What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-11-24 compared with 2020-11-25 · 347 added, 292 removed, 679 unchanged (48% of the section changed)

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Balances, September 30, 2018 33,813 $ 338 6,385 $ ( 54,216 ) $ 255,936 $ 151,961 $ ( 23,526 ) $ 330,493

Cumulative-effect adjustment from adoption of ASU 2016-09 — — — — 52 ( 33 ) — 19

Net income — — — — — 9,958 — 9,958

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Net income — — — — — 8,411 — 8,411

Other comprehensive loss — — — — — — ( 1,989 ) ( 1,989 )

Other comprehensive income — — — — — — 1,698 1,698

Employee stock purchase plan issuances — — ( 118 ) 1,021 44 — — 1,065

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Other comprehensive income — — — — — — 1,071 1,071

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

Other — — — — — ( 4 ) — ( 4 )

Employee stock purchase plan issuances — — ( 79 ) 694 520 — — 1,214

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Business Description

We are a leading global provider of business and mission-critical and IoT connectivity products, services and solutions.

We are a leading global provider of business and mission-critical IoT connectivity products, services and solutions.

We help our customers create next-generation connected products to deploy, monitor and manage critical communications infrastructures and compliance standards in demanding environments with high levels of security and reliability.

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All intercompany accounts and transactions have been eliminated in consolidation.

Reclassifications

The subcategories within total revenue and total cost of sales were redefined in 2019 into "Product" and "Service".

Fiscal 2018 hardware product and services and solutions amounts have been reclassified to conform to our fiscal 2020 and fiscal 2019 presentation.

Accounting Estimates

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Actual results could differ significantly from those estimates.

Cash Equivalents

Cash and Cash Equivalents

Cash equivalents consist of money market accounts and other highly liquid investments purchased with an original maturity of three months or less.

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We have not experienced any losses in these accounts.

Marketable Securities

Marketable securities previously consisted of certificates of deposit, commercial paper, corporate bonds and government municipal bonds.

All marketable securities were accounted for as available-for-sale and were carried at fair value on our Consolidated Balance Sheets with unrealized gains and losses recorded in accumulated other comprehensive loss within stockholders’ equity.

In order to estimate the fair value for each security in our investment portfolio, we obtained quoted market prices and trading activity for each security when available.

We obtained relevant information from our investment advisor and, if warranted, we may have reviewed the financial solvency of certain security issuers.

We regularly monitored and evaluated the value of our marketable securities.

When assessing marketable securities for other-than-temporary declines in value, we considered several factors.

These factors included:

how significant the decline in value is as a percentage of the original cost, how long the market value of the investment has been less than its original cost, the underlying factors contributing to a decline in the prices of securities in a single asset class, the performance of the issuer’s stock price in relation to the stock price of its competitors within the industry, expected market volatility, analyst recommendations, the views of external investment managers, any news or financial information that has been released specific to the investee and the outlook for the overall industry in which the issuer operates.

If events and circumstances indicate that a decline in the value of a security had occurred and is other-than-temporary, we would record a charge to other income, net.

Accounts Receivable

Accounts receivable are stated at the amount we expect to collect.

This amount is net of an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments and a reserve for future credit returns and pricing adjustments.

This amount is net of an allowance for credit losses for estimated losses resulting from the inability of our customers to make required payments and a reserve for future credit returns and pricing adjustments.

The following factors are considered when determining the collectability of specific customer accounts:

customer creditworthiness, past transaction history with the customer, and changes in customer payment terms or practices.

In addition, overall historical collection experience, current economic industry trends, and a review of the current status of trade accounts receivable are considered when determining the required allowance for doubtful accounts.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

our assessment, we provide for estimated uncollectible amounts through a charge to earnings and a credit to our allowance for doubtful accounts.

Balances that remain outstanding after we have used reasonable collection efforts are written off through a charge to the allowance for doubtful accounts and a credit to accounts receivable.

Based on our assessment, we provide for estimated uncollectible amounts through a charge to earnings and a credit to our allowance for credit losses.

Balances that remain outstanding after we have used reasonable collection efforts are written off through a charge to the allowance for credit losses and a credit to accounts receivable.

Estimated reserves for future credit returns and pricing adjustments are established based on an analysis of historical patterns of credit returns and price adjustments compared to received credit returns and distribution sales for the current period.

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Estimated sales returns for our distributor stock rotation program are accounted for under the guidance of Accounting Standard Codification (ASC) 845 Nonmonetary Transactions .

The following table presents a reconciliation of the allowance for credit losses (in thousands):

Year ended September 30,

Balance at beginning of period $ 3,778 $ 968

Additions 2,803 2,534

Uncollectible accounts charged to allowance, net of recoveries ( 2,647 ) 276

Balance at end of period $ 3,934 $ 3,778

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Inventories are valued at the lower of cost or net realizable value using the first-in, first-out (FIFO) method.

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Furniture and fixtures, purchased software and other equipment are depreciated over a period of three years to ten years .

Building improvements and buildings are depreciated over ten years and thirty-nine years , respectively.

Building improvements and buildings are depreciated over ten years and 39 years, respectively.

Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful life of the asset.

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We have two reportable operating segments, our IoT Products & Services segment and our IoT Solutions segment (see Note 4 to the consolidated financial statements).

As a result, 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.

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.

Fair values for both reporting units were each estimated on a standalone basis using a weighted combination of the income approach and market approach.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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 commonly used variation of the income approach used to value a business is the discounted cash flow (“DCF”) method.

The DCF method is a valuation technique in which the value of a business is estimated on the earnings capacity, or available cash flow, of that business.

Earnings capacity represents the earnings available for distribution to stockholders after consideration of the reinvestment required for future growth.

Significant judgment is required to estimate the amount and timing of future cash flows for each reporting unit and the relative risk of achieving those cash flows.

The market approach indicates the fair value of a business or asset based on a comparison of the business or asset to comparable publicly traded companies or assets and transactions in its industry as well as our prior acquisitions.

This approach can be estimated through the guideline company method.

This method indicates fair value of a business by comparing it to publicly traded companies in similar lines of business.

After identifying and selecting the guideline companies, we make judgments about the comparability of the companies based on size, growth rates, profitability, risk, and return on investment in order to estimate market multiples.

These multiples are then applied to the reporting units to estimate a fair value.

Results of our Fiscal 2020 Annual Impairment Test

We had a total of $ 157.1 million of goodwill for the IoT Products & Services reporting unit and $ 49.6 million of goodwill for the IoT Solutions reporting unit as of June 30, 2020.

At June 30, 2020, fair value exceeded the carrying value by more than 10% for both 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 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 million as of June 30, 2020.

This implied a range of control premiums of 17.0 % to 29.1 %.

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.

Effective with the reorganization announcement on October 7, 2020 (see Note 10 ), 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 10 ), we performed an interim impairment test in addition to our annual test as of June 30, 2021.

Our goodwill impairment tests as of October 7, 2020 and June 30, 2021 indicated no impairment (see Note 3 ).

During the fourth quarter of fiscal 2021, we assessed various qualitative factors to determine whether or not an additional goodwill impairment assessment was required as of September 30, 2021, and we concluded that no additional impairment assessment was required.

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.

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.

Contingent Consideration

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We used a probability-weighted discounted cash flow approach as a valuation technique to determine the fair value of the contingent consideration on the acquisition date.

At each subsequent reporting period, the fair value is re-measured with the change in fair value recognized in general and administrative expense in our Consolidated Statements of Operations.

At each subsequent reporting period, the fair value is re-measured with the change in fair value recognized in general and administrative expense in our Consolidated

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Statements of Operations.

Amounts, if any, paid to the seller in excess of the amount recorded on the acquisition date will be classified as cash flows used in operating activities.

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We typically have the option to either repair or replace hardware products we deem defective with regard to material or workmanship.

Estimated warranty costs are accrued in the period that the related revenue is recognized based upon an estimated average per unit repair or replacement cost applied to

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

the estimated number of units under warranty.

Estimated warranty costs are accrued in the period that the related revenue is recognized based upon an estimated average per unit repair or replacement cost applied to the estimated number of units under warranty.

These estimates are based upon historical warranty incidents and are evaluated on an ongoing basis to ensure the adequacy of the warranty accrual.

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We record treasury stock at cost.

Treasury stock may be acquired from employees for tax withholding purposes related to vesting of restricted stock awards as part of our stock-based compensation program.

Treasury stock may be acquired from employees for tax withholding purposes related to vesting of restricted stock awards as part of our stock-based compensation program and issued pursuant to the Employee Stock Purchase Plan.

Revenue Recognition

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Installation service charges from these sales are recorded when the product is installed.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Subscription and Support Services Revenue

Our SmartSense by Digi ® subscription revenue is recorded on a monthly basis.

These subscriptions are generally in a range from one year to five years , and may contain an evergreen renewal provision.

Generally, our subscription renewal charges per month are the same as the original contract term.

We derive service revenue from our Digi Remote Manager ® , a platform-as-a-service (“PaaS”) offering, whereby customers pay for services consumed based on the number of devices being managed or monitored.

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Some of Digi Support Services revenue is for training and this revenue is recognized as the services are performed.

Our SmartSense by Digi ® subscription revenue is recorded on a monthly basis.

These subscriptions are generally in a range from one year to five years , and may contain an evergreen renewal provision.

Generally, our subscription renewal charges per month are the same as the original contract term.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Professional Services Revenue

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Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Stock-Based Compensation

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Gains and losses on foreign currency exchange transactions, as well as translation gains or losses on transactions denominated in currencies other than an entity’s functional currency, are reflected in the statement of operations.

During fiscal 2020, 2019 and

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

2018 there were net transaction (losses) gains of $( 0.6 ) million, $ 0.4 million and $ 0.1 million, respectively that were recorded in other income, net.

During fiscal 2021, 2020 and 2019 there were net transaction (losses) gains of $( 0.1 ) million, $( 0.6 ) million and $ 0.4 million, respectively that were recorded in other income, net.

We manage our net asset or net liability position for U.S.

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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):

Fiscal year ended September 30,

Year ended September 30,

2021 2020 2019

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Because their effect would be anti-dilutive at period end, certain potentially dilutive shares related to stock options to purchase common shares were excluded in the above computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of our common shares.

At September 30, 2020, 2019 and 2018, such excluded stock options were 1,143,411 , 744,513 and 925,063 , respectively.

Recent Accounting Developments

In February 2016, 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-

For the years ended September 30, 2021, 2020 and 2019, such excluded stock options were 35,160 , 1,143,411 and 744,513 , respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 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 Consolidated Statements of Operations or 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, FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820).

Potential Impacts of COVID-19 on our Business

The impact of the coronavirus ("COVID-19") pandemic coIntinues 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 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of this Form 10-K.

Recent Accounting Developments

In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820).

The updated guidance changes the disclosure requirements on fair value measurements.

We will adopt this standard in the first quarter of fiscal 2021.

We do not expect this standard to have a material impact on our consolidated financial statements.

We adopted this standard in the first quarter of fiscal 2021.

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

In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments .

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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.

We will adopt this standard in the first quarter of fiscal 2021, following the modified-retrospective approach.

We do not expect this standard to have a material impact on our consolidated financial statements.

This update is intended to provide financial statement users with more decision-useful information about expected credit losses.

We adopted this standard in the first quarter of fiscal 2021, following the modified-retrospective approach.

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

In October 2021, FASB issued ASU 2021-08, Business Combinations (Topic 805):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.

This update requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination.

ASU 2021-08 is effective for our fiscal year beginning after September 30, 2021.

We are currently evaluating the impact that adopting this new accounting standard would have on our condensed consolidated financial statements, but do not believe it will have a material effect.

Fiscal 2021 Acquisitions

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.

The results of operations are now included in our third quarter of fiscal 2021 results within our IoT Products & Services segment.

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.

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 Haxiot revenue performance and contractually are not to exceed $ 3.0 million and $ 5.0 million for the annual periods ending December 31, 2021 and December 31, 2022.

The fair value amount of these earn-outs for the annual periods ending December 31, 2021 and December 31, 2022 are $ — million and $ 5.9 million, respectively.

In the third quarter of fiscal 2021, the preliminary purchase price allocation was updated, including related determination of fair value and income tax implications.

As a result, we adjusted goodwill to $ 8.6 million and adjusted contingent consideration to $ 5.9 million.

For tax purposes, this acquisition is treated as a stock acquisition.

The goodwill therefore is not deductible.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ACQUISITIONS (CONTINUED)

Costs directly related to the acquisition of $ 0.3 million in fiscal 2021 have been charged to operations and are included in general and administrative expense in our consolidated statements of operations.

These acquisition costs include legal, accounting, valuation and investment banking fees.

The following table summarizes the preliminary fair values of Haxiot assets acquired, net of $ 50 thousand of cash acquired, and liabilities assumed as of the acquisition date (in thousands).

Contingent consideration 5,900

Total $ 12,996

Fair value of net tangible assets acquired $ 86

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 8,605

Total $ 12,996

Acquisition of Ctek, Inc.

On July 6, 2021, we 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 are included in our fourth quarter fiscal 2021 results within our IoT Products & Services segment.

Through the acquisition of Ctek, Digi is uniquely positioned to provide customers with both battery and hardwired options for the control and 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.

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 $ 12.0 million of cash on hand.

The future earn-out payments are based on revenue performance outlined in the terms of the purchase agreement for the annual periods ending December 31, 2021, December 31, 2022 and December 31, 2023.

The 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 treated as a stock acquisition.

The goodwill therefore is not deductible.

Costs directly related to the acquisition of $ 0.3 million incurred in fiscal 2021 have been charged to operations and are included in general and administrative expense in our consolidated statements of operations.

These acquisition costs include legal, accounting, valuation and investment banking fees.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ACQUISITIONS (CONTINUED)

The following table summarizes the preliminary fair values of Ctek assets acquired and liabilities assumed as of the acquisition date (in thousands).

Cash $ 12,012

Contingent consideration 300

Working capital adjustment 422

Total $ 12,734

Fair value of net tangible assets acquired 397

Identifiable intangible assets:

Customer relationships 5,100

Purchased and core technology 1,300

Trademarks 70

Backlog 1,000

Goodwill 4,867

Total $ 12,734

Fiscal 2020 Acquisition

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We funded the closing of the acquisition with cash of $ 148.1 million comprised of cash on hand and proceeds from our credit facility (see Note 7 to the consolidated financial statements).

The earn-out payments are based on revenue performance from Opengear for the twelve-month periods ended December 31, 2019 and ending December 31, 2020.

The cumulative amount of these earn-outs for the periods ended December 31, 2019 and December 31, 2020, will not exceed $ 5.0 million and $ 10.0 million, respectively.

The earn-out payments were based on revenue performance from Opengear for the twelve-month periods ended December 31, 2019 and ending December 31, 2020.

The cumulative amount of these earn-outs for the periods ended December 31, 2019 and December 31, 2020, could have been up to $ 5.0 million and $ 10.0 million, respectively.

We paid the first installment of $ 0.9 million for the period ended December 31, 2019 during the third quarter of fiscal 2020.

The fair value of the remaining contingent consideration was $ 4.2 million at September 30, 2020 (see Note 8 to the consolidated financial statements).

The final payment of $ 10.0 million for the period ended December 31, 2020 was paid during the second quarter of fiscal 2021 (see Note 6 to the consolidated financial statements).

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.

For tax purposes, this acquisition is treated as a stock acquisition.

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We believe this is a complementary acquisition for us as it significantly enhances our IoT Products & Services segment by providing secure, resilient access and automation to critical IT infrastructure.

The Opengear acquisition has been accounted for using the acquisition method of accounting.

This requires, among other things, that assets acquired and liabilities assumed pursuant to the purchase agreement be recognized at fair value as of the acquisition date.

Costs directly related to the acquisition of $ 0.3 million incurred in fiscal 2019, $ 2.7 million incurred in fiscal 2020 and $ 0.3 million incurred in fiscal 2021 have been charged directly to operations and are included in general and administrative expenses in our consolidated statements of operations.

These acquisition costs include legal, accounting, integration, valuation and investment banking fees.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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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 $ 2.7 million incurred in fiscal 2020 have been charged directly to operations and are included in general and administrative expenses in our Consolidated Statements of Operations.

These acquisition costs include legal, accounting, integration, 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):

Fiscal year ended September 30,

Net sales $ 294,167 $ 308,986

Net income $ 14,366 $ 10,417

Net income per share - basic $ 0.50 $ 0.37

Net income per share - diluted $ 0.49 $ 0.36

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 $ 3.1 million were incurred as of the first quarter of fiscal 2019.

Given the success of our 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ACQUISITIONS (CONTINUED)

Fiscal 2018 Acquisitions

Acquisition of Accelerated Concepts, Inc.

On January 22, 2018, we purchased all the outstanding stock of Accelerated Concepts, Inc.

("Accelerated"), a Tampa-based provider of secure, enterprise-grade, cellular (LTE) networking equipment for primary and backup connectivity applications, for cash of $ 16.4 million (excluding cash acquired of $ 0.2 million) and future earn-out payments.

Purchase accounting related to the acquisition of Accelerated was finalized during the fourth quarter of fiscal 2018.

The earn-out payments were scheduled to be paid in two installments and the payment amount, if any, was to be calculated based on the revenue performance of Accelerated products.

The first installment was based on revenues from January 22, 2018 through January 21, 2019 and the second installment was based on revenues from January 22, 2019 through January 21, 2020.

If certain revenue thresholds were met, the cumulative amount of these earn-outs could have been $ 6.5 million.

In April 2019, we paid $ 3.5 million for the first installment.

In April 2020, we paid $ 2.4 million for the remaining contingent consideration (see Note 8 to the consolidated financial statements).

Acquisition of TempAlert LLC

On October 20, 2017, we purchased all the outstanding interests of TempAlert LLC ("TempAlert"), a Boston-based provider of automated, real-time temperature monitoring and task management solutions for cash of $ 40.7 million (excluding cash acquired of $ 0.6 million) and future earn-out payments.

Purchase accounting related to the acquisition was finalized during the first quarter of fiscal 2019.

The first earn-out payment was scheduled to be paid after December 31, 2018 and the second earn-out payment was scheduled to be paid after December 31, 2019, which was the end of the earn-out periods.

No payment was earned for the periods ended December 31, 2018 or December 31, 2019.

GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET

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Amortization expense in cost of sales includes amortization for purchased and core technology and certain patents and trademarks.

Amortization expense for fiscal years 2020, 2019 and 2018 was as follows (in thousands):

Fiscal year Total

2020 $ 14,754

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET (CONTINUED)

Estimated amortization expense for the next five years is as follows (in thousands):

Amortization expense for fiscal years 2021, 2020 and 2019 was as follows (in thousands):

Fiscal year Total

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2020 $ 14,754

Estimated amortization expense for the next five fiscal years is as follows (in thousands):

Fiscal year Total

2022 $ 16,570

2023 $ 13,579

2024 $ 12,865

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

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Balance on September 30, 2019 $ 103,519 $ 49,903 $ 153,422

Acquisitions 56,242 — 56,242

Foreign currency translation adjustment 604 ( 133 ) 471

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Acquisition 13,472 — 13,472

Adjustments 847 — 847

Foreign currency translation adjustment 496 572 1,068

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

Balance on September 30, 2021 $ 175,180 $ 50,342 $ 225,522

No goodwill impairment has been recorded in any period presented.

Goodwill 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 4 ).

Effective with the reorganization announcement on October 7, 2020 (see Note 1 0 ), 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.

Due to the reorganization, we performed our fiscal third quarter 2021 annual impairment test for those four reporting units along with our IoT Solutions segment.

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.

Fair values for the five reporting units were each estimated on a standalone basis using a weighted combination of the income approach and market approach.

The income approach indicates the fair value of a business based on the value of the cash flows the business or asset can be expected to generate in the future.

A commonly used variation of the income approach used to value a business is the discounted cash flow (“DCF”) method.

The DCF method is a valuation technique in which the value of a business is estimated on the earnings capacity, or available cash flow, of that business.

Earnings capacity represents the earnings available for distribution to stockholders after consideration of the reinvestment required for future growth.

Significant judgment is required to estimate the amount and timing of future cash flows for each reporting unit and the relative risk of achieving those cash flows.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET (CONTINUED)

This approach can be estimated through the guideline company method.

This method indicates fair value of a business by comparing it to publicly traded companies in similar lines of business.

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.

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.

Results of our Fiscal 2021 Annual Impairment Test

As of June 30, 2021, we had a total of $ 32.7 million of goodwill for the 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 Management reporting unit and $ 49.5 million of goodwill for the IoT Solutions reporting unit.

At June 30, 2021, fair value exceeded the carrying value by more than 20% for 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 $ 686.3 million as of June 30, 2021.

This implied a range of control (deficit)/ premiums of ( 4.5 )% to 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.

Results of our October 7, 2020 Interim Impairment Test

As of October 7, 2020, we had a total of $ 32.7 million of goodwill for the Enterprise Routers reporting unit, $ 59.2 million of goodwill for the Console Servers reporting unit, $ 53.3 million of goodwill for the OEM Solutions reporting unit, $ 15.4 million of goodwill for the Infrastructure Mgmt.

reporting unit and $ 49.5 million of goodwill for the IoT Solutions reporting unit.

At October 7, 2020, fair value exceeded the carrying value for 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.

This range was compared to the total market capitalization of $ 472.7 million as of October 7, 2020.

This implied a range of control premiums of 5.0 % to 10.0 %.

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEGMENT INFORMATION AND MAJOR CUSTOMERS

We have two reportable operating segments for purposes of ASC 280-10-50 “Segment Reporting”:

We have two reportable operating segments:

(i) IoT Products & Services and (ii) IoT Solutions.

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The qualitative information included, but was not limited to, the following:

the nature of the products and services and customers differ between the two segments, discrete financial information is available through gross profit for both segments and the Chief Operating Decision Maker is reviewing both segments’ financial information (through gross profit) separately to make decisions about the allocation of resources.

the nature of the products and services and customers differ between the two segments, discrete financial information is available through operating income for both segments and the Chief Operating Decision Maker is reviewing both segments’ financial information separately to make decisions about the allocation of resources.

Effective with the reorganization announcement on October 7, 2020 (see Note 1 0 ), our IoT Products & Services business is now structured to include four operating segments, each with a segment manager.

IoT Products & Services

Our IoT Products & Services segment is composed of the following communications products and development services:

• Cellular routers;

• OEM Solutions which include Radio frequency ("RF") products which include our Digi XBee ® Networking solutions as well as other RF solutions, embedded products which include Digi Connect ® , ConnectCore ® and Rabbit ® embedded systems on module and single board computers;

• Infrastructure management products which include console and serial servers and USB connected products;

• Console Servers which is comprised of our Network Resilience Platform and includes Smart Out-of-Band and NetOps Console Servers managed by our Lighthouse software.

• Digi Wireless Design Services;

• Digi Remote Manager ® ;

• Digi Support Services which offers various levels of technical services for development assistance, consulting and training.

Our IoT Products & Services segment is composed of the following four operating segments:

• 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.

As the four operating segments have similar qualitative and quantitative factors, they are aggregated 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 and gross profit.

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

Starting in the quarter ended December 31, 2020, the shared general and administrative costs are now allocated to each operating segment.

Thus, our measure of segment profit or loss used by our CODM changed.

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 aligns with the update to how the CODM assesses performance and allocates resources for our business segments.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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These solutions are focused on these vertical markets:

food service, healthcare (primarily pharmacies) and supply chain.

food service, healthcare (primarily pharmacies and hospitals) and supply chain.

The solutions are marketed as SmartSense by Digi ® .

We have formed, expanded and enhanced the IoT Solutions segment through acquisition.

We initially formed, expanded and enhanced our IoT Solutions segment through four acquisitions, the last of which was completed in October 2017.

We measure our segment results primarily by reference to revenue and gross profit.

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

Fiscal year ended September 30,

Year ended September 30,

2021 2020 2019

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Total gross profit $ 166,657 $ 143,972 $ 119,035

Operating Income (loss)

IoT Products & Services $ 18,212 $ 27,216 $ 21,806

IoT Solutions ( 7,684 ) ( 15,899 ) ( 11,734 )

Total operating income $ 10,528 $ 11,317 $ 10,072

Depreciation and Amortization

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

Fiscal year ended September 30,

Year ended September 30,

2021 2020 2019

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Total expended for property, plant and equipment $ 2,257 $ 899 $ 9,335

* Excluded from this amount is $ 1.8 million, $ 1.4 million and $ 1.1 million of transfers of inventory to property plant and equipment for subscriber assets for the year ended September 30, 2021, 2020 and 2019, respectively.

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

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At September 30, 2020, we had one customer whose accounts receivable balance represented 17.2 % of total accounts receivable.

At September 30, 2019, we had one customer, whose accounts receivable balance represented 14.7 % of total accounts receivable.

SALE OF BUILDING

On October 2, 2018, we sold our 130,000 square feet corporate headquarters building in Minnetonka, Minnesota to Minnetonka Leased Housing Associates II, LLLP.

The 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 is recorded in general and administrative expense.

During the fiscal year ended September 30, 2019, we paid $ 5.8 million for leasehold improvements to build out our new headquarters space.

These improvements are being depreciated over 10 years, which is the estimated useful life of the improvements.

SELECTED BALANCE SHEET DATA (in thousands)

SELECTED BALANCE SHEET DATA

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

As of September 30,

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Accounts receivable $ 51,828 $ 65,027

Less allowance for doubtful accounts 3,778 968

Less allowance for credit losses 3,934 3,778

Less reserve for future credit returns and pricing adjustments 4,156 2,022

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unobservable inputs

Money market $ 56,700 $ 56,700 $ — $ —

Total assets measured at fair value $ 56,700 $ 56,700 $ — $ —

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

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

In connection with the October 2015 acquisition of Bluenica, we may be required to make contingent payments over a period of up to 4 years, subject to achieving specified revenue thresholds for sales of Bluenica products.

In connection with the October 2015 acquisition of Bluenica, we agreed to make contingent payments over a period of up to 4 years, subject to achieving specified revenue thresholds for sales of Bluenica products.

The fair value of the liability for contingent consideration recognized was $ 10.4 million upon acquisition.

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We made a final payment of $ 0.2 million during fiscal 2019.

In connection our acquisition of TempAlert, we agreed to make contingent payments for the twelve month periods ending December 31, 2018 and December 31, 2019 based on the total Digi IoT Solutions segment revenue (see Note 2 to the consolidated financial statements).

The fair value of the liability for contingent consideration was zero upon acquisition.

No contingent consideration was earned.

In connection with our acquisition of Accelerated, we agreed to make contingent payments, based upon certain sales thresholds of Accelerated products (see Note 2 to the consolidated financial statements).

In connection with our acquisition of Accelerated, we agreed to make contingent payments, based upon certain sales thresholds of Accelerated products.

The fair values of the liability for contingent consideration recognized upon acquisition of Accelerated on January 22, 2018 was $ 2.3 million.

We paid the first installment of $ 3.5 million in fiscal 2019 and the final installment of $ 2.4 million in the third quarter of fiscal 2020.

In connection with our acquisition of Opengear, we agreed to make contingent payments, based upon certain revenue thresholds (see Note 2 to the consolidated financial statements).

In connection with our acquisition of Opengear, we agreed to make contingent payments, based upon certain revenue thresholds.

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 $ 4.2 million at September 30, 2020.

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 consolidated financial statements).

In the fiscal third quarter of fiscal 2021, the preliminary purchase price allocation was updated, including related determination of fair value and income tax implications.

As a result, we adjusted goodwill to $ 8.6 million and adjusted contingent consideration to $ 5.9 million on our balance sheet.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FAIR VALUE MEASUREMENTS (CONTINUED)

In connection with our acquisition of Ctek, we agreed to make contingent earn-out payments, based upon certain revenue thresholds (see Note 2 to the consolidated financial statements).

The fair value of the remaining liability for contingent consideration for the acquisition of Ctek was $ 0.3 million at September 30, 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):

Fiscal year ended September 30,

Year ended September 30,

Fair value at beginning of period $ 4,228 $ 5,407

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The change in fair value of contingent consideration reflects our estimate of the probability of achieving the relevant targets and is discounted based on our estimated discount rate.

We have estimated the fair value of the contingent consideration at September 30, 2020 based on the probability of achieving the specified revenue thresholds of 72 % for Opengear.

As of September 30, 2020, contingent consideration associated with the acquisition of Opengear remains subject to future performance through December 31, 2020.

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 provides 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 %.

Due to the timing of the acquisition, the fair value of the contingent consideration at September 30, 2021 is based on the probability of achieving the specified revenue thresholds for Haxiot and Ctek.

As of September 30, 2021, contingent consideration associated with Haxiot and Ctek remain subject to future performance through December 31, 2022 and 2023, respectively.

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.

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Our weighted average interest rate at September 30, 2021 was 1.34 %.

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 September 30, 2020.

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

The debt issuance costs 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 credit facility amendment was determined to be a modification so the existing costs will continue to be amortized over the term of the new facility.

The balance remaining at September 30, 2021 was $ 2.3 million.

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 September 30, 2021.

On November 1, 2021, Digi entered into a second amended and restated credit agreement consisting of a $ 350 million term loan B secured loan and a $ 35 million revolving credit facility (See Note 17 ).

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INDEBTEDNESS (CONTINUED)

The following table is a summary of our long-term indebtedness (in thousands):

As of September 30,

Revolving loan $ 48,118 $ 15,000

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Total long-term debt, net of current portion $ 45,799 $ 58,980

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INDEBTEDNESS (CONTINUED)

The following table is a summary of future maturities of our aggregate long-term debt at September 30, 2021 (in thousands):

Fiscal year Amount

Total long-term debt $ 48,118

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

Paycheck Protection Program Loan

On April 14, 2020, we were granted a loan for $ 9.0 million under the Paycheck Protection Program ("PPP") established as part of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act").

Based on our evaluation of additional rules for the PPP established after the grant acceptance, on May 4, 2020 we voluntarily repaid the full amount of the loan of $ 9.0 million, plus interest.

PRODUCT WARRANTY OBLIGATION

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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 on information available at the commencement date, including the lease term, in determining the present value of future

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LEASES (CONTINUED)

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LEASES (CONTINUED)

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

Balance Sheet Location September 30, 2020

Operating leases Other non-current assets $ 14,334

Balance Sheet Location September 30, 2021 September 30, 2020

Operating leases Operating lease right-of-use assets $ 15,684 $ 14,334

Total lease assets $ 15,684 $ 14,334

Operating leases Other current liabilities $ 2,527

Operating leases Other non-current liabilities 16,193

Operating leases Current portion of operating lease liabilities $ 2,633 $ 2,527

Operating leases Operating lease liabilities 18,368 16,193

Total lease liabilities $ 21,001 $ 18,720

The following were the components of our lease cost (in thousands):

Statement of Operations Location Fiscal year ended

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):

Statement of Operations Location Year ended

September 30, 2021 Year ended

September 30, 2020

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

Fiscal year ended

September 30, 2021 Year ended

September 30, 2020

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Right-of-use assets obtained in exchange for new operating lease liabilities 3,785 1,073

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

September 30, 2021

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Weighted average discount rate - operating leases 3.50 %

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 Consolidated Balance Sheet as of September 30, 2021 (in thousands):

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Total reported lease liability $ 21,001

In July 2020, we signed a lease agreement for ten years in Sandy, Utah.

We have $ 4.8 million of future minimum lease obligations under this new lease for 35,466 square feet of office space.

Included in this agreement is $ 1.0 million of tenant improvement allowance.

This agreement is not included on our Consolidated Balance Sheet nor in the above table as the lessor has not made the underlying asset available for use.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LEASES (CONTINUED)

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 Amount

Thereafter 11,361

Total minimum payments required $ 22,997

RESTRUCTURING

Q1 FY2021 Restructuring

On October 7, 2020, our Board of 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 a charge of $ 0.7 million for employee termination 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 2021 we recorded an additional $ 0.2 million related to this restructuring.

In the third quarter of fiscal 2021 we recorded an additional $ 0.1 million related to this restructuring.

The charges relating to this restructuring were fully paid during the fourth quarter of fiscal 2021.

2020 Restructuring

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

2020 Restructuring Manufacturing Transition 2017 Restructuring

Employee Termination Costs Employee Termination Costs Employee Termination Costs Other Total

2021 Restructuring 2020 Restructuring Manufacturing Transition 2017 Restructuring

Employee Termination Costs Employee Termination Costs Employee Termination Costs Employee Termination Costs Other Total

Balance at September 30, 2018 $ — $ — $ 147 $ 293 $ 13 $ 453

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Balance at September 30, 2019 — — — — — —

Restructuring charge — 133 — — — 133

Payments — ( 117 ) — — — ( 117 )

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Reversals — — — — — —

Foreign currency fluctuation ( 60 ) — — — — ( 60 )

Balance at September 30, 2021 $ — $ — $ — $ — $ — $ —

Revenue Disaggregation

The following summarizes our revenue by geographic location of our customers:

Fiscal year ended September 30,

The following table summarizes our revenue by geographic location of our customers:

Year ended September 30,

($ in thousands) 2021 2020 2019

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Total revenue $ 308,632 $ 279,271 $ 254,203

The following summarizes our revenue by the timing of revenue recognition:

Fiscal year ended September 30,

The following table summarizes our revenue by the timing of revenue recognition:

Year ended September 30,

($ in thousands) 2021 2020 2019

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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 was $ 2.0 million at September 30, 2020 and $ 2.1 million at September 30, 2019 and is included in property, equipment and improvements, net.

Depreciation expense for these subscriber assets was

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

REVENUE (CONTINUED)

$ 1.5 million, $ 1.1 million and $ 0.5 million for fiscal 2020, 2019 and 2018, respectively.

The total net book value of subscriber assets was $ 1.9 million at September 30, 2021 and $ 2.0 million at September 30, 2020 and is included in property, equipment and improvements, net.

Depreciation expense for these subscriber assets was $ 1.9 million, $ 1.5 million and $ 1.1 million for fiscal 2021, 2020 and 2019, respectively.

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

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Changes in unearned revenue were:

Fiscal year ended September 30,

Year ended September 30,

($ in thousands) 2021 2020 2019

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The components of income before income taxes are (in thousands):

Fiscal year ended September 30,

Year ended September 30,

2021 2020 2019

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The components of the income tax (benefit) expense are (in thousands):

Fiscal year ended September 30,

Year ended September 30,

2021 2020 2019

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Foreign 1,678 1,128 746

( 2,911 ) ( 825 ) ( 536 )

Federal ( 3,627 ) ( 2,911 ) ( 825 )

State ( 618 ) — —

Foreign ( 430 ) ( 446 ) 26

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Non-current deferred tax liability ( 13,493 ) ( 17,171 )

Net deferred tax (liability) asset $ ( 16,782 ) $ 7,069

Net deferred tax liability $ ( 13,054 ) $ ( 16,782 )

Depreciation and amortization $ ( 1,399 ) $ ( 1,037 )

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Net deferred tax (liability) asset $ ( 13,054 ) $ ( 16,782 )

As of September 30, 2020, we had $ 3.1 million of tax carryforwards (net of reserves) related to federal and state research and development tax credits.

