Company Quick10K Filing
Quick10K
Digi
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$12.20 28 $342
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-Q 2018-12-31 Quarter: 2018-12-31
10-K 2018-09-30 Annual: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-K 2017-09-30 Annual: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-K 2016-09-30 Annual: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-K 2015-09-30 Annual: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-K 2014-09-30 Annual: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-08-08 Earnings, Exhibits
8-K 2019-06-12 Regulation FD
8-K 2019-05-10 Officers, Regulation FD, Exhibits
8-K 2019-05-02 Earnings, Exhibits
8-K 2019-01-31 Earnings, Exhibits
8-K 2019-01-12 Officers, Regulation FD, Exhibits
8-K 2018-11-15 Earnings, Exhibits
8-K 2018-07-26 Earnings, Exhibits
8-K 2018-06-11 Officers, Regulation FD, Exhibits
8-K 2018-04-26 Earnings, Exhibits
8-K 2018-04-02 Exit Costs, Regulation FD
8-K 2018-01-25 Earnings, Exhibits
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LOGC LogicBio Therapeutics 317
EMCF Emclaire Financial 83
FMBM F&M Bank 0
RHYTH Rhythmone 0
PACV Pacific Ventures Group 0
JMBA Jamba 0
OCLN Originclear 0
TZACU Tenzing Acquisition 0
DGII 2019-06-30
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-31.A dgii-ex31a_2019630x10q.htm
EX-31.B dgii-ex31b_2019630x10q.htm
EX-32 dgii-ex32_2019630x10q.htm

Digi Earnings 2019-06-30

DGII 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 dgii-2019630x10qq3.htm 10-Q Document
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2019
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
Commission file number: 1-34033
digilogoregistered2a01.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)
(952) 912-3444
(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 þ No o
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 þ No o
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
 
o
 
Accelerated filer
 
þ
Non-accelerated filer
 
o
 
Smaller reporting company
 
o
Emerging growth company
 
o
 
 
 
 
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
On August 6, 2019, there were 28,136,548 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 June 30,
 
Nine months ended June 30,
 
2019
 
2018
(as adjusted)*
 
2019
 
2018
(as adjusted)*
 
(in thousands, except per share data)
Revenue:
 
 
 
 
 
 
 
Product
$
47,136

 
$
51,691

 
$
150,045

 
$
137,733

Services and solutions
14,030

 
10,581

 
39,198

 
24,042

Total revenue
61,166

 
62,272

 
189,243

 
161,775

Cost of sales:
 
 
 
 
 
 
 
Cost of product
25,982

 
26,639

 
80,291

 
68,929

Cost of services and solutions
6,137

 
5,244

 
18,328

 
12,287

Amortization of intangibles
719

 
741

 
2,184

 
2,118

Total cost of sales
32,838

 
32,624

 
100,803

 
83,334

Gross profit
28,328

 
29,648

 
88,440

 
78,441

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
11,392

 
11,595

 
34,583

 
32,530

Research and development
8,584

 
8,205

 
27,671

 
24,573

General and administrative
6,751

 
7,234

 
18,309

 
19,905

Restructuring (reversal) charge
(20
)
 
190

 
(87
)
 
190

Total operating expenses
26,707

 
27,224

 
80,476

 
77,198

Operating income
1,621

 
2,424

 
7,964

 
1,243

Other income, net:
 
 
 
 
 
 
 
Interest income
205

 
97

 
557

 
343

Interest expense

 
(5
)
 
(94
)
 
(12
)
Other (expense) income, net
(174
)
 
535

 
131

 
(37
)
Total other income, net
31

 
627

 
594

 
294

Income before income taxes
1,652

 
3,051

 
8,558

 
1,537

Income tax expense
4

 
147

 
886

 
3,246

Net income (loss)
$
1,648

 
$
2,904

 
$
7,672

 
$
(1,709
)
 
 
 
 
 
 
 
 
Net income (loss) per common share:
 
 
 
 
 
 
 
Basic
$
0.06

 
$
0.11

 
$
0.28

 
$
(0.06
)
Diluted
$
0.06

 
$
0.10

 
$
0.27

 
$
(0.06
)
Weighted average common shares:
 
 
 
 
 
 
 
Basic
28,072

 
27,177

 
27,816

 
27,002

Diluted
28,589

 
27,764

 
28,414

 
27,002

*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which we adopted on October 1, 2018.

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


1


DIGI INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
 
Three months ended June 30,
 
Nine months ended June 30,
 
2019
 
2018
(as adjusted)*
 
2019
 
2018
(as adjusted)*
 
(in thousands)
Net income (loss)
$
1,648

 
$
2,904

 
$
7,672

 
$
(1,709
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
532

 
(3,116
)
 
(1,120
)
 
(1,058
)
Change in net unrealized gain (loss) on investments
4

 
(1
)
 
18

 
(41
)
Less income tax (expense) benefit
(1
)
 
1

 
(5
)
 
9

Reclassification of realized loss on investments included in net income (1)

 

 

 
31

Less income tax benefit (2)

 

 

 
(8
)
Other comprehensive income (loss), net of tax
535

 
(3,116
)
 
(1,107
)
 
(1,067
)
Comprehensive income (loss)
$
2,183

 
$
(212
)
 
$
6,565

 
$
(2,776
)
(1) Recorded in Other (expense) income, net in our Condensed Consolidated Statements of Operations.
(2) Recorded in Income tax expense in our Condensed Consolidated Statements of Operations.
*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which we adopted on October 1, 2018.
The accompanying notes are an integral part of the condensed consolidated financial statements.




2


DIGI INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
June 30, 2019
 
September 30, 2018
(as adjusted)*
 
(in thousands, except share data)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
84,094

 
$
58,014

Marketable securities
2,254

 
4,736

Accounts receivable, net
44,721

 
49,819

Inventories
41,796

 
41,644

Other current assets
5,057

 
2,613

Assets held for sale

 
5,220

Total current assets
177,922

 
162,046

Property, equipment and improvements, net
14,417

 
8,354

Intangible assets, net
32,791

 
39,320

Goodwill
153,952

 
154,535

Deferred tax assets
5,343

 
6,600

Other non-current assets
821

 
1,291

Total assets
$
385,246

 
$
372,146

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
15,460

 
$
12,911

Accrued compensation
5,105

 
8,190

Unearned revenue
5,031

 
3,177

Contingent consideration on acquired businesses
5,405

 
5,890

Other current liabilities
4,020

 
5,405

Total current liabilities
35,021

 
35,573

Income taxes payable
684

 
851

Deferred tax liabilities
273

 
334

Contingent consideration on acquired businesses

 
4,175

Other non-current liabilities
4,192

 
720

Total liabilities
40,170

 
41,653

Contingencies (see Note 13)

 

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; 34,510,607 and 33,812,838 shares issued
345

 
338

Additional paid-in capital
264,225

 
255,936

Retained earnings
159,633

 
151,961

Accumulated other comprehensive loss
(24,633
)
 
(23,526
)
Treasury stock, at cost, 6,386,324 and 6,385,336 shares
(54,494
)
 
(54,216
)
Total stockholders’ equity
345,076

 
330,493

Total liabilities and stockholders’ equity
$
385,246

 
$
372,146

*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which we adopted on October 1, 2018.
The accompanying notes are an integral part of the condensed consolidated financial statements.



3


DIGI INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Nine months ended June 30,
 
2019
 
2018
(as adjusted)*
 
(in thousands)
Operating activities:
 
 
 
Net income (loss)
$
7,672

 
$
(1,709
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation of property, equipment and improvements
3,343

 
2,440

Amortization of intangible assets
6,669

 
6,866

Stock-based compensation
4,180

 
3,598

Deferred income tax provision
1,189

 
2,781

Gain on sale of property and equipment
(4,458
)
 
(8
)
Change in fair value of contingent consideration
1,188

 
333

Provision for bad debt and product returns
594

 
404

Provision for inventory obsolescence
1,350

 
1,550

Restructuring (reversal) charge
(87
)
 
190

Other
131

 
(58
)
Changes in operating assets and liabilities (net of acquisitions)
757

 
(25,231
)
Net cash provided by (used in) operating activities
22,528

 
(8,844
)
Investing activities:
 
 
 
Proceeds from maturities and sales of marketable securities
2,500

 
29,752

Proceeds from sale of business

 
2,000

Acquisition of businesses, net of cash acquired

 
(56,588
)
Proceeds from sale of property and equipment
10,047

 

Purchase of property, equipment, improvements and certain other intangible assets
(8,600
)
 
(963
)
Net cash provided by (used in) investing activities
3,947

 
(25,799
)
Financing activities:
 
 
 
Acquisition earn-out payments
(3,748
)
 

Proceeds from stock option plan transactions
4,054

 
3,871

Proceeds from employee stock purchase plan transactions
835

 
892

Purchases of common stock
(1,051
)
 
(730
)
Net cash provided by financing activities
90

 
4,033

Effect of exchange rate changes on cash and cash equivalents
(485
)
 
82

Net increase (decrease) in cash and cash equivalents
26,080

 
(30,528
)
Cash and cash equivalents, beginning of period
58,014

 
78,222

Cash and cash equivalents, end of period
$
84,094

 
$
47,694

 
 
 
 
Supplemental schedule of non-cash investing and financing activities:
 
 
 
Transfer of inventory to property, equipment and improvements
$
(921
)
 
$
(1,750
)
Liability related to acquisition of business
$

 
$
(2,300
)
Accrual for purchase of property, equipment, improvements and certain other intangible assets
$
(7
)
 
$

*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which we adopted on October 1, 2018.
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, 2017
 
33,008

 
$
330

 
6,437

 
$
(54,533
)
 
$
245,528

 
$
150,363

 
$
(22,659
)
 
$
319,029

Cumulative-effect adjustment from adoption of ASU 2016-09
 
 
 
 
 
 
 
 
 
52

 
(33
)
 
 
 
19

Net loss
 
 
 
 
 
 
 
 
 
 
 
(1,709
)
 
 
 
(1,709
)
Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
(1,067
)
 
(1,067
)
Employee stock purchase plan issuances
 
 
 
 
 
(106
)
 
897

 
(5
)
 
 
 
 
 
892

Repurchase of common stock
 
 
 
 
 
73

 
(730
)
 
 
 
 
 
 
 
(730
)
Issuance of stock under stock award plans
 
638

 
7

 
 
 
 
 
3,864

 
 
 
 
 
3,871

Stock-based compensation expense
 
 
 
 
 
 
 
 
 
3,598

 
 
 
 
 
3,598

Balances, June 30, 2018
 
33,646

 
$
337

 
6,404

 
$
(54,366
)
 
$
253,037

 
$
148,621

 
$
(23,726
)
 
$
323,903

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Balances, September 30, 2018
 
33,813

 
$
338

 
6,385

 
$
(54,216
)
 
$
255,936

 
$
151,961

 
$
(23,526
)
 
$
330,493

Net income
 
 
 
 
 
 
 
 
 
 
 
7,672

 
 
 
7,672

Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
(1,107
)
 
(1,107
)
Employee stock purchase plan issuances
 
 
 
 
 
(91
)
 
773

 
62

 
 
 
 
 
835

Repurchase of common stock
 
 
 
 
 
92

 
(1,051
)
 
 
 
 
 
 
 
(1,051
)
Issuance of stock under stock award plans
 
698

 
7

 
 
 
 
 
4,047

 
 
 
 
 
4,054

Stock-based compensation expense
 
 
 
 
 
 
 
 
 
4,180

 
 
 
 
 
4,180

Balances, June 30, 2019
 
34,511

 
$
345

 
6,386

 
$
(54,494
)
 
$
264,225

 
$
159,633

 
$
(24,633
)
 
$
345,076

*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which we adopted on October 1, 2018.
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, 2018 (the “2018 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.
Significant Accounting Policies Update
Effective October 1, 2018, we adopted Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) as discussed below. All amounts and disclosures set forth in this Form 10-Q have been updated to comply with the new standards, as indicated by the “as adjusted” footnote.
Except for the accounting policy for revenue recognition that was updated as a result of adopting ASU 2014-09, there have been no other changes to our significant accounting policies described in our 2018 Financial Statements.
Revenue Recognition
We recognize hardware product revenue upon transfer of control of goods or services to customers in an amount that reflects the consideration we expect to receive in exchange for those goods or services. We determine the amount of revenue to be recognized through application of the following steps:
Identification of the contract, or contracts with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when or as we satisfy the performance obligations.
Hardware Product Revenue and SmartSense by Digi Equipment Revenue and Associated Installation Fees
Our hardware product revenue is derived primarily from the sale of wired and wireless hardware products to our distributors and Direct/Original Equipment Manufacturer (“OEM”) customers. Product revenue generally is recognized upon shipment of product to customers. Sales to authorized domestic distributors and Direct/OEM customers are made with certain rights of return and price adjustment provisions. Estimated reserves for future returns and pricing adjustments are established by us based on an analysis of historical patterns of returns and price adjustments as well as an analysis of authorized returns compared to received returns and distribution sales for the current period. Estimated reserves for future returns and price adjustments are charged against revenue in the same period as the corresponding sales are recorded. Material differences between the historical trends used to determine estimated reserves and actual returns and pricing adjustments could result in a material change to our consolidated results of operations or financial position. We have applied consistent methodologies for estimating reserves for future returns and pricing adjustments for all periods presented.
Our SmartSense by Digi equipment revenue is recorded as an up-front sale at its stand-alone selling price because the customer could utilize our equipment with other monitoring services or could use our monitoring services with hardware purchased from other vendors. Our installation charges are recorded when the product is installed.

6


1. BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Subscription and Support Services Revenue
Our SmartSense by Digisubscription revenue is recorded on a monthly basis. These subscriptions are generally in a range from one to five years, and may contain an evergreen renewal provision. Generally, our subscription renewal charges per month are the same as the original contract term.
We also derive service revenue from our Digi Remote Manager®, a platform-as-a-service (“PaaS”) offering, whereby customers pay for services consumed based on the number of devices being managed or monitored. This revenue is recognized over the life of the service term. 
Digi Support Services revenues are recognized over the life of the support contract. Some of Digi Support Services revenue is for training and this revenue is recognized as the services are performed.
Professional Services Revenue
Professional services revenue is derived from our Digi Wireless Design Services contracts on either on a time-and-materials or a fixed-fee basis. These revenues are recognized as the services are performed for time-and-materials contracts, or when milestones are achieved and accepted by the customer for fixed-fee contracts.
Contracts with Multiple Performance Obligations
SmartSense by Digirevenues typically are derived from contracts with multiple performance obligations. These obligations may include: delivery of monitoring equipment that the customer either purchases out-right or uses while we retain ownership, monitoring services, providing condition alerts of assets being monitored, and recertification of sensor equipment. When we retain ownership of the equipment, we charge an implementation fee to the customer so they can begin using the equipment. In these instances, all revenue derived from the above obligations is recognized over the subscription term of the contract. If the customer purchases the equipment out-right, that portion of the revenue is recognized at the stand-alone selling price at the time the equipment is shipped and all other revenue is recognized over the subscription term of the contract. We have made an accounting policy election to exclude from the measurement of our revenues any sales or similar taxes we collect from customers.
Recently Issued Accounting Pronouncements
Adopted
In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The standard, which should be applied prospectively, is effective for our fiscal year ending September 30, 2021. Early adoption is permitted. This ASU was early adopted by us on October 1, 2018 and did not have an impact on our consolidated financial statements.
In May 2017, FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provided guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this update are to be applied prospectively to an award modified on or after the adoption date. This ASU was effective for us this first fiscal quarter ending December 31, 2018. This ASU was adopted by us on October 1, 2018 and did not have an impact on our consolidated financial statements.
In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The amendments in this update provide guidance on eight specific cash flow issues, thereby reducing the diversity in practice in how certain transaction are classified in the statement of cash flows. This ASU was effective for us this first fiscal quarter ending December 31, 2018. This ASU was adopted by us on October 1, 2018 and did not have an impact on our consolidated financial statements.
In January 2016, FASB issued ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires equity investments in unconsolidated entities (other than those

7


1. BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accounted for using the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. The amendments in this update also simplify the impairment assessment of equity investments without readily determinable fair values. This ASU also has changed the presentation and disclosure requirements for financial instruments. In addition, this ASU has clarified the guidance related to valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The amendments in this ASU were effective for our first fiscal quarter ending December 31, 2018. This ASU was adopted by us on October 1, 2018 and did not have an impact on our consolidated financial statements.
In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”). This standard requires that revenue is recognized for the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. It also establishes timing associated with recognizing revenues and amortizing costs, associated with contracts. FASB has issued several amendments to ASU 2014-09, including clarifications on disclosure of prior-period performance obligations and remaining performance obligations. The guidance permits two methods of adoption, one of which is to retrospectively adjust results for each prior reporting period presented. We elected to adopt the standard using this method effective October 1, 2018.
We have described how we recognize revenue in the aforementioned revenue recognition policy. Relative to the amortization of costs there are two impacts to our financial statements. First, in instances where we retain ownership of equipment a customer uses, we charge an implementation fee to the customer so they can begin using the equipment. We amortize this cost of the equipment over its useful life (typically three years). Second, we capitalize and amortize commissions paid to sales personnel or agents on service contracts. If the commissions earned during an accounting period exceed our capitalization threshold, they will be amortized over the calculated average expected life of the pool of contracts closed during that period.
To ease our transition in the adoption of Topic 606, we have elected several practical expedients outlined in the new accounting guidance:
We have not disclosed the remaining transaction price for reporting periods prior to the first quarter of fiscal 2019.
For completed contracts that have variable consideration, we will use the as-invoiced amount for all of our time and materials contracts and contracts relating to Digi Remote Manager® in instances where the contracts do not include free service.
We will expense incremental costs of obtaining a contract when incurred if the amortization period of the asset is one year or less.
The adoption of the standard related to the new revenue recognition impacted our reported results as follows:
 
 
Three months ended June 30, 2018
(in thousands, except per common share data)
 
As Reported
 
Impact of Adoption
 
As Adjusted
Revenue:
 
 
 
 
 
 
Product
 
$
51,691

 
$

 
$
51,691

Services and solutions
 
11,025

 
(444
)
 
10,581

Total revenue
 
62,716

 
(444
)
 
62,272

Cost of sales:
 
 
 
 
 
 
Cost of product
 
26,639

 

 
26,639

Cost of services and solutions
 
6,007

 
(763
)
 
5,244

Amortization of intangibles
 
741

 

 
741

Total cost of sales
 
33,387

 
(763
)
 
32,624

Gross profit
 
29,329

 
319

 
29,648

Operating expenses
 
27,292

 
(68
)
 
27,224

Operating income
 
$
2,037

 
$
387

 
$
2,424

Net income
 
$
2,621

 
$
283

 
$
2,904

Diluted income per share
 
$
0.09

 
$
0.01

 
$
0.10



8


1. BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 
Nine months ended June 30, 2018
(in thousands, except per common share data)
 
As Reported
 
Impact of Adoption
 
As Adjusted
Revenue:
 
 
 
 
 
 
Product
 
$
137,733

 
$

 
$
137,733

Services and solutions
 
24,971

 
(929
)
 
24,042

Total revenue
 
162,704

 
(929
)
 
161,775

Cost of sales:
 
 
 
 
 
 
Cost of product
 
68,929

 

 
68,929

Cost of services and solutions
 
13,737

 
(1,450
)
 
12,287

Amortization of intangibles
 
2,118

 

 
2,118

Total cost of sales
 
84,784

 
(1,450
)
 
83,334

Gross profit
 
77,920

 
521

 
78,441

Operating expenses
 
77,503

 
(305
)
 
77,198

Operating income
 
$
417

 
$
826

 
$
1,243

Net loss
 
$
(2,305
)
 
$
596

 
$
(1,709
)
Diluted loss per share
 
$
(0.09
)
 
$
0.02

 
$
(0.06
)

 
 
September 30, 2018
(in thousands)
 
As Reported
 
Impact of Adoption
 
As Adjusted
Accounts receivable, net
 
$
50,817

 
$
(998
)
 
$
49,819

Property, equipment and improvements, net
 
$
6,270

 
$
2,084

 
$
8,354

Deferred tax assets
 
$
6,665

 
$
(65
)
 
$
6,600

Unearned revenue current
 
$
2,579

 
$
598

 
$
3,177

Other non-current liabilities
 
$
510

 
$
210

 
$
720

Retained earnings
 
$
151,748

 
$
213

 
$
151,961

Adoption of the standards related to revenue recognition had no impact to total cash provided by or used in operating, financing or investing on our historical Condensed Consolidated Statements of Cash Flows.
Not Yet Adopted
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for us in the first quarter ending December 31, 2020. Early adoption is permitted. We are evaluating when to adopt, and the impact of adopting, ASU 2018-15 on our consolidated financial statements.
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 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 March 2017, FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments in this update shorten the amortization period for certain callable debt securities that are held at a premium. The amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount, which would be amortized to maturity. This ASU is effective for us in the first quarter ending December 31, 2019. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.


9


1. BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
In February 2016, FASB issued ASU 2016-02, Leases (Topic 842), which amends the existing guidance and requires lessees to recognize lease assets and lease liabilities on the balance sheet for leases with a term longer than 12 months that are classified as operating leases under previous authoritative guidance. The lease liability will be equal to the present value of lease payments and the right-of-use asset will be based on the lease liability, subject to adjustment for certain items. In July 2018, FASB issued two additional amendments that affect this guidance described in the following updates ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases (Topic 842): Targeted Improvements. The amendments in ASU 2018-10 affect narrow aspects of the guidance issued in ASU 2016-02. The amendments in ASU 2018-11 provide an alternative (and optional) transition method that allows entities to apply the transition provisions in ASU 2016-02 at the adoption date instead of at the earliest comparative period presented in the financial statements. ASU 2016-02 is effective for us, using the modified retrospective approach, the first fiscal quarter ending December 31, 2019. Early adoption is permitted. As noted above, ASU 2018-11 provides for an additional and optional transition method. We plan to apply the optional transition method at the adoption date and are evaluating the impact of adopting ASU 2016-02 on our consolidated financial statements.
2. ACQUISITIONS
Acquisition of Accelerated Concepts, Inc.
On January 22, 2018, we purchased all the outstanding stock of Accelerated Concepts, Inc. (“Accelerated”), a Tampa-based provider of secure, enterprise-grade, cellular (LTE) networking equipment for primary and backup connectivity applications, for cash of $16.4 million (excluding cash acquired of $0.2 million) and future earn-out payments. Accelerated’s results have been included in our consolidated financial statements within the IoT Products and Services segment since the date of acquisition. Purchase accounting related to the acquisition of Accelerated was finalized during the fourth quarter of fiscal 2018.
The earn-out payments are scheduled to be paid in two installments and the payment amount, if any, will be calculated based on the revenue performance of Accelerated products. The first installment was based on revenues from January 22, 2018 through January 21, 2019 (the “2018 period”) and the second installment will be based on revenues from January 22, 2019 through January 21, 2020 (the “2019 period”). If certain revenue thresholds are met, the cumulative amount of these earn-outs will be $6.5 million. In April 2019, we paid $3.5 million for the first installment. The fair value of the remaining contingent consideration was $2.5 million at June 30, 2019. (see Note 6 to the consolidated financial statements).
Acquisition of TempAlert LLC
On October 20, 2017, we purchased all the outstanding interests of TempAlert LLC (“TempAlert”), a Boston-based provider of automated, real-time temperature monitoring and task management solutions for cash of $40.7 million (excluding cash acquired of $0.6 million) and future earn-out payments. TempAlert’s results have been included in our consolidated financial statements within the IoT Solutions segment since the date of acquisition. Purchase accounting related to the acquisition was finalized during the first quarter of fiscal 2019.
The first earn-out payment was scheduled to be paid after December 31, 2018 and the second earn-out payment is scheduled to be paid after December 31, 2019, which is the end of the earn-out periods. No payment was earned for the period ended December 31, 2018. The cumulative amount of the remaining earn-outs for the period ended December 31, 2019, will not exceed $45.0 million. The fair value of the remaining contingent consideration was zero at June 30, 2019 (see Note 6 to the consolidated financial statements).

10


3. EARNINGS PER SHARE
The following table is a reconciliation of the numerators and denominators in the net income (loss) per common share calculations (in thousands, except per common share data):
 
Three months ended June 30,
 
Nine months ended June 30,
 
2019
 
2018
(as adjusted)*
 
2019
 
2018
(as adjusted)*
Numerator:
 
 
 
 
 
 
 
Net income (loss)
$
1,648

 
$
2,904

 
$
7,672

 
$
(1,709
)
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Denominator for basic net income (loss) per common share — weighted average shares outstanding
28,072

 
27,177

 
27,816

 
27,002

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options and restricted stock units
517

 
587

 
598

 

Denominator for diluted net income (loss) per common share — adjusted weighted average shares
28,589

 
27,764

 
28,414

 
27,002

 
 
 
 
 
 
 
 
Net income (loss) per common share, basic
$
0.06

 
$
0.11

 
$
0.28

 
$
(0.06
)
Net income (loss) per common share, diluted
$
0.06

 
$
0.10

 
$
0.27

 
$
(0.06
)
*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which we adopted on October 1, 2018.
For the three months ended June 30, 2019 and 2018, there were 617,841 and 770,178 potentially dilutive shares, respectively, and for the nine months ended June 30, 2019 and 2018, there were 667,841 and 977,828 potentially dilutive shares, respectively, 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. In addition, due to the net loss for the nine months ended June 30, 2018, there were 440,002 common stock options and restricted stock units that were not included in the above computation of diluted earnings per share.
4. SELECTED BALANCE SHEET DATA
The following table shows selected balance sheet data (in thousands):
 
June 30,
2019
 
September 30, 2018
(as adjusted)*
Accounts receivable, net:
 
 
 
Accounts receivable
$
48,747

 
$
53,164

Less allowance for doubtful accounts
1,349

 
785

Less reserve for future returns and pricing adjustments
2,677

 
2,560

Accounts receivable, net
$
44,721

 
$
49,819

Inventories:
 
 
 
Raw materials
$
15,494

 
$
22,047

Work in process
649

 
525

Finished goods
25,653

 
19,072

Inventories
$
41,796

 
$
41,644

*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which we adopted on October 1, 2018.
5. MARKETABLE SECURITIES
Our marketable securities historically consist of certificates of deposit, commercial paper, corporate bonds and government municipal bonds. As of June 30, 2019, all of our securities that we held were trading below our amortized cost basis. We determined each decline in value to be temporary in nature.

11


5. MARKETABLE SECURITIES (CONTINUED)
At June 30, 2019 our marketable securities were (in thousands):
 
Amortized
Cost (1)
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value (1)
Current marketable securities:
 
 
 
 
 
 
 
Certificates of deposit
$
2,255

 
$

 
$
(1
)
 
$
2,254

Total marketable securities
$
2,255

 
$

 
$
(1
)
 
$
2,254

(1)
Included in amortized cost and fair value is purchased and accrued interest of $6.
At September 30, 2018 our marketable securities were (in thousands):
 
Amortized
Cost (1)
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value (1)
Current marketable securities:
 
 
 
 
 
 
 
Certificates of deposit
$
4,756

 
$

 
$
(20
)
 
$
4,736

Total marketable securities
$
4,756

 
$

 
$
(20
)
 
$
4,736

(1)
Included in amortized cost and fair value is purchased and accrued interest of $6.
The following tables show the fair values and gross unrealized losses of our available-for-sale marketable securities that have been in a continuous unrealized loss position deemed to be temporary, aggregated by investment category (in thousands):
 
June 30, 2019
 
Less than 12 Months
 
More than 12 Months
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Certificates of deposit
$

 
$

 
$
2,254

 
$
(1
)
Total
$

 
$

 
$
2,254

 
$
(1
)
 
September 30, 2018
 
Less than 12 Months
 
More than 12 Months
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Certificates of deposit
$

 
$

 
$
4,736

 
$
(20
)
Total
$

 
$

 
$
4,736

 
$
(20
)
6. FAIR VALUE MEASUREMENTS
Financial assets and liabilities are classified in the 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
 
June 30, 2019
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Money market
$
20,302

 
$
20,302

 
$

 
$

Certificates of deposit
2,254

 

 
2,254

 

Total assets measured at fair value
$
22,556

 
$
20,302

 
$
2,254

 
$

Liabilities:
 
 
 
 
 
 
 
Contingent consideration on acquired businesses
$
5,405

 
$

 
$

 
$
5,405

Total liabilities measured at fair value
$
5,405

 
$

 
$

 
$
5,405


12


6. FAIR VALUE MEASUREMENTS (CONTINUED)
 
Total Fair
Value at
 
Fair Value Measurements Using
 Inputs Considered as
 
September 30, 2018
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Money market
$
24,318

 
$
24,318

 
$

 
$

Certificates of deposit
4,736

 

 
4,736

 

Total assets measured at fair value
$
29,054

 
$
24,318

 
$
4,736

 
$

Liabilities:
 
 
 
 
 
 
 
Contingent consideration on acquired businesses
$
10,065

 
$

 
$

 
$
10,065

Total liabilities measured at fair value
$
10,065

 
$

 
$

 
$
10,065

In connection with the October 2015 acquisition of Bluenica Corporation (“Bluenica”), we may be required to make contingent payments over a period of up to four years, subject to achieving specified revenue thresholds for sales of Bluenica products. The fair value of the liability for contingent consideration recognized was $10.4 million upon acquisition and was $2.9 million at June 30, 2019. We paid $0.5 million in fiscal 2017, no payments in fiscal 2018 and $2.2 million in the second quarter of fiscal 2019.
In connection with the November 2016 acquisition of FreshTemp, LLC (“FreshTemp”), we were required to make a contingent payment after June 30, 2018, for revenue related to specific customer contracts signed by June 30, 2017. The fair value of the liability for consideration recognized upon acquisition was $1.3 million. We made a final payment of $0.2 million during the first quarter of fiscal 2019.
In connection our acquisition of TempAlert, we agreed to make contingent payments for the twelve month periods ending December 31, 2018 and December 31, 2019 based on the total Digi IoT Solutions segment revenue (see Note 2 to the consolidated financial statements). The fair value of the liability for contingent consideration was zero, both upon acquisition and at June 30, 2019.
In connection with our acquisition of Accelerated, we agreed to make contingent payments, based upon certain thresholds (see Note 2 to the consolidated financial statements). The fair values of the liability for contingent consideration recognized upon acquisition of Accelerated on January 22, 2018 and at June 30, 2019 were $2.3 million and $2.5 million, respectively. The increase was a result of Accelerated outperforming initial revenue expectations. We made the first installment of $3.5 million in the third quarter of fiscal 2019.
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 June 30,
 
Nine months ended June 30,
 
2019
 
2018
 
2019
 
2018
Fair value at beginning of period
$
8,527

 
$
8,263

 
$
10,065

 
$
6,388

Purchase price contingent consideration

 

 

 
2,300

Contingent consideration payments
(3,500
)
 

 
(5,848
)
 

Change in fair value of contingent consideration
378

 
758

 
1,188

 
333

Fair value at end of period
$
5,405

 
$
9,021

 
$
5,405

 
$
9,021

The change in fair value of contingent consideration reflects our estimate of the probability 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 June 30, 2019 based on the probability of achieving the specified revenue thresholds at a range of 95.2% to 100.0% for Bluenica, 0% for TempAlert, and a range of 70.0% to 100.0% for Accelerated. A significant change in our estimates of achieving the relevant targets could materially change the fair value of the contingent consideration liability.

13


7. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Amortizable intangible assets were (in thousands):
 
June 30, 2019
 
September 30, 2018
 
Gross
carrying
amount
 
Accum.
amort.
 
Net
 
Gross
carrying
amount
 
Accum.
amort.
 
Net
Purchased and core technology
$
57,888

 
$
(50,455
)
 
$
7,433

 
$
58,102

 
$
(48,693
)
 
$
9,409

License agreements
102

 
(67
)
 
35

 
102

 
(46
)
 
56

Patents and trademarks
14,552

 
(11,725
)
 
2,827

 
15,701

 
(12,242
)
 
3,459

Customer relationships
46,457

 
(24,261
)
 
22,196

 
46,605

 
(21,049
)
 
25,556

Non-compete agreements
600

 
(300
)
 
300

 
600

 
(210
)
 
390

Order backlog
1,800

 
(1,800
)
 

 
1,800

 
(1,350
)
 
450

Total
$
121,399

 
$
(88,608
)
 
$
32,791

 
$
122,910

 
$
(83,590
)
 
$
39,320

Amortization expense was $2.1 million and $2.6 million for the three month periods ended June 30, 2019 and 2018, respectively, and $6.7 million and $6.9 million for the nine month periods ended June 30, 2019 and 2018, respectively. Amortization expense is recorded on our consolidated statements of operations within cost of sales and in general and administrative expense.
Estimated amortization expense related to intangible assets for the remainder of fiscal 2019 and the five succeeding fiscal years is (in thousands):
2019 (three months)
$
2,094

2020
8,277

2021
7,442

2022
6,590

2023
4,392

2024
3,704

The changes in the carrying amount of goodwill by reportable segments are (in thousands):
 
Nine months ended June 30,
 
IoT
Products and Services
 
IoT
Solutions
 
Total
Beginning balance, October 1
$
104,358

 
$
50,177

 
$
154,535

Foreign currency translation adjustment
(404
)
 
(179
)
 
(583
)
Ending balance, June 30
$
103,954

 
$
49,998

 
$
153,952

Goodwill is tested for impairment on an annual basis as of June 30, or more frequently if events or circumstances occur which could indicate impairment. We have two reportable operating segments, our IoT Solutions segment and our IoT Products & Services segment (see Note 9 to the Condensed Consolidated Financial Statements). These two operating segments constitute separate reporting units for purposes of the ASC 350-20-35 “Goodwill Measurement of Impairment” assessment and both units were tested individually for impairment.
Our test for potential goodwill impairment is a two-step approach. We first assess qualitative factors to determine whether the existence of events or circumstances to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value. If we determine based on this assessment that it is more likely than not that the fair value of a reporting units is less than its carrying amount, we perform the goodwill impairment test. This test requires us to determine the fair value of the reporting unit and compare it to the carrying amount, including goodwill, of such reporting unit. If the fair value exceeds the carrying amount, no impairment loss is recognized. However, if the carrying amount of the reporting unit exceeds its fair value, the goodwill of the reporting units is impaired and an impairment loss would be recognized.
We had a total of $104.0 million of goodwill on our Condensed Consolidated Balance Sheet for the IoT Products & Services reporting unit and $50.0 million of goodwill on our Condensed Consolidated Balance Sheet for the IoT Solutions reporting unit

14


7. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET (CONTINUED)
as of June 30, 2019. At June 30, 2019, fair value exceeded the carrying value by more than 10% for both reporting units. Implied fair values for both reporting units were each calculated on a standalone basis using a weighted combination of the income approach and market approach.
The income approach indicates the fair value of a business based on the value of the cash flows the business or asset can be expected to generate in the future.  A commonly used variation of the income approach used to value a business is the discounted cash flow (“DCF”) method.  The DCF method is a valuation technique in which the value of a business is estimated on the earnings capacity, or available cash flow, of that business.  Earnings capacity represents the earnings available for distribution to stockholders after consideration of the reinvestment required for future growth.  Significant judgment is required to estimate the amount and timing of future cash flows for each reporting unit and the relative risk of achieving those cash flows.
The market approach indicates the fair value of a business or asset based on a comparison of the business or asset to comparable publicly traded companies or assets and transactions in its industry as well as prior company or asset transactions.  This approach can be estimated through the guideline company method.  This method indicates fair value of a business by comparing it to publicly traded companies in similar lines of business.  After identifying and selecting the guideline companies, we make judgments about the comparability of the companies based on size, growth rates, profitability, risk, and return on investment in order to estimate market multiples.  These multiples are then applied to the reporting units to estimate a fair value.

The implied fair values of each reporting unit were added together to get an indicated value of total equity to which a range of indicated value of total equity was derived. This range was compared to the total market capitalization of $356.6 million as of June 30, 2019, which implied a range of control premiums of 13.3% to 20.3%. This range of control premiums fell below the control premiums observed in the last five years in the communications equipment industry. As a result, the market capitalization reconciliation analysis proved support for the reasonableness of the fair values estimated for each individual reporting unit.
Should the facts and circumstances surrounding our assumptions change, the first step of our goodwill impairment analysis may fail.  Assumptions and estimates to determine fair values are complex and often subjective.  They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts.  For example, if our future operating results do not meet current forecasts or if we experience a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of one or more of our reporting units, we may be required to record future impairment charges for goodwill.  An impairment could have a material effect on our consolidated balance sheet and results of operations.  We have had no goodwill impairment losses since the adoption of ASC 350, Intangibles-Goodwill and Others, in fiscal 2003.
8. SALE OF BUILDING
On October 2, 2018, we sold our 130,000 square feet corporate headquarters building in Minnetonka, Minnesota to Minnetonka Leased Housing Associates II, LLLP. The sale price was $10.0 million in cash adjusted for certain selling costs and an escrow for the leaseback of the building for four months. At September 30, 2018 the net book value of the land, building and improvements was $5.2 million and listed as assets held for sale on our Condensed Consolidated Balance Sheet. As a result, we recorded a $1.1 million tax benefit in the fourth quarter of fiscal 2018 because we were able to use credit loss carryforwards which previously had a valuation allowance. We recorded a gain of $4.4 million ($3.4 million net of tax) in the first quarter of fiscal 2019, which is recorded in general and administrative expense. During the nine months ended June 30, 2019, we paid $6.8 million for leasehold improvements to build out our new headquarters space. These improvements will be depreciated over 10 years, which is the estimated useful life of the improvements.

15


9. SEGMENT INFORMATION
We have two reportable operating segments: (1) IoT Products & Services, and (2) IoT Solutions. Summary operating results for each of our segments were as follows (in thousands):
 
 
Three months ended June 30,
 
Nine months ended June 30,
 
 
2019
 
2018
(as adjusted)*
 
2019
 
2018
(as adjusted)*
Revenue
 
 
 
 
 
 
 
 
IoT Products & Services
 
$
50,510

 
$
54,406

 
$
159,843

 
$
145,111

IoT Solutions
 
10,656

 
7,866

 
29,400

 
16,664

Total revenue
 
$
61,166

 
$
62,272

 
$
189,243

 
$
161,775

Operating income (loss)
 
 
 
 
 
 
 
 
IoT Products & Services
 
$
3,117

 
$
4,544

 
$
13,969

 
$
10,497

IoT Solutions
 
(1,496
)
 
(2,120
)
 
(6,005
)
 
(9,254
)
Total operating income
 
$
1,621

 
$
2,424

 
$
7,964

 
$
1,243

Depreciation and amortization
 
 
 
 
 
 
 
 
IoT Products & Services
 
$
1,391

 
$
1,754

 
$
4,711

 
$
4,332

IoT Solutions
 
1,795

 
1,719

 
5,301

 
4,974

Total depreciation and amortization
 
$
3,186

 
$
3,473

 
$
10,012

 
$
9,306

*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which we adopted on October 1, 2018.
Total expended for property, plant and equipment was as follows (in thousands):
 
 
Nine months ended June 30,
 
 
2019
 
2018
Expended for property, equipment and improvements
 
 
 
 
IoT Products & Services
 
$
8,212

 
$
963

IoT Solutions*
 
388

 

Total expended for property, plant and equipment
 
$
8,600

 
$
963

* Excluded from this amount is $921 and $1,750 of transfers of inventory to property plant and equipment for the nine months ended June 30, 2019 and 2018, respectively.
Total assets for each of our segments were as follows (in thousands):
 
 
June 30, 2019

 
September 30, 2018
(as adjusted)*
Assets
 
 
 
 
IoT Products & Services
 
$
204,069

 
$
209,574

IoT Solutions
 
94,828

 
99,822

Unallocated**
 
86,349

 
62,750

Total assets
 
$
385,246

 
$
372,146

*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which we adopted on October 1, 2018.
**Unallocated consists of cash and cash equivalents and current marketable securities.

16


10. REVENUE
Revenue Disaggregation
The following summarizes our revenue by geographic location of our customers:
 
Three months ended June 30,
 
Nine months ended June 30,
($ in thousands)
2019
 
2018
(as adjusted)*
 
2019
 
2018
(as adjusted)*
North America, primarily the United States
$
43,604

 
$
44,740

 
$
138,808

 
$
113,246

Europe, Middle East & Africa
9,582

 
10,216

 
30,450

 
29,876

Rest of world
7,980

 
7,316

 
19,985

 
18,653

Total revenue
$
61,166

 
$
62,272

 
$
189,243

 
$
161,775

*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which we adopted on October 1, 2018.
Net sales of services and solutions disaggregated by product group:
 
Three months ended June 30,
 
Nine months ended June 30,
($ in thousands)
2019
 
2018
(as adjusted)*
 
2019
 
2018
(as adjusted)*
IoT Products & Services Segment
 
 
 
 
 
 
 
Product
$
47,136

 
$
51,691

 
$
150,045

 
$
137,733

Services
3,374

 
2,715

 
9,798

 
7,378

Total IoT Products & Services Segment
50,510

 
54,406

 
159,843

 
145,111

IoT Solutions Segment
 
 
 
 
 
 
 
Solutions
10,656

 
7,866

 
29,400

 
16,664

Total Revenue
$
61,166

 
$
62,272

 
$
189,243

 
$
161,775

*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which we adopted on October 1, 2018.
Contract Balances
Contract Assets
Contract assets consist of subscriber assets.  These subscriber assets relate to an implementation fee in certain contracts that we charge our customers so they can begin using the equipment. In this case, we retain the ownership of this equipment that the customer uses. The total net book value of subscriber assets of $2.3 million and $2.1 million as of June 30, 2019 and September 30, 2018, respectively, are included in property, equipment and improvements, net. Amortization expense for these subscriber assets was $0.3 million and $0.2 million for the three month periods ended June 30, 2019 and June 30, 2018, respectively and $0.7 million and $0.3 million for the nine month periods ended June 30, 2019 and June 30, 2018, respectively. We amortize the cost of this equipment over its useful life (typically three years).
Contract Liabilities
The timing of revenue recognition may differ from the timing of invoicing to customers. Customers are invoiced for subscription services in advance on a monthly, quarterly or annual basis. Contract liabilities consist of unearned revenue related to annual or multi-year contracts for subscription services and related implementation fees for our IoT Solutions segment and our Digi Remote Manager® services in our IoT Products & Services segment.

17


10. REVENUE (CONTINUED)
Changes in unearned revenue were as follows:
 
 
Nine months ended
June 30,
($ in thousands)
 
2019
Unearned revenue, beginning of period*
 
$
3,933

Billings
 
18,908

Revenue recognized
 
(17,370
)
Unearned revenue, end of period
 
$
5,471

*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which we adopted on October 1, 2018.
Remaining Transaction Price
Transaction price allocated to the remaining performance obligations represents contracted revenue that has not been recognized, which includes unearned revenue and unbilled amounts that will be recognized as revenue in future periods. As of June 30, 2019 approximately $7.2 million of revenue is expected to be recognized from remaining performance obligations for subscriptions contracts. We expect to recognize revenue on approximately $4.9 million of remaining performance obligations over the next twelve months. Revenue from the remaining performance obligations we expect to recognize revenue over a range of two to five years.
11. INCOME TAXES
Our income tax expense was $0.9 million for the nine months ended June 30, 2019. Included in this expense was a net tax benefit discretely related to the nine months ended June 30, 2019 of $0.6 million, primarily a result of expiring statute of limitations of uncertain tax benefits as well as adjustments from the filing of the federal and foreign income tax returns. For the nine months ended June 30, 2019, our effective tax rate before items discretely related to the period was less than the U.S. statutory rate due primarily to certain income tax credits generated in the U.S.
Income tax expense was $3.2 million for the nine months ended June 30, 2018. Included in this expense was a net tax expense discretely related to the nine months ended June 30, 2018 of $3.0 million, primarily as a result of new U.S. tax legislation that was enacted during the first quarter of fiscal 2018. For the nine months ended June 30, 2018, our effective tax rate before items discretely related to the period was less than the U.S. statutory rate primarily due to the mix of income between taxing jurisdictions, certain of which had lower statutory tax rates than the U.S., and also due to certain tax credits generated in the U.S.
Our effective tax rate will vary based on a variety of factors, including overall profitability, the geographical mix of income before taxes and related statutory tax rate in each jurisdiction, and tax items discretely related to the period, such as settlements of audits. We expect that we may record other benefits or expenses in the future that are specific to a particular quarter such as expiration of statutes of limitation, the completion of tax audits, or legislation that is enacted for both U.S. and foreign jurisdictions.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is (in thousands):
Unrecognized tax benefits as of September 30, 2018
$
1,561

Decreases related to:
 
Prior year income tax positions
(34
)
Expiration of statute of limitations
(128
)
Unrecognized tax benefits as of June 30, 2019
$
1,399

The total amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate is $1.3 million, after considering the impact of interest and deferred benefit items. We expect that the total amount of unrecognized tax benefits will decrease by a minimal amount over the next 12 months.

18


12. PRODUCT WARRANTY OBLIGATION
The following table summarizes the activity associated with the product warranty accrual (in thousands) and is included on our Condensed Consolidated Balance Sheets within current liabilities:
 
Balance at
 
Warranties
 
Settlements
 
Balance at
Period
April 1
 
issued
 
made
 
June 30
Three months ended June 30, 2019
$
1,109

 
$
47

 
$
(101
)
 
$
1,055

Three months ended June 30, 2018
$
1,348

 
$
82

 
$
(135
)
 
$
1,295

 
 
 
 
 
 
 
 
 
Balance at
 
Warranties
 
Settlements
 
Balance at
Period
October 1
 
issued
 
made
 
June 30
Nine months ended June 30, 2019
$
1,172

 
$
263

 
$
(380
)
 
$
1,055

Nine months ended June 30, 2018
$
987

 
$
798

 
$
(490
)
 
$
1,295

13. COMMITMENTS AND CONTINGENCIES
Lease Commitments
In October 2018, we signed a thirteen-year lease agreement for our new headquarters located in Hopkins, Minnesota, with minimum lease obligations of $14.8 million with Colfin Midwest NNN Investor, LLC for 59,497 square feet of office space. In April 2019, we received $3.3 million for a tenant improvement allowance associated with our new headquarters. 
We have entered into various operating lease agreements for office facilities and equipment, the last of which expires in fiscal 2032. The office facility leases generally require us to pay a pro-rata share of the lessor’s operating expenses. Certain operating leases contain escalation clauses and are being amortized on a straight-line basis over the term of the lease.
The following schedule reflects future minimum rental commitments at June 30, 2019 under noncancelable operating leases (in thousands):
Fiscal year
 
Amount
2019 (three months)
 
$
426

2020
 
2,522

2021
 
2,490

2022
 
2,228

2023
 
2,049

2024
 
2,095

Thereafter
 
11,361

Total minimum payments required
 
$
23,171

Contingencies
In November 2018, DimOnOff Inc., a company headquartered in Quebec City, Quebec, Canada (“DimOnOff”), which sells control systems in the building automation and street lighting markets sued us and a former distributor from whom DimOnOff purchased certain of our products.  The suit was brought in the Superior Court of the Province of Quebec in the District of Quebec (Canada) and alleges certain Digi products it purchased and incorporated into street lighting systems in a Canadian city were defective causing some of the street lights to malfunction.  It alleges damages of just over CAD 1.0 million.  We intend to defend ourselves against DimOnOff’s claims.  At this time we cannot assess the likelihood or amount of any potential loss.
In addition to the matter discussed above, in the normal course of business, we are subject to various claims and litigation. There can be no assurance that any claims by third parties, if proven to have merit, will not materially adversely affect our business, liquidity or financial condition.

19


14. STOCK-BASED COMPENSATION
Stock-based awards were granted under the 2019 Omnibus Incentive Plan (the “2019 Plan”) beginning February 4, 2019 and, prior to that, were granted under the 2018 Omnibus Incentive Plan (the “2018 Plan”). Upon stockholder approval of the 2019 Plan, we ceased granting awards under any prior plan. Shares subject to awards under prior plans that are forfeited, canceled, returned to the Company for failure to satisfy vesting requirements, settled in cash or otherwise terminated without payment also will be available for grant under the 2019 Plan. The authority to grant options under the 2019 Plan and to set other terms and conditions rests with the Compensation Committee of the Board of Directors.
The 2019 Plan authorizes the issuance of up to 1,500,000 common shares in connection with awards of stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based full value awards or other stock-based awards. Eligible participants include our employees, our affiliates, non-employee directors of our Company and any consultant or advisor who is a natural person and provides services to us or our affiliates. Options that have been granted under the 2019 Plan typically vest over a four-year period and will expire if unexercised after seven years from the date of grant. Restricted stock unit awards (“RSUs”) that have been granted to directors typically vest in one year. RSUs that have been granted to executives and employees typically vest in January over a four-year period. The 2019 Plan is scheduled to expire on February 3, 2029. Options under the 2019 Plan can be granted as either incentive stock options or non-statutory stock options. The exercise price of options and the grant date price of restricted stock units is determined by our Compensation Committee but will not be less than the fair market value of our common stock based on the closing price as of the date of grant. Upon exercise of options or settlement of vested restricted stock units, we issue new shares of stock. As of June 30, 2019, there were approximately 1,556,370 shares available for future grants under the 2019 Plan.
Our equity plans and corresponding forms of award agreements generally have provisions allowing employees to elect to satisfy tax withholding obligations through the delivery of shares, having us retain a portion of shares issuable under the award or paying cash to us for the withholding. During the nine months ended June 30, 2019 and 2018, our employees forfeited 91,580 shares and 72,918 shares, respectively in order to satisfy $1.1 million and $0.7 million, respectively of withholding tax obligations related to stock-based compensation, pursuant to terms of awards under our board and shareholder-approved compensation plans for each respective period.
Employee contributions to the Employee Stock Purchase Plan (the “Purchase Plan”) were $0.8 million and $0.9 million during the nine month periods ended June 30, 2019 and 2018, respectively. Pursuant to the Purchase Plan, 90,592 and 105,732 common shares were issued to employees during the nine months ended June 30, 2019 and 2018, respectively. Shares are issued under the Purchase Plan from treasury stock. As of June 30, 2019, 224,984 common shares were available for future issuances under the Purchase Plan.
Stock-based compensation expense is included in the consolidated results of operations as follows (in thousands):
 
Three months ended June 30,
 
Nine months ended June 30,
 
2019
 
2018
 
2019
 
2018
Cost of sales
$
55

 
$
49

 
$
135

 
$
145

Sales and marketing
453

 
406

 
1,272

 
1,131

Research and development
268

 
168

 
737

 
343

General and administrative
697

 
597

 
2,036

 
1,979

Stock-based compensation before income taxes
1,473

 
1,220

 
4,180

 
3,598

Income tax benefit
(306
)
 
(249
)
 
(863
)
 
(747
)
Stock-based compensation after income taxes
$
1,167

 
$
971

 
$
3,317

 
$
2,851


20


14. STOCK-BASED COMPENSATION (CONTINUED)
Stock Options
The following table summarizes our stock option activity (in thousands, except per common share amounts):
 
 
Options Outstanding
 
Weighted Average Exercised Price
 
Weighted Average Contractual Term (in years)
 
Aggregate Intrinsic Value (1)
Balance at September 30, 2018
 
3,526

 
$10.49
 
 
 
 
Granted
 
606

 
11.64
 
 
 
 
Exercised
 
(448
)
 
9.04
 
 
 
 
Forfeited / Canceled
 
(346
)
 
12.52
 
 
 
 
Balance at June 30, 2019
 
3,338

 
$10.68
 
4.1
 
$
6,983

 
 
 
 
 
 
 
 
 
Exercisable at June 30, 2019
 
2,226

 
$10.34
 
3.3
 
$
5,418

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $12.68 as of June 30, 2019, which would have been received by the option holders had all option holders exercised their options as of that date. The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price.

The total intrinsic value of all options exercised during the nine months ended June 30, 2019 was $1.7 million and during the nine months ended June 30, 2018 was $0.7 million.
The table below shows the weighted average fair value, which was determined based upon the fair value of each option on the grant date utilizing the Black-Scholes option-pricing model and the related assumptions: