DIGI INTERNATIONAL INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED) DIGI INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY For fiscal years ended September 30, 2021, 2020 and 2019 (in thousands) Accumulated Additional Other Total Common Stock Treasury Stock Paid-In Retained Comprehensive Stockholders’ Shares Par Value Shares Value Capital Earnings Loss Equity Balances, September 30, 2018 33,813 $ 338 6,385 $ ( 54,216 ) $ 255,936 $ 151,961 $ ( 23,526 ) $ 330,493 Net income — — — — — 9,958 — 9,958 Other comprehensive loss — — — — — — ( 1,989 ) ( 1,989 ) Employee stock purchase plan issuances — — ( 111 ) 948 110 — — 1,058 Taxes paid for net share settlement of share-based payment awards — — 93 ( 1,071 ) — — — ( 1,071 ) Issuance of stock under stock award plans 795 8 — — 4,866 — — 4,874 Stock-based compensation expense — — — — 5,655 — — 5,655 Balances, September 30, 2019 34,608 346 6,367 ( 54,339 ) 266,567 161,919 ( 25,515 ) 348,978 Net income — — — — — 8,411 — 8,411 Other comprehensive income — — — — — — 1,698 1,698 Employee stock purchase plan issuances — — ( 118 ) 1,021 44 — — 1,065 Taxes paid for net share settlement of share-based payment awards — — 104 ( 1,791 ) — — — ( 1,791 ) Issuance of stock under stock award plans 905 9 — — 5,893 — — 5,902 Stock-based compensation expense — — — — 7,237 — — 7,237 Balances, September 30, 2020 35,513 355 6,353 ( 55,109 ) 279,741 170,330 ( 23,817 ) 371,500 Net income — — — — — 10,366 — 10,366 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 Taxes paid for net share settlement of share-based payment awards — — 117 ( 2,120 ) — — — ( 2,120 ) Issuance of stock under stock award plans 1,115 12 — — 8,513 — — 8,525 Stock-based compensation expense — — — — 8,135 — — 8,135 Balances, September 30, 2021 40,653 $ 407 6,391 $ ( 56,535 ) $ 370,699 $ 180,692 $ ( 22,746 ) $ 472,517 The accompanying notes are an integral part of the consolidated financial statements. 43 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Description 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. We have two reportable operating segments: (i) IoT Products & Services; and (ii) IoT Solutions. Principles of Consolidation The consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Accounting Estimates The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ significantly from those estimates. 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. The carrying amounts approximate fair value due to the short maturities of these investments. We maintain our cash and cash equivalents in bank accounts which may exceed federally insured limits at times. We have not experienced any losses in these accounts. Accounts Receivable Accounts receivable are stated at the amount we expect to collect. 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 credit losses. 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. Estimated reserves for future credit returns and price adjustments are charged against revenue in the same period as the corresponding sales are recorded. 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, 2021 2020 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 44 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Inventories Inventories are valued at the lower of cost or net realizable value using the first-in, first-out (FIFO) method. Appropriate consideration is given to deterioration, obsolescence and other factors in evaluating net realizable value. Property, Equipment and Improvements, Net Property, equipment and improvements are carried at cost, net of accumulated depreciation. Depreciation is provided by charges to operations using the straight-line method over the estimated asset useful lives. 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 39 years, respectively. Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful life of the asset. Long-lived assets to be held and used, such as property, equipment and improvements, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Expenditures for maintenance and repairs are charged to operations as incurred, while major renewals and betterments are capitalized. The assets and related accumulated depreciation accounts are adjusted for asset retirements and disposals with the resulting gain or loss included in operations. Identifiable Intangible Assets Purchased proven technology, license agreements, covenants not to compete and other identifiable intangible assets are recorded at fair value when acquired in a business acquisition, or at cost when not purchased in a business acquisition. All other identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives of three years to 14.5 years. Useful lives for identifiable intangible assets are estimated at the time of acquisition based on the periods of time from which we expect to derive benefits from the identifiable intangible assets. Amortization of purchased and core technology is included in cost of sales in the Consolidated Statements of Operations. Amortization of all other acquired identifiable intangible assets is charged to operating expenses as a component of general and administrative expense. Identifiable intangible assets are reviewed for impairment whenever events or circumstances indicate that undiscounted expected future cash flows are not sufficient to recover the carrying value amount. Impairment losses, if any, are recorded in the period the impairment is identified. There were no impairments identified in fiscal 2021, 2020 or 2019. Goodwill Goodwill represents the excess of cost over the fair value of 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 have two reportable operating segments, our IoT Products & Services segment and our IoT Solutions segment (see Note 4 to the consolidated financial statements). 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. Contingent Consideration We measure our contingent consideration liabilities recognized in connection with business combinations at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy as defined in ASC 820 "Fair Value Measurement". 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 45 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. 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. Payments to the seller not exceeding the acquisition-date fair value of the contingent consideration will be classified as cash flows used in financing activities. Warranties In general, we warrant our hardware products to be free from defects in material and workmanship under normal use and service. The warranty periods generally range from one year to five years . 