What changed in this filing

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Item 1. Financial Statements

2022-02-04 compared with 2021-08-06 · 164 added, 284 removed, 425 unchanged (51% of the section changed)

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three months ended June 30, Nine months ended June 30,

2021 2020 2021 2020

Three months ended December 31,

(in thousands, except per share data)

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Total operating expenses 44,082 41,165

Operating income 4,018 2,855 7,242 6,096

Operating income (loss) 3,799 ( 146 )

Other expense, net:

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Total other expense, net ( 5,000 ) ( 594 )

Income before income taxes 3,536 1,910 5,998 3,119

Income tax expense (benefit) 379 144 220 ( 859 )

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

Net income per common share:

Loss before income taxes ( 1,201 ) ( 740 )

Income tax benefit ( 2,388 ) ( 433 )

Net income (loss) $ 1,187 $ ( 307 )

Net income (loss) per common share:

Basic $ 0.03 $ ( 0.01 )

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three months ended June 30, Nine months ended June 30,

2021 2020 2021 2020

Three months ended December 31,

(in thousands)

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

Net income (loss) $ 1,187 $ ( 307 )

Other comprehensive (loss) income:

Foreign currency translation adjustment ( 212 ) 1,872

Change in net unrealized gain on investments — — — 18

Less income tax expense — — — ( 5 )

Other comprehensive income (loss) 463 681 2,068 ( 1,107 )

Other comprehensive (loss) income ( 212 ) 1,872

Comprehensive income $ 975 $ 1,565

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CONDENSED CONSOLIDATED BALANCE SHEETS

June 30, 2021 September 30, 2020

December 31, 2021 September 30, 2021

(in thousands, except share data)

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Unearned revenue 22,136 13,589

Contingent consideration on acquired business 3,000 4,228

Contingent consideration on acquired businesses 6,100 20

Current portion of operating lease liabilities 2,884 2,633

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months ended June 30,

Three months ended December 31,

(in thousands)

Operating activities:

Net income $ 5,778 $ 3,978

Adjustments to reconcile net income to net cash provided by operating activities:

Net income (loss) $ 1,187 $ ( 307 )

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

Depreciation of property, equipment and improvements 1,553 1,089

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Deferred income tax provision 1,732 750

Loss on sale of property and equipment 65 —

Change in fair value of contingent consideration — 5,772

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Restructuring charge 109 733

Other 84 ( 37 )

Changes in operating assets and liabilities (net of acquisitions) ( 23,831 ) ( 5,631 )

Net cash provided by operating activities 42,084 19,153

Net cash (used for) provided by operating activities ( 9,885 ) 8,312

Investing activities:

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Payments on long-term debt ( 95,799 ) ( 15,625 )

Payments for contingent consideration ( 4,200 ) ( 4,698 )

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

Proceeds from stock option plan transactions 4,227 3,944

Proceeds from employee stock purchase plan transactions 321 334

Purchases of common stock ( 1,985 ) ( 1,692 )

Net cash provided by financing activities 60,579 78,221

Taxes paid for net share settlement of share-based payment options and awards ( 6,025 ) ( 1,446 )

Net cash provided by (used for) financing activities 252,724 ( 12,793 )

Effect of exchange rate changes on cash and cash equivalents ( 36 ) 392

Net increase (decrease) in cash and cash equivalents 92,813 ( 37,707 )

Net decrease in cash and cash equivalents ( 105,244 ) ( 4,866 )

Cash and cash equivalents, beginning of period 152,432 54,129

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Transfer of inventory to property, equipment and improvements $ ( 699 ) $ ( 882 )

Contingent consideration recognized related to acquisition of business $ ( 5,914 ) $ ( 5,100 )

Tenant improvement allowance $ — $ 1,000

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

Balances March 31, 2020 35,364 $ 354 6,410 $ ( 55,563 ) $ 274,780 $ 164,131 $ ( 25,339 ) $ 358,363

Net income — — — — — 1,766 — 1,766

Other comprehensive loss — — — — — — 681 681

Employee stock purchase plan issuances — — ( 37 ) 324 ( 41 ) — — 283

Taxes paid for net share settlement of share-based payment awards — — — ( 9 ) — — — ( 9 )

Issuance of stock under stock award plans 41 — — — 339 — — 339

Stock-based compensation expense — — — — 1,882 — — 1,882

Balances, June 30, 2020 35,405 $ 354 6,373 $ ( 55,248 ) $ 276,960 $ 165,897 $ ( 24,658 ) $ 363,305

