DIGI INTERNATIONAL INC 10-Q

ITEM 1. FINANCIAL STATEMENTS DIGI INTERNATIONAL INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three months ended December 31, 2021 2020 (in thousands, except per share data) Revenue: Product $ 63,798 $ 62,604 Service 20,459 10,542 Total revenue 84,257 73,146 Cost of sales: Cost of product 29,239 27,776 Cost of service 5,748 3,237 Amortization 1,389 1,114 Total cost of sales 36,376 32,127 Gross profit 47,881 41,019 Operating expenses: Sales and marketing 15,319 14,924 Research and development 13,412 11,093 General and administrative 15,242 14,415 Restructuring charge 109 733 Total operating expenses 44,082 41,165 Operating income (loss) 3,799 ( 146 ) Other expense, net: Interest income 5 — Interest expense ( 4,903 ) ( 402 ) Other expense, net ( 102 ) ( 192 ) Total other expense, net ( 5,000 ) ( 594 ) 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 ) Diluted $ 0.03 $ ( 0.01 ) Weighted average common shares: Basic 34,560 29,374 Diluted 35,767 29,374 The accompanying notes are an integral part of the condensed consolidated financial statements. 1 Table of Contents DIGI INTERNATIONAL INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) Three months ended December 31, 2021 2020 (in thousands) Net income (loss) $ 1,187 $ ( 307 ) Other comprehensive (loss) income: Foreign currency translation adjustment ( 212 ) 1,872 Other comprehensive (loss) income ( 212 ) 1,872 Comprehensive income $ 975 $ 1,565 The accompanying notes are an integral part of the condensed consolidated financial statements. 2 Table of Contents DIGI INTERNATIONAL INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) December 31, 2021 September 30, 2021 (in thousands, except share data) ASSETS Current assets: Cash and cash equivalents $ 47,188 $ 152,432 Accounts receivable, net 49,359 43,738 Inventories 51,874 43,921 Other current assets 8,281 6,567 Total current assets 156,702 246,658 Property, equipment and improvements, net 27,058 12,132 Operating lease right-of-use assets 15,891 15,684 Intangible assets, net 322,794 118,029 Goodwill 342,498 225,522 Deferred tax assets 8 439 Other non-current assets 1,279 1,067 Total assets $ 866,230 $ 619,531 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 11,148 $ — Accounts payable 22,880 22,586 Accrued compensation 10,368 12,934 Unearned revenue 22,136 13,589 Contingent consideration on acquired businesses 6,100 20 Current portion of operating lease liabilities 2,884 2,633 Other current liabilities 3,795 7,179 Total current liabilities 79,311 58,941 Income taxes payable 2,254 2,334 Deferred tax liabilities 14,794 13,493 Long-term debt 275,340 45,799 Operating lease liabilities 18,225 18,368 Other non-current liabilities 2,274 8,079 Total liabilities 392,198 147,014 Commitments and Contingencies (See Note 13 ) Stockholders' equity: Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued and outstanding — — Common stock, $.01 par value; 60,000,000 shares authorized; 41,412,712 and 40,653,035 shares issued 414 407 Additional paid-in capital 372,797 370,699 Retained earnings 181,879 180,692 Accumulated other comprehensive loss ( 22,958 ) ( 22,746 ) Treasury stock, at cost, 6,447,449 and 6,390,645 shares ( 58,100 ) ( 56,535 ) Total stockholders' equity 474,032 472,517 Total liabilities and stockholders' equity $ 866,230 $ 619,531 The accompanying notes are an integral part of the condensed consolidated financial statements. 3 Table of Contents DIGI INTERNATIONAL INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three months ended December 31, 2021 2020 (in thousands) 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 Amortization of intangible assets 6,309 3,961 Stock-based compensation 2,017 1,745 Deferred income tax provision 1,732 750 Change in fair value of contingent consideration — 5,772 Provision for bad debt and product returns 414 ( 518 ) Provision for inventory obsolescence 600 600 Restructuring charge 109 733 Other 25 118 Changes in operating assets and liabilities (net of acquisitions) ( 23,831 ) ( 5,631 ) Net cash (used for) provided by operating activities ( 9,885 ) 8,312 Investing activities: Acquisition of businesses, net of cash acquired ( 347,593 ) — Purchase of property, equipment, improvements and certain other intangible assets ( 454 ) ( 777 ) Net cash used in investing activities ( 348,047 ) ( 777 ) Financing activities: Proceeds from long-term debt 350,000 — Payments on long-term debt ( 95,799 ) ( 15,625 ) Proceeds from stock option plan transactions 4,227 3,944 Proceeds from employee stock purchase plan transactions 321 334 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 decrease in cash and cash equivalents ( 105,244 ) ( 4,866 ) Cash and cash equivalents, beginning of period 152,432 54,129 Cash and cash equivalents, end of period $ 47,188 $ 49,263 Supplemental schedule of non-cash investing and financing activities: Transfer of inventory to property, equipment and improvements $ ( 699 ) $ ( 882 ) Tenant improvement allowance $ — $ 1,000 Accrual for purchase of property, equipment, improvements and certain other intangible assets $ ( 16 ) $ ( 452 ) The accompanying notes are an integral part of the condensed consolidated financial statements. 