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 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. We also warrant our software or firmware incorporated into our products generally for a period of one year and offer to provide a bug fix or software patch within a reasonable period. We have not accrued specifically for this warranty and have not had claims specifically related to software or firmware. We are not responsible for, and do not warrant that, custom software versions, created by OEM customers based upon our software source code, will function in a particular way, will conform to any specifications or are fit for any particular purpose. Further, we do not indemnify these customers from any third-party liability as it relates to or arises from any customization or modifications made by the OEM customer. Treasury Stock 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 and issued pursuant to the Employee Stock Purchase Plan. Revenue Recognition We recognize hardware product revenue upon transfer of control of goods or services to customers in an amount that reflects the consideration we expect to receive in exchange for those goods or services. We determine the amount of revenue to be recognized through application of the following steps: • identification of the contract, or contracts with a customer; • identification of the performance obligations in the contract; • determination of the transaction price; • allocation of the transaction price to the performance obligations in the contract; and • recognition of revenue when or as we satisfy the performance obligations. Hardware Product Revenue and SmartSense by Digi ® Equipment Revenue and Associated Installation Fees Our hardware product revenue is derived primarily from the sale of wired and wireless hardware products to our distributors and direct/original equipment manufacturer (“Direct/OEM”) customers. Product revenue generally is recognized upon shipment of the product to a customer. Sales to authorized domestic distributors and Direct/OEM customers typically are made with certain rights of return and price adjustment provisions. 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. Estimated reserves for future credit returns and price adjustments are charged against revenue in the same period as the corresponding sales are recorded. Material differences between the historical trends used to determine estimated reserves and actual credit returns and pricing adjustments could result in a material change to our consolidated results of operations or financial position. Estimated sales returns for our distributor stock rotation program are accounted for under the guidance of ASC 845 Nonmonetary Transactions . Equipment revenue from SmartSense by Digi ® within our IoT Solutions segment is recognized upon shipment of the equipment to a customer. Installation service charges from these sales are recorded when the product is installed. 46 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. 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. This revenue is recognized over the life of the service term and is included in our IoT Products & Services segment. Digi Support Services revenues are recognized over the life of the support contract and included in our IoT Products & Services segment. Some of Digi Support Services revenue is for training and this revenue is recognized as the services are performed. Professional Services Revenue Professional services revenue is derived from our Digi Wireless Design Services contracts on either on a time-and-materials or a fixed-fee basis. These revenues, which are included in our IoT Products & Services segment are recognized as the services are performed for time-and-materials contracts, or when milestones are achieved and accepted by the customer for fixed-fee contracts. Contracts with Multiple Performance Obligations From time to time we have contracts from customers with multiple performance obligations. Our hardware products may be combined with our Digi Remote Manager ® PaaS offering as well as other support services in an individual contract. Our SmartSense by Digi ® revenues typically are derived from contracts with multiple performance obligations. These obligations may include: delivery of monitoring equipment that the customer either purchases out-right or uses while we retain ownership, monitoring services, providing condition alerts of assets being monitored, and recertification of sensor equipment. When we retain ownership of the equipment, we charge an implementation fee to the customer so they can begin using the equipment. In these instances, all revenue derived from the above obligations is recognized over the subscription term of the contract. If the customer purchases the equipment out-right, that portion of the revenue is recognized at the stand-alone selling price at the time the equipment is shipped and all other revenue is recognized over the subscription term of the contract. We have made an accounting policy election to exclude from the measurement of our revenues any sales or similar taxes we collect from customers. Research and Development Research and development costs are expensed when incurred. Research and development costs include compensation, allocation of corporate costs, depreciation, utilities, professional services and prototypes. Software and firmware development costs are expensed as incurred until the point that both the technological feasibility and the proven marketability of the product are established. To date, the time period between the establishment of technological feasibility and completion of software development has been short and no significant development costs have been incurred during that period. Accordingly, we have not capitalized any software development costs to date. Income Taxes Deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Income tax expense is equal to the tax payable for the period and the change during the period in deferred tax assets and liabilities as well as changes in income tax reserves. We maintain valuation allowances unless it is more likely than not that all or a portion of the deferred tax assets will be realized. Changes in valuation allowances from period to period are included in our tax provision in the period of change. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. 47 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Stock-Based Compensation Stock-based compensation expense represents the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. This cost must be recognized over the period during which an employee is required to provide the service (usually the vesting period). Foreign Currency Translation Financial position and results of operations of our international subsidiaries are measured using local currencies as the functional currency. Assets and liabilities of these operations are translated at the exchange rates in effect at the end of each reporting period. For our international subsidiaries, our statements of operations accounts are translated at the weighted average rates of exchange prevailing during each reporting period. Translation adjustments arising from the use of differing currency exchange rates from period to period are included in accumulated other comprehensive loss in stockholders’ equity. 