $11,800
$122,503
 $(85,731) $36,772
 $122,910
 $(83,590) $39,320
Amortization expense was $2.6$2.5 million and $0.6$1.7 million for the three month periods ended March 31, 2018 and 2017, respectively, and $4.3 million and $0.9 million for the six month periods ended MarchDecember 31, 2018 and 2017, respectively. Amortization expense is recorded on our consolidated statements of operations within cost of sales and in general and administrative expense.

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8. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET (CONTINUED)
Estimated amortization expense related to identifiable intangible assets for the remainder of fiscal 20182019 and the five succeeding fiscal years is (in thousands):
2018 (six months)$4,945
20198,360
2019 (nine months)$6,283
20207,595
8,297
20217,130
7,722
20226,758
6,853
20234,751
4,668
20243,995
The changes in the carrying amount of goodwill are (in thousands):
Six months ended
March 31,
Three months ended
December 31,
2018 20172018 2017
Beginning balance, October 1$131,995
 $109,448
$154,535
 $131,995
Acquisitions23,614
 21,206

 17,341
Foreign currency translation adjustment373
 (733)(957) (3)
Ending balance, March 31$155,982
 $129,921
Ending balance, December 31$153,578
 $149,333
Goodwill is tested for impairment on an annual basis as of June 30, or more frequently if events or circumstances occur which could indicate impairment. The calculation of goodwill impairment requires us to make assumptions about the fair value of our reporting unit(s), which historically has been approximated by using our market capitalization plus a control premium for our reporting unit(s). Control premium assumptions require judgment and actual results may differ from assumed or estimated amounts.
As of the third quarter of fiscal 2017, we determined that we have two reportable operating segments, our IoT Solutions segment and our IoT Products & Services segment (see Note 9 to the Condensed Consolidated Financial Statements). As a result, we concluded that the IoT Solutions segment and the IoT Products & Services segment each constitute a separate reporting unitsunit for purposes of the ASC 350-20-35 “Goodwill Measurement of Impairment” assessment andassessment. As such, both units were tested individually for impairment.
Our test for potential goodwill impairment is a two-step approach. First, we estimateWe first assess qualitative factors to determine whether the fair values for each reporting unit by comparing the fair valueexistence of events or circumstances to the carrying value. If the carrying value of the reporting unit exceeds its estimated fair value, then we conduct the second step, which requires us to measure the amount of the impairment loss. The impairment loss,determine if any,it is calculated by comparing the implied fair value of the goodwill to its carrying amount. To calculate the implied fair value of goodwill,more likely than not that the fair value of a reporting unit is less than its carrying value. If we determine based on this assessment that it is more likely than not that the fair value of a reporting unit’s assets and liabilities, excludingunits is less than its carrying amount, we perform the goodwill is estimated. The excess ofimpairment test. This test requires us to determine the fair value of the reporting unit overand compare it to the carrying amount, assigned to its assets and liabilities, excludingincluding goodwill, isof such reporting unit. If the implied fair value exceeds the carrying amount, no impairment loss is recognized. However, if the carrying amount of the reporting unit’s goodwill.unit exceeds its fair value, the goodwill of the reporting units is impaired and an impairment loss would be recognized.

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8. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET (CONTINUED)
At June 30, 2017,2018, we had a total of $98.6$104.6 million of goodwill on our Condensed Consolidated Balance Sheet for the IoT Products & Services reporting unit and the implied fair value of this reporting unit exceeded its carrying value by approximately 7%36%. At June 30, 2017,2018, we had a total of $32.5$50.0 million of goodwill on our Condensed Consolidated Balance Sheet for the IoT Solutions reporting unit and the implied fair value of this reporting unit exceeded its carrying value by approximately 8%7%.
Based on that data, we concluded that no impairment was indicated for either reporting unit and we were not required to complete the second step of the goodwill impairment analysis.unit. No goodwill impairment charges were recorded. During the secondfirst quarter of fiscal 2018,2019, we assessed various qualitative factors to determine whether or not an additional goodwill impairment assessment was required as of MarchDecember 31, 2018, and we2018. We concluded that no additional impairment assessment was required.
Implied fair values for both reporting units were each calculated on a standalone basis using a weighted combination of the income approach and market approach.
The income approach indicates the fair value of a business based on the value of the cash flows the business or asset can be expected to generate in the future. A commonly used variation of the income approach used to value a business is the discounted cash flow (“DCF”) method. The DCF method is a valuation technique in which the value of a business is estimated on the earnings capacity, or available cash flow, of that business. Earnings capacity represents the earnings available for distribution to stockholders after consideration of the reinvestment required for future growth. Significant judgment is required to estimate the amount and timing of future cash flows for each reporting unit and the relative risk of achieving those cash flows.
The market approach indicates the fair value of a business or asset based on a comparison of the business or asset to comparable publicly traded companies or assets and transactions in its industry as well as prior company or asset transactions. This approach can be estimated through the guideline company method. This method indicates fair value of a business by comparing it to publicly traded companies in similar lines of business. After identifying and selecting the guideline companies, we make judgments about the comparability of the companies based on size, growth rates, profitability, risk, and return on investment in order to estimate market multiples. These multiples are then applied to the reporting units to estimate a fair value.
The implied fair values of each reporting unit were added together to get an indicated value of total equity to which a range of indicated value of total equity was derived. This range was compared to the total market capitalization of $359.6 million as of June 30, 2018, which implied a range of control premiums of 5.7% to 16.4%. This range of control premiums fell below the control premiums observed in the last five years in the communications equipment industry. As a result, the market capitalization reconciliation analysis proved support for the reasonableness of the fair values estimated for each individual reporting unit.
Should the facts and circumstances surrounding our assumptions change, the first step of our goodwill impairment analysis may fail. Assumptions and estimates to determine fair values are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. For example, if our future operating results do not meet current forecasts or if we

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8. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET (CONTINUED)
experience a sustained decline in our market capitalization that is determined to be indicatedindicative of a reduction in fair value of one or more of our reporting units, we may be required to record future impairment charges for goodwill. An impairment could have a material effect on our consolidated balance sheet and results of operations. We have had no goodwill impairment losses since the adoption of Accounting Standards Codification (ASC)ASC 350, Intangibles-Goodwill and Others, in fiscal 2003.
9. SALE OF BUILDING
On October 2, 2018, we sold our 130,000 square feet corporate headquarters building in Minnetonka, Minnesota to Minnetonka Leased Housing Associates II, LLLP. The sales price was $10.0 million in cash adjusted for certain selling costs and an escrow for the leaseback of the building for four months. At September 30, 2018 the net book value of the land, building and improvements was $5.2 million and listed as assets held for sale on our Condensed Consolidated Balance Sheet. As a result, we recorded a $1.1 million tax benefit in the fourth quarter of fiscal 2018 because we were able to use credit loss carryforwards which previously had a valuation allowance. We recorded a gain of $4.4 million ($3.4 million net of tax) in the first quarter of fiscal 2019, which is recorded in general and administrative expense.
During the three months ended December 31, 2018, we paid $1.2 million for leasehold improvements to build out our new headquarters space. These improvements will be depreciated over 13 years, which is the length of the lease.


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10. SEGMENT INFORMATION
We have two reportable operating segments for purposes of ASC 280-10-50 "Segment Reporting"“Segment Reporting”: (1) IoT Products & Services, (formerly M2M), and (2) IoT Solutions (formerly Solutions).Solutions. Our segments are described below:
IoT Products & Services
Our IoT Products & Services segment is composed of the following communications products and and communication product development services and includes our recent acquisition of Accelerated:services:
Cellular routers and gateways;products;
Radio frequency (RF) which include our XBee® modules as well as other RF solutions;
Embedded products include Digi Connect® and Rabbit® embedded systems on module and single board computers;
Network products, which has the highest concentration of mature products, including console and serial servers and USB connected products;
Digi Wireless Design Services;
Digi Remote Manager®; and
Digi Support servicesServices which offers various levels of technical services for development assistance, consulting and training.
IoT Solutions
We have formed the IoT Solutions segment primarily through four acquisitions: the October 2015 acquisition of Bluenica, the November 2016 acquisition of FreshTemp, the January 2017 acquisition of SMART Temps and the October 2017 acquisition of TempAlert. Our IoT Solutions segment offers wireless temperature and other environmental conditioncondition-based monitoring services as well as employee task management services. These productssolutions are focused on three primary vertical markets: healthcare (including retail pharmacies, hospitals and services are provided toother medical facilities), food service transportation, education, healthcare and pharma, and industrial markets andtransportation/logistics. These solutions are marketed as SmartSense by Digi™Digi. We have formed, expanded and enhanced the IoT Solutions segment through four acquisitions. These include: the October 2015 acquisition of Bluenica Corporation ("Bluenica"), formerly Digi Smart Solutions™the November 2016 acquisition of FreshTemp®, LLC ("FreshTemp®"), the January 2017 acquisition of SMART Temps®, LLC ("SMART Temps®") and the October 2017 acquisition of TempAlert, LLC ("TempAlert").
We measure our segment results primarily by reference to revenue and operating income (loss).income. IoT Solutions revenue includes both product and service revenue. Certain costs incurred at the corporate level are allocated to our segments. These costs include information technology, employee benefits and shared facility services. The information technology and shared facility costs are allocated based on headcount and the employee benefits costs are allocated based on compensation costs.

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9. SEGMENT INFORMATION (CONTINUED)
Summary operating results for each of our segments were as follows (in thousands):
 Three months ended March 31, Six months ended March 31, Three months ended December 31,
 2018 2017 2018 2017 2018 2017 (as adjusted)*
Revenue            
IoT Products & Services $49,825
 $43,873
 $90,705
 $88,809
 $53,294
 $40,880
IoT Solutions 4,966
 1,742
 9,283
 1,981
 9,019
 4,075
Total revenue $54,791
 $45,615
 $99,988
 $90,790
 $62,313
 $44,955
Operating (loss) income        
Operating income (loss)    
IoT Products & Services $4,689
 $2,710
 $5,953
 $5,797
 $7,402
 $1,264
IoT Solutions (4,186) (1,198) (7,573) (1,863) (1,844) (3,263)
Total operating (loss) income $503
 $1,512
 $(1,620) $3,934
Total operating income (loss) $5,558
 $(1,999)
Depreciation and amortization            
IoT Products & Services $1,729
 $953
 $2,578
 $1,800
 $1,942
 $849
IoT Solutions 1,559
 436
 3,115
 590
 1,731
 1,604
Total depreciation and amortization $3,288
 $1,389
 $5,693
 $2,390
 $3,673
 $2,453
*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which we adopted on October 1, 2018.

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10. SEGMENT INFORMATION (CONTINUED)
Total expended for property, plant and equipment was as follows (in thousand):
 Six months ended March 31, Three months ended December 31,
 2018 2017 2018 2017
Expended for property, plant and equipment    
Expended for property, equipment and improvements    
IoT Products & Services $785
 $962
 $1,775
 $453
IoT Solutions 
 22
 
 
Total expended for property, plant and equipment $785
 $984
 $1,775
 $453
Total assets for each of our segments were as follows (in thousands):
 March 31,
2018
 September 30, 2017 December 31,
2018
 September 30, 2018
(as adjusted)*
Assets        
IoT Products & Services $207,682
 $182,555
 $210,283
 $209,574
IoT Solutions 92,016
 47,644
 94,975
 99,822
Unallocated* 59,638
 114,990
Unallocated** 76,469
 62,750
Total assets $359,336
 $345,189
 $381,727
 $372,146
*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which we adopted on October 1, 2018.
**Unallocated consists of cash and cash equivalents current marketable securities and long-termcurrent marketable securities.
Total goodwill for each of our segments were as follows (in thousands):
 March 31,
2018
 September 30, 2017 December 31,
2018
 September 30, 2018
Goodwill        
IoT Products & Services $105,791
 $98,981
 $103,973
 $104,358
IoT Solutions 50,191
 33,014
 49,605
 50,177
Total goodwill $155,982
 $131,995
 $153,578
 $154,535

11. REVENUE
Revenue Disaggregation
The following summarizes our revenue by geographic location of our customers:
 Three months ended
December 31,
($ in thousands)2018 2017 (as adjusted)*
North America, primarily United States$46,335
 $29,337
Europe, Middle East & Africa10,104
 10,156
Asia5,080
 4,528
Latin America794
 934
Total revenue$62,313
 $44,955
*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which we adopted on October 1, 2018.

