What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-02-04 compared with 2021-08-06 · 113 added, 182 removed, 148 unchanged (67% of the section changed)

4 unchanged sentences

Forward-Looking Statements

The words such as "assume," "believe," "anticipate," "intend," "estimate," "target," "may," "will," "expect," "plan," "potential," "project," "should," or "continue" or the negative thereof or other expressions, which are predictions of or indicate future events and trends and which do not relate to historical matters, identify forward-looking statements.

This discussion contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

All statements, other than statements of historical fact are forward-looking statements.

Words such as "assume," "believe," "anticipate," "intend," "estimate," "target," "may," "will," "expect," "plan," "potential," "project," "should," or "continue" or the negative thereof or other expressions, which are predictions of or indicate future events and trends and which do not relate to historical matters, identify forward-looking statements.

Among other items, these statements relate to expectations of the business environment in which Digi operates, projections of future performance, perceived marketplace opportunities and statements regarding our mission and vision.

Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions.

Among others, these include risks related to the ongoing COVID-19 pandemic and efforts to mitigate the same, risks related to global economic volatility and the ability of companies like us to operate a global business in such conditions, the current supply chain and shipping market pressures that are negatively impacting both manufacturing and distribution timelines as well as operating costs for a wide range of companies globally, the highly competitive market in which our company operates, rapid changes in technologies that may displace products sold by us, declining prices of networking products, our reliance on distributors and other third parties to sell our products, the potential for significant purchase orders to be canceled or changed, delays in product development efforts, uncertainty in user acceptance of our products, the ability to integrate our products and services with those of other parties in a commercially accepted manner, potential liabilities that can arise if any of our products have design or manufacturing defects, our ability to defend or settle satisfactorily any litigation, uncertainty in global economic conditions and economic conditions within particular regions of the world which could negatively affect product demand and the financial solvency of customers and suppliers, the impact of natural disasters and other events beyond our control that could negatively impact our supply chain and customers, potential unintended consequences associated with restructuring, reorganizations or other similar business initiatives that may impact our ability to retain important employees or otherwise impact our operations in unintended and adverse ways, the ability to achieve the anticipated benefits and synergies associated with acquisitions or divestitures and changes in our level of revenue or profitability which can fluctuate for many reasons beyond our control.

Among others, these include risks related to the ongoing COVID-19 pandemic and efforts to mitigate the same, risks related to the global economic downturn that commenced during the COVID-19 pandemic and the ability of companies like us to operate a global business in such conditions, the impacts of the present global supply chain and transportation difficulties affecting business globally, the highly competitive market in which our company operates, rapid changes in technologies that may displace products sold by us, declining prices of networking products, our reliance on distributors and other third parties to sell our products, the potential for significant purchase orders to be canceled or changed, delays in product development efforts, uncertainty in user acceptance of our products, the ability to integrate our products and services with those of other parties in a commercially accepted manner, potential liabilities that can arise if any of our products have design or manufacturing defects, our ability to integrate and realize the expected benefits of acquisitions such as our recently completed acquisition of Ventus., our ability to defend or settle satisfactorily any litigation, uncertainty in global economic conditions and economic conditions within particular regions of the world which could negatively affect product demand and the financial solvency of customers and suppliers, the impact of natural disasters and other events beyond our control that could negatively impact our supply chain and customers, potential unintended consequences associated with restructuring, reorganizations or other similar business initiatives that may impact our ability to retain important employees or otherwise impact our operations in unintended and adverse ways, the ability to achieve the anticipated benefits and synergies associated with acquisitions or divestitures and changes in our level of revenue or profitability which can fluctuate for many reasons beyond our control.

These and other risks, uncertainties and assumptions identified from time to time in our filings with the United States Securities and Exchange Commission, including without limitation, our Annual Report on Form 10-K for the year ended September 30, 2022, this filing on Form 10-Q and other filings, could cause our actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf.

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A description of our critical accounting policies and estimates was provided in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

We are a leading global provider of business and mission-critical Internet-of-Things ("IoT") connectivity products, services and solutions comprised of two reporting segments:

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

Our business is comprised of two reporting segments:

IoT Products & Services and IoT Solutions.

Our IoT Products & Services segment offers products and services that help original equipment manufacturers ("OEMs"), enterprise and government customers create and deploy, secure IoT connectivity solutions.

From embedded and wireless modules to console servers, enterprise and industrial routers, we provide customers with a wide variety of communication sub-assemblies and finished products to meet their IoT communication requirements.

In addition, the IoT Products & Services segment provides our customers with a device management platform and other professional services to enable customers to capture and manage data from devices they connect to networks.

