UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: December 31, 2020 OR ☐ 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: 001-34033 DIGI INTERNATIONAL INC. (Exact name of registrant as specified in its charter) | --- | --- | --- | --- | --- | |------------ ...

Digi International Inc. (NASDAQ:DGII) Q1 2021 Earnings Conference Call February 3, 2021 5:00 PM ET Company Participants Jamie Loch - Senior Vice President, Chief Financial Officer & Treasurer Ron Konezny - President & Chief Executive Officer Conference Call Participants Anthony Stoss - Craig Hallum Jaeson Schmidt - Lake Street Scott Searle - ROTH Capital Operator Ladies and gentlemen, thank you for standing by, and welcome to Digi International's 2021 First Fiscal Quarter Earnings Call. At this time, all pa ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: September 30, 2020 or ☐ 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: 001-34033 DIGI INTERNATIONAL INC. (Exact name of registrant as specified in its charter) Delaware 41-1532464 (State or other jurisdiction of ...

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]

PART I. FINANCIAL INFORMATION [ITEM 1. Financial Statements](index=4&type=section&id=ITEM%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements, including statements of operations, comprehensive income, balance sheets, cash flows, and stockholders' equity, along with detailed notes explaining significant accounting policies, acquisitions, debt, segment performance, and other financial disclosures for the periods ended June 30, 2020 [Condensed Consolidated Statements of Operations](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Consolidated Statements of Operations (Three Months Ended June 30) | Metric (in thousands) | 2020 | 2019 | Change ($) | Change (%) | | :-------------------- | :------ | :------ | :--------- | :--------- | | Total Revenue | $70,338 | $61,166 | $9,172 | 15.0% | | Gross Profit | $37,349 | $28,328 | $9,021 | 31.8% | | Operating Income | $2,855 | $1,621 | $1,234 | 76.1% | | Net Income | $1,766 | $1,648 | $118 | 7.2% | | Basic EPS | $0.06 | $0.06 | $0.00 | 0.0% | | Diluted EPS | $0.06 | $0.06 | $0.00 | 0.0% | Consolidated Statements of Operations (Nine Months Ended June 30) | Metric (in thousands) | 2020 | 2019 | Change ($) | Change (%) | | :-------------------- | :------- | :------- | :--------- | :--------- | | Total Revenue | $206,102 | $189,243 | $16,859 | 8.9% | | Gross Profit | $106,454 | $88,440 | $18,014 | 20.4% | | Operating Income | $6,096 | $7,964 | $(1,868) | (23.5)% |\ | Net Income | $3,978 | $7,672 | $(3,694) | (48.1)% |\ | Basic EPS | $0.14 | $0.28 | $(0.14) | (50.0)% |\ | Diluted EPS | $0.13 | $0.27 | $(0.14) | (51.9)% | [Condensed Consolidated Statements of Comprehensive Income](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income) Consolidated Statements of Comprehensive Income (Three Months Ended June 30) | Metric (in thousands) | 2020 | 2019 | Change ($) | Change (%) | | :-------------------- | :----- | :----- | :--------- | :--------- | | Net Income | $1,766 | $1,648 | $118 | 7.2% | | Other Comprehensive Income (Loss), net of tax | $681 | $535 | $146 | 27.3% | | Comprehensive Income | $2,447 | $2,183 | $264 | 12.1% | Consolidated Statements of Comprehensive Income (Nine Months Ended June 30) | Metric (in thousands) | 2020 | 2019 | Change ($) | Change (%) | | :-------------------- | :----- | :------- | :--------- | :--------- | | Net Income | $3,978 | $7,672 | $(3,694) | (48.1)% |\ | Other Comprehensive Income (Loss), net of tax | $857 | $(1,107) | $1,964 | 177.4% |\ | Comprehensive Income | $4,835 | $6,565 | $(1,730) | (26.3)% | [Condensed Consolidated Balance Sheets](index=6&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Consolidated Balance Sheet (as of June 30, 2020 vs. September 30, 2019) | Metric (in thousands) | June 30, 2020 | Sept 30, 2019 | Change ($) | Change (%) | | :-------------------- | :------------ | :------------ | :--------- | :--------- | | Total Assets | $526,869 | $398,698 | $128,171 | 32.1% | | Total Liabilities | $163,564 | $49,720 | $113,844 | 229.0% | | Total Stockholders' Equity | $363,305 | $348,978 | $14,327 | 4.1% | | Cash and Cash Equivalents | $55,085 | $92,792 | $(37,707) | (40.6)% |\ | Goodwill | $206,693 | $153,422 | $53,271 | 34.7% | | Intangible Assets, net | $125,229 | $30,667 | $94,562 | 308.4% | | Long-term Debt | $74,477 | $0 | $74,477 | NM | [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Consolidated Statements of Cash Flows (Nine Months Ended June 30) | Metric (in thousands) | 2020 | 2019 | Change ($) | Change (%) | | :-------------------- | :--------- | :------- | :---------- | :--------- | | Operating Activities | $19,153 | $22,528 | $(3,375) | (15.0)% |\ | Investing Activities | $(136,791) | $3,947 | $(140,738) | (3566.7)% |\ | Financing Activities | $78,221 | $90 | $78,131 | 86812.2% |\ | Net (Decrease) Increase in Cash | $(37,707) | $26,080 | $(63,787) | (244.6)% |\ | Cash and Cash Equivalents, end of period | $55,085 | $84,094 | $(29,009) | (34.5)% | [Condensed Consolidated Statements of Stockholders' Equity](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders%27%20Equity) Changes in Stockholders' Equity (Nine Months Ended June 30, 2020) | Metric (in thousands) | Sept 30, 2019 | June 30, 2020 | Change ($) | | :-------------------- | :------------ | :------------ | :--------- | | Common Stock | $346 | $354 | $8 | | Additional Paid-In Capital | $266,567 | $276,960 | $10,393 | | Retained Earnings | $161,919 | $165,897 | $3,978 | | Accumulated Other Comprehensive Loss | $(25,515) | $(24,658) | $857 | | Treasury Stock | $(54,339) | $(55,248) | $(909) |\ | Total Stockholders' Equity | $348,978 | $363,305 | $14,327 | - Net income for the nine months ended June 30, 2020, was **$3,978 thousand**, contributing to the increase in retained earnings[18](index=18&type=chunk) - Other comprehensive income of **$857 thousand** was recognized, reducing the accumulated other comprehensive loss[18](index=18&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) [1. Basis of Presentation and Significant Accounting Policies](index=10&type=section&id=1.