As of September 30, 2021, we had $ 2.5 million of tax carryforwards (net of reserves) related to state research and development tax credits.

We also had $ 0.5 million of carryforwards consisting of a U.S.

capital loss of $ 2.6 million, non-U.S.

net operating losses of $ 0.2 million, non-U.S.

net operating losses of $ 0.2 million and foreign tax credits of $ 0.1 million.

The majority of our federal research and development tax credits have a 20-year carryforward period.

The state research and development tax credits have a 15-year carryforward period.

The majority of our state research and development tax credits have a 15-year carryforward period.

The majority of our non-U.S.

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tax credit carryforwards will expire in 2034.

capital loss carryforward will expire in fiscal tax year 2021.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INCOME TAXES (CONTINUED)

Our valuation allowance for certain U.S.

and foreign locations was $ 2.2 million at September 30, 2021 and $ 4.4 million at September 30, 2020.

The increase in valuation allowance is primarily the result of prior period adjustments to the valuation allowance and state research and development credits generated.

The decrease in valuation allowance is primarily the result of the expiring U.S.

capital loss carryforward of which had a corresponding valuation allowance.

The deferred tax assets realized could vary if there are differences in the timing or amount of future reversals of existing deferred tax liabilities or changes in the amounts of future taxable income.

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This would be reflected as income tax expense at the time that any such change in future taxable income is determined.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INCOME TAXES (CONTINUED)

The reconciliation of the statutory federal income tax amount to our income tax (benefit) expense is (in thousands):

Fiscal year ended September 30,

Year ended September 30,

2021 2020 2019

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State taxes, net of federal benefits 319 392 196

Manufacturing deduction — — ( 364 )

Transaction costs 60 143 —

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Change in valuation allowance ( 2,187 ) 173 520

Capital Loss Expiration 2,301 — —

Utilization of research and development tax credits ( 3,116 ) ( 2,881 ) ( 2,173 )

One-time transition tax — — 250

Deferred balance sheet remeasure ( 952 ) — 9

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In addition, certain provisions of this act became effective for us in fiscal 2019.

The estimated tax impacts of these provisions are included in our effective tax rate for the current period.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INCOME TAXES (CONTINUED)

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

Fiscal year ended September 30,

Year ended September 30,

2021 2020 2019

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Unrecognized tax benefits at end of fiscal year $ 2,908 $ 2,600 $ 1,713

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INCOME TAXES (CONTINUED)

The total amount of unrecognized tax benefits ("UTB") at September 30, 2021 that, if recognized, would affect our effective tax rate was $ 2.7 million.

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We are currently under U.S.

federal examination for fiscal years 2017 and 2018, and there is very limited audit activity of our income tax returns in U.S.

federal examination for fiscal years 2018 , and there is otherwise very limited audit activity of our income tax returns in U.S.

state jurisdictions or international jurisdictions.

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Under current tax law, we estimate the unrecognized tax liability to be immaterial.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

STOCK-BASED COMPENSATION

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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 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, we issue new shares of stock.

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 September 30, 2021, there were approximately 1,413,615 shares available for future grants under the 2021 Plan.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK-BASED COMPENSATION (CONTINUED)

The 2020 Plan, under which grants ceased upon approval of the 2021 Plan, authorized the issuance of up to 1,500,000 common shares in connection with awards of stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based full value awards or other stock-based awards.

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Options that have been granted under the 2020 Plan typically vested over a four -year period and expired if unexercised after seven years from the date of grant.

RSUs that were granted to directors typically vested in one year .

RSUs that were granted to executives and employees typically vested in December over a four-year period.

Restricted stock unit awards ("RSUs") that were granted to directors typically vested in one year.

RSUs that were granted to executives and employees typically vested in January over a four -year period.

Awards may no longer be granted under the 2020 Plan as grants ceased upon approval of the 2021 Plan effective January 29, 2021 at the Annual Meeting of Stockholders.

The exercise price of options and the grant date price of restricted stock units was determined by our Compensation Committee but could be less than the fair market value of our common stock based on the closing price on the date of grant.

Cash received from the exercise of stock options was $ 8.5 million, $ 5.9 million and $ 4.9 million for the twelve months ended September 30, 2021, 2020 and 2019, 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, having us retain a portion of shares issuable under the award or paying cash to us for the withholding.

During fiscal 2021, 2020 and 2019 our employees forfeited 116,195 , 103,492 and 93,128 shares, respectively in order to satisfy $ 2.1 million, $ 1.8 million and $ 1.1 million, respectively, of withholding tax obligations related to stock-based compensation, pursuant to terms of awards under our board and shareholder-approved compensation plans.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK-BASED COMPENSATION (CONTINUED)

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 "Purchase Plan"), covering all domestic employees with at least 90 days of continuous service and who are customarily employed at least 20 hours per week.

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Stock-based compensation expense is included in the consolidated results of operations as (in thousands):

Fiscal year ended September 30,

Year ended September 30,

2021 2020 2019

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Stock-based compensation after income taxes $ 6,380 $ 5,714 $ 4,481

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK-BASED COMPENSATION (CONTINUED)

Stock Options

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The total intrinsic value of all options exercised during each of the twelve months ended September 30, 2021, 2020 and 2019 was $ 6.5 million, $ 3.7 million and $ 2.1 million, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK-BASED COMPENSATION (CONTINUED)

The table below shows the weighted average fair value, which was determined based upon the fair value of each option on the grant date utilizing the Black-Scholes option-pricing model and the related assumptions:

Fiscal year ended September 30,

Year ended September 30,

2021 2020 2019

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The related weighted average period over which this cost is expected to be recognized was approximately 1.8 years.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK-BASED COMPENSATION (CONTINUED)

As of September 30, 2021, the weighted average exercise price and remaining life of the stock options were (in thousands, except remaining life and exercise price):

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The total grant date fair value of shares vested was $ 2.6 million, $ 3.7 million and $ 3.5 million in each of fiscal 2021, 2020 and 2019, respectively.

