PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements 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 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 | $(0.14) | (51.9)% | Condensed Consolidated Statements of Comprehensive Income Consolidated Statements of Comprehensive Income (Three Months Ended June 30) | Metric (in thousands) | 2020 | 2019 | Change ($) | 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 | $(1,730) | (26.3)% | Condensed Consolidated Balance Sheets Consolidated Balance Sheet (as of June 30, 2020 vs. September 30, 2019) | Metric (in thousands) | June 30, 2020 | Sept 30, 2019 | Change ($) | 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 | $74,477 | NM | Condensed Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows (Nine Months Ended June 30) | Metric (in thousands) | 2020 | 2019 | Change ($) | 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 | $(29,009) | (34.5)% | Condensed Consolidated Statements of Stockholders' Equity Changes in Stockholders' Equity (Nine Months Ended June 30, 2020) | Metric (in thousands) | Sept 30, 2019 | June 30, 2020 | Change ($) | | :-------------------- | :------------ | :------------ | :--------- | | 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 earnings18 - Other comprehensive income of $857 thousand was recognized, reducing the accumulated other comprehensive loss18 Notes to Condensed Consolidated Financial Statements 1. Basis of Presentation and Significant Accounting Policies 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 liabilities2324 - The adoption of the new lease standard did not have a significant impact on the condensed consolidated results of operations or cash flows24 - The extent of the COVID-19 pandemic's effect on operational and financial performance cannot be reasonably estimated due to inherent uncertainties22 2. Acquisitions 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 segment2829 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 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 prices41 4. Selected Balance Sheet Data 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 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 thresholds4647 6. Goodwill and Other Intangible Assets, Net 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 year48 - 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 impairment54 7. Sale of Building 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, 201856 - Recorded a gain of $4.4 million ($3.4 million net of tax) from the sale in the first quarter of fiscal 201956 8. Debt 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 Loan57 - Weighted average interest rate on the Credit Facility was 1.1% at June 30, 202058 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, 202065 - The company was in compliance with all debt covenants at June 30, 202063 9. Segment Information 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 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 months7273 11. Income Taxes 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 acquisition75 - 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 months77 12. Product Warranty Obligation 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 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 million84 - 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, 202084 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 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 segment87 - 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 202087 15. Contingencies 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 damages88 - The company intends to defend against DimOnOff's claims, and the likelihood or amount of any potential loss cannot be assessed at this time88 16. Stock-Based Compensation 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 years103 - Total unrecognized compensation cost for non-vested restricted stock units was $10.7 million, expected to be recognized over approximately 1.6 years105 17. Subsequent Event 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, Utah106 - The new lease, commencing January 2021, has an initial annual base rent of approximately $438,360, escalating 2% annually106 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 $10.5 million Safe Harbor Statement - The report contains forward-looking statements subject to risks and uncertainties, including those related to the COVID-19 pandemic, competitive markets, technological changes, reliance on third parties, product development delays, and acquisition integration110111 Presentation of Non-GAAP Financial Measures - The company uses non-GAAP financial measures, including adjusted net income, adjusted net income per diluted share, and Adjusted EBITDA, to provide additional insights into core operating results and financial performance112115 - Adjusted EBITDA is defined as EBITDA adjusted for stock-based compensation, acquisition-related expenses, restructuring charges, and gains from the disposition of the former corporate headquarters115 Critical Accounting Policies and Estimates - The preparation of financial statements requires significant estimates and judgments, which are based on historical experience and reasonable assumptions116 - A detailed description of critical accounting policies and estimates is provided in the Annual Report on Form 10-K for fiscal year ended September 30, 2019117 Overview - Digi International Inc. is a global provider of business and mission-critical Internet-of-Things (IoT) connectivity products, services, and solutions, operating in two segments: IoT Products & Services and IoT Solutions118 - Key operating objectives for fiscal 2020 included delivering growth in IoT Products & Services, seeking strategic growth through acquisitions (like Opengear), and optimizing reduced fixed cost footprint123 - Cost reduction actions implemented due to COVID-19 include suspending new hires, decreasing travel, reducing capital budget, eliminating 21 positions, suspending 401(K) matching, and reducing executive cash compensation124 Key Financial Metrics (Q3 Fiscal 2020 vs. Q3 Fiscal 2019) | Metric | Q3 FY2020 ($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 - COVID-19 has led to disparate impacts on customer categories, with some product demand increasing while industries like entertainment, hospitality, and retail experienced significant declines130 - The company expects sales volatility due to changing fiscal health and operational needs of customers, but the exact overall impact on demand remains uncertain132 - Generated $31.8 million in operating cash flow during Q3 fiscal 2020 and held $55 million in cash, with targeted steps taken to lower operating expenses133 - Supply chain has not been materially restrained by restrictions or border closures, but severe restrictions could negatively impact operations134 - Proactive mitigation efforts include remote work, increased IT networking, social distancing, dedicated shifts, mask requirements, restricted travel, and enhanced office cleaning136138 Consolidated Results of Operations Consolidated Results of Operations (Three Months Ended June 30) | Metric (in thousands) | 2020 ($) | 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 ($) | 2019 (%) | Change (%) | | :-------------------- | :------- | :------- | :------- | :------- | :--------- | | Revenue | 206,102 | 100.0 | 189,243 | 100.0 | 8.9 | | Cost of Sales | 99,648 | 48.3 | 100,803 | 53.3 | (1.1) | | Gross Profit | 106,454 | 51.7 | 88,440 | 46.7 | 20.4 | | Operating Expenses | 100,358 | 48.7 | 80,476 | 42.5 | 24.7 | | Operating Income | 6,096 | 3.0 | 7,964 | 4.2 | (23.5) | | Net Income | 3,978 | 1.9 | 7,672 | 4.1 | (48.1) | Revenue by Segment Revenue by Segment (Three Months Ended June 30) | Segment | 2020 ($K) | 2020 (%) | 2019 ($K) | 2019 (%) | Change (%) | | :---------------------- | :-------- | :------- | :-------- | :------- | :--------- | | IoT Products & Services | 63,472 | 90.2 | 50,510 | 82.6 | 25.7 | | IoT Solutions | 6,866 | 9.8 | 10,656 | 17.4 | (35.6) | | Total Revenue | 70,338 | 100.0 | 61,166 | 100.0 | 15.0 | - IoT Products & Services revenue increased by 25.7% for the three months ended June 30, 2020, driven by the Opengear acquisition, increased sales of embedded modules to significant customers, and higher support services revenue141 - IoT Solutions revenue decreased by 35.6% for the three months ended June 30, 2020, primarily due to delays in customer rollouts and equipment upgrades caused by COVID-19, and non-recurring large enterprise deals in the prior year145 Cost of Goods Sold and Gross Profit by Segment Gross Profit by Segment (Three Months Ended June 30) | Segment | 2020 ($K) | 2020 (%) | 2019 ($K) | 2019 (%) | Basis Point Inc. (Decr.) | | :---------------------- | :-------- | :------- | :-------- | :------- | :----------------------- | | IoT Products & Services | 33,899 | 53.4 | 23,058 | 45.7 | 770 | | IoT Solutions | 3,450 | 50.2 | 5,270 | 49.5 | 70 | | Total Gross Profit | 37,349 | 53.1 | 28,328 | 46.3 | 680 | - IoT Products & Services gross profit margin increased by 770 basis points for the three months ended June 30, 2020, primarily due to incremental gross profit from the higher-margin Opengear acquisition and increased sales of support services148 - IoT Solutions gross profit margin increased by 70 basis points for the three months ended June 30, 2020, driven by one-time non-recurring revenue and increased recurring subscription revenue, which typically have higher gross margins152153 Operating Expenses Operating Expenses (Three Months Ended June 30) | Expense Category (in thousands) | 2020 ($) | 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 expenses153154 - This increase was partially offset by a $1.1 million decrease in trade shows and related travel expenses due to COVID-19 restrictions155 Other (Expense) Income, Net Other (Expense) Income, Net (Three Months Ended June 30) | Metric (in thousands) | 2020 ($) | 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 income159 - 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 $0.3 million reduction in interest income160 Income Taxes - Refer to Note 11 to the condensed consolidated financial statements for a detailed discussion of income taxes161 Non-GAAP Financial Information Reconciliation of Net Income to Adjusted EBITDA (Three Months Ended June 30) | Metric (in thousands) | 2020 ($) | 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 ($) | 2019 EPS | | :-------------------------------------- | :------- | :------- | :------- | :------- | | Net Income | 1,766 | 0.06 | 1,648 | 0.06 | | Amortization | 4,123 | 0.14 | 2,060 | 0.07 | | Stock-based compensation | 1,882 | 0.06 | 1,473 | 0.05 | | Acquisition expense | 463 | 0.02 | 54 | 0.00 | | Adjusted Net Income | 6,573 | 0.23 | 4,618 | 0.16 | Liquidity and Capital Resources - The company primarily finances operations and capital expenditures through funds generated from operations, supplemented by a credit facility167 Condensed Consolidated Statement of Cash Flows Summary (Nine Months Ended June 30) | Activity (in thousands) | 2020 | 2019 | Change ($) | | :---------------------- | :--------- | :------- | :---------- | | 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 year171 - 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 Contractual Obligations 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 payments174 Recently Issued Accounting Pronouncements - For information on new accounting pronouncements, refer to Note 1 to the condensed consolidated financial statements175 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 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 - 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 rates179 - A 25 basis point change in interest rates would increase or decrease annual interest expense by $0.4 million179 Foreign Currency Risk - 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 statements180 - For the nine months ended June 30, 2020, foreign customer revenue was approximately $48.6 million, with $1.6 million denominated in foreign currency181 - 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' equity182 Credit Risk - The company has exposure to credit risk related to its accounts receivable portfolio, managed through regular monitoring of customer financial status and credit limits183 ITEM 4. Controls and Procedures 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 - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2020186 Changes in Internal Control Over Financial Reporting - 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 assets187 - Opengear will be included in the internal control assessment starting in the first quarter of fiscal 2021187 - No other material changes in internal control over financial reporting occurred during the nine months ended June 30, 2020188 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 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 contingencies189 ITEM 1A. Risk Factors 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 continuity190191 - A sustained decline in stock price, significant decrease in profits, or failure of acquired businesses to meet anticipated results could lead to goodwill impairment192193195 - Failure to comply with financial and other covenants under the $150 million credit facility could result in a default, materially adversely affecting the business196198199 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 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 units200 ITEM 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - No defaults upon senior securities were reported201 ITEM 4. Mine Safety Disclosures The company has no mine safety disclosures to report - No mine safety disclosures were reported202 ITEM 5. Other Information No other information was reported in this section - No other information was reported203 ITEM 6. Exhibits 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)206207 - The financial statements are filed in iXBRL format207
Digi International(DGII) - 2020 Q3 - Quarterly Report