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

Net income — — — — — 3,978 — 3,978

Net loss — — — — — ( 307 ) — ( 307 )

Other comprehensive income — — — — — — 1,872 1,872

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Stock-based compensation expense — — — — 1,745 — — 1,745

Balances, June 30, 2020 35,405 $ 354 6,373 $ ( 55,248 ) $ 276,960 $ 165,897 $ ( 24,658 ) $ 363,305

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

Net income — — — — — 3,157 — 3,157

Other comprehensive loss — — — — — — 463 463

Employee stock purchase plan issuances — — ( 18 ) 160 137 — — 297

Taxes paid for net share settlement of share-based payment awards — — 6 ( 119 ) — — — ( 119 )

Issuance of stock under stock award plans 70 1 .

— 402 — — 403

Stock-based compensation expense — — — — 2,110 — — 2,110

Balances, June 30, 2021 40,512 $ 405 6,401 $ ( 56,554 ) $ 367,253 $ 176,116 $ ( 21,749 ) $ 465,471

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

Balances, September 30, 2021 40,653 $ 407 6,391 $ ( 56,535 ) $ 370,699 $ 180,692 $ ( 22,746 ) $ 472,517

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Other comprehensive loss — — — — — — ( 212 ) ( 212 )

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

Employee stock purchase plan issuances — — ( 18 ) 161 160 — — 321

Taxes paid for net share settlement of share-based payment awards — — 109 ( 1,985 ) — — — ( 1,985 )

Taxes paid for net share settlement of share-based payment options and awards — — 74 ( 1,726 ) ( 4,299 ) — — ( 6,025 )

Issuance of stock under stock award plans 760 7 — — 4,220 — — 4,227

Stock-based compensation expense — — — — 2,017 — — 2,017

Balances, June 30, 2021 40,512 $ 405 6,401 $ ( 56,554 ) $ 367,253 $ 176,116 $ ( 21,749 ) $ 465,471

Balances, December 31, 2021 41,413 $ 414 6,447 $ ( 58,100 ) $ 372,797 $ 181,879 $ ( 22,958 ) $ 474,032

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

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The quarterly results of operations are not necessarily indicative of the results to be expected for the full year.

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

As a result, our disclosed measure of segment operating income (loss) has been updated.

Potential Impacts of COVID-19 on our Business

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Recently Issued Accounting Pronouncements

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.

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.

We adopted this standard in the first quarter of fiscal 2022.

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.

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.

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 $3.0 million and $2.9 million, respectively.

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 at June 30, 2021.

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

The goodwill therefore is not deductible.

We believe this is a complementary acquisition for us as it significantly enhances our IoT Products & Services segment by enhancing Digi's embedded systems portfolio and immediately extends the company's market reach with a complete LoRaWAN ® -based solutions offering.

Acquisition of Ventus

On November 1, 2021, we acquired Ventus Networks, LLC ("Ventus") for approximately $ 350 million in cash.

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.

For tax purposes, this acquisition is treated as an asset acquisition.

We believe this is a complementary acquisition for us as it significantly enhances our IoT Solutions segment by enhancing Digi's service portfolio and immediately extends the company's market reach with a Managed Network-as-a-Service ("MNaaS") solutions offering.

Costs directly related to the acquisition of $ 3.1 million incurred fiscal year to date 2022 have been charged to operations and are included in general and administrative expense in our condensed statements of operations.

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

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

Contingent consideration 5,900

Total $ 13,046

Fair value of net tangible assets acquired $ 124

Identifiable intangible assets:

Customer relationships 3,900

Purchased and core technology 1,050

Trademarks 500

Deferred tax liability on identifiable intangible assets ( 1,145 )

Goodwill 8,617

Total $ 13,046

Acquisition of Opengear, Inc.

On December 13, 2019, we completed our acquisition of Opengear, Inc.

("Opengear"), a New Jersey-based provider of secure IT infrastructure products and software.

Opengear results have been included in our condensed consolidated financial statements within our IoT Products & Services segment since the date of acquisition.

During the first quarter of fiscal 2021, we recorded an out-of-period adjustment in connection with the purchase price accounting of Opengear.

This balance sheet adjustment resulted in a decrease in fair value of net tangible assets acquired of $ 1.1 million , a decrease of $ 0.3 million to non-current deferred tax liability and an increase to goodwill of $ 0.8 million .

Management assessed the impact of this adjustment and believes, after considering both quantitative and qualitative factors, that it is not material to our current or previously issued consolidated financial statements.