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 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. dollar accounts in our foreign locations to reduce our foreign currency risk. We have not implemented a formal hedging strategy. Comprehensive Income Our comprehensive income is comprised of net income, foreign currency translation adjustments and unrealized gains and losses on available-for-sale marketable securities. These items are charged or credited to the accumulated other comprehensive loss account in stockholders’ equity. Net Income Per Common Share Basic net 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 and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares of our stock result from common stock options and restricted stock units. We use the treasury stock method to calculate the weighted-average shares used in the diluted earnings per share computation. Under this method the proceeds from exercise of an option, any amount of compensation cost for future service that we have not yet recognized, and the amount of estimated tax benefits that would be recorded in paid-in capital when the option is exercised are assumed to have been used to repurchase shares in the current period. 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): Year ended September 30, 2021 2020 2019 Numerator: Net income $ 10,366 $ 8,411 $ 9,958 Denominator: Denominator basic net income per common share — weighted average shares outstanding 32,111 28,849 27,905 Effect of dilutive securities: Stock options and restricted stock units 1,283 697 649 Denominator diluted net income per common share — adjusted weighted average shares 33,394 29,546 28,554 Net income per common share, basic $ 0.32 $ 0.29 $ 0.36 Net income per common share, diluted $ 0.31 $ 0.28 $ 0.35 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. For the years ended September 30, 2021, 2020 and 2019, such excluded stock options were 35,160 , 1,143,411 and 744,513 , respectively. 48 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 Adopted 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 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 . The amendments in this update replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses. This update is intended to provide financial statement users with more decision-useful information about 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. Issued 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. 2. ACQUISITIONS 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. 49 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. 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). Cash $ 7,096 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. 50 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. 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 Acquisition of Opengear, Inc. On December 13, 2019, we completed our acquisition of Opengear, Inc. ("Opengear"), a New Jersey-based provider of secure IT infrastructure products and software. Opengear results are included in our consolidated financial statements within our IoT Products & Services segment. The terms of the acquisition included an upfront cash payment as well as contingent consideration comprised of future earn-out payments. We funded the closing of the acquisition with cash of $ 148.1 million comprised of cash on hand and proceeds from our credit facility (see Note 7 to the consolidated financial statements). 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 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. 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 providing secure, resilient access and automation to critical IT infrastructure. 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. 51 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. ACQUISITIONS (CONTINUED) The following table summarizes the final fair values of Opengear assets acquired and liabilities assumed as of the acquisition date (in thousands): Cash $ 148,058 Contingent consideration 5,100 Total $ 153,158 Fair value of net tangible assets acquired $ 18,096 Identifiable intangible assets: Customer relationships 79,000 Purchased and core technology 18,100 Trademarks 8,000 Deferred tax liability on identifiable intangible assets ( 27,126 ) Goodwill 57,088 Total $ 153,158 The Consolidated Balance Sheet as of September 30, 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. Included in the fair value of net tangible assets acquired are $ 1.4 million of right-of-use assets included in other non-current assets and $ 1.7 million of lease liability included in other current and non-current liabilities associated with Opengear's operating leases. The weighted average useful life for all the identifiable intangibles listed above is estimated to be 13.4 years. For purposes of determining fair value, the existing customer relationships identified above are assumed to have a useful life of 14.5 years, purchased and core technology is assumed to have useful life of 9.0 years and trademarks are assumed to have a useful life of 12.0 years. Useful lives for identifiable intangible assets are estimated at the time of acquisition based on the periods of time from which we expect to derive benefits from the identifiable intangible assets. The identifiable intangible assets are amortized using the straight-line method. This reflects the pattern in which the assets are expected to be consumed. 3. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET Identifiable Intangible Assets, Net Amortizable identifiable intangible assets, net as of September 30, 2021 and 2020 were comprised of the following (in thousands): September 30, 2021 September 30, 2020 Gross carrying amount Accum. amort. Net Gross carrying amount Accum. amort. Net Purchased and core technology $ 69,162 $ ( 50,701 ) $ 18,461 $ 76,011 $ ( 55,482 ) $ 20,529 License agreements 112 ( 112 ) — 112 ( 112 ) — Patents and trademarks 23,491 ( 14,978 ) 8,513 22,836 ( 13,535 ) 9,301 Customer relationships 130,278 ( 39,973 ) 90,305 125,500 ( 34,232 ) 91,268 Non-compete agreements 600 ( 600 ) — 600 ( 450 ) 150 Order backlog 1,000 ( 250 ) 750 — — — Total $ 224,643 $ ( 106,614 ) $ 118,029 $ 225,059 $ ( 103,811 ) $ 121,248 Amortization expense is included in our consolidated statements of operations in cost of sales and general and administrative expense. Amortization expense in cost of sales includes amortization for purchased and core technology and certain patents and trademarks. 