DIGI INTERNATIONAL INC 10-Q

ITEM 1. FINANCIAL STATEMENTS DIGI INTERNATIONAL INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three months ended June 30, Nine months ended June 30, 2021 2020 2021 2020 (in thousands, except per share data) Revenue: Product $ 68,303 $ 62,807 $ 197,831 $ 182,695 Service 10,776 7,531 31,695 23,407 Total revenue 79,079 70,338 229,526 206,102 Cost of sales: Cost of product 31,477 28,759 91,747 86,937 Cost of service 3,933 3,005 10,409 9,439 Amortization 1,113 1,225 3,339 3,272 Total cost of sales 36,523 32,989 105,495 99,648 Gross profit 42,556 37,349 124,031 106,454 Operating expenses: Sales and marketing 15,910 13,133 46,271 39,750 Research and development 12,374 10,892 34,822 32,755 General and administrative 10,153 10,378 34,701 27,724 Restructuring charge 101 91 995 129 Total operating expenses 38,538 34,494 116,789 100,358 Operating income 4,018 2,855 7,242 6,096 Other expense, net: Interest income 3 22 4 303 Interest expense ( 371 ) ( 900 ) ( 1,019 ) ( 3,066 ) Other expense, net ( 114 ) ( 67 ) ( 229 ) ( 214 ) Total other expense, net ( 482 ) ( 945 ) ( 1,244 ) ( 2,977 ) Income before income taxes 3,536 1,910 5,998 3,119 Income tax expense (benefit) 379 144 220 ( 859 ) Net income $ 3,157 $ 1,766 $ 5,778 $ 3,978 Net income per common share: Basic $ 0.09 $ 0.06 $ 0.18 $ 0.14 Diluted $ 0.09 $ 0.06 $ 0.18 $ 0.13 Weighted average common shares: Basic 34,057 28,972 31,443 28,772 Diluted 35,148 29,187 32,706 29,477 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 June 30, Nine months ended June 30, 2021 2020 2021 2020 (in thousands) Net income $ 3,157 $ 1,766 $ 5,778 $ 3,978 Other comprehensive (loss) income: Foreign currency translation adjustment 463 681 2,068 ( 1,120 ) Change in net unrealized gain on investments — — — 18 Less income tax expense — — — ( 5 ) Other comprehensive income (loss) 463 681 2,068 ( 1,107 ) Comprehensive income $ 3,620 $ 2,447 $ 7,846 $ 2,871 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) June 30, 2021 September 30, 2020 (in thousands, except share data) ASSETS Current assets: Cash and cash equivalents $ 146,942 $ 54,129 Accounts receivable, net 41,276 59,227 Inventories 47,263 51,568 Other current assets 10,833 5,134 Total current assets 246,314 170,058 Property, equipment and improvements, net 12,559 11,507 Operating lease right-of-use assets 16,342 14,334 Intangible assets, net 114,982 121,248 Goodwill 221,331 210,135 Deferred tax assets 160 389 Other non-current assets 1,363 1,011 Total assets $ 613,051 $ 528,682 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ — $ 1,972 Accounts payable 18,840 28,067 Accrued compensation 11,544 9,372 Unearned revenue 13,047 7,691 Contingent consideration on acquired business 3,000 4,228 Current portion of operating lease liabilities 2,680 2,527 Other current liabilities 8,304 7,373 Total current liabilities 57,415 61,230 Income taxes payable 2,067 1,958 Deferred tax liabilities 18,662 17,171 Long-term debt 45,670 58,980 Operating lease liabilities 19,072 16,193 Other non-current liabilities 4,694 1,650 Total liabilities 147,580 157,182 Commitments and Contingencies (see Note 15) 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; 40,530,498 and 35,512,843 shares issued 405 355 Additional paid-in capital 367,253 279,741 Retained earnings 176,116 170,330 Accumulated other comprehensive loss ( 21,749 ) ( 23,817 ) Treasury stock, at cost, 6,419,504 and 6,353,094 shares ( 56,554 ) ( 55,109 ) Total stockholders' equity 465,471 371,500 Total liabilities and stockholders' equity $ 613,051 $ 528,682 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) Nine months ended June 30, 2021 2020 (in thousands) Operating activities: Net income $ 5,778 $ 3,978 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property, equipment and improvements 3,211 3,472 Amortization of intangible assets 11,989 10,687 Stock-based compensation 6,331 5,323 Deferred income tax provision 1,995 744 Loss on sale of property and equipment 65 — Change in fair value of contingent consideration 5,772 ( 128 ) Provision for bad debt and product returns 1,520 438 Provision for inventory obsolescence 1,200 1,467 Restructuring charge 995 129 Other 84 ( 37 ) Changes in operating assets and liabilities (net of acquisitions) 3,144 ( 6,920 ) Net cash provided by operating activities 42,084 19,153 Investing activities: Acquisition of businesses, net of cash acquired ( 6,312 ) ( 136,098 ) Purchase of property, equipment, improvements and certain other intangible assets ( 1,645 ) ( 693 ) Net cash used in investing activities ( 7,957 ) ( 136,791 ) Financing activities: Proceeds from long-term debt 618 119,018 Payments on long-term debt ( 15,625 ) ( 40,268 ) Payments for contingent consideration ( 4,200 ) ( 4,698 ) Proceeds from issuance of stock, net of offering expenses 73,830 — Proceeds from stock option plan transactions 7,024 5,063 Proceeds from employee stock purchase plan transactions 917 798 Purchases of common stock ( 1,985 ) ( 1,692 ) Net cash provided by financing activities 60,579 78,221 Effect of exchange rate changes on cash and cash equivalents ( 1,893 ) 1,710 Net increase (decrease) in cash and cash equivalents 92,813 ( 37,707 ) Cash and cash equivalents, beginning of period 54,129 92,792 Cash and cash equivalents, end of period $ 146,942 $ 55,085 Supplemental schedule of non-cash investing and financing activities: Transfer of inventory to property, equipment and improvements $ ( 1,624 ) $ ( 1,202 ) Contingent consideration recognized related to acquisition of business $ ( 5,914 ) $ ( 5,100 ) Tenant improvement allowance $ ( 1,000 ) $ — Accrual for purchase of property, equipment, improvements and certain other intangible assets $ ( 14 ) $ — 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 March 31, 2020 35,364 $ 354 6,410 $ ( 55,563 ) $ 274,780 $ 164,131 $ ( 25,339 ) $ 358,363 Net