What changed in this filing

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Item 1. Financial Statements

2021-05-07 compared with 2021-02-05 · 197 added, 142 removed, 482 unchanged (41% of the section changed)

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three months ended December 31,

Three months ended March 31, Six months ended March 31,

2021 2020 2021 2020

(in thousands, except per share data)

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Total operating expenses 37,087 34,917 78,252 65,864

Operating loss ( 146 ) ( 483 )

Operating income 3,370 3,724 3,224 3,241

Other expense, net:

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Total other expense, net ( 168 ) ( 1,595 ) ( 762 ) ( 2,032 )

Loss before income taxes ( 740 ) ( 920 )

Income tax benefit ( 433 ) ( 1,128 )

Net (loss) income $ ( 307 ) $ 208

Net (loss) income per common share:

Income before income taxes 3,202 2,129 2,462 1,209

Income tax expense (benefit) 274 125 ( 159 ) ( 1,003 )

Net income $ 2,928 $ 2,004 $ 2,621 $ 2,212

Net income per common share:

Basic $ 0.09 $ 0.07 $ 0.09 $ 0.08

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DIGI INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three months ended December 31,

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three months ended March 31, Six months ended March 31,

2021 2020 2021 2020

(in thousands)

Net (loss) income $ ( 307 ) $ 208

Other comprehensive income:

Net income $ 2,928 $ 2,004 $ 2,621 $ 2,212

Other comprehensive (loss) income:

Foreign currency translation adjustment ( 267 ) ( 2,484 ) 1,605 176

Other comprehensive income 1,872 2,660

Comprehensive income $ 1,565 $ 2,868

Comprehensive income (loss) $ 2,661 $ ( 480 ) $ 4,226 $ 2,388

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

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CONDENSED CONSOLIDATED BALANCE SHEETS

December 31, 2020 September 30, 2020

March 31, 2021 September 30, 2020

(in thousands, except share data)

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three months ended December 31,

Six months ended March 31,

(in thousands)

Operating activities:

Net (loss) income $ ( 307 ) $ 208

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:

Net income $ 2,621 $ 2,212

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Depreciation of property, equipment and improvements 2,164 2,289

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Deferred income tax provision 682 756

Loss on sale of property and equipment 70 —

Change in fair value of contingent consideration 5,772 ( 128 )

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Investing activities:

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

Acquisition of businesses, net of cash acquired ( 7,095 ) ( 136,098 )

Purchase of property, equipment, improvements and certain other intangible assets ( 1,287 ) ( 434 )

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Payments on long-term debt ( 15,625 ) ( 625 )

Payments for contingent consideration ( 4,200 ) —

Proceeds from issuance of stock, net of offering expenses 73,830 —

Proceeds from stock option plan transactions 6,620 4,724

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Purchases of common stock ( 1,865 ) ( 1,684 )

Net cash (used in) provided by financing activities ( 12,793 ) 112,869

Net cash provided by financing activities 59,997 112,931

Effect of exchange rate changes on cash and cash equivalents 148 1,578

Net decrease in cash and cash equivalents ( 4,866 ) ( 43,720 )

Net increase (decrease) in cash and cash equivalents 73,060 ( 34,706 )

Cash and cash equivalents, beginning of period 54,129 92,792

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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Additional Other Total

Additional Accum.

Common Stock Treasury Stock Paid-In Retained Comprehensive Stockholders'

(in thousands) Shares Par Value Shares Value Capital Earnings Loss Equity

Balances December 31, 2019 35,226 $ 352 6,431 $ ( 55,702 ) $ 272,393 $ 162,127 $ ( 22,855 ) $ 356,315

Net income — — — — — 2,004 — 2,004

Other comprehensive loss — — — — — — ( 2,484 ) ( 2,484 )

Employee stock purchase plan issuances — — ( 28 ) 246 ( 16 ) — — 230

Taxes paid for net share settlement of share-based payment awards — — 6 ( 107 ) — — — ( 107 )

Issuance of stock under stock award plans 138 2 — — 562 — — 564

Stock-based compensation expense — — — — 1,841 — — 1,841

Balances, March 31, 2020 35,364 $ 354 6,409 $ ( 55,563 ) $ 274,780 $ 164,131 $ ( 25,339 ) $ 358,363

Balances, September 30, 2019 34,608 $ 346 6,367 $ ( 54,339 ) $ 266,567 $ 161,919 $ ( 25,515 ) $ 348,978

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Stock-based compensation expense — — — — 3,441 — — 3,441

Balances, March 31, 2020 35,364 $ 354 6,409 $ ( 55,563 ) $ 274,780 $ 164,131 $ ( 25,339 ) $ 358,363

Balances, December 31, 2020 36,090 $ 361 6,412 $ ( 56,333 ) $ 285,536 $ 170,023 $ ( 21,945 ) $ 377,642

Net income — — — — — 2,928 — 2,928

Other comprehensive loss — — — — — — ( 267 ) ( 267 )

Issuance of common stock, net of offering expenses 4,025 40 — — 73,790 — — 73,830

Employee stock purchase plan issuances — — ( 18 ) 157 128 — — 285

Taxes paid for net share settlement of share-based payment awards — — 19 ( 419 ) — — — ( 419 )

Issuance of stock under stock award plans 327 3 .

— 2,673 — — 2,676

Stock-based compensation expense — — — — 2,477 — — 2,477

Balances, March 31, 2021 40,442 $ 404 6,413 $ ( 56,595 ) $ 364,604 $ 172,951 $ ( 22,212 ) $ 459,152

Balances, September 30, 2020 35,513 $ 355 6,353 $ ( 55,109 ) $ 279,741 $ 170,330 $ ( 23,817 ) $ 371,500

Net loss ( 307 ) ( 307 )

Other comprehensive income 1,872 1,872

Net income — — — — — 2,621 — 2,621

Other comprehensive loss — — — — — — 1,605 1,605

Issuance of common stock, net of offering expenses 4,025 40 — — 73,790 — — 73,830

Employee stock purchase plan issuances — — ( 43 ) 379 240 — — 619

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Stock-based compensation expense — — — — 4,222 — — 4,222

Balances, December 31, 2020 36,090 $ 361 6,412 $ ( 56,333 ) $ 285,536 $ 170,023 $ ( 21,945 ) $ 377,642

Balances, March 31, 2021 40,442 $ 404 6,413 $ ( 56,595 ) $ 364,604 $ 172,951 $ ( 22,212 ) $ 459,152

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

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Potential Impacts of COVID-19 on our Business

The impact of the coronavirus disease 2019 ("COVID-19") pandemic continues to unfold.

The impact of the coronavirus ("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.

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This standard did not have a material impact on our consolidated financial statements.

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.

Due to the timing of the acquisition, the impact of the Haxiot acquisition on our results of operations for the six days in March 2021 is immaterial, so results of operations for March 2021 will be included in our 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 $ 7.1 million of cash on hand.

The future earn-out payments are based on revenue performance from Haxiot for the annual periods ending December 31, 2021 and December 31, 2022.

The cumulative amount of these earn-outs for the annual periods ending December 31, 2021 and December 31, 2022, will not exceed $ 3.0 million and $ 5.0 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.

As a result, we preliminarily recorded $ 15.1 million of goodwill and accrued the maximum $ 8.0 million of contingent consideration on our balance sheet as of March 31, 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 & Services segment by enhancing Digi's embedded systems portfolio and immediately extends the company's market reach with a complete LoRaWAN ® -based solutions offering.

Costs directly related to the acquisition of $ 0.2 million incurred in the second 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.

Acquisition of Opengear, Inc.

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Total $ 153,158

The Condensed Consolidated Balance Sheet as of December 31, 2020 reflects the 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 Condensed Consolidated Balance Sheet as of March 31, 2021 reflects the final allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition.

EARNINGS PER SHARE

Basic net (loss) income per common share is calculated based on the weighted average number of common shares outstanding during the period.

Diluted net income per common share is computed by dividing net income by the weighted average number of common shares and potentially dilutive common shares outstanding during the period.

Potentially dilutive common shares result from dilutive common stock options and restricted stock units.

Diluted net loss per common share is computed by dividing net loss by the weighted average number of common shares.

All potentially dilutive common equivalent shares are excluded from the calculations of net loss per diluted share due to their anti-dilutive effect for the three months ended December 31, 2020.