52 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET (CONTINUED) Amortization expense for fiscal years 2021, 2020 and 2019 was as follows (in thousands): Fiscal year Total 2021 $ 16,534 2020 $ 14,754 2019 $ 8,818 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 2025 $ 9,408 2026 $ 9,176 The changes in the carrying amount of goodwill by reportable segments are (in thousands): IoT Products & Services IoT Solutions Total Balance on September 30, 2019 $ 103,519 $ 49,903 $ 153,422 Acquisitions 56,242 — 56,242 Foreign currency translation adjustment 604 ( 133 ) 471 Balance on September 30, 2020 $ 160,365 $ 49,770 $ 210,135 Acquisition 13,472 — 13,472 Adjustments 847 — 847 Foreign currency translation adjustment 496 572 1,068 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. 53 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET (CONTINUED) 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. 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. 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. 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 $ 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. 54 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. SEGMENT INFORMATION AND MAJOR CUSTOMERS We have two reportable operating segments: (i) IoT Products & Services and (ii) IoT Solutions. This determination was made by considering both qualitative and quantitative information. 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 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 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. 55 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. SEGMENT INFORMATION AND MAJOR CUSTOMERS (CONTINUED) IoT Solutions Our IoT Solutions segment offers wireless temperature and other condition-based monitoring services as well as employee task management services. These solutions are focused on these vertical markets: food service, healthcare (primarily pharmacies and hospitals) and supply chain. The solutions are marketed as SmartSense by Digi ® . 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. IoT Solutions revenue includes product, service and subscription revenue. Summary operating results for each of our segments were as follows (in thousands): Year ended September 30, 2021 2020 2019 Revenue IoT Products & Services $ 264,173 $ 249,530 $ 215,287 IoT Solutions 44,459 29,741 38,916 Total revenue $ 308,632 $ 279,271 $ 254,203 Gross Profit IoT Products & Services $ 144,472 $ 129,349 $ 100,522 IoT Solutions 22,185 14,623 18,513 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 IoT Products & Services $ 13,109 $ 11,521 $ 6,102 IoT Solutions 7,768 7,778 7,294 Total depreciation and amortization $ 20,877 $ 19,299 $ 13,396 Total expended for property, plant and equipment was as follows (in thousands): Year ended September 30, 2021 2020 2019 IoT Products & Services $ 2,257 $ 878 $ 8,863 IoT Solutions* — 21 472 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): As of September 30, 2021 2020 IoT Products & Services $ 386,934 $ 387,578 IoT Solutions 80,165 86,975 Unallocated* 152,432 54,129 Total assets $ 619,531 $ 528,682 *Unallocated consists of cash and cash equivalents. 56 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. SEGMENT INFORMATION AND MAJOR CUSTOMERS (CONTINUED) Net property, equipment and improvements by geographic location were as follows (in thousands): As of September 30, 2021 2020 United States $ 11,941 $ 11,297 International, primarily Europe 191 210 Total net property, equipment and improvements $ 12,132 $ 11,507 Our U.S. export sales represented 26.2 %, 25.1 % and 28.5 % of revenue for the fiscal years ended September 30, 2021, 2020 and 2019. No single customer exceeded 10% of revenue for any of the periods presented. At September 30, 2020, we had one customer whose accounts receivable balance represented 17.2 % of total accounts receivable. 5. SELECTED BALANCE SHEET DATA The following table shows selected balance sheet data (in thousands): As of September 30, 2021 2020 Accounts receivable, net: Accounts receivable $ 51,828 $ 65,027 Less allowance for credit losses 3,934 3,778 Less reserve for future credit returns and pricing adjustments 4,156 2,022 Total accounts receivable, net $ 43,738 $ 59,227 Inventories: Raw materials $ 27,265 $ 14,009 Work in process 14 — Finished goods 16,642 37,559 Total inventories $ 43,921 $ 51,568 Property, equipment and improvements, net: Land $ 570 $ 570 Buildings 2,338 2,338 Improvements 9,367 7,844 Equipment 16,878 17,153 Purchased software 2,868 3,770 Furniture and fixtures 2,174 3,236 Subscriber assets 6,982 5,104 Total property, equipment and improvements, gross 41,177 40,015 Less accumulated depreciation and amortization 29,045 28,508 Total property, equipment and improvements, net $ 12,132 $ 11,507 57 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. FAIR VALUE MEASUREMENTS Financial assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement: Level 1 (unadjusted quoted prices in active markets for identical assets or liabilities); Level 2 (observable market inputs, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data). There were no transfers into or out of our Level 2 financial assets during fiscal 2021. The following tables provide information by level for financial assets and liabilities that are measured at fair value on a recurring basis (in thousands): Fair Value Measurements at September 30, 2021 using: Total carrying value at September 30, 2021 Quoted price in active markets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Liabilities: Contingent consideration on acquired business $ 6,200 $ — $ — $ 6,200 Total liabilities measured at fair value $ 6,200 $ — $ — $ 6,200 Fair Value Measurements at September 30, 2020 using: Total carrying value at September 30, 2020 Quoted price in active markets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Liabilities: 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 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. We paid $ 0.5 million in fiscal 2017, no payments in fiscal 2018, $ 2.2 million in fiscal 2019 and the final installment of $ 2.9 million in fiscal 2020. In connection with the November 2016 acquisition of FreshTemp ® , we were required to make a contingent payment after June 30, 2018, for revenue related to specific customer contracts signed by June 30, 2017. The fair value of the liability for consideration recognized upon acquisition was $ 1.3 million. 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. 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. 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. We paid the first installment of $ 0.9 million during the third quarter of fiscal 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. 58 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. 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): Year ended September 30, 2021 2020 Fair value at beginning of period $ 4,228 $ 5,407 Purchase price contingent consideration 6,200 5,100 Contingent consideration payments ( 10,000 ) ( 6,151 ) Change in fair value of contingent consideration 5,772 ( 128 ) Fair value at end of period $ 6,200 $ 4,228 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. 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. 7. INDEBTEDNESS On March 15, 2021, we entered into an amended and restated credit agreement with BMO Harris Bank N.A. ("BMO"). This agreement provides us with a senior secured credit facility (the "Credit Facility") consisting of a $ 200 million revolving loan (the "Revolving Loan"). This loan replaced our syndicated senior secured credit agreement with BMO that was entered into on December 13, 2019 and replaced the remaining balance of our term loan with this new revolver. This prior agreement provided us with committed credit facilities ("Prior Credit Facility") totaling $ 150 million, which included a $ 50 million term loan and a $ 100 million revolving loan. We may use the Revolving Loan for working capital, capital expenditures, restricted payments and acquisitions permitted under the agreement. 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 September 30, 2021 was 1.34 %. 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 ). 59 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. INDEBTEDNESS (CONTINUED) The following table is a summary of our long-term indebtedness (in thousands): As of September 30, 2021 2020 Revolving loan $ 48,118 $ 15,000 Term loan — 48,125 Total loans 48,118 63,125 Less unamortized issuance costs ( 2,319 ) ( 2,173 ) Less current maturities of long-term debt — ( 1,972 ) Total long-term debt, net of current portion $ 45,799 $ 58,980 The following table is a summary of future maturities of our aggregate long-term debt at September 30, 2021 (in thousands): Fiscal year Amount 2022 $ — 2023 — 2024 — 2025 — 2026 48,118 Total long-term debt $ 48,118 Covenants and Security Interest The agreements governing the Credit Facility contain a number of covenants. Among other thing, these covenants require us to maintain certain financial ratios (net leverage ratio and minimum fixed charge ratio). At September 30, 2021, we were in compliance with our debt covenants. Amounts borrowed under the Credit Facility are secured by substantially all of our assets. 8. PRODUCT WARRANTY OBLIGATION The following table summarizes the activity associated with the product warranty accrual (in thousands) and is listed on our consolidated balance sheets within current liabilities: Balance at Warranties Settlements Balance at Fiscal year October 1 accrued made September 30 2021 $ 942 $ 244 $ ( 479 ) $ 707 2020 $ 1,012 $ 666 $ ( 736 ) $ 942 2019 $ 1,172 $ 305 $ ( 465 ) $ 1,012 9. LEASES All of our leases are operating leases and primarily consist of leases for office space. For any lease with an initial term in excess of twelve months, the related lease assets and lease liabilities are recognized on our consolidated balance sheets as either operating or financing leases at the inception of an agreement where it is determined that a lease exists. We have lease agreements that contain both lease and non-lease components. We have elected to combine lease and non-lease components for all classes of assets. Leases with an initial term of twelve months or less are not recorded on our consolidated balance sheets. Instead we recognize lease expense for these leases on a straight-line basis over the lease term. Operating lease assets represent the right to use an underlying asset for the lease term and operating lease liabilities represent the obligation to make lease payments. These assets and liabilities are recognized based on the present value of future payments over the lease term at the commencement date. We generally use a collateralized incremental borrowing rate based on information available at the commencement date, including the lease term, in determining the present value of future 60 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. LEASES (CONTINUED) payments. When determining our right-of-use asset, we generally do not include options to extend or terminate the lease unless it is reasonably certain that the option will be exercised. Our leases typically require payment of real estate taxes and common area maintenance and insurance. These components comprise the majority of our variable lease cost and are excluded from the present value of our lease obligations. Fixed payments may contain predetermined fixed rent escalations. We recognize the related rent expense on a straight-line basis from the commencement date to the end of the lease term. The following table shows the supplemental balance sheet information related to our leases (in thousands): Balance Sheet Location September 30, 2021 September 30, 2020 Assets Operating leases Operating lease right-of-use assets $ 15,684 $ 14,334 Total lease assets $ 15,684 $ 14,334 Liabilities 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 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 Operating lease cost Cost of goods sold and SG&A $ 3,504 $ 3,341 Variable lease cost Cost of goods sold and SG&A 1,094 744 Short-term lease cost Cost of goods sold and SG&A 127 175 Total lease cost $ 4,725 $ 4,260 The following table presents supplemental information related to operating leases (in thousands): Year ended September 30, 2021 Year ended September 30, 2020 Cash paid for amounts included in the measurement of operating lease liabilities $ 2,707 $ 2,893 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 Weighted average remaining lease term - operating leases 8.9 years Weighted average discount rate - operating leases 3.50 % 61 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. 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): Fiscal year Amount 2022 $ 3,570 2023 3,288 2024 2,945 2025 2,821 2026 2,610 Thereafter 9,394 Total future undiscounted lease payments 24,628 Less imputed interest ( 3,627 ) Total reported lease liability $ 21,001 10. 