income — — — — — 1,766 — 1,766 Other comprehensive loss — — — — — — 681 681 Employee stock purchase plan issuances — — ( 37 ) 324 ( 41 ) — — 283 Taxes paid for net share settlement of share-based payment awards — — — ( 9 ) — — — ( 9 ) Issuance of stock under stock award plans 41 — — — 339 — — 339 Stock-based compensation expense — — — — 1,882 — — 1,882 Balances, June 30, 2020 35,405 $ 354 6,373 $ ( 55,248 ) $ 276,960 $ 165,897 $ ( 24,658 ) $ 363,305 Balances, September 30, 2019 34,608 $ 346 6,367 $ ( 54,339 ) $ 266,567 $ 161,919 $ ( 25,515 ) $ 348,978 Net income — — — — — 3,978 — 3,978 Other comprehensive income — — — — — — 857 857 Employee stock purchase plan issuances — — ( 90 ) 783 15 — — 798 Taxes paid for net share settlement of share-based payment awards — — 96 ( 1,692 ) — — — ( 1,692 ) Issuance of stock under stock award plans 797 8 — — 5,055 — — 5,063 Stock-based compensation expense — — — — 5,323 — — 5,323 Balances, June 30, 2020 35,405 $ 354 6,373 $ ( 55,248 ) $ 276,960 $ 165,897 $ ( 24,658 ) $ 363,305 Balances, March 31, 2021 40,442 $ 404 6,413 $ ( 56,595 ) $ 364,604 $ 172,951 $ ( 22,212 ) $ 459,152 Net income — — — — — 3,157 — 3,157 Other comprehensive loss — — — — — — 463 463 Other 8 8 Employee stock purchase plan issuances — — ( 18 ) 160 137 — — 297 Taxes paid for net share settlement of share-based payment awards — — 6 ( 119 ) — — — ( 119 ) Issuance of stock under stock award plans 70 1 . — 402 — — 403 Stock-based compensation expense — — — — 2,110 — — 2,110 Balances, June 30, 2021 40,512 $ 405 6,401 $ ( 56,554 ) $ 367,253 $ 176,116 $ ( 21,749 ) $ 465,471 Balances, September 30, 2020 35,513 $ 355 6,353 $ ( 55,109 ) $ 279,741 $ 170,330 $ ( 23,817 ) $ 371,500 Net income — — — — — 5,778 — 5,778 Other comprehensive loss — — — — — — 2,068 2,068 Issuance of common stock, net of offering expenses 4,025 40 — — 73,790 — — 73,830 Other 8 8 Employee stock purchase plan issuances — — ( 61 ) 540 376 — — 916 Taxes paid for net share settlement of share-based payment awards — — 109 ( 1,985 ) — — — ( 1,985 ) Issuance of stock under stock award plans 974 10 — — 7,015 — — 7,025 Stock-based compensation expense — — — — 6,331 — — 6,331 Balances, June 30, 2021 40,512 $ 405 6,401 $ ( 56,554 ) $ 367,253 $ 176,116 $ ( 21,749 ) $ 465,471 5 Table of Contents The accompanying notes are an integral part of the condensed consolidated financial statements. 6 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, 2020 (the "2020 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. As described in Note 9, effective with the reorganization announcement on October 7, 2020, the measure of segment operating income (loss) used by our chief operating decision maker ("CODM") changed. As a result, our disclosed measure of segment operating income (loss) has been updated. Potential Impacts of COVID-19 on our Business 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, 2020 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 August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance changes the disclosure requirements on fair value measurements. We adopted this standard in the first quarter of fiscal 2021. This standard did not have a material impact on our consolidated financial statements. In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments . The amendments in this update replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses. This update is intended to provide financial statement users with more decision-useful information about expected credit losses. We adopted this standard in the first quarter of fiscal 2021, following the modified-retrospective approach. This standard did not have a material impact on our consolidated financial statements. 7 Table of Contents 2. ACQUISITIONS Acquisition of Haxiot, Inc. On March 26, 2021, we acquired Haxiot, Inc. ("Haxiot"), a Dallas-based provider of low power wide area ("LPWA") wireless technology. The results of operations are now included in our third quarter of fiscal 2021 results within our IoT Products & Services segment. The terms of the acquisition included an upfront cash payment as well as contingent consideration comprised of future earn-out payments. We funded the closing of the acquisition with $ 7.1 million of cash on hand. The future earn-out payments are based on Haxiot revenue performance and contractually are not to exceed $ 3.0 million and $ 5.0 million for the annual periods ending December 31, 2021 and December 31, 2022. The fair value amount of these earn-outs for the annual periods ending December 31, 2021 and December 31, 2022 are $3.0 million and $2.9 million, respectively. In the fiscal third quarter of fiscal 2021, the preliminary purchase price allocation was updated, including related determination of fair value and income tax implications. As a result, we adjusted goodwill to $ 8.6 million and adjusted contingent consideration to $ 5.9 million on our balance sheet at June 30, 2021. For tax purposes, this acquisition is treated as a stock acquisition. The goodwill therefore is not deductible. We believe this is a complementary acquisition for us as it significantly enhances our IoT Products & Services segment by enhancing Digi's embedded systems portfolio and immediately extends the company's market reach with a complete LoRaWAN ® -based solutions offering. Costs directly related to the acquisition of $ 0.2 million incurred fiscal year to date 2021 have been charged to operations and are included in general and administrative expense in our condensed statements of operations. These acquisition costs include legal, accounting, valuation and investment banking fees. The following table summarizes the preliminary fair values of Haxiot assets acquired and liabilities assumed as of the acquisition date (in thousands). Cash $ 7,146 Contingent consideration 5,900 Total $ 13,046 Fair value of net tangible assets acquired $ 124 Identifiable intangible assets: Customer relationships 3,900 Purchased and core technology 1,050 Trademarks 500 Deferred tax liability on identifiable intangible assets ( 1,145 ) Goodwill 8,617 Total $ 13,046 Acquisition of Opengear, Inc. On December 13, 2019, we completed our acquisition of Opengear, Inc. ("Opengear"), a New Jersey-based provider of secure IT infrastructure products and software. Opengear results have been included in our condensed consolidated financial statements within our IoT Products & Services segment since the date of acquisition. During the first quarter of fiscal 2021, we recorded an out-of-period adjustment in connection with the purchase price accounting of Opengear. This balance sheet adjustment resulted in a decrease in fair value of net tangible assets acquired of $ 1.1 million , a decrease of $ 0.3 million to non-current deferred tax liability and an increase to goodwill of $ 0.8 million . Management assessed the impact of this adjustment and believes, after considering both quantitative and qualitative factors, that it is not material to our current or previously issued consolidated financial statements. The following table summarizes the final fair values of Opengear assets acquired and liabilities assumed as of the acquisition date (in thousands): 8 Table of Contents Cash $ 148,058 Contingent consideration 5,100 Total $ 153,158 Fair value of net tangible assets acquired $ 18,096 Identifiable intangible assets: Customer relationships 79,000 Purchased and core technology 18,100 Trademarks 8,000 Deferred tax liability on identifiable intangible assets ( 27,126 ) Goodwill 57,088 Total $ 153,158 The condensed consolidated balance sheet as of June 30, 2021 reflects the final allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. 3. EARNINGS PER SHARE The following table is a reconciliation of the numerators and denominators in the net income per common share calculations (in thousands, except per common share data): Three months ended June 30, Nine months ended June 30, 2021 2020 2021 2020 Numerator: Net income $ 3,157 $ 1,766 $ 5,778 $ 3,978 Denominator: Denominator for basic net income per common share — weighted average shares outstanding 34,057 28,972 31,443 28,772 Effect of dilutive securities: Stock options and restricted stock units 1,091 215 1,263 705 Denominator for diluted net income per common share — adjusted weighted average shares 35,148 29,187 32,706 29,477 Net income per common share, basic $ 0.09 $ 0.06 $ 0.18 $ 0.14 Net income per common share, diluted $ 0.09 $ 0.06 $ 0.18 $ 0.13 For the three months ended June 30, 2021 and 2020, there were 41,540 and 2,241,860 potentially dilutive shares, respectively. For the nine months ended June 30, 2021 and 2020, there were 37,248 and 1,146,581 potentially dilutive shares, respectively. 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. 4. SELECTED BALANCE SHEET DATA The following table shows selected balance sheet data (in thousands): 9 Table of Contents June 30, 2021 September 30, 2020 Accounts receivable, net: Accounts receivable $ 48,596 $ 65,027 Less allowance for credit losses 3,681 3,778 Less reserve for future credit returns and pricing adjustments 3,639 2,022 Accounts receivable, net $ 41,276 $ 59,227 Inventories: Raw materials $ 15,331 $ 14,009 Finished goods 31,932 37,559 Inventories $ 47,263 $ 51,568 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). 10 Table of Contents 5. FAIR VALUE MEASUREMENTS (CONTINUED) The following tables provide information by level for financial liabilities that are measured at fair value on a recurring basis (in thousands): Total Fair Value at Fair Value Measurements Using Inputs Considered as June 30, 2021 Level 1 Level 2 Level 3 Liabilities: Contingent consideration on acquired business $ 5,900 $ — $ — $ 5,900 Total liabilities measured at fair value $ 5,900 $ — $ — $ 5,900 Total Fair Value at Fair Value Measurements Using Inputs Considered as September 30, 2020 Level 1 Level 2 Level 3 Liabilities: Contingent consideration on acquired business $ 4,228 $ — $ — $ 4,228 Total liabilities measured at fair value $ 4,228 $ — $ — $ 4,228 In connection with our acquisition of Bluenica Corporation ("Bluenica") in October 2015, we agreed to make contingent earn-out payments over a period of up to 4 years, subject to achieving specified revenue thresholds for sales of Bluenica products. We paid the final installment of $ 2.9 million during the third quarter of fiscal 2020. In connection with our acquisition of Accelerated Concepts, Inc. ("Accelerated") in January 2018, we agreed to make contingent earn-out payments if specified revenue thresholds for sales of Accelerated products were achieved. We paid the first installment payment of $ 3.5 million in the third quarter of fiscal 2019. We paid the final installment of $ 2.4 million in the third quarter of fiscal 2020. The earn-out period for this acquisition ended on January 22, 2020. In connection with our acquisition of Opengear, we agreed to make contingent payments, based upon certain revenue thresholds (see Note 2 to the condensed consolidated financial statements). We paid the first installment of $ 0.9 million during the third quarter of fiscal 2020. We paid the final installment of $ 10.0 million during the second quarter of fiscal 2021. In connection with our acquisition of Haxiot, we agreed to make contingent earn-out payments, based upon certain revenue thresholds (see Note 2 to the condensed consolidated financial statements). In the fiscal third quarter of fiscal 2021, the preliminary purchase price allocation was updated, including related determination of fair value and income tax implications. As a result, we adjusted goodwill to $ 8.6 million and adjusted contingent consideration to $ 5.9 million on our balance sheet at June 30, 2021. The following table