UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



☑						QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, ~~2020~~2021


☐						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: 001-34033

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)

9350 Excelsior Blvd.

Suite 700

Hopkins

Minnesota

55343

(Address of principal executive offices)

(Zip Code)

(952) 912-3444

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $.01 per share

DGII

The Nasdaq Stock Market LLC

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 ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.) Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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:

Large accelerated filer

☐

Accelerated filer

☑

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑

On August ~~4, 2020, there~~6, 2021, there were ~~29,035,870~~34,110,994 shares of the registrant's $.01 par value Common Stock outstanding.

INDEX


			Page
PART I. FINANCIAL INFORMATION

ITEM 1. Unaudited Financial Statements:

Condensed Consolidated Statements of Operations			1

Condensed Consolidated Statements of Comprehensive Income (Loss)			2

Condensed Consolidated Balance Sheets			3

Condensed Consolidated Statements of Cash Flows			4

Condensed Consolidated Statements of Stockholders’ Equity			5

Notes to Condensed Consolidated Financial Statements			67

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			2124

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk			3235

ITEM 4. Controls and Procedures			3335

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings			3335

ITEM 1A. Risk Factors			3335

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds			3436

ITEM 3. Defaults Upon Senior Securities			3436

ITEM 4. Mine Safety Disclosures			3436

ITEM 5. Other Information			3436

ITEM 6. Exhibits			3536

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DIGI INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


		Three months ended June 30,						Nine months ended June 30,							Three months ended June 30,				Nine months ended June 30,
		2020		2019		2020		2019			2021		2020		2021		2020
		(in thousands, except per share data)															(in thousands, except per share data)
Revenue:	Revenue:									Revenue:
Product	Product	$	62,807	$	53,434	$	182,695	$	166,887	Product	$	68,303	$	62,807	$	197,831	$	182,695
Service	Service	7,531		7,732		23,407		22,356		Service	10,776		7,531		31,695		23,407
Total revenue	Total revenue	70,338		61,166		206,102		189,243		Total revenue	79,079		70,338		229,526		206,102
Cost of sales:	Cost of sales:									Cost of sales:
Cost of product	Cost of product	28,759		29,230		86,937		89,124		Cost of product	31,477		28,759		91,747		86,937
Cost of service	Cost of service	3,005		2,889		9,439		9,495		Cost of service	3,933		3,005		10,409		9,439
Amortization	Amortization	1,225		719		3,272		2,184		Amortization	1,113		1,225		3,339		3,272
Total cost of sales	Total cost of sales	32,989		32,838		99,648		100,803		Total cost of sales	36,523		32,989		105,495		99,648
Gross profit	Gross profit	37,349		28,328		106,454		88,440		Gross profit	42,556		37,349		124,031		106,454
Operating expenses:	Operating expenses:									Operating expenses:
Sales and marketing	Sales and marketing	13,133		11,392		39,750		34,583		Sales and marketing	15,910		13,133		46,271		39,750
Research and development	Research and development	10,892		8,584		32,755		27,671		Research and development	12,374		10,892		34,822		32,755
General and administrative	General and administrative	10,378		6,751		27,724		18,309		General and administrative	10,153		10,378		34,701		27,724
Restructuring charge (reversal)		91		(20)		129		(87)
Restructuring charge										Restructuring charge	101		91		995		129
Total operating expenses	Total operating expenses	34,494		26,707		100,358		80,476		Total operating expenses	38,538		34,494		116,789		100,358
Operating income	Operating income	2,855		1,621		6,096		7,964		Operating income	4,018		2,855		7,242		6,096
Other (expense) income, net:
Other expense, net:										Other expense, net:
Interest income	Interest income	22		205		303		557		Interest income	3		22		4		303
Interest expense	Interest expense	(900)		—		(3,066)		(94)		Interest expense	(371)		(900)		(1,019)		(3,066)
Other (expense) income, net		(67)		(174)		(214)		131
Total other (expense) income, net		(945)		31		(2,977)		594
Other expense, net										Other expense, net	(114)		(67)		(229)		(214)
Total other expense, net										Total other expense, net	(482)		(945)		(1,244)		(2,977)
Income before income taxes	Income before income taxes	1,910		1,652		3,119		8,558		Income before income taxes	3,536		1,910		5,998		3,119
Income tax expense (benefit)	Income tax expense (benefit)	144		4		(859)		886		Income tax expense (benefit)	379		144		220		(859)

Net income	Net income	$	1,766	$	1,648	$	3,978	$	7,672	Net income	$	3,157	$	1,766	$	5,778	$	3,978

Net income per common share:	Net income per common share:									Net income per common share:

Basic	Basic	$	0.06	$	0.06	$	0.14	$	0.28	Basic	$	0.09	$	0.06	$	0.18	$	0.14

Diluted	Diluted	$	0.06	$	0.06	$	0.13	$	0.27	Diluted	$	0.09	$	0.06	$	0.18	$	0.13
Weighted average common shares:	Weighted average common shares:									Weighted average common shares:
Basic	Basic	28,972		28,072		28,772		27,816		Basic	34,057		28,972		31,443		28,772
Diluted	Diluted	29,187		28,589		29,477		28,414		Diluted	35,148		29,187		32,706		29,477

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

Table of Contents

DIGI INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)


		Three months ended June 30,						Nine months ended June 30,							Three months ended June 30,				Nine months ended June 30,
		2020		2019		2020		2019			2021		2020		2021		2020
		(in thousands)															(in thousands)
Net income	Net income	$	1,766	$	1,648	$	3,978	$	7,672	Net income	$	3,157	$	1,766	$	5,778	$	3,978
Other comprehensive income (loss), net of tax:
Other comprehensive (loss) income:										Other comprehensive (loss) income:
Foreign currency translation adjustment	Foreign currency translation adjustment	681		532		857		(1,120)		Foreign currency translation adjustment	463		681		2,068		(1,120)
Change in net unrealized gain on investments	Change in net unrealized gain on investments	—		4		—		18		Change in net unrealized gain on investments	0		0		0		18
Less income tax expense	Less income tax expense	—		(1)		—		(5)		Less income tax expense	0		0		0		(5)

Other comprehensive income (loss), net of tax		681		535		857		(1,107)
Other comprehensive income (loss)										Other comprehensive income (loss)	463		681		2,068		(1,107)
Comprehensive income	Comprehensive income	$	2,447	$	2,183	$	4,835	$	6,565	Comprehensive income	$	3,620	$	2,447	$	7,846	$	2,871

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

Table of Contents

DIGI INTERNATIONAL INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


		June 30, 2020		September 30, 2019			June 30, 2021		September 30, 2020
		(in thousands, except share data)							(in thousands, except share data)
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	55,085	$	92,792	Cash and cash equivalents	$	146,942	$	54,129

Accounts receivable, net	Accounts receivable, net	53,876		56,417		Accounts receivable, net	41,276		59,227
Inventories	Inventories	46,550		39,764		Inventories	47,263		51,568

Other current assets	Other current assets	10,951		3,574		Other current assets	10,833		5,134

Total current assets	Total current assets	166,462		192,547		Total current assets	246,314		170,058

Property, equipment and improvements, net	Property, equipment and improvements, net	12,284		13,857		Property, equipment and improvements, net	12,559		11,507
Operating lease right-of-use assets	Operating lease right-of-use assets	14,937		—		Operating lease right-of-use assets	16,342		14,334
Intangible assets, net	Intangible assets, net	125,229		30,667		Intangible assets, net	114,982		121,248
Goodwill	Goodwill	206,693		153,422		Goodwill	221,331		210,135
Deferred tax assets	Deferred tax assets	427		7,330		Deferred tax assets	160		389

Other non-current assets	Other non-current assets	837		875		Other non-current assets	1,363		1,011

Total assets	Total assets	$	526,869	$	398,698	Total assets	$	613,051	$	528,682
LIABILITIES AND STOCKHOLDERS' EQUITY	LIABILITIES AND STOCKHOLDERS' EQUITY					LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Current portion of long-term debt	Current portion of long-term debt	$	1,972	$	—	Current portion of long-term debt	$	0	$	1,972
Accounts payable	Accounts payable	21,929		21,183		Accounts payable	18,840		28,067
Accrued compensation	Accrued compensation	8,702		8,733		Accrued compensation	11,544		9,372
Unearned revenue	Unearned revenue	4,962		5,025		Unearned revenue	13,047		7,691
Contingent consideration on acquired businesses		4,228		5,407
Contingent consideration on acquired business						Contingent consideration on acquired business	3,000		4,228
Current portion of operating lease liabilities	Current portion of operating lease liabilities	2,540		—		Current portion of operating lease liabilities	2,680		2,527
Other current liabilities	Other current liabilities	6,012		4,110		Other current liabilities	8,304		7,373

Total current liabilities	Total current liabilities	50,345		44,458		Total current liabilities	57,415		61,230
Income taxes payable	Income taxes payable	1,544		1,192		Income taxes payable	2,067		1,958
Deferred tax liabilities	Deferred tax liabilities	18,934		261		Deferred tax liabilities	18,662		17,171
Long-term debt	Long-term debt	74,477		—		Long-term debt	45,670		58,980

Operating lease liabilities	Operating lease liabilities	16,799		—		Operating lease liabilities	19,072		16,193
Other non-current liabilities	Other non-current liabilities	1,465		3,809		Other non-current liabilities	4,694		1,650

Total liabilities	Total liabilities	163,564		49,720		Total liabilities	147,580		157,182
Contingencies (see Note 15)
Commitments and Contingencies (see Note 15)						Commitments and Contingencies (see Note 15)	0		0
Stockholders' equity:	Stockholders' equity:					Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued and outstanding	Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued and outstanding	—		—		Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued and outstanding	0		0
Common stock, $.01 par value; 60,000,000 shares authorized; 35,405,481 and 34,608,003 shares issued		354		346
Common stock, $.01 par value; 60,000,000 shares authorized; 40,530,498 and 35,512,843 shares issued						Common stock, $.01 par value; 60,000,000 shares authorized; 40,530,498 and 35,512,843 shares issued	405		355
Additional paid-in capital	Additional paid-in capital	276,960		266,567		Additional paid-in capital	367,253		279,741
Retained earnings	Retained earnings	165,897		161,919		Retained earnings	176,116		170,330
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(24,658)		(25,515)		Accumulated other comprehensive loss	(21,749)		(23,817)
Treasury stock, at cost, 6,373,007 and 6,367,428 shares		(55,248)		(54,339)
Treasury stock, at cost, 6,419,504 and 6,353,094 shares						Treasury stock, at cost, 6,419,504 and 6,353,094 shares	(56,554)		(55,109)
Total stockholders' equity	Total stockholders' equity	363,305		348,978		Total stockholders' equity	465,471		371,500
Total liabilities and stockholders' equity	Total liabilities and stockholders' equity	$	526,869	$	398,698	Total liabilities and stockholders' equity	$	613,051	$	528,682

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

Table of Contents

DIGI INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


		Nine months ended June 30,							Nine months ended June 30,
		2020		2019			2021		2020
		(in thousands)							(in thousands)
Operating activities:	Operating activities:					Operating activities:
Net income	Net income	$	3,978	$	7,672	Net income	$	5,778	$	3,978
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, equipment and improvements	Depreciation of property, equipment and improvements	3,472		3,343		Depreciation of property, equipment and improvements	3,211		3,472
Amortization of intangible assets	Amortization of intangible assets	10,687		6,669		Amortization of intangible assets	11,989		10,687
Stock-based compensation	Stock-based compensation	5,323		4,180		Stock-based compensation	6,331		5,323

Deferred income tax provision	Deferred income tax provision	744		1,189		Deferred income tax provision	1,995		744

Gain on sale of property and equipment		—		(4,458)
Loss on sale of property and equipment						Loss on sale of property and equipment	65		0
Change in fair value of contingent consideration	Change in fair value of contingent consideration	(128)		1,188		Change in fair value of contingent consideration	5,772		(128)
Provision for bad debt and product returns	Provision for bad debt and product returns	438		594		Provision for bad debt and product returns	1,520		438
Provision for inventory obsolescence	Provision for inventory obsolescence	1,467		1,350		Provision for inventory obsolescence	1,200		1,467
Restructuring charge (reversal)		129		(87)
Restructuring charge						Restructuring charge	995		129
Other	Other	(37)		131		Other	84		(37)
Changes in operating assets and liabilities (net of acquisitions)	Changes in operating assets and liabilities (net of acquisitions)	(6,920)		757		Changes in operating assets and liabilities (net of acquisitions)	3,144		(6,920)
Net cash provided by operating activities	Net cash provided by operating activities	19,153		22,528		Net cash provided by operating activities	42,084		19,153
Investing activities:	Investing activities:					Investing activities:

Proceeds from maturities and sales of marketable securities		—		2,500

Acquisition of business, net of cash acquired		(136,098)		—

Proceeds from sale of property and equipment		—		10,047
Acquisition of businesses, net of cash acquired						Acquisition of businesses, net of cash acquired	(6,312)		(136,098)

Purchase of property, equipment, improvements and certain other intangible assets	Purchase of property, equipment, improvements and certain other intangible assets	(693)		(8,600)		Purchase of property, equipment, improvements and certain other intangible assets	(1,645)		(693)
Net cash (used in) provided by investing activities		(136,791)		3,947
Net cash used in investing activities						Net cash used in investing activities	(7,957)		(136,791)
Financing activities:	Financing activities:					Financing activities:
Proceeds from long-term debt	Proceeds from long-term debt	119,018		—		Proceeds from long-term debt	618		119,018
Payments on long-term debt	Payments on long-term debt	(40,268)		—		Payments on long-term debt	(15,625)		(40,268)
Payments for contingent consideration	Payments for contingent consideration	(4,698)		(3,748)		Payments for contingent consideration	(4,200)		(4,698)

Proceeds from issuance of stock, net of offering expenses						Proceeds from issuance of stock, net of offering expenses	73,830		0
Proceeds from stock option plan transactions	Proceeds from stock option plan transactions	5,063		4,054		Proceeds from stock option plan transactions	7,024		5,063
Proceeds from employee stock purchase plan transactions	Proceeds from employee stock purchase plan transactions	798		835		Proceeds from employee stock purchase plan transactions	917		798
Purchases of common stock	Purchases of common stock	(1,692)		(1,051)		Purchases of common stock	(1,985)		(1,692)
Net cash provided by financing activities	Net cash provided by financing activities	78,221		90		Net cash provided by financing activities	60,579		78,221
Effect of exchange rate changes on cash and cash equivalents	Effect of exchange rate changes on cash and cash equivalents	1,710		(485)		Effect of exchange rate changes on cash and cash equivalents	(1,893)		1,710
Net (decrease) increase in cash and cash equivalents		(37,707)		26,080
Net increase (decrease) in cash and cash equivalents						Net increase (decrease) in cash and cash equivalents	92,813		(37,707)
Cash and cash equivalents, beginning of period	Cash and cash equivalents, beginning of period	92,792		58,014		Cash and cash equivalents, beginning of period	54,129		92,792
Cash and cash equivalents, end of period	Cash and cash equivalents, end of period	$	55,085	$	84,094	Cash and cash equivalents, end of period	$	146,942	$	55,085

Supplemental schedule of non-cash investing and financing activities:	Supplemental schedule of non-cash investing and financing activities:					Supplemental schedule of non-cash investing and financing activities:
Transfer of inventory to property, equipment and improvements	Transfer of inventory to property, equipment and improvements	$	(1,202)	$	(921)	Transfer of inventory to property, equipment and improvements	$	(1,624)	$	(1,202)
Contingent consideration recognized related to acquisition of business	Contingent consideration recognized related to acquisition of business	$	(5,100)	$	—	Contingent consideration recognized related to acquisition of business	$	(5,914)	$	(5,100)
Tenant improvement allowance						Tenant improvement allowance	$	(1,000)	$	—
Accrual for purchase of property, equipment, improvements and certain other intangible assets	Accrual for purchase of property, equipment, improvements and certain other intangible assets	$	—	$	(7)	Accrual for purchase of property, equipment, improvements and certain other intangible assets	$	(14)	$	0

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

Table of Contents

DIGI INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(UNAUDITED)


												Accumulated
								Additional				Other		Total											Additional				Accum. Other		Total
		Common Stock				Treasury Stock						Paid-In		Retained			Comprehensive		Stockholders'			Common Stock			Treasury Stock				Paid-In		Retained		Comprehensive	Stockholders'
(in thousands)	(in thousands)	Shares	Par Value		Shares	Value		Capital		Earnings		Loss		Equity		(in thousands)		Shares		Par Value		Shares	Value		Capital		Earnings		Loss		Equity
Balances, September 30, 2018		33,813	$	338	6,385	$	(54,216)	$	255,936	$	151,961	$	(23,526)	$	330,493
Balances March 31, 2020																Balances March 31, 2020		35,364		$	354	6,410	$	(55,563)	$	274,780	$	164,131	$	(25,339)	$	358,363
Net income	Net income									7,672				7,672		Net income		—		—		—	—		—		1,766		—		1,766
Other comprehensive loss	Other comprehensive loss											(1,107)		(1,107)		Other comprehensive loss		—		—		—	—		—		—		681		681
Employee stock purchase plan issuances	Employee stock purchase plan issuances				(91)	773		62						835		Employee stock purchase plan issuances		—		—		(37)	324		(41)		—		—		283
Repurchase of common stock					92	(1,051)								(1,051)
Taxes paid for net share settlement of share-based payment awards																Taxes paid for net share settlement of share-based payment awards		—		—		0	(9)		—		—		—		(9)
Issuance of stock under stock award plans	Issuance of stock under stock award plans	698	7					4,047						4,054		Issuance of stock under stock award plans		41		0		—	—		339		—		—		339
Stock-based compensation expense	Stock-based compensation expense							4,180						4,180		Stock-based compensation expense		—		—		—	—		1,882		—		—		1,882
Balances, June 30, 2019		34,511	$	345	6,386	$	(54,494)	$	264,225	$	159,633	$	(24,633)	$	345,076
Balances, June 30, 2020																Balances, June 30, 2020		35,405		$	354	6,373	$	(55,248)	$	276,960	$	165,897	$	(24,658)	$	363,305