Non-vested Restricted Stock Units

Below is a summary of our non-vested restricted stock units as of September 30, 2020 and changes during the twelve months then ended (in thousands, except per common share amounts):

Number of Awards Weighted Average Grant Date Fair Value

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK-BASED COMPENSATION (CONTINUED)

Non-vested Stock Units

The following table presents a summary of our non-vested restricted stock units as of September 30, 2021 and changes during the twelve 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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The related weighted average period over which this cost is expected to be recognized was approximately 1.3 years.

COMMON STOCK REPURCHASE

Common Stock Repurchase Program

On April 24, 2018 our Board of Directors authorized a program to repurchase up to $ 20.0 million of our common stock primarily to return capital to shareholders.

This repurchase authorization expired on May 1, 2019.

There were no shares repurchased under this program.

EMPLOYEE BENEFIT PLANS

We currently have a savings and profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code (the Code), whereby eligible employees may contribute up to 25 % of their pre-tax earnings subject to certain limits under law.

Prior to May 3, 2020, we provided a match of 100 % on the first 3 % of each employee’s bi-weekly contribution and a 50 % match on the next 2 % of each employee’s bi-weekly contribution.

In addition, we may make contributions to the plan at the discretion of the Board of Directors.

Effective May 3, 2020 we indefinitely suspended the employer matching contributions in

EMPLOYEE BENEFIT PLANS (CONTINUED)

the United States and Canada.

We provide a match of 100 % on the first 3 % of each employee’s bi-weekly contribution and a 50 % match on the next 2 % of each employee’s bi-weekly contribution.

The employer matching contribution was reinstated for all employees after a suspension effective May 3, 2020 and ending on December 31, 2020 in the United States and Canada.

We provided matching contributions of $ 2.4 million for fiscal 2021, $ 1.7 million for fiscal 2020 and $ 1.8 million for fiscal 2019.

In addition, we may make contributions to the plan at the discretion of the Board of Directors.

COMMITMENTS AND CONTINGENCIES

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Please refer to Note 9 to our 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.

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 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 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.

In addition to the matter discussed above, in the normal course of business, we are subject to various claims and litigation, which may include, but are not limited to, patent infringement and intellectual property claims.

While we are unable to predict the outcome of any potential claims or litigation due to the inherent unpredictability of these matters, we believe that it is possible that we could, in the future, incur judgments or enter into settlements of claims that could have a material adverse effect on our operations in any particular period.

QUARTERLY FINANCIAL DATA (UNAUDITED)

(in thousands, except per common share data)

Quarter ended

31 March 31 June 30 Sept.

Revenue $ 62,317 $ 73,447 $ 70,338 $ 73,169

Gross profit $ 30,464 $ 38,641 $ 37,349 $ 37,518

Net income (1) $ 208 $ 2,004 $ 1,766 $ 4,433

Net income per common share - basic $ 0.01 $ 0.07 $ 0.06 $ 0.15

Net income per common share - diluted $ 0.01 $ 0.07 $ 0.06 $ 0.15

Revenue $ 62,313 $ 65,764 $ 61,166 $ 64,960

Gross profit $ 29,783 $ 30,329 $ 28,328 $ 30,595

Net income $ 4,682 $ 1,342 $ 1,648 $ 2,286

Net income per common share - basic $ 0.17 $ 0.05 $ 0.06 $ 0.08

Net income per common share - diluted $ 0.17 $ 0.05 $ 0.06 $ 0.08

(1) During fiscal 2020, we recorded a discrete tax benefit of $ 1.0 million in the first quarter of fiscal 2020 resulting from excess tax benefits recognized on stock compensation and an adjustment of our state deferred tax rate due to the Opengear acquisition.

It alleged damages of just over CAD 1.0 million .

During the 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 presently, and expect in the future to be, subject to various claims and 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUBSEQUENT EVENTS

Restructuring

On October 7, 2020, our Board of Directors approved a reorganization of our IoT Products & Services business segment ("the plan").

The plan aligns the business segment's organization around product lines.

Under the plan, we expect to eliminate

SUBSEQUENT EVENTS (CONTINUED)

approximately 20 employment positions during the first quarter ending December 31, 2020.

In connection with the plan, we expect to incur total restructuring charges in the range of $ 0.8 million to $ 0.9 million relating to cash severance expenses during the first fiscal quarter ended December 31, 2020.

Acquisition of Ventus Holdings

On November 1, 2021, we acquired Ventus Networks, LLC for approximately $348 million in cash.

Ventus is a privately-held leader in MNaaS solutions that simplify the complexity of enterprise WAN connectivity.

The acquisition was funded through a combination of cash on hand and debt financing under a $ 350 million credit facility committed by BMO Harris Bank N.A.

Due to the timing of the acquisition, preliminary purchase price allocation has not yet been completed.

Second Amended and Restated Senior Secured Credit Facility

On November 1, 2021, Digi entered into a second amended and restated credit agreement consisting of a $ 350 million term loan B secured loan and a $ 35 million revolving credit facility.

The $ 35 million revolving credit facility, which presently has no outstanding balance, includes a $ 10 million letter of credit subfacility and $ 10 million swingline subfacility.

Amounts under the term loan will be repaid in quarterly installments on the last day of each fiscal quarter, with an annual amortization rate of 1 %.

The remaining outstanding balance is due to be repaid in full after seven years.

Borrowings under this credit facility bear a variable interest rate of LIBOR plus an applicable margin spread from 3.75 % to 4.00 %.

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.

If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments on the Loan, 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 Term Loan contains some affirmative covenants and the Revolving Credit Facility contains customary affirmative and negative covenants, including covenants that restrict the ability of Digi 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.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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-K

Item 8. Financial Statements and Supplementary Data