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

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

Cash $ 350,000

Contingent consideration 5,100

Total $ 153,158

Fair value of net tangible assets acquired $ 22,110

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Trademarks 16,000

Deferred tax liability on identifiable intangible assets ( 27,126 )

Goodwill 116,890

Total $ 350,000

The condensed consolidated balance sheet as of June 30, 2021 reflects the final allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition.

EARNINGS PER SHARE

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

Three months ended June 30, Nine months ended June 30,

2021 2020 2021 2020

The condensed consolidated balance sheet as of December 31, 2021 reflects the preliminary allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition.

Given the timing of the Ventus acquisition, the estimated fair value of the net assets acquired, liabilities assumed and identifiable intangible assets are preliminary and remain subject to change.

Included in the fair value of net tangible assets acquired was $ 0.9 million of right-of-use asset included in other non-current assets and $ 0.9 million of lease liability included in other current liabilities and other non-current liabilities associated with Ventus’s operating leases.

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

The preliminary weighted average useful life for all the identifiable intangibles listed above is estimated to be 19.2 years.

For purposes of determining fair value, the existing customer relationships identified above are assumed to have a useful life of 20.5 years, purchased and core technology is assumed to have useful life of 11 years and trademarks are assumed a useful life of 13 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 which reflects the pattern in which the assets are expected to be consumed.

The following consolidated pro forma information is presented as if the acquisition had occurred on October 1, 2020 (in thousands):

Three months ended December 31,

Net sales $ 89,322 $ 84,988

Net income ( 3,653 ) ( 7,783 )

Pro forma net income has been adjusted to include interest expense related to debt incurred as a result of the acquisition, amortization on the fair value of the intangibles acquired and remove any costs incurred with the sale transaction.

Net income for the three months ended December 31, 2020 was adjusted to include acquisition-related costs of $ 3.1 million.

EARNINGS PER SHARE

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

Three months ended December 31,

Net income (loss) $ 1,187 $ ( 307 )

Denominator for basic net income per common share — weighted average shares outstanding 34,560 29,374

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Denominator for diluted net income per common share — adjusted weighted average shares 35,767 29,374

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

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

For the three months ended June 30, 2021 and 2020, there were 41,540 and 2,241,860 potentially dilutive shares, respectively.

For the nine months ended June 30, 2021 and 2020, there were 37,248 and 1,146,581 potentially dilutive shares, respectively.

Net income (loss) per common share, basic $ 0.03 $ ( 0.01 )

Net income (loss) per common share, diluted $ 0.03 $ ( 0.01 )

For the three months ended December 31, 2021 and 2020, there were 35,160 and 547,045 potentially dilutive shares, respectively.

These potentially dilutive shares were related to stock options to purchase common shares that were not included in the above computation of diluted earnings per common share since the options' exercise prices were greater than the average market price of our common shares.

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

SELECTED BALANCE SHEET DATA

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and Level 3 (unobservable inputs that cannot be corroborated by observable market data).

FAIR VALUE MEASUREMENTS (CONTINUED)

The following tables provide information by level for financial liabilities that are measured at fair value on a recurring basis (in thousands):

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Inputs Considered as

June 30, 2021 Level 1 Level 2 Level 3

December 31, 2021 Level 1 Level 2 Level 3

Contingent consideration on acquired business $ 6,200 $ — $ — $ 6,200

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Total liabilities measured at fair value $ 6,200 $ — $ — $ 6,200

In connection with our acquisition of Bluenica Corporation ("Bluenica") in October 2015, we agreed to make contingent earn-out payments over a period of up to 4 years, subject to achieving specified revenue thresholds for sales of Bluenica products.

We paid the final installment of $ 2.9 million during the third quarter of fiscal 2020.

In connection with our acquisition of Accelerated Concepts, Inc.

("Accelerated") in January 2018, we agreed to make contingent earn-out payments if specified revenue thresholds for sales of Accelerated products were achieved.

We paid the first installment payment of $ 3.5 million in the third quarter of fiscal 2019.

We paid the final installment of $ 2.4 million in the third quarter of fiscal 2020.

The earn-out period for this acquisition ended on January 22, 2020.

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

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

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

We paid the final installment of $ 10.0 million during the second quarter of fiscal 2021.

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

In connection with our acquisition of Haxiot, we agreed to make contingent earn-out payments, based upon certain revenue thresholds.

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 at June 30, 2021.

As a result, we reduced contingent consideration by $ 2.1 million in the third fiscal quarter of 2021.

The fair value of the remaining liability for contingent consideration for the acquisition of Haxiot was $ 5.9 million at December 31, 2021.

In connection with our acquisition of Ctek, we agreed to make contingent earn-out payments, based upon certain revenue thresholds.

The fair value of the remaining liability for contingent consideration for the acquisition of Ctek was $ 0.3 million at December 31, 2021.

The following table presents a reconciliation of the contingent consideration liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):

Three months ended June 30, Nine months ended June 30,

2021 2020 2021 2020

Three months ended December 31,

Fair value at beginning of period $ 6,200 $ 4,228

Contingent consideration recognized for acquired business — — 8,000 5,100

Contingent consideration payments — ( 6,151 ) ( 10,000 ) ( 6,151 )

Change in fair value of contingent consideration — 5,772

Fair value at end of period $ 6,200 $ 10,000

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

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

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

The fair value of the contingent consideration at December 31, 2021 is based on the probability of achieving the specified revenue thresholds for Haxiot and Ctek.

GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Amortizable intangible assets were (in thousands):

June 30, 2021 September 30, 2020

December 31, 2021 September 30, 2021

amount Accum.

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Non-compete agreements 600 ( 600 ) — 600 ( 600 ) —

Order backlog 1,000 ( 500 ) 500 1,000 ( 250 ) 750

Total $ 435,711 $ ( 112,917 ) $ 322,794 $ 224,643 $ ( 106,614 ) $ 118,029

Amortization expense was $ 4.1 million and $ 4.1 million for the three months ended June 30, 2021 and 2020, respectively, and $ 12.0 million and $ 10.7 million for the nine months ended June 30, 2021 and 2020, respectively.

Amortization expense was $ 6.3 million and $ 4.0 million for the three months ended December 31, 2021 and 2020, respectively.

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

Estimated amortization expense related to intangible assets for the remainder of fiscal 2022 and the five succeeding fiscal years is (in thousands):

2021 (six months) $ 7,736

2022 (nine months) $ 20,717

2023 $ 24,996

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2025 $ 20,825

2026 $ 20,593

2027 $ 18,582

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

Nine months ended June 30,

Three months ended December 31,

Products and Services IoT

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Acquisition — 116,890 116,890

Adjustment (see Note 2) 846 — 846

Adjustment 154 — 154

Foreign currency translation adjustment ( 51 ) ( 17 ) ( 68 )

Balance at June 30, 2021 $ 170,710 $ 50,621 $ 221,331

Balance at December 31, 2021 $ 175,283 $ 167,215 $ 342,498

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

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We continue to have 2 reportable segments, our IoT Products & Services segment and our IoT Solutions segment (see Note 8 ).

Effective with the reorganization announcement on October 7, 2020 (see Note 14), our IoT Products & Services business is now structured to include four reporting units under the IoT Products & Services segment, each with a reporting manager:

Effective with the reorganization announcement on October 7, 2020, our IoT Products & Services business is now structured to include four reporting units under the IoT Products & Services segment, each with a reporting manager:

Cellular Routers, Console Servers, OEM Solutions and Infrastructure Management.

We have four reporting units along with our IoT Solutions segment that have been tested individually for impairment.

Due to the reorganization on October 7, 2020 (see Note 14), we performed our fiscal third quarter 2021 annual impairment test by reporting unit.

As a result, we tested Cellular Routers, Console Servers, OEM Solutions, Infrastructure Management and IOT Solutions units which constitute separate reporting units for purposes of the ASC 350-20-35 "Goodwill Measurement of Impairment" assessment, which were tested individually for impairment in fiscal third quarter 2021.

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.

We had four reporting units along with our IoT Solutions segment that were tested individually for impairment during our third quarter fiscal 2021 annual impairment test.

Following our acquisition of Ventus in November, 2021, we have 2 reporting units within our IoT Solutions segment that will be tested for impairment during our Fiscal 2022 annual impairment test in addition to the 4 reporting units included in IoT Products & Services.

GOODWILL AND OTHER INTANGIBLE ASSETS, NET (CONTINUED)

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

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

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

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

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

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

This approach can be estimated through the guideline company method.

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

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

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

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

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

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

This agreement provides us with a senior secured credit facility (the "Credit Facility") consisting of a $ 200 million revolving loan (the "Revolving Loan").

This loan replaced our syndicated senior secured credit agreement with BMO that was entered into on December 13, 2019 and replaced the remaining balance of our term loan with this new revolver.

This prior agreement provided us with committed credit facilities ("Prior Credit Facility") totaling $ 150 million, which included a $ 50 million term loan and a $ 100 million revolving loan.

