Digi International(DGII) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the company's unaudited interim financial statements and management's discussion and analysis of financial condition and results of operations ITEM 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including statements of operations, balance sheets, cash flows, and equity, along with detailed explanatory notes Condensed Consolidated Statements of Operations This statement details the company's revenues, costs, and profits over specific periods, culminating in net income and earnings per share | Metric (in thousands) | Three months ended March 31, 2021 | Three months ended March 31, 2020 | Six months ended March 31, 2021 | Six months ended March 31, 2020 | |:----------------------|:----------------------------------|:----------------------------------|:--------------------------------|:--------------------------------| | Revenue | $77,301 | $73,447 | $150,447 | $135,764 | | Gross profit | $40,457 | $38,641 | $81,476 | $69,105 | | Operating income | $3,370 | $3,724 | $3,224 | $3,241 | | Net income | $2,928 | $2,004 | $2,621 | $2,212 | | Basic EPS | $0.09 | $0.07 | $0.09 | $0.08 | | Diluted EPS | $0.09 | $0.07 | $0.08 | $0.07 | Condensed Consolidated Statements of Comprehensive Income (Loss) This statement presents net income and other comprehensive income items, such as foreign currency translation adjustments, to arrive at total comprehensive income or loss | Metric (in thousands) | Three months ended March 31, 2021 | Three months ended March 31, 2020 | Six months ended March 31, 2021 | Six months ended March 31, 2020 | |:----------------------------------|:----------------------------------|:----------------------------------|:--------------------------------|:--------------------------------| | Net income | $2,928 | $2,004 | $2,621 | $2,212 | | Foreign currency translation adj. | $(267) | $(2,484) | $1,605 | $176 |\n| Comprehensive income (loss) | $2,661 | $(480) | $4,226 | $2,388 | Condensed Consolidated Balance Sheets This statement provides a snapshot of the company's assets, liabilities, and stockholders' equity at specific points in time | Metric (in thousands) | March 31, 2021 | September 30, 2020 | |:----------------------------------|:---------------|:-------------------|\n| Total current assets | $234,431 | $170,058 |\n| Total assets | $607,503 | $528,682 |\n| Total current liabilities | $56,861 | $61,230 |\n| Total liabilities | $148,351 | $157,182 |\n| Total stockholders' equity | $459,152 | $371,500 | Condensed Consolidated Statements of Cash Flows This statement categorizes cash inflows and outflows from operating, investing, and financing activities over specific periods | Metric (in thousands) | Six months ended March 31, 2021 | Six months ended March 31, 2020 | |:----------------------------------------------------|:--------------------------------|:--------------------------------|\n| Net cash provided by (used in) operating activities | $21,297 | $(12,683) |\n| Net cash used in investing activities | $(8,382) | $(136,532) |\n| Net cash provided by financing activities | $59,997 | $112,931 |\n| Net increase (decrease) in cash and cash equivalents| $73,060 | $(34,706) |\n| Cash and cash equivalents, end of period | $127,189 | $58,086 | Condensed Consolidated Statements of Stockholders' Equity This statement details changes in the company's equity accounts, including common stock, retained earnings, and accumulated other comprehensive income - Total stockholders' equity increased from $371.5 million at September 30, 2020, to $459.2 million at March 31, 2021, primarily driven by the issuance of common stock (net of offering expenses) totaling $73.8 million and net income of $2.6 million[18] Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations and additional information supporting the condensed consolidated financial statements 1. Basis of Presentation and Significant Accounting Policies This note outlines the basis for preparing the interim financial statements and the significant accounting policies applied - The unaudited condensed consolidated financial statements are prepared in accordance with SEC rules for interim financial statements and U.S. GAAP, reflecting normal recurring adjustments. The company adopted ASU 2018-13 (Fair Value Measurement) and ASU 2016-13 (Credit Losses) in Q1 FY2021, neither of which had a material impact[21][24][25] - The impact of the COVID-19 pandemic on operational and financial performance remains uncertain and cannot be reasonably estimated, depending on future developments like duration, severity, and economic activity resumption[23] 2. Acquisitions This note details recent business acquisitions, including purchase price and expected impact on segments - On March 26, 2021, Digi International Inc. acquired Haxiot, Inc., a provider of LPWA wireless technology, for $7.1 