Financial Data and Key Metrics Changes - Revenue for the fiscal third quarter reached $70.3 million, a 15% increase year-over-year, marking the best performance in the company's history [9][17] - Adjusted EBITDA was $10.5 million, with an adjusted EBITDA margin of 15% [9][18] - Gross margins exceeded 50%, closing at 53.1% [18] - Operating cash flow generated during the quarter was $31.8 million, ending with $55.1 million in cash [19][20] - The company paid down over $30 million in debt, resulting in a net debt position of $19.4 million [20] Business Line Data and Key Metrics Changes - IoT Products and Services revenue increased by 25.7% year-over-year to $63.5 million, with gross margins rising to 53.4% [25] - IoT Solutions revenue decreased by 35.6% year-over-year to $6.9 million due to delays in customer rollouts and large enterprise deals not recurring [25] - The Console Server product line saw significant growth, contributing to the overall revenue increase [10] Market Data and Key Metrics Changes - Strong demand was noted in sectors such as medical, safe work from home, business continuity, data center, and solar energy [12] - The SmartSense IoT Solutions business added approximately 1,000 subscribers during the quarter, with a total of 69,300 subscribers generating $17 million in annualized recurring revenue [12] Company Strategy and Development Direction - The company is focused on enhancing its channel program and improving customer experience [11] - Digi is committed to capital allocation for potential acquisitions while strengthening its balance sheet [15] - The company aims to continue its initiatives around diversity and inclusion, which are expected to positively impact its culture and operations [7] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to manage profitability and cash generation despite the pandemic's challenges [34] - The ongoing macroeconomic conditions are being closely monitored, with expectations of potential stabilization in business performance [28] - Management noted that while the pandemic has caused uncertainty, they believe the worst impact may be behind them [28] Other Important Information - The company has not seen significant cancellations but rather deferrals in customer engagements due to the pandemic [38] - A diverse supply chain has allowed the company to maintain stable operations without significant supply constraints [41] Q&A Session Summary Question: Can you comment on RFP activity, especially in the SmartSense side? - Management noted re-engagement in SmartSense, particularly in retail and transportation sectors, while some verticals like restaurants are still struggling [31] Question: What gives you the confidence to make the $30 million debt payment? - The confidence stems from the company's ability to manage profitability and cash generation effectively [34] Question: Have you seen any significant cancellations across any of your product lines? - Management indicated that there have been deferrals rather than cancellations, with churn performing well [38][39] Question: How do you manage sites that are closed due to COVID? - The company works with customers needing relief to restructure contracts or payments, ensuring essential customers remain operational [45] Question: What is the growth seen in products and solutions without OpenGear's revenue contribution? - Management indicated some decline in that segment due to macroeconomic conditions but did not provide specific numbers [46]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Title of each class Trading Symbol Name of each exchange on which registered Common Stock, par value $.01 per share DGII The Nasdaq Stock Market LLC Non-accelerated filer ☐ Smaller reporting company ☐ ☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 2020 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 19 ...

Digi International, Inc. (NASDAQ:DGII) Q2 2020 Earnings Conference Call May 7, 2020 5:00 PM ET Company Participants James Loch - SVP, CFO & Treasurer Ronald Konezny - President, CEO & Director Conference Call Participants Mike Walkley - Canaccord Jaeson Schmidt - Lake Street Capital Markets Richard Eastman - Robert W. Baird & Co. Scott Searle - Roth Capital Partners Operator Thank you for standing by and welcome to Q2 2020 Digi International Incorporated Earnings Call. At this time, all participants are on ...

[PART I. FINANCIAL INFORMATION](index=3&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Financial Statements](index=3&type=section&id=ITEM%201.%20Financial%20Statements%3A) Presents unaudited condensed consolidated financial statements for Q1 2020, detailing operations, balance sheets, cash flows, and notes on key events [Condensed Consolidated Statements of Operations](index=3&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Total revenue increased to **$73.4 million** in Q1 2020, leading to significant growth in operating income and net income Condensed Consolidated Statements of Operations (Three Months Ended March 31) | Metric | 2020 (in thousands) | 2019 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | **Total Revenue** | $73,447 | $65,764 | 11.7% | | **Gross Profit** | $38,641 | $30,329 | 27.4% | | **Operating Income** | $3,724 | $785 | 374.4% | | **Net Income** | $2,004 | $1,342 | 49.3% | | **Diluted EPS** | $0.07 | $0.05 | 40.0% | [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets increased to **$554.8 million** as of March 31, 2020, driven by the Opengear acquisition and new debt, significantly raising total liabilities Balance Sheet Comparison | Metric (in thousands) | March 31, 2020 | September 30, 2019 | | :--- | :--- | :--- | | **Total Assets** | $554,752 | $398,698 | | Goodwill | $207,350 | $153,422 | | Intangible assets, net | $129,250 | $30,667 | | **Total Liabilities** | $196,389 | $49,720 | | Long-term debt | $104,973 | $0 | | **Total Stockholders' Equity** | $358,363 | $348,978 | [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash used in operating activities was **$12.7 million** for the six months ended March 31, 2020, primarily due to the Opengear acquisition Cash Flow Summary (Six Months Ended March 31) | Activity (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(12,683) | $6,202 | | Net cash (used in) provided by investing activities | $(136,532) | $4,953 | | Net cash provided by financing activities | $112,931 | $908 | | **Net (decrease) increase in cash** | **$(34,706)** | **$11,579** | [Notes to Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Detailed notes cover accounting policies, the **Opengear acquisition** for **$148.1 million**, new **$150 million credit facility**, and segment reporting - The company adopted the new lease accounting standard (ASU 2016-02) in the first quarter of fiscal 2020, recognizing a right-of-use asset of approximately **$14.1 million** and a lease liability of approximately **$17.9 million**[32](index=32&type=chunk) - On December 13, 2019, the company acquired Opengear, Inc. for an upfront cash payment of **$148.1 million**, funded by cash on hand and a new credit facility[36](index=36&type=chunk)[37](index=37&type=chunk) - In connection with the Opengear acquisition, the company entered into a **$150 million credit facility**, with **$109.4 million** outstanding as of March 31, 2020[63](index=63&type=chunk)[68](index=68&type=chunk) - The company's IoT Products & Services segment revenue grew to **$66.9 million** for the quarter, while IoT Solutions revenue decreased to **$6.6 million**[71](index=71&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=25&type=section&id=ITEM%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q2 2020 performance, highlighting **11.7% consolidated revenue growth** driven by Opengear and addressing COVID-19 impacts - Key operating objectives for fiscal 2020 include growing the SmartSense by Digi® business, driving growth in IoT Products & Services through new products, seeking strategic acquisitions like Opengear, and optimizing the cost structure[127](index=127&type=chunk) - The COVID-19 pandemic began to impact the business in March 2020, leading to varied demand and implemented cost reduction actions[135](index=135&type=chunk)[107](index=107&type=chunk) Q2 2020 vs Q2 2019 Performance Highlights | Metric | Q2 2020 | Q2 2019 | Change | | :--- | :--- | :--- | :--- | | Consolidated Revenue | $7.7M increase | 11.7% | | | Gross Margin | 52.6% | 46.1% | +650 bps | | Net Income | $2.0M | $1.3M | +49.3% | | Adjusted EBITDA | $11.2M (15.2% of revenue) | $6.5M (10.0% of revenue) | +72.3% | [Revenue by Segment](index=30&type=section&id=REVENUE%20BY%20SEGMENT) IoT Products & Services revenue increased **19.4%** to **$66.9 million**, while IoT Solutions revenue decreased **32.6%** to **$6.6 million** in Q2 2020 Revenue by Segment (Three Months Ended March 31) | Segment | 2020 (in thousands) | 2019 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | IoT Products & Services | $66,890 | $56,039 | 19.4% | | IoT Solutions | $6,557 | $9,725 | (32.6)% | | **Total Revenue** | **$73,447** | **$65,764** | **11.7%** | - The increase in IoT Products & Services revenue was primarily driven by incremental revenue from the Opengear acquisition and increased sales to a significant cellular products customer[143](index=143&type=chunk)[144](index=144&type=chunk) - The decrease in IoT Solutions revenue was mainly due to equipment upgrades from existing customers in fiscal 2019 that did not repeat in fiscal 2020[147](index=147&type=chunk) [Cost of Goods Sold and Gross Profit by Segment](index=32&type=section&id=COST%20OF%20GOODS%20SOLD%20AND%20GROSS%20PROFIT%20BY%20SEGMENT) IoT Products & Services gross margin improved by **740 basis points** to **53.0%** in Q2 2020, driven by Opengear, while IoT Solutions margin slightly decreased Gross Profit Margin by Segment (Three Months Ended March 31) | Segment | 2020 Margin | 2019 Margin | Basis Point Change | | :--- | :--- | :--- | :--- | | IoT Products & Services | 53.0% | 45.6% | +740 bps | | IoT Solutions | 48.5% | 49.0% | -50 bps | | **Total Gross Profit Margin** | **52.6%** | **46.1%** | **+650 bps** | - The improvement in IoT Products & Services gross margin was primarily due to incremental gross profit from the Opengear acquisition and increased sales from higher-margin support services[150](index=150&type=chunk) [Liquidity and Capital Resources](index=36&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) Cash decreased by **$34.7 million** due to the **Opengear acquisition** funded by **$110.0 million** in new debt, with total contractual obligations at **$167.4 million** - The company incurred **$110 million** in debt in Q1 2020 to finance the Opengear acquisition, with **$40 million** remaining available under the Revolving Loan as of March 31, 2020[171](index=171&type=chunk) Summary of Contractual Obligations at March 31, 2020 | Obligation (in thousands) | Total | Less than 1 year | 1-3 years | 3-5 years | Thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating leases | $24,426 | $3,497 | $5,887 | $4,699 | $10,343 | | Long-term debt (Term & Revolving) | $109,375 | $2,500 | $6,563 | $100,312 | $0 | | Interest on long-term debt | $23,257 | $5,227 | $9,455 | $8,575 | $0 | | **Total** | **$167,437** | **$21,603** | **$21,905** | **$113,586** | **$10,343** | [Quantitative and Qualitative Disclosures About Market Risk](index=38&type=section&id=ITEM%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company faces market risks from changes in interest rates due to variable-rate debt and foreign currency exchange rates from international sales and operations - The company is exposed to interest rate risk on its **$109.4 million** of outstanding variable-rate debt, with a **25 basis point** change impacting annualized interest expense by approximately **$0.1 million**[182](index=182&type=chunk) - The company is exposed to foreign currency risk, with approximately **$30.9 million** of revenue from foreign customers for the six months ended March 31, 2020[184](index=184&type=chunk)[185](index=185&type=chunk) [Controls and Procedures](index=38&type=section&id=ITEM%204.%20Controls%20and%20Procedures) Management concluded disclosure controls were effective, with the recently acquired Opengear business excluded from internal control assessment for this period - The company's management concluded that disclosure controls and procedures were effective as of March 31, 2020[188](index=188&type=chunk) - The recently acquired Opengear business was excluded from management's assessment of internal control over financial reporting, representing **35%** of consolidated total assets[189](index=189&type=chunk) [PART II. OTHER INFORMATION](index=39&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Legal Proceedings](index=39&type=section&id=ITEM%201.%20Legal%20Proceedings) The company is involved in a lawsuit by DimOnOff Inc. seeking over **CAD 1.0 million** in damages for alleged defective products, which the company intends to defend - DimOnOff Inc. has sued the company, alleging certain products were defective and caused street light malfunctions, claiming damages of over **CAD 1.0 million**[91](index=91&type=chunk)[191](index=191&type=chunk) [Risk Factors](index=39&type=section&id=ITEM%201A.%20Risk%20Factors) This section highlights material changes to risk factors, including the adverse impacts of health pandemics like COVID-19 and the risk of goodwill impairment - A key risk factor is the potential for a widespread health pandemic, such as COVID-19, to disrupt operations, supply chains, and customer demand[192](index=192&type=chunk)[193](index=193&type=chunk) - The company faces a risk of goodwill impairment if its stock price experiences a sustained decline or if future profits do not meet forecasts[194](index=194&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=40&type=section&id=ITEM%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company repurchased **6,486** common shares at an average price of **$16.44** per share during Q2 2020, not part of a publicly announced program Share Repurchases in Q2 2020 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jan 2020 | 6,340 | $16.49 | | Feb 2020 | 146 | $14.19 | | Mar 2020 | 0 | N/A | | **Total** | **6,486** | **$16.44** | [Exhibits](index=41&type=section&id=ITEM%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including the Opengear merger agreement, bylaws, incentive plans, credit agreement, and officer certifications

[PART I. FINANCIAL INFORMATION](index=3&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Financial Statements](index=3&type=section&id=ITEM%201.%20Financial%20Statements) Digi International reported flat revenue, a net income decline, and balance sheet growth driven by the Opengear acquisition and new debt Condensed Consolidated Statements of Operations (Unaudited) | Metric | Three months ended Dec 31, 2019 (in thousands) | Three months ended Dec 31, 2018 (in thousands) | | :--- | :--- | :--- | | **Total Revenue** | **$62,317** | **$62,313** | | Gross Profit | $30,464 | $29,783 | | Operating (Loss) Income | $(483) | $5,558 | | **Net Income** | **$208** | **$4,682** | | Diluted EPS | $0.01 | $0.17 | Condensed Consolidated Balance Sheets (Unaudited) | Metric | Dec 31, 2019 (in thousands) | Sep 30, 2019 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $49,072 | $92,792 | | **Total Assets** | **$560,904** | **$398,698** | | Long-term debt | $105,470 | $0 | | **Total Liabilities** | **$204,589** | **$49,720** | | Total Stockholders' Equity | $356,315 | $348,978 | Condensed Consolidated Statements of Cash Flows (Unaudited) | Metric | Three months ended Dec 31, 2019 (in thousands) | Three months ended Dec 31, 2018 (in thousands) | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(22,067) | $6,111 | | Net cash (used in) provided by investing activities | $(136,294) | $8,763 | | Net cash provided by (used in) financing activities | $112,869 | $(174) | | **Net (decrease) increase in cash** | **$(43,720)** | **$14,208** | - The company adopted the new lease accounting standard (ASU 2016-02) in the first quarter of fiscal 2020, resulting in the recognition of a right-of-use asset of approximately **$14.1 million** and a lease liability of approximately **$17.9 million** on the balance sheet[25](index=25&type=chunk)[26](index=26&type=chunk) [Note 2: Acquisitions](index=9&type=section&id=2.%20ACQUISITIONS) - On December 13, 2019, the company acquired Opengear, Inc., a provider of secure IT infrastructure products, funded with **$148.1 million** in cash from cash on hand and a new credit facility[30](index=30&type=chunk)[31](index=31&type=chunk) - The acquisition includes contingent consideration based on Opengear's revenue performance, with potential earn-out payments not to exceed **$5.0 million** for the period ended Dec 31, 2019, and **$10.0 million** for the period ending Dec 31, 2020, with the fair value estimated at **$9.1 million**[31](index=31&type=chunk) Preliminary Purchase Price Allocation for Opengear (in thousands) | Item | Fair Value (in thousands) | | :--- | :--- | | Fair value of net tangible assets acquired | $19,032 | | Customer relationships | $81,000 | | Purchased and core technology | $13,700 | | Trademarks | $8,000 | | Deferred tax liability | $(25,053) | | **Goodwill** | **$60,479** | | **Total** | **$157,158** | [Note 6: Goodwill and Other Intangible Assets](index=13&type=section&id=6.%20GOODWILL%20AND%20OTHER%20INTANGIBLE%20ASSETS%2C%20NET) - Total goodwill increased from **$153.4 million** at September 30, 2019, to **$214.8 million** at December 31, 2019, primarily due to **$60.5 million** in goodwill from the Opengear acquisition, allocated to the IoT Products & Services segment[51](index=51&type=chunk) - Net amortizable intangible assets increased significantly from **$30.7 million** to **$131.0 million** during the quarter, mainly due to the addition of customer relationships, technology, and trademarks from the Opengear acquisition[47](index=47&type=chunk) [Note 8: Segment Information](index=15&type=section&id=8.%20SEGMENT%20INFORMATION) Segment Revenue and Operating Income (in thousands) | Segment | Revenue (Q1'20, in thousands) | Revenue (Q1'19, in thousands) | Operating Income (Q1'20, in thousands) | Operating Income (Q1'19, in thousands) | | :--- | :--- | :--- | :--- | :--- | | IoT Products & Services | $54,613 | $53,294 | $2,388 | $7,402 | | IoT Solutions | $7,704 | $9,019 | $(2,871) | $(1,844) | | **Total** | **$62,317** | **$62,313** | **$(483)** | **$5,558** | [Note 9: Revenue](index=15&type=section&id=9.%20REVENUE) Revenue by Geographic Location (in thousands) | Region | Three months ended Dec 31, 2019 (in thousands) | Three months ended Dec 31, 2018 (in thousands) | | :--- | :--- | :--- | | North America | $47,536 | $46,335 | | Europe, Middle East & Africa | $8,516 | $10,104 | | Rest of world | $6,265 | $5,874 | | **Total Revenue** | **$62,317** | **$62,313** | - As of December 31, 2019, the company has approximately **$13.2 million** of revenue expected to be recognized from remaining performance obligations for subscription contracts, with **$8.4 million** expected over the next twelve months[64](index=64&type=chunk) [Note 13: Debt](index=19&type=section&id=13.%20DEBT) - In connection with the Opengear acquisition, the company entered into a new credit agreement on December 13, 2019, for a total of **$150 million**, consisting of a **$50 million** term loan and a **$100 million** revolving loan[77](index=77&type=chunk) Long-Term Indebtedness at Dec 31, 2019 (in thousands) | Component | Amount (in thousands) | | :--- | :--- | | Revolving loan | $60,000 | | Term loan | $50,000 | | **Total loans** | **$110,000** | | Less unamortized issuance costs | $(2,558) | | Less current maturities | $(1,972) | | **Total long-term debt, net** | **$105,470** | - The credit facility contains financial covenants requiring the company to maintain a maximum debt-to-EBITDA ratio and a minimum interest expense-to-EBITDA ratio, with compliance as of December 31, 2019[81](index=81&type=chunk)[83](index=83&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=22&type=section&id=ITEM%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management reported flat consolidated revenue, an operating loss due to surging expenses from acquisition costs and a prior-year gain, with liquidity significantly impacted by the Opengear acquisition and new debt [Overview](index=24&type=section&id=OVERVIEW) - The company operates through two segments: IoT Products & Services and IoT Solutions, with the IoT Products & Services segment recently expanded by the Opengear acquisition on December 13, 2019[111](index=111&type=chunk)[112](index=112&type=chunk)[113](index=113&type=chunk) - Key operating objectives for fiscal 2020 include growing the SmartSense by Digi® business, driving growth in the IoT Products & Services segment with new products, seeking further strategic acquisitions, and optimizing the manufacturing footprint[117](index=117&type=chunk) Key Financial Metrics (Q1 FY20 vs Q1 FY19) | Metric | Q1 FY2020 | Q1 FY2019 | | :--- | :--- | :--- | | Consolidated Revenue | $62.3M (flat) | $62.3M | | Gross Margin | 48.9% | 47.8% | | Net Income | $0.2M | $4.7M | | Diluted EPS | $0.01 | $0.17 | | Adjusted EBITDA | $6.4M (10.3% of revenue) | $6.2M (9.9% of revenue) | [Revenue by Segment Analysis](index=26&type=section&id=REVENUE%20BY%20SEGMENT) - IoT Products & Services revenue increased by **2.5%** year-over-year, driven by sales of cellular products, incremental revenue from the Opengear acquisition, and increased sales of Digi Remote Manager® and support services[125](index=125&type=chunk)[126](index=126&type=chunk)[127](index=127&type=chunk) - IoT Solutions revenue decreased by **14.6%** year-over-year, primarily due to large, non-recurring product purchases from existing customers in fiscal 2019, partially offset by an increase in recurring subscription revenue[128](index=128&type=chunk)[129](index=129&type=chunk) [Operating Expenses Analysis](index=29&type=section&id=OPERATING%20EXPENSES) - Total operating expenses increased by **$6.7 million** (**27.7%**) year-over-year, primarily due to a **$4.4 million** gain on the sale of the corporate headquarters in the prior-year quarter, a **$2.0 million** increase in acquisition costs related to Opengear, and incremental operating expenses from the newly acquired Opengear business[134](index=134&type=chunk) [Liquidity and Capital Resources](index=31&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) - Cash flows from operating activities decreased by **$28.2 million**, resulting in a net use of **$22.1 million**, primarily due to negative changes in working capital and lower net income[145](index=145&type=chunk) - Cash used in investing activities was **$136.3 million**, a significant increase from the **$8.8 million** provided in the prior year, mainly due to the **$136.1 million** net cash used for the Opengear acquisition[146](index=146&type=chunk) - Cash from financing activities was **$112.9 million**, driven by **$110.0 million** in proceeds from new debt taken on to fund the Opengear acquisition[147](index=147&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=32&type=section&id=ITEM%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is exposed to interest rate risk from its new **$110 million** variable-rate credit facility, where a **25 basis point** change would impact annual interest expense by **$0.3 million**, and foreign currency risk from transactions in Euros, British Pounds, Japanese Yen, and Canadian Dollars, though a **10%** change in key foreign exchange rates would have a minimal **0.1%** impact on revenue - The company is exposed to interest rate risk on its new Credit Facility, where with **$110 million** outstanding as of December 31, 2019, a **25 basis point** change in interest rates would change annualized interest expense by approximately **$0.3 million**[153](index=153&type=chunk) - The company has foreign currency transaction and translation risk, primarily from sales denominated in Euros and Canadian Dollars, where a hypothetical **10%** change in average exchange rates for key foreign currencies would have resulted in a **0.1%** change in revenue for the quarter[154](index=154&type=chunk)[157](index=157&type=chunk) [Controls and Procedures](index=33&type=section&id=ITEM%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures as of December 31, 2019, and concluded they were effective, with no material changes to internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[160](index=160&type=chunk) - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to affect, internal controls[161](index=161&type=chunk) [PART II. OTHER INFORMATION](index=34&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Legal Proceedings](index=34&type=section&id=ITEM%201.%20Legal%20Proceedings) The company is involved in a lawsuit filed by DimOnOff Inc. in Quebec, Canada, which alleges that certain Digi products were defective, causing street light malfunctions, with DimOnOff claiming damages of just over **CAD 1.0 million**, which Digi intends to defend against - The company is being sued by DimOnOff Inc. in Quebec, Canada, over allegedly defective products used in street lighting systems, with the plaintiff alleging damages of approximately **CAD 1.0 million**[85](index=85&type=chunk)[163](index=163&type=chunk) [Risk Factors](index=34&type=section&id=ITEM%201A.%20Risk%20Factors) The company has identified new material risk factors, including its new credit facility where failure to comply with financial covenants could lead to default, and the potential adverse impact of health epidemics, such as the novel coronavirus, on its international sales, supply chain, and customer demand - A new risk factor has been added regarding the credit facility entered into in December 2019, where failure to comply with financial covenants could result in a default, potentially having a material adverse effect on the business[164](index=164&type=chunk)[166](index=166&type=chunk) - The company has identified risks related to health epidemics, such as the novel coronavirus, which could disrupt operations, supply chains, and customer facilities, negatively impacting sales and operating results[167](index=167&type=chunk)[168](index=168&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=35&type=section&id=ITEM%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During the first quarter of fiscal 2020, the company repurchased a total of **88,723** shares of its common stock at an average price of **$17.77** per share, which were not part of a publicly announced program Common Stock Purchases (Q1 FY2020) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 2019 | 766 | $14.42 | | Nov 2019 | 65,268 | $17.97 | | Dec 2019 | 22,689 | $17.32 | | **Total** | **88,723** | **$17.77** | [Exhibits](index=36&type=section&id=ITEM%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including the merger agreement for the Opengear acquisition, the new credit agreement, and officer certifications, with most documents incorporated by reference from previous filings

Digi International Inc. (NASDAQ:DGII) Q1 2020 Earnings Conference Call January 30, 2020 5:00 PM ET Company Participants Jamie Loch - Chief Financial Officer Ronald Konezny - President and Chief Executive Officer Conference Call Participants Scott Searle - ROTH Capital Partners, LLC Anthony Stoss - Craig-Hallum Capital Group LLC Michael Walkley - Canaccord Genuity Inc. Jaeson Schmidt - Lake Street Capital Markets, LLC Gregory Burns - Sidoti & Company, LLC David Gearhart - First Analysis Securities Corporatio ...

Part I [Item 1. Business](index=3&type=section&id=Item%201.%20Business) Digi International Inc. offers IoT connectivity products and services through two segments, focusing on strategic growth and acquisitions - Digi operates through two segments: **IoT Products & Services** (hardware/platforms) and **IoT Solutions** (SmartSense™ monitoring services for various markets)[11](index=11&type=chunk)[12](index=12&type=chunk)[13](index=13&type=chunk) - The company's strategy targets modest growth for **IoT Products & Services** and significant revenue growth for **IoT Solutions**, supported by acquisitions[21](index=21&type=chunk)[22](index=22&type=chunk) Recent Acquisitions (Fiscal 2015-2019) | Acquisition Date | Company Acquired | Business Focus | Segment | | :--- | :--- | :--- | :--- | | October 2015 | Bluenica Corporation | Temperature monitoring for food industry | IoT Solutions | | November 2016 | FreshTemp, LLC | Temperature monitoring and task management for retail/restaurants | IoT Solutions | | January 2017 | SMART Temps, LLC | Real-time temperature management for various sectors | IoT Solutions | | October 2017 | TempAlert, LLC | Temperature monitoring and task management solutions | IoT Solutions | | January 2018 | Accelerated Concepts, Inc. | Cellular (LTE) networking equipment | IoT Products & Services | Sales Channel Revenue Contribution | Sales Channel | FY 2019 | FY 2018 | FY 2017 | | :--- | :--- | :--- | :--- | | Distributors, Integrators, VARs | 46.1% | 51.3% | 61.6% | | Direct Sales Organization | 53.9% | 48.7% | 38.4% | - Manufacturing operations are outsourced to contract manufacturers in Thailand, China, Mexico, and Taiwan for cost reduction and production flexibility[42](index=42&type=chunk) - Backlog increased to **$39.8 million** as of September 30, 2019, up from **$34.4 million**, with most expected to ship in fiscal 2020[50](index=50&type=chunk) [Item 1A. Risk Factors](index=8&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks including intense competition, rapid technological change, supply chain disruptions, cybersecurity threats, and acquisition integration challenges - The company faces intense competition from established firms with superior resources, potentially leading to market share loss[64](index=64&type=chunk)[65](index=65&type=chunk) - Rapid technological change and evolving industry standards can render products obsolete, requiring significant R&D investment[68](index=68&type=chunk)[69](index=69&type=chunk) - Substantial revenue depends on channel partners, whose performance or prioritization of competitors' products could adversely affect results[79](index=79&type=chunk)[80](index=80&type=chunk) - Gross margins may decline due to maturing hardware products, pricing pressures, and early-stage software/IoT solutions offerings[81](index=81&type=chunk) - Future acquisitions, like Opengear, Inc., pose risks including integration difficulties, unanticipated costs, and potential stockholder dilution[95](index=95&type=chunk)[96](index=96&type=chunk) - Cybersecurity risks, particularly for cloud-based solutions like **SmartSense by Digi™** and **Digi Remote Manager®**, could damage brand and incur costs/liability[101](index=101&type=chunk)[102](index=102&type=chunk)[103](index=103&type=chunk) - Dependence on third-party manufacturing and limited-source suppliers creates supply chain disruption risks, impacting customer relationships and profitability[118](index=118&type=chunk)[120](index=120&type=chunk)[121](index=121&type=chunk) [Item 1B. Unresolved Staff Comments](index=18&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[161](index=161&type=chunk) [Item 2. Properties](index=18&type=section&id=Item%202.%20Properties) The company's material properties as of September 30, 2019, include leased headquarters, an owned manufacturing facility, and other leased offices Material Property Locations (as of Sep 30, 2019) | Location | Use | Approx. Square Footage | Ownership/Lease Expiration | | :--- | :--- | :--- | :--- | | Hopkins, MN (HQ) | R&D, Sales, Marketing, Admin | 59,497 | Leased (Jan 2032) | | Eden Prairie, MN | Manufacturing & Warehousing | 58,000 | Owned | | Boston, MA | R&D, Sales, Marketing | 13,302 | Leased (Aug 2026) | | Mishawaka, IN | Sales, Support, Admin | 7,829 | Leased (Aug 2026) | [Item 3. Legal Proceedings](index=18&type=section&id=Item%203.%20Legal%20Proceedings) The company is subject to various claims and litigation in the normal course of business, with unpredictable outcomes - The company is subject to various claims and litigation in the normal course of business, including potential patent infringement claims[163](index=163&type=chunk) [Item 4. Mine Safety Disclosures](index=18&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) The company reports no mine safety disclosures - None[164](index=164&type=chunk) Part II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=18&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity,%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on Nasdaq, has never paid dividends, and a $20.0 million share repurchase program expired unused - The company's common stock is listed on the **Nasdaq Global Select Market** under the symbol **DGII**[165](index=165&type=chunk) - Digi has never paid cash dividends and intends to retain earnings for business operations[166](index=166&type=chunk) - A **$20.0 million** share repurchase program authorized in April 2018 expired in May 2019 with no shares repurchased[168](index=168&type=chunk) Issuer Purchases of Equity Securities (Q4 FY2019) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jul 1 - Jul 31, 2019 | 434 | $13.13 | | Aug 1 - Aug 31, 2019 | 1,114 | $12.84 | | Sep 1 - Sep 30, 2019 | 0 | N/A | | **Total** | **1,548** | **$12.92** | *All shares reported were forfeited by employees to satisfy tax withholding obligations related to the vesting of restricted stock units.* [Item 6. Selected Financial Data](index=20&type=section&id=Item%206.%20Selected%20Financial%20Data) This section provides a five-year summary of selected financial data, including income statement and balance sheet figures, with restated data for revenue recognition Five-Year Selected Financial Data (in thousands, except per share data) | Metric | 2019 | 2018 (adjusted) | 2017 (adjusted) | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $254,203 | $226,893 | $181,340 | $203,005 | $203,847 | | Gross Profit | $119,035 | $109,054 | $87,233 | $99,680 | $97,121 | | Operating Income | $10,072 | $2,782 | $8,866 | $17,105 | $10,889 | | Net Income | $9,958 | $1,631 | $9,403 | $16,708 | $6,588 | | Diluted EPS | $0.35 | $0.06 | $0.35 | $0.64 | $0.26 | | Total Assets | $398,698 | $372,146 | $345,696 | $336,166 | $300,360 | | Stockholders' Equity | $348,978 | $330,493 | $319,029 | $300,029 | $274,938 | [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=21&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Fiscal 2019 saw consolidated revenue grow 12.0% to $254.2 million, with significant increases in operating income and cash flow from operations Fiscal 2019 Financial Summary | Metric | FY 2019 | FY 2018 | % Change | | :--- | :--- | :--- | :--- | | Consolidated Revenue | $254.2M | $226.9M | 12.0% | | Consolidated Gross Profit | $119.0M | $109.1M | 9.2% | | Consolidated Operating Income | $10.1M | $2.8M | 262.0% | | Net Income | $10.0M | $1.6M | 510.5% | | Diluted EPS | $0.35 | $0.06 | 483.3% | | Adjusted EBITDA | $26.5M | $23.4M | 13.2% | - Key fiscal 2020 objectives include growing **SmartSense by Digi®**, launching new **IoT Products & Services**, pursuing strategic acquisitions, and optimizing third-party manufacturing[185](index=185&type=chunk) - Gross margins are expected to increase as recurring subscription and cloud monitoring revenue grows as a proportion of total revenue[188](index=188&type=chunk) [Revenue by Segment](index=23&type=section&id=REVENUE%20BY%20SEGMENT) Fiscal 2019 revenue growth was driven by a 6.8% increase in IoT Products & Services and a 53.3% surge in IoT Solutions Revenue by Segment (FY 2019 vs. FY 2018) | Segment | FY 2019 Revenue | % of Total | FY 2018 Revenue | % of Total | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | | IoT Products & Services | $215,287 | 84.7% | $201,506 | 88.8% | 6.8% | | IoT Solutions | $38,916 | 15.3% | $25,387 | 11.2% | 53.3% | | **Total Revenue** | **$254,203** | **100.0%** | **$226,893** | **100.0%** | **12.0%** | - **IoT Products & Services** growth was driven by **$5.4 million** incremental revenue from the Accelerated acquisition and increased RF/embedded product demand[190](index=190&type=chunk) - The **53.3%** growth in **IoT Solutions** resulted primarily from new customer deployments and expanded existing customer business[193](index=193&type=chunk) [Cost of Goods Sold and Gross Profit by Segment](index=24&type=section&id=COST%20OF%20GOODS%20SOLD%20AND%20GROSS%20PROFIT%20BY%20SEGMENT) IoT Products & Services gross margin decreased to 46.7%, while IoT Solutions margin improved to 47.6%, resulting in a slight overall decline Gross Profit by Segment (FY 2019 vs. FY 2018) | Segment | FY 2019 Gross Profit | Gross Margin % | FY 2018 Gross Profit | Gross Margin % | Margin Change (bps) | | :--- | :--- | :--- | :--- | :--- | :--- | | IoT Products & Services | $100,522 | 46.7% | $97,895 | 48.6% | (190) | | IoT Solutions | $18,513 | 47.6% | $11,159 | 44.0% | 360 | | **Total Gross Profit** | **$119,035** | **46.8%** | **$109,054** | **48.1%** | **(130)** | - The decrease in **IoT Products & Services** gross margin was primarily due to a product mix shift with lower high-margin network product sales[194](index=194&type=chunk) - The increase in **IoT Solutions** gross margin was driven by improved pricing and a higher mix of recurring subscription revenue[195](index=195&type=chunk) [Liquidity and Capital Resources](index=28&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) Fiscal 2019 liquidity improved significantly, with cash increasing by $34.8 million to $92.8 million, driven by strong operating cash flow Summary of Cash Flows (in thousands) | Activity | FY 2019 | FY 2018 (adjusted) | | :--- | :--- | :--- | | Net cash from operating activities | $28,964 | $(2,778) | | Net cash from investing activities | $5,511 | $(23,337) | | Net cash from financing activities | $1,113 | $5,827 | | **Net increase (decrease) in cash** | **$34,778** | **$(20,208)** | - The significant increase in cash from operations was primarily due to a **$27.2 million** positive change in net working capital and an **$8.3 million** increase in net income[211](index=211&type=chunk) - The company believes current cash, operating cash flow, and financing capacity will fund operations and capital expenditures for the next twelve months and beyond[210](index=210&type=chunk) [Critical Accounting Policies and Estimates](index=29&type=section&id=CRITICAL%20ACCOUNTING%20POLICIES%20AND%20ESTIMATES) Critical accounting policies requiring significant judgment include revenue recognition, inventory valuation, goodwill impairment, contingent consideration, and income taxes - **Revenue Recognition:** Revenue is recognized upon transfer of control, with transaction prices allocated based on standalone selling prices for multiple performance obligations[222](index=222&type=chunk)[231](index=231&type=chunk) - **Goodwill:** Tested annually for impairment by comparing fair value to carrying value for each reporting unit; no impairment recorded in fiscal 2019[233](index=233&type=chunk)[234](index=234&type=chunk)[237](index=237&type=chunk) - **Inventories:** Valued at lower of cost (FIFO) or net realizable value, with reserves for excess/obsolete inventory based on demand assumptions[232](index=232&type=chunk) - **Contingent Consideration:** Liabilities from business combinations are measured at fair value using a probability-weighted discounted cash flow approach, with changes recognized in G&A expense[239](index=239&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=32&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is exposed to foreign currency risk from international sales and translation, and credit risk from accounts receivable - The company faces foreign currency risk from foreign-denominated sales and subsidiary translation; a **10%** change in key rates would impact annual revenue by **0.1%**[246](index=246&type=chunk)[247](index=247&type=chunk) - The company does not use derivative financial instruments for interest rate risk or a formal hedging strategy for foreign currency risk[245](index=245&type=chunk)[246](index=246&type=chunk) - Credit risk from accounts receivable is managed by monitoring customer financial status and credit limits[248](index=248&type=chunk) [Item 8. Financial Statements and Supplementary Data](index=33&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the company's audited consolidated financial statements and notes, with an unqualified opinion from Grant Thornton LLP - Grant Thornton LLP issued an unqualified opinion on the consolidated financial statements, confirming fair presentation in conformity with U.S. GAAP[252](index=252&type=chunk) - The auditor also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of September 30, 2019[253](index=253&type=chunk) [Consolidated Financial Statements](index=34&type=section&id=Consolidated%20Financial%20Statements) The consolidated financial statements show fiscal 2019 revenues of $254.2 million, operating income of $10.1 million, and net income of $10.0 million Consolidated Statement of Operations Highlights (FY 2019, in thousands) | Line Item | Amount | | :--- | :--- | | Total Revenue | $254,203 | | Gross Profit | $119,035 | | Operating Income | $10,072 | | Net Income | $9,958 | | Diluted EPS | $0.35 | Consolidated Balance Sheet Highlights (as of Sep 30, 2019, in thousands) | Line Item | Amount | | :--- | :--- | | Cash and cash equivalents | $92,792 | | Total current assets | $192,547 | | Total assets | $398,698 | | Total current liabilities | $44,458 | | Total liabilities | $49,720 | | Total stockholders' equity | $348,978 | [Notes to Consolidated Financial Statements](index=41&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail accounting policies, acquisitions, goodwill, segment information, income taxes, and the adoption of new revenue recognition standards - The company adopted the new revenue recognition standard, **ASU 2014-09 (Topic 606)**, on October 1, 2018, retrospectively adjusting prior period financial statements[328](index=328&type=chunk)[331](index=331&type=chunk) - In January 2018, Accelerated Concepts, Inc. was acquired for **$16.4 million** cash plus earn-outs; in October 2017, TempAlert LLC was acquired for **$40.7 million** cash plus earn-outs[339](index=339&type=chunk)[342](index=342&type=chunk) - As of September 30, 2019, goodwill totaled **$153.4 million**, allocated **$103.5 million** to **IoT Products & Services** and **$49.9 million** to **IoT Solutions**, with no impairment recorded[353](index=353&type=chunk) - On November 7, 2019, the company agreed to acquire Opengear, Inc. for approximately **$140 million** cash, plus up to **$15 million** in contingent consideration[427](index=427&type=chunk) [Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=68&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[429](index=429&type=chunk) [Item 9A. Controls and Procedures](index=68&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded disclosure controls and internal control over financial reporting were effective as of September 30, 2019 - The CEO and CFO concluded that disclosure controls and procedures were effective as of September 30, 2019[432](index=432&type=chunk) - Management concluded that internal control over financial reporting was effective as of September 30, 2019, based on the **COSO framework**[434](index=434&type=chunk) - Grant Thornton LLP issued an unqualified opinion on the effectiveness of internal control over financial reporting as of September 30, 2019[435](index=435&type=chunk)[439](index=439&type=chunk) - No material changes in internal control over financial reporting occurred during the fourth quarter of fiscal 2019[436](index=436&type=chunk) [Item 9B. Other Information](index=70&type=section&id=Item%209B.%20Other%20Information) This section discloses the departure of the VP of Manufacturing Operations and related severance, with no replacement due to manufacturing transition - Jon A. Nyland, VP of Manufacturing Operations, resigned effective March 1, 2019, receiving **$116,000** severance; the position was not filled due to manufacturing transition[445](index=445&type=chunk) Part III [Item 10. Directors, Executive Officers and Corporate Governance](index=70&type=section&id=Item%2010.%20Directors,%20Executive%20Officers%20and%20Corporate%20Governance) This section provides executive officer information and incorporates by reference details on directors, corporate governance, and ethics codes - Information on directors and corporate governance is incorporated by reference from the 2020 Proxy Statement[446](index=446&type=chunk) - The company maintains a code of ethics for senior financial management and a code of conduct for all employees, available on its website[455](index=455&type=chunk) [Item 11. Executive Compensation](index=71&type=section&id=Item%2011.%20Executive%20Compensation) Executive and director compensation information is incorporated by reference from the 2020 Proxy Statement - Details on executive compensation are incorporated by reference from the 2020 Proxy Statement[456](index=456&type=chunk) [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=71&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Security ownership and equity compensation plan details are incorporated by reference from the 2020 Proxy Statement - Details on security ownership and equity compensation plans are incorporated by reference from the 2020 Proxy Statement[457](index=457&type=chunk) [Item 13. Certain Relationships and Related Transactions, and Director Independence](index=71&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions,%20and%20Director%20Independence) Information on related party transactions and director independence is incorporated by reference from the 2020 Proxy Statement - Details on related transactions and director independence are incorporated by reference from the 2020 Proxy Statement[458](index=458&type=chunk) [Item 14. Principal Accounting Fees and Services](index=71&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information on principal accounting fees and services is incorporated by reference from the 2020 Proxy Statement - Details on principal accounting fees and services are incorporated by reference from the 2020 Proxy Statement[459](index=459&type=chunk) Part IV [Item 15. Exhibits, Financial Statement Schedules](index=72&type=section&id=Item%2015.%20Exhibits,%20Financial%20Statement%20Schedules) This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K report - This section lists all financial statements, schedules, and exhibits filed with the annual report[461](index=461&type=chunk) - Key exhibits include governance documents, material contracts, and required CEO/CFO certifications[462](index=462&type=chunk)[464](index=464&type=chunk)[468](index=468&type=chunk) [Item 16. Form 10-K Summary](index=78&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company indicates that no Form 10-K summary is provided - None[471](index=471&type=chunk)

Digi International Inc. (NASDAQ:DGII) Q3 2019 Earnings Conference Call August 8, 2019 5:00 PM ET Company Participants Jamie Loch – Chief Financial Officer Ron Konezny – President and Chief Executive Officer Conference Call Participants Greg Burns – Sidoti & Company Mike Walkley – Canaccord Genuity Jaeson Schmidt – Lake Street David Gearhart – First Analysis Dick Ryan – Dougherty Operator Good day, ladies and gentlemen, and welcome to the Q3 2019 Digi International Inc. Earnings Conference Call. At this time ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Common Stock, par value $.01 per share DGII The Nasdaq Stock Market LLC þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 2019 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission file number: 1-34033 DIGI INTERNATIONAL INC. (Exact name of registrant as speci ...

[PART I. FINANCIAL INFORMATION](index=3&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This section presents the company's unaudited condensed consolidated financial statements and management's analysis [Financial Statements](index=3&type=section&id=ITEM%201.%20Financial%20Statements%3A) This section presents the unaudited condensed consolidated financial statements for the quarter ended March 31, 2019, including restated prior period information due to the adoption of ASU No 2014-09 [Condensed Consolidated Statements of Operations](index=3&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This statement details the company's revenues, expenses, and net income for the specified periods Q2 & YTD FY2019 vs FY2018 Statement of Operations (in thousands, except per share data) | Metric | Three Months Ended Mar 31, 2019 | Three Months Ended Mar 31, 2018 (as adjusted) | Six Months Ended Mar 31, 2019 | Six Months Ended Mar 31, 2018 (as adjusted) | | :--- | :--- | :--- | :--- | :--- | | **Total Revenue** | $65,764 | $54,548 | $128,077 | $99,503 | | **Gross Profit** | $30,329 | $26,834 | $60,112 | $48,793 | | **Operating Income (Loss)** | $785 | $818 | $6,343 | $(1,181) | | **Net Income (Loss)** | $1,342 | $(126) | $6,024 | $(4,613) | | **Diluted EPS** | $0.05 | $0.00 | $0.21 | $(0.17) | [Condensed Consolidated Statements of Comprehensive Income (Loss)](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) This statement presents the company's net income and other comprehensive income components for the periods Q2 & YTD FY2019 vs FY2018 Comprehensive Income (in thousands) | Metric | Three Months Ended Mar 31, 2019 | Three Months Ended Mar 31, 2018 (as adjusted) | Six Months Ended Mar 31, 2019 | Six Months Ended Mar 31, 2018 (as adjusted) | | :--- | :--- | :--- | :--- | :--- | | **Net Income (Loss)** | $1,342 | $(126) | $6,024 | $(4,613) | | **Other Comprehensive (Loss) Income, net of tax** | $(76) | $1,796 | $(1,642) | $2,049 | | **Comprehensive Income (Loss)** | $1,266 | $1,670 | $4,382 | $(2,564) | [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This statement provides a snapshot of the company's assets, liabilities, and equity at specific points in time Balance Sheet Highlights (in thousands) | Metric | March 31, 2019 | September 30, 2018 (as adjusted) | | :--- | :--- | :--- | | **Cash and cash equivalents** | $69,593 | $58,014 | | **Total current assets** | $175,167 | $162,046 | | **Total assets** | $383,535 | $372,146 | | **Total current liabilities** | $41,091 | $35,573 | | **Total liabilities** | $42,697 | $41,653 | | **Total stockholders' equity** | $340,838 | $330,493 | [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This statement details the cash inflows and outflows from operating, investing, and financing activities Cash Flow Summary for Six Months Ended March 31 (in thousands) | Activity | 2019 | 2018 (as adjusted) | | :--- | :--- | :--- | | **Net cash provided by (used in) operating activities** | $6,202 | $(4,981) | | **Net cash provided by (used in) investing activities** | $4,953 | $(25,860) | | **Net cash provided by financing activities** | $908 | $3,364 | | **Net increase (decrease) in cash and cash equivalents** | $11,579 | $(25,831) | [Condensed Consolidated Statements of Stockholders' Equity](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders%27%20Equity) This statement outlines changes in the company's equity accounts over the reporting period - Total stockholders' equity increased from **$330.5 million** at September 30, 2018, to **$340.8 million** at March 31, 2019. The increase was primarily driven by net income of **$6.0 million**, partially offset by an other comprehensive loss of **$1.6 million**[26](index=26&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section provides additional details and explanations for the financial statement line items - Effective October 1, 2018, the company adopted ASU 2014-09 (Topic 606) regarding revenue recognition, using the retrospective method. This required restating prior period financial information[29](index=29&type=chunk)[46](index=46&type=chunk) - The company finalized purchase accounting for the TempAlert acquisition in Q1 fiscal 2019. Contingent consideration for TempAlert was valued at **zero** as of March 31, 2019, while the fair value for the Accelerated acquisition contingent consideration was **$5.4 million**[61](index=61&type=chunk)[62](index=62&type=chunk)[63](index=63&type=chunk) - On October 2, 2018, the company sold its corporate headquarters for **$10.0 million** in cash, recording a gain of **$4.4 million** (**$3.4 million** net of tax) in the first quarter of fiscal 2019[93](index=93&type=chunk) - The company is facing a lawsuit from DimOnOff Inc., which alleges damages of just over **CAD 1.0 million** due to allegedly defective products. The company intends to defend itself and cannot currently assess the potential loss[111](index=111&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=26&type=section&id=ITEM%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's financial condition and operational results for the quarter ended March 31, 2019, highlighting revenue growth, gross margin trends, and liquidity [Overview](index=27&type=section&id=Overview) This section provides an overview of Digi International's business and its operating segments - Digi International is a global provider of IoT connectivity products, services, and solutions, operating through two reportable segments: IoT Products & Services and IoT Solutions[136](index=136&type=chunk) - The IoT Products & Services segment provides communication products (cellular, RF, embedded, network) and development services. The IoT Solutions segment offers wireless temperature monitoring and task management services, primarily for healthcare, food service, and logistics, marketed as SmartSense by Digi™[137](index=137&type=chunk)[139](index=139&type=chunk) [Consolidated Results of Operations](index=30&type=section&id=Consolidated%20Results%20of%20Operations) This section analyzes the company's overall financial performance, including revenue, gross profit, and Adjusted EBITDA Q2 FY2019 vs Q2 FY2018 Revenue Performance (in millions) | Revenue Type | Q2 2019 | Q2 2018 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | **Product** | $52.1 | $47.6 | +$4.5 | +9.5% | | **Services and Solutions** | $13.7 | $7.0 | +$6.7 | +96.4% | | **Total Revenue** | **$65.8** | **$54.5** | **+$11.2** | **+20.6%** | - Gross margin decreased to **46.1%** in Q2 2019 from **49.2%** in Q2 2018, primarily due to product/customer mix and costs from transitioning to third-party manufacturing, partially offset by higher-margin recurring revenue from IoT Solutions[146](index=146&type=chunk)[162](index=162&type=chunk) - Adjusted EBITDA for Q2 2019 was **$6.5 million** (**10.0% of revenue**), up from **$5.2 million** (**9.6% of revenue**) in Q2 2018[147](index=147&type=chunk)[148](index=148&type=chunk) - Revenue in North America grew **24.8%** YoY for the quarter, driven by SmartSense by Digi™ sales and the Accelerated acquisition[158](index=158&type=chunk) [Segment Results of Operations](index=33&type=section&id=Segment%20Results%20of%20Operations) This section details the financial performance of the IoT Products & Services and IoT Solutions segments Q2 FY2019 vs Q2 FY2018 Segment Performance (in millions) | Segment | Q2 2019 Revenue | Q2 2018 Revenue | % Change | Q2 2019 Operating Income (Loss) | Q2 2018 Operating Income (Loss) | | :--- | :--- | :--- | :--- | :--- | :--- | | **IoT Products & Services** | $56.0 | $49.8 | +12.5% | $3.5 | $4.7 | | **IoT Solutions** | $9.7 | $4.7 | +105.9% | $(2.7) | $(3.9) | - IoT Solutions revenue growth was driven by new customer deployments and an increase in recurring revenue, which constituted approximately **35%** of the segment's revenue for the six months ended March 31, 2019[181](index=181&type=chunk) - IoT Products & Services operating income decreased **26.4%** YoY for the quarter, primarily due to increased employee-related expenses and adjustments to contingent consideration[176](index=176&type=chunk) [Liquidity and Capital Resources](index=34&type=section&id=Liquidity%20and%20Capital%20Resources) This section assesses the company's cash position, cash flow generation, and capital management activities - As of March 31, 2019, the company held **$72.1 million** in cash, cash equivalents, and short-term marketable securities, an increase from **$62.8 million** at September 30, 2018[187](index=187&type=chunk) - Net cash provided by operating activities for the first six months of fiscal 2019 was **$6.2 million**, a significant improvement from a **$5.0 million** use of cash in the same period of fiscal 2018. This was driven by higher net income and favorable changes in working capital[190](index=190&type=chunk) - Investing activities provided **$4.9 million** in cash, largely due to the **$10.0 million** proceeds from the sale of the corporate headquarters, compared to a **$25.9 million** use of cash in the prior year period which included acquisition spending[192](index=192&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=36&type=section&id=ITEM%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risks include interest rate fluctuations on its investment portfolio and foreign currency exposure from international operations - The company's main market risks are interest rate risk on its investment portfolio and foreign currency risk[197](index=197&type=chunk)[198](index=198&type=chunk) - For the six months ended March 31, 2019, revenue from foreign customers was approximately **$32.9 million**. A **10%** change in the average exchange rates for the Euro, British Pound, Japanese Yen, and Canadian Dollar would impact revenue by **0.1%** and stockholders' equity by **1.5%**[199](index=199&type=chunk)[200](index=200&type=chunk) [Controls and Procedures](index=37&type=section&id=ITEM%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - The CEO and Acting Principal Financial Officer concluded that disclosure controls and procedures were effective as of the end of the period[204](index=204&type=chunk) - No changes occurred during the quarter that materially affected, or are reasonably likely to affect, the company's internal control over financial reporting[205](index=205&type=chunk) [PART II. OTHER INFORMATION](index=37&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section provides additional disclosures on legal proceedings, risk factors, equity sales, and other relevant information [Legal Proceedings](index=37&type=section&id=ITEM%201.%20Legal%20Proceedings) This section discloses a lawsuit filed by DimOnOff Inc. alleging over CAD 1.0 million in damages related to allegedly defective products - The company is being sued by DimOnOff Inc. for over **CAD 1.0 million** related to allegedly defective products. The company intends to defend itself against the claims[111](index=111&type=chunk)[206](index=206&type=chunk) [Risk Factors](index=37&type=section&id=ITEM%201A.%20Risk%20Factors) The company states that there have been no material changes to the risk factors that were previously disclosed in its Annual Report on Form 10-K for the fiscal year ended September 30, 2018 - There have been no material changes in risk factors from those disclosed in the Annual Report on Form 10-K for the year ended September 30, 2018[207](index=207&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=37&type=section&id=ITEM%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company's $20.0 million stock repurchase program expired without any repurchases, though a small number of shares were bought for employee tax obligations - The Board of Directors authorized a **$20.0 million** stock repurchase program on April 24, 2018, which expired on May 1, 2019. No shares were repurchased under this program[208](index=208&type=chunk) - During the second quarter of fiscal 2019, **7,052 shares** were purchased at an average price of **$11.37 per share**, but not as part of the publicly announced repurchase program. These were likely related to satisfying tax withholding obligations for employees on vested equity awards[209](index=209&type=chunk)[115](index=115&type=chunk) [Defaults Upon Senior Securities](index=37&type=section&id=ITEM%203.%20Defaults%20Upon%20Senior%20Securities) The company reports that there were no defaults upon senior securities during the period - None reported[210](index=210&type=chunk) [Mine Safety Disclosures](index=37&type=section&id=ITEM%204.%20Mine%20Safety%20Disclosures) The company reports that there are no mine safety disclosures applicable to its operations - None reported[211](index=211&type=chunk) [Other Information](index=38&type=section&id=ITEM%205.%20Other%20Information) The company reports that there is no other information to disclose for the period - None reported[213](index=213&type=chunk) [Exhibits](index=38&type=section&id=ITEM%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, incentive plans, and required certifications - A list of exhibits filed with the report is provided, including corporate governance documents, incentive plans, and required SEC certifications[213](index=213&type=chunk)