%20Basis%20of%20Presentation%20and%20Significant%20Accounting%20Policies) The financial statements are unaudited and prepared in accordance with SEC rules for interim reporting, reflecting normal recurring adjustments. The company adopted ASU 2016-02 (Leases) in fiscal 2020, recognizing right-of-use assets and lease liabilities, with no significant impact on operations or cash flows. The potential impacts of the COVID-19 pandemic on future operations remain uncertain - The company adopted ASU 2016-02, Leases (Topic 842), in the first quarter of fiscal 2020, resulting in the recognition of approximately **$14.1 million** in right-of-use assets and **$17.9 million** in lease liabilities[23](index=23&type=chunk)[24](index=24&type=chunk) - The adoption of the new lease standard did not have a significant impact on the condensed consolidated results of operations or cash flows[24](index=24&type=chunk) - The extent of the COVID-19 pandemic's effect on operational and financial performance cannot be reasonably estimated due to inherent uncertainties[22](index=22&type=chunk) [2. Acquisitions](index=11&type=section&id=2.%20Acquisitions) On December 13, 2019, Digi International Inc. acquired Opengear, Inc. for $148.1 million in cash and contingent consideration. The acquisition significantly enhances the IoT Products & Services segment by providing secure IT infrastructure products. The preliminary purchase price allocation included $53.6 million in goodwill and substantial identifiable intangible assets - Acquired Opengear, Inc. on December 13, 2019, for **$148.1 million** cash and contingent consideration, enhancing the IoT Products & Services segment[28](index=28&type=chunk)[29](index=29&type=chunk) Opengear Acquisition Preliminary Purchase Price Allocation (in thousands) | Asset/Liability Category | Fair Value (in thousands) | | :----------------------- | :------------------------ | | Cash | $148,058 | | Contingent Consideration | $5,100 | | Net Tangible Assets Acquired | $20,086 | | Identifiable Intangible Assets | $105,100 | | Deferred Tax Liability | $(25,634) |\ | Goodwill | $53,606 | | Total | $153,158 | Opengear Acquisition Pro Forma Net Income (Nine Months Ended June 30) | Metric (in thousands) | 2020 | 2019 | | :-------------------- | :------ | :------ | | Pro Forma Net Sales | $220,998 | $229,831 |\ | Pro Forma Net Income | $9,847 | $7,901 | | Pro Forma Diluted EPS | $0.33 | $0.28 | [3. Earnings Per Share](index=13&type=section&id=3.%20Earnings%20Per%20Share) The company's basic and diluted net income per common share remained stable at $0.06 for the three months ended June 30, 2020 and 2019. For the nine-month period, diluted EPS decreased from $0.27 in 2019 to $0.13 in 2020, primarily due to higher weighted average shares outstanding and lower net income Net Income Per Common Share (Three Months Ended June 30) | Metric (in thousands, except per share data) | 2020 | 2019 | | :------------------------------------------- | :------ | :------ | | Net Income | $1,766 | $1,648 | | Basic EPS | $0.06 | $0.06 | | Diluted EPS | $0.06 | $0.06 | | Weighted Average Common Shares (Basic) | 28,972 | 28,072 | | Weighted Average Common Shares (Diluted) | 29,187 | 28,589 | Net Income Per Common Share (Nine Months Ended June 30) | Metric (in thousands, except per share data) | 2020 | 2019 | | :------------------------------------------- | :------ | :------ | | Net Income | $3,978 | $7,672 | | Basic EPS | $0.14 | $0.28 | | Diluted EPS | $0.13 | $0.27 | | Weighted Average Common Shares (Basic) | 28,772 | 27,816 | | Weighted Average Common Shares (Diluted) | 29,477 | 28,414 | - Potentially dilutive shares not included in diluted EPS calculation were **2,241,860** for the three months ended June 30, 2020, and **1,146,581** for the nine months ended June 30, 2020, due to exercise prices exceeding market prices[41](index=41&type=chunk) [4. Selected Balance Sheet Data](index=14&type=section&id=4.%20Selected%20Balance%20Sheet%20Data) The company's selected balance sheet data shows a decrease in net accounts receivable and an increase in inventories from September 30, 2019, to June 30, 2020. The increase in inventories was primarily driven by raw materials Accounts Receivable, Net (in thousands) | Metric | June 30, 2020 | Sept 30, 2019 | | :-------------------- | :------------ | :------------ | | Accounts Receivable | $60,106 | $60,062 | | Less: Allowance for Doubtful Accounts | $2,178 | $968 | | Less: Reserve for Future Returns and Pricing Adjustments | $4,052 | $2,677 | | Accounts Receivable, Net | $53,876 | $56,417 | Inventories (in thousands) | Metric | June 30, 2020 | Sept 30, 2019 | | :-------------- | :------------ | :------------ | | Raw Materials | $33,080 | $12,308 | | Work in Process | $0 | $565 | | Finished Goods | $13,470 | $26,891 | | Total Inventories | $46,550 | $39,764 | [5. Fair Value Measurements](index=14&type=section&id=5.%20Fair%20Value%20Measurements) The company measures contingent consideration liabilities for acquired businesses at fair value using Level 3 unobservable inputs. Payments were made for Bluenica and Accelerated acquisitions, and the remaining liability for Opengear was $4.2 million at June 30, 2020, based on a 49% probability of achieving revenue thresholds Contingent Consideration Liability (Level 3) (in thousands) | Metric | June 30, 2020 | Sept 30, 2019 | | :------------------------------------ | :------------ | :------------ | | Contingent consideration on acquired businesses | $4,228 | $5,407 | Reconciliation of Contingent Consideration Liability (Nine Months Ended June 30) | Metric (in thousands) | 2020 | 2019 | | :------------------------------------ | :------ | :------ | | Fair value at beginning of period | $5,407 | $10,065 |\ | Contingent consideration recognized for acquired business | $5,100 | $0 | | Contingent consideration payments | $(6,151) | $(5,848) |\ | Change in fair value of contingent consideration | $(128) | $1,188 | | Fair value at end of period | $4,228 | $5,405 | - The fair value of the remaining contingent consideration for Opengear at June 30, 2020, was **$4.2 million**, estimated with a **49%** probability of achieving specified revenue thresholds[46](index=46&type=chunk)[47](index=47&type=chunk) [6. Goodwill and Other Intangible Assets, Net](index=16&type=section&id=6.%20Goodwill%20and%20Other%20Intangible%20Assets%2C%20Net) The company's net amortizable intangible assets significantly increased to $125.2 million at June 30, 2020, primarily due to the Opengear acquisition. Goodwill also increased to $206.7 million, with the IoT Products & Services segment seeing the largest increase. The annual impairment test as of June 30, 2020, indicated no impairment for either reporting unit Amortizable Intangible Assets, Net (in thousands) | Asset Category | June 30, 2020 | Sept 30, 2019 | | :---------------------- | :------------ | :------------ | | Purchased and Core Technology | $21,698 | $6,713 | | Patents and Trademarks | $9,637 | $2,607 | | Customer Relationships | $93,707 | $21,049 | | Total Net Intangible Assets | $125,229 | $30,667 | Goodwill by Reportable Segment (in thousands) | Segment | Sept 30, 2019 | Acquisitions | FX Adjustment | June 30, 2020 | | :---------------------- | :------------ | :----------- | :------------ | :------------ | | IoT Products & Services | $103,519 | $53,606 | $20 | $157,145 | | IoT Solutions | $49,903 | $0 | $(355) | $49,548 | | Total Goodwill | $153,422 | $53,606 | $(335) | $206,693 | - Amortization expense was **$10.7 million** for the nine months ended June 30, 2020, up from **$6.7 million** in the prior year[48](index=48&type=chunk) - The fiscal 2020 annual impairment test as of June 30, 2020, concluded that fair value exceeded the carrying value by more than **10%** for both reporting units, indicating no impairment[54](index=54&type=chunk) [7. Sale of Building](index=19&type=section&id=7.%20Sale%20of%20Building) In October 2018, the company sold its corporate headquarters building for $10.0 million cash, resulting in a gain of $4.4 million ($3.4 million net of tax) recorded in the first quarter of fiscal 2019 - Sold corporate headquarters building for **$10.0 million** in cash on October 2, 2018[56](index=56&type=chunk) - Recorded a gain of **$4.4 million** (**$3.4 million** net of tax) from the sale in the first quarter of fiscal 2019[56](index=56&type=chunk) [8. Debt](index=19&type=section&id=8.%20Debt) In connection with the Opengear acquisition, the company entered into a $150 million syndicated credit facility in December 2019, comprising a $50 million Term Loan and a $100 million Revolving Loan. The weighted average interest rate at June 30, 2020, was 1.1%. The company repaid a $9.0 million Paycheck Protection Program loan in May 2020 and was in compliance with debt covenants - Entered into a **$150 million** syndicated credit facility on December 13, 2019, consisting of a **$50 million** Term Loan and a **$100 million** Revolving Loan[57](index=57&type=chunk) - Weighted average interest rate on the Credit Facility was **1.1%** at June 30, 2020[58](index=58&type=chunk) Long-Term Indebtedness at June 30, 2020 (in thousands) | Debt Type | Amount (in thousands) | | :-------------------- | :-------------------- | | Revolving Loan | $30,000 | | Term Loan | $48,750 | | Total Loans | $78,750 | | Less: Unamortized Issuance Costs | $(2,301) |\ | Less: Current Maturities | $(1,972) |\ | Total Long-Term Debt, net of current portion | $74,477 | - Repaid the full **$9.0 million** Paycheck Protection Program loan, plus interest, on May 4, 2020[65](index=65&type=chunk) - The company was in compliance with all debt covenants at June 30, 2020[63](index=63&type=chunk) [9. Segment Information](index=20&type=section&id=9.%20Segment%20Information) The company operates in two reportable segments: IoT Products & Services and IoT Solutions. For the nine months ended June 30, 2020, IoT Products & Services revenue increased by 15.7% to $185.0 million, while IoT Solutions revenue decreased by 28.1% to $21.1 million. Total assets for IoT Products & Services significantly increased to $383.6 million, largely due to the Opengear acquisition Revenue by Segment (Nine Months Ended June 30) | Segment | 2020 (in thousands) | 2019 (in thousands) | Change ($) | Change (%) | | :---------------------- | :------------------ | :------------------ | :--------- | :--------- | | IoT Products & Services | $184,975 | $159,843 | $25,132 | 15.7% | | IoT Solutions | $21,127 | $29,400 | $(8,273) | (28.1)% |\ | Total Revenue | $206,102 | $189,243 | $16,859 | 8.9% | Gross Profit by Segment (Nine Months Ended June 30) | Segment | 2020 (in thousands) | 2019 (in thousands) | Change ($) | Change (%) | | :---------------------- | :------------------ | :------------------ | :--------- | :--------- | | IoT Products & Services | $96,010 | $73,987 | $22,023 | 29.8% | | IoT Solutions | $10,444 | $14,453 | $(4,009) | (27.7)% |\ | Total Gross Profit | $106,454 | $88,440 | $18,014 | 20.4% | Total Assets by Segment (in thousands) | Segment | June 30, 2020 | Sept 30, 2019 | | :---------------------- | :------------ | :------------ | | IoT Products & Services | $383,593 | $215,651 | | IoT Solutions | $88,191 | $90,255 | | Unallocated | $55,085 | $92,792 | | Total Assets | $526,869 | $398,698 | [10. Revenue](index=21&type=section&id=10.%20Revenue) The company's total revenue for the nine months ended June 30, 2020, was $206.1 million, with North America being the largest geographic contributor. The majority of revenue is recognized at a point in time. Contract liabilities (unearned revenue) were $6.4 million at June 30, 2020, and approximately $14.4 million of revenue is expected from remaining performance obligations Revenue by Geographic Location (Nine Months Ended June 30) | Region | 2020 (in thousands) | 2019 (in thousands) | Change ($) | Change (%) | | :------------------------------------ | :------------------ | :------------------ | :--------- | :--------- | | North America, primarily the United States | $157,513 | $138,808 | $18,705 | 13.5% | | Europe, Middle East & Africa | $29,428 | $30,450 | $(1,022) | (3.4)% |\ | Rest of World | $19,161 | $19,985 | $(824) | (4.1)% |\ | Total Revenue | $206,102 | $189,243 | $16,859 | 8.9% | Revenue by Timing of Recognition (Nine Months Ended June 30) | Timing of Recognition | 2020 (in thousands) | 2019 (in thousands) | Change ($) | Change (%) | | :-------------------- | :------------------ | :------------------ | :--------- | :--------- | | Transferred at a point in time | $186,739 | $172,640 | $14,099 | 8.2% | | Transferred over time | $19,363 | $16,603 | $2,760 | 16.6% | | Total Revenue | $206,102 | $189,243 | $16,859 | 8.9% | - Unearned revenue (contract liabilities) was **$6.4 million** at June 30, 2020, and approximately **$14.4 million** of revenue is expected to be recognized from remaining performance obligations, with **$11.2 million** expected within the next twelve months[72](index=72&type=chunk)[73](index=73&type=chunk) [11. Income Taxes](index=23&type=section&id=11.%20Income%20Taxes) For the nine months ended June 30, 2020, the company reported an income tax benefit of $0.9 million, primarily due to excess tax benefits on stock compensation and a state deferred tax rate adjustment from the Opengear acquisition. Unrecognized tax benefits totaled $2.2 million at June 30, 2020, with an expected decrease of $0.1 million over the next 12 months - Income tax benefit was **$0.9 million** for the nine months ended June 30, 2020, including a net tax benefit of **$1.1 million** from excess tax benefits on stock compensation and a state deferred tax rate adjustment due to the Opengear acquisition[75](index=75&type=chunk) - Unrecognized tax benefits as of June 30, 2020, totaled **$2.2 million**, with an expected decrease of approximately **$0.1 million** over the next 12 months[77](index=77&type=chunk) [12. Product Warranty Obligation](index=23&type=section&id=12.%20Product%20Warranty%20Obligation) The product warranty accrual balance at June 30, 2020, was $0.887 million, reflecting $0.525 million in new warranties issued and $0.650 million in settlements made during the nine months ended June 30, 2020 Product Warranty Accrual Activity (Nine Months Ended June 30) | Metric (in thousands) | 2020 | 2019 | | :-------------------- | :----- | :----- | | Balance at October 1 | $1,012 | $1,172 |\ | Warranties Issued | $525 | $263 | | Settlements Made | $(650) | $(380) |\ | Balance at June 30 | $887 | $1,055 | [13. Leases](index=23&type=section&id=13.%20Leases) The company's leases primarily consist of operating leases for office space. As of June 30, 2020, operating lease right-of-use assets were $14.9 million, and total operating lease liabilities were $19.3 million. Total lease cost for the nine months ended June 30, 2020, was $3.1 million, with a weighted average remaining lease term of 5.5 years and a discount rate of 4.80% Supplemental Balance Sheet Information Related to Leases (in thousands) | Asset/Liability Category | June 30, 2020 | | :----------------------- | :------------ | | Operating Lease Right-of-Use Assets | $14,937 | | Current Portion of Operating Lease Liabilities | $2,540 | | Non-Current Operating Lease Liabilities | $16,799 | | Total Lease Liabilities | $19,339 | - Total lease cost for the nine months ended June 30, 2020, was **$3.081 million**[84](index=84&type=chunk) - Weighted average remaining lease term for operating leases was **5.5 years**, with a weighted average discount rate of **4.80%** as of June 30, 2020[84](index=84&type=chunk) Future Undiscounted Operating Lease Payments (in thousands) | Fiscal Year | Amount (in thousands) | | :-------------------- | :-------------------- | | Remainder of 2020 | $873 | | 2021 | $3,308 | | 2022 | $2,911 | | 2023 | $2,656 | | 2024 | $2,450 | | 2025 | $2,348 | | Thereafter | $9,219 | | Total Future Undiscounted Lease Payments | $23,765 | [14. Restructuring](index=26&type=section&id=14.%20Restructuring) The company recorded restructuring charges of $38 thousand in the second quarter of fiscal 2020 for employee terminations in the IoT Products and Services segment, and an additional $95 thousand in the third quarter for employee terminations across both operating segments - Recorded **$38 thousand** in employee termination charges in Q2 fiscal 2020 for the IoT Products and Services segment[87](index=87&type=chunk) - Recorded **$95 thousand** in restructuring charges for employee terminations across both operating segments in Q3 fiscal 2020, expected to be fully paid in Q4 fiscal 2020[87](index=87&type=chunk) [15. Contingencies](index=26&type=section&id=15.%20Contingencies) The company is currently defending a lawsuit filed by DimOnOff Inc. in November 2018, alleging defective Digi products caused street light malfunctions and claiming damages of over CAD 1.0 million. The likelihood and amount of potential loss cannot be assessed at this time - DimOnOff Inc. sued the company in November 2018, alleging defective products caused street light malfunctions and claiming over **CAD 1.0 million** in damages[88](index=88&type=chunk) - The company intends to defend against DimOnOff's claims, and the likelihood or amount of any potential loss cannot be assessed at this time[88](index=88&type=chunk) [16. Stock-Based Compensation](index=28&type=section&id=16.%20Stock-Based%20Compensation) Stock-based compensation expense for the nine months ended June 30, 2020, was $5.3 million. The company granted 776 thousand stock options and 504 thousand restricted stock units (RSUs) during this period. Total unrecognized compensation cost for non-vested stock options was $6.7 million (2.9 years remaining), and for non-vested RSUs was $10.7 million (1.6 years remaining) Stock-Based Compensation Expense (Nine Months Ended June 30) | Expense Category (in thousands) | 2020 | 2019 | | :------------------------------ | :----- | :----- | | Cost of Sales | $222 | $135 | | Sales and Marketing | $1,669 | $1,272 |\ | Research and Development | $908 | $737 | | General and Administrative | $2,524 | $2,036 |\ | Total Stock-Based Compensation | $5,323 | $4,180 | Stock Option Activity (Nine Months Ended June 30, 2020) | Metric | Options Outstanding (in thousands) | Weighted Average Exercise Price | | :---------------------------- | :--------------------------------- | :------------------------------ | | Balance at Sept 30, 2019 | 3,348 | $10.85 | | Granted | 776 | $16.63 | | Exercised | (500) | $10.12 | | Forfeited / Canceled | (138) | $13.15 | | Balance at June 30, 2020 | 3,486 | $12.15 | | Exercisable at June 30, 2020 | 2,073 | $10.69 | - Total unrecognized compensation cost for non-vested stock options was **$6.7 million**, expected to be recognized over approximately **2.9 years**[103](index=103&type=chunk) - Total unrecognized compensation cost for non-vested restricted stock units was **$10.7 million**, expected to be recognized over approximately **1.6 years**[105](index=105&type=chunk) [17. Subsequent Event](index=30&type=section&id=17.%20Subsequent%20Event) On July 17, 2020, the company entered into a new 10-year lease agreement for approximately 35,466 square feet of office space in Sandy, Utah, with an initial annual base rent of $438,360 - Entered a **10-year** lease agreement on July 17, 2020, for **35,466 square feet** of office space in Sandy, Utah[106](index=106&type=chunk) - The new lease, commencing January 2021, has an initial annual base rent of approximately **$438,360**, escalating **2%** annually[106](index=106&type=chunk) [ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=31&type=section&id=ITEM%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and results of operations, including forward-looking statements, non-GAAP financial measures, critical accounting policies, and an overview of business segments. It details the impacts of COVID-19, consolidated and segment-specific financial performance, and liquidity. Key financial metrics for Q3 fiscal 2020 include a 15.0% increase in consolidated revenue, a 53.1% gross margin, and Adjusted EBITDA of $10.5 million [Safe Harbor Statement](index=31&type=section&id=SAFE%20HARBOR%20STATEMENT%20UNDER%20THE%20PRIVATE%20SECURITIES%20LITIGATION%20REFORM%20ACT%20OF%201995) - The report contains forward-looking statements subject to risks and uncertainties, including those related to the COVID-19 pandemic, competitive markets, technological changes, reliance on third parties, product development delays, and acquisition integration[110](index=110&type=chunk)[111](index=111&type=chunk) [Presentation of Non-GAAP Financial Measures](index=31&type=section&id=Presentation%20of%20Non-GAAP%20Financial%20Measures) - The company uses non-GAAP financial measures, including adjusted net income, adjusted net income per diluted share, and Adjusted EBITDA, to provide additional insights into core operating results and financial performance[112](index=112&type=chunk)[115](index=115&type=chunk) - Adjusted EBITDA is defined as EBITDA adjusted for stock-based compensation, acquisition-related expenses, restructuring charges, and gains from the disposition of the former corporate headquarters[115](index=115&type=chunk) [Critical Accounting Policies and Estimates](index=32&type=section&id=CRITICAL%20ACCOUNTING%20POLICIES%20AND%20ESTIMATES) - The preparation of financial statements requires significant estimates and judgments, which are based on historical experience and reasonable assumptions[116](index=116&type=chunk) - A detailed description of critical accounting policies and estimates is provided in the Annual Report on Form 10-K for fiscal year ended September 30, 2019[117](index=117&type=chunk) [Overview](index=32&type=section&id=OVERVIEW) - Digi International Inc. is a global provider of business and mission-critical Internet-of-Things (IoT) connectivity products, services, and solutions, operating in two segments: IoT Products & Services and IoT Solutions[118](index=118&type=chunk) - Key operating objectives for fiscal 2020 included delivering growth in IoT Products & Services, seeking strategic growth through acquisitions (like Opengear), and optimizing reduced fixed cost footprint[123](index=123&type=chunk) - Cost reduction actions implemented due to COVID-19 include suspending new hires, decreasing travel, reducing capital budget, eliminating **21** positions, suspending 401(K) matching, and reducing executive cash compensation[124](index=124&type=chunk) Key Financial Metrics (Q3 Fiscal 2020 vs. Q3 Fiscal 2019) | Metric | Q3 FY2020 ($M) | Q3 FY2019 ($M) | Change (%) | | :-------------------- | :------------- | :------------- | :--------- | | Consolidated Revenue | $70.3 | $61.2 | 15.0% | | Gross Margin | 53.1% | 46.3% | 6.8 pp | | Net Income | $1.8 | $1.6 | 7.2% | | Adjusted Net Income | $6.6 | $4.6 | 43.5% | | Adjusted EBITDA | $10.5 | $6.1 | 72.1% | [Potential Impacts of COVID-19 on Our Business and Operations](index=33&type=section&id=Potential%20Impacts%20of%20COVID-19%20on%20Our%20Business%20and%20Operations) - COVID-19 has led to disparate impacts on customer categories, with some product demand increasing while industries like entertainment, hospitality, and retail experienced significant declines[130](index=130&type=chunk) - The company expects sales volatility due to changing fiscal health and operational needs of customers, but the exact overall impact on demand remains uncertain[132](index=132&type=chunk) - Generated **$31.8 million** in operating cash flow during Q3 fiscal 2020 and held **$55 million** in cash, with targeted steps taken to lower operating expenses[133](index=133&type=chunk) - Supply chain has not been materially restrained by restrictions or border closures, but severe restrictions could negatively impact operations[134](index=134&type=chunk) - Proactive mitigation efforts include remote work, increased IT networking, social distancing, dedicated shifts, mask requirements, restricted travel, and enhanced office cleaning[136](index=136&type=chunk)[138](index=138&type=chunk) [Consolidated Results of Operations](index=35&type=section&id=CONSOLIDATED%20RESULTS%20OF%20OPERATIONS) Consolidated Results of Operations (Three Months Ended June 30) | Metric (in thousands) | 2020 ($) | 2020 (%) | 2019 ($) | 2019 (%) | Change (%) | | :-------------------- | :------- | :------- | :------- | :------- | :--------- | | Revenue | 70,338 | 100.0 | 61,166 | 100.0 | 15.0 | | Cost of Sales | 32,989 | 46.9 | 32,838 | 53.7 | 0.5 | | Gross Profit | 37,349 | 53.1 | 28,328 | 46.3 | 31.8 | | Operating Expenses | 34,494 | 49.0 | 26,707 | 43.6 | 29.2 | | Operating Income | 2,855 | 4.1 | 1,621 | 2.7 | 76.1 | | Net Income | 1,766 | 2.5 | 1,648 | 2.7 | 7.2 | Consolidated Results of Operations (Nine Months Ended June 30) | Metric (in thousands) | 2020 ($) | 2020 (%) | 2019 ($) | 2019 (%) | Change (%) | | :-------------------- | :------- | :------- | :------- | :------- | :--------- | | Revenue | 206,102 | 100.0 | 189,243 | 100.0 | 8.9 | | Cost of Sales | 99,648 | 48.3 | 100,803 | 53.3 | (1.1) | | Gross Profit | 106,454 | 51.7 | 88,440 | 46.7 | 20.4 | | Operating Expenses | 100,358 | 48.7 | 80,476 | 42.5 | 24.7 | | Operating Income | 6,096 | 3.0 | 7,964 | 4.2 | (23.5) | | Net Income | 3,978 | 1.9 | 7,672 | 4.1 | (48.1) | [Revenue by Segment](index=35&type=section&id=REVENUE%20BY%20SEGMENT) Revenue by Segment (Three Months Ended June 30) | Segment | 2020 ($K) | 2020 (%) | 2019 ($K) | 2019 (%) | Change (%) | | :---------------------- | :-------- | :------- | :-------- | :------- | :--------- | | IoT Products & Services | 63,472 | 90.2 | 50,510 | 82.6 | 25.7 | | IoT Solutions | 6,866 | 9.8 | 10,656 | 17.4 | (35.6) | | Total Revenue | 70,338 | 100.0 | 61,166 | 100.0 | 15.0 | - IoT Products & Services revenue increased by **25.7%** for the three months ended June 30, 2020, driven by the Opengear acquisition, increased sales of embedded modules to significant customers, and higher support services revenue[141](index=141&type=chunk) - IoT Solutions revenue decreased by **35.6%** for the three months ended June 30, 2020, primarily due to delays in customer rollouts and equipment upgrades caused by COVID-19, and non-recurring large enterprise deals in the prior year[145](index=145&type=chunk) [Cost of Goods Sold and Gross Profit by Segment](index=36&type=section&id=COST%20OF%20GOODS%20SOLD%20AND%20GROSS%20PROFIT%20BY%20SEGMENT) Gross Profit by Segment (Three Months Ended June 30) | Segment | 2020 ($K) | 2020 (%) | 2019 ($K) | 2019 (%) | Basis Point Inc. (Decr.) | | :---------------------- | :-------- | :------- | :-------- | :------- | :----------------------- | | IoT Products & Services | 33,899 | 53.4 | 23,058 | 45.7 | 770 | | IoT Solutions | 3,450 | 50.2 | 5,270 | 49.5 | 70 | | Total Gross Profit | 37,349 | 53.1 | 28,328 | 46.3 | 680 | - IoT Products & Services gross profit margin increased by **770 basis points** for the three months ended June 30, 2020, primarily due to incremental gross profit from the higher-margin Opengear acquisition and increased sales of support services[148](index=148&type=chunk) - IoT Solutions gross profit margin increased by **70 basis points** for the three months ended June 30, 2020, driven by one-time non-recurring revenue and increased recurring subscription revenue, which typically have higher gross margins[152](index=152&type=chunk)[153](index=153&type=chunk) [Operating Expenses](index=37&type=section&id=OPERATING%20EXPENSES) Operating Expenses (Three Months Ended June 30) | Expense Category (in thousands) | 2020 ($) | 2020 (%) | 2019 ($) | 2019 (%) | Change ($) | Change (%) | | :------------------------------ | :------- | :------- | :------- | :------- | :--------- | :--------- | | Sales and Marketing | 13,133 | 18.7 | 11,392 | 18.6 | 1,741 | 15.3 | | Research and Development | 10,892 | 15.5 | 8,584 | 14.0 | 2,308 | 26.9 | | General and Administrative | 10,378 | 14.8 | 6,751 | 11.0 | 3,627 | 53.7 | | Restructuring Charge (Reversal) | 91 | 0.0 | (20) | 0.0 | 111 | NM | | Total Operating Expenses | 34,494 | 49.0 | 26,707 | 43.6 | 7,787 | 29.2 | - The **$7.8 million** increase in operating expenses for the three months ended June 30, 2020, was primarily due to incremental operating expenses from Opengear, a **$1.1 million** increase in professional and outside services fees (including acquisition-related expenses), a **$0.4 million** increase in bad debts provision, and a **$0.3 million** increase in employee-related expenses[153](index=153&type=chunk)[154](index=154&type=chunk) - This increase was partially offset by a **$1.1 million** decrease in trade shows and related travel expenses due to COVID-19 restrictions[155](index=155&type=chunk) [Other (Expense) Income, Net](index=39&type=section&id=OTHER%20%28EXPENSE%29%20INCOME%2C%20NET) Other (Expense) Income, Net (Three Months Ended June 30) | Metric (in thousands) | 2020 ($) | 2020 (%) | 2019 ($) | 2019 (%) | Change ($) | Change (%) | | :-------------------- | :------- | :------- | :------- | :------- | :--------- | :--------- | | Interest Income | 22 | 0.0 | 205 | 0.3 | (183) | (89.3) | | Interest Expense | (900) | (1.3) | 0 | 0.0 | (900) | NM | | Other (Expense) Income, Net | (67) | (0.1) | (174) | (0.3) | 107 | (61.5) | | Total Other (Expense) Income, Net | (945) | (1.4) | 31 | 0.0 | (976) | NM | - The **$1.0 million** decrease in other (expense) income, net, for the three months ended June 30, 2020, was primarily due to a **$0.9 million** increase in interest expense related to the Credit Facility for the Opengear acquisition and a **$0.2 million** reduction in interest income[159](index=159&type=chunk) - The **$3.6 million** decrease for the nine months ended June 30, 2020, was driven by a **$3.0 million** increase in interest expense from the Credit Facility, a **$0.3 million** increase in foreign currency losses, and a **$0.3 million** reduction in interest income[160](index=160&type=chunk) [Income Taxes](index=39&type=section&id=INCOME%20TAXES) - Refer to Note 11 to the condensed consolidated financial statements for a detailed discussion of income taxes[161](index=161&type=chunk) [Non-GAAP Financial Information](index=40&type=section&id=NON-GAAP%20FINANCIAL%20INFORMATION) Reconciliation of Net Income to Adjusted EBITDA (Three Months Ended June 30) | Metric (in thousands) | 2020 ($) | 2020 (%) | 2019 ($) | 2019 (%) | | :-------------------- | :------- | :------- | :------- | :------- | | Net Income | 1,766 | | 1,648 | | | Interest expense (income), net | 878 | | (205) | | | Income tax expense (benefit) | 144 | | 4 | | | Depreciation and amortization | 5,306 | | 3,186 | | | Stock-based compensation | 1,882 | | 1,473 | | | Restructuring charge (reversal) | 91 | | (20) | | | Acquisition expense | 463 | | 54 | | | Adjusted EBITDA | 10,530 | 15.0 | 6,140 | 10.0 | Reconciliation of Net Income to Adjusted Net Income (Three Months Ended June 30) | Metric (in thousands, except per share) | 2020 ($) | 2020 EPS | 2019 ($) | 2019 EPS | | :-------------------------------------- | :------- | :------- | :------- | :------- | | Net Income | 1,766 | 0.06 | 1,648 | 0.06 | | Amortization | 4,123 | 0.14 | 2,060 | 0.07 | | Stock-based compensation | 1,882 | 0.06 | 1,473 | 0.05 | | Acquisition expense | 463 | 0.02 | 54 | 0.00 | | Adjusted Net Income | 6,573 | 0.23 | 4,618 | 0.16 | [Liquidity and Capital Resources](index=42&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) - The company primarily finances operations and capital expenditures through funds generated from operations, supplemented by a credit facility[167](index=167&type=chunk) Condensed Consolidated Statement of Cash Flows Summary (Nine Months Ended June 30) | Activity (in thousands) | 2020 | 2019 | Change ($) | | :---------------------- | :--------- | :------- | :---------- | | Operating Activities | $19,153 | $22,528 | $(3,375) |\ | Investing Activities | $(136,791) | $3,947 | $(140,738) |\ | Financing Activities | $78,221 | $90 | $78,131 |\ | Net (Decrease) Increase in Cash | $(37,707) | $26,080 | $(63,787) | - Cash flows from investing activities decreased by **$140.7 million**, primarily due to the **$136.1 million** acquisition of Opengear and proceeds from the sale of the corporate headquarters and marketable securities in the prior year[171](index=171&type=chunk) - Cash flows from financing activities increased by **$78.1 million**, mainly driven by **$78.8 million** in net proceeds from long-term debt (Revolving Loan and Term Loan)[172](index=172&type=chunk) [Contractual Obligations](index=43&type=section&id=CONTRACTUAL%20OBLIGATIONS) Summary of Contractual Obligations at June 30, 2020 (in thousands) | Obligation | Total | Less than 1 year | 1-3 years | 3-5 years | Thereafter | | :------------------------ | :------- | :--------------- | :-------- | :-------- | :--------- | | Operating Leases | $23,946 | $3,454 | $5,808 | $4,878 | $9,806 | | Contingent Consideration | $4,228 | $4,228 | $0 | $0 | $0 | | Revolving Loan | $30,000 | $0 | $0 | $30,000 | $0 | | Term Loan | $48,750 | $2,500 | $6,875 | $39,375 | $0 | | Interest on Long-Term Debt | $7,743 | $2,035 | $3,208 | $2,500 | $0 | | Total | $114,667 | $12,217 | $15,891 | $76,753 | $9,806 | - The table excludes possible payments for uncertain tax positions (**$2.3 million** reserve) and royalties under license agreements due to inability to reliably estimate future cash payments[174](index=174&type=chunk) [Recently Issued Accounting Pronouncements](index=43&type=section&id=RECENTLY%20ISSUED%20ACCOUNTING%20PRONOUNCEMENTS) - For information on new accounting pronouncements, refer to Note 1 to the condensed consolidated financial statements[175](index=175&type=chunk) [ITEM 3. Quantitative and Qualitative Disclosures About Market Risk](index=44&type=section&id=ITEM%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is exposed to market risks from changes in interest rates and foreign currency exchange rates. Interest rate risk primarily affects variable-rate debt under its Credit Facility, with a 25 basis point change impacting interest expense by $0.4 million annually. Foreign currency risk stems from sales denominated in foreign currencies and translation of foreign subsidiary results, with a 10% exchange rate change potentially impacting revenue by 0.1% and stockholders' equity by 1.0% [Interest Rate Risk](index=44&type=section&id=INTEREST%20RATE%20RISK) - The company is exposed to interest rate risk on its Credit Facility, which includes a **$48.8 million** Term Loan and **$30.0 million** Revolving Loan with variable interest rates[179](index=179&type=chunk) - A **25 basis point** change in interest rates would increase or decrease annual interest expense by **$0.4 million**[179](index=179&type=chunk) [Foreign Currency Risk](index=44&type=section&id=FOREIGN%20CURRENCY%20RISK) - The company is exposed to foreign currency transaction risk from sales in Euros, British Pounds, Japanese Yen, and Canadian Dollars, and translation risk from foreign subsidiary financial statements[180](index=180&type=chunk) - For the nine months ended June 30, 2020, foreign customer revenue was approximately **$48.6 million**, with **$1.6 million** denominated in foreign currency[181](index=181&type=chunk) - A **10%** change in average exchange rates for major foreign currencies would result in a **0.1%** increase or decrease in revenue and a **1.0%** increase or decrease in stockholders' equity[182](index=182&type=chunk) [Credit Risk](index=44&type=section&id=CREDIT%20RISK) - The company has exposure to credit risk related to its accounts receivable portfolio, managed through regular monitoring of customer financial status and credit limits[183](index=183&type=chunk) [ITEM 4. Controls and Procedures](index=45&type=section&id=ITEM%204.%20Controls%20and%20Procedures) The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2020. The recently acquired Opengear business was excluded from the assessment of internal control over financial reporting for this period but will be included in fiscal 2021 [Evaluation of Disclosure Controls and Procedures](index=45&type=section&id=EVALUATION%20OF%20DISCLOSURE%20CONTROLS%20AND%20PROCEDURES) - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[186](index=186&type=chunk) [Changes in Internal Control Over Financial Reporting](index=45&type=section&id=CHANGES%20IN%20INTERNAL%20CONTROL%20OVER%20FINANCIAL%20REPORTING) - The acquired Opengear business was excluded from the assessment of internal control over financial reporting for the period ended June 30, 2020, representing **33%** of consolidated total assets[187](index=187&type=chunk) - Opengear will be included in the internal control assessment starting in the first quarter of fiscal 2021[187](index=187&type=chunk) - No other material changes in internal control over financial reporting occurred during the nine months ended June 30, 2020[188](index=188&type=chunk) PART II. OTHER INFORMATION [ITEM 1. Legal Proceedings](index=45&type=section&id=ITEM%201.%20Legal%20Proceedings) This section incorporates by reference the disclosure on contingencies from Note 15 to the condensed consolidated financial statements, which details a lawsuit filed by DimOnOff Inc. against the company - Refer to Note 15 to the condensed consolidated financial statements for details on legal proceedings and contingencies[189](index=189&type=chunk) [ITEM 1A. Risk Factors](index=45&type=section&id=ITEM%201A.%20Risk%20Factors) The company updated its risk factors to highlight potential adverse impacts from health epidemics like COVID-19 on sales and operations, the risk of goodwill impairment if stock price declines or forecasts are not met, and the material adverse effects of failing to comply with covenants under its $150 million credit facility - Sales and operations face risks from health epidemics or pandemics, such as COVID-19, which could disrupt operations, impact sales, and affect business continuity[190](index=190&type=chunk)[191](index=191&type=chunk) - A sustained decline in stock price, significant decrease in profits, or failure of acquired businesses to meet anticipated results could lead to goodwill impairment[192](index=192&type=chunk)[193](index=193&type=chunk)[195](index=195&type=chunk) - Failure to comply with financial and other covenants under the **$150 million** credit facility could result in a default, materially adversely affecting the business[196](index=196&type=chunk)[198](index=198&type=chunk)[199](index=199&type=chunk) [ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=47&type=section&id=ITEM%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During the third quarter of fiscal 2020, the company purchased 788 shares of common stock at an average price of $10.90 per share. These shares were forfeited by employees to satisfy tax withholding obligations related to the vesting of restricted stock units Common Stock Purchases (Q3 Fiscal 2020) | Period | Total Number of Shares Purchased | Average Price per Share | | :---------------------- | :------------------------------- | :---------------------- | | May 1, 2020 - May 31, 2020 | 788 | $10.90 | | Total | 788 | $10.90 | - All shares purchased were forfeited by employees to satisfy tax withholding obligations related to the vesting of restricted stock units[200](index=200&type=chunk) [ITEM 3. Defaults Upon Senior Securities](index=47&type=section&id=ITEM%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities during the period - No defaults upon senior securities were reported[201](index=201&type=chunk) [ITEM 4. Mine Safety Disclosures](index=47&type=section&id=ITEM%204.%20Mine%20Safety%20Disclosures) The company has no mine safety disclosures to report - No mine safety disclosures were reported[202](index=202&type=chunk) [ITEM 5. Other Information](index=47&type=section&id=ITEM%205.%20Other%20Information) No other information was reported in this section - No other information was reported[203](index=203&type=chunk) [ITEM 6. Exhibits](index=48&type=section&id=ITEM%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including the Agreement and Plan of Merger for Opengear, Restated Certificate of Incorporation, Amended and Restated By-Laws, CEO/CFO certifications, Section 1350 Certification, and iXBRL financial statements - Key exhibits include the Agreement and Plan of Merger for Opengear, Restated Certificate of Incorporation, Amended and Restated By-Laws, and various certifications (Rule 13a-14(a)/15d-14(a) and Section 1350)[206](index=206&type=chunk)[207](index=207&type=chunk) - The financial statements are filed in iXBRL format[207](index=207&type=chunk)

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)