million cash and up to $8.0 million in contingent earn-out payments. This acquisition is expected to enhance the IoT Products & Services segment[27][28][29] - An out-of-period adjustment related to the Opengear, Inc. acquisition (December 2019) resulted in an $0.8 million increase to goodwill during Q1 FY2021, deemed immaterial to current or prior financial statements[30][31] 3. Earnings Per Share This note provides the calculation of basic and diluted earnings per share, including potentially dilutive securities | Metric (in thousands, except per share data) | Three months ended March 31, 2021 | Three months ended March 31, 2020 | Six months ended March 31, 2021 | Six months ended March 31, 2020 | |:---------------------------------------------|:----------------------------------|:----------------------------------|:--------------------------------|:--------------------------------|\n| Net income | $2,928 | $2,004 | $2,621 | $2,212 |\n| Basic weighted average shares | 30,900 | 28,881 | 30,129 | 28,673 |\n| Diluted weighted average shares | 32,223 | 29,486 | 31,436 | 29,585 |\n| Basic EPS | $0.09 | $0.07 | $0.09 | $0.08 |\n| Diluted EPS | $0.09 | $0.07 | $0.08 | $0.07 | - Potentially dilutive shares not included in diluted EPS calculations were 37,248 for both three and six months ended March 31, 2021, and 713,980 and 592,780 for the respective periods in 2020, due to exercise prices exceeding market prices[35] 4. Selected Balance Sheet Data This note presents selected components of the balance sheet, such as accounts receivable and inventories | Metric (in thousands) | March 31, 2021 | September 30, 2020 | |:----------------------------------|:---------------|:-------------------|\n| Accounts receivable, net | $44,108 | $59,227 |\n| Inventories | $51,407 | $51,568 |\n| - Raw materials | $14,478 | $14,009 |\n| - Finished goods | $36,929 | $37,559 | 5. Fair Value Measurements This note describes the fair value measurements of financial instruments and contingent consideration | Liabilities (in thousands) | March 31, 2021 Total Fair Value | September 30, 2020 Total Fair Value | |:--------------------------------------------------|:--------------------------------|:------------------------------------|\n| Preliminary contingent consideration on acquired business | $8,000 | $4,228 | - The company made final earn-out payments for the Bluenica acquisition ($2.9 million) and Accelerated acquisition ($2.4 million) during Q3 FY2020. The final installment of $10.0 million for the Opengear acquisition was paid in Q2 FY2021[39][40][41] - A preliminary contingent consideration of $8.0 million was recorded for the Haxiot acquisition at March 31, 2021, based on 100% probability of achieving revenue thresholds, subject to final purchase accounting[42][43] 6. Goodwill and Other Intangible Assets, Net This note provides details on the company's goodwill and amortizable intangible assets, including changes and impairment assessments | Amortizable Intangible Assets (in thousands) | March 31, 2021 Net | September 30, 2020 Net | |:---------------------------------------------|:-------------------|:-----------------------|\n| Purchased and core technology | $18,384 | $20,529 |\n| Patents and trademarks | $8,621 | $9,301 |\n| Customer relationships | $86,417 | $91,268 |\n| Non-compete agreements | $120 | $150 |\n| Total | $113,542 | $121,248 | - Amortization expense was $3.9 million for Q2 FY2021 (down from $4.1 million in Q2 FY2020) and $7.9 million for H1 FY2021 (up from $6.6 million in H1 FY2020)[45] | Goodwill by Segment (in thousands) | September 30, 2020 | March 31, 2021 | |:-----------------------------------|:-------------------|:---------------|\n| IoT Products & Services | $160,365 | $177,073 |\n| IoT Solutions | $49,770 | $50,460 |\n| Total Goodwill | $210,135 | $227,533 | - Goodwill increased by $15.1 million due to the Haxiot acquisition and $0.8 million from an Opengear adjustment. The company performed a qualitative assessment as of March 31, 2021, concluding no impairment or triggering events[46] 7. Indebtedness This note outlines the company's debt obligations, including credit facilities, interest rates, and covenant compliance - On March 15, 2021, Digi entered into an amended $200 million senior secured revolving credit facility, replacing the prior $150 million facility (which included a $50 million term loan and $100 million revolving loan). The new Revolving Loan bears a variable interest rate of LIBOR plus 1.25% to 3.25% and matures on March 15, 2026[54][55][56] | Long-term Debt Maturities (in thousands) | Amount | |:-----------------------------------------|:-------|\n| 2026 | $48,118|\n| Total long-term debt | $48,118| - As of March 31, 2021, the company was in compliance with all debt covenants, which include maintaining specific financial ratios (net leverage ratio and minimum fixed charge ratio)[58] 8. Stockholders' Equity This note details changes in stockholders' equity, including common stock issuances and their proceeds - In March 2021, Digi sold 4,025,000 shares of common stock at $19.50 per share, generating net proceeds of $73.8 million. The proceeds are intended for working capital, general corporate purposes, and potential future acquisitions[59] 9. Segment Information This note provides financial information for the company's reportable segments, including revenue and operating income - Digi operates with two reportable segments: IoT Products & Services and IoT Solutions. Effective October 7, 2020, the IoT Products & Services segment was reorganized into four operating segments: Cellular Routers, Console Servers, OEM Solutions, and Infrastructure Management[60][61][62][63][65] | Segment Revenue (in thousands) | Three months ended March 31, 2021 | Three months ended March 31, 2020 | Six months ended March 31, 2021 | Six months ended March 31, 2020 | |:-------------------------------|:----------------------------------|:----------------------------------|:--------------------------------|:--------------------------------|\n| IoT Products & Services | $65,632 | $66,890 | $127,412 | $121,503 |\n| IoT Solutions | $11,669 | $6,557 | $23,035 | $14,261 |\n| Total revenue | $77,301 | $73,447 | $150,447 | $135,764 | | Segment Operating Income (Loss) (in thousands) | Three months ended March 31, 2021 | Three months ended March 31, 2020 | Six months ended March 31, 2021 | Six months ended March 31, 2020 | |:-----------------------------------------------|:----------------------------------|:----------------------------------|:--------------------------------|:--------------------------------|\n| IoT Products & Services | $4,583 | $8,362 | $5,852 | $12,759 |\n| IoT Solutions | $(1,213) | $(4,638) | $(2,628) | $(9,518) |\n| Total operating income | $3,370 | $3,724 | $3,224 | $3,241 | 10. Revenue This note disaggregates revenue by geographic location and timing of recognition, along with remaining performance obligations | Revenue by Geographic Location (in thousands) | Three months ended March 31, 2021 | Three months ended March 31, 2020 | Six months ended March 31, 2021 | Six months ended March 31, 2020 | |:----------------------------------------------|:----------------------------------|:----------------------------------|:--------------------------------|:--------------------------------|\n| North America | $56,423 | $57,374 | $110,441 | $104,910 |\n| Europe, Middle East & Africa | $11,690 | $9,885 | $22,226 | $18,401 |\n| Rest of world | $9,188 | $6,188 | $17,780 | $12,453 |\n| Total revenue | $77,301 | $73,447 | $150,447 | $135,764 | | Revenue by Timing of Recognition (in thousands) | Three months ended March 31, 2021 | Three months ended March 31, 2020 | Six months ended March 31, 2021 | Six months ended March 31, 2020 | |:------------------------------------------------|:----------------------------------|:----------------------------------|:--------------------------------|:--------------------------------|\n| Transferred at a point in time | $69,144 | $66,765 | $133,332 | $123,065 |\n| Transferred over time | $8,157 | $6,682 | $17,115 | $12,699 |\n| Total revenue | $77,301 | $73,447 | $150,447 | $135,764 | - As of March 31, 2021, approximately $12.8 million of revenue is expected to be recognized from remaining performance obligations for subscription contracts, with $8.1 million expected within the next twelve months[71] 11. Income Taxes This note discusses the company's income tax expense or benefit, including unrecognized tax benefits - The company reported an income tax benefit of $0.2 million for the six months ended March 31, 2021, primarily due to $0.8 million in excess tax benefits from stock compensation. This compares to a $1.0 million benefit in the prior year, which included $1.1 million from stock compensation and a deferred tax rate adjustment from the Opengear acquisition[73][74] - Unrecognized tax benefits totaled $2.546 million as of March 31, 2021, with $2.4 million impacting the effective tax rate. A decrease of approximately $0.1 million is expected over the next 12 months[75] 12. Product Warranty Obligation This note details the changes in the company's product warranty accrual over the reporting period | Product Warranty Accrual (in thousands) | Balance at January 1, 2021 | Warranties issued | Settlements made | Balance at March 31, 2021 | |:----------------------------------------|:---------------------------|:------------------|:-----------------|:--------------------------|\n| Three months ended March 31, 2021 | $965 | $66 | $(108) | $923 |\n| Six months ended March 31, 2021 | $942 | $189 | $(208) | $923 | 13. Leases This note provides information on the company's operating leases, including lease assets, liabilities, and terms - All leases are operating leases, primarily for office space. Lease assets and liabilities are recognized for terms over twelve months, based on the present value of future payments using a collateralized incremental borrowing rate[77][78] | Lease Information (in thousands) | March 31, 2021 | September 30, 2020 | |:---------------------------------|:---------------|:-------------------|\n| Total lease assets | $16,267 | $14,334 |\n| Total lease liabilities | $21,556 | $18,720 | - The weighted average remaining lease term for operating leases was 6.4 years, and the weighted average discount rate was 4.5% as of March 31, 2021[82] 14. Restructuring This note describes restructuring activities, including charges for employee termination costs and position eliminations - On October 7, 2020, the Board approved a reorganization of the IoT Products & Services segment, resulting in a $0.9 million charge for employee termination costs and the elimination of 19 positions in the first half of fiscal 2021[84] | Q1 FY2021 Restructuring (in thousands) | Employee Termination Costs | |:---------------------------------------|:---------------------------|\n| Balance at September 30, 2020 | $0 |\n| Restructuring charge | $894 |\n| Payments | $(599) |\n| Foreign currency fluctuation | $(39) |\n| Balance at March 31, 2021 | $256 | 15. Commitments and Contingencies This note discloses the company's commitments and potential liabilities arising from legal proceedings and other business activities - The company settled a lawsuit with DimOnOff Inc. in Q2 FY2021, agreeing to provide reduced product pricing instead of a cash payment, for an amount substantially lower than the CAD 1.0 million claimed[86][88] - The company is subject to various claims and litigation in the normal course of business, with no assurance that such claims will not materially adversely affect its business, liquidity, or financial condition[89] 16. Stock-Based Compensation This note details the company's stock-based compensation plans, expense, and unrecognized compensation costs - Stock-based awards are granted under the 2021 Omnibus Incentive Plan, authorizing up to 1,400,000 common shares. As of March 31, 2021, 1,352,093 shares were available for future grants[90][91] | Stock-Based Compensation Expense (in thousands) | Six months ended March 31, 2021 | Six months ended March 31, 2020 | |:------------------------------------------------|:--------------------------------|:--------------------------------|\n| Cost of sales | $171 | $142 |\n| Sales and marketing | $1,148 | $1,060 |\n| Research and development | $503 | $625 |\n| General and administrative | $2,400 | $1,614 |\n| Total stock-based compensation before income taxes | $4,222 | $3,441 | - Total unrecognized compensation cost for non-vested stock options was $7.3 million (expected recognition over 2.9 years) and for non-vested stock units was $12.2 million (expected recognition over 1.6 years) as of March 31, 2021[100][101] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of the company's financial condition and operational results, covering business segments, key objectives, revenue, expenses, acquisitions, financing, COVID-19 impacts, non-GAAP measures, liquidity, and contractual obligations Safe Harbor Statement This statement cautions readers about forward-looking statements, highlighting inherent risks and uncertainties - The report contains forward-looking statements identified by words like 'believe,' 'anticipate,' 'intend,' and 'expect,' which are subject to risks and uncertainties, including those related to COVID-19, global economic volatility, supply chain pressures, competition, and product development[104][105] Critical Accounting Policies and Estimates This section discusses accounting policies and estimates requiring significant management judgment, which can impact reported financial amounts - The preparation of financial statements requires management to make estimates and judgments affecting reported amounts, contingent assets/liabilities, and acquisition values, based on historical experience and reasonable assumptions. Actual results may differ from these estimates[107] Overview This section provides a general description of the company's business, its operating segments, and key strategic objectives - Digi International Inc. is a global provider of IoT connectivity products, services, and solutions, operating in two segments: IoT Products & Services (OEMs, enterprise, government solutions) and IoT Solutions (wireless temperature and condition monitoring, marketed as SmartSense by Digi)[110][111][112] - Key operating objectives for fiscal 2021 include continued growth of SmartSense by Digi, growth in IoT Products & Services through new products and recurring revenue, and identification of strategic acquisitions[114] Q2 FY2021 Key Financial Metrics | Metric | Q2 FY2021 | Q2 FY2020 | Change (YoY) | |:-------------------------------------|:--------------------|:--------------------|:-------------|\n| Consolidated Revenue | $77.3 million | $73.4 million | +5.2% |\n| Product Revenue | $66.9 million | $65.6 million | +2.0% |\n| Services Revenue | $10.4 million | $7.8 million | +32.9% |\n| Gross Margin | 52.3% | 52.6% | -0.3 pp |\n| Net Income | $2.9 million | $2.0 million | +46.1% |\n| Diluted EPS | $0.09 | $0.07 | +28.6% |\n| Adjusted Net Income | $8.6 million | $7.5 million | +14.7% |\n| Adjusted Diluted EPS | $0.27 | $0.25 | +8.0% |\n| Adjusted EBITDA | $11.7 million | $10.8 million | +8.3% |\n| Adjusted EBITDA as % of Total Revenue| 15.1% | 14.7% | +0.4 pp | Acquisition of Haxiot, Inc. This section details the acquisition of Haxiot, Inc., including the purchase price and expected integration - On March 26, 2021, Digi acquired Haxiot, Inc. for $7.1 million cash and up to $8.0 million in contingent consideration. The acquisition's impact on Q2 FY2021 results was immaterial, with full integration into the IoT Products & Services segment expected in Q3 FY2021[120] Public Offering of Common Stock This section describes the public offering of common stock and the net proceeds generated - During Q2 FY2021, the company sold 4,025,000 shares of common stock, generating net proceeds of $73.8 million[121] Amended and Restated Credit Agreement This section outlines the terms of the company's new $200 million revolving loan facility - On March 15, 2021, Digi entered into a new $200 million revolving loan facility with BMO Harris Bank N.A., replacing its previous syndicated credit agreement[122] Potential Impacts of COVID-19 on Our Business and Operations This section discusses the ongoing and potential impacts of the COVID-19 pandemic on the company's market, supply chain, and operations - The COVID-19 pandemic continues to create significant uncertainty, impacting market outlook, supply chains, and operating costs. While some demand has increased, others remain depressed. Significant shortages of electronic components and increased shipping costs are expected to negatively impact operating results in upcoming quarters[123][126] - The company has taken steps to lower operating expenses and has not experienced material adverse changes to its balance sheet assets or internal controls. Travel restrictions have had minor impacts on operations, with some increase in business travel recently[124][125][129][130] Consolidated Results of Operations This section provides a consolidated analysis of the company's revenues, gross profit, operating expenses, and net income | Metric (in thousands) | Three months ended March 31, 2021 | Three months ended March 31, 2020 | % incr. (decr.) | Six months ended March 31, 2021 | Six months ended March 31, 2020 | % incr. (decr.) | |:----------------------|:----------------------------------|:----------------------------------|:----------------|:--------------------------------|:--------------------------------|:----------------|\n| Revenue | $77,301 | $73,447 | 5.2% | $150,447 | $135,764 | 10.8% |\n| Gross profit | $40,457 | $38,641 | 4.7% | $81,476 | $69,105 | 17.9% |\n| Operating expenses | $37,087 | $34,917 | 6.2% | $78,252 | $65,864 | 18.8% |\n| Operating income | $3,370 | $3,724 | (9.5)% | $3,224 | $3,241 | 0.5% |\n| Net income | $2,928 | $2,004 | 46.1% | $2,621 | $2,212 | 18.5% | Revenue by Segment This section analyzes revenue performance across the company's IoT Products & Services and IoT Solutions segments | Segment Revenue (in thousands) | Three months ended March 31, 2021 | Three months ended March 31, 2020 | % incr. (decr.) | Six months ended March 31, 2021 | Six months ended March 31, 2020 | % incr. (decr.) | |:-------------------------------|:----------------------------------|:----------------------------------|:----------------|:--------------------------------|:--------------------------------|:----------------|\n| IoT Products & Services | $65,632 | $66,890 | (1.9)% | $127,412 | $121,503 | 4.9% |\n| IoT Solutions | $11,669 | $6,557 | 78.0% | $23,035 | $14,261 | 61.5% |\n| Total revenue | $77,301 | $73,447 | 5.2% | $150,447 | $135,764 | 10.8% | - IoT Products & Services revenue decreased 1.9% in Q2 FY2021 due to decreased cellular router sales in the government transit sector, partially offset by increased embedded portfolio sales to a medical device customer. For the six months, it increased 4.9% due to Opengear acquisition and embedded/Xbee product sales, partially offset by cellular router declines[133][134][136] - IoT Solutions revenue increased 78.0% in Q2 FY2021 and 61.5% for the six months, driven by new hardware installations and increased recurring subscription revenue, with nearly 77,000 sites serviced as of March 31, 2021[137] Cost of Goods Sold and Gross Profit by Segment This section examines the cost of goods sold and gross profit margins for each of the company's operating segments | Segment Gross Profit (in thousands) | Three months ended March 31, 2021 | Three months ended March 31, 2020 | Basis point inc. (decr.) | Six months ended March 31, 2021 | Six months ended March 31, 2020 | Basis point inc. (decr.) | |:------------------------------------|:----------------------------------|:----------------------------------|:-------------------------|:--------------------------------|:--------------------------------|:-------------------------|\n| IoT Products & Services | $34,457 (52.5%) | $35,460 (53.0%) | (50) | $70,136 (55.0%) | $62,111 (51.1%) | 390 |\n| IoT Solutions | $6,000 (51.4%) | $3,181 (48.5%) | 290 | $11,340 (49.2%) | $6,994 (49.0%) | 20 |\n| Total gross profit | $40,457 (52.3%) | $38,641 (52.6%) | (30) | $81,476 (54.2%) | $69,105 (50.9%) | 330 | - IoT Products & Services gross profit margin decreased 50 basis points in Q2 FY2021 due to increased material overhead expenses from global supply chain challenges. For the six months, it increased 390 basis points due to incremental gross profit from the Opengear acquisition and favorable cellular router product mix[139][140] - IoT Solutions gross profit margin increased 290 basis points in Q2 FY2021 and 20 basis points for the six months, primarily driven by increased recurring subscription revenue, which typically has higher gross margins[142][143][145] Operating Expenses This section details the company's sales and marketing, research and development, general and administrative, and restructuring expenses | Operating Expenses (in thousands) | Three months ended March 31, 2021 | Three months ended March 31, 2020 | % incr. (decr.) | Six months ended March 31, 2021 | Six months ended March 31, 2020 | % incr. (decr.) | |:----------------------------------|:----------------------------------|:----------------------------------|:----------------|:--------------------------------|:--------------------------------|:----------------|\n| Sales and marketing | $15,437 | $14,556 | 6.1% | $30,361 | $26,617 | 14.1% |\n| Research and development | $11,355 | $11,532 | (1.5)% | $22,448 | $21,863 | 2.7% |\n| General and administrative | $10,134 | $8,791 | 15.3% | $24,549 | $17,346 | 41.5% |\n| Restructuring charge | $161 | $38 | NM | $894 | $38 | NM |\n| Total operating expenses | $37,087 | $34,917 | 6.2% | $78,252 | $65,864 | 18.8% | - The $2.2 million increase in Q2 FY2021 operating expenses was driven by a $1.7 million increase in compensation-related expenses (bonus/commission) and increased professional fees (M&A), partially offset by a $0.9 million decrease in travel expenses[147][148] - The $12.4 million increase in H1 FY2021 operating expenses was primarily due to a $5.9 million increase in earn-out expenses (Opengear), a $5.3 million increase in compensation-related expenses (Opengear salaries, commissions, bonuses), and incremental amortization/restructuring charges, partially offset by a $1.8 million decrease in travel expenses[149][151] Operating Income This section analyzes the company's consolidated and segment-specific operating income performance - Consolidated operating income decreased 9.5% to $3.4 million in Q2 FY2021 from $3.7 million in Q2 FY2020, while remaining flat at $3.2 million for both H1 FY2021 and H1 FY2020[152] - IoT Products & Services operating income decreased 45.2% to $4.6 million in Q2 FY2021 and 54.1% to $5.9 million in H1 FY2021. IoT Solutions operating loss improved by 73.8% to $(1.2) million in Q2 FY2021 and 72.4% to $(2.6) million in H1 FY2021[153][154] Other Expense, Net This section reports on non-operating income and expenses, including interest income, interest expense, and other net items | Other Expense, Net (in thousands) | Three months ended March 31, 2021 | Three months ended March 31, 2020 | Six months ended March 31, 2021 | Six months ended March 31, 2020 | |:----------------------------------|:----------------------------------|:----------------------------------|:--------------------------------|:--------------------------------|\n| Interest income | $1 | $50 | $1 | $281 |\n| Interest expense | $(246) | $(1,734) | $(648) | $(2,166) |\n| Other expense, net | $77 | $89 | $(115) | $(147) |\n| Total other expense, net | $(168) | $(1,595) | $(762) | $(2,032) | - Total other expense, net, improved by $1.4 million in Q2 FY2021 and $1.3 million in H1 FY2021, primarily due to decreased interest expense from debt paydowns and refinancing of the term loan with a revolving loan[155] Income Taxes This section refers to detailed disclosures on income taxes in the financial statement notes - Refer to Note 11 for detailed discussion on income taxes[156] Non-GAAP Financial Information This section presents non-GAAP financial measures used by management to assess core operating performance - The company uses non-GAAP measures like adjusted net income, adjusted net income per diluted share, and Adjusted EBITDA to evaluate core operating results and financial performance, excluding significant non-cash or non-recurring items such as intangible amortization, stock-based compensation, and acquisition-related expenses[157][161] Reconciliation of Net Income to Adjusted EBITDA | Metric (in thousands) | Three months ended March 31, 2021 | Three months ended March 31, 2020 | Six months ended March 31, 2021 | Six months ended March 31, 2020 | |:------------------------------------------|:----------------------------------|:----------------------------------|:--------------------------------|:--------------------------------|\n| Net income | $2,928 | $2,004 | $2,621 | $2,212 |\n| Interest expense, net | $245 | $1,684 | $647 | $1,885 |\n| Income tax benefit | $274 | $125 | $(159) | $(1,003) |\n| Depreciation and amortization | $5,002 | $5,236 | $10,052 | $8,853 |\n| Stock-based compensation | $2,477 | $1,841 | $4,222 | $3,441 |\n| Changes in fair value of contingent consideration | $0 | $(388) | $5,772 | $(129) |\n| Restructuring charge | $161 | $38 | $894 | $38 |\n| Acquisition expense | $609 | $249 | $624 | $2,155 |\n| Adjusted EBITDA | $11,696 | $10,789 | $24,673 | $17,452 | Reconciliation of Net Income to Adjusted Net Income | Metric (in thousands, except per share) | Three months ended March 31, 2021 | Three months ended March 31, 2020 | Six months ended March 31, 2021 | Six months ended March 31, 2020 | |:----------------------------------------|:----------------------------------|:----------------------------------|:--------------------------------|:--------------------------------|\n| Net income | $2,928 ($0.09) | $2,004 ($0.07) | $2,621 ($0.08) | $2,212 ($0.07) |\n| Amortization | $3,927 ($0.12) | $4,116 ($0.14) | $7,888 ($0.25) | $6,564 ($0.22) |\n| Stock-based compensation | $2,477 ($0.08) | $1,841 ($0.06) | $4,222 ($0.13) | $3,441 ($0.12) |\n| Acquisition expense | $609 ($0.02) | $249 ($0.01) | $624 ($0.02) | $2,155 ($0.07) |\n| Changes in fair value of contingent consideration | $0 ($0.00) | $(388) ($(0.01)) | $5,772 ($0.18) | $(129) ($0.00) |\n| Restructuring charge | $161 ($0.00) | $38 ($0.00) | $894 ($0.03) | $38 ($0.00) |\n| Interest expense related to acquisition | $248 ($0.01) | $1,709 ($0.06) | $650 ($0.02) | $2,125 ($0.07) |\n| Adjusted net income | $8,648 ($0.27) | $7,451 ($0.25) | $18,554 ($0.59) | $11,947 ($0.40) | Liquidity and Capital Resources This section discusses the company's cash position, financing activities, and ability to meet short-term and long-term obligations - The company primarily finances operations and capital expenditures through cash generated from operations. As of March 31, 2021, $151.9 million remained available under the $200 million revolving loan facility[168][169] - Cash flows from operating activities increased by $34.0 million for the six months ended March 31, 2021, primarily due to increased collections and non-cash adjustments. Investing activities increased by $128.1 million due to the prior year's Opengear acquisition, partially offset by the Haxiot acquisition[173][174] - Cash flows from financing activities decreased by $52.9 million, mainly due to lower proceeds from long-term debt compared to the prior year, additional debt payments, and acquisition earn-out payments, partially offset by $73.8 million from common stock issuance[175] Contractual Obligations This section outlines the company's future payment commitments under operating leases, contingent consideration, and debt | Contractual Obligations (in thousands) | Total | Less than 1 year | 1-3 years | 3-5 years | Thereafter | |:---------------------------------------|:--------|:-----------------|:----------|:----------|:-----------|\n| Operating leases | $26,221 | $3,629 | $6,456 | $5,575 | $10,561 |\n| Contingent consideration | $8,000 | $3,000 | $5,000 | $0 | $0 |\n| Revolving loan | $48,118 | $0 | $0 | $48,118 | $0 |\n| Interest on long-term debt | $4,903 | $981 | $1,961 | $1,961 | $0 |\n| Total | $87,242 | $7,610 | $13,417 | $55,654 | $10,561 | - The table excludes possible payments for uncertain tax positions ($2.6 million as of March 31, 2021) and royalties under license agreements, as reliable estimates for these cannot be made[176] Recently Issued Accounting Pronouncements This section refers to disclosures on new accounting standards and their impact on the financial statements - Refer to Note 1 to the condensed consolidated financial statements for information on new accounting pronouncements[177] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines the company's exposure to market risks, specifically related to fluctuations in interest rates and foreign currency exchange rates, and discusses its credit risk management Interest Rate Risk This section assesses the company's exposure to fluctuations in interest rates on its variable-rate debt - The company is exposed to interest rate fluctuations on its $48.1 million outstanding Revolving Loan, which bears a variable interest rate (LIBOR plus 1.25%-3.25%). A 25 basis point change in interest rates would impact interest expense by $0.1 million annually[180] Foreign Currency Risk This section discusses the company's exposure to foreign currency exchange rate fluctuations, particularly translation risk - The company is primarily exposed to foreign currency translation risk from its foreign subsidiaries, as most sales are USD-denominated. A 10% change in major foreign exchange rates (Euro, British Pound, Japanese Yen, Canadian Dollar) would result in a 0.7% increase or decrease in stockholders' equity[181][182] Credit Risk This section describes how the company manages credit risk associated with its accounts receivable - Credit risk related to accounts receivable is managed through regular monitoring of customer financial status, credit limits, and collaboration with sales and customer contacts[183] ITEM 4. Controls and Procedures This section details the evaluation of the company's disclosure controls and procedures and reports on any changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures This section reports on the effectiveness of the company's disclosure controls and procedures as assessed by management - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2021, ensuring timely and accurate reporting of information required under the Exchange Act[184] Changes in Internal Control Over Financial Reporting This section discloses any material changes in the company's internal control over financial reporting - There were no material changes in internal control over financial reporting during the three months ended March 31, 2021[185] PART II. OTHER INFORMATION This section contains additional information not included in the financial statements, such as legal proceedings and risk factors ITEM 1. Legal Proceedings This section incorporates by reference the legal proceedings disclosure from the notes to the condensed consolidated financial statements - The disclosure regarding legal proceedings is incorporated by reference from Note 15 to the condensed consolidated financial statements[186] ITEM 1A. Risk Factors This section updates the risk factors previously disclosed, highlighting increased risks related to manufacturing relationships, limited-source suppliers, and the impact of the COVID-19 pandemic on supply chains, component shortages, and shipping costs - No material changes in risk factors from the prior Annual Report on Form 10-K, except for increased risks related to manufacturing relationships and limited-source suppliers[188] - The COVID-19 pandemic has caused significant shortages of electronic components and increased shipping costs, which are expected to negatively impact the business in upcoming quarters, potentially materially[189] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds This section provides information on common stock purchases made by the company during the second quarter of fiscal 2021, specifically related to shares forfeited by employees for tax withholding | Period | Total Number of Shares Purchased | Average Price per Share | |:----------------------------------------|:---------------------------------|:------------------------|\n| January 1, 2021 - January 31, 2021 | 2,301 | $18.91 |\n| February 1, 2021 - February 28, 2021 | 16,359 | $23.01 |\n| March 1, 2021 - March 31, 2021 | 0 | $0.00 |\n| Total | 18,660 | $22.50 | - All reported shares were forfeited by employees to satisfy tax withholding obligations related to the vesting of restricted stock units[190] ITEM 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities - There were no defaults upon senior securities[191] ITEM 4. Mine Safety Disclosures This section states that there were no mine safety disclosures - There were no mine safety disclosures[192] ITEM 5. Other Information This section states that there is no other information to report - There is no other information to report[192] ITEM 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including the purchase agreement, organizational documents, credit agreement, stock award agreements, and certifications - Exhibits include the Purchase Agreement, Restated Certificate of Incorporation, Amended and Restated By-Laws, Amended and Restated Credit Agreement, various forms of stock award agreements (RSU, Stock Options, PSU), and certifications (CEO, CFO, Section 1350)[195][196] SIGNATURE This section contains the official signature and date of the authorized financial officer for the report Signature Details The report is duly signed on behalf of Digi International Inc. by James J. Loch, Senior Vice President, Chief Financial Officer, and Treasurer, on May 7, 2021 - The report was signed by James J. Loch, Senior Vice President, Chief Financial Officer and Treasurer, on May 7, 2021[201]