presents a reconciliation of the contingent consideration liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands): Three months ended June 30, Nine months ended June 30, 2021 2020 2021 2020 Fair value at beginning of period $ 8,000 $ 10,379 $ 4,228 $ 5,407 Contingent consideration recognized for acquired business — — 8,000 5,100 Contingent consideration payments — ( 6,151 ) ( 10,000 ) ( 6,151 ) Change in fair value of contingent consideration * ( 2,100 ) * — 3,672 ( 128 ) Fair value at end of period $ 5,900 $ 4,228 $ 5,900 $ 4,228 * The change in fair value for the three months ended June 30, 2021, totaling ($ 2,100 ) represents an adjustment to our preliminary purchase price of Haxiot that does not impact our condensed consolidated statement of operations. The change in fair value of contingent consideration reflects our estimates of the probabilities of achieving the relevant targets and is discounted based on our estimated discount rate. Due to the timing of the acquisition, the fair value of the contingent consideration at June 30, 2021 is based on the probability of achieving the specified revenue thresholds for Haxiot. 11 Table of Contents 6. GOODWILL AND OTHER INTANGIBLE ASSETS, NET Amortizable intangible assets were (in thousands): June 30, 2021 September 30, 2020 Gross carrying amount Accum. amort. Net Gross carrying amount Accum. amort. Net Purchased and core technology $ 77,624 $ ( 59,264 ) $ 18,360 $ 76,011 $ ( 55,482 ) $ 20,529 License agreements 112 ( 112 ) — 112 ( 112 ) — Patents and trademarks 23,591 ( 14,806 ) 8,785 22,836 ( 13,535 ) 9,301 Customer relationships 129,690 ( 41,913 ) 87,777 125,500 ( 34,232 ) 91,268 Non-compete agreements 600 ( 540 ) 60 600 ( 450 ) 150 Total $ 231,617 $ ( 116,635 ) $ 114,982 $ 225,059 $ ( 103,811 ) $ 121,248 Amortization expense was $ 4.1 million and $ 4.1 million for the three months ended June 30, 2021 and 2020, respectively, and $ 12.0 million and $ 10.7 million for the nine months ended June 30, 2021 and 2020, respectively. Amortization expense 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 2021 and the five succeeding fiscal years is (in thousands): 2021 (six months) $ 7,736 2022 $ 14,722 2023 $ 12,518 2024 $ 11,815 2025 $ 8,358 2026 $ 8,126 The changes in the carrying amount of goodwill by reportable segments are (in thousands): Nine months ended June 30, IoT Products and Services IoT Solutions Total Balance on September 30, 2020 $ 160,365 $ 49,770 $ 210,135 Acquisition 8,617 — 8,617 Adjustment (see Note 2) 846 — 846 Foreign currency translation adjustment 882 851 1,733 Balance at June 30, 2021 $ 170,710 $ 50,621 $ 221,331 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 9). Effective with the reorganization announcement on October 7, 2020 (see Note 14), our IoT Products & Services business is now structured to include four reporting units under the IoT Products & Services segment, each with a reporting manager: Cellular Routers, Console Servers, OEM Solutions and Infrastructure Management. We have four reporting units along with our IoT Solutions segment that have been tested individually for impairment. Due to the reorganization on October 7, 2020 (see Note 14), we performed our fiscal third quarter 2021 annual impairment test by reporting unit. As a result, we tested Cellular Routers, Console Servers, OEM Solutions, Infrastructure Management and IOT Solutions units which constitute separate reporting units for purposes of the ASC 350-20-35 "Goodwill Measurement of Impairment" assessment, which were tested individually for impairment in fiscal third quarter 2021. 12 Table of Contents For our quantitative goodwill impairment tests, we determine the estimated fair value of each reporting unit and compare it to the carrying value of the reporting unit, including goodwill. If the carrying amount of a reporting unit is higher than its estimated fair value, then an impairment loss must be recognized for the excess. Fair values for the five reporting units were each estimated on a standalone basis using a weighted combination of the income approach and market approach. 6. GOODWILL AND OTHER INTANGIBLE ASSETS, NET (CONTINUED) The income approach indicates the fair value of a business based on the value of the cash flows the business or asset can be expected to generate in the future. A commonly used variation of the income approach used to value a business is the discounted cash flow (“DCF”) method. The DCF method is a valuation technique in which the value of a business is estimated on the earnings capacity, or available cash flow, of that business. Earnings capacity represents the earnings available for distribution to stockholders after consideration of the reinvestment required for future growth. Significant judgment is required to estimate the amount and timing of future cash flows for each reporting unit and the relative risk of achieving those cash flows. The market approach indicates the fair value of a business or asset based on a comparison of the business or asset to comparable publicly traded companies or assets and transactions in its industry as well as our prior acquisitions. This approach can be estimated through the guideline company method. This method indicates fair value of a business by comparing it to publicly traded companies in similar lines of business. After identifying and selecting the guideline companies, we make judgments about the comparability of the companies based on size, growth rates, profitability, risk, and return on investment in order to estimate market multiples. These multiples are then applied to the reporting units to estimate a fair value. Assumptions and estimates to determine fair values under the income and market approaches are complex and often subjective. They can be affected by a variety of factors. These include external factors such as industry and economic trends. They also include internal factors such as changes in our business strategy and our internal forecasts. Changes in circumstances or a potential event could negatively affect the estimated fair values. We will continue to monitor potential COVID-19 industry and demand impacts as this could potentially affect our cash flows and market capitalization. If our future operating results do not meet current forecasts or if we experience a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of one or more of our reporting units, we may be required to record future impairment charges for goodwill. Results of our Fiscal 2021 Annual Impairment Test 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 March 15, 2021, we entered into an amended and restated credit agreement with BMO Harris Bank N.A. ("BMO"). This agreement provides us with a senior secured credit facility (the "Credit Facility") consisting of a $ 200 million revolving loan (the "Revolving Loan"). This loan replaced our syndicated senior secured credit agreement with BMO that was entered into on December 13, 2019 and replaced the remaining balance of our term loan with this new revolver. This prior agreement provided us with committed credit facilities ("Prior Credit Facility") totaling $ 150 million, which included a $ 50 million term loan and a $ 100 million revolving loan. We may use the Revolving Loan for working capital, capital expenditures, restricted payments and acquisitions permitted under the agreement. 13 Table of Contents Borrowings under the Credit Facility bear a variable interest rate of LIBOR plus an applicable margin spread from 1.25 % to 3.25 %. The amount of the applicable margin spread is a function of our leverage ratio and is reset monthly. In addition to paying interest on the outstanding balance under the Credit Facility, we are required to pay a commitment fee on the non-utilized commitments thereunder which is also reported in interest expense. Our weighted average interest rate at June 30, 2021 was 0.47 %. The additional debt issuance costs and remaining balance under the Prior Credit Facility totaled $ 2.6 million and is being amortized using the straight-line method over the term of the loan and reported in interest expense. The Revolving Loan is due in a lump sum payment at maturity on March 15, 2026. The fair value of the Revolving Loan approximated carrying value at June 30, 2021. 14 Table of Contents 7. INDEBTEDNESS (CONTINUED) The following table is a summary of our long-term indebtedness at June 30, 2021 (in thousands): Revolving loan $ 48,118 Total loans 48,118 Less unamortized issuance costs ( 2,448 ) Less current maturities of long-term debt — Total long-term debt, net of current portion $ 45,670 Covenants and Security Interest The agreements governing the Credit Facility contain a number of covenants. Among other thing, these covenants require us to maintain a certain financial ratio (net leverage ratio and minimum fixed charge ratio). At June 30, 2021, we were in compliance with our debt covenants. Amounts borrowed under the Credit Facility are secured by substantially all of our assets. 8. STOCKHOLDERS' EQUITY Public Offering of Common Stock During March 2021 we sold 4,025,000 shares of our common stock at a public offering price of $ 19.50 per share. The shares offered were registered pursuant to a registration statement that we filed with the Securities and Exchange Commission. We received net proceeds of $ 73.8 million, net of transaction expenses of $ 0.3 million related to the public offering. We intend to use the proceeds for working capital and general corporate purposes. We may, in the future, use the proceeds to acquire or invest in complementary businesses, products and technologies. 9. SEGMENT INFORMATION We have two reportable segments: IoT Products & Services and IoT Solutions. Effective with the reorganization announcement on October 7, 2020 (see Note 14), our IoT Products & Services business is now structured to include four operating segments, each with a segment manager. 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. 15 Table of Contents 9. SEGMENT INFORMATION (CONTINUED) The four operating segments have similar qualitative and quantitative factors which allow us to aggregate them under the IoT Products & Services reportable segment. 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. Thus, our measure of segment profit or loss used by our CODM changed. The shared general and administrative costs are now allocated to each operating segment. As a result, our disclosed measure of segment operating income has been updated for all periods presented. The change to the business segment operating income aligns with the update to how the CODM assesses performance and allocates resources for our business segments. Summary operating results for each of our segments were (in thousands): Three months ended June 30, Nine months ended June 30, 2021 2020 2021 2020 Revenue IoT Products & Services $ 66,812 $ 63,472 $ 194,224 $ 184,975 IoT Solutions 12,267 6,866 35,302 21,127 Total revenue $ 79,079 $ 70,338 $ 229,526 $ 206,102 Gross Profit IoT Products & Services $ 36,806 $ 33,899 $ 106,942 $ 96,010 IoT Solutions 5,750 3,450 17,089 10,444 Total gross profit $ 42,556 $ 37,349 $ 124,031 $ 106,454 Operating Income (Loss) IoT Products & Services $ 6,101 $ 6,481 $ 11,954 $ 19,240 IoT Solutions ( 2,083 ) ( 3,626 ) ( 4,712 ) ( 13,144 ) Total operating income $ 4,018 $ 2,855 $ 7,242 $ 6,096 Depreciation and Amortization IoT Products & Services $ 3,181 $ 3,320 $ 9,390 $ 8,364 IoT Solutions 1,964 1,986 5,810 5,795 Total depreciation and amortization $ 5,145 $ 5,306 $ 15,200 $ 14,159 Total expended for property, plant and equipment was (in thousands): Nine months ended June 30, 2021 2020 IoT Products & Services $ 1,645 $ 654 IoT Solutions* — 39 Total expended for property, plant and equipment $ 1,645 $ 693 * Excluded from this amount is $ 1,624 and $ 1,202 of transfers of inventory to property plant and equipment for subscriber assets for the nine months ended June 30, 2021 and 2020, respectively. Total assets for each of our segments were (in thousands): June 30, 2021 September 30, 2020 IoT Products & Services $ 385,478 $ 387,578 IoT Solutions 80,631 86,975 Unallocated* 146,942 54,129 Total assets $ 613,051 $ 528,682 16 Table of Contents * Unallocated consists of cash and cash equivalents. 