EARNINGS PER SHARE (CONTINUED)

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

Three months ended December 31,

Net (loss) income $ ( 307 ) $ 208

Denominator for basic net (loss) income per common share — weighted average shares outstanding 29,374 28,467

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 March 31, Six months ended March 31,

2021 2020 2021 2020

Net income $ 2,928 $ 2,004 $ 2,621 $ 2,212

Denominator for basic net income per common share — weighted average shares outstanding 30,900 28,881 30,129 28,673

Effect of dilutive securities:

Stock options and restricted stock units 1,323 605 1,307 912

Denominator for diluted net (loss) income per common share — adjusted weighted average shares 29,374 29,614

Net (loss) income per common share, basic $ ( 0.01 ) $ 0.01

Net (loss) income per common share, diluted $ ( 0.01 ) $ 0.01

For the three months ended December 31, 2020 and 2019, there were 547,045 and 594,447 potentially dilutive shares, respectively.

Denominator for diluted net income per common share — adjusted weighted average shares 32,223 29,486 31,436 29,585

Net income per common share, basic $ 0.09 $ 0.07 $ 0.09 $ 0.08

Net income per common share, diluted $ 0.09 $ 0.07 $ 0.08 $ 0.07

For the three months ended March 31, 2021 and 2020, there were 37,248 and 713,980 potentially dilutive shares, respectively.

For the six months ended March 31, 2021 and 2020, there were 37,248 and 592,780 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.

In addition, due to the net loss for the three months ended December 31, 2020, there were 1,157,727 common stock options and restricted stock units that were not included in the above computation of diluted earnings per share.

SELECTED BALANCE SHEET DATA

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Accounts receivable $ 50,529 $ 65,027

Less allowance for doubtful accounts 2,987 3,778

Less reserve for future returns and pricing adjustments 2,295 2,022

Less allowance for credit losses 2,907 3,778

Less reserve for future credit returns and pricing adjustments 3,514 2,022

Accounts receivable, net $ 44,108 $ 59,227

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Inputs Considered as

December 31, 2020 Level 1 Level 2 Level 3

Contingent consideration on acquired businesses $ 10,000 $ — $ — $ 10,000

March 31, 2021 Level 1 Level 2 Level 3

Preliminary contingent consideration on acquired business $ 8,000 $ — $ — $ 8,000

Total liabilities measured at fair value $ 8,000 $ — $ — $ 8,000

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September 30, 2020 Level 1 Level 2 Level 3

Contingent consideration on acquired businesses $ 4,228 $ — $ — $ 4,228

Contingent consideration on acquired business $ 4,228 $ — $ — $ 4,228

Total liabilities measured at fair value $ 4,228 $ — $ — $ 4,228

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We paid the first installment of $ 0.9 million during the third quarter of fiscal 2020.

The fair value of the remaining liability for contingent consideration for the acquisition of Opengear was equal to the maximum payout of $ 10.0 million at December 31, 2020 due to a substantial increase in revenue over our previous expectations.

We expect to pay this amount during the second quarter of fiscal 2021.

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).

Due to the timing of the acquisition, we recorded a preliminary amount of the contingent consideration of $ 8.0 million at March 31, 2021 which is subject to change as part of our completion of purchase accounting.

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 December 31,

Three months ended March 31, Six months ended March 31,

2021 2020 2021 2020

Fair value at beginning of period $ 10,000 $ 14,766 $ 4,228 $ 5,407

Contingent consideration recognized for acquired business 8,000 ( 4,000 ) 8,000 5,100

Contingent consideration payments ( 10,000 ) — ( 10,000 ) —

Change in fair value of contingent consideration — ( 387 ) 5,772 ( 128 )

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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.

The fair value of the contingent consideration at December 31, 2020 was based on the actual achievement of the specified revenue thresholds for Opengear.

Due to the timing of the acquisition, the fair value of the contingent consideration at March 31, 2021 is preliminary and based on the probability of achieving the specified revenue thresholds at 100 % for Haxiot.

GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Amortizable intangible assets were (in thousands):

December 31, 2020 September 30, 2020

March 31, 2021 September 30, 2020

amount Accum.

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Total $ 226,029 $ ( 112,487 ) $ 113,542 $ 225,059 $ ( 103,811 ) $ 121,248

Amortization expense was $ 4.0 million and $ 2.4 million for the three months ended December 31, 2020 and 2019, respectively.

Amortization expense was $ 3.9 million and $ 4.1 million for the three months ended March 31, 2021 and 2020, respectively, and $ 7.9 million and $ 6.6 million for the six months ended March 31, 2021 and 2020, respectively.

Amortization expense is recorded on our condensed consolidated statements of operations within cost of sales and in general and administrative expense.

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

2021 (nine months) $ 11,616

2021 (six months) $ 7,736

2022 $ 14,722

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

Three months ended December 31,

Six months ended March 31,

Products and Services IoT

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Balance on September 30, 2020 $ 160,365 $ 49,770 $ 210,135

Acquisition 15,095 — 15,095

Adjustment (see Note 2) 846 — 846

Foreign currency translation adjustment 767 690 1,457

Balance at December 31, 2020 $ 162,045 $ 50,321 $ 212,366

Balance at March 31, 2021 $ 177,073 $ 50,460 $ 227,533

Goodwill represents the excess of cost over the fair value of net identifiable assets acquired.

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We have concluded that these operating segments along with our IoT Solutions segment constitute separate reporting units and will be tested individually for impairment.

As of December 31, 2020, we have performed a qualitative assessment and concluded that there is no impairment or triggering events.

As of March 31, 2021, we have performed a qualitative assessment and concluded that there is no impairment or triggering events.

For our fiscal 2020 annual impairment test we concluded that the IoT Products & Services segment and the IoT Solutions segment constitute separate reporting units for purposes of the ASC 350-20-35 "Goodwill Measurement of Impairment" assessment and both units were tested individually for impairment.

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As a result, the market capitalization reconciliation analysis proved support for the reasonableness of the fair values estimated for each individual reporting unit.

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, borrowings under the Credit Facility bear a variable interest rate of LIBOR plus an applicable margin spread from 3.25 % to 1.25 %.

On March 15, 2021, we entered into an amended and restated credit agreement with BMO Harris Bank N.A.

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.

Borrowings under the Credit Facility bear a variable interest rate of LIBOR plus an applicable margin spread from 1.25 % to 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 December 31, 2020 was 0.6 %.

We also incurred debt issuance costs under the Credit Facility of $ 2.6 million in the first quarter of fiscal 2020.

These issuance costs are 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.

The fair values of the Term Loan and Revolving Loan approximated carrying value at December 31, 2020.

Our weighted average interest rate at March 31, 2021 was 0.5 %.

The additional debt issuance costs in addition to the remaining balance under the Prior Credit Facility totaled $ 2.6 million and is being amortized using the straight-line method over the term of the loan and reported in interest expense.

The Revolving Loan is due in a lump sum payment at maturity on March 15, 2026.

The fair value of the Revolving Loan approximated carrying value at March 31, 2021.

INDEBTEDNESS (CONTINUED)

The following table is a summary of our long-term indebtedness at December 31, 2020 (in thousands):

Term loan $ 47,500

The following table is a summary of our long-term indebtedness at March 31, 2021 (in thousands):

Revolving loan $ 48,118

Total loans 48,118

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Total long-term debt, net of current portion $ 45,541

The following table is a summary of future maturities of our aggregate long-term debt at December 31, 2020 (in thousands):

2021 (nine months) $ 1,875

The following table is a summary of future maturities of our aggregate long-term debt at March 31, 2021 (in thousands):

2021 (six months) $ —

Total long-term debt $ 48,118

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Among other thing, these covenants require us to maintain a certain financial ratio (net leverage ratio and minimum fixed charge ratio).

At December 31, 2020, we were in compliance with our debt covenants.

At March 31, 2021, we were in compliance with our debt covenants.

Amounts borrowed under the Credit Facility are secured by substantially all of our assets.

STOCKHOLDERS' EQUITY

Public Offering of Common Stock

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 registered pursuant to a 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 working capital and general corporate purposes.

We may in the future, use the proceeds to acquire or invest in complementary businesses, products and technologies.

SEGMENT INFORMATION

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• 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 installments and date center applications 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 system on modules ("SOMs").

While cellular is used, other communication protocols can be used such as Zigbee, Bluetooth or Radio-Frequency ("RF") based on application.

• Infrastructure Management - includes connect sensors that will be cellular enabled devices that are battery operated, as well as other types of console server applications that are more DAL based compared to Console Servers.

They do have some products that are not using cellular communications, but a large part of the portfolio does use cellular communication.

We believe these four operating segments have similar qualitative and quantitative factors which allow us to aggregate them under the IoT Products & Services reportable segment.

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.

SEGMENT INFORMATION (CONTINUED)

The four 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 income (loss).

Our CODM reviews and makes business decisions which includes a primary review of operating income (loss) but also includes gross profit.

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 measure of 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 (loss) has been updated for all periods presented.

The change to the business segment operating income (loss) aligns with the update to how the CODM assesses performance and allocates resources for our business segments.

SEGMENT INFORMATION (CONTINUED)

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 December 31,

Three months ended March 31, Six months ended March 31,

2021 2020 2021 2020

IoT Products & Services $ 65,632 $ 66,890 $ 127,412 $ 121,503

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IoT Solutions ( 1,213 ) ( 4,638 ) ( 2,628 ) ( 9,518 )

Total operating loss $ ( 146 ) $ ( 483 )

Total operating income $ 3,370 $ 3,724 $ 3,224 $ 3,241

Depreciation and Amortization

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

Three months ended December 31,

Six months ended March 31,

IoT Products & Services $ 1,287 $ 407

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Total expended for property, plant and equipment $ 1,287 $ 434

* Excluded from this amount is $ 882 and $ 186 of transfers of inventory to property plant and equipment for subscriber assets for the three months ended December 31, 2020 and 2019, respectively.

* Excluded from this amount is $ 1,399 and $ 743 of transfers of inventory to property plant and equipment for subscriber assets for the six months ended March 31, 2021 and 2020, respectively.

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

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

Three months ended December 31,

Three months ended March 31, Six months ended March 31,

2021 2020 2021 2020

North America, primarily the United States $ 56,423 $ 57,374 $ 110,441 $ 104,910

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

Three months ended December 31,

Three months ended March 31, Six months ended March 31,

2021 2020 2021 2020

Transferred at a point in time $ 69,144 $ 66,765 $ 133,332 $ 123,065

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In these cases, we retain the ownership of the equipment that the customer uses.

The total net book value of subscriber assets of $ 2.4 million and $ 2.0 million as of December 31, 2020 and September 30, 2020, respectively, are included in property, equipment and improvements, net.

Depreciation expense for these subscriber assets, which is included in cost of sales, was $ 0.5 million and $ 0.3 million for the three months ended December 31, 2020 and December 31, 2019, respectively.

The total net book value of subscriber assets of $ 2.4 million and $ 2.0 million as of March 31, 2021 and September 30, 2020, respectively, are included in property, equipment and improvements, net.

Depreciation expense for these subscriber assets, which is included in cost of sales, was $ 0.5 million and $ 0.3 million for the three months ended March 31, 2021 and March 31, 2020, respectively and $ 1.0 million and $ 0.7 million for the six months ended March 31, 2021 and March 31, 2020, respectively.

We depreciate the cost of this equipment over its useful life (typically three years ).

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Changes in unearned revenue were (in thousands):

Three months ended December 31,

Three months ended March 31, Six months ended March 31,

2021 2020 2021 2020

Unearned revenue, beginning of period $ 13,066 $ 6,802 $ 9,341 $ 5,025

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This includes unearned revenue and unbilled amounts that will be recognized as revenue in future periods.

As of December 31, 2020, approximately $ 13.5 million of revenue is expected to be recognized from remaining performance obligations for subscription contracts.

As of March 31, 2021, approximately $ 12.8 million of revenue is expected to be recognized from remaining performance obligations for subscription contracts.

We expect to recognize revenue on approximately $ 8.1 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 .

Our income tax benefit was $ 0.4 million for the three months ended December 31, 2020.

Included in this benefit was a net tax benefit discretely related to the three months ended December 31, 2020 of $ 0.3 million.

Our income tax benefit was $ 0.2 million for the six months ended March 31, 2021.

Included in this benefit was a net tax benefit discretely related to the six months ended March 31, 2021 of $ 0.8 million.

This benefit primarily was the result of excess tax benefits recognized on stock compensation.

Income tax benefit was $ 1.1 million for the three months ended December 31, 2019.

Included in this benefit was a net tax benefit discretely related to the three months ended December 31, 2019 of $ 1.0 million.

Income tax benefit was $ 1.0 million for the six months ended March 31, 2020.

Included in this benefit was a net tax benefit discretely related to the six months ended March 31, 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 three months ended December 31, 2019, our effective tax rate before items discretely related to the period was less than the U.S.

For the six months ended March 31, 2020, our effective tax rate before items discretely related to the period was less than the U.S.

statutory rate.

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Unrecognized tax benefits as of September 30, 2020 $ 2,600

Decreases related to:

Expiration of statute of limitations ( 54 )

Unrecognized tax benefits as of December 31, 2020 $ 2,546

The total amount of unrecognized tax benefits at December 31, 2020 that, if recognized, would affect our effective tax rate was $ 2.4 million, after considering the impact of interest and deferred benefit items.