4 Table of Contents DIGI INTERNATIONAL INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) Additional Accum. Other Total Common Stock Treasury Stock Paid-In Retained Comprehensive Stockholders' (in thousands) Shares Par Value Shares Value Capital Earnings Loss Equity Balances, September 30, 2020 35,513 $ 355 6,353 $ ( 55,109 ) $ 279,741 $ 170,330 $ ( 23,817 ) $ 371,500 Net loss — — — — — ( 307 ) — ( 307 ) Other comprehensive income — — — — — — 1,872 1,872 Employee stock purchase plan issuances — — ( 25 ) 222 112 — — 334 Taxes paid for net share settlement of share-based payment awards — — 84 ( 1,446 ) — — — ( 1,446 ) Issuance of stock under stock award plans 577 6 — — 3,938 — — 3,944 Stock-based compensation expense — — — — 1,745 — — 1,745 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 Net income — — — — — 1,187 — 1,187 Other comprehensive loss — — — — — — ( 212 ) ( 212 ) Employee stock purchase plan issuances — — ( 18 ) 161 160 — — 321 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, 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. 5 Table of Contents DIGI INTERNATIONAL INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The unaudited condensed consolidated financial statements of Digi International Inc. ("we", "us", "our", "Digi" or "the Company") have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission applicable to interim financial statements. While these financial statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles ("GAAP") for complete financial statements. These financial statements should be read in conjunction with the financial statement disclosures in our Annual Report on Form 10-K for the year ended September 30, 2021 (the "2021 Financial Statements"). We use the same accounting policies in preparing quarterly and annual financial statements. The quarterly results of operations are not necessarily indicative of the results to be expected for the full year. Potential Impacts of COVID-19 on our Business The impact of the coronavirus ("COVID-19") pandemic continues to unfold. The extent of the pandemic's effect on our operational and financial performance will depend in large part on future developments, which cannot be reasonably estimated at this time. Future developments include the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact both within and outside the jurisdictions where we operate, the impact on governmental programs and budgets, the development of treatments or vaccines, and the timing and level of resumption of widespread economic activity. Due to the inherent uncertainty of the unprecedented and rapidly evolving situation, we are unable to predict with any confidence the likely impact of the COVID-19 pandemic on our future operations. For a more detailed discussion see Part I, Item 1 in our Annual Report on Form 10-K for the year ended September 30, 2021 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of this Form 10-Q. Recently Issued Accounting Pronouncements Adopted 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. 6 Table of Contents 2. ACQUISITIONS 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 Ventus assets acquired and liabilities assumed as of the acquisition date (in thousands). Cash $ 350,000 Fair value of net tangible assets acquired $ 22,110 Identifiable intangible assets: Customer relationships 179,000 Purchased and core technology 16,000 Trademarks 16,000 Goodwill 116,890 Total $ 350,000 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, 2021 2020 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. 7 Table of Contents 3. 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, 2021 2020 Numerator: Net income (loss) $ 1,187 $ ( 307 ) Denominator: Denominator for basic net income per common share — weighted average shares outstanding 34,560 29,374 Effect of dilutive securities: Stock options and restricted stock units 1,207 — Denominator for diluted net income per common share — adjusted weighted average shares 35,767 29,374 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. 4. SELECTED BALANCE SHEET DATA The following table shows selected balance sheet data (in thousands): December 31, 2021 September 30, 2021 Accounts receivable, net: Accounts receivable $ 57,863 $ 51,828 Less allowance for credit losses 3,827 3,934 Less reserve for future credit returns and pricing adjustments 4,677 4,156 Accounts receivable, net $ 49,359 $ 43,738 Inventories: Raw materials $ 31,707 $ 27,279 Finished goods 20,167 16,642 Inventories $ 51,874 $ 43,921 8 Table of Contents 5. FAIR VALUE MEASUREMENTS Financial assets and liabilities are classified in the following fair value hierarchy based on the lowest level input that is significant to the fair value measurement: Level 1 (unadjusted quoted prices in active markets for identical assets or liabilities); Level 2 (observable market