We may use the Revolving Loan for working capital, capital expenditures, restricted payments and acquisitions permitted under the agreement.

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

The amount of the applicable margin spread is a function of our leverage ratio and is reset monthly.

On November 1, 2021, we entered into a second amended and restated credit agreement with BMO Harris Bank N.A.

This agreement provides us with a senior secured credit facility (the "Credit Facility") consisting of a $ 350 million term loan B secured loan (the “Term Loan Facility”) and a $ 35 million revolving credit facility (the “Revolving Loan Facility”) with an uncommitted option to increase incremental loans under the Credit Facility, subject to an incremental cap.

The Revolving Loan Facility includes a $ 10 million letter of credit subfacility and $ 10 million swingline subfacility.

Digi may use proceeds of the Revolving Loan Facility in the future for general corporate purposes.

This loan replaced our syndicated senior secured credit agreement with BMO that was entered into on March 15, 2021 and replaced the remaining balance of our revolver with this new term loan.

This prior agreement provided us with committed credit facilities ("Prior Credit Facility") consisting of a $ 200 million revolving loan.

On December 22, 2021, Digi entered into a third amended and restated credit agreement with BMO.

Digi refinanced the Term Loan Facility and Revolving Loan Facility under its existing credit agreement entered into on November 1, 2021, but did not receive any additional proceeds from nor modify the amounts of any facilities or subfacilities contained within that credit agreement.

Following the December amendment, borrowings under the Term Loan Facility bear interest at a rate per annum equal to LIBOR with a floor of 0.50 % for an interest period of one, three or six months as selected by Digi, reset at the end of the selected interest period (or a replacement benchmark rate if LIBOR is no longer available) plus 5.00 % or a base rate plus 4.00 %.

The base rate is determined by reference to the highest of BMO’s prime rate, the Federal Funds Effective Rate plus 0.50 %, or the one-month LIBOR for U.S.

dollars plus 1.00 %.

The applicable margin for loans under the Revolving Credit Facility is in a range of 4.00 % to 3.75 % for LIBOR loans and 3.00 % to 2.75 % for base rate loans, depending on Digi’s consolidated leverage ratio.

In addition to paying interest on the outstanding balance under the Credit Facility, we are required to pay a commitment fee on the non-utilized commitments thereunder which is also reported in interest expense.

Our weighted average interest rate at June 30, 2021 was 0.47 %.

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

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

The fair value of the Revolving Loan approximated carrying value at June 30, 2021.

Our weighted average interest rate at December 31, 2021 was 4.58 %.

The debt issuance costs and remaining balance under the Prior Credit Facility totaled $ 2.3 million at November 1, 2021.

Of this amount $ 1.9 million was written off and included in interest expense upon the entry into the new amendment and $ 0.4 million is being amortized over the term of the amended loan and reported in interest expense.

Digi incurred an additional $ 11.7 million and $ 1.7 million in debt issuance costs relating to the November 1 and December 22 amendments, respectively.

These amounts will be amortized over the term of the amended loan and reported in interest expense.

The Term Loan is payable in quarterly installments, with the balance remaining due at December 22, 2028.

The Revolving Loan is due in a lump sum payment at maturity on December 22, 2026.

The fair value of the Term Loan and Revolving Loan approximated carrying value at December 31, 2021.

In December 2021, Digi made a one-time payment of $ 50 million against the term loan.

INDEBTEDNESS (CONTINUED)

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

The following table is a summary of our long-term indebtedness at December 31, 2021 and September 30, 2021 (in thousands):

Balance at December 31, 2021 Balance at September 30, 2021

Revolving Loan $ — $ 48,118

Term loan $ 300,000 $ —

Total loans 300,000 48,118

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Total long-term debt, net of current portion $ 275,340 $ 45,799

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

Fiscal year Amount

Total long-term debt $ 300,000

Covenants and Security Interest

The agreements governing the Credit Facility contain a number of covenants.

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

At June 30, 2021, we were in compliance with our debt covenants.

The agreements governing the Revolving Loan Facility contains a number of covenants.

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

At December 31, 2021, had no amounts drawn on the Revolving Loan Facility.

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

STOCKHOLDERS' EQUITY

Public Offering of Common Stock

During March 2021 we sold 4,025,000 shares of our common stock at a public offering price of $ 19.50 per share.

The shares offered were registered pursuant to a registration statement that we filed with the Securities and Exchange Commission.

We received net proceeds of $ 73.8 million, net of transaction expenses of $ 0.3 million related to the public offering.

We intend to use the proceeds for working capital and general corporate purposes.

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

SEGMENT INFORMATION

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IoT Products & Services and IoT Solutions.

Effective with the reorganization announcement on October 7, 2020 (see Note 14), our IoT Products & Services business is now structured to include four operating segments, each with a segment manager.

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

These four operating segments include:

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SEGMENT INFORMATION (CONTINUED)

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

Following the acquisition of Ventus on November 1, 2021, IoT Solutions is now comprised of two operating segments:

• SmartSense - offers wireless temperature and other condition-based monitoring services as well as employee task management services.

• Ventus - provides MNaaS solutions that simplify the complexity of enterprise wide area network ("WAN") connectivity via wireless and fixed line solutions.

The operating segments included in each reportable segment have similar qualitative and quantitative factors which allow us to aggregate them under each 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.

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

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

The shared general and administrative costs are now allocated to each operating segment.

As a result, our disclosed measure of segment operating income has been updated for all periods presented.

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

Following the October 2020 reorganization, the shared general and administrative costs began being allocated to each operating segment.

As a result, our disclosed measure of segment operating income has been updated for all periods presented to conform with this change.

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

Three months ended June 30, Nine months ended June 30,

2021 2020 2021 2020

Three months ended December 31,

IoT Products & Services $ 65,744 $ 61,780

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IoT Solutions ( 317 ) ( 1,415 )

Total operating income $ 4,018 $ 2,855 $ 7,242 $ 6,096

Total operating income (loss) $ 3,799 $ ( 146 )

Depreciation and Amortization

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

Nine months ended June 30,

Three months ended December 31,

IoT Products & Services $ 454 $ 777

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Total expended for property, plant and equipment $ 454 $ 777

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

* Excluded from this amount is $699 and $882 of transfers of inventory to property plant and equipment for subscriber assets for the three months ended December 31, 2021 and 2020, respectively.

SEGMENT INFORMATION (CONTINUED)

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

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

Three months ended June 30, Nine months ended June 30,

2021 2020 2021 2020

Three months ended December 31,

North America, primarily the United States $ 66,243 $ 54,018

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

Three months ended June 30, Nine months ended June 30,

2021 2020 2021 2020

Three months ended December 31,

Transferred at a point in time $ 66,535 $ 64,188

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

The total net book value of subscriber assets of $ 2.2 million and $ 2.2 million as of June 30, 2021 and September 30, 2020, respectively, are included in property, equipment and improvements, net.

Depreciation expense for these subscriber assets, which is included in cost of sales, was $ 0.5 million and $ 0.4 million for the three months ended June 30, 2021 and June 30, 2020, respectively and $ 1.4 million and $ 1.1 million for the nine months ended June 30, 2021 and June 30, 2020, respectively.

The total net book value of subscriber assets of $ 9.8 million and $ 1.9 million as of December 31, 2021 and September 30, 2021, respectively, are included in property, equipment and improvements, net.

The December 31, 2021 balance includes $ 8.1 million acquired in the acquisition of Ventus.

Depreciation expense for these subscriber assets, which is included in cost of sales, was $ 0.8 million and $ 0.5 million for the three months ended December 31, 2021 and December 31, 2020, respectively.

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

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These pertain to our IoT Solutions segment and our Digi Remote Manager ® services in our IoT Products & Services segment.

REVENUE (CONTINUED)

Changes in unearned revenue were (in thousands):

Three months ended June 30, Nine months ended June 30,

2021 2020 2021 2020

Three months ended December 31,

Unearned revenue, beginning of period $ 15,488 $ 9,341

Unearned revenue assumed from Ventus acquisition 2,100 —

Billings 27,181 14,267

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

June 30, 2021, approximately $ 14.8 million of revenue is expected to be recognized from remaining performance obligations for subscription contracts.

As of December 31, 2021, approximately $ 24.3 million of revenue is expected to be recognized from remaining performance obligations for subscription contracts.

We expect to recognize revenue on approximately $ 22.1 million of remaining performance obligations over the next twelve months .

Revenue from the remaining performance obligations we expect to recognize over a range of two to seven years .

Our income tax expense was $ 0.2 million for the nine months ended June 30, 2021.

Included in this expense was a net tax benefit discretely related to the nine months ended June 30, 2021 of $ 1.0 million.

Our income tax benefit was $ 2.4 million for the three months ended December 31, 2021.

Included in this benefit was a net tax benefit discretely related to the three months ended December 31, 2021 of $ 2.2 million.

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

Income tax benefit was $ 0.9 million for the nine months ended June 30, 2020.

Included in this benefit was a net tax benefit discretely related to the nine months ended June 30, 2020 of $ 1.1 million.

This benefit primarily was the result of excess tax benefits recognized on stock compensation and an adjustment of our state deferred tax rate due to the Opengear acquisition.

For the nine months ended June 30, 2020, our effective tax rate before items discretely related to the period was less than the U.S.

statutory rate.

This was primarily due to certain research and development tax credits generated in the U.S.

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

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

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

Our effective tax rate will vary based on a variety of factors.

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Expiration of statute of limitations ( 68 )

Unrecognized tax benefits as of June 30, 2021 $ 2,391

The total amount of unrecognized tax benefits at June 30, 2021 that, if recognized, would affect our effective tax rate was $ 2.2 million, after considering the impact of interest and deferred benefit items.

Unrecognized tax benefits as of December 31, 2021 $ 2,840

The total amount of unrecognized tax benefits at December 31, 2021 that, if recognized, would affect our effective tax rate was $ 2.6 million, after considering the impact of interest and deferred benefit items.

We expect that the total amount of unrecognized tax benefits will decrease by approximately $ 0.7 million over the next 12 months.

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Balance at Warranties Settlements Balance at

Period April 1 issued made June 30

Three months ended June 30, 2021 $ 923 $ 16 $ ( 146 ) $ 793

Three months ended June 30, 2020 $ 860 $ 123 $ ( 96 ) $ 887

Balance at Warranties Settlements Balance at

Period October 1 issued made June 30

Nine months ended June 30, 2021 $ 942 $ 205 $ ( 354 ) $ 793

Nine months ended June 30, 2020 $ 1,012 $ 525 $ ( 650 ) $ 887

Period October 1 issued made December 31

Three months ended December 31, 2021 $ 707 $ 71 $ ( 120 ) $ 658

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

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

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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.

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 the condensed consolidated balance sheets.

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

Balance Sheet Location June 30,

2021 September 30,

Balance Sheet Location December 31, 2021 September 30, 2021

Operating leases Operating lease right-of-use assets $ 15,891 $ 15,684

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

Three months ended June 30, Nine months ended June 30,

2021 2020 2021 2020

Three months ended December 31,

Operating lease cost $ 937 $ 861

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

Nine months ended June 30,

Three months ended December 31,

Cash paid for amounts included in the measurement of operating lease liabilities $ — $ 911

Right-of-use assets acquired in Ventus acquisition 919 —

Right-of-use assets obtained in exchange for new operating lease liabilities — 2,892

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

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

LEASES (CONTINUED)

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

At December 31, 2021 the weighted average remaining lease term of our operating leases was 8.4 years and the weighted average discount rate for these leases was 3.1 %.

Fiscal year Amount

Remainder of 2021 $ 1,777

Thereafter 7,069

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Total reported lease liability $ 21,109

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.

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

Q1 2021 Restructuring

Employee Termination Costs

Balance at September 30, 2020 $ —

Restructuring charge 995

Payments ( 599 )

Foreign currency fluctuation ( 39 )

Balance at June 30, 2021 $ 357

COMMITMENTS AND CONTINGENCIES

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Please refer to Note 12 to our condensed consolidated financial statements for additional information.

In November 2018, DimOnOff Inc., a company headquartered in Quebec City, Quebec, Canada ("DimOnOff"), which sells control systems in the building automation and street lighting markets sued us and a former distributor from whom DimOnOff purchased certain 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.

COMMITMENTS AND CONTINGENCIES (CONTINUED)

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

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

In addition to the matter discussed above, in the normal course of business, we are 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.

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.

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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.

STOCK-BASED COMPENSATION (CONTINUED)

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 June 30, 2021, there were approximately 1,325,088 shares available for future grants under the 2021 Plan.

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

As of December 31, 2021, there were approximately 755,017 shares available for future grants under the 2021 Plan.

Cash received from the exercise of stock options was $ 4.2 million and $ 3.9 million for the three months ended December 31, 2021 and December 31, 2020, respectively.

Our equity plans and corresponding forms of award agreements generally have provisions allowing employees to elect to satisfy tax withholding obligations through the delivery of shares.

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

During the nine months ended June 30, 2021 and 2020, our employees forfeited 109,516 shares and 95,997 shares, respectively, in order to satisfy respective withholding tax obligations of $ 2.0 million and $ 1.7 million.

During the three months ended December 31, 2021 and 2020, our employees forfeited 611,415 shares and 83,928 shares, respectively, in order to satisfy respective withholding tax obligations of $ 6.0 million and $ 1.4 million, respectively.