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 In second quarter of fiscal 2020, we recorded and re-aligned our product management group within IoT Products & Services segment and eliminated two employment positions. We recorded $ 38 thousand for employee termination charges. This was fully paid during the second quarter of fiscal 2020. In the third quarter of fiscal 2020, we recorded $ 95 thousand of restructuring for employee termination charges primarily within our IoT Solutions segment. This resulted in the elimination of 22 employment positions. This restructuring was completed in the fourth quarter of fiscal 2020. Manufacturing Transition As announced in April 2018, we transferred the manufacturing functions of our Eden Prairie, Minnesota operations facility to existing contract manufacture suppliers. As a result, 53 employment positions in total were eliminated, resulting in restructuring charges amounting to approximately $ 0.5 million for employee costs during the third and fourth quarters of fiscal 2018 in our IoT Product and Services segment. The payments associated with these charges were completed in the first half of fiscal 2019. 2017 Restructuring In May 2017, we approved a restructuring plan primarily impacting our France location, which is now closed. We also eliminated certain employment positions in the U.S. The restructuring was the result of a decision to consolidate our France operations to our Europe, Middle East and Africa ("EMEA") headquarters in Munich. The total restructuring charges amounted to $ 2.5 million in fiscal 2017, which included $ 2.3 million of employee costs and $ 0.2 million of contract termination costs during the third quarter of fiscal 2017 in our IoT Product and Services segment. These actions resulted in an elimination of 10 employment positions in the U.S. and 8 employment positions in France. The payments associated with these charges were completed during the first half of fiscal 2019. 62 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. RESTRUCTURING (CONTINUED) Below is a summary of the restructuring charges and other activity within the restructuring accrual (in thousands): 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 Restructuring charge — — — — — — Payments — — ( 108 ) ( 233 ) ( 18 ) ( 359 ) Reversals — — ( 39 ) ( 53 ) 5 ( 87 ) Foreign currency fluctuation — — — ( 7 ) — ( 7 ) Balance at September 30, 2019 — — — — — — Restructuring charge — 133 — — — 133 Payments — ( 117 ) — — — ( 117 ) Reversals — ( 16 ) — — — ( 16 ) Foreign currency fluctuation — — — — — — Balance at September 30, 2020 — — — — — — Restructuring charge 995 — — — — 995 Payments ( 935 ) — — — — ( 935 ) Reversals — — — — — — Foreign currency fluctuation ( 60 ) — — — — ( 60 ) Balance at September 30, 2021 $ — $ — $ — $ — $ — $ — 11. REVENUE Revenue Disaggregation The following table summarizes our revenue by geographic location of our customers: Year ended September 30, ($ in thousands) 2021 2020 2019 North America, primarily the United States $ 227,923 $ 213,487 $ 184,022 Europe, Middle East & Africa 46,024 40,076 39,896 Rest of world 34,685 25,708 30,285 Total revenue $ 308,632 $ 279,271 $ 254,203 The following table summarizes our revenue by the timing of revenue recognition: Year ended September 30, ($ in thousands) 2021 2020 2019 Transferred at a point in time $ 274,960 $ 253,371 $ 231,387 Transferred over time 33,672 25,900 22,816 Total revenue $ 308,632 $ 279,271 $ 254,203 Contract Balances Contract Assets Contract assets consist of subscriber assets. These subscriber assets relate to fees in certain contracts that we charge our customers so they can begin using equipment. In these cases, we retain the ownership of the equipment that the customer uses. 63 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. REVENUE (CONTINUED) 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 ). Contract Liabilities The timing of revenue recognition may differ from the timing of invoicing to customers. Customers are invoiced for subscription services in advance on a monthly, quarterly or annual basis. Contract liabilities consist of unearned revenue related to annual or multi-year contracts for subscription services and related implementation fees for our IoT Solutions segment and our Digi Remote Manager ® services in our IoT Products & Services segment. Changes in unearned revenue were: Year ended September 30, ($ in thousands) 2021 2020 2019 Unearned revenue, beginning of period $ 9,341 $ 5,025 $ 3,933 Billings 48,972 35,213 43,071 Revenue recognized ( 42,825 ) ( 30,897 ) ( 41,979 ) Unearned revenue, end of period $ 15,488 $ 9,341 $ 5,025 Remaining Transaction Price Transaction price allocated to the remaining performance obligations represents contracted revenue that has not been recognized, which includes unearned revenue and unbilled amounts that will be recognized as revenue in future periods. As of September 30, 2021 approximately $ 17.4 million of revenue is expected to be recognized from remaining performance obligations for subscriptions contracts. We expect to recognize revenue on approximately $ 14.4 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 years to seven years . 12. INCOME TAXES The components of income before income taxes are (in thousands): Year ended September 30, 2021 2020 2019 United States $ 5,380 $ 3,756 $ 7,981 International 3,619 3,707 3,164 Income before income taxes $ 8,999 $ 7,463 $ 11,145 The components of the income tax (benefit) expense are (in thousands): Year ended September 30, 2021 2020 2019 Current: Federal $ 1,388 $ 709 $ 950 State 242 572 290 Foreign 1,678 1,128 746 Deferred: Federal ( 3,627 ) ( 2,911 ) ( 825 ) State ( 618 ) — — Foreign ( 430 ) ( 446 ) 26 Income tax (benefit) expense $ ( 1,367 ) $ ( 948 ) $ 1,187 64 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. INCOME TAXES (CONTINUED) Net deferred tax (liability) asset consists of (in thousands): As of September 30, 2021 2020 Non-current deferred tax asset $ 439 $ 389 Non-current deferred tax liability ( 13,493 ) ( 17,171 ) Net deferred tax liability $ ( 13,054 ) $ ( 16,782 ) Depreciation and amortization $ ( 1,399 ) $ ( 1,037 ) Lease asset ( 3,683 ) ( 3,415 ) Lease liability 4,941 4,477 Inventories 755 979 Compensation costs 4,064 3,698 Other accruals 6,387 3,985 Tax credit carryforwards 3,026 6,021 Valuation allowance ( 2,186 ) ( 4,372 ) Identifiable intangible assets ( 24,959 ) ( 27,118 ) Net deferred tax (liability) asset $ ( 13,054 ) $ ( 16,782 ) 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. 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 state research and development tax credits have a 15-year carryforward period. The majority of our non-U.S. net operating losses have an unlimited carryforward period. Our non-U.S. tax credit carryforwards will expire in 2034. 65 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. 