Our IoT Solutions segment offers wireless temperature and other condition-based monitoring services as well as task management services.

These solutions are focused on the following vertical markets:

food service, retail, healthcare, transportation/logistics and education.

These solutions are marketed as SmartSense by Digi ® .

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

We compete for customers on the basis of existing and planned product features, service and software application capabilities, company reputation, brand recognition, technical support, alliance relationships, quality and reliability, product development capabilities, price and availability.

From embedded and wireless modules to console servers as well as enterprise and industrial routers, we provide a wide variety of communication sub-assemblies and finished products to meet our customers' IoT communication requirements.

In addition, this segment provides our customers with a device management platform and other professional services to enable customers to capture and manage data from devices connected to networks.

On October 7, 2020, our Board of Directors approved a reorganization of our IoT Products & Services business segment.

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For further detail on segment performance, see the Revenue by Segment, Cost of Goods Sold and Gross Profit by Segment and Operating Income sections of this Item 2.

Our IoT Solutions segment primarily consists of our SmartSense by Digi® and Ventus operating segments.

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

These solutions are focused on the following vertical markets:

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

We initially formed, expanded and enhanced our SmartSense by Digi business through four acquisitions.Our recent acquisition of Ventus makes us a leader in the provision of Managed Network-as-a-Service ("MNaaS") solutions that simplify the complexity of enterprise wide area network ("WAN") connectivity for our customers and provides us with a significant base of high margin subscription based recurring revenue.

Ventus’s portfolio includes cellular wireless and fixed line WAN solutions for an array of connectivity applications in banking, healthcare, retail, gaming, hospitality and other sectors.

In fiscal 2022, our key operating objectives include:

• continued growth of our SmartSense by Digi ® business that is the base of our IoT Solutions segment;

• delivering growth within our IoT Products & Services segment through new product introductions and efforts to grow recurring revenue streams;

• identification of strategic growth initiatives through acquisition.

• continued growth of our SmartSense by Digi ® and Ventus businesses that are the base of our IoT Solutions segment;

• delivering growth within our IoT Products & Services segment through new product introductions;

• integration of our recently acquired Ventus business.

We utilize many financial, operational, and other metrics to evaluate our financial condition and financial performance.

Below we highlight the metrics for the third quarter of fiscal 2021 that we feel are most important in these evaluations:

• Consolidated revenue increased $8.7 million, or 12.4% in the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020.

• Gross margin increased as a percentage of revenue to 53.8% in the third quarter of fiscal 2021 as compared to 53.1% in the third quarter of fiscal 2020.

• Net income for the third fiscal quarter of 2021 was $3.2 million, or $0.09 per diluted share.

Net income for the third fiscal quarter of 2020 was $1.8 million, or $0.06 per diluted share.

Adjusted net income and adjusted net income per share was $8.7 million, or $0.25 per diluted share.

In the third fiscal quarter of fiscal 2020, adjusted net income and adjusted net income per share was $6.6 million, or $0.23 per diluted share.

• Adjusted EBITDA for the third fiscal quarter of 2021 was $11.6 million, or 14.6% of total revenue.

In the third fiscal quarter of fiscal 2020, Adjusted EBITDA was $10.5 million, or 15.0% of total revenue.

Impact of Global Events and Conditions on Our Business Results and Operations

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Global Supply Chain and Freight Transportation Disruptions

Like many companies, we are experiencing disruptions in our supply chain.

This has led to shortfalls in available components we need to make products and well as increased costs both to obtain components and to transport components and products.

It has also lengthened the timelines for us to fulfill customer orders.

T he severity of the disruptions is continuously changing, meaning the impact on our ability to meet demand for particular products in a timely manner has been subject to ebb and flow.

We are taking steps to attempt to mitigate the impact of the disruptions such as placing inventory demand further out into the future to secure our allocations of components, encouraging customers to place orders earlier than normal due to longer lead times and attempting (in conjunction with customers) to influence political leaders to assure components needed to make products that are essential to the health and well-being of society are prioritized to our customer’s needs by suppliers.

At present the ongoing duration and severity of these disruptions we are unable to predict as is the ultimate impact on our business and financial results, which could be material.

Ongoing Covid-19 Pandemic Impacts

The ongoing pandemic and related global economic volatility continues to create significant uncertainty regarding the nearer term outlook for the markets where we provide products and services.

While the rollout of vaccines is well underway in many parts of the world, the pandemic (including the recent spread of more contagious variants of the virus) and related economic volatility it has caused still represents a fluid situation that presents a wide and changing range of potential impacts on our own business and those of our customers, vendors and other business partners.