10. REVENUE Revenue Disaggregation The following table summarizes our revenue by geographic location of our customers (in thousands): Three months ended June 30, Nine months ended June 30, 2021 2020 2021 2020 North America, primarily the United States $ 56,965 $ 52,603 $ 167,406 $ 157,513 Europe, Middle East & Africa 12,543 11,027 34,769 29,428 Rest of world 9,571 6,708 27,351 19,161 Total revenue $ 79,079 $ 70,338 $ 229,526 $ 206,102 The following table summarizes our revenue by the timing of revenue recognition (in thousands): Three months ended June 30, Nine months ended June 30, 2021 2020 2021 2020 Transferred at a point in time $ 70,333 $ 63,674 $ 203,665 $ 186,739 Transferred over time 8,746 6,664 25,861 19,363 Total revenue $ 79,079 $ 70,338 $ 229,526 $ 206,102 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 $ 2.2 million and $ 2.2 million as of June 30, 2021 and September 30, 2020, respectively, are included in property, equipment and improvements, net. Depreciation expense for these subscriber assets, which is included in cost of sales, was $ 0.5 million and $ 0.4 million for the three months ended June 30, 2021 and June 30, 2020, respectively and $ 1.4 million and $ 1.1 million for the nine months ended June 30, 2021 and June 30, 2020, respectively. 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. Changes in unearned revenue were (in thousands): Three months ended June 30, Nine months ended June 30, 2021 2020 2021 2020 Unearned revenue, beginning of period $ 16,436 $ 8,702 $ 9,341 $ 5,025 Billings 9,180 5,256 37,193 24,810 Revenue recognized ( 10,775 ) ( 7,530 ) ( 31,693 ) ( 23,407 ) Unearned revenue, end of period $ 14,841 $ 6,428 $ 14,841 $ 6,428 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 17 Table of Contents June 30, 2021, approximately $ 14.8 million of revenue is expected to be recognized from remaining performance obligations for subscription contracts. We expect to recognize revenue on approximately $ 13.0 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 . 11. INCOME TAXES Our income tax expense was $ 0.2 million for the nine months ended June 30, 2021. Included in this expense was a net tax benefit discretely related to the nine months ended June 30, 2021 of $ 1.0 million. This benefit primarily was the result of excess tax benefits recognized on stock compensation. Income tax benefit was $ 0.9 million for the nine months ended June 30, 2020. Included in this benefit was a net tax benefit discretely related to the nine months ended June 30, 2020 of $ 1.1 million. This benefit primarily was the result of excess tax benefits recognized on stock compensation and an adjustment of our state deferred tax rate due to the Opengear acquisition. For the nine months ended June 30, 2020, our effective tax rate before items discretely related to the period was less than the U.S. statutory rate. This was primarily due to certain research and development tax credits generated in the U.S. 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, 2020 $ 2,600 Decreases related to: Expiration of statute of limitations ( 209 ) Unrecognized tax benefits as of June 30, 2021 $ 2,391 The total amount of unrecognized tax benefits at June 30, 2021 that, if recognized, would affect our effective tax rate was $ 2.2 million, after considering the impact of interest and deferred benefit items. We expect that the total amount of unrecognized tax benefits will decrease by approximately $ 0.1 million over the next 12 months. 12. 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 April 1 issued made June 30 Three months ended June 30, 2021 $ 923 $ 16 $ ( 146 ) $ 793 Three months ended June 30, 2020 $ 860 $ 123 $ ( 96 ) $ 887 Balance at Warranties Settlements Balance at Period October 1 issued made June 30 Nine months ended June 30, 2021 $ 942 $ 205 $ ( 354 ) $ 793 Nine months ended June 30, 2020 $ 1,012 $ 525 $ ( 650 ) $ 887 13. 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 18 Table of Contents 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 June 30, 2021 September 30, 2020 Assets Operating leases Operating lease right-of-use assets $ 16,342 $ 14,334 Total lease assets $ 16,342 $ 14,334 Liabilities Operating leases Current portion of operating lease liabilities $ 2,680 $ 2,527 Operating leases Operating lease liabilities 19,072 16,193 Total lease liabilities $ 21,752 $ 18,720 The following were the components of our lease cost which is recorded in both cost of goods sold and selling, general and administrative expense (in thousands): Three months ended June 30, Nine months ended June 30, 2021 2020 2021 2020 Operating lease cost $ 856 $ 829 $ 2,615 $ 2,458 Variable lease cost 286 260 805 497 Short-term lease cost 32 73 98 127 Total lease cost $ 1,174 $ 1,162 $ 3,518 $ 3,081 The following table presents supplemental information related to operating leases (in thousands): Nine months ended June 30, 2021 2020 Cash paid for amounts included in the measurement of operating lease liabilities $ 1,784 $ 1,175 Right-of-use assets obtained in exchange for new operating lease liabilities $ 3,919 $ 593 Non-cash tenant improvement allowance $ 1,000 $ — At June 30, 2021 the weighted average remaining lease term of our operating leases was 7.0 years and the weighted average discount rate for these leases was 4.5 %. 