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10.11. REVENUE (CONTINUED)
Net sales of services and solutions disaggregated by product group:
 Three months ended
December 31,
($ in thousands)2018 2017 (as adjusted)*
IoT Products & Services Segment   
Hardware product$50,812
 $38,454
Services2,482
 2,426
Total IoT Products & Services Segment53,294
 40,880
IoT Solutions Segment   
Solutions9,019
 4,075
Total Revenue$62,313
 $44,955
*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which we adopted on October 1, 2018.
Contract Balances
In certain contracts with our customers we charge an implementation fee to the customer so they can begin using the equipment and retain ownership of the equipment the customer uses. We amortize this cost of the equipment over its useful life (typically three years).
We also incur costs for commissions paid to sales personnel or agents on service contracts. If the commissions earned during an accounting period exceed our capitalization threshold, they will be amortized over the calculated average expected life of the pool of contracts closed during that period. We have elected the practical expedient to not capitalize these commissions for contracts with terms of one year or less.
Contract assets were $2.1 million and $2.1 million as of December 31, 2018 and September 30, 2018, respectively. Amortization expense for these contract assets was $0.2 million for the three months ended December 31, 2018 and minimal for the three months ended December 31, 2017. Contract assets are typically amortized over a three year period.
Unearned Revenue
Unearned revenue is comprised mainly of unearned revenue related to annual or multi-year contracts for subscription services and related implementation fees for our IoT Solutions segment and our Digi Remote Manager® services in our IoT Products & Services segment.
Changes in unearned revenue were as follows:
  Three months ended
December 31,
($ in thousands) 2018
Unearned revenue, beginning of period* $3,933
Billings 9,702
Revenue recognized (5,326)
Unearned revenue, end of period $8,309
*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which we adopted on October 1, 2018.
Remaining Transaction Price
Transaction price allocated to the remaining performance obligations represents contracted revenue that has not been recognized, which includes unearned revenue and unbilled amounts that will be recognized as revenue in future periods. As of December 31, 2018 approximately $7.6 million of revenue is expected to be recognized from remaining performance obligations for subscriptions contracts. We expect to recognize revenue on approximately $3.2 million of remaining

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11. REVENUE (CONTINUED)
performance obligations over the next twelve months. Revenue from the remaining performance obligations we expect to recognize revenue over a range of two to five years.
12. INCOME TAXES
IncomeOur income tax provision was $3.0$1.0 million for the sixthree months ended MarchDecember 31, 2018. NetIncluded in this provision was a net tax expensebenefit discretely related to the sixthree months ended MarchDecember 31, 2018 was $3.0of $0.1 million, primarily as a result of new U.S.expiring statute of limitations of uncertain tax legislation that was enacted during the first quarter of fiscal 2018 and the adoption of ASU 2016-09 related to the accounting for thebenefits as well as excess tax effects ofbenefits recognized on stock compensation.
The Tax Cuts and Jobs Act of 2017 (the “Act”) was enacted on December 22, 2017. The Act lowered the U.S. federal corporate tax rate from 35% to 21% as of January 1, 2018 and requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. Due to our fiscal year end, our statutory rate for fiscal 2018 will be a blend of the new and old tax rates. At March 31, 2018 we had not fully completed our accounting for the tax effects of enactment of the Act; however in certain cases, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. For the items for which we were able to determine a reasonable estimate, we recognized a provisional income tax expense amount of $2.7 million which is included as a component of income tax expense.
We remeasured U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which requires estimates of our changes in deferred tax assets and liabilities before and after the new statutory rate was enacted. As a result, we are still analyzing certain aspects of the legislation and refining our calculations such as, refining current year estimates and filings of tax returns, of which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. As of March 31, 2018, the provisional amount recorded related to the re-measurement of this deferred tax balance was $2.6 million.
In addition, we considered the potential tax expense impacts of the one-time transition tax. The transition tax is based on our total post-1986 earnings and profits (“E&P”) that we previously deferred from U.S. income taxes. We recorded a provisional amount for our one-time transition tax liability for our foreign subsidiaries, resulting in an increase in income tax expense of $0.1 million for the sixthree months ended March 31, 2018. We have not yet completed the calculation of the post-1986 E&P for these foreign subsidiaries and, further, this transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation, evaluate the testing periods for cash and E&P measurement and finalize substantiation of material foreign taxes paid or accrued. Furthermore, it is expected that further guidance will be forthcoming from U.S. Treasury which may or may not impact the final transition tax required. We continue to review the outside basis differential of our foreign investments. At this point, no additional income taxes have been provided for any undistributed foreign earnings not subject to the transition tax and additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis difference in these entities (i.e., basis difference in excess of that subject to the one-time transition tax) is not practical at this time, but it is expected that with inclusion of the transition tax, the potential outstanding basis difference as of March 31, 2018 is expected to be a deductible temporary difference for which no deferred tax asset would be allowed.
We adopted ASU 2016-09 “Improvements to Employee Share-Based Payment Accounting” on October 1, 2017. As a result of the adoption, we recorded $0.7 million of excess tax expense related to our share-based payments in our provision for income taxes for the six months ended March 31, 2018. Historically, this was record in additional paid-in capital. The excess tax expense related to share-based payments are recognized as tax expense discretely related to the six months ended March 31, 2018.
For the six months ended MarchDecember 31, 2018, our effective tax rate before items discretely related to the period was less than the U.S. statutory rate due primarily to the mix of income between taxing jurisdictions, certain of which have lower statutory tax rates than the U.S., and also due to certain income tax credits generated in the U.S.
IncomeIn comparison, the income tax provision was $0.9$2.6 million for the sixthree months ended MarchDecember 31, 2017. NetIncluded in this provision was a net tax benefitsexpense discretely related to the sixthree months ended MarchDecember 31, 2017 were $0.1of $2.8 million, resulting primarily fromas a result of new U.S. tax legislation that was enacted during the reversalfirst quarter of tax reserves due to the expiration of statutes of limitation from U.S. and foreign tax jurisdictions.fiscal 2018. For the sixthree months ended MarchDecember 31, 2017, our effective tax rate before items discretely related to the period was less than the U.S. statutory rate primarily due to the mix of income between taxing jurisdictions, certain of which havehad lower statutory tax rates than the U.S., and certain tax credits generated in the U.S.
The Tax Cuts and Jobs Act of 2017 (the “Act”) was enacted in the U.S. on December 22, 2017. The Act lowered the U.S. federal corporate tax rate from 35% to 21% as of January 1, 2018 and required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that previously were tax deferred. We applied the guidance in SAB 118 when accounting for the enactment-date income tax effects of the Act in fiscal 2018. At September 30, 2018, we had not fully completed our accounting for the enactment effects of the Act. We, however, had recorded a provisional estimate of the effects on our existing deferred tax balances and the one-time transition tax. The provisional tax expense recorded in fiscal 2018 was $3.0 million. At December 31, 2018, we had completed our accounting for the enactment-date income tax effects of the Act. In fiscal 2019, there have been no significant adjustments to the provisional amounts recorded in fiscal 2018. In addition, certain provisions of the Act became effective for us in fiscal 2019. The estimated tax impacts of these provisions are included in out effective tax rate for the current period.
Our effective tax rate will vary based on a variety of factors, including overall profitability, the geographical mix of income before taxes and related statutory tax rate in each jurisdiction, and tax items discretely related to the period, such as settlements of audits. We expect that we may record other benefits or expenses in the future that are specific to a particular quarter such as expiration of statutes of limitation, the completion of tax audits, or legislation that is enacted for both U.S. and foreign jurisdictions.

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10. INCOME TAXES (CONTINUED)
A reconciliation of the beginning and ending amount of unrecognized tax benefits is (in thousands):
Unrecognized tax benefits as of September 30, 2017$1,335
Unrecognized tax benefits as of September 30, 2018$1,561
Decreases related to:  
Expiration of statute of limitations(116)(56)
Unrecognized tax benefits as of March 31, 2018$1,219
Unrecognized tax benefits as of December 31, 2018$1,505
The total amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate is $1.1$1.4 million, after considering the impact of interest and deferred benefit items. We expect that the total amount of unrecognized tax benefits will decrease by approximately $0.1 million over the next 12 months.
11.13. PRODUCT WARRANTY OBLIGATION
In general, we warrant our products to be free from defects in material and workmanship under normal use and service. The warranty periods generally range from one to five years. We typically have the option to either repair or replace products we deem defective with regard to material or workmanship. Estimated warranty costs are accrued in the period that the related revenue is recognized based upon an estimated average per unit repair or replacement cost applied to the estimated number of units under warranty. These estimates are based upon historical warranty incidents and are evaluated on an ongoing basis to ensure the adequacy of the warranty accrual.

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13. PRODUCT WARRANTY OBLIGATION (CONTINUED)
The following table summarizes the activity associated with the product warranty accrual (in thousands) and is included on our Condensed Consolidated Balance Sheets within current liabilities:
 Balance at Warranties Settlements Balance at
PeriodJanuary 1 issued made March 31
Three months ended March 31, 2018$1,164
 $362
 $(178) $1,348
Three months ended March 31, 2017$1,025
 $62
 $(195) $892
        
 Balance at Warranties Settlements Balance at
PeriodOctober 1 issued made March 31
Six months ended March 31, 2018$987
 $716
 $(355) $1,348
Six months ended March 31, 2017$1,033
 $231
 $(372) $892
 Balance at Warranties Settlements Balance at
PeriodOctober 1 issued made December 31
Three months ended December 31, 2018$1,172
 $72
 $(104) $1,140
Three months ended December 31, 2017$987
 $354
 $(177) $1,164
We also warrant our software or firmware incorporated into our products and offer to provide a bug fix or software patch within a reasonable period. We have not accrued specifically for this warranty and have not had claims specifically related to the software. We are not responsible for, and do not warrant that, custom software versions, created by original equipment manufacturer (“OEM”) customers based upon our software source code, will function in a particular way, will conform to any specifications or are fit for any particular purpose. Further, we do not indemnify these customers from any third-party liability as it relates to or arises from any customization or modifications made by the OEM customer.
12.14. COMMITMENTS AND CONTINGENCIES
Lease Commitments
In October 2018, we signed a thirteen-year lease agreement with minimum lease obligations of $14.8 million with Colfin Midwest NNN Investor, LLC for 59,497 square feet of office space. This is now our new headquarters location in Hopkins, Minnesota, which is approximately three miles from our previous headquarters.
Contingencies
In November 2018, DimOnOff Inc., a company headquartered in Quebec City, Quebec, Canada which sells control systems in the building automation and street lighting markets sued us and a former distributor from whom DimOnOff purchased certain of our products.  The suit was brought in the Superior Court of the Province of Quebec in the District of Quebec (Canada) and alleges certain Digi products it purchased and incorporated into street lighting systems in a Canadian city were defective causing some of the street lights to malfunction.  It alleges damages in of just over C$1.0 million.  We intend to defend ourselves against DimOnOff’s claims.  At this time we cannot assess the likelihood or amount of any potential loss.
In addition to the matter discussed above, in the normal course of business, we are subject to various claims and litigation. There can be no assurance that any claims by third parties, if proven to have merit, will not materially adversely affect our business, liquidity or financial condition.

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13.15. STOCK-BASED COMPENSATION
Stock-based awards were granted under the 2018 Omnibus Incentive Plan (the “2018 Plan”) beginning January 29, 2018 and, prior to that, were granted under the 2017 Omnibus Incentive Plan (the “2017 Plan”). Upon stockholder approval of the 2018 Plan, we ceased granting awards under any prior plan. Shares subject to awards under prior plans that are forfeited, canceled, returned to the Company for failure to satisfy vesting requirements, settled in cash or otherwise terminated without payment also will be available for grant under the 2018 Plan. The authority to grant options under the 2018 Plan and to set other terms and conditions rests with the Compensation Committee of the Board of Directors.
The 2018 Plan authorizes the issuance of up to 1,500,000 common shares in connection with awards of stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based full value awards or other stock-based awards. Eligible participants include our employees, our affiliates, non-employee directors of our Company and any consultant or advisor who is a natural person and provides services to us or our affiliates. Options that have been granted under the 2018 Plan typically vest over a four-year period and will expire if unexercised after seven years from the date of grant. Restricted stock unit awards (“RSUs”) that have been granted to directors typically vest in one year. RSUs that have been granted to executives and employees typically vest in January over a four-year period. Awards may be granted under the 2018 Plan until January 28, 2028. Options under the 2018 Plan can be granted as either incentive stock options (“ISOs”) or non-statutory stock options (“NSOs”). The exercise price of options and the grant date price of restricted stock units shall be determined by our Compensation Committee but shall not be less than the fair market value of our common stock based on the closing price on

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15. STOCK-BASED COMPENSATION (CONTINUED)
the date of grant. Upon exercise, we issue new shares of stock. As of MarchDecember 31, 2018, there were approximately 1,359,416297,885 shares available for future grants under the 2018 Plan.
Our equity plans and corresponding forms of award agreements generally have provisions allowing employees to elect to satisfy tax withholding obligations through the delivery of shares, having us retain a portion of shares issuable under the award or paying cash to us for the withholding. During the sixthree months ended MarchDecember 31, 2018 and 2017, our employees forfeited 68,61183,988 shares and 43,16064,276 shares, respectively in order to satisfy $0.7$1.0 million and $0.6 million, respectively of withholding tax obligations related to stock-based compensation, pursuant to terms of awards under our board and shareholder-approved compensation plans for each respective period.
Cash received from the exercise of stock options was $3.4$0.7 million and $3.2$3.0 million during the sixthree months ended MarchDecember 31, 2018 and 2017, respectively.
We sponsor an Employee Stock Purchase Plan (the “Purchase Plan”), covering all domestic employees with at least 90 days of continuous service and who are customarily employed at least 20 hours per week. The Purchase Plan allows eligible participants the right to purchase common stock on a quarterly basis at the lower of 85% of the market price at the beginning or end of each three-month offering period. Employee contributions to the Purchase Plan were $0.6$0.3 million and $0.5$0.4 million during both sixthree month periods ended MarchDecember 31, 2018 and 2017. Pursuant to the Purchase Plan, 74,38133,706 and 48,29945,718 common shares were issued to employees during the sixthree months ended MarchDecember 31, 2018 and 2017, respectively. Shares are issued under the Purchase Plan from treasury stock. As of MarchDecember 31, 2018, 366,641281,870 common shares were available for future issuances under the Purchase Plan.
Stock-based compensation expense is included in the consolidated results of operations as follows (in thousands):
Three months ended March 31, Six months ended March 31,Three months ended December 31,
2018 2017 2018 20172018 2017
Cost of sales$46
 $54
 $96
 $116
$55
 $50
Sales and marketing391
 345
 725
 685
353
 334
Research and development167
 155
 175
 337
200
 8
General and administrative721
 601
 1,382
 1,190
806
 661
Stock-based compensation before income taxes1,325
 1,155
 2,378
 2,328
1,414
 1,053
Income tax benefit(277) (382) (498) (757)(294) (221)
Stock-based compensation after income taxes$1,048
 $773
 $1,880
 $1,571
$1,120
 $832
Stock-based compensation cost capitalized as part of inventory was immaterial as of MarchDecember 31, 2018 and September 30, 2017.

