Company Quick10K Filing
Digi
Price13.71 EPS0
Shares29 P/E39
MCap391 P/FCF14
Net Debt-93 EBIT11
TEV299 TEV/EBIT27
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-08
10-Q 2019-12-31 Filed 2020-02-07
10-K 2019-09-30 Filed 2019-11-27
10-Q 2019-06-30 Filed 2019-08-09
10-Q 2019-03-31 Filed 2019-05-07
10-Q 2018-12-31 Filed 2019-02-05
10-K 2018-09-30 Filed 2018-11-21
10-Q 2018-06-30 Filed 2018-08-01
10-Q 2018-03-31 Filed 2018-05-01
10-Q 2017-12-31 Filed 2018-01-30
10-K 2017-09-30 Filed 2017-11-22
10-Q 2017-06-30 Filed 2017-08-01
10-Q 2017-03-31 Filed 2017-05-05
10-Q 2016-12-31 Filed 2017-01-31
10-K 2016-09-30 Filed 2016-12-13
10-Q 2016-06-30 Filed 2016-08-02
10-Q 2016-03-31 Filed 2016-05-03
10-Q 2015-12-31 Filed 2016-02-03
10-K 2015-09-30 Filed 2015-11-30
10-Q 2015-06-30 Filed 2015-07-31
10-Q 2015-03-31 Filed 2015-05-04
10-Q 2014-12-31 Filed 2015-02-02
10-K 2014-09-30 Filed 2014-12-11
10-Q 2014-06-30 Filed 2014-08-04
10-Q 2014-03-31 Filed 2014-05-02
10-Q 2013-12-31 Filed 2014-02-03
10-K 2013-09-30 Filed 2013-11-22
10-Q 2013-06-30 Filed 2013-08-02
10-Q 2013-03-31 Filed 2013-05-03
10-Q 2012-12-31 Filed 2013-02-01
10-K 2012-09-30 Filed 2012-11-21
10-Q 2012-03-31 Filed 2012-05-09
10-Q 2011-12-31 Filed 2012-02-08
10-K 2011-09-30 Filed 2011-11-29
10-Q 2011-06-30 Filed 2011-08-09
10-Q 2011-03-31 Filed 2011-05-06
10-Q 2010-12-31 Filed 2011-02-09
10-K 2010-09-30 Filed 2010-11-29
10-Q 2010-06-30 Filed 2010-08-09
10-Q 2010-03-31 Filed 2010-05-10
10-Q 2009-12-31 Filed 2010-02-05
8-K 2020-05-07
8-K 2020-04-28
8-K 2020-01-30
8-K 2020-01-29
8-K 2019-12-13
8-K 2019-11-14
8-K 2019-11-07
8-K 2019-08-08
8-K 2019-06-12
8-K 2019-05-10
8-K 2019-05-02
8-K 2019-01-31
8-K 2019-01-12
8-K 2018-11-15
8-K 2018-07-26
8-K 2018-06-11
8-K 2018-04-26
8-K 2018-04-24
8-K 2018-04-02
8-K 2018-01-29
8-K 2018-01-25

DGII 10Q Quarterly Report

Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.A dgii-ex10a2020331x10q.htm
EX-10.B dgii-ex10b2020331x10q.htm
EX-10.B.I dgii-ex10bi2020331x10q.htm
EX-10.B.II dgii-ex10bii2020331x10q.htm
EX-10.B.III dgii-ex10biii2020331x1.htm
EX-10.B.IV dgii-ex10biv2020331x10q.htm
EX-10.B.V dgii-ex10bv2020331x10q.htm
EX-10.C dgii-ex10c2020331x10q.htm
EX-31.A dgii-ex31a2020331x10q.htm
EX-31.B dgii-ex31b2020331x10q.htm
EX-32 dgii-ex322020331x10q.htm

Digi Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
4003202401608002012201420172020
Assets, Equity
7055402510-42012201420172020
Rev, G Profit, Net Income
209-2-13-24-352012201420172020
Ops, Inv, Fin

Document
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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: March 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
digilogoregistered2a02.jpg
DIGI INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware
 
41-1532464
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
9350 Excelsior Blvd.
Suite 700
 
 
Hopkins
Minnesota
 
55343
(Address of principal executive offices)
 
(Zip Code)
(952912-3444
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common Stock, par value $.01 per share
 
DGII
 
The Nasdaq Stock Market LLC
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.) Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer
 
 
Accelerated filer
 
Non-accelerated filer
 
 
Smaller reporting company
 
Emerging growth company
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
On May 1, 2020, there were 28,954,853 shares of the registrant's $.01 par value Common Stock outstanding.
 



INDEX
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


i



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DIGI INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
Three months ended March 31,
 
Six months ended March 31,
 
2020
 
2019
 
2020
 
2019
 
(in thousands, except per share data)
Revenue:
 
 
 
 
 
 
 
Product
$
65,641

 
$
58,473

 
$
119,888

 
$
113,453

Service
7,806

 
7,291

 
15,876

 
14,624

Total revenue
73,447

 
65,764

 
135,764

 
128,077

Cost of sales:
 
 
 
 
 
 
 
Cost of product
29,687

 
31,225

 
58,178

 
59,894

Cost of service
3,873

 
3,485

 
6,434

 
6,606

Amortization
1,246

 
725

 
2,047

 
1,465

Total cost of sales
34,806

 
35,435

 
66,659

 
67,965

Gross profit
38,641

 
30,329

 
69,105

 
60,112

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
14,556

 
11,534

 
26,617

 
23,191

Research and development
11,532

 
9,569

 
21,863

 
19,087

General and administrative
8,791

 
8,441

 
17,346

 
11,558

Restructuring charge (reversal)
38

 

 
38

 
(67
)
Total operating expenses
34,917

 
29,544

 
65,864

 
53,769

Operating income
3,724

 
785

 
3,241

 
6,343

Other (expense) income, net:
 
 
 
 
 
 
 
Interest income
50

 
144

 
281

 
352

Interest expense
(1,734
)
 
(2
)
 
(2,166
)
 
(94
)
Other income (expense), net
89

 
257

 
(147
)
 
305

Total other (expense) income, net
(1,595
)
 
399

 
(2,032
)
 
563

Income before income taxes
2,129

 
1,184

 
1,209

 
6,906

Income tax expense (benefit)
125

 
(158
)
 
(1,003
)
 
882

Net income
$
2,004

 
$
1,342

 
$
2,212

 
$
6,024

 
 
 
 
 
 
 
 
Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.07

 
$
0.05

 
$
0.08

 
$
0.22

Diluted
$
0.07

 
$
0.05

 
$
0.07

 
$
0.21

Weighted average common shares:
 
 
 
 
 
 
 
Basic
28,881

 
27,866

 
28,673

 
27,687

Diluted
29,486

 
28,438

 
29,585

 
28,289



The accompanying notes are an integral part of the condensed consolidated financial statements.


1



DIGI INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)
 
Three months ended March 31,
 
Six months ended March 31,
 
2020
 
2019
 
2020
 
2019
 
(in thousands)
Net income
$
2,004

 
$
1,342

 
$
2,212

 
$
6,024

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(2,484
)
 
(83
)
 
176

 
(1,652
)
Change in net unrealized gain on investments

 
9

 

 
14

Less income tax expense

 
(2
)
 

 
(4
)
Other comprehensive (loss) income, net of tax
(2,484
)
 
(76
)
 
176

 
(1,642
)
Comprehensive (loss) income
$
(480
)
 
$
1,266

 
$
2,388

 
$
4,382


The accompanying notes are an integral part of the condensed consolidated financial statements.




2



DIGI INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
March 31, 2020
 
September 30, 2019
 
(in thousands, except share data)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
58,086

 
$
92,792

Accounts receivable, net
78,491

 
56,417

Inventories
43,280

 
39,764

Other current assets
8,510

 
3,574

Total current assets
188,367

 
192,547

Property, equipment and improvements, net
12,817

 
13,857

Intangible assets, net
129,250

 
30,667

Goodwill
207,350

 
153,422

Deferred tax assets
426

 
7,330

Other non-current assets
16,542

 
875

Total assets
$
554,752

 
$
398,698

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Current portion of long-term debt
$
1,972

 
$

Accounts payable
17,421

 
21,183

Accrued compensation
7,961

 
8,733

Unearned revenue
8,107

 
5,025

Contingent consideration on acquired businesses
10,379

 
5,407

Other current liabilities
7,366

 
4,110

Total current liabilities
53,206

 
44,458

Income taxes payable
1,798

 
1,192

Deferred tax liabilities
18,934

 
261

Long-term debt
104,973

 

Other non-current liabilities
17,478

 
3,809

Total liabilities
196,389

 
49,720

Contingencies (see Note 15)

 

Stockholders' equity:
 
 
 
Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued and outstanding

 

Common stock, $.01 par value; 60,000,000 shares authorized; 35,364,405 and 34,608,003 shares issued
354

 
346

Additional paid-in capital
274,780

 
266,567

Retained earnings
164,131

 
161,919

Accumulated other comprehensive loss
(25,339
)
 
(25,515
)
Treasury stock, at cost, 6,409,552 and 6,367,428 shares
(55,563
)
 
(54,339
)
Total stockholders' equity
358,363

 
348,978

Total liabilities and stockholders' equity
$
554,752

 
$
398,698


The accompanying notes are an integral part of the condensed consolidated financial statements.



3



DIGI INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Six months ended March 31,
 
2020
 
2019
 
(in thousands)
Operating activities:
 
 
 
Net income
$
2,212

 
$
6,024

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
 
 
Depreciation of property, equipment and improvements
2,289

 
2,217

Amortization of intangible assets
6,564

 
4,609

Stock-based compensation
3,441

 
2,707

Deferred income tax provision
756

 
1,338

Gain on sale of property and equipment

 
(4,395
)
Change in fair value of contingent consideration
(128
)
 
810

Provision for bad debt and product returns
108

 
568

Provision for inventory obsolescence
516

 
900

Restructuring charge (reversal)
38

 
(67
)
Other
50

 
(116
)
Changes in operating assets and liabilities (net of acquisitions)
(28,529
)
 
(8,393
)
Net cash (used in) provided by operating activities
(12,683
)
 
6,202

Investing activities:
 
 
 
Proceeds from maturities and sales of marketable securities

 
2,252

Acquisition of businesses, net of cash acquired
(136,098
)
 

Proceeds from sale of property and equipment

 
10,047

Purchase of property, equipment, improvements and certain other intangible assets
(434
)
 
(7,346
)
Net cash (used in) provided by investing activities
(136,532
)
 
4,953

Financing activities:
 
 
 
Proceeds from long-term debt
110,000

 

Payments on long-term debt
(625
)
 

Payments for contingent consideration

 
(2,348
)
Proceeds from stock option plan transactions
4,724

 
3,751

Proceeds from employee stock purchase plan transactions
516

 
549

Purchases of common stock
(1,684
)
 
(1,044
)
Net cash provided by financing activities
112,931

 
908

Effect of exchange rate changes on cash and cash equivalents
1,578

 
(484
)
Net (decrease) increase in cash and cash equivalents
(34,706
)
 
11,579

Cash and cash equivalents, beginning of period
92,792

 
58,014

Cash and cash equivalents, end of period
$
58,086

 
$
69,593

 
 
 
 
Supplemental schedule of non-cash investing and financing activities:
 
 
 
Transfer of inventory to property, equipment and improvements
$
(743
)
 
$
(654
)
Contingent consideration recognized related to acquisition of business
$
(5,100
)
 
$

Accrual for purchase of property, equipment, improvements and certain other intangible assets
$

 
$
(20
)

The accompanying notes are an integral part of the condensed consolidated financial statements.



4



DIGI INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
Other
 
Total
 
 
Common Stock
 
Treasury Stock
 
Paid-In
 
Retained
 
Comprehensive
 
Stockholders'
(in thousands)
 
Shares
 
Par Value
 
Shares
 
Value
 
Capital
 
Earnings
 
Loss
 
Equity
Balances, September 30, 2018
 
33,813

 
$
338

 
6,385

 
$
(54,216
)
 
$
255,936

 
$
151,961

 
$
(23,526
)
 
$
330,493

Net income
 
 
 
 
 
 
 
 
 
 
 
6,024

 
 
 
6,024

Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
(1,642
)
 
(1,642
)
Employee stock purchase plan issuances
 
 
 
 
 
(63
)
 
544

 
5

 
 
 
 
 
549

Repurchase of common stock
 
 
 
 
 
91

 
(1,044
)
 
 
 
 
 
 
 
(1,044
)
Issuance of stock under stock award plans
 
658

 
7

 
 
 
 
 
3,744

 
 
 
 
 
3,751

Stock-based compensation expense
 
 
 
 
 
 
 
 
 
2,707

 
 
 
 
 
2,707

Balances, March 31, 2019
 
34,471

 
$
345

 
6,413

 
$
(54,716
)
 
$
262,392

 
$
157,985

 
$
(25,168
)
 
$
340,838

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Balances, September 30, 2019
 
34,608

 
$
346

 
6,367

 
$
(54,339
)
 
$
266,567

 
$
161,919

 
$
(25,515
)
 
$
348,978

Net income
 
 
 
 
 
 
 
 
 
 
 
2,212

 
 
 
2,212

Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
176

 
176

Employee stock purchase plan issuances
 
 
 
 
 
(53
)
 
460

 
56

 
 
 
 
 
516

Repurchase of common stock
 
 
 
 
 
95

 
(1,684
)
 
 
 
 
 
 
 
(1,684
)
Issuance of stock under stock award plans
 
756

 
8

 
 
 
 
 
4,716

 
 
 
 
 
4,724

Stock-based compensation expense
 
 
 
 
 
 
 
 
 
3,441

 
 
 
 
 
3,441

Balances, March 31, 2020
 
35,364

 
$
354

 
6,409

 
$
(55,563
)
 
$
274,780

 
$
164,131

 
$
(25,339
)
 
$
358,363

The accompanying notes are an integral part of the condensed consolidated financial statements.


5

DIGI INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


1. BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation
The unaudited condensed consolidated financial statements of Digi International Inc. ("we", "us", "our", "Digi" or "the Company") have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission applicable to interim financial statements. While these financial statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles ("GAAP") for complete financial statements. These financial statements should be read in conjunction with the financial statement disclosures in our Annual Report on Form 10-K for the year ended September 30, 2019 (the "2019 Financial Statements"). We use the same accounting policies in preparing quarterly and annual financial statements. The quarterly results of operations are not necessarily indicative of the results to be expected for the full year.

Potential Impacts of COVID-19 on our Business
The impact of the coronavirus disease 2019 ("COVID-19") pandemic continues to unfold. The extent of the pandemic's effect on our operational and financial performance will depend in large part on future developments, which cannot be reasonably estimated at this time. Future developments include the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact both within and outside the jurisdictions where we operate, the impact on governmental programs and budgets, the development of treatments or vaccines, and the resumption of widespread economic activity. Due to the inherent uncertainty of the unprecedented and rapidly evolving situation, we are unable to predict with any confidence the likely impact of the COVID-19 pandemic on our future operations. For a more detailed discussion see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of this Form 10-Q.
Recently Issued Accounting Pronouncements
Adopted
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842), which provides for comprehensive changes to lease accounting. The standard requires that a lessee recognize a lease obligation liability and a right-to-use asset for virtually all leases, subsequently amortized over the lease term.
We adopted this standard in the first quarter of fiscal 2020, following the modified retrospective application approach by applying the new standard to all applicable leases existing at the date of initial application and not restating comparative periods. We have completed our implementation efforts. These efforts included identification and analysis of our lease portfolio, analysis and evaluation of the new reporting and disclosure requirements of the new guidance, and an evaluation of our lease-related processes and internal controls. The adoption of this standard resulted in the recognition of a right-of-use asset included in other non-current assets of approximately $14.1 million and a lease liability of approximately $17.9 million included in other current liabilities and other non-current liabilities on our condensed consolidated balance sheet in the first quarter of fiscal 2020. In adopting the new standard, we elected the package of practical expedients permitted under the transition guidance, as well as the practical expedient not to separate non-lease components from lease components. We also elected the practical expedient to use hindsight in determining the lease term when considering options to extend or terminate a lease, options to purchase the underlying asset, and in assessing the impairment of right-of-use assets. The adoption of this standard did not have a significant impact on our condensed consolidated results of operations or condensed consolidated statements of cash flows. We have identified new and updated existing internal controls and processes to support measurement, recognition and disclosure under this new standard, but such changes were not deemed to be material to our overall system of internal control over financial reporting.
Not Yet Adopted
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820).  The updated guidance improves the disclosure requirements on fair value measurements. The updated guidance is effective for us in the first

6



1. BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
quarter ending December 31, 2020. Early adoption is permitted for any removed or modified disclosures. We are evaluating when to adopt, and the impact of adopting, ASU 2018-13 on our consolidated financial statements.
In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments in this update replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses. This update is intended to provide financial statement users with more decision-useful information about the expected credit losses. This ASU is effective for us in the first quarter ending December 31, 2020. Entities may early adopt beginning after December 15, 2018. We are evaluating the impact of adopting ASU 2016-13 on our consolidated financial statements.
2. ACQUISITIONS
Acquisition of Opengear, Inc.
On December 13, 2019, we completed our acquisition of Opengear, Inc. ("Opengear"), a New Jersey-based provider of secure IT infrastructure products and software. Opengear results are included in our condensed consolidated financial statements within our IoT Products & Services segment.
The terms of the acquisition included an upfront cash payment as well as contingent consideration comprised of future earn-out payments. We funded the closing of the acquisition with cash of $148.1 million comprised of cash on hand and proceeds from our credit facility (see Note 8 to the condensed consolidated financial statements). The future earn-out payments are based on revenue performance from Opengear for the periods ended December 31, 2019 and ending December 31, 2020. The cumulative amount of these earn-outs for the periods ended December 31, 2019 and ending December 31, 2020, will not exceed $5.0 million and $10.0 million, respectively. We expect to pay the first installment of $0.9 million during the third quarter of fiscal 2020. The fair value of this contingent consideration was $5.1 million at both the date of acquisition and at March 31, 2020 (see Note 5 to the condensed consolidated financial statements).
For tax purposes, this acquisition is treated as a stock acquisition. The goodwill therefore is not deductible. We believe this is a complementary acquisition for us as it significantly enhances our IoT Products and Services segment by providing secure, resilient access and automation to critical IT infrastructure.
The Opengear acquisition has been accounted for using the acquisition method of accounting. This requires, among other things, that assets acquired and liabilities assumed pursuant to the purchase agreement be recognized at fair value as of the acquisition date. The following table summarizes the preliminary values of Opengear assets acquired and liabilities assumed as of the acquisition date (in thousands):
Cash
 
$
148,058

Contingent consideration
 
5,100

Total
 
$
153,158

 
 
 
Fair value of net tangible assets acquired
 
$
19,006

Identifiable intangible assets:
 
 
Customer relationships
 
79,000

Purchased and core technology
 
18,100

Trademarks
 
8,000

Deferred tax liability on identifiable intangible assets
 
(25,634
)
Goodwill
 
54,686

Total
 
$
153,158


The condensed consolidated balance sheet as of March 31, 2020 reflects the preliminary allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. Given the timing of the Opengear acquisition, the estimated fair value of the net assets acquired, liabilities assumed and contingent consideration are preliminary and remain subject to change. Included in the fair value of net tangible assets acquired was $1.4 million of right-

7



2. ACQUISITIONS (CONTINUED)
of-use asset included in other non-current assets and $1.7 million of lease liability included in other current liabilities and other non-current liabilities associated with Opengear's operating leases.
The preliminary weighted average useful life for all the identifiable intangibles listed above is estimated to be 13.4 years. For purposes of determining fair value, the existing customer relationships identified above are assumed to have a useful life of 14.5 years, purchased and core technology is assumed to have useful life of 9.0 years and trademarks are assumed a useful life of 12.0 years. Useful lives for identifiable intangible assets are estimated at the time of acquisition based on the periods of time from which we expect to derive benefits from the identifiable intangible assets. The identifiable intangible assets are amortized using the straight-line method. This reflects the pattern in which the assets are expected to be consumed.
Costs directly related to the acquisition of $0.3 million incurred in the fourth quarter of fiscal 2019 and $2.1 million incurred in fiscal 2020 have been charged directly to operations and are included in general and administrative expense in our condensed consolidated statements of operations. These acquisition costs include legal, accounting, valuation and investment banking fees.
The following consolidated pro forma information is presented as if the acquisition had occurred on October 1, 2018 (in thousands):
 
Three months ended March 31,
 
Six months ended March 31,
 
2020
 
2019
 
2020
 
2019
Net sales
$
73,447

 
$
79,218

 
$
150,660

 
$
154,885

Net income
$
2,184

 
$
1,770

 
$
5,920

 
$
4,801

Net income per share - basic
$
0.08

 
$
0.06

 
$
0.21

 
$
0.17

Net income per share - diluted
$
0.07

 
$
0.06

 
$
0.20

 
$
0.17


Pro forma net income has been adjusted to include interest expense related to debt incurred as a result of the acquisition as well as amortization on the fair value of the intangibles acquired. It has also been adjusted to assume the acquisition-related costs of $2.5 million were incurred as of the first quarter of fiscal 2019.
Given the efforts to rapidly integrate the workforce, customer offerings, technology, and reporting capabilities of Opengear with that of our other components in our IoT Products & Services business, along with the inherent complementary synergies gained from doing so, it is impractical for us to present Opengear specific results otherwise required by GAAP.
3. EARNINGS PER SHARE
The following table is a reconciliation of the numerators and denominators in the net income per common share calculations (in thousands, except per common share data):
 
Three months ended March 31,
 
Six months ended March 31,
 
2020
 
2019
 
2020
 
2019
Numerator:
 
 
 
 
 
 
 
Net income
$
2,004

 
$
1,342

 
$
2,212

 
$
6,024

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Denominator for basic net income per common share — weighted average shares outstanding
28,881

 
27,866

 
28,673

 
27,687

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options and restricted stock units
605

 
572

 
912

 
602

Denominator for diluted net income per common share — adjusted weighted average shares
29,486

 
28,438

 
29,585

 
28,289

 
 
 
 
 
 
 
 
Net income per common share, basic
$
0.07

 
$
0.05

 
$
0.08

 
$
0.22

Net income per common share, diluted
$
0.07

 
$
0.05

 
$
0.07

 
$
0.21



8



3. EARNINGS PER SHARE (CONTINUED)
For the three months ended March 31, 2020 and 2019, there were 713,980 and 633,752 potentially dilutive shares, respectively. For the six months ended March 31, 2020 and 2019, there were 592,780 and 683,752 potentially dilutive shares, respectively. These potentially dilutive shares were related to stock options to purchase common shares that were not included in the above computation of diluted earnings per common share since the options' exercise prices were greater than the average market price of our common shares.
4. SELECTED BALANCE SHEET DATA
The following table shows selected balance sheet data (in thousands):
 
March 31,
2020
 
September 30, 2019
Accounts receivable, net:
 
 
 
Accounts receivable
$
83,748

 
$
60,062

Less allowance for doubtful accounts
1,905

 
968

Less reserve for future returns and pricing adjustments
3,352

 
2,677

Accounts receivable, net
$
78,491

 
$
56,417

Inventories:
 
 
 
Raw materials
$
13,210

 
$
12,308

Work in process
14

 
565

Finished goods
30,056

 
26,891

Inventories
$
43,280

 
$
39,764



5. FAIR VALUE MEASUREMENTS
Financial assets and liabilities are classified in the following fair value hierarchy based on the lowest level input that is significant to the fair value measurement: Level 1 (unadjusted quoted prices in active markets for identical assets or liabilities); Level 2 (observable market inputs, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data). The following tables provide information by level for financial assets and liabilities that are measured at fair value on a recurring basis (in thousands):
 
Total Fair
Value at
 
Fair Value Measurements Using
 Inputs Considered as
 
March 31, 2020
 
Level 1
 
Level 2
 
Level 3
Liabilities:
 
 
 
 
 
 
 
Contingent consideration on acquired businesses
$
10,379

 
$

 
$

 
$
10,379

Total liabilities measured at fair value
$
10,379

 
$

 
$

 
$
10,379


 
Total Fair
Value at
 
Fair Value Measurements Using
 Inputs Considered as
 
September 30, 2019
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Money market
$
56,700

 
$
56,700

 
$

 
$

Total assets measured at fair value
$
56,700

 
$
56,700

 
$

 
$

Liabilities:
 
 
 
 
 
 
 
Contingent consideration on acquired businesses
$
5,407

 
$

 
$

 
$
5,407

Total liabilities measured at fair value
$
5,407

 
$

 
$

 
$
5,407


In connection with our acquisition of Bluenica Corporation ("Bluenica") in October 2015, we agreed to make contingent earn-out payments over a period of up to 4 years, subject to achieving specified revenue thresholds for sales of Bluenica products. To date, we have paid a total of $2.7 million for contingent consideration. The fair value of the remaining liability for the contingent consideration period was $2.9 million at March 31, 2020.

9



5. FAIR VALUE MEASUREMENTS (CONTINUED)
In connection with our acquisition of Accelerated in January 2018, we agreed to make contingent earn-out payments if specified revenue thresholds for sales of Accelerated products were achieved. We made the first installment payment of $3.5 million in the third quarter of fiscal 2019. The earn-out period for this acquisition ended on January 22, 2020. The fair value of the liability for the remaining contingent consideration was $2.4 million at March 31, 2020.
In connection with our acquisition of Opengear, Inc., we agreed to make contingent payments, based upon certain revenue thresholds (see Note 2 to the condensed consolidated financial statements). The fair values of the liability for contingent consideration for the acquisition of Opengear was $5.1 million at March 31, 2020. We expect to pay the first installment of $0.9 million during the third quarter of fiscal 2020.
The following table presents a reconciliation of the contingent consideration liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):
 
Three months ended March 31,
 
Six months ended March 31,
 
2020
 
2019
 
2020
 
2019
Fair value at beginning of period
$
14,766

 
$
10,147

 
$
5,407

 
$
10,065

Contingent consideration recognized for acquired business
(4,000
)
 

 
5,100

 

Contingent consideration payments

 
(2,187
)
 

 
(2,348
)
Change in fair value of contingent consideration
(387
)
 
567

 
(128
)
 
810

Fair value at end of period
$
10,379

 
$
8,527

 
$
10,379

 
$
8,527


The change in fair value of contingent consideration reflects our estimates of the probabilities of achieving the relevant targets and is discounted based on our estimated discount rate. We have estimated the fair value of the contingent consideration at March 31, 2020 based on the probability of achieving the specified revenue thresholds at 100% for Bluenica, 100% for Accelerated and a range 49% to 86% for Opengear. A significant change in our estimates of achieving any relevant target could materially change the fair value of the contingent consideration liability.
6. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Amortizable intangible assets were (in thousands):
 
March 31, 2020
 
September 30, 2019
 
Gross
carrying
amount
 
Accum.
amort.
 
Net
 
Gross
carrying
amount
 
Accum.
amort.
 
Net
Purchased and core technology
$
75,662

 
$
(52,802
)
 
$
22,860

 
$
57,699

 
$
(50,986
)
 
$
6,713

License agreements
102

 
(88
)
 
14

 
102

 
(74
)
 
28

Patents and trademarks
22,662

 
(12,667
)
 
9,995

 
14,577

 
(11,970
)
 
2,607

Customer relationships
125,255

 
(29,084
)
 
96,171

 
46,315

 
(25,266
)
 
21,049

Non-compete agreements
600

 
(390
)
 
210

 
600

 
(330
)
 
270

Order backlog
1,800

 
(1,800
)
 

 
1,800

 
(1,800
)
 

Total
$
226,081

 
$
(96,831
)
 
$
129,250

 
$
121,093

 
$
(90,426
)
 
$
30,667


Amortization expense was $4.1 million and $2.1 million for the three