inputs, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data). The following tables provide information by level for financial liabilities that are measured at fair value on a recurring basis (in thousands): Total Fair Value at Fair Value Measurements Using Inputs Considered as December 31, 2021 Level 1 Level 2 Level 3 Liabilities: Contingent consideration on acquired business $ 6,200 $ — $ — $ 6,200 Total liabilities measured at fair value $ 6,200 $ — $ — $ 6,200 Total Fair Value at Fair Value Measurements Using Inputs Considered as September 30, 2021 Level 1 Level 2 Level 3 Liabilities: Contingent consideration on acquired business $ 6,200 $ — $ — $ 6,200 Total liabilities measured at fair value $ 6,200 $ — $ — $ 6,200 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. 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 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 December 31, 2021 2020 Fair value at beginning of period $ 6,200 $ 4,228 Change in fair value of contingent consideration — 5,772 Fair value at end of period $ 6,200 $ 10,000 The change in fair value of contingent consideration reflects our estimates of the probabilities of achieving the relevant targets and is discounted based on our estimated discount rate. The fair value of the contingent consideration at December 31, 2021 is based on the probability of achieving the specified revenue thresholds for Haxiot and Ctek. 9 Table of Contents 6. GOODWILL AND OTHER INTANGIBLE ASSETS, NET Amortizable intangible assets were (in thousands): December 31, 2021 September 30, 2021 Gross carrying amount Accum. amort. Net Gross carrying amount Accum. amort. Net Purchased and core technology $ 85,162 $ ( 52,090 ) $ 33,072 $ 69,162 $ ( 50,701 ) $ 18,461 License agreements 112 ( 112 ) — 112 ( 112 ) — Patents and trademarks 39,559 ( 15,576 ) 23,983 23,491 ( 14,978 ) 8,513 Customer relationships 309,278 ( 44,039 ) 265,239 130,278 ( 39,973 ) 90,305 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 $ 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): 2022 (nine months) $ 20,717 2023 $ 24,996 2024 $ 24,282 2025 $ 20,825 2026 $ 20,593 2027 $ 18,582 The changes in the carrying amount of goodwill by reportable segments are (in thousands): Three months ended December 31, IoT Products and Services IoT Solutions Total Balance on September 30, 2021 $ 175,180 $ 50,342 $ 225,522 Acquisition — 116,890 116,890 Adjustment 154 — 154 Foreign currency translation adjustment ( 51 ) ( 17 ) ( 68 ) 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. Goodwill is quantitatively tested for impairment on an annual basis as of June 30, or more frequently if events or circumstances occur which could indicate impairment. We continue to have 2 reportable segments, our IoT Products & Services segment and our IoT Solutions segment (see Note 8 ). 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 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. 10 Table of Contents 6. GOODWILL AND OTHER INTANGIBLE ASSETS, NET (CONTINUED) Results of our Fiscal 2021 Annual Impairment Test As of June 30, 2021, we had a total of $ 32.7 million of goodwill for the Enterprise Routers reporting unit, $ 60.2 million of goodwill for the Console Servers reporting unit, $ 63.4 million of goodwill for the OEM Solutions reporting unit, $ 15.4 million of goodwill for the Infrastructure Mgmt. reporting unit and $ 49.5 million of goodwill for the IoT Solutions reporting unit. At June 30, 2021, fair value exceeded the carrying value by more than 20% for all five reporting units. Implied fair values for both reporting units were each calculated on a standalone basis using a weighted combination of the income approach and market approach. The implied fair values of each reporting unit were added together along with our unallocated assets to get an indicated value of total equity to which a range of indicated value of total equity was derived. This range was compared to the total market capitalization of $ 686.3 million as of June 30, 2021. This implied a range of control (deficit)/ premiums of ( 4.5 )% to 5.4 %. This range of control premiums fell below the control premiums observed in the last five years in the communications equipment industry. As a result, the market capitalization reconciliation analysis proved support for the reasonableness of the fair values estimated for each individual reporting unit. 7. INDEBTEDNESS On November 1, 2021, we entered into a second amended and restated credit agreement with BMO Harris Bank N.A. ("BMO"). This agreement provides us with a senior secured credit facility (the "Credit Facility") consisting of a $ 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 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. 11 Table of Contents 7. INDEBTEDNESS (CONTINUED) 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 Less unamortized issuance costs ( 13,512 ) ( 2,319 ) Less current maturities of long-term debt ( 11,148 ) — 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 2022 $ 8,750 2023 17,500 2024 17,500 2025 17,500 2026 17,500 2027 17,500 2028 203,750 Total long-term debt $ 300,000 Covenants and Security Interest 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. 