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13. STOCK-BASED COMPENSATION (CONTINUED)2018.
Stock Options
The following table summarizes our stock option activity (in thousands, except per common share amounts):
 Options Outstanding Weighted Average Exercised Price Weighted Average Contractual Term (in years) Aggregate Intrinsic Value (1) Options Outstanding Weighted Average Exercised Price Weighted Average Contractual Term (in years) Aggregate Intrinsic Value (1)
Balance at September 30, 2017 3,902
 $10.54  
Balance at September 30, 2018 3,526
 $10.49  
Granted 660
 10.28   585
 11.60  
Exercised (384) 8.93   (79) 8.39  
Forfeited / Canceled (490) 13.02   (39) 11.54  
Balance at March 31, 2018 3,688
 $10.34 4.6 $2,443
Balance at December 31, 2018 3,993
 $10.69 4.5 $1,756
        
Exercisable at March 31, 2018 2,324
 $9.99 3.8 $2,033
Exercisable at December 31, 2018 2,428
 $10.12 3.4 $1,696
(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $10.30$10.09 as of MarchDecember 31, 2018, which would have been received by the option holders had all option holders exercised their options as of that date. The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price.

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15. STOCK-BASED COMPENSATION (CONTINUED)
The total intrinsic value of all options exercised during the sixthree months ended MarchDecember 31, 2018 was $0.5$0.3 million and during the sixthree months ended MarchDecember 31, 2017 was $0.9$0.4 million.
The table below shows the weighted average fair value, which was determined based upon the fair value of each option on the grant date utilizing the Black-Scholes option-pricing model and the related assumptions:
Six months ended March 31,Three months ended December 31,
2018 20172018 2017
Weighted average per option grant date fair value$3.72 $4.64$4.36 $3.71
Assumptions used for option grants:  
Risk free interest rate2.12% - 2.58% 1.46% - 1.96%2.78% - 2.93% 2.12% - 2.18%
Expected term6.00 years 6.00 years6.00 years 6.00 years
Expected volatility33% - 34% 33% - 34%33% 33% - 34%
Weighted average volatility33% 34%33% 33%
Expected dividend yield0 00 0
Expected volatilities are based on the historical volatility of our stock. We use historical data to estimate option exercise and employee termination information within the valuation model. The expected term of options granted is derived from the vesting period and historical information and represents the period of time that options granted are expected to be outstanding. The risk-free rate used is the zero-coupon U.S. Treasury bond rate in effect at the time of the grant whose maturity equals the expected term of the option.
As of MarchDecember 31, 2018, the total unrecognized compensation cost related to non-vested stock options was $5.0$6.4 million and the related weighted average period over which it is expected to be recognized is approximately 2.83.1 years.

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13. STOCK-BASED COMPENSATION (CONTINUED)
Non-vested Restricted Stock Units
A summary of our non-vested restricted stock units as of MarchDecember 31, 2018 and changes during the sixthree months then ended is presented below (in thousands, except per common share amounts):
Number of Awards Weighted Average Grant Date Fair ValueNumber of Awards Weighted Average Grant Date Fair Value
Nonvested at September 30, 2017566
 $11.28
Nonvested at September 30, 2018674
 $11.05
Granted359
 $10.35
480
 $11.40
Vested(189) $11.08
(185) $10.50
Canceled(39) $11.19
(10) $11.27
Nonvested at March 31, 2018697
 $10.86
Nonvested at December 31, 2018959
 $11.33
As of MarchDecember 31, 2018, the total unrecognized compensation cost related to non-vested restricted stock units was $6.6$9.9 million, and the related weighted average period over which it is expected to be recognized is approximately 1.72.0 years.

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16. RESTRUCTURING
Below is a summary of the restructuring charges and other activity (in thousands): all within our IoT Products and Services segment:
Q3 2017
Restructuring
Manufacturing Transition 
2017
Restructuring
  
Employee
Termination
Costs
 Other TotalEmployee
Termination
Costs
 Employee
Termination
Costs
 Other Total
Balance at September 30, 2017$1,528
 $128
 $1,656
Balance at September 30, 2018$147
 $293
 $13
 $453
Payments(971) (132) (1,103)(84) (233) (16) (333)
Reversals(19) (53) 5
 (67)
Foreign currency fluctuation79
 4
 83

 (7) 
 (7)
Balance at March 31, 2018$636
 $
 $636
Balance at December 31, 2018$44
 $
 $2
 $46
Q3 Manufacturing Transition
As announced on April 3, 2018, we transferred the manufacturing functions of our Eden Prairie, Minnesota operations facility to existing contract manufacture suppliers. As a result, approximately 53 employment positions were eliminated, resulting in restructuring charges of approximately $0.5 million related to employee costs during the third and fourth quarters of fiscal 2018. The payments associated with these charges are expected to be completed by the third quarter of fiscal 2019. This manufacturing transition is expected to result in total annualized savings of between $3.0 million to $5.0 million.
2017 Restructuring
In May 2017, we approved a restructuring plan primarily impacting our France location.location, which is now closed. We also eliminated certain employee costs in the U.S. The restructuring is awas the result of a decision to consolidate our France operations to our Europe, Middle East and Africa (“EMEA”) headquarters in Munich. The total restructuring charges amounted to $2.5 million that included $2.3 million of employee costs and $0.2 million of contract termination costs during the third quarter of fiscal 2017. These actions resulted in an elimination of 10 positions in the U.S. and 8 positions in France. The payments associated with these charges are expected to be completed by the endfirst half of the fourth quarter ending September 30, 2018.fiscal 2019.
15.17. COMMON STOCK REPURCHASE
On May 2, 2017,April 24, 2018 our Board of Directors authorized a program to repurchase up to $20.0 million of our common stock primarily to return capital to shareholders. This repurchase authorization expired on May 1, 2018 (see Note 16is scheduled to the Condensed Consolidated Financial Statements). Shares repurchased under the program will be made through open market and privately negotiated transactions from time to time and in amounts that management deems appropriate. The amount and timing of share repurchases depends upon market conditions and other corporate considerations. During the third quarter of fiscal 2017, we began to repurchase our common stock on the open market. During the third quarter of fiscal 2017, we repurchased 28,691 shares for $0.3 million. As of March 31, 2018, $19.7 million remained available for repurchase. No further repurchases of common stock were made under this program.

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16. SUBSEQUENT EVENTS
Manufacturing Transition
Subsequent to the end of the second quarter of fiscal 2018, as announced on April 3, 2018, Digi will transfer the manufacturing functions of its Eden Prairie, Minnesota operations facility to existing contract manufacture suppliers. As a result, approximately 60 positions are planned to be eliminated over the next 120 days, resulting in restructuring charges amounting to approximately $0.6 million related to employee costs during the third and fourth quarters of fiscal 2018. The payments associated with these charges are expected to be completed by December 31, 2018. This manufacturing transition is expected to result in total annualized savings of approximately $3.0 million to $5.0 million.
Stock Repurchase Program
Subsequent to end of the second fiscal quarter of 2018, on April 24, 2018 our Board of Directors authorized a new program to repurchase up to $20.0 million of our common stock primarily to return capital to shareholders. This repurchase authorization expiresexpire on May 1, 2019. SharesThere were no shares repurchased under the newthis program will be made through open market and privately negotiated transactions from time to time and in amounts that management deems appropriate. The amount and timingas of share repurchases depends upon market conditions and other corporate considerations.December 31, 2018.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our management’s discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended September 30, 2017,2018, as well as our subsequent reports on Form 8-K and any amendments thereto.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Form 10-Q contains certain statements that are “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995, and within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-Looking Statements
The words “anticipate,” “assume,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “plan,” “should,” or “will” or the negative thereof or other variations thereon or similar terminology, which are predictions of or indicate future events and trends and which do not relate to historical matters, identify forward-looking statements. Among other items, these statements relate to expectations of the business environment in which we operate, estimated future values and projections of future performance, perceived marketplace opportunities and statements regarding our mission and vision. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, including risks related to the highly

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competitive market in which our company operates, rapid changes in technologies that may displace products sold by us, declining prices of networking products, our reliance on distributors and other third parties to sell our products, delays in product development efforts, uncertainty in user acceptance of our products, the ability to integrate our products and services with those of other parties in a commercially accepted manner, potential liabilities that can arise if any of our products have design or manufacturing defects, our ability to defend or settle satisfactorily any litigation, uncertainty in global economic conditions and economic conditions within particular regions of the world which could negatively affect product demand and the financial solvency of customers and suppliers, the impact of natural disasters and other events beyond our control that could negatively impact our supply chain and customers, potential unintended consequences associated with restructuring or other similar business initiatives that may impact our operations and our ability to retain important employees, the ability to achieve the anticipated benefits and synergies associated with acquisitions or divestitures, and changes in our level of revenue or profitability, which can fluctuate for many reasons beyond our control. These and other risks, uncertainties and assumptions identified from time to time in our filings with the United States Securities and Exchange Commission, including without limitation, our Annual Report on Form 10-K for the year ended September 30, 2017,2018, and subsequent quarterly reports on Form 10-Q and other filings, could cause the company’s future results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. Many of such factors are beyond our ability to control or predict. These forward-looking statements speak only as of the date for which they are made. We disclaim any intent or obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
Presentation of Non-GAAP Financial Measures
This report includes Adjusted EBITDA, from continuing operations, which is a non-GAAP measure. We understand that there are material limitations on the use of non-GAAP measures. Non-GAAP measures are not substitutes for GAAP measures, such as net (loss) income, for the purpose of analyzing financial performance. The disclosure of these measures does not reflect all charges and gains that were actually recognized by the company. Non-GAAP measures are not prepared in accordance with, or as an alternative for measures prepared in accordance with, generally accepted accounting principles and may be different from non-GAAP measures used by other companies.companies or presented by us in prior reports. In addition, non-GAAP measures are not based on any comprehensive set of accounting rules or principles. We believe that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures. Additionally, we understand that Adjusted EBITDA from continuing operations does not reflect our cash expenditures, the cash requirements for the replacement of depreciated and amortized assets, or changes in or cash requirements for our working capital needs.
We believe that the presentation of Adjusted EBITDA from continuing operations as a percentage of revenue is useful because it provides a reliable and consistent approach to measuring our performance from year to year and in assessing our performance against that of other companies. We believe this information helps compare operating results and corporate performance exclusive of the impact of our capital structure and the method by which assets were acquired. Adjusted EBITDA from continuing operations is used as an internal metric for executive compensation, as well as incentive compensation for the broader employee base, and it is monitored quarterly for these purposes.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, the disclosure of contingent assets and liabilities and the values of purchased assets and assumed liabilities in acquisitions. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
A description of our critical accounting policies and estimates was provided in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended September 30, 2017.2018. There have been no material changes to our critical accounting policies as disclosed in that report, except for the stock-based compensationrevenue recognition policy updated below.
Stock-Based Compensation
Stock-based compensation expense represents
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Revenue Recognition
We recognize hardware product revenue upon transfer of control of goods or services to customers in an amount that reflects the cost of employee services receivedconsideration we expect to receive in exchange for those goods or services. We determine the amount of revenue to be recognized through application of the following steps:
Identification of the contract, or contracts with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when or as we satisfy the performance obligations.
Hardware Product Revenue and SmartSense by Digi Equipment Revenue and Associated Installation Fees
Our hardware product revenue is derived primarily from the sale of wired and wireless hardware products to our distributors and Direct/Original Equipment Manufacturer (“OEM”) customers. Product revenue generally is recognized upon shipment of product to customers. Sales to authorized domestic distributors and Direct/OEM customers are made with certain rights of return and price adjustment provisions. Estimated reserves for future returns and pricing adjustments are established by us based on an awardanalysis of equity instrumentshistorical patterns of returns and price adjustments as well as an analysis of authorized returns compared to received returns and distribution sales for the current period. Estimated reserves for future returns and price adjustments are charged against revenue in the same period as the corresponding sales are recorded. Material differences between the historical trends used to determine estimated reserves and actual returns and pricing adjustments could result in a material change to our consolidated results of operations or financial position. We have applied consistent methodologies for estimating reserves for future returns and pricing adjustments for all periods presented.
Our SmartSense by Digi equipment revenue is recorded as an up-front sale at its stand-alone selling price because the customer could utilize our equipment with other monitoring services or could use our monitoring services with hardware purchased from other vendors. Our installation charges are recorded when the product is installed.
Subscription and Support Services Revenue
Our SmartSense by Digisubscription revenue is recorded on a monthly basis. These subscriptions are generally in a range from one to five years, and may contain an evergreen renewal provision. Generally, our subscription renewal charges per month are the same as the original contract term.
We also derive service revenue from our Digi Remote Manager®, a platform-as-a-service (“PaaS”) offering, whereby customers pay for services consumed based on the grant date fair valuenumber of the award.devices being managed or monitored. This cost must berevenue is recognized over the period during which an employee is required to providelife of the service (usuallyterm. 
Digi Support Services revenues are recognized over the vesting period). Upon adoptionlife of ASU 2016-09, “Improvementsthe support contract. Some of Digi Support Services revenue is for training and this revenue is recognized as the services are performed.
Professional Services Revenue
Professional services revenue is derived from our Digi Wireless Design Services contracts on either on a time-and-materials or a fixed-fee basis. These revenues are recognized as the services are performed for time-and-materials contracts, or when milestones are achieved and accepted by the customer for fixed-fee contracts.
Contracts with Multiple Performance Obligations
SmartSense by Digirevenues typically are derived from contracts with multiple performance obligations. These obligations may include: delivery of monitoring equipment that the customer either purchases out-right or uses while we retain ownership, monitoring services, providing condition alerts of assets being monitored, and recertification of sensor equipment. When we retain ownership of the equipment, we charge an implementation fee to Employee Share-Based Payment Accounting,” we will now account for forfeitures asthe customer so they occur. Previously, we applied an estimated forfeiture rate to awards granted.can begin using the equipment. In these instances, all revenue derived from the above obligations is recognized over the subscription term of the contract. If the