We sponsor an Employee Stock Purchase Plan as amended and restated as of December 10, 2019, October 29, 2013, December 4, 2009 and November 27, 2006 (the "ESPP"), covering all domestic employees with at least 90 days of continuous service and who are customarily employed at least 20 hours per week.

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The most recent amendments to the ESPP, ratified by our stockholders on January 29, 2020, increased the total number of shares to 3,425,000 that may be purchased under the plan.

ESPP contributions by employees were $ 0.9 million for the nine months ended June 30, 2021 and $ 0.8 million for the nine months ended June 30, 2020.

Pursuant to the ESPP, 61,302 and 90,592 common shares were issued to employees during the nine months ended June 30, 2021 and June 30, 2020, respectively.

ESPP contributions by employees were $ 0.3 million for the three months ended December 31, 2021 and December 31, 2020.

Pursuant to the ESPP, 17,936 and 25,246 common shares were issued to employees during the three months ended December 31, 2021 and December 31, 2020, respectively.

Shares are issued under the ESPP from treasury stock.

As of June 30, 2021, 650,412 common shares were available for future issuances under the ESPP.

STOCK-BASED COMPENSATION (CONTINUED)

As of December 31, 2021, 615,134 common shares were available for future issuances under the ESPP.

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

Three months ended June 30, Nine months ended June 30,

2021 2020 2021 2020

Three months ended December 31,

Cost of sales $ 86 $ 82

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Stock-based compensation after income taxes $ 1,587 $ 1,380

STOCK-BASED COMPENSATION (CONTINUED)

Stock Options

The following table summarizes our stock option activity (in thousands, except per common share amounts):

Options Outstanding Weighted Average Exercised Price Weighted Average Contractual Term (in years) Aggregate Intrinsic Value (1)

Options Outstanding Weighted Average Exercise Price Weighted Average Contractual Term (in years) Aggregate Intrinsic Value (1)

Balance at September 30, 2021 2,952 $ 13.20

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Forfeited / Canceled ( 43 ) 16.78

Balance at March 31, 2021 3,123 $ 13.16 3.91 $ 21,864

Exercisable at March 31, 2021 1,949 $ 11.52 2.86 $ 16,745

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $ 20.11 as of June 30, 2021, which would have been received by the option holders had all option holders exercised their options as of that date.

Balance at December 31, 2021 2,262 $ 16.18 4.85 $ 19,000

Exercisable at December 31, 2021 1,008 $ 13.03 3.53 $ 11,636

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $ 24.57 as of December 31, 2021, which would have been received by the option holders had all option holders exercised their options as of that date.

The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price.

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

The total intrinsic value of all options exercised during the three months ended December 31, 2021 was $ 13.3 million and during the three months ended December 31, 2020 was $ 2.2 million.

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

Nine months ended June 30,

Three months ended December 31,

Weighted average per option grant date fair value $ 10.23 $ 7.12

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

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

STOCK-BASED COMPENSATION (CONTINUED)

time that options granted are expected to be outstanding.

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

The risk-free rate used is the zero-coupon U.S.

Treasury bond rate in effect at the time of the grant whose maturity equals the expected term of the option.

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

As of December 31, 2021, the total unrecognized compensation cost related to non-vested stock options was $ 4.8 million and the related weighted average period over which it is expected to be recognized is approximately 1.6 years.

STOCK-BASED COMPENSATION (CONTINUED)

Non-vested Stock Units

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

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

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

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Canceled ( 35 ) $ 15.50 — $ —

Nonvested at March 31, 2021 875 $ 15.48 18 $ 25.15

As of June 30, 2021, the total unrecognized compensation cost related to non-vested stock units was $ 10.8 million.

Nonvested at December 31, 2021 870 $ 18.42 15 $ 25.15

As of December 31, 2021, the total unrecognized compensation cost related to non-vested stock units was $ 9.5 million.

The related weighted average period over which this cost is expected to be recognized is approximately 1.7 years.

SUBSEQUENT EVENTS

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 will be included in our fourth quarter fiscal 2021 results within our IoT Products & Services segment.

The terms of the acquisition included an upfront cash payment as well as contingent consideration comprised of future earn-out payments.

We funded the closing of the acquisition with $ 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.

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.

Costs directly related to the acquisition of $ 0.2 million incurred in the third quarter of fiscal 2021 have been charged to operations and are included in general and administrative expense in our condensed statements of operations.

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

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

What changed 10-Q

Item 1. Financial Statements