Balances, September 30, 2019	Balances, September 30, 2019	34,608	$	346	6,367	$	(54,339)	$	266,567	$	161,919	$	(25,515)	$	348,978	Balances, September 30, 2019		34,608		$	346	6,367	$	(54,339)	$	266,567	$	161,919	$	(25,515)	$	348,978
Net income	Net income									3,978				3,978		Net income		—		—		—	—		—		3,978		—		3,978
Other comprehensive income	Other comprehensive income											857		857		Other comprehensive income		—		—		—	—		—		—		857		857
Employee stock purchase plan issuances	Employee stock purchase plan issuances				(90)	783		15						798		Employee stock purchase plan issuances		—		—		(90)	783		15		—		—		798
Repurchase of common stock					96	(1,692)								(1,692)
Taxes paid for net share settlement of share-based payment awards																Taxes paid for net share settlement of share-based payment awards		—		—		96	(1,692)		—		—		—		(1,692)
Issuance of stock under stock award plans	Issuance of stock under stock award plans	797	8					5,055						5,063		Issuance of stock under stock award plans		797		8		—	—		5,055		—		—		5,063
Stock-based compensation expense	Stock-based compensation expense							5,323						5,323		Stock-based compensation expense		—		—		—	—		5,323		—		—		5,323
Balances, June 30, 2020	Balances, June 30, 2020	35,405	$	354	6,373	$	(55,248)	$	276,960	$	165,897	$	(24,658)	$	363,305	Balances, June 30, 2020		35,405		$	354	6,373	$	(55,248)	$	276,960	$	165,897	$	(24,658)	$	363,305

Balances, March 31, 2021																Balances, March 31, 2021		40,442		$	404	6,413	$	(56,595)	$	364,604	$	172,951	$	(22,212)	$	459,152
Net income																Net income		—		—		—	—		—		3,157		—		3,157
Other comprehensive loss																Other comprehensive loss		—		—		—	—		—		—		463		463

Other																Other											8				8
Employee stock purchase plan issuances																Employee stock purchase plan issuances		—		—		(18)	160		137		—		—		297
Taxes paid for net share settlement of share-based payment awards																Taxes paid for net share settlement of share-based payment awards		—		—		6	(119)		—		—		—		(119)
Issuance of stock under stock award plans																Issuance of stock under stock award plans		70		1		.	—		402		—		—		403
Stock-based compensation expense																Stock-based compensation expense		—		—		—	—		2,110		—		—		2,110
Balances, June 30, 2021																Balances, June 30, 2021		40,512		$	405	6,401	$	(56,554)	$	367,253	$	176,116	$	(21,749)	$	465,471

Balances, September 30, 2020																Balances, September 30, 2020		35,513		$	355	6,353	$	(55,109)	$	279,741	$	170,330	$	(23,817)	$	371,500
Net income																Net income		—		—		—	—		—		5,778		—		5,778
Other comprehensive loss																Other comprehensive loss		—		—		—	—		—		—		2,068		2,068
Issuance of common stock, net of offering expenses																Issuance of common stock, net of offering expenses		4,025		40		—	—		73,790		—		—		73,830
Other																Other											8				8
Employee stock purchase plan issuances																Employee stock purchase plan issuances		—		—		(61)	540		376		—		—		916
Taxes paid for net share settlement of share-based payment awards																Taxes paid for net share settlement of share-based payment awards		—		—		109	(1,985)		—		—		—		(1,985)
Issuance of stock under stock award plans																Issuance of stock under stock award plans		974		10		—	—		7,015		—		—		7,025
Stock-based compensation expense																Stock-based compensation expense		—		—		—	—		6,331		—		—		6,331
Balances, June 30, 2021																Balances, June 30, 2021		40,512		$	405	6,401	$	(56,554)	$	367,253	$	176,116	$	(21,749)	$	465,471

Table of Contents

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

Table of Contents

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 unaudited condensed consolidated financial statements of Digi International Inc. ("we", "us", "our", "Digi" or "the Company") have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission applicable to interim financial statements. While these financial statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles ("GAAP") for complete financial statements. These financial statements should be read in conjunction with the financial statement disclosures in our Annual Report on Form 10-K for the year ended September 30, ~~2019~~2020 (the ~~"2019~~"2020 Financial Statements"). We use the same accounting policies in preparing quarterly and annual financial statements. The quarterly results of operations are not necessarily indicative of the results to be expected for the full year.

As described in Note 9, effective with the reorganization announcement on October 7, 2020, the measure of segment operating income (loss) used by our chief operating decision maker ("CODM") changed. As a result, our disclosed measure of segment operating income (loss) has been updated.

Potential Impacts of COVID-19 on our Business

The impact of the coronavirus ~~disease 2019~~ ("COVID-19") pandemic continues to unfold. The extent of the pandemic's effect on our operational and financial performance will depend in large part on future developments, which cannot be reasonably estimated at this time. Future developments include the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact both within and outside the jurisdictions where we operate, the impact on governmental programs and budgets, the development of treatments or vaccines, and the timing and level of resumption of widespread economic activity. Due to the inherent uncertainty of the unprecedented and rapidly evolving situation, we are unable to predict with any confidence the likely impact of the COVID-19 pandemic on our future operations. For a more detailed discussion see Part I, Item 1 in our Annual Report on Form 10-K for the year ended September 30, 2020 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of this Form 10-Q.

Recently Issued Accounting Pronouncements

Adopted

In ~~February 2016,~~August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") ~~2016-02,~~ ~~Leases (Topic 842)~~, which provides for comprehensive changes to lease accounting. The standard requires that a lessee recognize a lease obligation liability and a right-to-use asset for virtually all leases, subsequently amortized over the lease term.

We adopted this standard in the first quarter of fiscal 2020, following the modified retrospective application approach that applies the new standard to all applicable leases existing at the date of initial application and not restating comparative periods. We have completed our implementation efforts. These efforts included identification and analysis of our lease portfolio, analysis and evaluation of the new reporting and disclosure requirements of the new guidance, and an evaluation of our lease-related processes and internal controls. The adoption of this standard resulted in the recognition of a right-of-use asset included in other non-current assets of approximately $14.1 million. It also resulted in a lease liability of approximately $17.9 million included in other current liabilities and other non-current liabilities. Both of these were recorded on our condensed consolidated balance sheet in the first quarter of fiscal 2020. In adopting the new standard, we elected the package of practical expedients permitted under the transition guidance, as well as the practical expedient not to separate non-lease components from lease components. We also elected the practical expedient to use hindsight in determining the lease term when considering options to extend or terminate a lease, options to purchase the underlying asset, and in assessing the impairment of right-of-use assets. The adoption of this standard did not have a significant impact on our condensed consolidated results of operations or condensed consolidated statements of cash flows. We have identified new and updated existing internal controls and processes to support measurement, recognition and disclosure under this new standard. Such changes were not deemed to be material to our overall system of internal control over financial reporting.

~~Not Yet Adopted~~

~~In August 2018, the FASB issued ASU~~ 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance changes the disclosure requirements on fair value measurements. ~~The updated guidance is effective for us beginning~~

~~Table~~We adopted this standard in the first quarter of ~~Contents~~

~~1. BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)~~

~~with the quarter ending December 31, 2020. Early adoption is permitted for any removed or modified disclosures. We are evaluating the~~fiscal 2021. This standard did not have a material impact ~~of adopting ASU 2018-13~~ on our consolidated financial statements.

In June 2016, ~~the~~ FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial 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. ~~ASU 2016-13 is effective for us beginning with~~We adopted this standard in the first quarter ~~ending December 31, 2020. Entities may early adopt beginning after December 15, 2018. We are evaluating~~of fiscal 2021, following the modified-retrospective approach. This standard did not have a material impact ~~of adopting ASU 2016-13~~ on our consolidated financial statements.

Table of Contents

2. ACQUISITIONS

Acquisition of ~~Opengear,~~Haxiot, Inc.

On ~~December 13, 2019,~~March 26, 2021, we ~~completed our acquisition of Opengear,~~acquired Haxiot, Inc. ("~~Opengear"~~Haxiot"), a ~~New Jersey-based~~Dallas-based provider of ~~secure IT infrastructure products and software. Opengear~~low power wide area ("LPWA") wireless technology. The results of operations are now included in our ~~condensed consolidated financial statements~~third quarter of fiscal 2021 results within our IoT Products & Services segment.

The terms of the acquisition included an upfront cash payment as well as contingent consideration comprised of future earn-out payments. We funded the closing of the acquisition with ~~cash of $148.1~~$7.1 million ~~comprised~~ of cash on ~~hand and proceeds from our credit facility (see Note 8 to the condensed consolidated financial statements).~~hand. The future earn-out payments are based on Haxiot revenue performance ~~from Opengear~~and contractually are not to exceed $3.0 million and $5.0 million for the ~~twelve-month~~annual periods ~~ended December 31, 2019 and~~ ending December 31, ~~2020.~~2021 and December 31, 2022. The ~~cumulative~~fair value amount of these earn-outs for the annual periods ~~ended~~ending December 31, ~~2019~~2021 and December 31, ~~2020, will not exceed $5.0~~2022 are $3.0 million and ~~$10.0~~$2.9 million, respectively. ~~We paid~~In the ~~first installment of $0.9 million for the period ended December 31, 2019 during the~~fiscal third quarter of fiscal ~~2020. The~~2021, the preliminary purchase price allocation was updated, including related determination of fair value ~~of this~~and income tax implications. As a result, we adjusted goodwill to $8.6 million and adjusted contingent consideration ~~was $5.1~~to $5.9 million ~~at the date of acquisition and the remaining fair value was $4.2 million~~on our balance sheet at June 30, ~~2020 (see Note 5 to the condensed consolidated financial statements).~~2021.

For tax purposes, this acquisition is treated as a stock acquisition. The goodwill therefore is not deductible. We believe this is a complementary acquisition for us as it significantly enhances our IoT Products ~~and~~& Services segment by ~~providing secure, resilient access~~enhancing Digi's embedded systems portfolio and ~~automation~~immediately extends the company's market reach with a complete LoRaWAN®-based solutions offering.

Costs directly related to ~~critical IT infrastructure.~~the acquisition of $0.2 million incurred fiscal year to date 2021 have been charged to operations and are included in general and administrative expense in our condensed statements of operations. These acquisition costs include legal, accounting, valuation and investment banking fees.

The ~~Opengear acquisition has been accounted for using~~following table summarizes the ~~acquisition method~~preliminary fair values of ~~accounting. This requires, among other things, that~~Haxiot assets acquired and liabilities assumed ~~pursuant to the purchase agreement be recognized at fair value~~ as of the acquisition ~~date.~~ date (in thousands).


Cash	$	7,146

Contingent consideration	5,900


Total	$	13,046

Fair value of net tangible assets acquired	$	124
Identifiable intangible assets:
Customer relationships	3,900
Purchased and core technology	1,050

Trademarks	500
Deferred tax liability on identifiable intangible assets	(1,145)
Goodwill	8,617
Total	$	13,046

Acquisition of Opengear, Inc.

On December 13, 2019, we completed our acquisition of Opengear, Inc. ("Opengear"), a New Jersey-based provider of secure IT infrastructure products and software. Opengear results have been included in our condensed consolidated financial statements within our IoT Products & Services segment since the date of acquisition.

During the first quarter of fiscal 2021, we recorded an out-of-period adjustment in connection with the purchase price accounting of Opengear. This balance sheet adjustment resulted in a decrease in fair value of net tangible assets acquired of $1.1 million, a decrease of $0.3 million to non-current deferred tax liability and an increase to goodwill of $0.8 million. Management assessed the impact of this adjustment and believes, after considering both quantitative and qualitative factors, that it is not material to our current or previously issued consolidated financial statements.

The following table summarizes the ~~preliminary~~final fair values of Opengear assets acquired and liabilities assumed as of the acquisition date (in thousands):

Table of Contents


Cash	$	148,058

Contingent consideration	5,100


Total	$	153,158

Fair value of net tangible assets acquired	$	~~20,086~~18,096
Identifiable intangible assets:
Customer relationships	79,000
Purchased and core technology	18,100
Trademarks	8,000
Deferred tax liability on identifiable intangible assets	~~(25,634)~~(27,126)
Goodwill	~~53,606~~57,088
Total	$	153,158

The condensed consolidated balance sheet as of June 30, ~~2020~~2021 reflects the ~~preliminary~~final allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The estimated fair value of the net tangible assets acquired is preliminary and remains subject to change due to the finalization of the net working capital adjustment and related escrow. Included in the fair value of net tangible assets acquired are $1.4 million of right-of-use assets

~~Table of Contents~~

~~2. ACQUISITIONS (CONTINUED)~~

~~included in other non-current assets and $1.7 million of lease liability included in other current and non-current liabilities associated with Opengear's operating leases.~~

The preliminary weighted average useful life for all the identifiable intangibles listed above is estimated to be 13.4 years. For purposes of determining fair value, the existing customer relationships identified above are assumed to have a useful life of 14.5 years, purchased and core technology is assumed to have useful life of 9.0 years and trademarks are assumed to have a useful life of 12.0 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 identifiable intangible assets are amortized using the straight-line method. This reflects the pattern in which the assets are expected to be consumed.

Costs directly related to the acquisition of $0.3 million incurred in the fourth quarter of fiscal 2019 and $2.6 million incurred in fiscal 2020 have been charged directly to operations and are included in general and administrative expenses in our condensed consolidated statements of operations. These acquisition costs include legal, accounting, valuation and investment banking fees.

~~The following consolidated pro forma information is presented as if the acquisition had occurred on October 1, 2018 (in thousands):~~

Three months ended June 30, Nine months ended June 30,
2020 2019 2020 2019
Net sales $ 70,338 $ 74,946 $ 220,998 $ 229,831
Net income $ 2,411 $ 3,064 $ 9,847 $ 7,901
Net income per share - basic $ 0.08 $ 0.11 $ 0.34 $ 0.28
Net income per share - diluted $ 0.08 $ 0.11 $ 0.33 $ 0.28

Pro forma net income has been adjusted to include interest expense related to debt incurred as a result of the acquisition as well as amortization on the fair value of the intangibles acquired. It also has been adjusted to assume the acquisition-related costs of $3.0 million were incurred as of the first quarter of fiscal 2019.

Given the efforts to rapidly integrate the workforce, customer offerings, technology, and reporting capabilities of Opengear with that of our other components in our IoT Products & Services business, along with the inherent complementary synergies gained from doing so, it is impractical for us to present Opengear specific results otherwise required by GAAP.

3. EARNINGS PER SHARE

The following table is a reconciliation of the numerators and denominators in the net income per common share calculations (in thousands, except per common share data):

Three months ended June 30, Nine months ended June 30,
2020 2019 2020 2019
Numerator:
Net income $ 1,766 $ 1,648 $ 3,978 $ 7,672
Denominator:
Denominator for basic net income per common share — weighted average shares outstanding 28,972 28,072 28,772 27,816
Effect of dilutive securities:
Stock options and restricted stock units 215 517 705 598
Denominator for diluted net income per common share — adjusted weighted average shares 29,187 28,589 29,477 28,414
Net income per common share, basic $ 0.06 $ 0.06 $ 0.14 $ 0.28
Net income per common share, diluted $ 0.06 $ 0.06 $ 0.13 $ 0.27

~~Table of Contents~~

~~3. EARNINGS PER SHARE (CONTINUED)~~


	Three months ended June 30,				Nine months ended June 30,
	2021		2020		2021		2020
Numerator:


Net income	$	3,157	$	1,766	$	5,778	$	3,978

Denominator:
Denominator for basic net income per common share — weighted average shares outstanding	34,057		28,972		31,443		28,772
Effect of dilutive securities:
Stock options and restricted stock units	1,091		215		1,263		705
Denominator for diluted net income per common share — adjusted weighted average shares	35,148		29,187		32,706		29,477




Net income per common share, basic	$	0.09	$	0.06	$	0.18	$	0.14



Net income per common share, diluted	$	0.09	$	0.06	$	0.18	$	0.13

For the three months ended June 30, ~~2020~~2021 and ~~2019,~~2020, there were ~~2,241,860~~41,540 and ~~617,841~~2,241,860 potentially dilutive shares, respectively. For the nine months ended June 30, ~~2020~~2021 and ~~2019,~~2020, there were ~~1,146,581~~37,248 and ~~667,841~~1,146,581 potentially dilutive shares, respectively. These potentially dilutive shares were related to stock options to purchase common shares that were not included in the above computation of diluted earnings per common share since the options' exercise prices were greater than the average market price of our common shares.

4. SELECTED BALANCE SHEET DATA

The following table shows selected balance sheet data (in thousands):

June 30,
2020 September 30,
2019
Accounts receivable, net:
Accounts receivable $ 60,106 $ 60,062
Less allowance for doubtful accounts 2,178 968
Less reserve for future returns and pricing adjustments 4,052 2,677
Accounts receivable, net $ 53,876 $ 56,417
Inventories:
Raw materials $ 33,080 $ 12,308
Work in process — 565
Finished goods 13,470 26,891
Inventories $ 46,550 $ 39,764

Table of Contents


	June 30, 2021		September 30, 2020
Accounts receivable, net:
Accounts receivable	$	48,596	$	65,027
Less allowance for credit losses	3,681		3,778
Less reserve for future credit returns and pricing adjustments	3,639		2,022
Accounts receivable, net	$	41,276	$	59,227
Inventories:
Raw materials	$	15,331	$	14,009

Finished goods	31,932		37,559
Inventories	$	47,263	$	51,568

5. FAIR VALUE MEASUREMENTS

Financial assets and liabilities are classified in the following fair value hierarchy based on the lowest level input that is significant to the fair value measurement: Level 1 (unadjusted quoted prices in active markets for identical assets or liabilities); Level 2 (observable market inputs, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data).

Table of Contents

5. FAIR VALUE MEASUREMENTS (CONTINUED)

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
		June 30, 2020		Level 1		Level 2		Level 3			June 30, 2021		Level 1		Level 2		Level 3

Liabilities:	Liabilities:									Liabilities:
Contingent consideration on acquired businesses		$	4,228	$	—	$	—	$	4,228
Contingent consideration on acquired business										Contingent consideration on acquired business	$	5,900	$	0	$	0	$	5,900
Total liabilities measured at fair value	Total liabilities measured at fair value	$	4,228	$	—	$	—	$	4,228	Total liabilities measured at fair value	$	5,900	$	0	$	0	$	5,900

Total Fair
Value at Fair Value Measurements Using
Inputs Considered as
September 30, 2019 Level 1 Level 2 Level 3
Assets:
Money market $ 56,700 $ 56,700 $ — $ —
Total assets measured at fair value $ 56,700 $ 56,700 $ — $ —
Liabilities:
Contingent consideration on acquired businesses $ 5,407 $ — $ — $ 5,407
Total liabilities measured at fair value $ 5,407 $ — $ — $ 5,407


	Total Fair Value at		Fair Value Measurements Using Inputs Considered as
	September 30, 2020		Level 1		Level 2		Level 3







Liabilities:
Contingent consideration on acquired business	$	4,228	$	0	$	0	$	4,228
Total liabilities measured at fair value	$	4,228	$	0	$	0	$	4,228

In connection with our acquisition of Bluenica Corporation ("Bluenica") in October 2015, we agreed to make contingent earn-out payments over a period of up to 4 years, subject to achieving specified revenue thresholds for sales of Bluenica products. We paid the final installment of $2.9 million during the third quarter of fiscal 2020.

~~Table of Contents~~

~~5. FAIR VALUE MEASUREMENTS (CONTINUED)~~

In connection with our acquisition of Accelerated Concepts, Inc. ("Accelerated") in January 2018, we agreed to make contingent earn-out payments if specified revenue thresholds for sales of Accelerated products were achieved. We ~~made~~paid the first installment payment of $3.5 million in the third quarter of fiscal 2019. ~~The earn-out period for this acquisition ended on January 22, 2020.~~ We paid the final installment of $2.4 million in the third quarter of fiscal 2020. The earn-out period for this acquisition ended on January 22, 2020.

In connection with our acquisition of Opengear, we agreed to make contingent payments, based upon certain revenue thresholds (see Note 2 to the condensed consolidated financial statements). We paid the first installment of $0.9 million during the third quarter of fiscal 2020. ~~The~~We paid the final installment of $10.0 million during the second quarter of fiscal 2021.

In connection with our acquisition of Haxiot, we agreed to make contingent earn-out payments, based upon certain revenue thresholds (see Note 2 to the condensed consolidated financial statements). In the fiscal third quarter of fiscal 2021, the preliminary purchase price allocation was updated, including related determination of fair value ~~of the remaining liability for~~and income tax implications. As a result, we adjusted goodwill to $8.6 million and adjusted contingent consideration ~~for the acquisition of Opengear was $4.2~~to $5.9 million on our balance sheet at June 30, ~~2020.~~2021.

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 June 30,						Nine months ended June 30,								Three months ended June 30,				Nine months ended June 30,
		2020		2019		2020		2019			2021			2020		2021		2020
Fair value at beginning of period	Fair value at beginning of period	$	10,379	$	8,527	$	5,407	$	10,065	Fair value at beginning of period	$	8,000		$	10,379	$	4,228	$	5,407
Contingent consideration recognized for acquired business	Contingent consideration recognized for acquired business	—		—		5,100		—		Contingent consideration recognized for acquired business	0			0		8,000		5,100
Contingent consideration payments	Contingent consideration payments	(6,151)		(3,500)		(6,151)		(5,848)		Contingent consideration payments	0			(6,151)		(10,000)		(6,151)
Change in fair value of contingent consideration		—		378		(128)		1,188
Change in fair value of contingent consideration *										Change in fair value of contingent consideration *	(2,100)		*	0		3,672		(128)
Fair value at end of period	Fair value at end of period	$	4,228	$	5,405	$	4,228	$	5,405	Fair value at end of period	$	5,900		$	4,228	$	5,900	$	4,228

* The change in fair value for the three months ended June 30, 2021, totaling ($2,100) represents an adjustment to our preliminary purchase price of Haxiot that does not impact our condensed consolidated statement of operations.

The change in fair value of contingent consideration reflects our estimates of the probabilities of achieving the relevant targets and is discounted based on our estimated discount rate. ~~We have estimated~~Due to the timing of the acquisition, the fair value of the contingent consideration at June 30, ~~2020~~2021 is based on the probability of achieving the specified revenue thresholds ~~at 49%~~ for ~~Opengear. A significant change in our estimates of achieving any relevant target could materially change the fair value of the contingent consideration liability.~~Haxiot.

Table of Contents

6. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Amortizable intangible assets were (in thousands):


		June 30, 2020										September 30, 2019											June 30, 2021				September 30, 2020
		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	Purchased and core technology	$	75,728	$	(54,030)	$	21,698	$	57,699	$	(50,986)	$	6,713	Purchased and core technology	$	77,624	$	(59,264)	$	18,360	$	76,011	$	(55,482)	$	20,529
License agreements	License agreements	112		(105)		7		102		(74)		28		License agreements	112		(112)		0		112		(112)		0
Patents and trademarks	Patents and trademarks	22,748		(13,111)		9,637		14,577		(11,970)		2,607		Patents and trademarks	23,591		(14,806)		8,785		22,836		(13,535)		9,301

Customer relationships	Customer relationships	125,300		(31,593)		93,707		46,315		(25,266)		21,049		Customer relationships	129,690		(41,913)		87,777		125,500		(34,232)		91,268
Non-compete agreements	Non-compete agreements	600		(420)		180		600		(330)		270		Non-compete agreements	600		(540)		60		600		(450)		150
Order backlog		1,800		(1,800)		—		1,800		(1,800)		—

Total	Total	$	226,288	$	(101,059)	$	125,229	$	121,093	$	(90,426)	$	30,667	Total	$	231,617	$	(116,635)	$	114,982	$	225,059	$	(103,811)	$	121,248

Amortization expense was $4.1 million and ~~$2.1~~$4.1 million for the three months ended June 30, ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~$10.7~~$12.0 million and ~~$6.7~~$10.7 million for the nine months ended June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. Amortization expense is recorded on our condensed consolidated statements of operations within cost of sales and in general and administrative expense.

~~Table of Contents~~

~~6. GOODWILL AND OTHER INTANGIBLE ASSETS, NET (CONTINUED)~~

Estimated amortization expense related to intangible assets for the remainder of fiscal ~~2020~~2021 and the five succeeding fiscal years is (in thousands):


2020 (three months)		$	4,065
2021		$	15,555
2021 (six months)				2021 (six months)	$	7,736
2022	2022	$	14,711	2022	$	14,722
2023	2023	$	12,518	2023	$	12,518
2024	2024	$	11,815	2024	$	11,815
2025	2025	$	8,358	2025	$	8,358
2026				2026	$	8,126

The changes in the carrying amount of goodwill by reportable segments are (in thousands):

Nine months ended June 30,
IoT
Products and Services IoT
Solutions Total
Balance on September 30, 2019 $ 103,519 $ 49,903 $ 153,422
Acquisitions 53,606 — 53,606
Foreign currency translation adjustment 20 (355) (335)
Balance at June 30, 2020 $ 157,145 $ 49,548 $ 206,693


	Nine months ended June 30,
	IoT Products and Services		IoT Solutions		Total
Balance on September 30, 2020	$	160,365	$	49,770	$	210,135
Acquisition	8,617		0		8,617
Adjustment (see Note 2)	846		0		846
Foreign currency translation adjustment	882		851		1,733
Balance at June 30, 2021	$	170,710	$	50,621	$	221,331

~~Goodwill~~

0Goodwill represents the excess of cost over the fair value of net identifiable assets acquired. Goodwill is quantitatively tested for impairment on an annual basis as of June 30, or more frequently if events or circumstances occur which could indicate impairment. We continue to have 2 reportable segments, our IoT Products & Services segment and our IoT Solutions segment (see Note 9). Effective with the reorganization announcement on October 7, 2020 (see Note 14), our IoT Products & Services business is now structured to include four reporting units under the IoT Products & Services segment, each with a reporting manager: Cellular Routers, Console Servers, OEM Solutions and Infrastructure Management. We have four reporting units along with our IoT Solutions segment that have been tested individually for impairment.

Due to the reorganization on October 7, 2020 (see Note 14), we performed our fiscal third quarter 2021 annual impairment test by reporting unit. As a result, we tested Cellular Routers, Console Servers, OEM Solutions, Infrastructure Management and IOT Solutions units which constitute separate reporting units for purposes of the ASC 350-20-35 "Goodwill Measurement of Impairment" assessment, which were tested individually for impairment in fiscal third quarter 2021.

Table of Contents

For our quantitative goodwill impairment tests, we determine the estimated fair value of each reporting unit and compare it to the carrying value of the reporting unit, including goodwill. If the carrying amount of a reporting unit is higher than its estimated fair value, then an impairment loss must be recognized for the excess. ~~Both of our operating segments constitute separate~~Fair values for the five reporting units ~~and both units~~ were ~~tested individually for impairments.~~

~~The fair value of~~ each ~~reporting unit is determined~~estimated on a standalone basis using a weighted combination of anthe income approach and market approach.

6. GOODWILL AND OTHER INTANGIBLE ASSETS, NET (CONTINUED)

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 ~~discounted cash flow ("DCF") method is utilized for~~commonly used variation of the income ~~approach. In developing~~approach used to value a business is the discounted cash flow ~~analysis, our assumptions about~~(“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 ~~revenues, expenses, capital expenditures,~~growth. Significant judgment is required to estimate the amount and ~~changes in working capital are based on management's projections, and assume a terminal growth rate thereafter. A separate discount rate is determined~~timing of future cash flows for each reporting unit and ~~these~~the relative risk of achieving those cash ~~flows are then discounted to determine~~flows.

The market approach indicates the fair value of a business or asset based on a comparison of the ~~reporting unit. The market~~business or asset to comparable publicly traded companies or assets and transactions in its industry as well as our prior acquisitions. This approach ~~determines a value derived from~~can be estimated through the guideline company method. This ~~market approach~~ method ~~estimates~~indicates fair value of a business by comparing it to publicly traded companies in similar lines of business. After identifying and selecting the ~~price reasonably expected to be realized from~~guideline companies, we make judgments about the ~~sale~~comparability of the ~~reporting unit~~companies based on ~~comparable companies.~~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.

Assumptions and estimates to determine fair values under the income and market approaches are complex and often subjective. They can be affected by a variety of factors. These include external factors such as industry and economic trends. They also include internal factors such as changes in our business strategy and our internal forecasts. ~~We believe we made a reasonable estimate with the assumptions used to calculate the fair values of our two reporting segments.~~ Changes in circumstances or a potential event could negatively affect the estimated fair values. We will continue to monitor potential COVID-19 industry and demand impacts as this could potentially affect our cash flows and market capitalization. If our future operating results do not meet current forecasts or if we experience a sustained decline in our market capitalization that is determined to be indicative 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.

Results of our Fiscal ~~2020~~2021 Annual Impairment Test

As of June 30, ~~2020,~~2021, we had a total of ~~$157.1~~$32.7 million of goodwill for the ~~IoT Products & Services~~Enterprise Routers reporting unit, $60.2 million of goodwill for the Console Servers reporting unit, $63.4 million of goodwill for the OEM Solutions reporting unit, $15.4 million of goodwill for the Infrastructure Mgmt. reporting unit and ~~$49.6~~$49.5 million of goodwill for the IoT Solutions reporting unit. At June 30, ~~2020,~~2021, fair value exceeded the carrying value by more than ~~10%~~20% for ~~both~~all five reporting units. 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 implied fair values of each reporting unit were added together along with our unallocated assets 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 ~~$338.2~~$686.3 million as of June 30, ~~2020.~~2021. This implied a range of control (deficit)/ premiums of ~~17.0%~~(4.5)% to ~~29.1%~~5.4%. 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.

7. INDEBTEDNESS

On March 15, 2021, we entered into an amended and restated credit agreement with BMO Harris Bank N.A. ("BMO"). This agreement provides us with a senior secured credit facility (the "Credit Facility") consisting of a $200 million revolving loan (the "Revolving Loan"). This loan replaced our syndicated senior secured credit agreement with BMO that was entered into on December 13, 2019 and replaced the remaining balance of our term loan with this new revolver. This prior agreement provided us with committed credit facilities ("Prior Credit Facility") totaling $150 million, which included a $50 million term loan and a $100 million revolving loan. We may use the Revolving Loan for working capital, capital expenditures, restricted payments and acquisitions permitted under the agreement.

1113

Table of Contents

~~7. SALE OF BUILDING~~

On October 2, 2018, we sold a 130,000 square feet building that served as our corporate headquarters in Minnetonka, Minnesota to Minnetonka Leased Housing Associates II, LLLP. The sale price was $10.0 million in cash adjusted for certain selling costs and an escrow for the leaseback of the building for four months. As a result of this sale, we recorded a gain of $4.4 million ($3.4 million net of tax) in the first quarter of fiscal 2019, which was recorded in general and administrative expense.

~~8. DEBT~~

In connection with our acquisition of Opengear, we entered into a syndicated credit agreement with BMO Harris Bank N.A. ("BMO") on December 13, 2019. This agreement provided us with committed credit facilities (the "Credit Facility") totaling $150 million. The Credit Facility includes: (i) a $50 million term loan (the "Term Loan") and (ii) a $100 million revolving loan (the "Revolving Loan").

Prior to May 4, 2020, borrowings under the Credit Facility bore interest rates based on an underlying variable benchmark plus applicable margin based on our total leverage ("ABR"); this interest rate was reset quarterly. Effective May 4, 2020, borrowingsBorrowings under the Credit Facility bear a variable interest rate of LIBOR plus an applicable margin spread from ~~3.25%~~1.25% to ~~1.25%~~3.25%. The amount of the applicable margin spread is a function of our leverage ratio and is reset monthly. In addition to paying interest on the outstanding balance under the Credit Facility, we are required to pay a commitment fee on the non-utilized commitments thereunder which is also reported in interest expense. Our weighted average interest rate at June 30, ~~2020~~2021 was ~~1.1%~~0.47%.

~~We also incurred~~The additional debt issuance costs and remaining balance under the Prior Credit Facility oftotaled $2.6 million ~~in the first quarter of fiscal 2020. These issuance costs are~~and is being amortized using the straight-line method over the term of the loan and reported in interest expense.

Amounts under the Term Loan will be repaid in quarterly installments on the last day of each fiscal quarter. Amortization is 5% in the first two years, 7.5% in the next two years and 10% in the final year. The remaining outstanding balance will mature on December 13, 2024. The Revolving Loan is due in a lump sum payment at maturity on ~~December 13, 2024.~~

March 15, 2026. The fair ~~values~~value of the ~~Term Loan and~~ Revolving Loan approximated carrying value at June 30, ~~2020.~~2021.

Table of Contents

7. INDEBTEDNESS (CONTINUED)

The following table is a summary of our long-term indebtedness at June 30, ~~2020~~2021 (in thousands):


Revolving loan	$	~~30,000~~48,118
~~Term loan~~	~~48,750~~
Total loans	~~78,750~~48,118
Less unamortized issuance costs	~~(2,301)~~(2,448)
Less current maturities of long-term debt	~~(1,972)~~0
Total long-term debt, net of current portion	$	~~74,477~~45,670

~~The following table is a summary of future maturities of our aggregate long-term debt at June 30, 2020 (in thousands):~~

2020 (three months) $ 625
2021 2,500
2022 3,438
2023 3,750
2024 4,687
2025 63,750
Total long-term debt $ 78,750

Covenants and Security Interest

The agreements governing the Credit Facility contain a number of covenants. Among other thing, these covenants require us to maintain a certain financial ratio (net leverage ratio and minimum fixed charge ratio). At June 30, ~~2020,~~2021, we were in compliance with our debt covenants. Amounts borrowed under the Credit Facility are secured by substantially all of our assets.

~~Table of Contents~~

8. ~~DEBT (CONTINUED)~~STOCKHOLDERS' EQUITY

~~Paycheck Protection Program Loan~~Public Offering of Common Stock

~~On April 14, 2020,~~During March 2021 we sold 4,025,000 shares of our common stock at a public offering price of $19.50 per share. The shares offered were ~~granted~~registered pursuant to a ~~loan~~registration statement that we filed with the Securities and Exchange Commission. We received net proceeds of $73.8 million, net of transaction expenses of $0.3 million related to the public offering. We intend to use the proceeds for ~~$9.0 million under~~working capital and general corporate purposes. We may, in the ~~Paycheck Protection Program ("PPP") established as part of~~future, use the ~~Coronavirus Aid, Relief~~proceeds to acquire or invest in complementary businesses, products and Economic Security Act ("CARES Act"). Based on additional rules for the PPP established after the grant acceptance, we subsequently made the determination to pay back the full amount of the loan of $9.0 million, plus interest. This payment was made on May 4, 2020.technologies.

9. SEGMENT INFORMATION

We have 2 reportable ~~operating~~ segments: IoT Products & Services and IoT Solutions. Effective with the reorganization announcement on October 7, 2020 (see Note 14), our IoT Products & Services business is now structured to include four operating segments, each with a segment manager. These 4 operating segments include:

•Cellular Routers - box devices (fully enclosed) that provide connectivity typically in a place where the device can be plugged in exclusively using cellular communications.

•Console Servers - similar to cellular routers except they are exclusively for edge computing installations and data center applications exclusively using cellular communications.

•OEM Solutions - Original Equipment Manufacturers ("OEM") will be a chip, rather than a boxed device. This can come in the form of a stand-alone chip, or from a systems-on-module ("SOMs"). While cellular connectivity is used, other communication protocols can be used such as Zigbee, Bluetooth or Radio-Frequency ("RF") based on application.

•Infrastructure Management - includes battery operated, cellular enabled connect sensors as well as other types of console server applications that are more Digi Accelerated Linux ("DAL") based than Console Servers. This operating segment has some products that do not use cellular communications, but a large part of this segment does use cellular communications.

Table of Contents

9. SEGMENT INFORMATION (CONTINUED)

The 4 operating segments have similar qualitative and quantitative factors which allow us to aggregate them under the IoT Products & Services reportable segment.The qualitative factors include similar nature of products and services, production process, type or class of customers and methods used to distribute the products.The quantitative factors include similar operating margins.Our CODM reviews and makes business decisions which includes a primary review of operating income but also includes gross profit.Thus, our measure of segment profit or loss used by our CODM changed.The shared general and administrative costs are now allocated to each operating segment.As a result, our disclosed measure of segment operating income has been updated for all periods presented.The change to the business segment operating income aligns with the update to how the CODM assesses performance and allocates resources for our business segments.

Summary operating results for each of our segments were (in thousands):


		Three months ended June 30,						Nine months ended June 30,							Three months ended June 30,				Nine months ended June 30,
		2020		2019		2020		2019			2021		2020		2021		2020
Revenue	Revenue									Revenue
IoT Products & Services	IoT Products & Services	$	63,472	$	50,510	$	184,975	$	159,843	IoT Products & Services	$	66,812	$	63,472	$	194,224	$	184,975
IoT Solutions	IoT Solutions	6,866		10,656		21,127		29,400		IoT Solutions	12,267		6,866		35,302		21,127
Total revenue	Total revenue	$	70,338	$	61,166	$	206,102	$	189,243	Total revenue	$	79,079	$	70,338	$	229,526	$	206,102
Gross Profit	Gross Profit									Gross Profit
IoT Products & Services	IoT Products & Services	$	33,899	$	23,058	$	96,010	$	73,987	IoT Products & Services	$	36,806	$	33,899	$	106,942	$	96,010
IoT Solutions	IoT Solutions	3,450		5,270		10,444		14,453		IoT Solutions	5,750		3,450		17,089		10,444
Total gross profit	Total gross profit	$	37,349	$	28,328	$	106,454	$	88,440	Total gross profit	$	42,556	$	37,349	$	124,031	$	106,454
Depreciation and amortization
Operating Income (Loss)										Operating Income (Loss)
IoT Products & Services										IoT Products & Services	$	6,101	$	6,481	$	11,954	$	19,240
IoT Solutions										IoT Solutions	(2,083)		(3,626)		(4,712)		(13,144)
Total operating income										Total operating income	$	4,018	$	2,855	$	7,242	$	6,096
Depreciation and Amortization										Depreciation and Amortization
IoT Products & Services	IoT Products & Services	$	3,320	$	1,391	$	8,364	$	4,711	IoT Products & Services	$	3,181	$	3,320	$	9,390	$	8,364
IoT Solutions	IoT Solutions	1,986		1,795		5,795		5,301		IoT Solutions	1,964		1,986		5,810		5,795
Total depreciation and amortization	Total depreciation and amortization	$	5,306	$	3,186	$	14,159	$	10,012	Total depreciation and amortization	$	5,145	$	5,306	$	15,200	$	14,159

Total expended for property, plant and equipment was (in thousands):


		Nine months ended June 30,							Nine months ended June 30,
		2020		2019			2021		2020
Expended for property, equipment and improvements

IoT Products & Services	IoT Products & Services	$	654	$	8,212	IoT Products & Services	$	1,645	$	654
IoT Solutions*	IoT Solutions*	39		388		IoT Solutions*	0		39
Total expended for property, plant and equipment	Total expended for property, plant and equipment	$	693	$	8,600	Total expended for property, plant and equipment	$	1,645	$	693

* Excluded from this amount is ~~$1,202~~$1,624 and ~~$921~~$1,202 of transfers of inventory to property plant and equipment for subscriber assets for the nine months ended June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

Total assets for each of our segments were (in thousands):

June 30,
2020 September 30,
2019
Assets
IoT Products & Services $ 383,593 $ 215,651
IoT Solutions 88,191 90,255
Unallocated* 55,085 92,792
Total assets $ 526,869 $ 398,698

*Unallocated consists of cash and cash equivalents and current marketable securities.


	June 30, 2021		September 30, 2020

IoT Products & Services	$	385,478	$	387,578
IoT Solutions	80,631		86,975
Unallocated*	146,942		54,129
Total assets	$	613,051	$	528,682

1316

Table of Contents

*Unallocated consists of cash and cash equivalents.

10. REVENUE

Revenue Disaggregation

The following table summarizes our revenue by geographic location of our ~~customers:~~customers (in thousands):


		Three months ended June 30,						Nine months ended June 30,							Three months ended June 30,				Nine months ended June 30,
($ in thousands)		2020		2019		2020		2019
											2021		2020		2021		2020
North America, primarily the United States	North America, primarily the United States	$	52,603	$	43,604	$	157,513	$	138,808	North America, primarily the United States	$	56,965	$	52,603	$	167,406	$	157,513
Europe, Middle East & Africa	Europe, Middle East & Africa	11,027		9,582		29,428		30,450		Europe, Middle East & Africa	12,543		11,027		34,769		29,428
Rest of world	Rest of world	6,708		7,980		19,161		19,985		Rest of world	9,571		6,708		27,351		19,161
Total revenue	Total revenue	$	70,338	$	61,166	$	206,102	$	189,243	Total revenue	$	79,079	$	70,338	$	229,526	$	206,102

The following table summarizes our revenue by the timing of revenue ~~recognition:~~recognition (in thousands):


		Three months ended June 30,						Nine months ended June 30,							Three months ended June 30,				Nine months ended June 30,
($ in thousands)		2020		2019		2020		2019
											2021		2020		2021		2020
Transferred at a point in time	Transferred at a point in time	$	63,674	$	54,452	$	186,739	$	172,640	Transferred at a point in time	$	70,333	$	63,674	$	203,665	$	186,739
Transferred over time	Transferred over time	6,664		6,714		19,363		16,603		Transferred over time	8,746		6,664		25,861		19,363
Total revenue	Total revenue	$	70,338	$	61,166	$	206,102	$	189,243	Total revenue	$	79,079	$	70,338	$	229,526	$	206,102

Contract Balances

Contract Assets

Contract assets consist of subscriber assets. These subscriber assets relate to fees in certain contracts that we charge our customers so they can begin using equipment. In these cases, we retain the ownership of the equipment that the customer uses. The total net book value of subscriber assets of $2.2 million and ~~$2.1~~$2.2 million as of June 30, ~~2020~~2021 and September 30, ~~2019,~~2020, respectively, are included in property, equipment and improvements, net. Depreciation expense for these subscriber assets, which is included in cost of sales, was ~~$0.4~~$0.5 million and ~~$0.3~~$0.4 million for the three ~~month periods~~months ended June 30, ~~2020~~2021 and June 30, ~~2019,~~2020, respectively and ~~$1.1~~$1.4 million and ~~$0.7~~$1.1 million for the nine ~~month periods~~months ended June 30, ~~2020~~2021 and June 30, ~~2019,~~2020, respectively. We depreciate the cost of this equipment over its useful life (typically three years).

Contract Liabilities

The timing of revenue recognition may differ from the timing of invoicing to customers. Customers are invoiced for subscription services in advance on a monthly, quarterly or annual basis. Contract liabilities consist of unearned revenue related to annual or multi-year contracts for subscription services and related implementation fees. These pertain to our IoT Solutions segment and our Digi Remote Manager^® services in our IoT Products & Services segment.

Changes in unearned revenue ~~were:~~were (in thousands):


~~($ in thousands)~~	Nine months ended June 30, 2020
~~Unearned revenue, beginning of period~~	$	~~5,025~~
~~Billings~~	~~24,810~~
~~Revenue recognized~~	~~(23,407)~~
~~Unearned revenue, end of period~~	$	~~6,428~~


	Three months ended June 30,				Nine months ended June 30,
	2021		2020		2021		2020
Unearned revenue, beginning of period	$	16,436	$	8,702	$	9,341	$	5,025
Billings	9,180		5,256		37,193		24,810
Revenue recognized	(10,775)		(7,530)		(31,693)		(23,407)
Unearned revenue, end of period	$	14,841	$	6,428	$	14,841	$	6,428

Remaining Transaction Price

Transaction price allocated to the remaining performance obligations represents contracted revenue that has not been recognized. This includes unearned revenue and unbilled amounts that will be recognized as revenue in future periods. As of

Table of Contents

June 30, ~~2020,~~2021, approximately ~~$14.4~~$14.8 million of revenue is expected to be recognized from remaining performance obligations for subscription contracts. We expect to recognize revenue on approximately ~~$11.2~~$13.0 million of remaining performance obligations over the next twelve months. Revenue from the remaining performance obligations we expect to recognize over a range of two to seven years.

~~Table of Contents~~

11. INCOME TAXES

Our income tax expense was $0.2 million for the nine months ended June 30, 2021. Included in this expense was a net tax benefit discretely related to the nine months ended June 30, 2021 of $1.0 million. This benefit primarily was the result of excess tax benefits recognized on stock compensation.

Income tax benefit was $0.9 million for the nine months ended June 30, 2020. Included in this benefit was a net tax benefit discretely related to the nine months ended June 30, 2020 of $1.1 million. This benefit primarily was the result of excess tax benefits recognized on stock compensation and an adjustment of our state deferred tax rate due to the Opengear acquisition. For the nine months ended June 30, 2020, our effective tax rate before items discretely related to the period was less than the U.S. statutory rate. This was primarily due to certain research and development ~~tax credits generated in the U.S.~~

Income tax expense was $0.9 million for the nine months ended June 30, 2019. Included in this expense was a net tax benefit discretely related to the nine months ended June 30, 2019 of $0.6 million. This expense primarily was the result of expiring statute of limitations of uncertain tax benefits as well as excess tax benefits recognized on stock compensation. For the nine months ended June 30, 2019, our effective tax rate before items discretely related to the period was less than the U.S. statutory rate. This primarily was due to certain income tax credits generated in the U.S.

Our effective tax rate will vary based on a variety of factors. These include our 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 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 in both U.S. and foreign jurisdictions.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is (in thousands):


Unrecognized tax benefits as of September 30, ~~2019~~2020	$	~~1,713~~
~~Increases related to:~~2,600
~~Prior year income tax positions~~	~~751~~


Decreases related to:

~~Settlements~~	~~(7)~~
Expiration of statute of limitations	~~(258)~~(209)
Unrecognized tax benefits as of June 30, ~~2020~~2021	$	~~2,199~~2,391

The total amount of unrecognized tax benefits at June 30, 2021 that, if recognized, would affect our effective tax rate ~~is $2.0~~was $2.2 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.

12. PRODUCT WARRANTY OBLIGATION

The following tables summarize 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			Balance at		Warranties		Settlements		Balance at
Period	Period	April 1		issued		made		June 30		Period	April 1		issued		made		June 30
Three months ended June 30, 2021										Three months ended June 30, 2021	$	923	$	16	$	(146)	$	793
Three months ended June 30, 2020	Three months ended June 30, 2020	$	860	$	123	$	(96)	$	887	Three months ended June 30, 2020	$	860	$	123	$	(96)	$	887
Three months ended June 30, 2019		$	1,109	$	47	$	(101)	$	1,055

		Balance at		Warranties		Settlements		Balance at			Balance at		Warranties		Settlements		Balance at
Period	Period	October 1		issued		made		June 30		Period	October 1		issued		made		June 30
Nine months ended June 30, 2021										Nine months ended June 30, 2021	$	942	$	205	$	(354)	$	793
Nine months ended June 30, 2020	Nine months ended June 30, 2020	$	1,012	$	525	$	(650)	$	887	Nine months ended June 30, 2020	$	1,012	$	525	$	(650)	$	887
Nine months ended June 30, 2019		$	1,172	$	263	$	(380)	$	1,055

13. LEASES

~~Our leases primarily consist of operating leases for office space.~~ All of our leases are operating ~~leases.~~leases and primarily consist of leases for office space. For any lease with an initial term in excess of twelve months, the related lease assets and lease liabilities are recognized on the condensed consolidated balance sheets as either operating or financing leases at the inception of an agreement where it is determined that a lease exists. We have lease agreements that contain both lease and non-lease components. We have elected to combine lease and non-lease

1518

Table of Contents

~~13. LEASES (CONTINUED)~~

~~and non-lease~~ components for all classes of assets. Leases with an initial term of twelve months or less are not recorded on the condensed consolidated balance sheets. Instead we recognize lease expense for these leases on a straight-line basis over the lease term.

Operating lease assets represent the right to use an underlying asset for the lease term and operating lease liabilities represent the obligation to make lease payments. These assets and liabilities are recognized based on the present value of future payments over the lease term at the commencement date. We generally use a collateralized incremental borrowing rate based

on information available at the commencement date, including the lease term, in determining the present value of future payments. When determining our right-of-use asset, we generally do not include options to extend or terminate the lease unless it is reasonably certain that the option will be exercised.

Our leases typically require payment of real estate taxes and common area maintenance and insurance. These components comprise the majority of our variable lease cost and are excluded from the present value of our lease obligations. Fixed payments may contain predetermined fixed rent escalations. We recognize the related rent expense on a straight-line basis from the commencement date to the end of the lease term.

The following table shows the supplemental balance sheet information related to our leases (in thousands):

~~Balance Sheet Location~~

~~June 30, 2020~~

~~Assets~~

~~Operating leases~~

~~Other non-current assets~~

~~14,937~~

~~Total lease assets~~

~~14,937~~

~~Liabilities~~

~~Operating leases~~

~~Other current liabilities~~

~~2,540~~

~~Operating leases~~

~~Other non-current liabilities~~

~~16,799~~

~~Total lease liabilities~~

~~19,339~~


	Balance Sheet Location	June 30, 2021		September 30, 2020
Assets
Operating leases	Operating lease right-of-use assets	$	16,342	$	14,334
Total lease assets		$	16,342	$	14,334

Liabilities

Operating leases	Current portion of operating lease liabilities	$	2,680	$	2,527

Operating leases	Operating lease liabilities	19,072		16,193
Total lease liabilities		$	21,752	$	18,720

The following were the components of our lease cost which is recorded in both cost of goods sold and selling, general and administrative expense (in thousands):


								Three months ended June 30,				Nine months ended June 30,
		Statement of Operations Location	Three months ended June 30, 2020		Nine months ended June 30, 2020			2021		2020		2021		2020
Operating lease cost	Operating lease cost	Cost of goods sold and SG&A	$	901	$	2,584	Operating lease cost	$	856	$	829	$	2,615	$	2,458
Variable lease cost	Variable lease cost	Cost of goods sold and SG&A	260		497		Variable lease cost	286		260		805		497
Short-term lease cost							Short-term lease cost	32		73		98		127
Total lease cost	Total lease cost		$	1,161	$	3,081	Total lease cost	$	1,174	$	1,162	$	3,518	$	3,081

The following table presents supplemental information related to operating leases (in thousands):


	Nine months ended June 30, 2020
~~Cash paid for amounts included in the measurement of operating lease liabilities~~	$	~~2,010~~
~~Right-of-use assets obtained in exchange for new operating lease liabilities~~	$	~~993~~


	Nine months ended June 30,
	2021		2020
Cash paid for amounts included in the measurement of operating lease liabilities	$	1,784	$	1,175
Right-of-use assets obtained in exchange for new operating lease liabilities	$	3,919	$	593
Non-cash tenant improvement allowance	$	1,000	$	0


	~~June 30, 2020~~
~~Weighted average remaining lease term - operating leases~~	~~5.5 years~~
~~Weighted average discount rate - operating leases~~	~~4.80~~	%

At June 30, 2021 the weighted average remaining lease term of our operating leases was 7.0 years and the weighted average discount rate for these leases was 4.5%.

1619

Table of Contents

13. LEASES (CONTINUED)

The table below reconciles the undiscounted cash flows for each of the first five years as well as all the remaining years to the operating lease liabilities recorded on the condensed consolidated balance sheet as of June 30, ~~2020~~2021 (in thousands):

Fiscal year Amount
Remainder of 2020 $ 873
2021 3,308
2022 2,911
2023 2,656
2024 2,450
2025 2,348
Thereafter 9,219
Total future undiscounted lease payments 23,765
Less imputed interest (4,426)
Total reported lease liability $ 19,339

As follows, aggregate annual future minimum rental commitments under operating leases with noncancelable terms of more than one year at September 30, 2019 were reported under previous lease accounting standards (in thousands):


Fiscal year	Fiscal year	Amount		Fiscal year	Amount
2020		$	2,596
2021		2,575
Remainder of 2021				Remainder of 2021	$	1,777
2022	2022	2,314		2022	3,368
2023	2023	2,056		2023	3,144
2024	2024	2,095		2024	2,918
2025				2025	2,821
2026				2026	2,591
Thereafter	Thereafter	11,361		Thereafter	9,266
Total minimum payments required		$	22,997
Total future undiscounted lease payments				Total future undiscounted lease payments	25,885
Less imputed interest				Less imputed interest	(4,133)
Total reported lease liability				Total reported lease liability	$	21,752

14. RESTRUCTURING

~~In second quarter~~Q1 FY2021 Restructuring

On October 7, 2020, our Board of ~~fiscal 2020,~~Directors approved a reorganization of our IoT Products & Services business segment. The restructuring plan aligns the business segment's organization around product lines. Under this plan, we recorded ~~and re-aligned our product management group within IoT Products and Services segment. We recorded $38 thousand~~a charge of $0.7 million for employee termination ~~charges. This was fully paid~~charges and eliminated 19 employment positions primarily in the U.S. during the three months ended December 31, 2020. In the second quarter of fiscal ~~2020.~~

2021 we recorded an additional $0.2 million related to this restructuring. In the third quarter of fiscal ~~2020,~~2021 we recorded ~~$95 thousand~~an additional $0.1 million related to this restructuring.

Below is a summary of the restructuring ~~for employee termination~~ charges ~~within both~~and other activity (in thousands):


	Q1 2021 Restructuring
	Employee Termination Costs
Balance at September 30, 2020	$	0
Restructuring charge	995
Payments	(599)

Foreign currency fluctuation	(39)
Balance at June 30, 2021	$	357

15. COMMITMENTS AND CONTINGENCIES

Leases

We lease certain of our ~~operating segments. This restructuring is expected~~buildings and equipment under noncancelable lease agreements. Please refer to ~~be fully paid in the fourth quarter of fiscal 2020.~~Note 13 to our condensed consolidated financial statements for additional information.

Litigation

~~15. CONTINGENCIES~~

In November 2018, DimOnOff Inc., a company headquartered in Quebec City, Quebec, Canada ("DimOnOff"), 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~~Digi 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~~alleged damages of just over CAD 1.0 million. ~~We intend to defend ourselves against DimOnOff's claims. At this time~~During the

Table of Contents

15. COMMITMENTS AND CONTINGENCIES (CONTINUED)

second quarter of fiscal 2021, the lawsuit was settled and 0 payment will be made by us. However, we ~~cannot assess~~will be providing DimOnOff reduced product pricing on a limited number of products for an amount substantially lower than what was claimed in the ~~likelihood or amount of any potential loss.~~lawsuit.

In addition to the matter discussed above, in the normal course of business, we are presently, and expect in the future to be, subject to various claims and ~~litigation.~~litigation with third parties such as non-practicing intellectual property entities as well as customers, vendors and/or employees. 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.

~~Table of Contents~~

16. STOCK-BASED COMPENSATION

Stock-based awards were granted under the 2021 Omnibus Incentive Plan (the "2021 Plan") beginning January 29, 2021. Prior to that date, such awards made in fiscal 2021 were granted under the 2020 Omnibus Incentive Plan (the "2020 Plan") ~~beginning January 29, 2020. Prior to that date such awards made in fiscal 2020 were granted under the 2019 Omnibus Incentive Plan (the "2019 Plan")~~. Upon stockholder approval of the ~~2020~~2021 Plan, we ceased granting awards under the ~~2019~~2020 Plan. Shares subject to awards under the ~~2019~~2020 Plan or any prior plans that are forfeited, canceled, returned to us for failure to satisfy vesting requirements, settled in cash or otherwise terminated without payment also will be available for grant under the ~~2020~~2021 Plan. The authority to grant options under the ~~2020~~2021 Plan and to set other terms and conditions rests with the Compensation Committee of the Board of Directors.

The ~~2020~~2021 Plan authorizes the issuance of up to ~~1,500,000~~1,400,000 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 ~~2020~~2021 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. Performance stock unit awards ("PSUs") that have been granted to an executive will vest based on achievement of a cumulative adjusted earnings per share metric measured over a three-year period. Share-based compensation expenses recorded for this performance award is reevaluated at each reporting period based on the probability of achievement of the goal. The ~~2020~~2021 Plan is scheduled to expire on January 28, ~~2030.~~2031. Options under the ~~2020~~2021 Plan can be granted as either incentive stock options or non-statutory stock options. The exercise price of options and the grant date price of RSUs and PSUs is determined by our Compensation Committee but will not be less than the fair market value of our common stock based on the closing price as of the date of grant. Upon exercise of options or settlement of vested restricted stock units or performance stock units, we issue new shares of stock. As of June 30, ~~2020,~~2021, there were approximately ~~1,198,802~~1,325,088 shares available for future grants under the ~~2020~~2021 Plan.

Cash received from the exercise of stock options was ~~$0.3~~$7.0 million and $5.1 million for the ~~three and~~ nine months ended June 30, ~~2020, respectively. Cash received from the exercise of stock options was $0.3 million~~2021 and ~~$4.1 million for the three and nine months ended~~ June 30, ~~2019,~~2020, respectively.

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. When employees make this election, we retain a portion of shares issuable under the award. Tax with withholding obligations otherwise occur by the employee paying cash to us for the withholding. During the nine months ended June 30, ~~2020~~2021 and ~~2019,~~2020, our employees forfeited ~~95,997~~109,516 shares and ~~91,580~~95,997 shares, respectively, in order to satisfy respective withholding tax obligations of ~~$1.7~~$2.0 million and ~~$1.1~~$1.7 million.

We sponsor an Employee Stock Purchase Plan as amended and restated as of December 10, 2019, October 29, 2013, December 4, 2009 and November 27, 2006 (the "ESPP"), covering all domestic employees with at least 90 days of continuous service and who are customarily employed at least 20 hours per week. The ESPP 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. The most recent amendments to the ESPP, ratified by our stockholders on January 29, 2020, increased the total number of shares to 3,425,000 that may be purchased under the plan. ESPP contributions by employees were ~~$0.3~~$0.9 million ~~and $0.8 million and common shares issued were 37,333 and 90,418 during~~for the ~~three and~~ nine months ended June 30, ~~2020, respectively. ESPP contributions by employees were $0.3 million~~2021 and $0.8 million ~~and common shares issued were 26,898 and 90,592 during~~for the ~~three and~~ nine months ended June 30, ~~2019,~~2020. Pursuant to the ESPP, 61,302 and 90,592 common shares were issued to employees during the nine months ended June 30, 2021 and June 30, 2020, respectively. Shares are issued under the ESPP from treasury stock. As of June 30, ~~2020, 739,122~~2021, 650,412 common shares were available for future issuances under the ESPP.

Table of Contents

16. STOCK-BASED COMPENSATION (CONTINUED)

The following table shows stock-based compensation expense that is included in the consolidated results of operations (in thousands):

Three months ended June 30, Nine months ended June 30,
2020 2019 2020 2019
Cost of sales $ 80 $ 55 $ 222 $ 135
Sales and marketing 609 453 1,669 1,272
Research and development 283 268 908 737
General and administrative 910 697 2,524 2,036
Stock-based compensation before income taxes 1,882 1,473 5,323 4,180
Income tax benefit (399) (306) (1,111) (863)
Stock-based compensation after income taxes $ 1,483 $ 1,167 $ 4,212 $ 3,317

~~Table of Contents~~

~~16. STOCK-BASED COMPENSATION (CONTINUED)~~


	Three months ended June 30,				Nine months ended June 30,
	2021		2020		2021		2020
Cost of sales	$	98	$	80	$	269	$	222
Sales and marketing	614		609		1,762		1,669
Research and development	259		283		762		908
General and administrative	1,132		910		3,538		2,524
Stock-based compensation before income taxes	2,110		1,882		6,331		5,323
Income tax benefit	(541)		(399)		(1,369)		(1,111)
Stock-based compensation after income taxes	$	1,569	$	1,483��	$	4,962	$	4,212

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, 2019		3,348	$10.85
Balance at September 30, 2020							Balance at September 30, 2020	3,393	$12.20
Granted	Granted	776	16.63				Granted	497	17.58
Exercised	Exercised	(500)	10.12				Exercised	(625)	11.24
Forfeited / Canceled	Forfeited / Canceled	(138)	13.15				Forfeited / Canceled	(142)	14.18
Balance at June 30, 2020		3,486	$12.15	4.2	$	3,111
Balance at March 31, 2021							Balance at March 31, 2021	3,123	$13.16	3.91	$	21,864

Exercisable at June 30, 2020		2,073	$10.69	3.0	$	2,787
Exercisable at March 31, 2021							Exercisable at March 31, 2021	1,949	$11.52	2.86	$	16,745

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of ~~$11.65~~$20.11 as of June 30, ~~2020,~~2021, 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.

The total intrinsic value of all options exercised during the nine months ended June 30, ~~2020~~2021 was ~~$3.4~~$5.4 million and during the nine months ended June 30, ~~2019~~2020 was ~~$1.7~~$3.4 million.

The following table 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:


		Nine months ended June 30,				Nine months ended June 30,
		2020	2019		2021	2020
Weighted average per option grant date fair value	Weighted average per option grant date fair value	$6.18	$4.37	Weighted average per option grant date fair value	$7.45	$6.18
Assumptions used for option grants:	Assumptions used for option grants:			Assumptions used for option grants:
Risk free interest rate	Risk free interest rate	0.44% - 1.73%	2.3% - 2.93%	Risk free interest rate	0.51% - 1.035%	0.44% - 1.73%
Expected term	Expected term	6.00 years	6.00 years	Expected term	6.00 years	6.00 years
Expected volatility	Expected volatility	36% - 42%	33% - 34%	Expected volatility	44% - 46%	42%
Weighted average volatility	Weighted average volatility	36%	33%	Weighted average volatility	44%	36%
Expected dividend yield	Expected dividend yield	—	—	Expected dividend yield	0	0

The fair value of each option award granted during the periods presented was estimated using the Black-Scholes option valuation model that uses the assumptions noted in the above table. 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

Table of Contents

16. STOCK-BASED COMPENSATION (CONTINUED)

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 June 30, ~~2020,~~2021, the total unrecognized compensation cost related to non-vested stock options was ~~$6.7~~$6.8 million and the related weighted average period over which it is expected to be recognized is approximately 2.9 years.

~~Table of Contents~~

~~16. STOCK-BASED COMPENSATION (CONTINUED)~~

Non-vested ~~Restricted~~ Stock Units

The following table presents a summary of our non-vested restricted stock and performance stock units as of June 30, ~~2020~~2021 and changes during the nine months then ended (in thousands, except per common share amounts):


		Number of Awards	Weighted Average Grant Date Fair Value			RSUs			PSUs
Nonvested at September 30, 2019		888	$	11.65
						Number of Awards	Weighted Average Grant Date Fair Value		Number of Awards	Weighted Average Grant Date Fair Value
Nonvested at September 30, 2020					Nonvested at September 30, 2020	972	$	13.20	0	$	0
Granted	Granted	504	$	14.88	Granted	346	$	18.65	18	$	25.15
Vested	Vested	(297)	$	11.66	Vested	(349)	$	12.74	0	$	0
Canceled	Canceled	(98)	$	12.41	Canceled	(94)	$	13.81	0	$	0
Nonvested at June 30, 2020		997	$	13.20
Nonvested at March 31, 2021					Nonvested at March 31, 2021	875	$	15.48	18	$	25.15

As of June 30, ~~2020,~~2021, the total unrecognized compensation cost related to non-vested ~~restricted~~ stock units was ~~$10.7~~$10.8 million. The related weighted average period over which this cost is expected to be recognized is approximately 1.6 years.

17. SUBSEQUENT ~~EVENT~~EVENTS

Acquisition of Ctek, Inc.

On July ~~17, 2020,~~6, 2021, we ~~entered into~~acquired Ctek, Inc. ("Ctek"), a San Pedro, California-based provider that specializes in solutions for remote monitoring and industrial controls. The results of operations of Ctek will be included in our fourth quarter fiscal 2021 results within our IoT Products & Services segment.

The terms of the acquisition included an ~~agreement to lease new lease agreement to rent approximately 35,466 square feet~~upfront cash payment as well as contingent consideration comprised of ~~office space~~future earn-out payments. We funded the closing of the acquisition with $12.0 million of cash on hand. The future earn-out payments are based on revenue performance outlined in ~~Sandy, Utah. The lease has an initial term~~the terms of ~~10 years and is expected to comment in January 2021. The base rent under~~ the ~~new facility lease~~purchase agreement ~~is approximately $438,360~~ for the ~~first year, escalating 2% annually thereafter.~~annual periods ending December 31, 2021, December 31, 2022 and December 31, 2023. The ~~lease~~cumulative amount of these earn-outs for the annual periods will not exceed $0.5 million, $1.0 million and $1.5 million, respectively. Due to the timing of the acquisition, the purchase price allocation, including related determinations of fair value and income tax implications, are in process.

For tax purposes, this acquisition is ~~subject~~treated as a stock acquisition. The goodwill therefore is not deductible. Through the acquisition of Ctek, Digi is uniquely positioned to ~~additional charges~~provide customers with both battery and hardwired options for ~~property management, common area expenses~~the control and ~~other costs.~~monitoring of critical infrastructure, from complex off-shore oil rig locations to localized deployments such as municipal park lighting. In addition, Ctek’s offering and existing client portfolio is set to further Digi’s reach in a rapidly expanding market.

Costs directly related to the acquisition of $0.2 million incurred in the third quarter of fiscal 2021 have been charged to operations and are included in general and administrative expense in our condensed statements of operations. These acquisition costs include legal, accounting, valuation and investment banking fees.

2023

Table of Contents

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, ~~2019,~~2020, as well as our subsequent reports on Form 10-Q and Form 8-K and any amendments to these reports.

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 such as "assume," "believe," "anticipate," "intend," "estimate," "target," "may," "will," "expect," "plan," "potential," "project," "should," or "continue" or the negative thereof or other expressions, 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 ~~the Company~~Digi operates, 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. Among others, these include risks related to the ~~present outbreak of the~~ongoing COVID-19 pandemic and efforts to mitigate the same, risks related to ~~the~~global economic ~~downturn that commenced during the COVID-19 pandemic~~volatility and the ability of companies like us to operate a global business in such conditions, the current supply chain and shipping market pressures that are negatively impacting both manufacturing and distribution timelines as well as operating costs for a wide range of companies globally, the highly 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, the potential for significant purchase orders to be canceled or changed, 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, reorganizations or other similar business initiatives that may impact our ability to retain important employees or otherwise impact our operations in unintended and adverse ways, the ability to achieve the anticipated benefits and synergies associated with acquisitions or divestitures ~~(including, but not limited to, our recently announced acquisition of Opengear),~~ 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, ~~2019,~~2020, this filing on Form 10-Q and other filings, could cause ~~the Company's future~~our actual 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 net income, adjusted net income per diluted share and adjusted earnings before interest, taxes and amortization ("Adjusted EBITDA"), each of which is a non-GAAP financial 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 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. These non-GAAP measures are not in accordance with, or, an alternative for measures prepared in accordance with GAAP and may be different from non-GAAP measures used by other companies or presented by us in prior reports. In addition, these 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, Adjusted EBITDA 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.

~~Table of Contents~~

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

We believe that providing historical and adjusted net income and adjusted net income per diluted share, respectively, exclusive of such items as reversals of tax reserves, discrete tax benefits, restructuring charges and reversals, intangible amortization, stock-based compensation, other non-operating income/expense, adjustments to estimates of contingent consideration, acquisition-related expenses and interest expense from acquisitions permits investors to compare results with prior periods that did not include these items. Management uses the aforementioned non-GAAP measures to monitor and evaluate ongoing operating results and trends and to gain an understanding of our comparative operating performance. In addition, certain of our stockholders have expressed an interest in seeing financial performance measures exclusive of the impact of these matters, which while important, are not central to the core operations of our business. Management believes that Adjusted EBITDA, defined as EBITDA adjusted for stock-based compensation expense, acquisition-related expenses, restructuring charges and reversals, and gains from the disposition of our former corporate headquarters is useful to investors to evaluate the Company's core operating results and financial performance because it excludes items that are significant non-cash or non-recurring items reflected in the condensed consolidated statements of operations. We believe that the presentation of Adjusted EBITDA 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our condensed 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 fiscal year ended September 30, ~~2019.~~2020.

Table of Contents

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

OVERVIEW

We are a leading global provider of business and mission-critical Internet-of-Things ("IoT") connectivity products, services and solutions comprised of two reporting segments: IoT Products & Services and IoT Solutions.

Our IoT Products & Services segment offers products and services that help original equipment manufacturers ("OEMs"), enterprise and government customers create and deploy, secure IoT connectivity solutions. From embedded and wireless modules to console servers, enterprise and industrial routers, we provide customers with a wide variety of communication sub-assemblies and finished products to meet their IoT communication requirements. In addition, the IoT Products & Services segment provides our customers with a device management platform and other professional services to enable customers to capture and manage data from devices they connect to networks.

Our IoT Solutions segment offers wireless temperature and other condition-based monitoring services as well as task management services. These solutions are focused on the following vertical markets: food service, retail, healthcare, ~~(primarily pharmacies),~~ transportation/logistics and education. These solutions are marketed as SmartSense by Digi^®. We have formed, expanded and enhanced the IoT Solutions segment through four acquisitions.

~~For further detail on segment performance, see the Revenue by Segment and Cost of Goods Sold and Gross Profit by Segment sections of this Item 2.~~

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 October 7, 2020, our Board of Directors approved a reorganization of our IoT Products & Services business segment. The restructuring plan aligned the business segment's organization around product lines, each with a segment manager. Under this plan, we recorded charges of $1.0 million for employee termination charges and eliminated 19 employment positions primarily in the U.S. during the first half of fiscal 2021. We have grouped our products under the following categories: Cellular Routers, Console Servers, OEM Solutions and Infrastructure Management. Consequently, the measure of segment operating profit used by our chief operating decision maker ("CODM") changed. As a result, our disclosed measure of segment operating income has been updated. For further detail on segment performance, see the Revenue by Segment, Cost of Goods Sold and Gross Profit by Segment and Operating Income sections of this Item 2.

In fiscal 2021, our key operating objectives include:

•continued growth of our SmartSense by Digi® business that is the base of our IoT Solutions segment;

•delivering growth within our IoT Products & Services segment through new product introductions and efforts to grow recurring revenue streams; and

•identification of strategic growth initiatives through acquisition.

We utilize many financial, operational, and other metrics to evaluate our financial condition and financial performance. Below we highlight the metrics for the third quarter of fiscal 2021 that we feel are most important in these evaluations:

•Consolidated revenue increased $8.7 million, or 12.4% in the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020.

•Gross margin increased as a percentage of revenue to 53.8% in the third quarter of fiscal 2021 as compared to 53.1% in the third quarter of fiscal 2020.

•Net income for the third fiscal quarter of 2021 was $3.2 million, or $0.09 per diluted share. Net income for the third fiscal quarter of 2020 was $1.8 million, or $0.06 per diluted share. Adjusted net income and adjusted net income per share was $8.7 million, or $0.25 per diluted share. In the third fiscal quarter of fiscal 2020, adjusted net income and adjusted net income per share was $6.6 million, or $0.23 per diluted share.

•Adjusted EBITDA for the third fiscal quarter of 2021 was $11.6 million, or 14.6% of total revenue. In the third fiscal quarter of fiscal 2020, Adjusted EBITDA was $10.5 million, or 15.0% of total revenue.

Impact of Global Events and Conditions on Our Business Results and Operations

Table of Contents

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

~~For fiscal 2020, we established the following key operating objectives:~~Global Supply Chain and Freight Transportation Disruptions

•~~continued growth of our SmartSense by Digi~~^® ~~business that is the base of our IoT solutions segment;~~

•Like many companies, we are experiencing disruptions in our supply chain. This has led to shortfalls in available components we need to make products and well as increased costs both to obtain components and to transport components and products. It has also lengthened the timelines for us to fulfill customer orders. ~~delivering growth within our IoT Products & Services segment driven by new product introductions;~~

•T~~seeking further strategic growth through potential acquisitions, such as our recent purchase~~he severity of ~~Opengear in~~ the ~~first quarter of fiscal 2020; and~~

•~~optimizing our reduced fixed cost footprint with third-party manufacturing.~~

~~As discussed further below,~~disruptions is continuously changing, meaning the ~~COVID-19 pandemic is impacting our business operations and may~~ impact on our ability to meet ~~these objectives.~~

~~Beginning~~demand for particular products in a timely manner has been subject to ebb and flow. We are taking steps to attempt to mitigate the ~~second fiscal quarter, Digi implemented a plan~~impact of the disruptions such as placing inventory demand further out into the future to ~~streamline~~secure our allocations of components, encouraging customers to place orders earlier than normal due to longer lead times and attempting (in conjunction with customers) to influence political leaders to assure components needed to make products that are essential to the ~~Company’s operations to more closely align expenses~~health and well-being of society are prioritized to our ~~projected revenue~~customer’s needs by suppliers.At present the ongoing duration and severity of these disruptions we are unable to predict as ~~well as to position~~is the ~~Company for continued operating performance~~ultimate impact on our business and ~~profitable growth. In addition, in April 2020, we announced a number of cost reduction actions:~~

•~~We have suspended most new hires, dramatically decreased our travel and discretionary spending, reduced our capital budget and requested price concessions from our largest vendors;~~

•~~We have eliminated 21 positions and reconfigured our workforce. We expect the payments associated with this restructuring to~~financial results, which could be ~~complete by the fourth quarter of fiscal 2020;~~

•~~We have indefinitely suspended our 401(K) matching program in the U.S. and its equivalent in Canada; and~~

•~~Our Board of Directors and the executive team have reduced their cash compensation and base salaries by 10% for the next 6 months in exchange for equity.~~material.

~~We utilize many financial, operational,~~Ongoing Covid-19 Pandemic Impacts

The ongoing pandemic and ~~other metrics~~related global economic volatility continues to ~~evaluate our financial condition and financial performance. Below we highlight~~create significant uncertainty regarding the ~~metrics~~nearer term outlook for the ~~third quarter~~markets where we provide products and services.While the rollout of ~~fiscal 2020 that we feel are most important~~vaccines is well underway in ~~these evaluations:~~

•~~Consolidated revenue increased $9.2 million, or 15.0% in~~many parts of the ~~third quarter~~world, the pandemic (including the recent spread of ~~fiscal 2020 compared to~~more contagious variants of the ~~third quarter of fiscal 2019. Product revenue increased by $9.4 million, or 17.5%, in the third quarter of fiscal 2020 compared to the same period~~virus) and related economic volatility it has caused still represents a year ago. Services revenue decreased by $0.2 million, or 2.6%, in the third quarter of fiscal 2020 compared to the same period a year ago. Fiscal 2020 includes revenue from our recent acquisition of Opengear which is included in product revenue.

•Gross margin increased as a percentage of revenue to 53.1% in the third quarter of fiscal 2020 as compared to 46.3% in the third quarter of fiscal 2019. Fiscal 2020 includes gross margin from our recent acquisition of Opengear.

•Net income for the third fiscal quarter of 2020 was $1.8 million, or $0.06 per diluted share. Net income for the third fiscal quarter of 2019 was $1.6 million, or $0.06 per diluted share. Adjusted net income and adjusted net income per share was $6.6 million, or $0.23 per diluted share. In the third fiscal quarter of fiscal 2019, adjusted net income and adjusted net income per share was $4.6 million, or $0.16 per diluted share.

•~~Adjusted EBITDA for the third fiscal quarter of 2020 was $10.5 million, or 15.0% of total revenue.~~ ~~In the third fiscal quarter of fiscal 2019, Adjusted EBITDA was $6.1 million, or 10.0% of total revenue.~~

~~Potential Impacts of COVID-19 on Our Business and Operations~~

~~The COVID-19 pandemic remains~~ fluid situation that presents a wide and changing range of potential impacts on our own business and those of ~~potential varying durations for different global geographies, including locations where we have offices, employees,~~our customers, vendors and other ~~suppliers and~~ business partners.

To date, during the pandemic we have observed disparate impacts among categories of customers, products and services. Some product categories have seen increases in demand. Conversely, some industries such as entertainment, hospitality and retail that purchase our products and services have experienced significant declines in demand for their own products or services and, in turn, have been less inclined to purchase our products and services.

~~Table of Contents~~

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

~~Given the fact~~As our products and services serve companies across a broad range of industries, in some instances demand has increased or appears to be returning to levels associated with pre-pandemic conditions while others continue to be depressed.At present, the duration, severity and impact of the pandemic in various locations globally as well as the impacts of related economic volatility remain unclear.

During fiscal 2020, we ~~expect~~took steps to lower our ~~sales will likely experience more volatility~~operating expenses as a result of the ~~changing and less predictable fiscal health and operational needs of many customers as a result of the COVID-19~~ pandemic and ~~the ongoing~~related economic downturn. Many companies, including many of our suppliers and customers, are reporting or predicting negative impacts from COVID-19 and the economic downturn on future operating results. But given disparate demands for certain of our products and from customers in varying industries, it remains too early for us to know the exact impact COVID-19 and the economic downturn will have on overall demand for our products and services. We also cannot be certain how demand may shift over time as the impacts of the COVID-19 pandemic and the economic downturn may go through several phases of varying severity and duration.

~~Present State of Our Operations~~

During our third fiscal quarter ended June 30, 2020, we generated $31.8 million of operating cash flow. As of that date, we had a cash balance of $55 million. In light of broader macro-economic risks and already known impacts on certain industries that use our products and services, we have taken and are taking targeted steps to lower our operating expenses. volatility.We continue to monitor the impacts of COVID-19 ~~and the economic downturn~~ on our operations ~~closely and this situation~~closely.As conditions change we could ~~change based on a large number~~take steps to increase or decrease expenses as we believe circumstances warrant.Since the start of ~~factors, many of which are~~the pandemic there have not ~~within our control. We do not expect there to be~~been any material adverse changes to our assets on our balance sheet ~~or our ability~~and, at present, we do not expect there to ~~timely account for those assets. Further, in connection with~~be material adverse changes.During the ~~preparation~~nine months of ~~this quarterly report on Form 10-Q and the interim financial statements contained herein,~~fiscal 2021, we reviewed the potential impacts of the COVID-19 pandemic ~~and the economic downturn~~ on goodwill and intangible ~~assets. We have~~assets and determined there to be no material impact at ~~this~~that time.We ~~have~~ also reviewed the potential impacts on future risks to the business as it relates to collections, returns and other business related items.No significant changes to these reserves have been made.

~~Potential Impacts on Our Supply Chain~~

To date, restrictions and border closures have not restrained our ability to obtain inventory or manufacture or deliver products or services to customers in any material way. However, if such restrictions become more severe, they could negatively impact those activities in a way that would harm our business. Travel restrictions impacting people can restrain our ability to assist our customers with on-site installation activities or product troubleshooting, but at present we do not expect these impacts on personal travel to be material to our business operations or financial results. We ~~have taken steps to restrain and monitor our operating expenses and therefore we do not expect any such impacts to materially change the relationship between costs and revenues.~~

~~Proactive Efforts to Mitigate the Negative Impacts of COVID-19 and the Economic Downturn~~

~~Like most companies, we~~also have taken a range of actions with respect to how we operate to assure we comply with government restrictions and guidelines as well as ~~best~~other practices to protect the health and well-being of our employees and our ability to continue operating our business effectively.To date, we have been able to operate our business ~~effectively~~ using these measures and to maintain effectively all internal controls as documented and posted.We also have not experienced challenges in maintaining business continuity and do not expect to incur material expenditures to do so.However, the impacts of ~~COVID-19~~the pandemic and efforts to mitigate the same ~~have remained unpredictable~~remain fluid and it remains possible that challenges may arise in the future.

~~The actions we have taken so far during the pandemic include, but are not limited to:~~

•~~In locations where government authorities recommend or require or we otherwise believe it is prudent, requiring all employees who can work from home to work from home. As;~~

•~~Increasing our IT networking capability to best assure employees can work effectively outside the office;~~

•~~For employees who must perform essential functions in one of our offices:~~

•~~Having employees maintain a distance of at least six feet from other employees whenever possible;~~

•~~Having employees work in dedicated shifts to lower the risk all employees who perform similar tasks might become infected by COVID-19;~~

•~~Having employees stay segregated from other employees in the office with whom they require no interaction;~~

•~~Requiring employees to wear masks while they are in the office whenever possible;~~

•~~Allowing employees who utilize public transportation to get to and from the office to work on flexible timelines so they can ride public transportation during non-peak use hours;~~

~~Table of Contents~~

~~ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)~~Recent Events Impacting Third Quarter Results

Acquisition of Haxiot, Inc.

On March 26, 2021, we acquired Haxiot, Inc. ("Haxiot") a Dallas-based provider of low power wide area ("LPWA") wireless technology. We funded the closing of the acquisition with $7.1 million cash on hand. In fiscal third quarter, the purchase price allocation was recorded , including related determinations of fair value and income tax implications. as a result, we recorded $8.6 million of goodwill and adjusted the contingent consideration to $5.9 million on our balance sheet. The results of operations are now included in our third quarter fiscal 2021 results within our IoT Products & Services segment.

•~~Increased cleaning of office spaces, surfaces and tools that may come into contact with employees;~~

•~~Restricting travel; and~~

•~~Allowing 72 hours before we open non-essential packages and disinfecting any essential packages before they are opened.~~

~~CONSOLIDATED RESULTS OF OPERATIONS~~

~~The following table sets forth selected information derived from our interim condensed consolidated statements of operations:~~

Three months ended June 30, % incr. Nine months ended June 30, % incr.
($ in thousands) 2020 2019 (decr.) 2020 2019 (decr.)
Revenue $ 70,338 100.0 % $ 61,166 100.0 % 15.0 $ 206,102 100.0 % $ 189,243 100.0 % 8.9
Cost of sales 32,989 46.9 32,838 53.7 0.5 99,648 48.3 100,803 53.3 (1.1)
Gross profit 37,349 53.1 28,328 46.3 31.8 106,454 51.7 88,440 46.7 20.4
Operating expenses 34,494 49.0 26,707 43.6 29.2 100,358 48.7 80,476 42.5 24.7
Operating income 2,855 4.1 1,621 2.7 76.1 6,096 3.0 7,964 4.2 (23.5)
Other (expense) income, net (945) (1.4) 31 — NM (2,977) (1.5) 594 0.3 NM
Income before income taxes 1,910 2.7 1,652 2.7 15.6 3,119 1.5 8,558 4.5 (63.6)
Income tax expense (benefit) 144 0.2 4 — NM (859) (0.4) 886 0.4 NM
Net income $ 1,766 2.5 % $ 1,648 2.7 % 7.2 $ 3,978 1.9 % $ 7,672 4.1 % 48.1

~~REVENUE BY SEGMENT~~

Three months ended June 30, % incr. Nine months ended June 30, % incr.
($ in thousands) 2020 2019 (decr.) 2020 2019 (decr.)
Revenue
IoT Products & Services $ 63,472 90.2 $ 50,510 82.6 25.7 $ 184,975 89.7 % $ 159,843 84.5 % 15.7
IoT Solutions 6,866 9.8 10,656 17.4 (35.6) 21,127 10.3 29,400 15.5 (28.1)
Total revenue $ 70,338 100.0 $ 61,166 100.0 15.0 $ 206,102 100.0 % $ 189,243 100.0 % 8.9

~~IoT Products & Services~~

~~IoT Products & Services revenue increased 25.7% for the three months ended June 20, 2020 as compared to the same period in the prior fiscal year. This primarily was a result of:~~

•~~incremental revenue from our acquisition of Opengear;~~

•~~increased sales to significant customers related to our embedded modules; and~~

•~~increased sales of support services revenue.~~

~~This increase partially was offset by:~~

•~~decreased sales of our Digi Remote Manager~~^® ~~and wireless design services.~~

~~IoT Products & Services revenue increased 15.7% for the nine months ended June 30, 2020, respectively, as compared to the same period in the prior fiscal year. This primarily was a result of:~~

•~~incremental revenue from our acquisition of Opengear;~~

•~~increased sales to a significant customer of our cellular products; and~~

•~~an increase in support services revenue.~~

2526

Table of Contents

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

CONSOLIDATED RESULTS OF OPERATIONS

The following table sets forth selected information derived from our interim condensed consolidated statements of operations:


	Three months ended June 30,								% incr.		Nine months ended June 30,								% incr.
($ in thousands)	2021				2020				(decr.)		2021				2020				(decr.)



Revenue	$	79,079	100.0	%	$	70,338	100.0	%	12.4	%	$	229,526	100.0	%	$	206,102	100.0	%	11.4	%




Cost of sales	36,523		46.2		32,989		46.9		10.7		105,495		46.0		99,648		48.3		5.9
Gross profit	42,556		53.8		37,349		53		13.9		124,031		54.0		106,454		51.7		16.5
Operating expenses	38,538		48.7		34,494		49.0		11.7		116,789		50.9		100,358		48.7		16.4
Operating income	4,018		5.0		2,855		4.1		40.7		7,242		3.2		6,096		3.0		(18.8)
Other expense, net	(482)		(0.6)		(945)		(1.3)		NM		(1,244)		(0.5)		(2,977)		(1.4)		NM
Income before income taxes	3,536		4.5		1,910		2.7		85.1		5,998		2.6		3,119		1.5		(92.3)
Income tax expense (benefit)	379		0.5		144		0.2		NM		220		0.1		(859)		(0.4)		NM


Net income	$	3,157	4.0	%	$	1,766	2.5	%	78.8	%	$	5,778	2.5	%	$	3,978	1.9	%	45.2	%

REVENUE BY SEGMENT


	Three months ended June 30,						% incr.	Nine months ended June 30,								% incr.
($ in thousands)	2021			2020			(decr.)	2021				2020				(decr.)
Revenue
IoT Products & Services	$	66,812	84.5	$	63,472	90.2	5.3	$	194,224	84.6	%	$	184,975	89.7	%	5.0
IoT Solutions	12,267		15.5	6,866		9.8	78.7	35,302		15.4		21,127		10.3		67.1
Total revenue	$	79,079	100.0	$	70,338	100.0	12.4	$	229,526	100.0	%	$	206,102	100.0	%	11.4

IoT Products & Services

IoT Products & Services revenue increased 5.3% for the three months ended June 30, 2021 as compared to the same period in the prior fiscal year. This primarily was a result of:

•increased sales of our console servers primarily due revenue from our acquisition of Opengear in December 2019; and

•increased sales within our embedded portfolio attributable to demand from a specific medical device customer

This increase partially offset by:

•decreased sales of our cellular routers,

IoT Products & Services revenue increased 5.0% for the nine months ended June 30, 2021 as compared to the same period in the prior fiscal year. This primarily was a result of:

•increased sales of our console servers primarily due to incremental revenue from our acquisition of Opengear in December 2019; and

•increased revenue from embedded and Xbee® products.

This increase partially was offset by:

•~~large~~decreased sales of our cellular routers in the government transit sector primarily related to ~~certain customers~~an existing customer in the prior year that ~~did~~was not ~~reoccur in fiscal 2020 for our network and RF products;~~

•~~decreased sales of our enterprise and embedded products due to timing and delays in customer purchases; and~~

•~~decreased sales of our wireless design services.~~repeated this year.

IoT Solutions

IoT Solutions revenue ~~decreased 35.6%~~increased 78.6% and ~~28.1%~~67.1% for the three and nine months ended June 30, ~~2020,~~2021, respectively, as compared to the same periods in the prior fiscal year. This primarily was a result of:

•~~delays in customer rollouts, expansions~~new hardware installations with new and ~~equipment upgrades as a result of COVID-19 and the economic downturn;~~

•~~large enterprise deals in fiscal 2019 that did not reoccur in fiscal 2020;~~existing customers; and

•~~for the nine months ended June 30, 2020 compared to the same period in the prior fiscal year, equipment upgrades from existing customers in fiscal 2019 that did not reoccur in fiscal 2020.~~Table of Contents

~~This decrease partially was offset by:~~ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

•increased recurring revenue from our subscription ~~services.~~services as we service nearly 79,000 sites as of June 30, 2021, compared to nearly 69,000 sites as of June 30, 2020.

COST OF GOODS SOLD AND GROSS PROFIT BY SEGMENT


		Three months ended June 30,													Basis point		Nine months ended June 30,																			Basis point			Three months ended June 30,							Basis point	Nine months ended June 30,		Basis point
($ in thousands)	($ in thousands)	2020						2019					Inc. (Decr.)		2020								2019						Inc. (Decr.)			($ in thousands)	2021						2020			inc. (decr.)			2021		2020	inc. (decr.)

Cost of Goods Sold	Cost of Goods Sold																			Cost of Goods Sold
IoT Products & Services	IoT Products & Services	$	29,573	46.6	%	$	27,452	54.3	%	(770)	$	88,965	48.1	%	$	85,856	53.7	%	(560)	IoT Products & Services	$	30,006		44.9	%	$	29,573	46.6		%	(170)			$	87,282		44.9	%		$	88,965	48.1	%	(320)
IoT Solutions	IoT Solutions	3,416		49.8	%	5,386		50.5	%	(70)	10,683		50.6	%	14,947		50.8	%	(20)	IoT Solutions	6,517			53.1	%	3,416		49.8		%	330			18,213			51.6	%		10,683		50.6	%	100
Total cost of goods sold	Total cost of goods sold	$	32,989	46.9	%	$	32,838	53.7	%	(680)	$	99,648	48.3	%	$	100,803	53.3	%	(500)	Total cost of goods sold	$	36,523		46.2	%	$	32,989	46.9		%	(70)			$	105,495		46.0	%		$	99,648	48.3	%	(230)


		Three months ended June 30,													Basis point		Nine months ended June 30,																			Basis point			Three months ended June 30,							Basis point	Nine months ended June 30,		Basis point
($ in thousands)	($ in thousands)	2020						2019					Inc. (Decr.)		2020								2019						Inc. (Decr.)			($ in thousands)	2021						2020			inc. (decr.)			2021		2020	inc. (decr.)

IoT Products & Services revenue																				IoT Products & Services revenue	$	66,812				$	63,472							$	194,224					$	184,975
IoT Solutions revenue																				IoT Solutions revenue	12,267					6,866								35,302						21,127
Total revenue																				Total revenue	79,079					70,338								229,526						206,102
Gross Profit	Gross Profit																			Gross Profit
IoT Products & Services	IoT Products & Services	$	33,899	53.4	%	$	23,058	45.7	%	770	$	96,010	51.9	%	$	73,987	46.3	%	560	IoT Products & Services	36,807			55.1	%	33,899		53.4		%	170			106,942			55.1	%		96,010		51.9	%	320
IoT Solutions	IoT Solutions	3,450		50.2	%	5,270		49.5	%	70	10,444		49.4	%	14,453		49.2	%	20	IoT Solutions	5,749			46.9	%	3,450		50.2		%	(330)			17,089			48.4	%		10,444		49.4	%	(100)
Total gross profit	Total gross profit	$	37,349	53.1	%	$	28,328	46.3	%	680	$	106,454	51.7	%	$	88,440	46.7	%	500	Total gross profit	$	42,556		53.8	%	$	37,349	53.1		%	70			$	124,031		54.0	%		$	106,454	51.7	%	230

IoT Product & Services

IoT Products & Services gross profit margin increased ~~770 and 560~~170 basis points for the three months ended June 30, 2021 as compared to the same period in the prior fiscal year. This increase primarily was a result of:

•favorable product and customer mix within and among our console server, cellular router, embedded and Xbee® products.

This increase partially offset by:

•increased material and overhead expenses associated with the production and distribution of our products as a result of global supply chain challenges.

IoT Products & Services gross profit margin increased 320 basis points for the nine months ended June 30, ~~2020, respectively,~~2021 as compared to the same ~~periods~~period in the prior fiscal year. ~~These increases~~This increase primarily ~~were~~was a result of:

•incremental gross profit from our console servers due to the Opengear acquisition ~~of Opengear, which have higher gross margins;~~in December 2019; and

•~~increased sales from our support services, which typically has higher gross margins.~~

~~For the nine months ended June 30, 2020, this increase partially was offset by:~~

•~~unfavorable~~favorable product mix ~~as we experienced lower sales of RF~~within our cellular router, embedded, Xbee® and infrastructure management products ~~and certain network products, which typically have higher gross margins.~~

2628

Table of Contents

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

IoT Solutions

The IoT Solutions gross profit margin ~~increased 70 and 20~~decreased (330) basis points for the three ~~and nine~~ months ended June 30, ~~2020~~2021 as compared to the same periods in the prior fiscal year. ~~These increases~~This increase primarily ~~were~~was a result of:

•~~one-time non-recurring~~increased one time, product revenue, ~~in the third quarter of fiscal 2020;~~which typically has lower gross margin; and

•increased ~~recurring subscription revenue, which typically has higher~~material and overhead expenses associated with the production and distribution of our products as a result of global supply challenges.

The IoT Solutions gross ~~margins.~~profit margin decreased (100) basis points for the nine months ended June 30, 2021 as compared to the same period in the prior fiscal year. This decrease primarily was a result of:

•increased material and overhead expenses associated with the production and distribution of our products as a result of global supply challenges.

OPERATING EXPENSES

Below is our operating expenses and operating expenses as a percentage of total revenue:


		Three months ended June 30,													$		%		Nine months ended June 30,																								$			%		Three months ended June 30,												$		%	Nine months ended June 30,			$	%
($ in thousands)	($ in thousands)	2020						2019					incr. (decr.)		incr. (decr.)		2020								2019										incr. (decr.)			incr. (decr.)		($ in thousands)		2021						2020						incr. (decr.)			incr. (decr.)			2021			2020	incr. (decr.)	incr. (decr.)

Operating Expenses	Operating Expenses																									Operating Expenses
Sales and marketing	Sales and marketing	$	13,133	18.7	%	$	11,392	18.6	%	$	1,741	15.3	$	39,750	19.3	%	$	34,583	18.3	%	$	5,167			14.9	Sales and marketing		$	15,910		20.1	%		$	13,133		18.7		%			$	2,777		21.1			$	46,271		20.2	%		$	39,750		19.3	%		$	6,521	16.4
Research and development	Research and development	10,892		15.5	%	8,584		14.0	%	2,308		26.9	32,755		15.9	%	27,671		14.6	%	5,084				18.4	Research and development		12,374			15.6	%		10,892			15.5		%			1,482			13.6			34,822			15.2	%		32,755			15.9	%		2,067		6.3
General and administrative	General and administrative	10,378		14.8	%	6,751		11.0	%	3,627		53.7	27,724		13.5	%	18,309		9.7	%	9,415				51.4	General and administrative		10,153			12.8	%		10,378			14.8		%			(225)			(2.2)			34,701			15.1	%		27,724			13.5	%		6,977		25.2
Restructuring charge (reversal)		91		—	%	(20)		—	%	111		NM	129		0.1	%	(87)		(0.1)	%	216				(248.3)
Restructuring charge																							Restructuring charge	101			0.1		%	91			—		%	10					NM			995			0.4		%	129			0.1		%	866			NM
Total operating expenses	Total operating expenses	$	34,494	49.0	%	$	26,707	43.6	%	$	7,787	29.2	$	100,358	48.7	%	$	80,476	42.5	%	$	19,882			24.7	Total operating expenses		$	38,538		48.7	%		$	34,494		49.0		%			$	4,044		11.7			$	116,789		50.9	%		$	100,358		48.7	%		$	16,431	16.4

NM means not meaningful

The ~~$7.8~~$4.0 million increase in operating expenses in the third quarter of fiscal ~~2020~~2021 from the third quarter of fiscal ~~2019~~2020 primarily was the result of:

•~~incremental~~an increase of $3.1 million in compensation related expenses primarily related to additional bonus and commission expense due to increased company performance; and

•other increases primarily related bad debt expense and outside services.

The $16.4 million increase in fiscal year-to-date operating expenses for the nine months ending June 30, 2021, when compared to the same period in the prior fiscal year was the result of:

•an increase of $5.9 million in earn-out expenses primarily as a result of revenue from ~~Opengear;~~Opengear exceeding our previous estimate; and

•an increase of $8.4 million in ~~$1.1 million professional and outside services fees which includes a $0.4 million increase~~compensation expenses primarily related to incremental salaries from the Opengear acquisition in ~~acquisition related expenses;~~

•~~a $0.4 million increase in bad debts provision;~~December 2019, and

•~~a $0.3 million increase~~other increases primarily related to incremental expenses due to the Opengear acquisition in ~~employee related expenses.~~December 2019, restructuring charges, bad debt expense and outside services.

This increase partially was offset by:

•a decrease of ~~$1.1~~$1.7 million in ~~trade shows~~M&A expense; and

•a decrease of $1.9 million in travel related ~~travel~~ expenses as events and travel were restricted due to ~~COVID-19; and~~the pandemic.

• ~~decrease in acquisition earn-out expenses of $0.4 million;~~

~~The $19.9 million increase in operating expenses in the first nine months of fiscal 2020 from the first nine months of fiscal 2019 primarily was the result of:~~

•~~incremental operating expenses from Opengear;~~

•~~a $4.4 million gain on the sale of our corporate headquarters building recorded in the first quarter of fiscal 2019;~~

•~~a $1.6 increase in acquisition expenses; and~~

•~~a $0.4 million increase in certification testing~~

~~This increase partially was offset by:~~

•~~a decrease in acquisition earnout expenses of $1.3 million;~~OPERATING INCOME

2729

Table of Contents

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

•Operating income was $4.0 million for the three months ended June 30, 2021, compared to $2.9 million for three months ended June 30, 2020. Operating income was $7.2 million for the nine months ending June 30, 2021, compared to $6.1 million for the nine months ending June 30, 2020.

IoT Product & Services provided operating income of $6.1 million for the three months ended June 30,2021 compared to $4.8 million for the three months ended June 30, 2020, an increase of $1.3 million, or 27.4%. IoT Product & Services provided operating income of $4.7 million for the nine months ending June 30, 2021 compared to $14.5 million for the nine months ending June 30, 2020, a decrease of ~~$1.2~~$9.8 million, or 67.3%. Drivers for the changes e in ~~trade shows~~operating income for both the quarter and ~~related travel~~year-to-date periods are described above in the revenue, gross profit and operating expenses ~~as events~~details.

IoT Solutions had an operating loss of $2.1 million for the three months ended June 30, 2021 compared to an operating loss of $1.9 million for the three months ended June 30, 2020, a decrease of $0.2 million, or 7.8%. IoT Solutions had operating income of $2.5 million for the nine months ending June 30, 2021 compared to an operating loss of $8.4 million for the nine months ending June 30, 2020, an improvement of $10.9 million, or 129.8%. Drivers for the improvement in operating loss are described above in the revenue, gross profit and ~~travel were restricted due to COVID-19;~~

•~~a $0.5 million decrease related to employee commission and other employee related costs; and~~

•~~a reduction of $0.4 million in amortization expense mostly related to certain intangibles that have been fully amortized.~~operating expenses details.

OTHER ~~(EXPENSE) INCOME,~~EXPENSE, NET


		Three months ended June 30,													$		%		Nine months ended June 30,																									$			%		Three months ended June 30,												$		%	Nine months ended June 30,			$	%
($ in thousands)	($ in thousands)	2020						2019					incr. (decr.)		incr. (decr.)		2020									2019										incr. (decr.)			incr. (decr.)		($ in thousands)		2021						2020						incr. (decr.)			incr. (decr.)			2021			2020	incr. (decr.)	incr. (decr.)

Other (expense) income, net
Other expense, net																							Other expense, net
Interest income	Interest income	$	22	—	%	$	205	0.3	%	$	(183)	(89.3)	$	303	0.1	%	$	557	0.3	%	$	(254)				(45.6)	Interest income		$	3		—	%		$	22		—		%			$	(19)		(86.4)			$	4		—	%		$	303		0.1	%		$	(299)	(98.7)
Interest expense	Interest expense	(900)		(1.3)	%	—		—	%	(900)		NM	(3,066)		(1.5)	%	(94)		(0.1)	%	(2,972)					NM	Interest expense		(371)			(0.5)	%		(900)			(1.3)		%			529			NM			(1,019)			(0.4)	%		(3,066)			(1.5)	%		2,047		(66.8)
Other (expense) income, net		(67)		(0.1)	%	(174)		(0.3)	%	107		(61.5)	(214)		(0.1)	%	131		0.1	%	(345)					(263.4)
Total other (expense) income, net		$	(945)	(1.4)	%	$	31	—	%	$	(976)	NM	$	(2,977)	(1.5)	%	$	594	0.3	%	$	(3,571)				NM
Other expense, net																							Other expense, net	(114)				(0.1)		%	(67)			(0.1)		%	(47)					70.1			(229)			(0.1)		%	(214)			(0.1)		%	(15)			7.0
Total other expense, net																							Total other expense, net	$	(482)			(0.6)		%	$	(945)		(1.3)		%	$	463				NM			$	(1,244)		(0.5)		%	$	(2,977)		(1.4)		%	$	1,733		NM

NM means not meaningful

~~The $1.0~~Other expense, net, improved $0.5 million ~~decrease in other (expense) income, net~~and $1.7 million for the three and nine months periods ended June 30, 2021, respectively, as compared to the same periods in the ~~third quarter of~~prior fiscal ~~2020 from~~year. The improvement was primarily due to the ~~third quarter of fiscal 2019 primarily was the result of:~~

•~~an increase in~~decrease interest expense ~~of $0.9 million related to~~as we paid down our term loan and paid off our revolving loan under the prior Credit Facility and subsequently in March 2021, refinanced the balance ~~outstanding under the Credit Facility in connection~~of our term loan with ~~the acquisition of Opengear on December 13, 2019~~a revolving loan. (see Note 87 to the condensed consolidated financial statements)~~; and~~

•~~a decrease of $0.2 million related to a reduction in interest income.~~

~~The $3.6 million decrease in other (expense) income, net in the first nine months of fiscal 2020 from the first nine months of fiscal 2019 primarily was the result of:~~

•an increase in interest expense of $3.0 million related to the balance outstanding under the Credit Facility in connection with the acquisition of Opengear on December 13, 2019 (see Note 8 to the condensed consolidated financial statements);

•~~a decrease of $0.3 million related to an increase in foreign currency losses compared to foreign current gains in the prior fiscal year, primarily related to fluctuations in the Euro; and~~

•~~a decrease of $0.3 million related to a reduction in interest income.~~.

INCOME TAXES

See Note 11 to the condensed consolidated financial statements for discussion of income taxes.

NON-GAAP FINANCIAL INFORMATION

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 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 Digi. These non-GAAP measures are not in accordance with, or, an alternative for measures prepared in accordance with GAAP and may be different from non-GAAP measures used by other companies or presented by us in prior reports. In addition, these 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. We believe these measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures. Additionally, Adjusted EBITDA 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.

Table of Contents

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

~~NON-GAAP FINANCIAL INFORMATION~~include these items. Management uses the aforementioned non-GAAP measures to monitor and evaluate ongoing operating results and trends and to gain an understanding of our comparative operating performance. In addition, certain of our stockholders have expressed an interest in seeing financial performance measures exclusive of the impact of these matters, which while important, are not central to the core operations of our business. Management believes that Adjusted EBITDA, defined as EBITDA adjusted for stock-based compensation expense, acquisition-related expenses, restructuring charges and reversals, and changes in fair value of contingent consideration is useful to investors to evaluate the Company's core operating results and financial performance because it excludes items that are significant non-cash or non-recurring items reflected in the condensed consolidated ctatements of cperations. We believe that the presentation of Adjusted EBITDA 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.

Below are reconciliations from GAAP to Non-GAAP information that we feel is important to our business:

Reconciliation of Net Income to Adjusted EBITDA

(In thousands)


		Three months ended June 30,														Nine months ended June 30,																Three months ended June 30,					Nine months ended June 30,
		2020						2019						2020								2019						2021				2020				2021	2020
				% of total revenue				% of total revenue				% of total revenue				% of total revenue					% of total revenue					% of total revenue				% of total revenue				% of total revenue
Total revenue	Total revenue	$	70,338	100.0	%	$	61,166	100.0	%	$	206,102	100.0	%	$	189,243	100.0	%	Total revenue	$	79,079	100.0		%	$	70,338	100.0	%	$	229,526	100.0	%	$	206,102	100.0	%

Net income	Net income	$	1,766			$	1,648			$	3,978			$	7,672			Net income	$	3,157				$	1,766			$	5,778			$	3,978

Interest expense (income), net		878				(205)				2,763				(463)
Interest expense, net																		Interest expense, net	368					878				1,015				2,763
Income tax expense (benefit)	Income tax expense (benefit)	144				4				(859)				886				Income tax expense (benefit)	379					144				220				(859)
Depreciation and amortization	Depreciation and amortization	5,306				3,186				14,159				10,012				Depreciation and amortization	5,148					5,306				15,200				14,159
Stock-based compensation	Stock-based compensation	1,882				1,473				5,323				4,180				Stock-based compensation	2,110					1,882				6,331				5,323
Gain on sale of building		—				—				—				(4,396)
Restructuring charge (reversal)		91				(20)				129				(87)
Changes in fair value of contingent consideration																		Changes in fair value of contingent consideration	—					—				5,772				—

Restructuring charge																		Restructuring charge	101					91				995				129
Acquisition expense	Acquisition expense	463				54				2,618				1,045				Acquisition expense	313					463				937				2,618
Adjusted EBITDA		$	10,530	15.0	%	$	6,140	10.0	%	$	28,111	13.6	%	$	18,849	10.0	%

Adjusted EBITDA(1)																		Adjusted EBITDA(1)	$	11,576	14.6		%	$	10,530	15.0	%	$	36,248	15.8	%	$	28,111	13.6	%

(1)Beginning in fiscal 2021, Adjusted EBITDA now excludes changes in fair value of contingent consideration. The prior year presentation has been adjusted to conform to the current year presentation.

Table of Contents

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

Reconciliation of Net Income and Net Income per Diluted Share to

Adjusted Net Income and Adjusted Net Income per Diluted Share

(In thousands, except per share amounts)


		Three months ended June 30,														Nine months ended June 30,															Three months ended June 30,					Nine months ended June 30,
		2020						2019						2020								2019					2021				2020				2021	2020
Net income and net income per diluted share	Net income and net income per diluted share	$	1,766	$	0.06	$	1,648	$	0.06	$	3,978	$	0.13	$	7,672	$	0.27	Net income and net income per diluted share	$	3,157	$	0.09	$	1,766	$	0.06	$	5,778	$	0.18	$	3,978	$	0.13
Amortization	Amortization	4,123		0.14		2,060		0.07		10,687		0.36		6,669		0.23		Amortization	4,101		0.12		4,123		0.14		11,989		0.37		10,687		0.36
Stock-based compensation	Stock-based compensation	1,882		0.06		1,473		0.05		5,323		0.18		4,180		0.15		Stock-based compensation	2,110		0.06		1,882		0.06		6,331		0.19		5,323		0.18
Other non-operating expense (income)		67		—		174		0.01		214		0.01		(131)		—
Other non-operating expense																		Other non-operating expense	114		—		67		—		229		0.01		214		0.01
Acquisition expense	Acquisition expense	463		0.02		54		—		2,618		0.09		1,045		0.04		Acquisition expense	313		0.01		463		0.02		937		0.03		2,618		0.09
Acquisition earn-out adjustments		—		—		378		0.01		(128)		—		1,188		0.04
Restructuring charge (reversal)		91		—		(20)		—		129		—		(87)		—
Changes in fair value of contingent consideration																		Changes in fair value of contingent consideration	—		—		—		—		5,772		0.18		(128)		—
Restructuring charge																		Restructuring charge	101		—		91		—		995		0.03		129		—
Interest expense related to acquisition	Interest expense related to acquisition	907		0.03		—		—		3,032		0.10		—		—		Interest expense related to acquisition	378		0.01		907		0.03		1,028		0.03		3,032		0.10
Gain on sale of building		—		—		—		—		—		—		(4,396)		(0.15)

Tax effect from the above adjustments ⁽¹⁾	Tax effect from the above adjustments ⁽¹⁾	(2,660)		(0.09)		(877)		(0.03)		(5,391)		(0.18)		(1,707)		(0.06)		Tax effect from the above adjustments (1)	(1,026)		(0.03)		(2,660)		(0.09)		(4,494)		(0.14)		(5,391)		(0.18)
Discrete tax benefits ⁽²⁾	Discrete tax benefits ⁽²⁾	(66)		—		(272)		(0.01)		(1,127)		(0.04)		(580)		(0.02)		Discrete tax benefits (2)	(512)		(0.01)		(66)		—		(764)		(0.02)		(1,127)		(0.04)
Adjusted net income and adjusted net income per diluted share ⁽³⁾	Adjusted net income and adjusted net income per diluted share ⁽³⁾	$	6,573	$	0.23	$	4,618	$	0.16	$	19,335	$	0.66	$	13,853	$	0.49	Adjusted net income and adjusted net income per diluted share (3)	$	8,736	$	0.25	$	6,573	$	0.23	$	27,801	$	0.85	$	19,335	$	0.66
Diluted weighted average common shares	Diluted weighted average common shares			29,187				28,589				29,477				28,414		Diluted weighted average common shares			35,148				29,187				32,706				29,477

(1)The tax effect from the above adjustments assumes an estimated effective tax rate of 18.0% for fiscal 2021 and 20.2% for fiscal 2020 ~~and 18% for fiscal 2019~~ based on adjusted net income.

(2)For the three and nine months ended June 30, 2021, discrete tax benefits primarily are a result of excess tax benefits recognized on stock compensation. For the three months ended June 30, 2020, discrete tax benefits were primarily ~~are~~ a result of ~~expiring statute of limitations.~~excess tax benefits on stock compensation. For the nine months ended June 30, 2020, discrete tax benefits ~~include~~were primarily a result of excess tax benefits ~~recognized~~ on stock compensation and an adjustment of our state deferred tax rate due to the Opengear acquisition and expiring statute of limitations. For the three and nine months ended June 30, 2019, discrete tax benefits are a result of expiring statute of limitations of uncertain tax benefits as well as excess tax benefits recognized on stock compensation.acquisition.

(3)Adjusted net income per diluted share may not add due to the use of rounded numbers.

~~Table of Contents~~

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

LIQUIDITY AND CAPITAL RESOURCES

Historically we have financed our operations and capital expenditures principally with funds generated from operations. Our liquidity requirements arise from our working capital needs, and to a lesser extent, our need to fund capital expenditures to support our current operations and facilitate growth and expansion.

InOn March 15, 2021, we entered into an amended and restated credit agreement consisting of a $200 million revolving loan. The $47.5 million term loan outstanding from the ~~first quarter~~prior credit agreement was replaced by this new revolving loan along with additional proceeds of ~~fiscal 2020, we incurred debt~~$0.6 million for a total of ~~$110~~$48.1 million ~~associated with our acquisition of Opengear.~~at June 30, 2021. As of June 30, ~~2020, $70~~2021, $151.9 million remained available under the Revolving Loan, which included $10 million available for a letter of credit subfacility and $10 million available under a swingline subfacility, the outstanding amounts of which decrease the available commitment. During the ~~third~~first quarter of fiscal ~~2020,~~2021, we repaid ~~$30~~the final $15 million of the Revolving ~~Loan.~~Loan under the prior credit agreement. For additional information regarding the terms of our Credit Facility, including the Revolving Loan and its subfacilities, see Note 87 to our condensed consolidated financial statements.