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customer purchases the equipment out-right, that portion of the revenue is recognized at the stand-alone selling price at the time the equipment is shipped and all other revenue is recognized over the subscription term of the contract.
OVERVIEW
We are a leading global provider of business and mission-critical Internet-of-Things (“IoT”) connectivity products, services and solutions. We have two reportable operating segments for purposes of ASC 280-10-50 “Segments Reporting”:
IoT Products & Services (formerly “M2M”) segment; and
IoT Solutions (formerly “Solutions”) segment.
Our IoT Products & Services segment consists primarily of distinct communications products and relatedalso includes communication product development services. Among other things, these products and services help our customers create next generationnext-generation connected products and enable our customers to deploy and manage critical communications infrastructures in demanding environments with high levels of security and reliability. On theThis segment creates secure, easy-to-implement embedded solutions and services to help customers build IoT connectivity. It also deploys ready-to-use, complete box solutions to connect remote equipment. The IoT Products side, we provide both embedded and end user devices& Services segment also offers dedicated professional services for the design of specialized wireless communications products for customers. Finally, this segment offers managed cloud services that are used byenable customers to support their connected device strategies. On thecapture and manage data from devices they connect to networks. Our IoT Services side, we provide embedded design, technical support, professional services and a software device management platform to support their IoT deployments. The products and services of this segment are used by a wide range of businesses and institutions, especially in vertical markets such as medical devices, utilities, transportation and industrial markets.institutions.
All of the revenue we report in our consolidated financial statements as product revenue is derived from products included in this segment and includes products from our recent acquisition of Accelerated (see Note 2 to the Condensed Consolidated Financial Statements.)segment. These products include our cellular routers and gateways,products, radio frequency (“RF”), products, embedded and network products. Our cellular product category includes our cellular routers and all gateways. Our RF product category includes our XBee®XBee® modules as well as other RF Solutions.  Our Embedded product category includes Digi Connect®Connect® and Rabbit®Rabbit® embedded systems on module and single board computers.  Our network product category, which has the highest concentration of mature products, includes console and serial servers and USB connected products. Revenues we report as services and solutions revenue in our consolidated financial statements from this segment include Digi Wireless Design Services, Digi Remote Manager® and support servicesDigi Support Services we provide for our products.
Our IoT Solutions segment offers wireless temperature and other environmental conditioncondition-based monitoring services as well as employee task management services. These productssolutions are focused on three primary vertical markets: healthcare (including retail pharmacies, hospitals and services are provided to theother medical facilities), food service transportation, education, healthcare/pharma, and industrial andtransportation/logistics. These solutions are marketed as SmartSense by Digi™.Digi, formerly Digi Smart Solutions. We have formed, expanded and enhanced the IoT Solutions segment through a series of acquisitions includingfour acquisitions. These include: the October 2015 acquisition of Bluenica, Corporation (“Bluenica”), the November 2016 acquisition of FreshTemp LLC (“FreshTemp”)®, the January 2017 acquisition of SMART Temps LLC (“SMART Temps”)® and the October 2017 acquisition of TempAlert LLC (“TempAlert”) to enhance and expand the capabilities of the IoT Solutions

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segment.TempAlert. All revenues from this segment are reported in our consolidated financial statements as services and solutions revenue as customers subscribe for ongoing monitoring services that are enabled by the deployment of hardware and related software.
For further detail on segment performance, see Segment Results of Operations section of the management discussion and analysis.
We compete for customers on the basis of existing and planned product features, service and software application capabilities, company reputation, brand recognition, technical support, alliance relationships, quality and reliability, product development capabilities, price and availability.
On January 22, 2018, we purchased all the outstanding stock of Accelerated Concepts, Inc. (“Accelerated”), a Tampa-based provider of secure, enterprise-grade, cellular (LTE) networking equipment for primary and backup connectivity applications. This acquisition is included with our IoT Products and Services segment. The terms of the acquisition include an upfront cash payment together with future earn-out payments. Cash of $16.8 million (excluding cash acquired of $0.3 million) was paid at the time of closing. The earn-out payments are scheduled to be paid in two installments based on the revenue performance of Accelerated products. The first installment will be based on revenues from January 22, 2018 through January 21, 2019 (the “2018 period”) and the second installment will be based on revenues from January 22, 2019 through January 21, 2020 (the “2019 period”). The cumulative amount of these earn-outs will be $4.5 million, if certain revenue thresholds are met. Additional payments, not to exceed $2.0 million for both installments, may also be due depending on revenue performance. The fair value of this contingent consideration was $2.3 million at the date of acquisition and at March 31, 2018 (see Note 7 to the Condensed Consolidated Financial Statements).
Subsequent to the end of the second quarter of fiscal 2018, Digi announced on April 3, 2018 that it will transfer the manufacturing functions of its Eden Prairie, Minnesota operations facility to existing contract manufacture suppliers. As a result, approximately 60 positions are planned to be eliminated over the next 120 days, resulting in restructuring charges amounting to approximately $0.6 million related to employee costs during the third and fourth quarters of fiscal 2018. The payments associated with these charges are expected to be completed by December 31, 2018. This manufacturing transition is expected to result in total annualized savings of approximately $3.0 million to $5.0 million.
We utilize many financial, operational, and other metrics to evaluate our financial condition and financial performance. Below we highlight the metrics for the secondfirst quarter of fiscal 20182019 that we feel are most important in these evaluations:
Total Revenue was $54.8$62.3 Million. Our revenue was $54.8$62.3 million for the secondfirst quarter of fiscal 2019 compared to $45.0 million in the first quarter of fiscal 2018, compared to $45.6an increase of $17.3 million, in the second quarter of fiscal 2017. or 38.6%.
Product revenue increased by $5.8$12.3 million, or 13.9%, primarily related to $6.232.1%. This included $5.2 million of incremental revenue related to Accelerated products. Revenue was also favorably impacted by $0.2 million due to the strengtheningJanuary 2018 acquisition of the British Pound and Euro compared to the U.S. Dollar.Accelerated.
Services and solutions revenue increased by $3.4$5.0 million, or 87.1%76.9%, in the secondfirst quarter of fiscal 20182019 compared to the second quarter of fiscal 2017. This increase was driven primarily by the continued growth and expansion of our IoT Solutions segment, which included incremental revenue of $3.5 million from our recent acquisition of TempAlert in October 2017 (see Note 2 to our Condensed Consolidated Financial Statements).
Gross Margin was 48.6%. Our gross margin increased assame period a percentage of revenue to 48.6% in the second quarter of fiscal 2018 as compared to 48.0% in the second quarter of fiscal 2017. Gross margin was positively impacted by the acquisition of Accelerated, which has a higher gross margin, partially offset by IoT Solutions segment and increased amortization expense, primarily related to our acquisitions.
Net loss for the second fiscal quarter of 2018 was $0.4 million, or $0.01 loss per diluted share. Net income for the second fiscal quarter of 2017 was $1.3 million, or $0.05 per diluted share.
Adjusted EBITDA for the second fiscal quarter of 2018 was $4.8 Million, or 8.8% of total revenue. In the second fiscal quarter of fiscal 2017, Adjusted EBITDA was $4.7 million, or 10.2% of total revenue.year ago.

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Gross Margin was 47.8%. Our gross margin decreased as a percentage of revenue to 47.8% in the first quarter of fiscal 2019 as compared to 48.8% in the first quarter of fiscal 2018. Our gross margin decline was primarily a result of product and customer mix, increased amortization associated with the Accelerated acquisition partially offset from an increase in higher margin recurring revenue and lower costs associated with our manufacturing transition.
Net income for the first fiscal quarter of 2019 was $4.7 million, or $0.17 per diluted share. Net loss for the first fiscal quarter of 2018 was $4.5 million, or $0.17 loss per diluted share. Net income in the first fiscal quarter of 2019 includes a gain on the sale of our corporate headquarters of $4.4 million ($3.4 million, net of tax) or $0.12 per diluted share.
Adjusted EBITDA for the first fiscal quarter of 2019 was $6.2 Million, or 9.9% of total revenue. In the first fiscal quarter of fiscal 2018, Adjusted EBITDA was $3.0 million, or 6.6% of total revenue.
Below is a reconciliation of net (loss) income to Adjusted EBITDA:
Three months ended March 31,Three months ended December 31,
2018 20172018 2017 (as adjusted)*
($ in thousands)  % of total
revenue
   % of total
revenue
  % of total
revenue
   % of total
revenue
Total revenue$54,791
 100.0% $45,615
 100.0%$62,313
 100.0% $44,955
 100.0%
              
Net (loss) income$(357)   $1,331
  
Net income$4,682
   $(4,487)  
Interest income, net(34)   (110)  (116)   (205)  
Income tax provision367
   148
  1,040
   2,648
  
Depreciation and amortization3,288
   1,389
  3,673
   2,453
  
Stock-based compensation1,325
   1,155
  1,414
   1,053
  
Gain on sale of building(4,396)   
  
Restructuring reversal(67)   
  
Acquisition expense249
   750
  (69)   1,501
  
Adjusted EBITDA$4,838
 8.8% $4,663
 10.2%$6,161
 9.9% $2,963
 6.6%
*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which we adopted on October 1, 2018.


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CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth selected information derived from our interim condensed consolidated statements of operations:
Three months ended March 31,% incr. Six months ended March 31,% incr.Three months ended December 31,% incr.
($ in thousands)2018 2017(decr.) 2018 2017(decr.)2018 2017 (as adjusted)*(decr.)
Revenue:                         
Product$47,588
 86.9 % $41,766
 91.6 %13.9
 $86,042
 86.1 % $84,939
 93.6%1.3
$50,812
 81.5% $38,454
 85.5 %32.1
Services and solutions7,203
 13.1
 3,849
 8.4
87.1
 13,946
 13.9
 5,851
 6.4
138.4
11,501
 18.5
 6,501
 14.5
76.9
Total revenue54,791
 100.0
 45,615
 100.0
20.1
 99,988
 100.0
 90,790
 100.0
10.1
62,313
 100.0
 44,955
 100.0
38.6
Cost of sales:                      
Cost of product23,080
 42.2
 21,398
 46.9
7.9
 42,290
 42.3
 43,735
 48.2
(3.3)25,813
 41.4
 19,210
 42.7
34.4
Cost of services and solutions4,287
 7.8
 2,003
 4.4
114.0
 7,730
 7.7
 3,177
 3.5
143.3
5,977
 9.6
 3,179
 7.1
88.0
Amortization of intangibles770
 1.4
 312
 0.7
146.8
 1,377
 1.4
 523
 0.6
163.3
740
 1.2
 607
 1.4
21.9
Total cost of sales28,137
 51.4
 23,713
 52.0
18.7
 51,397
 51.4
 47,435
 52.3
8.4
32,530
 52.2
 22,996
 51.2
41.5
Gross profit26,654
 48.6
 21,902
 48.0
21.7
 48,591
 48.6
 43,355
 47.7
12.1
29,783
 47.8
 21,959
 48.8
35.6
Operating expenses26,151
 47.7
 20,390
 44.7
28.3
 50,211
 50.2
 39,421
 43.4
27.4
24,225
 38.9
 23,958
 53.3
1.1
Operating income (loss)503
 0.9
 1,512
 3.3
(66.7) (1,620) (1.6) 3,934
 4.3
(141.2)5,558
 8.9
 (1,999) (4.5)378.0
Other (expense) income, net(493) (0.9) (33) (0.1)1,393.9
 (333) (0.3) 667
 0.8
(149.9)
Other income, net164
 0.3
 160
 0.4
2.5
Income (loss) before income taxes10
 
 1,479
 3.2
(99.3) (1,953) (1.9) 4,601
 5.1
(142.4)5,722
 9.2
 (1,839) (4.1)411.1
Income tax provision367
 0.7
 148
 0.3
148.0
 2,973
 3.0
 913
 1.0
225.6
1,040
 1.7
 2,648
 5.9
(60.7)
Net (loss) income$(357) (0.7)% $1,331
 2.9 %(126.8) $(4,926) (4.9)% $3,688
 4.1%(233.6)
Net income (loss)$4,682
 7.5% $(4,487) (10.0)%204.3
*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which we adopted on October 1, 2018.
REVENUE
Product
Product revenue increased by $5.8$12.3 million, or 13.9%32.1%, in the secondfirst fiscal quarter of 20182019 compared to the secondfirst fiscal quarter of 2017.2018. This increase included $6.2$5.2 million of incremental revenue related tofrom Accelerated, which we acquired in January 2018. We also experienced increased sales in our North America region for our industrial cellular products. We also experienced largerincurred increased sales to significant customer for our RF products particularly our Digi XBee® cellular products that has continued to receive design wins. In addition, USB connected products, Rabbit® branded products and embedded modules had increased sales. This was offset partially by a decline in sales of terminal servers as we had sales to certain customersa significant customer in the North America region and larger salesfirst quarter of embedded modules to certain customers in the EMEA region. Embedded modules includefiscal 2018.
In general, we expect our new ConnectCore 6UL. Sales related to our terminal servers may fluctuate as they are in the mature phasenetwork products, most of their product life cycle. This was partially offset by decreases in industrial cellular products and USB connected products. In addition, certain embedded products, which are in the mature, portion of their product life cycle, also decreased. We expect these mature products to continue to decline in the future.over time. Our product revenue is subject to large customer projects and deployments that can fluctuate from period to period.
ProductServices and Solutions
Services and solutions revenue increased by $1.1$5.0 million, or 1.3%76.9%, in the first halfquarter of fiscal 2019 compared to the same period a year ago. This primarily was driven by the growth of our SmartSense by Digi™ business of $4.9 million. The increase year over year is due to an existing customer expanding their equipment to include ambient sensors, additional customer deployments, and an increase in our recurring revenue base. We are serving just over 54,000 as of December 31, 2018, compared to just over 38,000 sites a year ago. Although a single transportation customer ended their relationship with this business, we continued to add new sites in multiple verticals and mitigated the first halftransportation customer loss through new direct agreements with end customers. We believe this termination is an isolated event and does not represent a trend. We will continue to seek and evaluate acquisitions that will further enhance our IoT Solutions segment as we believe this marketplace offers a path to a significant base of fiscal 2017. Thisrecurring revenue that can provide both stable revenue generation and significant growth for us.
We expect our Solutions revenue to increase included $6.2 million of incrementalover time. The growth rate in revenue relatedmay be subject to Accelerated products. We also experienced larger sales offluctuations from period to period as large-scale deployments to specific customers may take place in certain time frames and may not occur in every

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terminal serversquarter. Further, one-time orders or replacement equipment from existing customers could cause there to certain customersbe one-time increases in the North America region, RF products to certain customersrevenue that are not repeated in the North America and EMEA regions and embedded modules to certain customers in the EMEA region. This was partially offset by decreases in industrial cellular products as we had a large sale to a significant customer in the prior fiscal year and USB connected products. The cellular router and gateway revenue is driven by large awards-based customer projects and is subject to revenue fluctuations from period to period. We also had decreases in certain embedded products which are in the mature portion of their product life cycle.subsequent quarters.
Services and Solutions
Revenue from our services and solutions offerings increased $3.4 million, or 87.1%, for the three months ended March 31, 2018 compared to the same period a year ago. This primarily was driven by the growth of our SmartSense by Digi™ business. Services and solutions revenue includes $3.5 million of incremental revenue from the acquisition of TempAlert, which we acquired on October 20, 2017 (see Note 2 to our Condensed Consolidated Financial Statements). We are now servicing nearly 42,000 sites.
Services and solutions revenue increased by $8.1 million, or 138.4%, in the first six months of fiscal 2018 compared to the first six months of fiscal 2017. This was driven primarily by the growth of our SmartSense by Digi™ business. Services and solutions revenue includes $6.3 million of incremental revenue from the acquisition of both TempAlert and SMART temps. We acquired TempAlert on October 20, 2017 and SMART Temps on January 9, 2017. Revenue in Digi Wireless Design Services and our Digi Remote Manager increased $0.8 million in the six months ended March 31, 2018 compared to the same period a year ago.Foreign Currency Impacts
Included in revenue performance for the year was a minimal decrease in foreign currency translation increase of $0.2 million and $0.5 million for three and six months ended MarchDecember 31, 2018, respectively, when compared to the same period in the prior fiscal year. This primarily was caused by the strengthening of the Euro for the three month period and the British Pound and Euro for the six month period against the U.S. dollar.
Revenue by Geographic Location
The following summarizes our revenue by geographic location of our customers:
Three months ended March 31, $ incr.% incr. Six months ended March 31, $ incr.% incr.Three months ended December 31, $ incr.% incr.
($ in thousands)2018 2017 (decr.) 2018 2017 (decr.)2018 2017 (as adjusted)* (decr.)
North America, primarily United States$39,412
 $29,711
 9,701
32.7
 $68,991
 $59,373
 9,618
16.2
$46,335
 $29,337
 16,998
57.9
Europe, Middle East & Africa9,504
 9,545
 (41)(0.4) 19,660
 19,356
 304
1.6
10,104
 10,156
 (52)(0.5)
Asia4,778
 5,370
 (592)(11.0) 9,306
 9,938
 (632)(6.4)5,080
 4,528
 552
12.2
Latin America1,097
 989
 108
10.9
 2,031
 2,123
 (92)(4.3)794
 934
 (140)(15.0)
Total revenue$54,791
 $45,615
 9,176
20.1
 $99,988
 $90,790
 9,198
10.1
$62,313
 $44,955
 17,358
38.6
*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which we adopted on October 1, 2018.
Revenue in North America increased by $9.7 million and $9.6$17.0 million, or 32.7% and 16.2%,57.9% for the three and six months ended MarchDecember 31, 2018 respectively, compared to the same periodsperiod a year ago. Revenue for the three months ended MarchDecember 31, 2018 compared to the same period a year ago included incremental revenue of $9.8$5.2 million from the acquisitionsJanuary 2018 acquisition of Accelerated and TempAlert. RevenueAccelerated. In addition, for the sixthree months ended MarchDecember 31, 2018 compared to the same period a year ago, included incrementalour SmartSense by Digi™ revenue increased $4.9 million. RF products also experienced increased revenue as we had a large customer deployment of $12.5 million fromour Digi XBee® cellular in the acquisitionsfirst quarter of Accelerated, TempAlertfiscal 2019. In addition, we had an increase in large project-based sales of cellular products and SMART Temps. We also had increased sales of terminal serversembedded products. We expect North America revenue to increase as a percentage of total revenue as our SmartSense by Digi™ and Accelerated products and services primarily are sold in both comparable periods.North America.
Revenue in EMEA remained relativelygenerally flat compared to the same period a year ago.
Revenue in Asia increased by $0.6 million, or 12.2% for the three months ended MarchDecember 31, 2018 compared to the same period a year ago. ForWe experienced increased sales of embedded modules and RF products in the six months ended March 31, 2018first quarter of fiscal 2019 compared to the same period a year ago.
Revenue in the prior fiscal year, EMEA revenue increased $0.3Latin America decreased by $0.1 million, or 1.6%. Revenue was favorably impacted by $0.2 million and $0.5 million15.0% for the three and six months ended MarchDecember 31, 2018 compared to the same period a year ago, as both the Euro and British Pound strengthened against the U.S. Dollar (see Foreign Currency Risk in Part I, Item 3, of this Form 10-Q).
Revenue in Asia decreased by $0.6 million in both the three and six month periods ended March 31, 2018 compared to the same period in the prior fiscal year. We experienced a decrease in RF modules and certain embedded products as they are in the mature portion of their product life cycle.

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Revenue in Latin America increased by $0.1 million for the three months ended March 31, 2018 compared to the same period a year ago. For the six months ended March 31, 2018 compared to the same period in the prior fiscal year, Latin America revenue decreased $0.1 million.
No significant changes were made to our pricing strategy that impacted revenue during the sixthree months ended MarchDecember 31, 2018 as compared to the same period in the prior fiscal year. As foreign currency rates fluctuate, we may from time to time adjust the prices of our products, services and solutions.
GROSS PROFIT
Gross profit for the three months ended MarchDecember 31, 2018 and 2017 was $26.7$29.8 million and $21.9$22.0 million, respectively,respectively. This was an increase of $4.8$7.8 million, or 21.7%. Gross profit for the six months ended March 31, 2018 and 2017 was $48.6 million and $43.4 million, respectively, an increase of $5.2 million, or 12.1%35.6%.
Product gross profit for the three months ended MarchDecember 31, 2018 and 2017 was $24.5$25.0 million, or 49.2%, and $20.4$19.2 million, respectively,or 50.0%, respectively. This was an increase of $4.1$5.8 million, or 20.3%. Product gross profit for the six months ended March 31, 2018 and 2017 was $43.8 million and $41.2 million, respectively, an increase of $2.6 million, or 6.2%29.9%. The increase inincluded incremental gross profit of $2.3 million for both comparable periods was due primarily to the additionJanuary 2018 acquisition of Accelerated, increase sales from most of our products during the second quarter of fiscal 2018.
Services and solutions gross profit was $2.9 million, or 40.5%, and $1.8 million, or 48.0%, forlower costs associated with our manufacturing transition. For the three months ended March 31, 2018 and 2017, respectively. Services and solutions gross profit was $6.2 million, or 44.6% and $2.7 million, or 45.7% for the six months ended March 31, 2018 and 2017, respectively. The increase in gross profit for both comparable periods was primarily related to the IoT Solutions segment. Services and solutions gross profit may vary from quarter to quarter, as our wireless product design and development service margins are highly dependent on the utilization rates of our personnel. However, we expect our IoT Solutions segment gross margin to increase in future periods as recurring revenue from this segment increases.
Gross profit was negatively impacted by amortization of $0.8 million and $0.3 million for the three months ended March 31, 2018 and 2017, respectively and by $1.4 million and $0.5 million for the six months ended March 31, 2018 and 2017, respectively. This increase in amortization expense is primarily related to our IoT Solutions segment.
OPERATING EXPENSES
The following summarizes our total operating expenses in dollars and as a percentage of total revenue:
 Three months ended March 31, $ incr. Six months ended March 31, $ incr.
($ in thousands)2018 2017 (decr.) 2018 2017 (decr.)
Sales and marketing$11,175
 20.4% $8,731
 19.1% $2,444
 $20,935
 20.9% $17,053
 18.8% $3,882
Research and development8,617
 15.7% 6,979
 15.3% 1,638
 16,368
 16.4% 13,884
 15.3% 2,484
General and administrative6,359
 11.6% 4,680
 10.3% 1,679
 12,908
 12.9% 8,484
 9.3% 4,424
Total operating expenses$26,151
 47.7% $20,390
 44.7% $5,761
 $50,211
 50.2% $39,421
 43.4% $10,790
Sales and marketing expenses increased $2.4 million and $3.9 million for the three and six months ended March 31, 2018, respectively, compared to the same periods a year ago primarily due to incremental expenses for TempAlert, SMART Temps and Accelerated of $1.9 million and $3.2 million. The remainder of the increases related primarily to an increase in commissions of $0.6 million and $0.7 million for the three and six months ended March 31, 2018, respectively, compared to the same periods a year ago.
Research and development expenses increased $1.6 million and $2.5 million for the three and six months ended March 31, 2018, respectively, compared to the same periods a year ago primarily due to incremental expenses for TempAlert, SMART Temps and Accelerated of $1.6 million and $2.4 million.
General and administrative expenses increased $1.7 million for the three months ended MarchDecember 31, 2018 compared to the same period a year ago, gross margin declined primarily dueas a result of product and customer mix, increased amortization expense related to incremental expensesthe Accelerated acquisition, partially offset by lower costs associated with our manufacturing transition.
Services and solutions gross profit, across both segments, was $5.5 million, or 48.0%, and $3.3 million, or 51.1%, for TempAlert, SMART Tempsthe three months ended December 31, 2018 and Accelerated of $2.0 million. We also had2017, respectively. This represents an increase in compensation-related expensesgross profit of $0.4$2.2 million, mostly related to increased incentive compensation and an increase of $0.6 million related to an earn-out reversal in the prior fiscal year. This was partially offset by a reduction of $1.1 million of professional fees primarily related to acquisition expenses.or 66.3%.

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GeneralThe increase in gross profit primarily was driven by our SmartSense by Digi business due to increases in recurring revenue and administrative expenses increased $4.4product and customer mix. As recurring revenue increases and becomes a greater percentage of total revenue, we expect gross margins to increase over time. This was offset partially by a decline in gross profit for Digi Wireless Design services as our wireless product design and development service margins are highly dependent on the utilization rates of our personnel. Gross margins declined overall in the three months ended December 31, 2018 as compared to the same period in the prior fiscal year due to Digi Wireless Design services.
Gross profit was impacted negatively by amortization of $0.7 million and $0.6 million for the sixthree months ended MarchDecember 31, 2018 and 2017, respectively. This increase in amortization expense is related primarily to the January 2018 acquisition of Accelerated.
OPERATING EXPENSES
The following summarizes our total operating expenses in dollars and as a percentage of total revenue:
 Three months ended December 31, $ incr.
($ in thousands)2018 2017 (as adjusted)* (decr.)
Sales and marketing$11,657
 18.7 % $9,760
 21.7% $1,897
Research and development9,518
 15.3 % 7,751
 17.3% 1,767
General and administrative3,117
 4.9 % 6,447
 14.3% (3,330)
Restructuring reversal(67) (0.1)% 
 % (67)
Total operating expenses$24,225
 38.9 % $23,958
 53.3% $267
*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which we adopted on October 1, 2018.
Sales and marketing expenses increased $1.9 million for the three months ended December 31, 2018 compared to the same period a year ago primarily due toago. This included incremental expenses for TempAlert, SMART Temps and Accelerated of $3.6$1.1 million. The remainder of the increase related primarily to an increase in employee-related expenses.
Research and development expenses increased $1.8 million for the three months ended December 31, 2018 compared to the same period a year ago. The increase includes incremental expenses related to the acquisition of Accelerated of $0.8 million. The remainder of the increase primarily was related to variable compensation-related expenses of $0.7 million.
General and administrative expenses decreased $3.3 million for the three months ended December 31, 2018 compared to the same period a year ago. This decrease primarily is related to $4.4 million gain recorded in the first quarter of fiscal 2019 for the sale of our corporate headquarters. In addition, we had a decrease in professional fees of $1.3 million primarily related to higher acquisition costs incurred in the first quarter of fiscal 2018. This was offset partially by an increase in incremental expenses for Accelerated of $0.9 million, increased compensation-related expenses of $0.7 million, acquisition earn-out expenses of $0.6 million mostlyand depreciation expenses of $0.2 million related to increased incentive compensation and an increaseacceleration of $0.3 related to adjustmentsdepreciation for assets that will be disposed of as part of the move of our earn-outs.corporate headquarters.
OTHER INCOME (EXPENSE) INCOME,, NET
We recorded a decrease in other (expense)Other income, net of $0.5 million andremained flat for the three months ended December 31, 2018 compared to the same period a year ago.
INCOME TAXES
Our income tax provision was $1.0 million for the three and six months ended MarchDecember 31, 2018, respectively, compared to the same periods2018. Included in this provision was a year ago primarily related to additional foreign currency gains recognized in the current fiscal year compared to the prior fiscal year. The foreign currency losses in the current fiscal year were mostlynet tax benefit discretely related to the strengtheningthree months ended December 31, 2018 of $0.1 million, primarily a result of expiring statute of limitations of uncertain tax benefits as well as excess tax benefits recognized on stock compensation. For the Euro and Japanese Yen againstthree months ended December 31, 2018, our effective tax rate before items discretely related to the period was less than the U.S. dollar, as non-functional currencies were remeasured atstatutory rate due primarily to certain income tax credits generated in the current rate.U.S.
INCOME TAXES
IncomeIn comparison, the income tax provision was $3.0$2.6 million for the sixthree months ended MarchDecember 31, 2018. Net2017. Included in this provision was a net tax expense discretely related to the sixthree months ended MarchDecember 31, 2018 was $3.02017 of $2.8 million, primarily as a result of new U.S. tax legislation that was enacted during the first quarter of fiscal 2018 and2018. For the adoption of ASU 2016-09three months ended December 31, 2017, our effective tax rate before items discretely related to the accounting forperiod was less than the U.S. statutory rate

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primarily due to the mix of income between taxing jurisdictions, certain of which had lower statutory tax effects of stock compensation.rates than the U.S., and certain tax credits generated in the U.S.
The Tax Cuts and Jobs Act of 2017 (the “Act”) was enacted in the U.S. on December 22, 2017. The Act lowered the U.S. federal corporate tax rate from 35% to 21% as of January 1, 2018 and requiresrequired companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that previously were previously tax deferred. Due to our fiscal year end, our statutory rateWe applied the guidance in SAB 118 when accounting for fiscal 2018 will be a blendthe enactment-date income tax effects of the new and old tax rates.Act in fiscal 2018. At March 31,September 30, 2018, we had not fully completed our accounting for the taxenactment effects of enactment of the Act;Act. We, however, in certain cases, as described below, we have madehad recorded a reasonableprovisional estimate of the effects on our existing deferred tax balances and the one-time transition tax. ForThe provisional tax expense recorded in fiscal 2018 was $3.0 million. At December 31, 2018, we had completed our accounting for the items for which we were able to determine a reasonable estimate, we recognized a provisionalenactment-date income tax expense amount of $2.7 million which is included as a component of income tax expense.
We remeasured U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which requires estimates of our changes in deferred tax assets and liabilities before and after the new statutory rate was enacted. As a result, we are still analyzing certain aspectseffects of the legislation and refining our calculations such as, refining current year estimates and filingsAct. In fiscal 2019, there have been no significant adjustments to the provisional amounts recorded in fiscal 2018. In addition, certain provisions of the Act became effective for us in fiscal 2019. The estimated tax returns, of which could potentially affect the measurementimpacts of these balances or potentially give rise to new deferred tax amounts. As of March 31, 2018, the provisional amount recorded related to the re-measurement of this deferred tax balance was $2.6 million.
In addition, we considered the potential tax expense impacts of the one-time transition tax. The transition tax is based on our total post-1986 earnings and profits (“E&P”) that we previously deferred from U.S. income taxes. We recorded a provisional amount for our one-time transition tax liability for our foreign subsidiaries, resultingprovisions are included in an increase in income tax expense of $0.1 million for the six months ended March 31, 2018. We have not yet completed the calculation of the post-1986 E&P for these foreign subsidiaries and, further, this transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation, evaluate the testing periods for cash and E&P measurement and finalize substantiation of material foreign taxes paid or accrued. Furthermore, it is expected that further guidance will be forthcoming from U.S. Treasury which may or may not impact the final transition tax required. We continue to review the outside basis differential of our foreign investments. At this point, no additional income taxes have been provided for any undistributed foreign earnings not subject to the transition tax and additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis difference in these entities (i.e., basis difference in excess of that subject to the one-time transition tax) is not practical at this time, but it is expected that with inclusion of the transition tax, the potential outstanding basis difference as of March 31, 2018 is expected to be a deductible temporary difference for which no deferred tax asset would be allowed.
We adopted ASU 2016-09 “Improvements to Employee Share-Based Payment Accounting” on October 1, 2017. As a result of the adoption, we recorded $0.7 million of excess tax expense related to our share-based payments in our provision for income taxes for the six months ended March 31, 2018. Historically, this was record in additional paid-in capital. The excess tax expense related to share-based payments are recognized as tax expense discretely related to the six months ended March 31, 2018.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

For the six months ended March 31, 2018, ourout effective tax rate before items discretely related to the period was less than the U.S. statutory rate due primarily to the mix of income between taxing jurisdictions, certain of which have lower statutory tax rates than the U.S., and also due to certain income tax credits generated in the U.S.
Income tax provision was $0.9 million for the six months ended March 31, 2017. Net tax benefits discretely related to the six months ended March 31, 2017 were $0.1 million resulting primarily from the reversal of tax reserves due to the expiration of statutes of limitation from U.S. and foreign tax jurisdictions. For the six months ended March 31, 2017, our effective tax rate before items discretely related to the period was less than the U.S. statutory rate primarily due to the mix of income between taxing jurisdictions, certain of which have lower statutory tax rates than the U.S., and certain tax credits in the U.S.current period.
Our effective tax rate will vary based on a variety of factors, including overall profitability, the geographical mix of income before taxes and related statutory tax rate in each jurisdiction, and tax items specificdiscretely related to the period, such as settlements of audits. We expect that we may record other benefits or expenses in the future that are specific to a particular quarter such as expiration of statutes of limitation, the completion of tax audits, or legislation that is enacted for both U.S. and foreign jurisdictions.
SEGMENT RESULTS OF OPERATIONS
IoT PRODUCTS & SERVICES
Three months ended March 31,% incr. Six months ended March 31,% incr.Three months ended December 31,% incr.
($ in thousands)2018 2017(decr.) 2018 2017(decr.)2018 2017(decr.)
Revenue:                        
Product$47,588
 95.5% $41,766
 95.2%13.9 $86,042
 94.9% $84,939
 95.6%1.3
$50,812
 95.3% $38,454
 94.1%32.1
Services2,237
 4.5
 2,107
 4.8
6.2 4,663
 5.1
 3,870
 4.4
20.5
2,482
 4.7
 2,426
 5.9
2.3
Total revenue49,825
 100.0
 43,873
 100.0
13.6 90,705
 100.0
 88,809
 100.0
2.1
53,294
 100.0
 40,880
 100.0
30.4
Cost of sales:                      
Cost of product23,080
 46.3
 21,398
 48.8
7.9 42,290
 46.6
 43,735
 49.3
(3.3)25,813
 48.4
 19,210
 47.0
34.4
Cost of services1,410
 2.8
 1,321
 3.0
6.7 2,749
 3.0
 2,388
 2.7
15.1
1,889
 3.6
 1,339
 3.3
41.1
Amortization of intangibles246
 0.5
 91
 0.2
170.3 330
 0.4
 192
 0.2
71.9
226
 0.4
 84
 0.2
169.0
Total cost of sales24,736
 49.6
 22,810
 52.0
8.4 45,369
 50.0
 46,315
 52.2
(2.0)27,928
 52.4
 20,633
 50.5
35.4
Gross profit25,089
 50.4
 21,063
 48.0
19.1 45,336
 50.0
 42,494
 47.8
6.7
25,366
 47.6
 20,247
 49.5
25.3
Total operating expenses20,400
 41.0
 18,353
 41.8
11.2 39,383
 43.4
 36,697
 41.3
7.3
17,964
 33.7
 18,983
 46.4
(5.4)
Operating income$4,689
 9.4% $2,710
 6.2%73.0 $5,953
 6.6% $5,797
 6.5%2.7
$7,402
 13.9% $1,264
 3.1%485.6
Revenue
Revenue from our IoT Products & Services segment increased $5.9 million and $1.9$12.4 million, or 13.6% and 2.1%,30.4% for the three and six months ended MarchDecember 31, 2018 respectively, compared to the same periodsperiod in the prior fiscal year.
Product revenue increased $5.8by $12.3 million, foror 32.1%, in the three months ended March 31, 2018 whichfirst fiscal quarter of 2019 compared to the first fiscal quarter of 2018. This included $6.2$5.2 million of incremental revenue related to Accelerated products. In addition, we experienced largerthe January 2018 acquisition of Accelerated. We also incurred increased sales of terminal servers to certainsignificant customers in theour North America region and larger sales of embedded modules to certain customers in the EMEA region. Embedded modules includefor our new ConnectCore 6UL. Sales related to our terminal servers may fluctuate as they are in the mature phase of their product life cycle. This was partially offset by a decrease in industrial cellular products and our RF products particularly our Digi XBee® cellularproducts that has continued to receive design wins. In addition, USB connected product sales. In addition, certainproducts, Rabbit® branded products and embedded products, which aremodules increased. This was offset partially by a decline in the mature portion of their product life cycle, also decreased.terminal servers. Services revenue from this segment of increased $0.1 million for the three months ended MarchDecember 31, 2018 compared to the same period a year ago, primarily relateddue to Digi Remote Manager.Wireless Design Services.
Product revenue increased $1.1 million for the six months ended March 31, 2018In general, we expect our network products, all of which included $6.2 million of incremental revenue relatedare mature, to Accelerated products. We also experienced larger sales of terminal servers to certain customers in the North America region, RF products to certain customers in the North America and EMEA regions and embedded modules to certain customers in the EMEA region. This was partially offset by decreases in industrial cellular products as we had a large sale to a significant customer in the prior fiscal year and USB connected products. The cellular router and gatewaydecline over time. Our product revenue is driven bysubject to large awards-based customer projects and is subject to revenue fluctuationsdeployments that can fluctuate from period to period. We also had a decrease in certain embedded products which are in the mature portion of their product life cycle. Services revenue from this segment of