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 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. If future taxable income projections are not realized, an additional valuation allowance may be required. This would be reflected as income tax expense at the time that any such change in future taxable income is determined. The reconciliation of the statutory federal income tax amount to our income tax (benefit) expense is (in thousands): Year ended September 30, 2021 2020 2019 Statutory income tax amount $ 1,890 $ 1,567 $ 2,341 Increase (decrease) resulting from: State taxes, net of federal benefits 319 392 196 Transaction costs 60 143 — Employee stock purchase plan 79 127 59 Foreign operations 556 431 225 Non-deductible executive compensation 150 115 171 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 ) Deferred balance sheet remeasure ( 952 ) — 9 ASU 2016-09 excess stock compensation ( 1,131 ) ( 673 ) ( 56 ) Contingent consideration 1,212 ( 27 ) 250 Changes from provision to return ( 458 ) ( 111 ) ( 511 ) Adjustment of tax contingency reserves 329 151 146 U.S. deduction for foreign export sales ( 630 ) ( 355 ) ( 146 ) Global intangible low-taxed income 33 31 162 Other, net 178 ( 31 ) ( 6 ) Income tax (benefit) expense $ ( 1,367 ) $ ( 948 ) $ 1,187 The Tax Cuts & Jobs Act of 2017 was enacted in the U.S. on December 22, 2017. We applied the guidance in Staff Accounting Bulletin ("SAB") 118 when accounting for the enactment-date income tax effects of this act in fiscal 2018. At September 30, 2018 we had not fully completed our accounting for the enactment effects of this act. We, however, had recorded a provisional estimate of the tax expense related to the effects on our existing deferred tax balances and the one-time transition tax which totaled $ 3.0 million in fiscal 2018. In the first quarter of fiscal 2019 we completed our accounting for the enactment date income tax effects of this act, and there were no significant adjustments to the provisional amounts recorded in fiscal 2018. In addition, certain provisions of this act became effective for us in fiscal 2019. 66 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. INCOME TAXES (CONTINUED) A reconciliation of the beginning and ending amount of unrecognized tax benefits is (in thousands): Year ended September 30, 2021 2020 2019 Unrecognized tax benefits at beginning of fiscal year $ 2,600 $ 1,713 $ 1,561 Increases related to: Prior year income tax positions 40 756 9 Current year income tax positions 507 425 314 Decreases related to: Prior year income tax positions ( 155 ) — ( 34 ) Settlements — ( 7 ) — Expiration of statute of limitations ( 84 ) ( 287 ) ( 137 ) Unrecognized tax benefits at end of fiscal year $ 2,908 $ 2,600 $ 1,713 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. We expect that it is reasonably possible that the total amounts of UTB will decrease by approximately $ 0.8 million over the next 12 months due to the expiration of various statutes of limitations. Of the $ 2.9 million of UTB, $ 2.3 million is included in non-current income taxes payable and $ 0.6 million is included with non-current deferred tax assets on the consolidated balance sheets at September 30, 2021. We recognize interest and penalties related to income tax matters in income tax expense. During fiscal 2021 and 2020, there were insignificant amounts of interest and penalties related to income tax matters in income tax expense. We accrued interest and penalties related to unrecognized tax benefits of $ 0.1 million at both September 30, 2021 and 2020. These accrued interest and penalties are included in our non-current income taxes payable on our consolidated balance sheets. We operate in multiple tax jurisdictions both in the U.S. and outside of the U.S. and face audits from various tax authorities regarding transfer pricing, tax credits, and other matters. Accordingly we must determine the appropriate allocation of income to each of these jurisdictions. This determination requires us to make several estimates and assumptions. Tax audits associated with the allocation of this income, and other complex issues, may require an extended period of time to resolve and may result in adjustments to our income tax balances in those years that are material to our consolidated balance sheets and results of operations. We file a U.S. federal income tax return and income tax returns in various states and foreign jurisdictions. With few exceptions, we are no longer subject to state and local or non-U.S. income tax examinations by tax authorities for years before fiscal year 2017. We are currently under 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. At September 30, 2021, the majority of undistributed foreign earnings are taxed under the one time transition tax and the global intangible low-taxed income ("GILTI") provision of the Tax Cuts and Jobs Act of 2017. Additionally, the previously un-taxed accumulated undistributed foreign earnings from prior fiscal years are still permanently reinvested and, as such, we have not accrued additional U.S. tax. It is our position that the earnings of our foreign subsidiaries are to be reinvested indefinitely to fund current operations and provide for future international expansion opportunities and only repatriate earnings to the extent that U.S. taxes have already been recorded. As of September 30, 2021, we are permanently reinvested with respect to previously non-taxed accumulated earnings in all jurisdictions. Although we have no current need to repatriate historical foreign earnings that have not been taxed in the U.S., if we change our assertion from indefinitely reinvesting undistributed foreign earnings, we would have to accrue applicable taxes. The amount of any taxes and the application of any tax credits would be determined based on the income tax laws at the time of such repatriation. Under current tax law, we estimate the unrecognized tax liability to be immaterial. 67 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. 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. 14. STOCK-BASED COMPENSATION Stock-based awards were granted under the 2021 Omnibus Incentive Plan (the "2021 Plan") beginning January 29, 2021. Prior to that date, such awards made in fiscal 2021 were granted under the 2020 Omnibus Incentive Plan (the "2020 Plan"). Upon stockholder approval of the 2021 Plan, we ceased granting awards under the 2020 Plan. 