~~On April 14, 2020,~~ Additionally, during the second quarter of fiscal 2021 we ~~were granted a loan for $9.0 million under the Paycheck Protection Program ("PPP") established as part~~sold 4,0258,000 shares of ~~the Coronavirus Aid, Relief~~our common stock and ~~Economic Security Act ("CARES Act"). Based on additional rules for the PPP established after the grant acceptance, we subsequently made the determination to pay back the full amount~~received net proceeds of ~~the loan of $9.0 million, plus interest. This payment was made on May 4, 2020.~~$73.8 million.

We expect positive cash flows from ~~operations.~~operations for the foreseeable future. We believe that our current cash and cash equivalents balances, cash generated from operations and our ability to borrow under our credit facility will be sufficient to fund our business operations and capital expenditures for the next twelve months and beyond. As follows, our condensed consolidated ~~statement~~statements of cash flows for the nine months ended June 30, ~~2020~~2021 and ~~2019~~2020 is summarized:

Nine months ended June 30,
($ in thousands) 2020 2019
Operating activities $ 19,153 $ 22,528
Investing activities (136,791) 3,947
Financing activities 78,221 90
Effect of exchange rate changes on cash and cash equivalents 1,710 (485)
Net (decrease) increase in cash and cash equivalents $ (37,707) $ 26,080

~~Cash flows from operating activities decreased $3.4 million primarily as a result of:~~

•negative changes in operating assets and liabilities (net of acquisitions) of $7.7 million. This primarily was due to increased inventory and income taxes receivable and earnout payment in excess of original valuation, offset by a decrease in accounts payable in the prior fiscal year and a decrease in accounts receivable; and

•a decrease in net income of $3.7 million, partially offset by non-cash adjustments of $8.0 million. This primarily included a gain in the sale of our former corporate headquarters building in the prior fiscal year and increased depreciation and amortization expense.

~~Cash flows from investing activities decreased $140.7 million primarily as a result of:~~

•~~net cash used of $136.1 million for the purchase of Opengear;~~

•~~proceeds of $10.0 million for the sale of our corporate headquarters building and $2.5 million proceeds from maturities of our marketable securities both in the prior fiscal year; and~~

•a partial offset to these decreases was $7.9 million related to purchases of property, equipment, and facilities improvements (mostly related to the build-out of our new corporate headquarters space) in the prior fiscal year.

~~Cash flows from financing activities increased $78.1 million primarily as a result of:~~

•~~proceeds, net of payments, of long-term debt of $78.8 million of debt from the Revolving Loan and Term Loan (see Note 8 to the condensed consolidated financial statements);~~

•~~increases in proceeds from stock award plans of $0.3 million; and~~

3032

Table of Contents

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


	Nine months ended June 30,
($ in thousands)	2021		2020
Operating activities	$	42,084	$	19,153
Investing activities	(7,957)		(136,791)
Financing activities	60,579		78,221
Effect of exchange rate changes on cash and cash equivalents	(1,893)		1,710
Net increase (decrease) in cash and cash equivalents	$	92,813	$	(37,707)

Cash flows from operating activities increased $22.9 million primarily as a result of:

•increased changes in operating assets and liabilities (net of acquisitions) of $2.4 million. This primarily was due to a decrease in accounts receivable due to ramped up collections in the current fiscal year in addition to increased accounts receivable in the prior fiscal year; and

•a decrease in net income of $1.9 million and non-cash adjustments of $18.1 million. These non-cash adjustments include an accrual for additional earn-out provision and increase depreciation and amortization.

Cash flows from investing activities increased $125.8 million primarily as a result of:

•an increase of $136.1 million related to the purchase of Opengear in the prior fiscal year,

•a partial offset to this decrease was $2.7 million related to the purchase of Haxiot in the current fiscal year and an additional $1.0 million related to purchases of property, equipment, and facilities improvements compared to the prior fiscal year.

Cash flows from financing activities decreased $17.6 million primarily as a result of:

•a decrease of $118.4 million related to proceeds of $119.0 million long-term debt from the Revolving Loan and Term Loan in the prior fiscal year partially offset by proceeds of $0.6 million from the Revolving Loan in the current fiscal year (see Note 7 to the condensed consolidated financial statements);

•a reduction of $24.5 million related to payments on long-term debt;

•an increase of $0.5 million related to the financing portion of acquisition earn-out payments for the Opengear acquisition; and

•a partial offset to these decreases ~~relates~~was an increase of $73.8 million due to ~~additional payments~~the proceeds from issuance of ~~$1.0~~common stock (see Note 8 to the condensed consolidated financial statements) and a $1.8 million ~~related to acquisition earn-out payments.~~

increase in proceeds from stock award plans.

CONTRACTUAL OBLIGATIONS

The following table summarizes our contractual obligations at June 30, ~~2020:~~2021:


		Payments due by fiscal period																			Payments due by fiscal period
($ in thousands)	($ in thousands)	Total		Less than 1 year		1-3 years		3-5 years		Thereafter		($ in thousands)	Total		Less than 1 year		1-3 years		3-5 years		Thereafter
Operating leases	Operating leases	$	23,946	$	3,454	$	5,808	$	4,878	$	9,806	Operating leases	$	25,471	$	2,750	$	6,571	$	5,589	$	10,561
Contingent consideration	Contingent consideration	$	4,228	$	4,228	$	—	$	—	$	—	Contingent consideration	$	5,900	$	3,000	$	2,900	$	—	$	—

Revolving loan	Revolving loan	$	30,000	$	—	$	—	$	30,000	$	—	Revolving loan	$	48,118	$	—	$	—	$	48,118	$	—
Term loan		$	48,750	$	2,500	$	6,875	$	39,375	$	—
Interest on long-term debt	Interest on long-term debt	$	7,743	$	2,035	$	3,208	$	2,500	$	—	Interest on long-term debt	$	4,508	$	949	$	2,847	$	712	$	—
Total	Total	$	114,667	$	12,217	$	15,891	$	76,753	$	9,806	Total	$	83,997	$	6,699	$	12,318	$	54,419	$	10,561

The operating lease agreements included above primarily relate to office space. The table above does not include possible payments for uncertain tax positions. Our reserve for uncertain tax positions, including accrued interest and penalties, was ~~$2.3~~$2.5 million as of June 30, ~~2020.~~2021. Due to the nature of the underlying liabilities and the extended time often needed to resolve income tax uncertainties, we cannot make reliable estimates of the amount or timing of future cash payments that may be required to settle these liabilities. The above table also does not include those obligations for royalties under license agreements

Table of Contents

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

as these royalties are calculated based on future sales of licensed products and we cannot make reliable estimates of the amount of cash payments.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

For information on new accounting pronouncements, see Note 1 to our condensed consolidated financial statements.

3134

Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to ongoing market risk related to changes in interest rates and foreign currency exchange rates.

INTEREST RATE RISK

We may be exposed to interest rate risk should we decide to invest in marketable securities. When we hold marketable securities, we classify them as available-for-sale and are carried at fair value. Our investments may 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.

We are exposed to market risks related to fluctuations in interest rates on amounts borrowed under the Credit Facility. As of June 30, ~~2020,~~2021, we had ~~$48.8 million outstanding under our Term Loan and $30.0~~$48.1 million outstanding under our Revolving Loan. Prior to May 4, 2020, borrowings under the Credit Facility bore interest rates based on an underlying variable benchmark plus applicable margin based on our total leverage ("ABR"); this interest rate was reset quarterly. Effective May 4, 2020, borrowingsBorrowings under the Credit Facility bear a variable interest rate of LIBOR plus an applicable margin spread from ~~3.25%~~1.25% to ~~1.25%~~3.25%. The amount of the applicable margin spread is a function of our leverage ratio and is reset monthly. Based on the balance sheet position for ~~both~~ the ~~Term Loan and~~ Revolving Loan at June 30, ~~2020,~~2021, the annualized effect of a 25 basis point change in interest rates would increase or decrease our interest expense by ~~$0.4~~$0.1 million. For additional information, see Note 87 to our condensed consolidated financial statements. For our Credit Facility, interest rate changes generally do not affect the fair value of the debt instruments, but do impact future earnings and cash flows, assuming other factors are held constant.

FOREIGN CURRENCY RISK

We are not exposed to foreign currency transaction risk associated with ~~certain~~ sales transactions ~~being~~as the majority of our sales are denominated in ~~Euros, British Pounds, Japanese Yen or Canadian~~U.S. Dollars. 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. We have not implemented a formal hedging strategy.

For both the nine months ended June 30, 2020 and 2019, we had approximately $48.6 million and $50.4 million, respectively, of revenue from foreign customers including export sales. Of these sales, $1.6 million and $2.7 million, respectively, were denominated in foreign currency, predominantly Euros and Canadian Dollar. In future periods, we expect that the majority of our sales will continue to be in U.S. Dollars. The table below compares the average monthly exchange rates of the Euro, British Pound, Japanese Yen and Canadian Dollar to the U.S. Dollar:

Nine months ended June 30, % increase
2020 2019 (decrease)
Euro 1.1219 1.1359 (1.2) %
British Pound 1.2273 1.2915 (5.0) %
Japanese Yen 0.0093 0.0090 3.3 %
Canadian Dollar 0.7307 0.7499 (2.6) %

A 10% change in the average exchange rate for the Euro, British Pound, Japanese Yen and Canadian Dollar to the U.S. Dollar during the first nine months of fiscal ~~2020~~2021 would have resulted in a ~~0.1% increase or decrease in revenue and a 1.0%~~0.7% 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 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.

~~Table of Contents~~

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 December 13, 2019, we completed our acquisition of Opengear. As permitted for recently acquired businesses, management has excluded the acquired Opengear business from its assessment of internal control over financial reporting. The excluded Opengear business represents total assets of 33% of our consolidated total assets as of June 30, 2020. The Opengear total assets include intangibles of 19%, which will be evaluated and tested under our corporate controls. We are required to include Opengear in our assessment beginning in the first quarter of fiscal 2021.

There were no changes in our internal control over financial reporting that occurred during the ~~nine~~three months ended June 30, ~~2020~~2021 that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The disclosure set forth under the heading ~~"Contingencies"~~"Litigation" in Note 15 to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q is incorporated herein by reference.

Table of Contents

ITEM 1A. RISK FACTORS

Except as noted below, there 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, ~~2019.~~2020.

~~Our sales~~We depend on manufacturing relationships and on limited-source suppliers, and any disruptions in these relationships may cause damage to our customer relationships.

We procure all parts and certain services involved in the production of our products and subcontract most of our product manufacturing to outside firms that specialize in such services. Although most of the components of our products are available from multiple vendors, we have several single-source supplier relationships, either because alternative sources are not available or because the relationship is advantageous to us. Further, the COVID-19 pandemic has created stress on many supply chains globally. This has had some impact on our own ability to procure certain inventory and services. Prior to our first quarter of fiscal 2021 these impacts were generally small and contained. More recently we have seen more significant shortages and higher prices in our ability to procure certain inventory. In addition, shipping costs have recently increased significantly as well. We do expect these shortages and higher costs to have some impact on our business in upcoming quarters, although the severity and duration of the impacts is not clear at this time they could potentially be material. There can be no assurance that our suppliers will be able to meet our future requirements for products and components in a timely fashion. In addition, the availability and cost of many of these components to us is dependent in part on our ability to provide our suppliers with accurate forecasts of our future requirements. Delays or lost revenue could be caused by other factors beyond our control, including late deliveries by vendors of components, or force majeure events such as the ongoing pandemic. As an example of force majeure, a fire in November 2014 disrupted the operations ~~globally face risks related~~at one of our contract manufacturers in Thailand. If we are required to ~~health epidemics or pandemics that~~identify alternative suppliers for any of our required components, qualification and pre-production periods could be lengthy and may cause an increase in component costs and delays in providing products to customers. Any extended interruption in the supply of any of the key components currently obtained from limited sources could disrupt our operations and ~~adversely impact our sales and operating results.~~

Our business operations and financial results could be adversely affected by the effects of a widespread outbreak of contagious disease or other material adverse widespread public health development, such as the recent outbreak of the COVID-19 respiratory illness caused by a novel coronavirus first identified in Wuhan, Hubei Province, China. These effects could include the absence of one or more key employees or significant numbers or employees generally, disruptions or restrictions on our ability to maintain operations at one or more of our facilities, disruptions or restrictions to travel that is important to our operations, adverse impacts on our ability to distribute or deliver our products or services as well as temporary disruptions, restrictions or closures of the facilities of our suppliers or customers and their contract manufacturers. Any of the above absences, disruptions or restrictions could impact our sales and operating results negatively. If these absences, disruptions or restrictions are significant and material it is possible our business continuity could be jeopardized. Depending on the location of any such disruption or restriction, there may not be a solution that will be easy to implement in a timely manner or without significant expense. In addition, any significant outbreak of contagious diseases could materially and adversely affect the economies and financial markets of many countries or the entire world, resulting in an economic downturn that could affect demand for our products, likely impact our operating results and restrain our access to capital from lenders or other sources.

If our stock price declines over a sustained period of time, our profits significantly decrease or our acquired businesses do not attain results that were anticipated at the time of acquisition, we may need to recognize an impairment of our goodwill.

The price of our common stock could decline. If such a decline continued over a sustained period of time, we could have an impairment of our goodwill. Our market value is dependent upon certain factors, including continued future growth of our products, services and solutions. If such growth does not materialize or our forecasts are not met (including forecasts

~~Table of Contents~~

established at the time of acquisition), our profits could be significantly reduced, and our market value may decline, which could result in an impairment of our goodwill. As discussed in other risk factors, there could be circumstances beyond our control, such as impacts from the current COVID-19 pandemic that could exacerbate the conditions that would lead to such an impairment.

~~We entered into a credit facility, and failure to comply with the covenants thereunder may have a material adverse effect.~~

In December 2019, we entered into a credit agreement (the “Credit Agreement”) with BMO, as administrative agent and collateral agent, BMO Capital Markets Corp., as joint lead arranger and sole book runner, Silicon Valley Bank, as joint lead arranger, and other lenders from time to time party thereto (collectively, the “Lenders”), which provides us with senior secured credit facilities totaling $150 million, consisting of (i) the Term Loan and (ii) the Revolving Loan. The Revolving Loan includes a $10 million letter of credit loan and $10 million swingline loan, the outstanding amounts of which decrease the available commitment. Loans under the Term Loan will be repaid in quarterly installments on the last day of each fiscal quarter, with amortization of 5% in the first two years, 7.5% in the next two years and 10% in the final year. The remaining outstanding balance will be repaid in full after five years.

If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments on the Credit Facility, we will be in default. We are also required to comply with several financial covenants under the Credit Agreement. Our ability to comply with such financial covenants may be affected by events beyond our control, which could result in a default under the Credit Agreement; such default may have a material adverse effect on our ~~business, financial condition, operating results or cash flows.~~

~~The Credit Agreement also contains other customary affirmative~~customer relationships and negative covenants, including covenants that restrict the ability of the Company and its subsidiaries to incur additional indebtedness, dispose of significant assets, make certain investments, including any acquisitions other than permitted acquisitions, make certain payments, enter into sale and leaseback transactions, grant liens on its assets or rate management transactions, subject to certain limitations. These restrictions could adversely affect our business.profitability.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

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 third quarter of fiscal ~~2020:~~2021:

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
April 1, 2020 - April 30, 2020 — $ — — $ —
May 1, 2020 - May 31, 2020 788 $ 10.90 — $ —
June 1, 2020 - June 30, 2020 — $ — — $ —
788 $ 10.90 — $ —


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
April 1, 2021 - April 30, 2021	9	$	23.00	—	$	—
May 1, 2021 - May 31, 2021	6,919	$	17.54	—	$	—
June 1, 2021 - June 30, 2021	—	$	—	—	$	—
	6,928	$	17.24	—	$	—

(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

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

3436

Table of Contents

ITEM 6. EXHIBITS

Exhibit No.

Description

Method of Filing

(a)

Purchase Agreement ~~and Plan of Merger by and among Digi International Inc., Namath Merger Sub. Inc., Opengear, Inc. and Shareholder Representative Services LLC, as representative,~~ dated as of ~~November 7, 2019~~March 3, 2021 by and between the Company and Piper Sandler & Co., as representative of the several underwriters named in Schedule I thereto* (1)

Incorporated by Reference

(a)

Restated Certificate of Incorporation of the Company, as amended (2)

Incorporated by Reference

(b)

Amended and Restated By-Laws of the Company (3)

Incorporated by Reference

(a)

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

Filed Electronically

(b)

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

Filed Electronically

Section 1350 Certification

Filed Electronically

101

The following materials from Digi International Inc.'s Quarterly Report on Form 10-Q for the fiscal period ended June 30, ~~2020,~~2021, as filed with the Security and Exchange Commission, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations; (ii) Condensed Consolidated Statements of Comprehensive Income; (iii) Condensed Consolidated Balance Sheets; (iv) Condensed Consolidated Statements of Cash Flows; (v) Condensed Consolidated Statements of Stockholders' Equity; and (vi) the Notes to the Condensed Consolidated Financial Statements.

Filed Electronically

104

The cover page from Digi International Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, ~~2020~~2021 is formatted in iXBRL (included in Exhibit 101).

____________

* Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Digi agrees to furnish to the Commission a copy of any omitted schedule upon request.

** 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~~1.1 to the Company's Current Report on Form 8-K filed on ~~November 8, 2019.~~March 5, 2021.

(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.

(3)Incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on April 30, 2020.

3537

Table of Contents

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:

August ~~7, 2020~~6, 2021

By:

/s/ James J. Loch

James J. Loch

Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Authorized Officer)

3638


	June 30, 2020		September 30, 2019
Accounts receivable, net:
Accounts receivable	$	60,106	$	60,062
Less allowance for doubtful accounts	2,178		968
Less reserve for future returns and pricing adjustments	4,052		2,677
Accounts receivable, net	$	53,876	$	56,417
Inventories:
Raw materials	$	33,080	$	12,308
Work in process	—		565
Finished goods	13,470		26,891
Inventories	$	46,550	$	39,764


Fiscal year	Amount
Remainder of 2020	$	873
2021	3,308
2022	2,911
2023	2,656
2024	2,450
2025	2,348
Thereafter	9,219
Total future undiscounted lease payments	23,765
Less imputed interest	(4,426)
Total reported lease liability	$	19,339


	Nine months ended June 30,				% increase
	2020	2019	(decrease)
Euro	1.1219	1.1359	(1.2)	%
British Pound	1.2273	1.2915	(5.0)	%
Japanese Yen	0.0093	0.0090	3.3	%
Canadian Dollar	0.7307	0.7499	(2.6)	%


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
April 1, 2020 - April 30, 2020	—	$	—	—	$	—
May 1, 2020 - May 31, 2020	788	$	10.90	—	$	—
June 1, 2020 - June 30, 2020	—	$	—	—	$	—
	788	$	10.90	—	$	—