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increased $0.8 million for the three months ended March 31, 2018 compared to the same period a year ago, primarily related to Digi Remote Manager and Wireless Design Services.
Revenue for this segment was also favorably impacted by $0.2 million and $0.5 million for the three and six months ended March 31, 2018, respectively, due to the strengthening of the British Pound and Euro compared to the U.S. Dollar.
Operating Income
Operating income increased $2.0 million and $0.2 million, or 73.0% and 2.7%, for the three and six months ended March 31, 2018 compared to the same periods in the prior fiscal year
The increase for the three months ended March 31, 2018 compared to the prior fiscal year was due to an increase in our gross profit of $4.0 million, or 19.1%, offset by an increase in operating expenses of $2.0 million, or 11.2%. Included in operating income for the three months ended March 31, 2018 is gross profit of $3.6 million and operating expenses of $2.2 million related to Accelerated.
For the six months ended March 31, 2018 compared to the same period in the prior fiscal year, the increase in operating income was due to an increase in gross profit of $2.8 million, or 6.7%, offset by an increase in operating expenses of $2.6 million, or 7.3%. Included in operating income for the six months ended March 31, 2018 is gross profit of $3.6 million and operating expenses of $2.2 million related to Accelerated. Also included in operating income is an increase in acquisition related costs of $0.7 million and an increase of $0.3 million in earn-out adjustments for fair value of contingent consideration.
IoT SOLUTIONS
 Three months ended March 31,% incr. Six months ended March 31,% incr.
($ in thousands)2018 2017(decr.) 2018 2017(decr.)
Solutions revenue$4,966
 100.0 % $1,742
 100.0 %185.1
 $9,283
 100.0 % $1,981
 100.0 %368.6
Cost of sales:                 
Cost of services2,877
 57.9
 682
 39.1
321.8
 4,981
 53.6
 789
 39.8
531.3
Amortization of intangibles524
 10.6
 221
 12.7
137.1
 1,047
 11.3
 331
 16.7
216.3
Total cost of sales3,401
 68.5
 903
 51.8
276.6
 6,028
 64.9
 1,120
 56.5
438.2
Gross profit1,565
 31.5
 839
 48.2
(86.5) 3,255
 35.1
 861
 43.5
(278.0)
Total operating expenses5,751
 115.8
 2,037
 117.0
182.3
 10,828
 116.7
 2,724
 137.5
297.5
Operating loss$(4,186) (84.3)% $(1,198) (68.8)%249.4
 $(7,573) (81.6)% $(1,863) (94.0)%306.5
Revenue
Revenue from our IoT Solutions segment increased $3.2 million, or 185.1%, for the three months ended March 31, 2018 compared to the same period a year ago. The increase was driven primarily by the continued growth and expansion of our SmartSense by Digi™ business. IoT Solutions revenue includes $3.5 million of incremental revenue of from the acquisition of TempAlert (see Note 2 to our Condensed Consolidated Financial Statements). We are now servicing nearly 42,000 sites and our recurring revenue from this segment continues to grow.
Revenue from our IoT Solutions segment increased $7.3 million, or 368.6%, for the six months ended March 31, 2018 compared to the same period a year ago. The increase was driven primarily by the continued growth and expansion of our SmartSense by Digi™ business. IoT Solutions revenue includes $6.3 million of incremental revenue of from the acquisition of both TempAlert and SMART Temps (see Note 2 to our Condensed Consolidated Financial Statements).
Operating Loss
Operating loss increased $3.0 million for the three months ended March 31, 2018 as compared to the same period in the prior fiscal year. This increase in operating loss was primarily due to an increase in operating expenses of $3.7 million, which included $3.3 million of incremental expenses from our recent acquisitions of TempAlert and SMART Temps. This was partially offset by an increase in our gross profit of $0.7 million. We expect our Solutions gross margin to increase in future periods as recurring revenue from this segment increases.

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Operating lossIncome
Operating income increased $5.7$6.1 million, or 485.6%, for the sixthree months ended MarchDecember 31, 2018 compared to the same period in the prior fiscal year. This increase was due to an increase in gross profit of $5.1 million, or 25.3%, offset by an decrease in operating expenses of $1.0 million, or 5.4%. Included in operating income for the three months ended December 31, 2018 is gross profit of $2.3 million and operating expenses of $2.9 million related to Accelerated. In addition, operating income also included a $4.4 million gain recorded in the first quarter of fiscal 2019 for the sale of our corporate headquarters.
IoT SOLUTIONS
 Three months ended December 31,% incr.
($ in thousands)2018 2017 (as adjusted)*(decr.)
Solutions revenue$9,019
 100.0 % $4,075
 100.0 %121.3
Cost of sales:        
Cost of services4,088
 45.4
 1,840
 45.2
122.2
Amortization of intangibles514
 5.7
 523
 12.7
(1.7)
Total cost of sales4,602
 51.0
 2,363
 58.0
94.8
Gross profit4,417
 49.0
 1,712
 42.0
158.0
Total operating expenses6,261
 69.4
 4,975
 122.1
25.8
Operating loss$(1,844) (20.4)% $(3,263) (80.1)%(43.5)
*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which we adopted on October 1, 2018.
Revenue
Revenue from our IoT Solutions segment increased $4.9 million, or 121.3%, for the three months ended December 31, 2018 compared to the same period a year ago. This primarily was driven by the growth of our SmartSense by Digi™ business. The increase is due to an existing customer expanding their equipment to include ambient sensors, additional customer deployments, and an increase in our recurring revenue base. We are serving just over 54,000 as of December 31, 2018, compared to just over 38,000 sites a year ago. Although a single transportation customer ended their relationship with this business, we continued to add new sites in multiple verticals and mitigated the transportation customer loss through new direct agreements with end customers. We believe this termination is an isolated event and does not represent a trend. We will continue to seek and evaluate acquisitions that will further enhance our IoT Solutions segment as we believe this marketplace offers a path to a significant base of recurring revenue that can provide both stable revenue generation and significant growth for us.
We expect our Solutions revenue to increase over time. The growth rate in revenue may be subject to fluctuations from period to period as large-scale deployments to specific customers may take place in certain time frames and may not occur in every quarter. Further, one-time orders or replacement equipment from existing customers could cause there to be one-time increases in revenue that are not repeated in subsequent quarters.
Operating Loss
Operating loss decreased $1.4 million for the three months ended December 31, 2018 as compared to the same period in the prior fiscal year. This decrease in operating loss was primarily due to an increase in gross profit of $2.7 million, or 158.0%, offset by an increase in operating expenses of $8.1$1.3 million, which included $7.0 million of incremental expenses fromor 25.8%. We expect our recent acquisitions of TempAlert and SMART Temps. This was partially offset by anIoT Solutions gross margin to increase in our gross profit of $2.4 million.future periods as recurring revenue from this segment increases.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations and capital expenditures principally with funds generated from operations. In addition, we received $10.0 million of proceeds related to the sale of our corporate headquarters during the first quarter of fiscal 2019. At MarchDecember 31, 2018, cash, cash equivalents and short-term marketable securities were $57.1$76.5 million compared to $110.2$62.8 million at September 30, 2017. At March 31, 2018, our cash, cash equivalents and marketable securities, including long-term marketable securities, were $59.6 million.2018. Our working capital (total current assets less total current liabilities) was $109.3$132.9 million at MarchDecember 31, 2018. At September 30, 2017,2018, our working capital was $156.4$126.5 million. The decreaseincrease in cash and working capital is directly related to the purchase price$10.0 million proceeds for the sale of our corporate headquarters. This increase was offset partially by purchases

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of property, equipment and other costs associated with the TempAlert and Accelerated acquisitions in fiscal 2018 (see Note 2improvements related to the Condensed Consolidated Financial Statements).build out of the new leased space for our corporate headquarters and cash expensed for our annual incentive compensation.
We presently anticipate total fiscal 20182019 capital expenditures will be approximately $2.2$7.8 million, of whichand we have spent $0.8$1.8 million as of MarchDecember 31, 2018.
Net cash used inprovided by operating activities was $5.0$6.1 million and $0.9compared to net cash used by operating activities of $1.3 million for the sixthree months ended MarchDecember 31, 2018 and 2017, respectively, a net decreaseincrease in cash of $4.1$7.4 million. This decreaseincrease was a result of net income of $4.7 million in cash resulted from a decrease in cashthe first three months of $8.6 million as we incurredfiscal 2019 compared to a net loss of $4.5 million in the first halfthree months of fiscal 2018, andresulting in a net income in the first halfincrease of fiscal 2017 and$9.2 million. We also had an increase related to changes in working capital of $2.2 million. This was partially offset by an increase in$1.9 million, depreciation and amortization of $3.3$1.2 million, due toearn-out expenses of $0.7 million and additional amortization from recent acquisitions, an increasestock compensation of $0.4 million. This was offset partially by the gain on the sale of the corporate headquarters of $4.4 million and a decrease in deferred income tax provision of $2.4$1.7 million related to the Tax Cuts and Jobs Act of 2017 (see Note 1012 to the Condensed Consolidated Financial Statements) and increases in cash related to other non-cash items of $1.0 million. .
The changes in working capital that resulted in a decreasean increase in cash of $2.2$1.9 million were driven by $5.2increases of $2.6 million related to accrued liabilities, $2.3 million related to accounts payable, $1.4 million related to prepaids and other assets, and $0.6 million related to accounts receivable as we collected on certain large customer sales. This was offset partially by a decrease of $2.6$4.9 million related to inventory and $0.5 decrease related to prepaids and other assets. This was partially offset by a $6.1 million increase related to accrued liabilities.inventory purchases in the first quarter of fiscal 2019.
Net cash used inprovided by investing activities was $25.9 million and $4.4$8.8 million during the sixthree months ended MarchDecember 31, 2018 and 2017, respectively,net cash used by investing activities was $34.2 million during the three months ended December 31, 2017. This resulted in a net decreaseincrease of $21.5$43.0 million. The decrease in cash flows from investing activities in the first six months of fiscal 2018 comparedThis increase is related primarily to the same period in the prior fiscal year is primarily related to $26.6 million of additional cash expenditures for acquisitions, as we spent $16.5$40.1 million (net of cash acquired of $0.3$0.6 million) for the Accelerated acquisition and $40.1 million (net of cash acquired $0.6 million)that was spent for the TempAlert acquisition in fiscal 2018.2018 and $10.0 million of proceeds from the sale of our corporate headquarters in fiscal 2019. This was offset by the SMART Temp acquisition of $28.3 million (net ofdecreases in cash acquired of $0.5 million) and the FreshTemp acquisition $1.7due to $3.7 million in the same period a year ago. We also had fewer proceeds of $1.0 million from the sale of Etherios. This was offset by additionalmarketable securities, $2.0 million in proceeds from marketable securitiesthe sale of $5.9Etherios received in fiscal 2018 and an additional $1.3 million and spent $0.2 million less onin purchases of property, equipment, and improvements.
Net cash used by financing activities was $0.2 million during the three months ended December 31, 2018 compared to net cash provided by financing activities was $3.3 million and $2.9of $2.7 million during the sixthree months ended MarchDecember 31, 2018 and 2017, respectively, a net increasedecrease of $0.4$2.9 million. We spent $0.5This decrease is a result of $2.7 million related to the firstin fewer proceeds from employee stock plans and a $0.2 million earn-out payment to the former shareholders of BluenicaFreshTemp in the first sixthree months of fiscal 2017 compared to the same period a year ago. This was partially offset by $0.12019. In addition, we had additional proceeds from employee stock plans of $0.5 million on additionaland fewer expenditures on purchases of common stock.stock of $0.2 million.
We generally expect positive cash flows from operations and believe that our current cash, cash equivalents and short-term marketable securities balances, cash generated from operations and our ability to secure debt and/or equity financing will be sufficient to fund our business operations, possible acquisitions and capital expenditures for the next twelve months and beyond.
Recently Issued Accounting Pronouncements
For information on new accounting pronouncements, see Note 1 to our Condensed Consolidated Financial Statements.