Unrecognized tax benefits as of March 31, 2021 $ 2,546

The total amount of unrecognized tax benefits at March 31, 2021 that, if recognized, would affect our effective tax rate was $ 2.4 million, after considering the impact of interest and deferred benefit items.

We expect that the total amount of unrecognized tax benefits will decrease by approximately $ 0.1 million over the next 12 months.

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Balance at Warranties Settlements Balance at

Period October 1 issued made December 31

Three months ended December 31, 2020 $ 942 $ 123 $ ( 100 ) $ 965

Three months ended December 31, 2019 $ 1,012 $ 74 $ ( 87 ) $ 999

Period January 1 issued made March 31

Three months ended March 31, 2021 $ 965 $ 66 $ ( 108 ) $ 923

Three months ended March 31, 2020 $ 999 $ 328 $ ( 467 ) $ 860

Balance at Warranties Settlements Balance at

Period October 1 issued made March 31

Six months ended March 31, 2021 $ 942 $ 189 $ ( 208 ) $ 923

Six months ended March 31, 2020 $ 1,012 $ 402 $ ( 554 ) $ 860

All of our leases are operating leases and primarily consist of leases for office space.

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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.

We generally use a collateralized incremental borrowing rate based

LEASES (CONTINUED)

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.

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We recognize the related rent expense on a straight-line basis from the commencement date to the end of the lease term.

LEASES (CONTINUED)

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

Balance Sheet Location December 31,

Balance Sheet Location March 31,

2021 September 30,

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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 December 31,

Three months ended March 31, Six months ended March 31,

2021 2020 2021 2020

Operating lease cost $ 897 $ 815 $ 1,758 $ 1,629

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

Three months ended December 31,

Six months ended March 31,

Cash paid for amounts included in the measurement of operating lease liabilities $ 1,784 $ 1,175

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Non-cash tenant improvement allowance $ 1,000 $ —

At December 31, 2020 the weighted average remaining lease term of our operating leases was 6.3 years and the weighted average discount rate for these leases was 4.6 %.

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 December 31, 2020 (in thousands):

At March 31, 2021 the weighted average remaining lease term of our operating leases was 6.4 years and the weighted average discount rate for these leases was 4.5 %.

LEASES (CONTINUED)

Fiscal year Amount

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during the three months ended December 31, 2020.

In the second quarter of fiscal 2021 we recorded an additional $ 0.2 million related to this restructuring.

Below is a summary of the restructuring charges and other activity (in thousands):

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Foreign currency fluctuation ( 39 )

Balance at December 31, 2020 $ 196

Balance at March 31, 2021 $ 256

COMMITMENTS AND CONTINGENCIES

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Please refer to Note 13 to our condensed consolidated financial statements for additional information.

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 products.

The suit was brought in the Superior Court of the Province of Quebec in the District of Quebec (Canada) and alleges certain Digi products it purchased and incorporated into street lighting systems in a Canadian city were defective causing some of the street lights to malfunction.

It alleges damages of just over CAD 1.0 million.

We intend to defend ourselves against DimOnOff's claims.

At this time we cannot assess the likelihood or amount of any potential loss.

It alleged damages of just over CAD 1.0 million.

COMMITMENTS AND CONTINGENCIES (CONTINUED)

second quarter of fiscal 2021, the lawsuit was settled and no payment will be made by us.

However, we will be providing DimOnOff reduced product pricing on a limited number of products for an amount substantially lower than what was claimed in the lawsuit.

In addition to the matter discussed above, in the normal course of business, we are subject to various claims and litigation.

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Shares subject to awards under the 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 2021 Plan.

The authority to grant options under the 2020 Plan and to set other terms and conditions rests with the Compensation Committee of the Board of Directors.

The authority to grant options under the 2021 Plan and set other terms and conditions rests with the Compensation Committee of the Board of Directors.

The 2021 Plan authorizes the issuance of up to 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.

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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 2021 Plan is scheduled to expire on January 28, 2031.

Options under the 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 is determined by our Compensation Committee but will not be less

STOCK-BASED COMPENSATION (CONTINUED)

than the fair market value of our common stock based on the closing price as of the date of grant.

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 December 31, 2020, there were approximately 648,815 shares available for future grants under the 2020 Plan.

Cash received from the exercise of stock options was $ 3.9 million and $ 4.2 million for the three months ended December 31, 2020 and December 31, 2019, respectively.