19 Table of Contents 13. LEASES (CONTINUED) The table below reconciles the undiscounted cash flows for each of the first five years as well as all the remaining years to the operating lease liabilities recorded on the condensed consolidated balance sheet as of June 30, 2021 (in thousands): Fiscal year Amount Remainder of 2021 $ 1,777 2022 3,368 2023 3,144 2024 2,918 2025 2,821 2026 2,591 Thereafter 9,266 Total future undiscounted lease payments 25,885 Less imputed interest ( 4,133 ) Total reported lease liability $ 21,752 14. RESTRUCTURING Q1 FY2021 Restructuring On October 7, 2020, our Board of Directors approved a reorganization of our IoT Products & Services business segment. The restructuring plan aligns the business segment's organization around product lines. Under this plan, we recorded a charge of $ 0.7 million for employee termination charges and eliminated 19 employment positions primarily in the U.S. during the three months ended December 31, 2020. In the second quarter of fiscal 2021 we recorded an additional $ 0.2 million related to this restructuring. In the third quarter of fiscal 2021 we recorded an additional $ 0.1 million related to this restructuring. Below is a summary of the restructuring charges and other activity (in thousands): Q1 2021 Restructuring Employee Termination Costs Balance at September 30, 2020 $ — Restructuring charge 995 Payments ( 599 ) Foreign currency fluctuation ( 39 ) Balance at June 30, 2021 $ 357 15. COMMITMENTS AND CONTINGENCIES Leases We lease certain of our buildings and equipment under noncancelable lease agreements. Please refer to Note 13 to our condensed consolidated financial statements for additional information. Litigation In November 2018, DimOnOff Inc., a company headquartered in Quebec City, Quebec, Canada ("DimOnOff"), which sells control systems in the building automation and street lighting markets sued us and a former distributor from whom DimOnOff purchased certain Digi products. The suit was brought in the Superior Court of the Province of Quebec in the District of Quebec (Canada) and alleges certain Digi products it purchased and incorporated into street lighting systems in a Canadian city were defective causing some of the street lights to malfunction. It alleged damages of just over CAD 1.0 million. During the 20 Table of Contents 15. COMMITMENTS AND CONTINGENCIES (CONTINUED) second quarter of fiscal 2021, the lawsuit was settled and no payment will be made by us. However, we will be providing DimOnOff reduced product pricing on a limited number of products for an amount substantially lower than what was claimed in the lawsuit. In addition to the matter discussed above, in the normal course of business, we are presently, and expect in the future to be, subject to various claims and litigation with third parties such as non-practicing intellectual property entities as well as customers, vendors and/or employees. 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. 16. STOCK-BASED COMPENSATION Stock-based awards were granted under the 2021 Omnibus Incentive Plan (the "2021 Plan") beginning January 29, 2021. Prior to that date, such awards made in fiscal 2021 were granted under the 2020 Omnibus Incentive Plan (the "2020 Plan"). Upon stockholder approval of the 2021 Plan, we ceased granting awards under the 2020 Plan. Shares subject to awards under the 2020 Plan or any prior plans that are forfeited, canceled, returned to us for failure to satisfy vesting requirements, settled in cash or otherwise terminated without payment also will be available for grant under the 2021 Plan. The authority to grant options under the 2021 Plan and set other terms and conditions rests with the Compensation Committee of the Board of Directors. The 2021 Plan authorizes the issuance of up to 1,400,000 common shares in connection with awards of stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based full value awards or other stock-based awards. Eligible participants include our employees, our affiliates, non-employee directors of our Company and any consultant or advisor who is a natural person and provides services to us or our affiliates. Options that have been granted under the 2021 Plan typically vest over a four-year period and will expire if unexercised after seven years from the date of grant. Restricted stock unit awards ("RSUs") that have been granted to directors typically vest in one year . RSUs that have been granted to executives and employees typically vest in January over a four-year period. Performance stock unit awards ("PSUs") that have been granted to an executive will vest based on achievement of a cumulative adjusted earnings per share metric measured over a three-year period. Share-based compensation expenses recorded for this performance award is reevaluated at each reporting period based on the probability of achievement of the goal. The 2021 Plan is scheduled to expire on January 28, 2031. Options under the 2021 Plan can be granted as either incentive stock options or non-statutory stock options. The exercise price of options and the grant date price of RSUs and PSUs is determined by our Compensation Committee but will not be less than the fair market value of our common stock based on the closing price as of the date of grant. Upon exercise of options or settlement of vested restricted stock units or performance stock units, we issue new shares of stock. As of June 30, 2021, there were approximately 1,325,088 shares available for future grants under the 2021 Plan. Cash received from the exercise of stock options was $ 7.0 million and $ 5.1 million for the nine months ended June 30, 2021 and June 30, 2020, respectively. 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 nine months ended June 30, 2021 and 2020, our employees forfeited 109,516 shares and 95,997 shares, respectively, in order to satisfy respective withholding tax obligations of $ 2.0 million and $ 1.7 million. 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 $ 0.9 million for the nine months ended June 30, 2021 and $ 0.8 million for the nine months ended June 30, 2020. Pursuant to the ESPP, 61,302 and 90,592 common shares were issued to employees during the nine months ended June 30, 2021 and June 30, 2020, respectively. Shares are issued under the ESPP from treasury stock. As of June 30, 2021, 650,412 common shares were available for future issuances under the ESPP. 21 Table of Contents 16. STOCK-BASED COMPENSATION (CONTINUED) The following table shows stock-based compensation expense that is included in the consolidated results of operations (in thousands): Three months ended June 30, Nine months ended June 30, 2021 2020 2021 2020 Cost of sales $ 98 $ 80 $ 269 $ 222 Sales and marketing 614 609 1,762 1,669 Research and development 259 283 762 908 General and administrative 1,132 910 3,538 2,524 Stock-based compensation before income taxes 2,110 1,882 6,331 5,323 Income tax benefit ( 541 ) ( 399 ) ( 1,369 ) ( 1,111 ) Stock-based compensation after income taxes $ 1,569 $ 1,483 $ 4,962 $ 4,212 Stock Options The following table summarizes our stock option activity (in thousands, except per common share amounts): Options Outstanding Weighted Average Exercised Price Weighted Average Contractual Term (in years) Aggregate Intrinsic Value (1) Balance at September 30, 2020 3,393 $ 12.20 Granted 497 17.58 Exercised ( 625 ) 11.24 Forfeited / Canceled ( 142 ) 14.18 Balance at March 31, 2021 3,123 $ 13.16 3.91 $ 21,864 Exercisable at March 31, 2021 1,949 $ 11.52 2.86 $ 16,745 (1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $ 20.11 as of June 30, 2021, which would have been received by the option holders had all option holders exercised their options as of that date. The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price. The total intrinsic value of all options exercised during the nine months ended June 30, 2021 was $ 5.4 million and during the nine months ended June 30, 2020 was $ 3.4 million. The following table shows the weighted average fair value, which was determined based upon the fair value of each option on the grant date utilizing the Black-Scholes option-pricing model and the related assumptions: Nine months ended June 30, 2021 2020 Weighted average per option grant date fair value $ 7.45 $ 6.18 Assumptions used for option grants: Risk free interest rate 0.51% - 1.035% 0.44% - 1.73% Expected term 6.00 years 6.00 years Expected volatility 44% - 46% 42 % Weighted average volatility 44 % 36 % 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 22 Table of Contents 16. STOCK-BASED COMPENSATION (CONTINUED) time that options granted are expected to be outstanding. The risk-free rate used is the zero-coupon U.S. Treasury bond rate in effect at the time of the grant whose maturity equals the expected term of the option. As of June 30, 2021, the total unrecognized compensation cost related to non-vested stock options was $ 6.8 million and the related weighted average period over which it is expected to be recognized is approximately 2.9 years. Non-vested Stock Units The following table presents a summary of our non-vested restricted stock and performance stock units as of June 30, 2021 and changes during the nine months then ended (in thousands, except per common share amounts): RSUs PSUs Number of Awards Weighted Average Grant Date Fair Value Number of Awards Weighted Average Grant Date Fair Value Nonvested at September 30, 2020 972 $ 13.20 — $ — Granted 346 $ 18.65 18 $ 25.15 Vested ( 349 ) $ 12.74 — $ — Canceled ( 94 ) $ 13.81 — $ — Nonvested at March 31, 2021 875 $ 15.48 18 $ 25.15 As of June 30, 2021, the total unrecognized compensation cost related to non-vested stock units was $ 10.8 million. The related weighted average period over which this cost is expected to be recognized is approximately 1.6 years. 17. SUBSEQUENT EVENTS Acquisition of Ctek, Inc. On July 6, 2021, we acquired Ctek, Inc. ("Ctek"), a San Pedro, California-based provider that specializes in solutions for remote monitoring and industrial controls. The results of operations of Ctek will be included in our fourth quarter fiscal 2021 results within our IoT Products & Services segment. The terms of the acquisition included an upfront cash payment as well as contingent consideration comprised of future earn-out payments. We funded the closing of the acquisition with $ 12.0 million of cash on hand. The future earn-out payments are based on revenue performance outlined in the terms of the purchase agreement for the annual periods ending December 31, 2021, December 31, 2022 and December 31, 2023. The cumulative amount of these earn-outs for the annual periods will not exceed $ 0.5 million, $ 1.0 million and $ 1.5 million, respectively. Due to the timing of the acquisition, the purchase price allocation, including related determinations of fair value and income tax implications, are in process. For tax purposes, this acquisition is treated as a stock acquisition. The goodwill therefore is not deductible. Through the acquisition of Ctek, Digi is uniquely positioned to provide customers with both battery and hardwired options for the control and monitoring of critical infrastructure, from complex off-shore oil rig locations to localized deployments such as municipal park lighting. In addition, Ctek’s offering and existing client portfolio is set to further Digi’s reach in a rapidly expanding market. Costs directly related to the acquisition of $ 0.2 million incurred in the third quarter of fiscal 2021 have been charged to operations and are included in general and administrative expense in our condensed statements of operations. These acquisition costs include legal, accounting, valuation and investment banking fees. 23 Table of Contents