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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Our exposure to interest rate risk relates primarily to our investment portfolio. Our marketable securities are classified as available-for-sale and are carried at fair value. Our investments consist of money market funds, certificates of deposit, commercial paper, corporate bonds and government municipal bonds. Our investment policy specifies the types of eligible investments and minimum credit quality of our investments, as well as diversification and concentration limits which mitigate our risk. We do not use derivative financial instruments to hedge against interest rate risk because the majority of our investments mature in less than one year.
FOREIGN CURRENCY RISK
We are exposed to foreign currency transaction risk associated with certain sales transactions being denominated in Euros, British Pounds, Japanese Yen or Canadian Dollars and in certain cases, transactions in U.S. Dollars in our foreign entities. We are also exposed to foreign currency translation risk as the financial position and operating results of our foreign subsidiaries are translated into U.S. Dollars for consolidation. We manage our net asset or net liability position for non-functional currency accounts, primarily the U.S. Dollar accounts in our foreign locations to reduce our foreign currency risk. In addition, as foreign currency rates fluctuate, we may from time to time, adjust the prices of our products, services and solutions. We have not implemented a formal hedging strategy.
For the sixthree months ended MarchDecember 31, 2018 and 2017, we had approximately $31.0$16.0 million and $31.4$15.6 million, respectively, of revenue from foreign customers including export sales. Of these sales, $5.9$1.0 million and $9.6$3.8 million, respectively, were denominated in foreign currency, predominantly Euros, British Pounds and Canadian Dollar. In future periods, we expect a significant portion of sales will continue to be made in both Euros, British Pounds and Canadian Dollar.
Total revenue was favorablyunfavorably impacted by foreign currency translation of $0.2 million and $0.5 millionminimally for three and six months ended MarchDecember 31, 2018, respectively, as compared to the same periodsperiod in the prior fiscal year. This primarily was caused by the strengthening of the Euro for the three month period and the British Pound and Euro for the six month period against the U.S. dollar.
The table below compares the average monthly exchange rates of the Euro, British Pound, Japanese Yen and Canadian Dollar to the U.S. Dollar:
Six months ended March 31, % increaseThree months ended December 31, % increase
2018 2017 (decrease)2018 2017 (decrease)
Euro1.2029
 1.0727
 12.1%1.1447
 1.1781
 (2.8)%
British Pound1.3591
 1.2415
 9.5%1.2705
 1.3278
 (4.3)%
Japanese Yen0.0090
 0.0090
 %0.0091
 0.0089
 2.2 %
Canadian Dollar0.7893
 0.7523
 4.9%0.7335
 0.7874
 (6.8)%
A 10% change from the first sixthree months of fiscal 20172019 average exchange rate for the Euro, British Pound, Japanese Yen and Canadian Dollar to the U.S. Dollar would have resulted in a 0.6%0.2% increase or decrease in revenue and a 2.0%1.5% increase or decrease in stockholders’ equity due to foreign currency translation. The above analysis does not take into consideration any pricing adjustments we might consider in response to changes in such exchange rates.
CREDIT RISK
We have some exposure to credit risk related to our accounts receivable portfolio. Exposure to credit risk is controlled through regular monitoring of customer financial status, credit limits and collaboration with sales management and customer contacts to facilitate payment.
Investments are made in accordance with our investment policy and may consist of money market funds, certificates of deposit, commercial paper, corporate bonds and government municipal bonds. The fair value of our investments contains an element of credit exposure, which could change based on changes in market conditions. If market conditions deteriorate or if the issuers of these securities experience credit rating downgrades, we may incur impairment charges for securities in our investment portfolio. All of our securities are held domestically.

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ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to our management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
On October 20, 2017, we completed the acquisition of the TempAlert business and on January 22, 2018, we completed the acquisition of Accelerated. As permitted for recently acquired businesses, management has excluded the acquired TempAlert and Accelerated businesses from its assessment of internal control over financial reporting. The excluded TempAlert and Accelerated businesses represents total assets of 12.8% and 8.2%, respectively, of our consolidated total assets as of March 31, 2018. We are required to include them in our assessment beginning in the first quarter of fiscal 2019.
There were no changes in our internal control over financial reporting that occurred during the quarterly period ended MarchDecember 31, 2018 that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
The disclosures set forth in Note 1214 to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q are incorporated herein by reference.

ITEM 1A. RISK FACTORS
Except at noted below, thereThere have been no material changes in our risk factors from those previously disclosed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended September 30, 2017.
We are subject to various cybersecurity risks, which are particularly acute in the cloud-based technologies operated by us and other third parties that form a part of our solutions. These risks may increase our costs and could damage our brand and reputation.
As we continue to direct a substantial portion of our sales and development efforts toward broader based solutions, such as SmartSense by Digi™ and the Digi Remote Manager®, we expect to store, convey and potentially process significant amounts of data produced by devices. Further many of our business applications now exist within cloud platforms that are managed by third parties, which also adds risk from breach of third-parties
This data may include confidential or proprietary information, intellectual property or personally identifiable information of our customers or other third parties with whom they do business. It is important for us to maintain solutions and related infrastructure that are perceived by our customers and other parties with whom we do business to provide a reasonable level of reliability and security. Despite available security measures and other precautions, the infrastructure and transmission methods used by our products and services may be vulnerable to interception, attack or other disruptive problems. Continued high-profile data breaches at other companies evidence an external environment that is becoming increasingly hostile to information security. Improper disclosure of data or perception that our data security is insufficient could harm our reputation, give rise to legal proceedings, or subject our company to liability under laws that protect data, any of which could result in increased costs and loss of revenue.
If a cyberattack or other security incident were to allow unauthorized access to or modification of our customers’ data or our own data, whether due to a failure with our systems or related systems operated by third parties, we could suffer damage to our brand and reputation.
The costs we would incur to address and fix these incidents could significantly increase our expenses. These types of security incidents could also lead to lawsuits, regulatory investigations and increased legal liability, including in some cases contractual costs related to customer notification and fraud monitoring. Further, as regulatory focus on privacy and data security issues continues to increase and worldwide laws and regulations concerning the protection of information become more complex, the potential risks and costs of compliance to our business will intensify.
As illustrated by the recent Spectre and Meltdown threats, our products operate with and are dependent on products and components across a broad ecosystem. If there is a security vulnerability in one of these components, and if there is a security exploit targeting it, we could face increased costs, reduced revenue, liability claims, or damage to our reputation or competitive position.
The business of Accelerated which we acquired recently is subject to significant customer concentration.
In the second quarter of fiscal 2018 we acquired Accelerated.  While Accelerated has many customers, it’s business historically has been highly dependent on its relationship with a single telecommunications carrier customer.  Any disruption or difficulties in securing or renewing contractual relationships with this customer, maintaining such relationship on favorable terms or any other disruption in our business with this customer could have an adverse impact on our business, results of operations, financial condition and prospects.
We recently announced a significant restructuring of our manufacturing operations that will make us more dependent on third parties to manufacture our products which could have adverse impacts on our business if we do not properly forecast customer demands for products.
During the second quarter of fiscal 2018 we announced that we will restructure our manufacturing operations to become more reliant on third parties to manufacture our products.  Among other potential impacts on our business and operations, this restructuring is expected to lengthen the lead times on which we can produce many finished products that are available to meet

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customer demands.  If we do not properly forecast customer demands for products these lengthened lead times could result in lost revenues and adversely impact our business, results of operation, financial condition and prospects.  In addition, the restructuring is expected to be completed multiple months and result in the elimination of approximately sixty employment positions, primarily in our manufacturing operations.  If we are unable to retain employees in this area of our operations during the transition of manufacturing to third parties we could experience adverse impacts on our ability to timely produce products which could adversely impact our business, results or operations, financial condition and prospects. 2018.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Subsequent to end of the second fiscal quarter of 2018, onOn April 24, 2018 our Board of Directors authorized a new program to repurchase up to $20.0 million of our common stock primarily to return capital to shareholders. This repurchase authorization expires on May 1, 2019. Shares repurchased under the new program will be made through open market and privately negotiated transactions from time to time and in amounts that management deems appropriate. The amount and timing of share repurchases depends upon market conditions and other corporate considerations.
On May 2, 2017, our Board of Directors authorized a program to repurchase up to $20.0 million of our common stock primarily to return capital to shareholders. This repurchase authorization expiredis scheduled to expire on May 1, 2019. There were no shares repurchased under this program as of December 31, 2018.
The following table presents the information with respect to purchases made by or on behalf of Digi International Inc. or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stock during the secondfirst quarter of fiscal 2018:2019:
Period Total Number of Shares Purchased (1) Average Price Paid per Share Total Number of Shares Purchased as Part of a Publicly Announced Program Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program
January 1, 2018 - January 31, 2018 4,335
 $10.40
 
 $19,725,797.42
February 1, 2018 - February 28, 2018 
 $
 
 $19,725,797.42
March 1, 2018 - March 31, 2018 
 $
 
 $19,725,797.42
Total 4,335
 $10.40
 
 $19,725,797.42
Period Total Number of Shares Purchased (1) Average Price Paid per Share Total Number of Shares Purchased as Part of a Publicly Announced Program Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program
October 1, 2018 - October 31, 2018 1,913
 $11.60
 
 $20,000,000.00
November 1, 2018 - November 30, 2018 53,127
 $11.78
 
 $20,000,000.00
December 1, 2018 - December 31, 2018 28,948
 $10.92
 
 $20,000,000.00
Total 83,988
 $11.47
 
 $20,000,000.00
(1)All shares reported were forfeited by employees in connection with the satisfaction of tax withholding obligations related to the vesting of restricted stock units.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NoneNone.

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ITEM 4. MINE SAFETY DISCLOSURES

NoneNone.

ITEM 5. OTHER INFORMATION

Item 5.07 Submission of Matters to a Vote of Security Holders.
NoneOur annual meeting of stockholders was held on February 4, 2019. Of the 27,569,769 shares of our common stock eligible to vote at the meeting, 25,040,248 shares were present at the meeting by proxy or in person. The stockholders voted on the following matters:
1.Spiro C. Lazarakis and Hatem H. Naguib were elected as directors for a three-year term. Voting for each of their elections was:
 Name  Votes for: Votes “Withheld” Abstain 
Broker
Non-Votes
 Spiro C. Lazarakis  20,136,804
 
 1,388,332
 3,515,112
 Hatem H. Naguib  20,135,225
 
 1,389,911
 3,515,112
2.The stockholders approved the Digi International Inc. 2019 Omnibus Incentive Plan. The approval of the plan received 17,945,867 “for” votes and 3,568,664 “against” votes. 10,605 shares abstained from voting and there were 3,515,112 broker non-votes on this matter.
          
3.A non-binding advisory vote regarding the executive compensation disclosed in our proxy statement for the annual meeting received 19,454,996 “for” votes, 2,053,703 “against” votes. 16,437 shares abstained from voting and there were 3,515,112 broker non-votes on this matter.
          
4.The stockholders ratified the appointment of Grant Thornton LLP as our independent registered public accounting firm for the fiscal year ending September 30, 2019 with 24,942,428 shares voting in favor of the ratification and 80,688 shares voting against the ratification. 17,132 shares abstained from voting on this matter.



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ITEM 6. EXHIBITS
    
Exhibit No.DescriptionMethod of Filing
2
(a)Incorporated by Reference
3
(a)Restated Certificate of Incorporation of the Company, as amended (2)(1)Incorporated by Reference
 
   
3
(b)Incorporated by Reference
 
   
4
(a)Incorporated by Reference

4
(b)Incorporated by Reference
10
(a)Incorporated by Reference
    
10
(a)(i)(b)Filed Electronically
10
(a)(ii)Filed Electronically
10
(a)(iii)Filed Electronically
10
(a)(iv)Filed ElectronicallyIncorporated by Reference
    
31
(a)Filed Electronically
 
   
31
(b)Filed Electronically
 
   
32
 Filed Electronically
 
   
101.INS
 XBRL Instance DocumentFiled Electronically
 
   
101.SCH
 XBRL Taxonomy Extension Schema DocumentFiled Electronically
 
   
101.CAL
 XBRL Taxonomy Calculation Linkbase DocumentFiled Electronically
 
   
101.DEF
 XBRL Taxonomy Definition Linkbase DocumentFiled Electronically
 
   
101.LAB
 XBRL Taxonomy Label Linkbase DocumentFiled Electronically
 
   
101.PRE
 XBRL Taxonomy Presentation Linkbase DocumentFiled Electronically
______________
*Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-Q.

(1)Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed October 25, 2017 (File No. 1-34033)
(2)Incorporated by reference to Exhibit 3(a) to the Company’s Annual Report on Form 10-K for the year ended September 30, 1993 (File No. 0-17972)

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(3)(2)Incorporated by reference to Exhibit 3(b) to the Company’s Current Report on Form 8-K filed on August 28, 2017 (File No. 1-34033)
(4)(3)Incorporated by reference to Exhibit 4(a)10(o) to the Company’s registration statementAnnual Report on Form 8-A filed on April 25, 200810-K for the year ended September 30, 2018 (File No. 1-34033)
(5)Incorporated by reference to Exhibit 4(b) to the Company’s registration statement on Form 8-A filed on April 25, 2008 (File No. 1-34033)
(6)(4)Incorporated by reference to Appendix A to the Company’s definitive proxy statement on Schedule 14A filed December 8, 201714, 2018 (File No. 1-34033)


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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
      
  
DIGI INTERNATIONAL INC.
 
 
Date:May 1, 2018February 5, 2019By:  /s/ Michael C. GoergenGokul V. Hemmady 
   Michael C. Goergen Gokul V. Hemmady 
   
Senior Vice President, Chief Financial Officer and
Treasurer (Principal Financial Officer and Authorized Officer) 
 

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