As our products and services serve companies across a broad range of industries, in some instances demand has increased or appears to be returning to levels associated with pre-pandemic conditions while others continue to be depressed.

At present, the duration, severity and impact of the pandemic in various locations globally as well as the impacts of related economic volatility remain unclear.

During fiscal 2020, we took steps to lower our operating expenses as a result of the pandemic and related economic volatility.

We continue to monitor the impacts of COVID-19 on our operations closely.

As conditions change we could take steps to increase or decrease expenses as we believe circumstances warrant.

Since the start of the pandemic there have not been any material adverse changes to our assets on our balance sheet and, at present, we do not expect there to be material adverse changes.

During the nine months of fiscal 2021, we reviewed the potential impacts of the COVID-19 pandemic on goodwill and intangible assets and determined there to be no material impact at that time.

We also reviewed the potential impacts on future risks to the business as it relates to collections, returns and other business related items.

No significant changes to these reserves have been made.

We also have taken a range of actions with respect to how we operate to assure we comply with government restrictions and guidelines as well as other practices to protect the health and well-being of our employees and our ability to continue operating our business effectively.

To date, we have been able to operate our business using these measures and to maintain effectively all internal controls as documented and posted.

We also have not experienced challenges in maintaining business continuity and do not expect to incur material expenditures to do so.

However, the impacts of the pandemic and efforts to mitigate the same remain fluid and it remains possible that challenges may arise in the future.

Recent Events Impacting Third Quarter Results

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.

We funded the closing of the acquisition with $7.1 million cash on hand.

In fiscal third quarter, the purchase price allocation was recorded , including related determinations of fair value and income tax implications.

as a result, we recorded $8.6 million of goodwill and adjusted the contingent consideration to $5.9 million on our balance sheet.

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

Below we highlight the metrics for the first quarter of fiscal 2022 that we feel are most important in these evaluations:

• Consolidated revenue was $84.3 million, an increase of 15% over the first quarter of fiscal 2021.

• Consolidated gross profit was $47.9 million, an increase of 17% over the first quarter of fiscal 2021.

• Consolidated operating income was $3.8 million, compared to a net operating loss of $0.1 million for the first quarter of fiscal 2021.

• Net income was $1.2 million, compared to a net loss of $0.3 million in the first fiscal quarter of fiscal 2021.

• Diluted earnings (loss) per share was $0.03, compared to $(0.01).

• Adjusted EBITDA was $17.0 million, or 20.1% of total revenue, compared to $13.0 million, or 17.7% of total revenue

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

in the first fiscal quarter of fiscal 2021.

• Adjusted net income and adjusted net income per share was $12.7 million, or $0.36 per diluted share, compared to $9.9 million, or $0.32 per diluted share in the first fiscal quarter of fiscal 2021, an increase of 13%.

Recent Events Impacting First Quarter Results

Acquisition of Ventus

On November 1, 2021, we acquired Ventus for approximately $350 million in cash.

The acquisition was funded through a combination of cash on hand and debt financing under an amended and restated credit facility committed by BMO Harris Bank N.A (see Note 7 ).

In the first quarter of fiscal 2022, the preliminary purchase price allocation was recorded , including related determinations of fair value and income tax implications.

As a result, we recorded $117 million of goodwill on our condensed consolidated balance sheets.

The results of operations following the acquisition date are now included in our first fiscal quarter 2022 results within our IoT Solutions segment.

CONSOLIDATED RESULTS OF OPERATIONS

The following table sets forth selected information derived from our interim condensed consolidated statements of operations:

Three months ended June 30, % incr.

Nine months ended June 30, % incr.

($ in thousands) 2021 2020 (decr.) 2021 2020 (decr.)

Three months ended December 31, % incr.

($ in thousands) 2021 2020 (decr.)

Revenue $ 84,257 100.0 % $ 73,146 100.0 % 15.2 %

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Operating expenses 44,082 52.3 41,165 56.3 7.1

Operating income 4,018 5.0 2,855 4.1 40.7 7,242 3.2 6,096 3.0 (18.8)

Other expense, net (482) (0.6) (945) (1.3) NM (1,244) (0.5) (2,977) (1.4) NM

Operating income 3,799 4.4 (146) (0.2) NM

Other expense, net (5,000) (5.9) (594) (0.8) NM

Income before income taxes (1,201) (1.4) (740) (1.0) 62.3 %

Income tax expense (benefit) 379 0.5 144 0.2 NM 220 0.1 (859) (0.4) NM

Net income $ 3,157 4.0 % $ 1,766 2.5 % 78.8 % $ 5,778 2.5 % $ 3,978 1.9 % 45.2 %

Income tax benefit (2,388) (2.8) (433) (0.6) NM

Net income (loss) $ 1,187 1.4 % $ (307) (0.4) % NM

REVENUE BY SEGMENT

Three months ended June 30, % incr.

Nine months ended June 30, % incr.

($ in thousands) 2021 2020 (decr.) 2021 2020 (decr.)

Three months ended December 31, % incr.

($ in thousands) 2021 2020 (decr.)

IoT Products & Services $ 65,744 78.0 % $ 61,780 84.5 % 6.4 %

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IoT Products & Services

IoT Products & Services revenue increased 5.3% for the three months ended June 30, 2021 as compared to the same period in the prior fiscal year.

This primarily was a result of:

• increased sales of our console servers primarily due revenue from our acquisition of Opengear in December 2019;

• increased sales within our embedded portfolio attributable to demand from a specific medical device customer

This increase partially offset by:

• decreased sales of our cellular routers,

IoT Products & Services revenue increased 5.0% for the nine months ended June 30, 2021 as compared to the same period in the prior fiscal year.

IoT Products & Services revenue increased 6.4% for the three months ended December 31, 2021 as compared to the same period in the prior fiscal year.

This primarily was a result of:

• increased sales of our console servers primarily due to incremental revenue from our acquisition of Opengear in December 2019;

• increased revenue from embedded and Xbee ® products.

This increase partially was offset by:

• decreased sales of our cellular routers in the government transit sector primarily related to an existing customer in the prior year that was not repeated this year.

• increased sales of our Cellular and OEM products.

This increase was partially offset by:

• decreased sales of our Console Servers, Infrastructure Management portfolio and Technical Services.

IoT Solutions

IoT Solutions revenue increased 78.6% and 67.1% for the three and nine months ended June 30, 2021, respectively, as compared to the same periods in the prior fiscal year.

IoT Solutions revenue increased 62.9% for the three months ended December 31, 2021, as compared to the same periods in the prior fiscal year.

This primarily was a result of:

• new hardware installations with new and existing customers;

• increased recurring revenue from our November 2021 acquisition of Ventus, as well as growth in both SmartSense and Ventus in the first fiscal quarter;

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

• increased recurring revenue from our subscription services as we service nearly 79,000 sites as of June 30, 2021, compared to nearly 69,000 sites as of June 30, 2020.

• an increase in sites serviced primarily as a result of our acquisition of Ventus, as we service nearly 271,000 sites as of December 31, 2021, including the newly acquired Ventus endpoints, compared to 75,000 sites as of December 31, 2020.

This increase was partially offset by:

• decreased customer implementation sales in SmartSense.

COST OF GOODS SOLD AND GROSS PROFIT BY SEGMENT

Three months ended June 30, Basis point Nine months ended June 30, Basis point

Three months ended December 31, Basis point

($ in thousands) 2021 2020 inc.

(decr.) 2021 2020 inc.

Cost of Goods Sold

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Total cost of goods sold $ 36,376 43.2 % $ 32,127 43.9 % 72

Three months ended June 30, Basis point Nine months ended June 30, Basis point

Three months ended December 31, Basis point

($ in thousands) 2021 2020 inc.

(decr.) 2021 2020 inc.

IoT Products & Services revenue $ 66,812 $ 63,472 $ 194,224 $ 184,975

IoT Solutions revenue 12,267 6,866 35,302 21,127

Total revenue 79,079 70,338 229,526 206,102

IoT Products & Services 35,675 54.3 % 35,679 57.8 % 349

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IoT Product & Services

IoT Products & Services gross profit margin increased 170 basis points for the three months ended June 30, 2021 as compared to the same period in the prior fiscal year.

This increase primarily was a result of:

• favorable product and customer mix within and among our console server, cellular router, embedded and Xbee® products.

This increase partially offset by:

• increased material and overhead expenses associated with the production and distribution of our products as a result of global supply chain challenges.

IoT Products & Services gross profit margin increased 320 basis points for the nine months ended June 30, 2021 as compared to the same period in the prior fiscal year.

This increase primarily was a result of:

• incremental gross profit from our console servers due to the Opengear acquisition in December 2019;

• favorable product mix within our cellular router, embedded, Xbee® and infrastructure management products

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

IoT Products & Services gross profit margin decreased 349 basis points for the three months ended December 31, 2021 as compared to the same period in the prior fiscal year.

This decrease primarily was a result of:

• changes in product and customer mix and increased production and distribution costs due to the continuing supply chain challenges.

IoT Solutions

The IoT Solutions gross profit margin decreased (330) basis points for the three months ended June 30, 2021 as compared to the same periods in the prior fiscal year.

The IoT Solutions gross profit margin increased (1,895) basis points for the three months ended December 31, 2021 as compared to the same periods in the prior fiscal year.

This increase primarily was a result of:

• increased one time, product revenue, which typically has lower gross margin;

• increased material and overhead expenses associated with the production and distribution of our products as a result of global supply challenges.

The IoT Solutions gross profit margin decreased (100) basis points for the nine months ended June 30, 2021 as compared to the same period in the prior fiscal year.

This decrease primarily was a result of:

• increased material and overhead expenses associated with the production and distribution of our products as a result of global supply challenges.

• increased recurring subscription revenue, including growth from the acquisition of Ventus, which typically has high gross margin.

OPERATING EXPENSES

Below is our operating expenses and operating expenses as a percentage of total revenue:

Three months ended June 30, $ % Nine months ended June 30, $ %

Three months ended December 31, $ %

($ in thousands) 2021 2020 incr.

(decr.) incr.

(decr.) 2021 2020 incr.

(decr.) incr.

Operating Expenses

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General and administrative 15,242 18.1 % 14,415 19.7 % 827 5.7

Restructuring charge 101 0.1 % 91 — % 10 NM 995 0.4 % 129 0.1 % 866 NM

Restructuring charge 109 0.1 % 733 1.0 % (624) (85.1)

Total operating expenses $ 44,082 52.3 % $ 41,165 56.3 % $ 2,917 7.1

NM means not meaningful

The $4.0 million increase in operating expenses in the third quarter of fiscal 2021 from the third quarter of fiscal 2020 primarily was the result of:

• an increase of $3.1 million in compensation related expenses primarily related to additional bonus and commission expense due to increased company performance;

• other increases primarily related bad debt expense and outside services.

The $16.4 million increase in fiscal year-to-date operating expenses for the nine months ending June 30, 2021, when compared to the same period in the prior fiscal year was the result of:

• an increase of $5.9 million in earn-out expenses primarily as a result of revenue from Opengear exceeding our previous estimate;

• an increase of $8.4 million in compensation expenses primarily related to incremental salaries from the Opengear acquisition in December 2019, and

• other increases primarily related to incremental expenses due to the Opengear acquisition in December 2019, restructuring charges, bad debt expense and outside services.

This increase partially was offset by:

• a decrease of $1.7 million in M&A expense;

• a decrease of $1.9 million in travel related expenses as events and travel were restricted due to the pandemic.

OPERATING INCOME

The $2.9 million increase in operating expenses in the first quarter of fiscal 2022 from the first quarter of fiscal 2021 primarily was the result of:

• an incremental $3.3 million in M&A expense related to the Ventus acquisition in November 2021;

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Operating income was $4.0 million for the three months ended June 30, 2021, compared to $2.9 million for three months ended June 30, 2020.

Operating income was $7.2 million for the nine months ending June 30, 2021, compared to $6.1 million for the nine months ending June 30, 2020.

IoT Product & Services provided operating income of $6.1 million for the three months ended June 30,2021 compared to $4.8 million for the three months ended June 30, 2020, an increase of $1.3 million, or 27.4%.

IoT Product & Services provided operating income of $4.7 million for the nine months ending June 30, 2021 compared to $14.5 million for the nine months ending June 30, 2020, a decrease of $9.8 million, or 67.3%.

Drivers for the changes e in operating income for both the quarter and year-to-date periods are described above in the revenue, gross profit and operating expenses details.

IoT Solutions had an operating loss of $2.1 million for the three months ended June 30, 2021 compared to an operating loss of $1.9 million for the three months ended June 30, 2020, a decrease of $0.2 million, or 7.8%.

IoT Solutions had operating income of $2.5 million for the nine months ending June 30, 2021 compared to an operating loss of $8.4 million for the nine months ending June 30, 2020, an improvement of $10.9 million, or 129.8%.

• $4.7 million in incremental operating expenses from recent acquisitions including Haxiot, Ctek and Ventus.

These increases were partially offset by:

• a decrease of $5.8 million in contingent consideration expenses;

• A decrease of $0.6 million in restructuring charges.

OPERATING INCOME (LOSS)

Operating income was $3.8 million for the three months ended December 31, 2021, compared to an operating loss of $0.1 million for the three months ended December 31, 2020.

IoT Product & Services provided operating income of $4.1 million for the three months ended December 31, 2021 compared to $1.3 million for the three months ended December 31, 2020, an increase of $2.8 million, or 224.3%.

Drivers for the changes in operating income for the quarter are described above in the revenue, gross profit and operating expenses details.

IoT Solutions had an operating loss of $(0.3) million for the three months ended December 31, 2021 compared to an operating loss of $(1.4) million for the three months ended December 31, 2020, an increase of $1.1 million, or (77.6)%.

Drivers for the improvement in operating loss are described above in the revenue, gross profit and operating expenses details.

OTHER EXPENSE, NET

Three months ended June 30, $ % Nine months ended June 30, $ %

Three months ended December 31, $ %

($ in thousands) 2021 2020 incr.

(decr.) incr.

(decr.) 2021 2020 incr.

(decr.) incr.

Other expense, net

Interest income $ 3 — % $ 22 — % $ (19) (86.4) $ 4 — % $ 303 0.1 % $ (299) (98.7)

Interest income $ 5 — % $ — — % $ 5 NM

Interest expense (4,903) (5.8) % (402) (0.5) % (4,501) NM

Other expense, net (114) (0.1) % (67) (0.1) % (47) 70.1 (229) (0.1) % (214) (0.1) % (15) 7.0

Total other expense, net $ (482) (0.6) % $ (945) (1.3) % $ 463 NM $ (1,244) (0.5) % $ (2,977) (1.4) % $ 1,733 NM

Other expense, net (102) (0.1) % (192) (0.3) % 90 NM

Total other expense, net $ (5,000) (5.9) % $ (594) (0.8) % $ (4,406) NM

NM means not meaningful

Other expense, net, improved $0.5 million and $1.7 million for the three and nine months periods ended June 30, 2021, respectively, as compared to the same periods in the prior fiscal year.

The improvement was primarily due to the decrease interest expense as we paid down our term loan and paid off our revolving loan under the prior Credit Facility and subsequently in March 2021, refinanced the balance of our term loan with a revolving loan.

Other expense, net, increased $(4.4) million for the three months ended December 31, 2021, as compared to the same period in the prior fiscal year.

The increase was primarily a result of an increase to our interest expense as we refinanced our revolving loan with a new credit facility in November 2021 and wrote off a portion of the deferred financing fees associated with our prior credit facility.

(see Note 7 to the condensed consolidated financial statements).

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This report includes adjusted net income, adjusted net income per diluted share and adjusted earnings before interest, taxes and amortization ("Adjusted EBITDA"), each of which is a non-GAAP financial measure.

We understand that there are material limitations on the use of non-GAAP measures.

Non-GAAP measures are not substitutes for GAAP measures, such as net income, for the purpose of analyzing financial performance.

Non-GAAP measures are not substitutes for GAAP measures for the purpose of analyzing financial performance.

The disclosure of these measures does not reflect all charges and gains that were actually recognized by Digi.

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Additionally, Adjusted EBITDA does not reflect our cash expenditures, the cash requirements for the replacement of depreciated and amortized assets, or changes in or cash requirements for our working capital needs.

We believe that providing historical and adjusted net income and adjusted net income per diluted share, respectively, exclusive of such items as reversals of tax reserves, discrete tax benefits, restructuring charges and reversals, intangible amortization, stock-based compensation, other non-operating income/expense, changes in fair value of contingent consideration, acquisition-related expenses and interest expense related to acquisitions permits investors to compare results with prior periods that did not

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

include these items.

stock-based compensation, other non-operating income/expense, adjustments to estimates of contingent consideration, acquisition-related expenses and interest expense related to acquisition permits investors to compare results with prior periods that did not include these items.

Management uses the aforementioned non-GAAP measures to monitor and evaluate ongoing operating results and trends and to gain an understanding of our comparative operating performance.

In addition, certain of our stockholders have expressed an interest in seeing financial performance measures exclusive of the impact of these matters, which while important, are not central to the core operations of our business.

Management believes that Adjusted EBITDA, defined as EBITDA adjusted for stock-based compensation expense, acquisition-related expenses, restructuring charges and reversals, and changes in fair value of contingent consideration is useful to investors to evaluate the Company's core operating results and financial performance because it excludes items that are significant non-cash or non-recurring items reflected in the condensed consolidated ctatements of cperations.

Management believes that Adjusted EBITDA, defined as EBITDA adjusted for stock-based compensation expense, acquisition-related expenses, restructuring charges and reversals and changes in fair value of contingent consideration is useful to investors to evaluate our core operating results and financial performance because it excludes items that are significant non-cash or non-recurring expenses reflected in the consolidated statements of operations.