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 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. Eligible participants include our employees, our affiliates, non-employee directors of our Company and any consultant or advisor who is a natural person and provides services to us or our affiliates. Options that have been granted under the 2021 Plan typically vest over a four -year period and will expire if unexercised after seven years from the date of grant. Restricted stock unit awards ("RSUs") that have been granted to directors typically vest in one year. RSUs that have been granted to executives and employees typically vest in January over a four -year period. Performance stock unit awards ("PSUs") that have been granted to an executive will vest based on achievement of a cumulative adjusted earnings per share metric measured over a three -year period. Share-based compensation expenses recorded for this performance award is reevaluated at each reporting period based on the probability of achievement of the goal. The 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 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. 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. Eligible participants included our employees, our affiliates, non-employee directors of our Company and any consultant or advisor who is a natural person and provided services to us or our affiliates. 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. 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. 68 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. 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. The Purchase Plan allows eligible participants the right to purchase common stock on a quarterly basis at the lower of 85 % of the market price at the beginning or end of each three-month offering period. The most recent amendments to the Purchase Plan, 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. Employee contributions to the Purchase Plan were $ 1.2 million, $ 1.1 million and $ 1.1 million in fiscal 2021, 2020 and 2019, respectively. Pursuant to the Purchase Plan, 78,644 , 117,826 , and 111,036 shares of common stock were issued to employees during fiscal 2021, 2020 and 2019, respectively. Shares are issued under the Purchase Plan from treasury stock. As of September 30, 2021, 633,070 shares of common stock were available for future issuances under the Purchase Plan. Stock-based compensation expense is included in the consolidated results of operations as (in thousands): Year ended September 30, 2021 2020 2019 Cost of sales $ 371 $ 291 $ 174 Sales and marketing 2,069 2,318 1,708 Research and development 1,032 1,197 996 General and administrative 4,663 3,431 2,777 Stock-based compensation before income taxes 8,135 7,237 5,655 Income tax benefit ( 1,755 ) ( 1,523 ) ( 1,174 ) Stock-based compensation after income taxes $ 6,380 $ 5,714 $ 4,481 Stock Options Below is a summary of our stock options as of September 30, 2021 and changes during the twelve months then ended (in thousands, except per common share amounts): Options Outstanding Weighted Average Exercised Price Weighted Average Contractual Term (in years) Aggregate Intrinsic Value (1) Balance at September 30, 2020 3,393 $ 12.20 Granted 531 17.78 Exercised ( 742 ) 11.47 Forfeited / Canceled ( 230 ) 14.66 Balance at September 30, 2021 2,952 $ 13.20 3.6 $ 23,232 Exercisable at September 30, 2021 1,927 $ 11.55 2.5 $ 18,246 (1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $ 21.02 as of September 30, 2021, which would have been received by the option holders had all option holders exercised their options as of that date. The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price. The total intrinsic value of all options exercised during each of the twelve months ended September 30, 2021, 2020 and 2019 was $ 6.5 million, $ 3.7 million and $ 2.1 million, respectively. 69 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. 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: Year ended September 30, 2021 2020 2019 Weighted average per option grant date fair value $ 6.97 $ 6.17 $ 4.48 Assumptions used for option grants: Risk free interest rate 0.51% - 1.035% 0.37% - 1.73% 1.60% - 2.93% Expected term 6.00 years 6.00 years 6.00 years Expected volatility 44% - 46% 36% - 44% 33% - 35% Weighted average volatility 45 % 36 % 34 % Expected dividend yield 0 % 0 % 0 % The fair value of each option award granted during the periods presented was estimated using the Black-Scholes option valuation model that uses the assumptions noted in the above table. Expected volatilities are based on the historical volatility of our stock. We use historical data to estimate option exercise and employee termination information within the valuation model. The expected term of options granted is derived from the vesting period and historical information and represents the period of 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 September 30, 2021, the total unrecognized compensation cost related to non-vested stock-based compensation arrangements, net of expected forfeitures, was $ 5.7 million. The related weighted average period over which this cost is expected to be recognized was approximately 1.8 years. 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): Options Outstanding Options Exercisable Range of Exercise Prices Options Outstanding Weighted Average Remaining Contractual Life (In Years) Weighted Average Exercise Price Number of Shares Vested Weighted Average Exercise Price $7.40 - $9.35 463 1.26 $ 8.44 463 $ 8.44 $9.70 - $10.81 470 2.00 $ 10.32 455 $ 10.32 $10.96 - $11.87 463 3.64 $ 11.55 323 $ 11.57 $12.48 - $13.50 414 2.15 $ 13.14 413 $ 13.14 $13.76 - $16.75 453 5.64 $ 15.28 93 $ 13.81 $17.10 - $17.94 593 5.53 $ 17.56 171 $ 17.75 $18.20 - $25.15 96 6.20 $ 21.63 9 $ 18.20 $7.40 - $25.15 2,952 3.57 $ 13.20 1,927 $ 11.55 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. 70 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. 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): RSUs PSUs 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 — $ — Granted 366 $ 18.76 18 $ 25.15 Vested ( 373 ) $ 12.80 — $ — Canceled ( 153 ) $ 14.12 — $ — Nonvested at September 30, 2021 812 $ 15.72 18 $ 25.15 As of September 30, 2021, the total unrecognized compensation cost related to non-vested restricted stock units was $ 9.2 million. The related weighted average period over which this cost is expected to be recognized was approximately 1.3 years. 15. 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. 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. 16. COMMITMENTS AND CONTINGENCIES Leases We lease certain of our buildings and equipment under noncancelable lease agreements. Please refer to Note 9 to our consolidated financial statements for additional information. Litigation 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 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. 71 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. SUBSEQUENT EVENTS 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. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.