8. SEGMENT INFORMATION We have two reportable segments: IoT Products & Services and IoT Solutions. 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: • Cellular Routers - box devices (fully enclosed) that provide connectivity typically in a place where the device can be plugged in exclusively using cellular communications. • Console Servers - similar to cellular routers except they are exclusively for edge computing installations and data center applications exclusively using cellular communications. • OEM Solutions - Original Equipment Manufacturers ("OEM") will be a chip, rather than a boxed device. This can come in the form of a stand-alone chip, or from a systems-on-module ("SOMs"). While cellular connectivity is used, other communication protocols can be used such as Zigbee, Bluetooth or Radio-Frequency ("RF") based on application. • Infrastructure Management - includes battery operated, cellular enabled connect sensors as well as other types of console server applications that are more Digi Accelerated Linux ("DAL") based than Console Servers. This operating segment has some products that do not use cellular communications, but a large part of this segment does use cellular communications. 12 Table of Contents 8. SEGMENT INFORMATION (CONTINUED) 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. The quantitative factors include similar operating margins. Our CODM reviews and makes business decisions which includes a primary review of operating income but also includes gross profit. 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 December 31, 2021 2020 Revenue IoT Products & Services $ 65,744 $ 61,780 IoT Solutions 18,513 11,366 Total revenue $ 84,257 $ 73,146 Gross Profit IoT Products & Services $ 35,675 $ 35,679 IoT Solutions 12,206 5,340 Total gross profit $ 47,881 $ 41,019 Operating Income (Loss) IoT Products & Services $ 4,116 $ 1,269 IoT Solutions ( 317 ) ( 1,415 ) Total operating income (loss) $ 3,799 $ ( 146 ) Depreciation and Amortization IoT Products & Services $ 3,629 $ 3,134 IoT Solutions 4,233 1,916 Total depreciation and amortization $ 7,862 $ 5,050 Total expended for property, plant and equipment was (in thousands): Three months ended December 31, 2021 2020 IoT Products & Services $ 454 $ 777 IoT Solutions* — — Total expended for property, plant and equipment $ 454 $ 777 * 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. 13 Table of Contents 8. SEGMENT INFORMATION (CONTINUED) Total assets for each of our segments were (in thousands): December 31, 2021 September 30, 2021 IoT Products & Services $ 386,589 $ 386,934 IoT Solutions 432,453 80,165 Unallocated* 47,188 152,432 Total assets $ 866,230 $ 619,531 * Unallocated consists of cash and cash equivalents. 9. REVENUE Revenue Disaggregation The following table summarizes our revenue by geographic location of our customers (in thousands): Three months ended December 31, 2021 2020 North America, primarily the United States $ 66,243 $ 54,018 Europe, Middle East & Africa 10,159 10,536 Rest of world 7,855 8,592 Total revenue $ 84,257 $ 73,146 The following table summarizes our revenue by the timing of revenue recognition (in thousands): Three months ended December 31, 2021 2020 Transferred at a point in time $ 66,535 $ 64,188 Transferred over time 17,722 8,958 Total revenue $ 84,257 $ 73,146 Contract Balances Contract Assets Contract assets consist of subscriber assets. These subscriber assets relate to fees in certain contracts that we charge our customers so they can begin using equipment. In these cases, we retain the ownership of the equipment that the customer uses. 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 ). Contract Liabilities The timing of revenue recognition may differ from the timing of invoicing to customers. Customers are invoiced for subscription services in advance on a monthly, quarterly or annual basis. Contract liabilities consist of unearned revenue related to annual or multi-year contracts for subscription services and related implementation fees. These pertain to our IoT Solutions segment and our Digi Remote Manager ® services in our IoT Products & Services segment. 14 Table of Contents 9. REVENUE (CONTINUED) Changes in unearned revenue were (in thousands): Three months ended December 31, 2021 2020 Unearned revenue, beginning of period $ 15,488 $ 9,341 Unearned revenue assumed from Ventus acquisition 2,100 — Billings 27,181 14,267 Revenue recognized ( 20,459 ) ( 10,542 ) Unearned revenue, end of period $ 24,310 $ 13,066 Remaining Transaction Price Transaction price allocated to the remaining performance obligations represents contracted revenue that has not been recognized. This includes unearned revenue and unbilled amounts that will be recognized as revenue in future periods. 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 . 10. INCOME TAXES 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 $ 0.4 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. These include our overall profitability, the geographical mix of income before taxes and related statutory tax rate in each jurisdiction, and tax items discretely related to the period, such as settlements of audits. We may record other benefits or expenses in the future that are specific to a particular quarter such as expiration of statutes of limitation, the completion of tax audits, or legislation that is enacted in both U.S. and foreign jurisdictions. A reconciliation of the beginning and ending amount of unrecognized tax benefits is (in thousands): Unrecognized tax benefits as of September 30, 2021 $ 2,908 Decreases related to: Expiration of statute of limitations ( 68 ) 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. 11. PRODUCT WARRANTY OBLIGATION The following tables summarize the activity associated with the product warranty accrual (in thousands) and is included on our condensed consolidated balance sheets within current liabilities: Balance at Warranties Settlements Balance at 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 15 Table of Contents 12. LEASES All of our leases are operating leases and primarily consist of leases for office space. For any lease with an initial term in excess of twelve months, the related lease assets and lease liabilities are recognized on the condensed consolidated balance sheets as either operating or financing leases at the inception of an agreement where it is determined that a lease exists. We have lease agreements that contain both lease and non-lease components. We have elected to combine lease and non-lease components for all classes of assets. Leases with an initial term of twelve months or less are not recorded on the condensed consolidated balance sheets. Instead we recognize lease expense for these leases on a straight-line basis over the lease term. Operating lease assets represent the right to use an underlying asset for the lease term and operating lease liabilities represent the obligation to make lease payments. These assets and liabilities are recognized based on the present value of future payments over the lease term at the commencement date. We generally use a collateralized incremental borrowing rate based on information available at the commencement date, including the lease term, in determining the present value of future payments. When determining our right-of-use asset, we generally do not include options to extend or terminate the lease unless it is reasonably certain that the option will be exercised. Our leases typically require payment of real estate taxes and common area maintenance and insurance. These components comprise the majority of our variable lease cost and are excluded from the present value of our lease obligations. Fixed payments may contain predetermined fixed rent escalations. We recognize the related rent expense on a straight-line basis from the commencement date to the end of the lease term. The following table shows the supplemental balance sheet information related to our leases (in thousands): Balance Sheet Location December 31, 2021 September 30, 2021 Assets Operating leases Operating lease right-of-use assets $ 15,891 $ 15,684 Total lease assets $ 15,891 $ 15,684 Liabilities Operating leases Current portion of operating lease liabilities $ 2,884 $ 2,633 Operating leases Operating lease liabilities 18,225 18,368 Total lease liabilities $ 21,109 $ 21,001 The following were the components of our lease cost which is recorded in both cost of goods sold and selling, general and administrative expense (in thousands): Three months ended December 31, 2021 2020 Operating lease cost $ 937 $ 861 Variable lease cost 28 268 Short-term lease cost 273 32 Total lease cost $ 1,238 $ 1,161 The following table presents supplemental information related to operating leases (in thousands): Three months ended December 31, 2021 2020 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 16 Table of Contents 12. LEASES (CONTINUED) 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 %. The table below reconciles the undiscounted cash flows for each of the first five years as well as all the remaining years to the operating lease liabilities recorded on the condensed consolidated balance sheet as of December 31, 2021 (in thousands): Fiscal year Amount 2022 $ 2,910 2023 3,641 2024 3,208 2025 2,821 2026 2,590 2027 1,760 Thereafter 7,069 Total future undiscounted lease payments 23,999 Less imputed interest ( 2,890 ) Total reported lease liability $ 21,109 13. COMMITMENTS AND CONTINGENCIES We lease certain of our buildings and equipment under noncancelable lease agreements. Please refer to Note 12 to our condensed consolidated financial statements for additional information. 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. 