We believe that the presentation of Adjusted EBITDA as a percentage of revenue is useful because it provides a reliable and consistent approach to measuring our performance from year to year and in assessing our performance against that of other companies.

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(In thousands)

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

2021 2020 2021 2020

revenue % of total

Three months ended December 31,

revenue % of total

2 unchanged sentences

Interest expense, net 4,898 402

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

Income tax benefit (2,388) (433)

Depreciation and amortization 7,862 5,050

4 unchanged sentences

Adjusted EBITDA $ 16,970 20.1 % $ 12,977 17.7 %

$ 11,576 14.6 % $ 10,530 15.0 % $ 36,248 15.8 % $ 28,111 13.6 %

(1) Beginning in fiscal 2021, Adjusted EBITDA now excludes changes in fair value of contingent consideration.

The prior year presentation has been adjusted to conform to the current year presentation.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Reconciliation of Net Income and Net Income per Diluted Share to

Reconciliation of Net Income and Net Income (Loss) per Diluted Share to

Adjusted Net Income and Adjusted Net Income per Diluted Share

(In thousands, except per share amounts)

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

2021 2020 2021 2020

Net income and net income per diluted share $ 3,157 $ 0.09 $ 1,766 $ 0.06 $ 5,778 $ 0.18 $ 3,978 $ 0.13

Three months ended December 31,

Net income (loss) and net income (loss) per diluted share $ 1,187 $ 0.03 $ (307) $ (0.01)

Amortization 6,309 0.18 3,961 0.13

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Diluted weighted average common shares 35,767 30,532

(1) The tax effect from the above adjustments assumes an estimated effective tax rate of 18.0% for fiscal 2021 and 20.2% for fiscal 2020 based on adjusted net income.

(2) For the three and nine months ended June 30, 2021, discrete tax benefits primarily are a result of excess tax benefits recognized on stock compensation.

For the three months ended June 30, 2020, discrete tax benefits were primarily a result of excess tax benefits on stock compensation.

For the nine months ended June 30, 2020, discrete tax benefits were primarily a result of excess tax benefits on stock compensation and an adjustment of our state deferred tax rate due to the Opengear acquisition.

(1) The tax effect from the above adjustments assumes an estimated effective tax rate of 18.0% for fiscal 2022 and fiscal 2021 based on adjusted net income.

(2) For the three months ended December 31, 2021 , discrete tax benefits primarily are a result of excess tax benefits recognized on stock compensation.

For the three months ended December 31, 2020, discrete tax benefits primarily are a result of excess tax benefits recognized on stock compensation.

(3) Adjusted net income per diluted share may not add due to the use of rounded numbers.

2 unchanged sentences

Our liquidity requirements arise from our working capital needs, and to a lesser extent, our need to fund capital expenditures to support our current operations and facilitate growth and expansion.

On March 15, 2021, we entered into an amended and restated credit agreement consisting of a $200 million revolving loan.

The $47.5 million term loan outstanding from the prior credit agreement was replaced by this new revolving loan along with additional proceeds of $0.6 million for a total of $48.1 million at June 30, 2021.

As of June 30, 2021, $151.9 million remained available under the Revolving Loan, which included $10 million available for a letter of credit subfacility and $10 million available under a swingline subfacility, the outstanding amounts of which decrease the available commitment.

During the first quarter of fiscal 2021, we repaid the final $15 million of the Revolving Loan under the prior credit agreement.

On November 1, 2021, we 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.

During the first quarter of fiscal 2022, we repaid all outstanding balances under the credit facility entered into on March 21, 2021.

As of December 31, 2021, $35.0 million remained available under the Revolving Loan, which included $10 million available for a letter of credit subfacility and $10 million available under a swingline subfacility, the outstanding amounts of which decrease the available commitment.

For additional information regarding the terms of our Credit Facility, including the Revolving Loan and its subfacilities, see Note 7 to our condensed consolidated financial statements.

Additionally, during the second quarter of fiscal 2021 we sold 4,0258,000 shares of our common stock and received net proceeds of $73.8 million.

We expect positive cash flows from operations for the foreseeable future.

Our first fiscal quarter operating cash flows were negatively impacted by changes in operating assets and liabilities (net of acquisitions) that we do not anticipate in future periods.

We believe that our current cash and cash equivalents balances, cash generated from operations and our ability to borrow under our credit facility will be sufficient to fund our business operations and capital expenditures for the next twelve months and beyond.

As follows, our condensed consolidated statements of cash flows for the nine months ended June 30, 2021 and 2020 is summarized:

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Nine months ended June 30,

As follows, our condensed consolidated statements of cash flows for the three months ended December 31, 2021 and 2020 is summarized:

Year ended September 30,

($ in thousands) 2021 2020

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

Cash flows from operating activities increased $22.9 million primarily as a result of:

• increased changes in operating assets and liabilities (net of acquisitions) of $2.4 million.

This primarily was due to a decrease in accounts receivable due to ramped up collections in the current fiscal year in addition to increased accounts receivable in the prior fiscal year;

• a decrease in net income of $1.9 million and non-cash adjustments of $18.1 million.

These non-cash adjustments include an accrual for additional earn-out provision and increase depreciation and amortization.

Cash flows from investing activities increased $125.8 million primarily as a result of:

• an increase of $136.1 million related to the purchase of Opengear in the prior fiscal year,

• a partial offset to this decrease was $2.7 million related to the purchase of Haxiot in the current fiscal year and an additional $1.0 million related to purchases of property, equipment, and facilities improvements compared to the prior fiscal year.

Cash flows from financing activities decreased $17.6 million primarily as a result of:

• a decrease of $118.4 million related to proceeds of $119.0 million long-term debt from the Revolving Loan and Term Loan in the prior fiscal year partially offset by proceeds of $0.6 million from the Revolving Loan in the current fiscal year (see Note 7 to the condensed consolidated financial statements);

• a reduction of $24.5 million related to payments on long-term debt;

• an increase of $0.5 million related to the financing portion of acquisition earn-out payments for the Opengear acquisition;

• a partial offset to these decreases was an increase of $73.8 million due to the proceeds from issuance of common stock (see Note 8 to the condensed consolidated financial statements) and a $1.8 million increase in proceeds from stock award plans.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Cash flows used for operating activities increased $18.2 million primarily as a result of:

• an increased reduction in operating assets and liabilities (net of acquisitions) of $18.2 million.

This primarily was due to the capitalization of $13.5 million in costs related to the issuance of debt in November and an increase in inventory and;

• a reduction of $5.8 million in contingent consideration fair value changes,

• partially offset by increases in net income, depreciation and amortization expenses and stock-based compensation expenses.

Cash flows used for investing activities increased $347.3 million primarily as a result of:

• an increase of $347.6 million related to the purchase of our November 2021 acquisition of Ventus (see Note 2 to the condensed consolidated financial statements),

• a partial offset to this increase was a reduction of $0.3 million related to purchases of property, equipment, and facilities improvements compared to the prior fiscal year.

Cash flows from financing activities increased $265.5 million primarily as a result of:

• an increase of $350.0 million in proceeds from the Term Loan issued in November 2021 partially offset by payments of $45.8 million of the previous credit facility, an early payment of $50.0 million on the new issuance and the payment of compared to $15.6 million in debt payments in first fiscal quarter 2020 (see Note 7 to the condensed consolidated financial statements),

• partially offset by a $4.6 million increase in taxes paid for net share settlements.

CONTRACTUAL OBLIGATIONS

The following table summarizes our contractual obligations at June 30, 2021:

The following table summarizes our contractual obligations at December 31, 2021:

Payments due by fiscal period

2 unchanged sentences

Contingent consideration $ 6,200 $ 6,100 $ 100 $ — $ —

Revolving loan $ 48,118 $ — $ — $ 48,118 $ —

Term Loan $ 300,000 $ 13,125 $ 35,000 $ 35,000 $ 216,875

Interest on long-term debt $ 85,912 $ 16,155 $ 27,140 $ 23,829 $ 18,788

2 unchanged sentences

The table above does not include possible payments for uncertain tax positions.

Our reserve for uncertain tax positions, including accrued interest and penalties, was $2.5 million as of June 30, 2021.

Our reserve for uncertain tax positions, including accrued interest and penalties, was $2.9 million as of December 31, 2021.

Due to the nature of the underlying liabilities and the extended time often needed to resolve income tax uncertainties, we cannot make reliable estimates of the amount or timing of future cash payments that may be required to settle these liabilities.

The above table also does not include those obligations for royalties under license agreements

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

as these royalties are calculated based on future sales of licensed products and we cannot make reliable estimates of the amount of cash payments.

The above table also does not include those obligations for royalties under license agreements as these royalties are calculated based on future sales of licensed products and we cannot make reliable estimates of the amount of cash payments.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

For information on new accounting pronouncements, see Note 1 to our condensed consolidated financial statements.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

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 2. Management’s Discussion and Analysis