As of March 31, 2021, there were approximately 1,352,093 shares available for future grants under the 2021 Plan.

Cash received from the exercise of stock options was $ 6.6 million and $ 4.7 million for the six months ended March 31, 2021 and March 31, 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.

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Tax with withholding obligations otherwise occur by the employee paying cash to us for the withholding.

During the three months ended December 31, 2020 and 2019, our employees forfeited 83,928 shares and 88,723 shares, respectively, in order to satisfy respective withholding tax obligations of $ 1.4 million and $ 1.6 million.

During the six months ended March 31, 2021 and 2020, our employees forfeited 102,588 shares and 95,209 shares, respectively, in order to satisfy respective withholding tax obligations of $ 1.9 million and $ 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.

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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 million for both of the three-month periods ended December 31, 2020 and December 31, 2019, respectively.

Pursuant to the ESPP, 25,246 and 24,738 common shares were issued to employees during the three months ended December 31, 2020 and December 31, 2019, respectively.

ESPP contributions by employees were $ 0.6 million for the six months ended March 31, 2021 and $ 0.5 million for the six months ended March 31, 2020.

Pursuant to the ESPP, 43,106 and 53,085 common shares were issued to employees during the six months ended March 31, 2021 and March 31, 2020, respectively.

Shares are issued under the ESPP from treasury stock.

As of December 31, 2020, 686,468 common shares were available for future issuances under the ESPP.

As of March 31, 2021, 668,608 common shares were available for future issuances under the ESPP.

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 December 31,

Three months ended March 31, Six months ended March 31,

2021 2020 2021 2020

Cost of sales $ 89 $ 78 $ 171 $ 142

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Forfeited / Canceled ( 129 ) 13.98

Balance at December 31, 2020 3,385 $ 12.86 4.2 $ 20,433

Exercisable at December 31, 2020 1,983 $ 11.28 3.1 $ 15,103

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $ 18.90 as of December 31, 2020, which would have been received by the option holders had all option holders exercised their options as of that date.

Balance at March 31, 2021 3,131 $ 13.09 4.1 $ 18,714

Exercisable at March 31, 2021 1,878 $ 11.40 3.0 $ 14,248

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $ 18.99 as of March 31, 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.

STOCK-BASED COMPENSATION (CONTINUED)

The total intrinsic value of all options exercised during the three months ended December 31, 2020 was $ 2.2 million and during the three months ended December 31, 2019 was $ 3.0 million.

The total intrinsic value of all options exercised during the six months ended March 31, 2021 was $ 5.1 million and during the six months ended March 31, 2020 was $ 3.3 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:

Three months ended December 31,

Six months ended March 31,

Weighted average per option grant date fair value $ 7.42 $ 6.34

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We use historical data to estimate option exercise and employee termination information within the valuation model.

The expected term of options granted is derived from the vesting period and historical information and represents the period of time that options granted are expected to be outstanding.

The expected term of options granted is derived from the vesting period and historical information and represents the period of

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 December 31, 2020, the total unrecognized compensation cost related to non-vested stock options was $ 7.9 million and the related weighted average period over which it is expected to be recognized is approximately 3.1 years.

As of March 31, 2021, the total unrecognized compensation cost related to non-vested stock options was $ 7.3 million and the related weighted average period over which it is expected to be recognized is approximately 2.9 years.

Non-vested Stock Units

The following table presents a summary of our non-vested restricted stock as of December 31, 2020 and changes during the three months then ended (in thousands, except per common share amounts):

Number of Awards Weighted Average Grant Date Fair Value

The following table presents a summary of our non-vested restricted stock and performance stock units as of March 31, 2021 and changes during the six months then ended (in thousands, except per common share amounts):

Number of Awards Weighted Average Grant Date Fair Value Number of Awards Weighted Average Grant Date Fair Value

Nonvested at September 30, 2020 972 $ 13.20 — $ —

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Canceled ( 73 ) $ 13.45 — $ —

Nonvested at December 31, 2020 959 $ 14.26

As of December 31, 2020, the total unrecognized compensation cost related to non-vested stock units was $ 12.3 million.

Nonvested at March 31, 2021 907 $ 15.26 18 $ 25.15

As of March 31, 2021, the total unrecognized compensation cost related to non-vested stock units was $ 12.2 million.

The related weighted average period over which this cost is expected to be recognized is approximately 1.6 years.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements