Exhibit 99.3
DIGI INTERNATIONAL INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Digi International Inc. (“we”, “us”, “our”, “Digi” or “the Company”) completed the acquisition of Opengear, Inc. (“Opengear”) on December 13, 2019. 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 million comprised of cash on hand and proceeds from our credit facility. Founded in 2004, Opengear delivers critical IT infrastructure, including failover-to-cellular and out-of-band management solutions, to a broad range of Fortune 100 and other customers. Its provisioning, orchestration and remote management of network devices, through innovative software and appliances, enables technical staff to manage their data centers and remote network locations.
The following unaudited pro forma condensed combined financial statements are based on our historical consolidated financial statements and Opengear’s respective historical consolidated financial statements, adjusted to give effect to our acquisition of Opengear and the related financing of the acquisition. The unaudited pro forma condensed combined statements of operations for the twelve months ended September 30, 2019 give effect to the acquisition as if it had occurred on October 1, 2018, the beginning of our fiscal year 2019. The unaudited pro forma condensed combined balance sheet as of September 30, 2019, gives effect to the Opengear transaction as if it had occurred on September 30, 2019.
The assumptions and estimates underlying the unaudited adjustments to the pro forma condensed combined financial statements are described in the accompanying notes, which should be read together with the unaudited pro forma condensed combined financial statements.
The unaudited pro forma condensed combined financial statements should be read together with our historical consolidated financial statements, which are included in our latest annual report on Form 10-K and quarterly report on Form 10-Q, and the historical financial information of Opengear included in the current report on Form 8-K, as amended, to which this is an exhibit.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2019
(in thousands)
| | | Digi International Inc. Historical | | | Opengear Historical | | | Pro Forma Adjustments | | | | Pro Forma Combined | |
| ASSETS | | | | | | | | | | | | | | | | | |
| Current assets: | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 92,792 | | | $ | 9,571 | | | $ | (42,385 | ) | (e) | | $ | 59,978 | |
| Accounts receivable, net | | | 56,417 | | | | 7,758 | | | | — | | | | | 64,175 | |
| Inventories | | | 39,764 | | | | 4,932 | | | | — | | | | | 44,696 | |
| Other current assets | | | 3,574 | | | | 2,196 | | | | (101 | ) | (g)(j) | | | 5,669 | |
| Total current assets | | | 192,547 | | | | 24,457 | | | | (42,486 | ) | | | | 174,518 | |
| Property, equipment and improvements, net | | | 13,857 | | | | 181 | | | | — | | | | | 14,038 | |
| Intangible assets, net | | | 30,667 | | | | — | | | | 102,700 | | (a) | | | 133,367 | |
| Goodwill | | | 153,422 | | | | — | | | | 60,436 | | (h) | | | 213,858 | |
| Deferred tax assets | | | 7,330 | | | | 74 | | | | — | | | | | 7,404 | |
| Other non-current assets | | | 875 | | | | 381 | | | | — | | | | | 1,256 | |
| Total assets | | $ | 398,698 | | | $ | 25,093 | | | $ | 120,650 | | | | $ | 544,441 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | | | | | | | | |
| Accounts payable | | $ | 21,183 | | | $ | 2,364 | | | $ | — | | | | $ | 23,547 | |
| Accrued compensation | | | 8,733 | | | | 2,456 | | | | — | | | | | 11,189 | |
| Unearned revenue | | | 5,025 | | | | — | | | | — | | | | | 5,025 | |
| Contingent consideration on acquired businesses | | | 5,407 | | | | — | | | | 9,100 | | (i) | | | 14,507 | |
| Current portion of long-term debt | | | — | | | | — | | | | 1,986 | | (c) | | | 1,986 | |
| Other current liabilities | | | 4,110 | | | | 645 | | | | (269 | ) | (g)(j) | | | 4,486 | |
| Total current liabilities | | | 44,458 | | | | 5,465 | | | | 10,817 | | | | | 60,740 | |
| Income taxes payable | | | 1,192 | | | | — | | | | — | | | | | 1,192 | |
| Deferred tax liabilities | | | 261 | | | | 8 | | | | 24,803 | | (j) | | | 25,072 | |
| Other non-current liabilities | | | 3,809 | | | | 963 | | | | — | | | | | 4,772 | |
| Long-term debt | | | — | | | | — | | | | 105,592 | | (c) | | | 105,592 | |
| Total liabilities | | | 49,720 | | | | 6,436 | | | | 141,212 | | | | | 197,368 | |
| Stockholders’ equity: | | | | | | | | | | | | | | | | | |
| Preferred stock | | | — | | | | — | | | | — | | | | | — | |
| Common stock | | | 346 | | | | 1 | | | | (1 | ) | (f) | | | 346 | |
| Additional paid-in capital | | | 266,567 | | | | 2,734 | | | | (2,734 | ) | (f) | | | 266,567 | |
| Retained earnings | | | 161,919 | | | | 15,462 | | | | (17,367 | ) | (f) | | | 160,014 | |
| Accumulated other comprehensive loss | | | (25,515 | ) | | | 460 | | | | (460 | ) | | | | (25,515 | ) |
| Treasury stock | | | (54,339 | ) | | | — | | | | — | | | | | (54,339 | ) |
| Total stockholders’ equity | | | 348,978 | | | | 18,657 | | | | (20,562 | ) | | | | 347,073 | |
| Total liabilities and stockholders’ equity | | $ | 398,698 | | | $ | 25,093 | | | $ | 120,650 | | | | $ | 544,441 | |
See accompanying notes to the pro forma financial information.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 2019
(in thousands, except per share data)
| | | Digi
International
Inc. Historical | | | Opengear
Historical | | | Pro Forma
Adjustments | | | | Pro Forma
Combined | |
| Revenue | | $ | 254,203 | | | $ | 54,745 | | | $ | — | | | | $ | 308,948 | |
| Cost of sales | | | 135,168 | | | | 14,841 | | | | 1,522 | | (a) | | | 151,531 | |
| Gross profit | | | 119,035 | | | | 39,904 | | | | (1,522 | ) | | | | 157,417 | |
| Operating expenses: | | | | | | | | | | | | | | | | | |
| Sales and marketing | | | 45,801 | | | | — | | | | — | | | | | 45,801 | |
| Research and development | | | 37,564 | | | | — | | | | — | | | | | 37,564 | |
| General and administrative | | | 25,685 | | | | 23,579 | | | | 6,253 | | (a) | | | 55,173 | |
| | | | | | | | | | | | (344 | ) | (b) | | | | |
| Restructuring reversal | | | (87 | ) | | | — | | | | — | | | | | (87 | ) |
| Total operating expenses | | | 108,963 | | | | 23,579 | | | | 5,909 | | | | | 138,451 | |
| Operating income | | | 10,072 | | | | 16,325 | | | | (7,431 | ) | | | | 18,966 | |
| Other income (loss), net: | | | | | | | | | | | | | | | | | |
| Interest income | | | 733 | | | | — | | | | (465 | ) | (k) | | | 268 | |
| Interest expense | | | (102 | ) | | | — | | | | (7,177 | ) | (c) | | | (7,279 | ) |
| Other income, net | | | 442 | | | | 3 | | | | | | | | | 445 | |
| Total other income (loss), net | | | 1,073 | | | | 3 | | | | (7,642 | ) | | | | (6,566 | ) |
| Income before income taxes | | | 11,145 | | | | 16,328 | | | | (15,073 | ) | | | | 12,400 | |
| Income tax provision | | | 1,187 | | | | 3,781 | | | | (3,494 | ) | (d) | | | 1,474 | |
| Net income | | $ | 9,958 | | | $ | 12,547 | | | $ | (11,579 | ) | | | $ | 10,926 | |
| | | | | | | | | | | | | | | | | | |
| Net income per common share: | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.36 | | | | | | | | | | | | $ | 0.39 | |
| Diluted | | $ | 0.35 | | | | | | | | | | | | $ | 0.38 | |
| Weighted average common shares: | | | | | | | | | | | | | | | | | |
| Basic | | | 27,905 | | | | | | | | | | | | | 27,905 | |
| Diluted | | | 28,554 | | | | | | | | | | | | | 28,554 | |
See accompanying notes to the pro forma financial information.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (Unaudited)
Note 1: Basis of Presentation
Our historical consolidated financial statements have been adjusted in the unaudited pro forma condensed combined financial statements to give effect to pro forma events that are (1) directly attributable to the business combination, (2) factually supportable and (3) expected to have a continuing impact on the combined results following the business combination.
The business combination was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. As the acquirer for accounting purposes, we have allocated the total purchase price to Opengear’s tangible and intangible assets acquired and liabilities assumed, based on their fair values at the date of the acquisition, and conformed the accounting policies of Opengear to our own accounting policies.
Our fiscal year end is September 30. Opengear’s historical year-end was December 31. The balance sheet for Opengear included in the unaudited pro forma condensed combined balance sheet is as of September 30, 2019, and the results of operations for Opengear included in the unaudited pro forma condensed combined statement of operations are for the 12 months ended September 30, 2019.
The pro forma condensed combined financial statements do not necessarily reflect what the combined company’s financial condition or results of operations would have been had the acquisition occurred on the dates indicated. They also may not be useful in predicting the future financial condition and results of operations of the combined company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.
The unaudited pro forma condensed combined statements of operations do not reflect the costs of any integration activities or benefits that may result from realization of potential future synergies that may result from the acquisition.
Note 2: Preliminary Purchase Price Allocation
We have performed a preliminary allocation of the purchase price for Opengear to the acquired assets and assumed liabilities, as shown in the following table as of the acquisition date (in thousands):
| Cash | | $ | 148,058 | |
| Contingent consideration | | | 9,100 | |
| Total | | $ | 157,158 | |
| | | | | |
| Fair value of net tangible assets acquired | | $ | 19,032 | |
| Identifiable intangible assets: | | | | |
| Customer relationships | | | 81,000 | |
| Purchased and core technology | | | 13,700 | |
| Trademarks | | | 8,000 | |
| Deferred tax liability on identifiable intangible assets | | | (25,053 | ) |
| Goodwill | | | 60,479 | |
| Total | | $ | 157,158 | |
This preliminary purchase price allocation has been used to prepare pro forma adjustments in the unaudited pro forma condensed combined financial information. The preliminary purchase price may change based on the final working capital valuations and necessary calculations. Thus, the preliminary measures of fair value reflected are subject to changes and such changes could be significant to the unaudited pro forma condensed combined financial information. The final allocation may include (1) changes in allocations to intangible assets and (2) changes to income tax related accounts, as well as changes to other assets and liabilities, which may impact pro forma adjustments to the unaudited pro forma condensed combined financial information.
Note 3: Pro Forma Adjustments
| (a) | As part of the preliminary valuation analysis, we identified intangible assets, including customer relationships, purchased and core technology, and trade names. The following table summarizes the preliminary estimated fair values of Opengear’s identifiable intangible assets and their estimated useful lives and estimated pro forma amortization expense using a straight-line method (in thousands): |
| | | | | | Life in | | | Yearly | |
| | | Amount | | | Years | | | Amortization | |
| Purchased and core technology | | $ | 13,700 | | | | 9 | | | $ | 1,522 | |
| | | | | | | | | | | | | |
| Tradename | | $ | 8,000 | | | | 12 | | | | 667 | |
| Customer relationships | | $ | 81,000 | | | | 14.5 | | | | 5,586 | |
| Total tradename and customer relationships | | | | | | | | | | | 6,253 | |
| | | | | | | | | | | | | |
| Total amortization | | | | | | | | | | $ | 7,775 | |
These preliminary estimates of fair value and estimated useful lives may differ from final amounts which we will calculate after completing a detailed valuation analysis, and the difference could have a significant impact on the accompanying unaudited pro forma condensed combined financial statements. These amounts also may not be useful in predicting the future financial condition and results of operations of the combined company.
| (b) | Includes the removal of transaction costs related to the acquisition of $0.3 million for the year-ended September 30, 2019, since they do not have a continuing impact. |
| (c) | Represents interest expense resulting from for our $150 million credit facility entered in to commensurate with the acquisition, consisting of (i) a $50 million term loan and (ii) a $100 million revolving loan, both of which are at an interest rate of 6.00%. $60 million of the revolving loan facility was utilized to fund the acquisition of Opengear. Also included in interest expense is a commitment fee on the $40 million of unutilized revolving loan at 0.3% and amortization of $2.6 million of debt issuance costs amortized over the term of the loans. The annualized effect of a 25-basis point change in interest rates would increase or decrease our interest expense by $0.3 million. |
The following table is a summary of our long-term indebtedness (in thousands):
| Revolving loan | | $ | 60,000 | |
| Term loan | | | 50,000 | |
| Total loans | | | 110,000 | |
| Less unamortized issuance costs | | | (2,422 | ) |
| Less current maturities of long-term debt | | | (1,986 | ) |
| Total long-term debt, net of current portion | | $ | 105,592 | |
| (d) | Adjustment to income tax provision relating to adjustment (a), (b), (c) and (k) assuming a blended U.S. federal and state income tax rate of 23.45% for the year ended September 30, 2019. The tax rate does not take into account any historical or possible future tax events that may impact the combined company. |
| (e) | Reflects the cash used to fund the acquisition and $1.9 million of related transaction expenses incurred in Q1 of fiscal year 2020. |
| (f) | Represents the elimination of the historical equity of Opengear. |
| (g) | Reflects the adjustment for assets not acquired or liabilities not assumed as part of the acquisition. |
| (h) | Reflects the adjustment to record preliminary estimate of goodwill resulting from the acquisition. The amount of goodwill in the table above differs from the amount included in the pro forma combined condensed balance sheet as of September 30, 2019 because it was prepared as of December 13, 2019, the date of acquisition. |
| (i) | Represents the preliminary estimate of contingent consideration in the form of earn-out payments recognized as part of the acquisition of Opengear. This preliminary estimate may differ from final amounts the Company will calculate after completing a detailed valuation analysis or after completion of the earn-out period based on actual performance of Opengear. The difference could have a significant impact on the accompanying unaudited pro forma condensed combined financial statements. These amounts also may not be useful in predicting the future financial condition and results of operations of the combined company. |
| (j) | Reflects the adjustment for deferred tax assets and liabilities and taxes payable resulting from the acquisition. |
| (k) | Reflects the adjustment to reduce interest income based on $40 million of cash used to fund the acquisition at a 1.2% annual interest rate. |