14. STOCK-BASED COMPENSATION Stock-based awards were granted under the 2021 Omnibus Incentive Plan (the "2021 Plan") beginning January 29, 2021. Prior to that date, such awards made in fiscal 2021 were granted under the 2020 Omnibus Incentive Plan (the "2020 Plan"). Upon stockholder approval of the 2021 Plan, we ceased granting awards under the 2020 Plan. Shares subject to awards under the 2020 Plan or any prior plans that are forfeited, canceled, returned to us for failure to satisfy vesting requirements, settled in cash or otherwise terminated without payment also will be available for grant under the 2021 Plan. The authority to grant options under the 2021 Plan and set other terms and conditions rests with the Compensation Committee of the Board of Directors. The 2021 Plan authorizes the issuance of up to 1,400,000 common shares in connection with awards of stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based full value awards or other stock-based awards. Eligible participants include our employees, our affiliates, non-employee directors of our Company and any consultant or advisor who is a natural person and provides services to us or our affiliates. Options that have been granted under the 2021 Plan typically vest over a four-year period and will expire if unexercised after seven years from the date of grant. Restricted stock unit awards ("RSUs") that have been granted to directors typically vest in one year . RSUs that have been granted to executives and employees typically vest in January over a four-year period. Performance stock unit awards ("PSUs") that have been granted to an executive will vest based on achievement of a cumulative adjusted earnings per share metric measured over a three-year period. Share-based compensation expenses recorded for this performance award is reevaluated at each reporting period based on the probability of achievement of the goal. The 2021 Plan is scheduled to expire on January 28, 2031. Options 17 Table of Contents 14. 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 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. When employees make this election, we retain a portion of shares issuable under the award. Tax with withholding obligations otherwise occur by the employee paying cash to us for the withholding. 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. The ESPP allows eligible participants the right to purchase common stock on a quarterly basis at the lower of 85 % of the market price at the beginning or end of each three-month offering period. The most recent amendments to the ESPP, ratified by our stockholders on January 29, 2020, increased the total number of shares to 3,425,000 that may be purchased under the plan. ESPP contributions by employees were $ 0.3 million for 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 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 December 31, 2021 2020 Cost of sales $ 86 $ 82 Sales and marketing 490 525 Research and development 322 210 General and administrative 1,119 928 Stock-based compensation before income taxes 2,017 1,745 Income tax benefit ( 430 ) ( 365 ) Stock-based compensation after income taxes $ 1,587 $ 1,380 18 Table of Contents 14. 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 Exercise Price Weighted Average Contractual Term (in years) Aggregate Intrinsic Value (1) Balance at September 30, 2021 2,952 $ 13.20 Granted 452 22.74 Exercised ( 1,099 ) 10.84 Forfeited / Canceled ( 43 ) 16.78 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 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: Three months ended December 31, 2021 2020 Weighted average per option grant date fair value $ 10.23 $ 7.12 Assumptions used for option grants: Risk free interest rate 1.25% - 1.46% 0.51% - 0.54% Expected term 6.00 years 6.00 years Expected volatility 46 % 44 % Weighted average volatility 46 % 44 % Expected dividend yield — — The fair value of each option award granted during the periods presented was estimated using the Black-Scholes option valuation model that uses the assumptions noted in the above table. Expected volatilities are based on the historical volatility of our stock. We use historical data to estimate option exercise and employee termination information within the valuation model. The expected term of options granted is derived from the vesting period and historical information and represents the period of time that options granted are expected to be outstanding. The risk-free rate used is the zero-coupon U.S. Treasury bond rate in effect at the time of the grant whose maturity equals the expected term of the option. As of 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. 19 Table of Contents 14. 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 December 31, 2021 and changes during the three months then ended (in thousands, except per common share amounts): RSUs PSUs Number of Awards Weighted Average Grant Date Fair Value Number of Awards Weighted Average Grant Date Fair Value Nonvested at September 30, 2021 812 $ 15.72 18 $ 25.15 Granted 285 $ 22.95 — $ — Vested ( 192 ) $ 14.24 ( 3 ) $ 25.15 Canceled ( 35 ) $ 15.50 — $ — 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. 20 Table of Contents