Digi International Annual Report 2019

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-Kþ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended: September 30, 2019oro TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to .Commission file number: 1-34033DIGI 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 registeredCommon Stock, par value $.01 per share DGII The Nasdaq Stock Market LLCSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þIndicate 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 preceding12 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 oIndicate 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 oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growthcompany. 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 þNon-accelerated filer o Smaller reporting company o Emerging growth company oIf 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 financialaccounting standards provided pursuant to Section 13(a) of the Exchange Act. oIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þThe aggregate market value of voting stock held by non-affiliates of the Registrant as of the last business day of the Registrant's most recently competed second fiscal quarterwas $350,541,316 based on a closing price of $12.67 per common share as reported on the Nasdaq Global Select Market. (For purposes of this calculation all of the registrant'sdirectors and executive officers are deemed affiliates of the registrant.)Shares of common stock outstanding as of November 18, 2019: 28,314,196DOCUMENTS INCORPORATED BY REFERENCEPortions of the Registrant's Proxy Statement for its 2020 Annual Meeting of Stockholders are incorporated by reference into Part III hereto. INDEX PagePART I. ITEM 1. Business1ITEM 1A. Risk Factors6ITEM 1B. Unresolved Staff Comments16ITEM 2. Properties16ITEM 3. Legal Proceedings16ITEM 4. Mine Safety Disclosures16 PART II. ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities16ITEM 6. Selected Financial Data18ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations19ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk29ITEM 8. Financial Statements and Supplementary Data30ITEM 9. Changes in and Disagreements with Accountants On Accounting and Financial Disclosure62ITEM 9A. Controls and Procedures62ITEM 9B. Other Information64 PART III. ITEM 10. Directors, Executive Officers and Corporate Governance64ITEM 11. Executive Compensation65ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters65ITEM 13. Certain Relationships and Related Transactions, and Director Independence65ITEM 14. Principal Accounting Fees and Services65 PART IV. ITEM 15. Exhibits, Financial Statement Schedules66ITEM 16. Form 10-K Summary69iTable of ContentsPART I.ITEM 1. BUSINESSGeneral Background and Product OfferingsDigi International Inc. ("Digi," "we," "our," or "us") was incorporated in 1985 as a Minnesota corporation. We were reorganized as a Delaware corporation in 1989in conjunction with our initial public offering. Our common stock is traded on the Nasdaq Global Select Market tier of the Nasdaq Stock Market LLC under thesymbol DGII. Our World Headquarters is located at 9350 Excelsior Blvd., Suite 700, Hopkins, Minnesota 55343. The telephone number at our WorldHeadquarters is (952) 912-3444.We are a leading global provider of business and mission-critical Internet of Things ("IoT") connectivity products, services and solutions. We help our customerscreate next-generation connected products and solutions to deploy, monitor and manage critical communications infrastructures and compliance standards indemanding environments with high levels of security and reliability. We have two reportable operating segments under applicable accounting standards: (i) IoTProducts & Services segment; and (ii) IoT Solutions segment.Our IoT Products & Services segment offers products and services that help original equipment manufacturers ("OEMs"), enterprise and government customerscreate and deploy, secure IoT connectivity solutions. From embedded and wireless modules to console servers, enterprise and industrial routers, we providecustomers with a wide variety of communication sub-assemblies and finished products to meet their IoT communication requirements. In addition, the IoTProducts & Services segment provides our customers with a device management platform and other professional services to enable customers to capture andmanage data from devices they connect to networks.Our IoT Solutions segment offers wireless temperature and other condition-based monitoring services as well as employee task management services. Thesesolutions are focused on the following vertical markets: food service, retail, healthcare (primarily pharmacies), transportation/logistics and education. Thesesolutions are marketed as SmartSense by Digi™. We have formed, expanded and enhanced the IoT Solutions segment through four acquisitions.For more in-depth descriptions of our products and services, please refer to the heading "Principal Products and Services" at the end of Part I, Item 1 of this Form10-K.Our corporate website address is www.digi.com. In the "Company - Investor Relations" section of our website, we make our annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K, our proxy statement and any amendments to these reports available free of charge as soon asreasonably practicable after these reports are filed with or furnished to the United States Securities and Exchange Commission ("SEC"). Information on our websiteis not incorporated by reference into this report or any other report we file with or furnish to the SEC.Industry and Marketplace ConditionsCurrent Market Conditions and Status of Our BusinessWe believe the IoT industry is in the midst of a long-term expansion as many industries are undergoing a digital transformation within their business that drivesdemand for IoT capabilities across a broad spectrum of services. IoT use cases include automating workflows, condition-based monitoring and asset tracking.The performance of our IoT Products & Services segment in fiscal 2019, which is the significant majority of our sales, experienced growth. This growth wasdriven primarily by our acquisition of Accelerated Concepts, Inc. ("Accelerated") in the second quarter of fiscal 2018, new product introductions and largecustomer deployments. This segment sells both wired and wireless products that are either embedded into the products of OEMs or as stand-alone products. Theseofferings allow our customers to connect a wide range of assets to networks. The growth of this segment was not universal across all products. For instance, thesegment has a number of products that are in the mature phase of their life cycle and have been experiencing sales declines for several years. While we expect anongoing trend of marketplace growth, it is susceptible to downturns either because of general economic conditions, the continued development of technology thatcan make products less competitive or even obsolete and uncertainty or changes in regulatory environments. Sales of many of our products are also subject to largeproject-based customer deployments. As such, if we are unable to identify and commence new deployments with equal or greater significance than completedprojects, our growth from period to period may be inconsistent and this segment may contract in any given period.1Table of ContentsOur IoT Solutions segment continued to experience significant growth in fiscal 2019 as we continue to integrate the acquisitions we have made in this segment andoffer more comprehensive task management monitoring solutions to our customers. In September 2019, we launched a new SmartSense IoT Platform. This newplatform integrates the platforms from the acquisitions and provides redesigned multi-sensor monitoring and reporting that affords users enhanced equipmentmanagement abilities with an asset-versus-sensor focus. The new platform is capable of further incorporating data from multiple sensor types into asingle monitoring and reporting platform, to deliver real-time and detailed information on critical business assets and equipment.StrategyWe continue to take significant steps intended to deliver consistent long-term growth with higher levels of profitability.IoT Products & Services SegmentOur IoT Products & Services segment is being managed with an expectation for modest revenue and profitability growth. We recently have focused more attentionon pairing our hardware offerings with our Digi Remote Manager® device management platform as well as other support services. These bundled offerings allowcustomers to monitor and manage the performance of our hardware remotely. We may seek to acquire hardware or other businesses that we believe can improveour market position in this segment.IoT Solutions SegmentOur IoT Solutions segment is being managed primarily for significant revenue growth. This segment was formed and has grown primarily through acquisitions.While this segment still represents a modest overall portion of total revenues, we have high organic growth expectations and we intend to seek added scale andgrowth through acquisitions.This business helps customers monitor temperature and other conditions important to preserve the quality of perishable or other sensitive inventories and tracks thecompletion of employee tasks. Our efforts have created a market-leading, high-growth hardware enabled service business with significant recurring revenuepotential. At present this marketplace primarily is served by smaller companies that lack the infrastructure to provide hardware-enabled implementation services tocustomers in as effective and efficient a manner as we are able to do because of our long-standing history as an IoT hardware provider.We now serve over 63,000 customer sites for many leading brands in the following vertical markets: food service, retail, healthcare (primarily pharmacies),transportation/logistics and education. We entered these markets aggressively as they share similar needs for continuous monitoring and asset tracking forcompliance and regulatory purposes. We believe these markets comprise a large addressable market with low customer penetration.Acquisitions and DispositionsAcquisitionsSince fiscal 2015, we have acquired four businesses that form the basis of our IoT Solutions segment and one business that is included in our IoT Products andServices segment.In October 2015, we acquired Ontario-based Bluenica Corporation ("Bluenica"). Bluenica focused on temperature monitoring of perishable goods in the foodindustry by using wireless sensors to ensure that quality, freshness and public health requirements are met.In November 2016, we acquired Pittsburgh-based FreshTemp, LLC ("FreshTemp®"). FreshTemp® offered restaurants, convenience stores and other retailers theability to monitor the temperature of food products automatically through the use of wireless sensors. The company also enabled these businesses to track thecompletion of operational tasks by their employees that could impact human health and safety in real time.In January 2017, we acquired Indiana-based SMART Temps,LLC (" SMART Temps®"). SMART Temps® provided real-time temperature management forrestaurant, grocery, education and healthcare settings. The acquisition significantly expanded our customer base, especially in the pharmacy and educationmarketplaces.In October 2017, we acquired Boston-based TempAlert, LLC ("TempAlert"), a provider of automated, real-time temperature monitoring and task managementsolutions for the healthcare, industrial and food service industries. This acquisition more than doubled the number of customer sites we monitored while enhancingour ability to analyze data collected from our services.2Table of ContentsIn January 2018, we acquired Tampa-based Accelerated, a provider of secure, enterprise-grade, cellular (LTE) networking equipment and backup connectivityapplications. This acquisition expanded our IoT Products and Services segment by enhancing our existing cellular product lines and extended our market reachwith a line of commercial routers and network appliance products.In November 2019, we announced that we entered into an agreement to acquire New Jersey-based Opengear, Inc., a provider of secure IT infrastructure productsand software. This acquisition provides products that are complementary to our IoT Products and Services segment.DispositionIn October 2015, we sold our Etherios CRM consulting services business to West Monroe Partners, LLC. We sold Etherios as part of a strategy to focus onproviding highly reliable machine connectivity solutions for business and mission-critical application environments.These are the only acquisitions and dispositions we have completed in the past five years. We will continue to evaluate strategic opportunities to acquire businessesas they arise and may seek to divest businesses or assets we no longer consider appropriate to our long-term strategy.Sales ChannelsA significant portion of our IoT Products & Services segment sales are made through a global network of distributors, systems integrators and value addedresellers ("VARs"). These third parties accounted for 46.1%, 51.3% and 61.6% of our total consolidated revenue in fiscal 2019, 2018 and 2017, respectively. OurIoT Solutions segment does not sell through these channels. We also complete sales of both IoT Products & Services and IoT Solutions through our own dedicatedsales organization to OEMs, large enterprise customers and other end user customers which accounted for 53.9%, 48.7% and 38.4% of our total consolidatedrevenue in fiscal 2019, 2018 and 2017, respectively.DistributorsOur larger distributors, by sales volume, include Anewtech Systems, Arrow Electronics, Atlantik Elektronik GmbH, Avnet, Digi-Key, Express Systems &Peripherals, Ingram Micro, Miel, Mouser Electronics, Sapply, Solid State Supplies, Symmetry Electronics, Synnex, Tech Data and Tokyo Electron Device. Wealso maintain relationships with many other distributors in the U.S., Canada, Europe, Asia Pacific and Latin America.Strategic Sales RelationshipsWe maintain alliances with other industry leaders to develop and market technology solutions. These include many major communications hardware and softwarevendors, operating system suppliers, computer hardware manufacturers, enterprise application providers and cellular carriers. Among others, relationships include:AT&T, Bell Mobility, NXP, Orange, Rogers, Silicon Laboratories, Sprint, Telus, Telit, T-Mobile, Verizon, Vodafone and several other cellular carriers worldwide.We have established relationships with equipment vendors in a range of industries such as energy, industrial, retail, transportation, medical, and government thatallow these partners to ship our products and services as component parts of their overall solutions. Our products are used by many of the world’s leadingtelecommunications companies and Internet service providers, including AT&T, Sprint and Verizon.No single customer comprised more than 10% of our consolidated revenue for any of the years ended September 30, 2019, 2018 or 2017.CompetitionWe compete primarily in the communications technology industry. This industry is characterized by rapid technological advances and evolving industry standards.This market can be affected significantly by new product introductions and marketing activities of industry participants. In addition, we may compete with othercompanies to acquire new businesses or technologies and the competition to secure such assets may be intense. We compete for customers on the basis of existingand planned product features, service and software application capabilities, company reputation, brand recognition, technical support, alliance relationships,quality and reliability, product development capabilities, price and availability. While no competitor offers a comparable range of products and services, variouscompanies do compete with us with respect to one or more of our products or solutions. With respect to many of our product and service offerings, we facecompetition from companies who dedicate more resources and attention to that particular offering than we are able to do given the breadth of our3Table of Contentsbusiness. As the marketplace for IoT connectivity products and solutions continues to grow, we expect to encounter increased competition. Some of thesecompetitors may have access to significantly more financial and technical resources than we possess.Manufacturing OperationsWe outsource our manufacturing operations to certain contract manufacturers, which are located primarily in Thailand, China, Mexico and Taiwan. We rely onthird party foundries for our semiconductor devices that are Application Specific Integrated Circuits ("ASICs"). We also outsource printed circuit boardproduction. By outsourcing our operations to these manufacturers, we can leverage the manufacturing strength of our vendors and allow us to focus on new productintroductions. In addition, it allows us to reduce our fixed costs, maintain production flexibility and optimize our profits.Our products are manufactured to our designs with standard and custom components. Most of the components are available from multiple vendors. We haveseveral single-sourced supplier relationships, either because alternative sources are not available or because the relationship is advantageous to us. If thesesuppliers are unable to provide a timely and reliable supply of components, we could experience manufacturing delays that could adversely affect our consolidatedresults of operations in a material way.SeasonalityIn general, our business is not considered to be highly seasonal, although our first fiscal quarter revenue is often less than other quarters due to holidays and fewershipping days.Working CapitalWe fund our business operations through a combination of cash and cash equivalents, marketable securities and cash generated from operations. We believe thatour current financial resources, cash generated from operations and our capacity for debt and/or equity financing will be sufficient to fund our business operationsfor the next twelve months and beyond.Research & Development and Intellectual Property RightsDue to rapidly changing technology in the communications technology industry, we believe a large part of our success depends upon the product and servicedevelopment skills of our personnel as well as our ability to integrate any acquired technologies with organically developed technologies. While we dedicatesignificant resources to research and development, many of our competitors are focused on a smaller set of products than us and are likely able to dedicate moreresources than us toward the portions of the market in which we compete with them.Our proprietary rights and technology are protected by a combination of copyrights, patents, trade secrets and trademarks.We have established common law and registered trademark rights on a family of marks for a number of our products. Our IoT Products and Services primarily aresold under the Digi, Rabbit® and Digi XBee® brands. We believe that the Digi and Rabbit® brands have established strong identities with our targeted customerbase and our customers associate the Digi brand with "reliability" and the Rabbit® brand with "ease of integration." We believe that our customers associate DigiXBee® with "ease of use." Many of our customers choose us because they are building a very complex system solution and they want the highest level in productreliability and ease of integration and use. Our IoT Solutions are offered under the SmartSense by Digi™ brand, which enables organizations to drive operationalexcellence through sensor-based insights.Our patents are applicable to specific technologies and are valid for varying periods of time based on the date of patent application or patent grant in the U.S. andthe legal term of patents in the various foreign countries where patent protection is obtained. We believe our intellectual property has significant value and is animportant factor in the marketing of our company and products.BacklogBacklog as of September 30, 2019 and 2018 was $39.8 million and $34.4 million, respectively. The majority of the backlog at September 30, 2019 is expected tobe shipped in fiscal 2020. Backlog as of any particular date is not necessarily indicative of our future sales trends.EmployeesWe had 543 employees on September 30, 2019.4Table of ContentsPRINCIPAL PRODUCTS AND SERVICESOur primary products and services for each operating segment are:IoT Products & Services SegmentHardware ProductsCellular routers and gateways - Cellular routers provide connectivity for devices over a cellular data network. They can be used as a cost effective alternative tolandlines for primary or backup connectivity for remote locations and devices. These products have been certified by the major wireless providers in NorthAmerica and abroad. Cellular gateway products enable devices or groups of devices to be networked in locations where there is no existing network or whereaccess to a network is prohibited. All of our cellular products can be augmented with services from our Digi Remote Manager® platform that provides securemanagement of devices across remote networks.Cellular Remote Management - Our cellular remote management products provide cellular router technology and device management solutions for businesscontinuity and out-of-band management. These products are used for failover backup or as the primary connection over and LTE cellular network. Remotemanagement devices have embedded LTE/3G cellular modem providing fast and reliable cellular connections without additional equipment. All connections areencrypted for security.Radio Frequency (RF) - Our RF products are small box gateway or module products that utilize a variety of wireless protocols for PC-to-device or device-to-device connectivity. These products often are used in locations where deploying a wired network is not possible either because of cost, disruption or impracticality.By supporting Digi XBee®, ZigBee, Wi-Fi and other radio frequency ("RF") technologies, we can meet most customer application requirements. Our RF productscan be connected into the Digi Remote Manager® for remote management, application connectivity and customization via RF gateways that have cellularconnectivity.Embedded - Our Connect, Rabbit® and ARM-based embedded systems on module, and single board computers are designed and developed with small footprints,low power consumption and software. This makes them a popular choice for manufacturers of medical, transportation and industrial devices. Single boardcomputer products and customer products that include cellular connectivity can be connected directly to the Digi Remote Manager® or other similar platforms,enabling remote management and remote application connectivity.Network - Our network products consist of console servers, serial servers and Universal Serial Bus (USB) solutions. Our console servers provide a secure remotegraphical access to computer systems and network equipment that can communicate with virtually any server or device. Our serial servers (also known as deviceservers and terminal servers) provide secure, reliable and flexible serial-to-Ethernet integration of most devices into wired Ethernet networks. Our USB solutionsinclude USB-to-serial converters that offer instant Input/Output (I/O) expansion for peripheral device connectivity. We also offer USB over Internet Protocol (IP)products that connect USB and serial devices on a wired or wireless Local Area Network (LAN), while eliminating the need for locally-attached host PCs. Inaddition, we also offer multiport USB hubs that offer a simple solution for adding switched USB ports to a PC or server.ServicesDigi Remote Manager® - Digi Remote Manager® is a recurring revenue service that provides a centralized remote device management solution. Digi RemoteManager® provides a secure environment for customers to aggregate their interaction with a large number of disparate devices and connect them to enterpriseapplications. It allows customers to meet service level commitments and stay compliant with Payment Card Industry Data Security Standard ("PCI DSS")standards and also allows customers to monitor, diagnose and fix remote devices without sending a technician on site.Digi Wireless Design Services - Our Digi Wireless Design Services provide customers turn-key wireless networking product development, testing, andcertification for a wide range of wireless technology platforms and applications.Digi Support Services - Our Digi Support Services provide various levels of technical support to customers with programming and implementation challengesrelated to Digi products. We offer base support up to our highest level of professional support, which includes implementation planning, application development,on-site support, installation and customer training. These support services help minimize design risk and ensure optimal performance.5Table of ContentsIoT Solutions SegmentSmartSense by Digi™ - Our SmartSense by Digi™ is an end-to-end, cost-effective system that uses sensors, gateways and cloud based applications to enablecustomers in food service, retail, healthcare (primarily pharmacies), transportation/logistics and education to (i) monitor wirelessly the temperature of food andother perishable or sensitive goods, (ii) monitor facilities or pharmacies by tracking the completion of operating tasks by employees, and (iii) have visibility in thesupply chain to product temperature through an end-to-end system for quality control and incident management. While our sales model varies across our differentproduct options and customer verticals within this segment, generally customers receive hardware up-front, including gateways and sensors, and pay a monthlysubscription for monitoring sensor data.ITEM 1A. RISK FACTORSMultiple risk factors exist which could have a material effect on our operations, results of operations, financial position, liquidity, capital resources and commonstock.Risks Relating to Our BusinessWe face intense competition from established companies that may have significant advantages over us and our products.The market for our products is intensely competitive. Certain of our competitors and potential competitors have or may develop greater financial, technological,manufacturing, marketing and personnel resources than us either generally or relative to the product sets they sell in competition to us. Further, there are numerouscompanies competing with us in various segments of the market for our products, and their products may have advantages over our products in areas such asconformity to existing and emerging industry standards, interoperability with other products, management and security capabilities, performance, price, ease ofuse, scalability, reliability, flexibility, product features and technical support.Our current and potential competitors have or may develop one or more of the following significant advantages over us in the product areas where they competewith us:•tighter focus on an individual product or productcategory;•greater financial, technical and marketing resources;•barriers to transition to ourproducts;•higher brand recognition across larger geographicregions;•more comprehensive product features and functionality;•longer-standing cooperative relationships with OEM and end-usercustomers;•superior customer service capacity andquality;•longer operating history; and•larger customerbase.We cannot provide assurance that we will be able to compete successfully with our current and potential competitors. Such competitors may be able to morequickly develop or adapt to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion andsale of their products. Additionally, it is probable that new competitors or new alliances among existing competitors could emerge and rapidly acquire significantmarket share.Our dependence on new product development and the rapid technological change that characterizes our industry make us susceptible to loss of market shareresulting from competitors’ product introductions and enhancements, service capabilities and similar risks.Our industry is characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions, short product life cycles incertain instances and rapidly changing customer requirements. The introduction of products and enhancements embodying new technologies that can disrupt one ormore markets in which we compete and the emergence of new industry standards or regulations impacting our industry can render existing products obsolete orunmarketable.Our future success will depend on our ability to enhance our existing products, to introduce new products to meet changing customer requirements and emergingtechnologies, and to demonstrate the performance advantages and cost-effectiveness of our products over competing products. Failure by us to modify ourproducts to support new alternative technologies or failure6Table of Contentsto achieve widespread customer acceptance of such modified products could cause us to lose market share and cause our revenue to decline. Further, if ourcompetitors offer better service capabilities associated with the implementation and use of their products, our business could be impacted negatively.We may experience delays in developing and marketing product enhancements or new products that respond to technological change, evolving industry standardsor regulations and changing customer requirements. There can be no assurance that we will not experience difficulties that could delay or prevent the successfuldevelopment, introduction, and marketing of these products or product enhancements, or that our new products and product enhancements will meet therequirements of the marketplace adequately and achieve any significant or sustainable degree of market acceptance in existing or additional markets. In addition,the future introductions or announcements of products by us or one of our competitors embodying new technologies or changes in industry standards or regulationsor customer requirements could render our then-existing products obsolete or unmarketable. This risk may become more pronounced as new competitors emergein markets where we sell our products, especially if these competitors have more resources than us to develop and market new products and technologies andprovide related services. There can be no assurance that the introduction or announcement of new product offerings by us or one or more of our competitors willnot cause customers to defer their purchase of our existing products, which could cause our revenue to decline.We intend to continue to devote significant resources to our research and development, which, if not successful, could cause a decline in our revenue and harm ourbusiness.We intend to continue to devote significant resources to research and development in the coming years to enhance our existing product offerings and developadditional product offerings. For fiscal 2019, 2018, and 2017, respectively, our research and development expenses were 14.8%, 14.6% and 15.8% of our revenue.If we are unable to enhance existing products and develop new products, applications and services as a result of our research and development efforts, if weencounter delays in deploying these enhanced or new products, applications and services, or if the products, applications and services we enhance or develop arenot successful, our business could be harmed. Even if we enhance existing products and develop new products, applications and services that are accepted by ourtarget markets, the net revenue from these products, applications and services may not be sufficient to justify our investment in research and development.Many of our products, applications and services have been developed through a combination of internally developed technologies and acquired technologies. Ourability to continue to develop products, applications and services could be partially dependent on finding and acquiring new technologies in the marketplace. Evenif we identify new technologies that we believe would be complementary to our internally developed technologies, we may not be successful in obtaining thosetechnologies or integrating them effectively with our existing technologies.Our participation in a services and solutions model, using hardware and cloud-based services, presents execution and competitive risks.We participate in a services and solutions model that uses both hardware and cloud-based services. Our SmartSense by Digi™ offerings deploy hardware, softwareand cloud-based hosting. In other areas of our business we offer our own internally developed hosted services and cloud-based platform, software applications, andsupporting products and services. We also employ significant human and financial resources to develop and deploy these offerings. As we work to grow and scalethese offerings, these investments have and can adversely impacted our gross margins and profitability and may continue to do so in the future. While we believewe have a strong foundation to compete, it is uncertain whether our strategies will attract the users or generate the revenue required to be successful. We have andexpect to encounter competition from other solutions providers, some of whom may have more significant resources than us with which to compete. Whether weare successful in this business model depends on a number of factors, including:•our ability to put in place the infrastructure to deploy and evolve our solutions effectively andcontinuously;•the features and functionality of our offerings relative to competing offerings as well as our ability to marketeffectively;•our ability to engage in successful strategic relationships with third parties such as telecommunications carriers, component makers and systemsintegrators;•competing effectively for market share; and•deploying complete end-to-end solutions that meet the needs of the marketplace generally as well as the particular requirements of our customers moreeffectively and efficiently than competitive solutions.7Table of ContentsOur ability to sustain and grow our business depends in large part on the success of our channel partner distributors and resellers.A substantial part of our revenue is generated through sales by channel partner distributors and resellers. Further, in recent years we have been taking steps toexpand our relationship with certain distributors who have global reach. This effort may increase the percent of our revenue driven through channel partners orheighten our reliance on certain channel partners to drive sales. To the extent our channel partners are unsuccessful selling our products or if we are unable toobtain and retain a sufficient number of high-quality channel partners, our operating results could be materially and adversely affected. In addition, our channelpartners may market, sell and support products and services that are competitive with ours, and may devote more resources to the marketing, sales and support ofsuch products. These channel partners may have incentives to promote our competitors’ products in lieu of our products, particularly for our competitors withlarger volumes of orders, more diverse product offerings and longer relationships with our distributors and resellers. It is possible, one or more of our importantchannel partners may stop selling our products completely. Our channel partner sales structure could subject us to lawsuits, potential liability and reputational harmif, for example, any of our channel partners misrepresents the functionality of our products or services to customers, or violates laws or our corporate policies. Ifwe fail to manage our existing or future sales channel partners effectively, our business and operating results could be materially and adversely affected.Our gross margins may be subject to decline.Our gross margins have declined since 2016 and may be subject to further declines which could decrease our overall profitability and impact our financialperformance adversely. Some of the hardware products we sell are approaching the end of their product life cycles. These mature hardware products have soldhistorically at higher gross margins than our other product and service offerings. We expect this general trend of declining sales for many of our mature products tocontinue and the pace of the decline may accelerate. In addition, ongoing cost pressures in our industry create downward pressure on the prices at which we andother manufacturers can sell hardware products. We have indicated that we would be willing to realize lower levels of gross margins from customers in return forlong-term, binding purchase commitments. If this strategy were successful, it could apply downward pressure on our gross margins. While part of our longer termstrategy is to sell software applications and IoT solutions such as SmartSense by Digi™, which may provide recurring revenues at relatively high gross margins,these types of offerings are at early stages of adoption by customers and their sales growth is not necessarily predictable or assured. As such, our gross marginsmay be subject to decline unless we can implement cost reduction initiatives effectively to offset the impact of these factors.Our revenue may be subject to fluctuations based on the level of significant large project-based purchases.No single customer has represented more than 10% of our revenue in any of the last three fiscal years. However, many of our customers make significant one-timehardware purchases for large projects that are not repeated. As a result, our revenue may be subject to significant fluctuations based on whether we are able to closesignificant project based sales opportunities. In addition, in our SmartSense by Digi business certain customers have outsized deployments relative to othercustomers. It is possible we will see revenue fluctuations in this business based upon the scale of new deployments in different financial periods. Our failure tocomplete one or a series of significant sales opportunities in a particular fiscal period could have a material adverse effect on our revenue for that period.Some of our products are sold into mature markets, which could limit our ability to continue to generate revenue from these products.Some of our hardware products are sold into mature markets that are characterized by a trend of declining demand. We have made targeted investments to provideenhanced and new products into these mature markets and believe this may mitigate declining demand. However, over the longer term, the overall market for thesehardware products is expected to decrease due to the adoption of new technologies. As such, we expect that our revenue from these products will continue todecline over time. As a result, our future prospects depend in part on our ability to acquire or develop and successfully market additional products that addressgrowth markets.Our ability to grow our business is dependent in part on strategic relationships we develop and maintain with third parties as well as our ability to integrate andassure use of our products and services in coordination with the products and services of certain strategic partners in a commercially acceptable manner.We believe that our ability to increase our sales depends in part on maintaining and strengthening relationships with parties such as telecommunications carriers,systems integrators, enterprise application providers, component providers and other strategic technology companies. Once a relationship is established, we likelywill dedicate significant time and resources to it in an effort to advance our business interests and there is no assurance any strategic relationship will generateenough revenue8Table of Contentsto offset the significant resources we use to advance the relationship. Parties with whom we establish strategic relationships also work with companies that competewith us. We have limited, if any, control as to whether these parties devote adequate resources to promoting, selling, and implementing our products. Further, newor emerging technologies, technological trends or changes in customer requirements may result in certain companies with whom we maintain strategicrelationships de-emphasizing their dealings with us or becoming potential competitors in the future. We also have limited, if any, control as to other businessactivities of these parties and we could experience reputational harm because of our association with such parties if they fail to execute on business initiatives, areaccused of breaking the law or otherwise suffer reputational harm for other reasons. All of these factors could materially and adversely impact our business andresults of operations.In some cases, we expect the establishment of a strategic relationship with a third party to result in integrations of our products or services with those of otherparties. Identifying appropriate parties for these relationships as well as negotiating and documenting business agreements with them requires significant time andresources. We expect these agreements typically to be non-exclusive and not to prohibit the other party from working with our competitors or offering competingservices. Once the relationship is established, we may encounter difficulties in combining our products and services in a commercially acceptable manner. Weexpect this dynamic, where our ability to generate sales is dependent on our products and services interacting with those sold by third parties, may become morecommon in the future. There can be no guarantee in any particular instance that we will be successful in making our products interact with those of other parties ina commercially acceptable manner and, even if we do, we cannot guarantee that the resulting products and services will be effectively marketed or sold via therelationship.Our failure to compete successfully in our highly competitive market could result in reduced prices and loss of market share.The market in which we operate is characterized by rapid technological advances and evolving industry standards. The market can be affected significantly by newproduct introductions and marketing activities of industry participants. In addition, the amount of competition we face in the marketplace may change and grow asthe market for our industry grows and new entrants enter the marketplace. Present and future competitors may be able to identify new markets and developproducts more quickly, which are superior to those developed by us. Such competitors may adapt new technologies faster, devote greater resources to research anddevelopment, promote products more aggressively and price products more competitively than us. Competition may also intensify, or we may no longer be able tocompete effectively in the markets in which we compete.Our failure to anticipate or manage product transitions effectively could have a material adverse effect on our revenue and profitability.From time to time, we or our competitors may announce new or enhanced products that may replace or shorten the life cycles of our existing products.Announcements of currently planned or other new or enhanced products may cause customers to defer or stop purchasing our products until these products becomeavailable. Furthermore, the introduction of new or enhanced products requires us to manage the transition from older product inventories and ensure that adequatesupplies of new or enhanced products can be delivered to meet customer demand. Our failure to anticipate the revenue declines associated with older products ormanage transitions from older products effectively could result in inventory obsolescence and also have a material adverse effect on our revenue and profitability.Acquisitions could disrupt our business and seriously harm our financial condition.We will continue to consider acquisitions of businesses, products or technologies. In the event of any future acquisitions, we could issue stock that would dilute ourcurrent stockholders’ percentage ownership, incur debt, assume liabilities or incur large and immediate write-offs. For instance, in November 2019, we announcedour expected acquisition of Opengear, Inc. that we intend to finance in part with debt.Our operation of any acquired business also involves numerous risks, including but not limited to:•problems combining the acquired operations, technologies, orproducts;•unanticipated costs;•diversion of management’s attention from our corebusiness;•difficulties integrating businesses in different countries andcultures;•effectively implementing internal controls over financialreporting;•adverse effects on existing business relationships with suppliers andcustomers;•risks associated with entering markets in which we have no or limited prior experience;and9Table of Contents•potential loss of key employees, particularly those of the acquiredbusinessWe cannot assure that we will be able to successfully integrate any businesses, products, technologies, or personnel that we have acquired or that we might acquirein the future. Any such integration failure could disrupt our business and have a material adverse effect on our consolidated financial condition and results ofoperations. Moreover, from time to time, we may enter into negotiations for a proposed acquisition, but be unable or unwilling to consummate the acquisitionunder consideration. This could cause significant diversion of management’s attention and out-of-pocket expenses for us. We could also be exposed to litigation asa result of any consummated or unconsummated acquisition.The business of Accelerated which we acquired in fiscal 2018 is subject to significant customer concentration.In the second quarter of fiscal 2018, we acquired Accelerated. While Accelerated has many customers, its business historically has been highly dependent on itsrelationship with a single telecommunications carrier customer. Any disruption or difficulties in securing or renewing contractual relationships with this customer,maintaining such relationship on favorable terms or any other disruption in our business with this customer could have an adverse impact on our business, resultsof operations, financial condition and prospects.We are subject to various cybersecurity risks, which are particularly acute in cloud-based technologies that we and other third parties operate that form a part ofour solutions. These risks may increase our costs and could damage our brand and reputation.As we continue to direct a substantial portion of our sales and development efforts toward broader based solutions, such as SmartSense by Digi™ and the DigiRemote Manager®, we expect to store, convey and potentially process significant amounts of data produced by devices. Further many of our business applicationsnow exist within cloud platforms that are managed by third parties, which also adds risk from breach of third parties.This data may include confidential or proprietary information, intellectual property or personally identifiable information of our customers or other third partieswith whom they do business. It is important for us to maintain solutions and related infrastructure that are perceived by our customers and other parties with whomwe do business as providing reasonable levels of reliability and security. Despite available security measures and other precautions, the infrastructure andtransmission methods used by our products and services may be vulnerable to interception, attack or other disruptive problems. Continued high-profile databreaches at other companies evidence an external environment that is becoming increasingly hostile to information security. Improper disclosure of data or aperception that our data security is insufficient could harm our reputation, give rise to legal proceedings or subject our company to liability under laws that protectdata, which may evolve and expand in scope over time. Any of these factors could result in increased costs and loss of revenue for us.If a cyberattack or other security incident were to allow unauthorized access to or modification of our customers’ data or our own data, whether due to a failurewith our systems or related systems operated by third parties, we could suffer damage to our brand and reputation.The costs we would incur to address and fix these incidents could significantly increase our expenses. These types of security incidents could also lead to lawsuits,regulatory investigations and increased legal liability, including in some cases contractual costs related to customer notification and fraud monitoring. Further, asthe regulatory focus on privacy and data security issues continues to increase and worldwide laws and regulations concerning the protection of information becomemore complex, the potential risks and costs of compliance to our business are expected to intensify.Our products operate with and are dependent on products and components across a broad ecosystem. If there is a security vulnerability in one of these components,and if there is a security exploit targeting it, we could face increased costs, reduced revenue, liability claims or damage to our reputation or competitive position.Our results may be adversely impacted by implementation of an Enterprise Resource Planning ("ERP") system.During fiscal 2019, we began the process of implementing NetSuite for our IoT Products & Services segment in order to have a single ERP for our Company. OnOctober 1, 2019, this segment began operating under this ERP system. We do expect this implementation once completed will enhance internal processes, improveaccess to information and improve the control environment. However, the complexities of an ERP implementation and large-scale process changes associated withthis implementation could result in business interruptions and reduced financial performance, adversely impacting our business.10Table of ContentsSmartSense by Digi™ is subject to the risks faced by a business operating in an emerging market.SmartSense by Digi™ primarily was formed through acquisitions of four businesses and is operated in an emerging market where technology based solutions tomonitor the condition of perishable goods as well as the competition of employee tasks have not been used historically. The operation of SmartSense by Digi™ willbe subject to significant additional risks that are not necessarily related to our legacy products and services.Additional risks that relate to SmartSense by Digi™, include, but are not limited to:•We have not traditionally sold products or services to restaurants, pharmacies, hospitals and other similar businesses, which are a focus for SmartSense byDigi™.•SmartSense by Digi™ offerings are deployed in part to help assure perishable goods are safely preserved. This presents a potential risk of loss in the eventof a malfunction or failure of our offerings.•Although we have retained several key employees with experience in operating companies we have acquired to date, SmartSense by Digi™ has a limitedhistory with us in a marketplace that is nascent in its development and has numerous competitors. We cannot provide assurances we will be successful inoperating and continuing to grow this business.•Our ability to succeed with the SmartSense by Digi™ offerings will depend in large part on our ability to provide customers with hardware and softwareproducts that are easy to deploy and offer features and functionality that address the needs of particular businesses. We may face challenges and delays inthe development of this business as the marketplace for products and services evolves to meet the needs and desires of customers.In light of these risks and uncertainties, we may not be able to establish or maintain the market share of SmartSense by Digi™, integrate it successfully into ourother operations or take full advantage of businesses we have acquired or may acquire in the future. There can be no assurance that we will recover our investmentsin SmartSense by Digi™ or that we will realize significant and consistent profits from this business. Also, there can be no assurance that diverting ourmanagement’s attention to this business will not have a material adverse effect on our other existing businesses, any of which may have a material adverse effecton our results of operations, financial condition and prospects.Our consolidated operating results and financial condition may be adversely impacted by worldwide economic conditions and credit tightening.If worldwide economic conditions experience a significant downturn, these conditions may make it difficult or impossible for our customers and suppliers toaccurately forecast and plan future business activities, which may cause them to slow or suspend spending on products and services. Our customers may find itdifficult to gain sufficient credit in a timely manner, which could result in an impairment of their ability to place orders with us or to make timely payments to usfor previous purchases. If this occurs, our revenue may be reduced, thereby having a negative impact on our results of operations. In addition, we may be forced toincrease our allowance for doubtful accounts and our days sales outstanding may increase, which would have a negative impact on our cash position, liquidity andfinancial condition. To the extent we incur debt, we may be unable to adhere to financial covenants or to service the debt. We cannot predict either the timing orduration of an economic downturn in the economy, should one occur. Any downturn could have a material adverse impact on our business, results of operations,financial condition and prospects.The long and variable sales cycle for certain of our products and services makes it more difficult for us to predict our operating results and manage our business.The sale of our products and services can involve a significant technical evaluation and commitment of capital and other resources by potential customers and endusers, as well as delays frequently associated with end users’ internal procedures to deploy new technologies and to test and accept new technologies. For these andother reasons, the sales cycle associated with certain of our products is typically lengthy and is subject to a number of significant risks, such as end users’ internalpurchasing reviews, that are beyond our control. Because of the lengthy sales cycle and the large size of certain customer orders, if orders forecasted for a specificcustomer are not realized or delayed, our operating results could be materially adversely affected.We have become more dependent on third parties to manufacture our products which could have adverse impacts on our business if we do not properly forecastcustomer demand.During fiscal 2018, we restructured our manufacturing operations to become more reliant on third parties to manufacture our products. Among other potentialimpacts on our business and operations, this restructuring has lengthened the lead times on which we can produce many finished products that are available to meetcustomer demands. If we do not properly forecast11Table of Contentscustomer demands for products these lengthened lead times could result in lost revenues and adversely impact our business, results of operation, financialcondition and prospects. We depend on manufacturing relationships and on limited-source suppliers, and any disruptions in these relationships may cause damage to our customerrelationships.We procure all parts and certain services involved in the production of our products and subcontract most of our product manufacturing to outside firms thatspecialize in such services. Although most of the components of our products are available from multiple vendors, we have several single-source supplierrelationships, either because alternative sources are not available or because the relationship is advantageous to us. There can be no assurance that our supplierswill be able to meet our future requirements for products and components in a timely fashion. In addition, the availability of many of these components to us isdependent in part on our ability to provide our suppliers with accurate forecasts of our future requirements. Delays or lost revenue could be caused by other factorsbeyond our control, including late deliveries by vendors of components, or force majeure events. For instance, a fire in November 2014 disrupted the operations atone of our contract manufacturers in Thailand. If we are required to identify alternative suppliers for any of our required components, qualification and pre-production periods could be lengthy and may cause an increase in component costs and delays in providing products to customers. Any extended interruption in thesupply of any of the key components currently obtained from limited sources could disrupt our operations and have a material adverse effect on our customerrelationships and profitability.Our inability to obtain the appropriate telecommunications carrier certifications or approvals from governmental regulatory bodies could impede our ability togrow revenue in our wireless products.The sale of our wireless products in certain geographical markets is sometimes dependent on the ability to gain telecommunications carrier certifications and/orapprovals by certain governmental bodies. Failure to obtain these approvals, or delays in receiving the approvals, could impact our ability to enter our targetedmarkets or to compete effectively or at all in these markets and could have an adverse impact on our business and prospects.We are dependent on wireless communication networks owned and controlled by others.Our revenue could decline if we are unable to deliver continued access to digital cellular wireless carriers that we depend on to provide sufficient network capacity,reliability and security to our customers. Our financial condition could be impacted if our wireless carriers increase the prices of their services or suffer operationalor technical failures.Natural disasters could impact our supply chain and customers negatively resulting in an adverse impact to our revenue and profitability.Certain of our components and other materials used in producing our products are from regions susceptible to natural disasters. If we are unable to procurenecessary materials, we could experience a disruption to our supply chain that would hinder our ability to produce our products in a timely manner. It also couldcause us to seek other sources of supply which may be more costly or which we may not be able to procure on a timely basis. We also risk damage to any tooling,equipment or inventory at the supplier’s facilities. For instance, flooding in October 2011 and a fire in November 2014 disrupted the operations at one of ourcontract manufacturers in Thailand. In addition, our customers may not follow their normal purchasing patterns or temporarily cease purchasing from us due toimpacts to their businesses in the region, creating unexpected fluctuations or decreases in our revenue and profitability. Natural disasters could have materialadverse impacts on our business.Our use of suppliers in other parts of the world involves risks that could negatively impact us.We purchase a number of components from suppliers in other parts of the world. Product delivery times may be extended due to the distances involved, requiringmore lead time in ordering. In addition, ocean freight delays may occur as a result of labor problems, weather delays, expediting orders for third parties or customsissues. Any extended delay in receipt of the component parts could eliminate anticipated cost savings and have a material adverse effect on our customerrelationships and profitability. More recently, governments have announced the imposition of tariffs on various products and components which may impact thepricing of certain components and inventories and could have a material adverse effect on our competitive standing in the marketplace and our financial results.Our ability to compete could be jeopardized if we are unable to protect our intellectual property rights.Our ability to compete depends in part on our proprietary rights and technology. Our proprietary rights and technology are protected by a combination ofcopyrights, patents, trade secrets and trademarks. We enter into confidentiality agreements with our employees, and sometimes with our customers, potentialcustomers and other third parties, and limit access to the distribution of our proprietary information. There can be no assurance that the steps taken by us in thisregard will be adequate12Table of Contentsto prevent the misappropriation of our technology. Our pending patent applications may be denied and any patents, once issued, may be circumvented by ourcompetitors. Furthermore, there can be no assurance that others will not develop technologies that are superior to our technologies. Despite our efforts to protectour proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In addition,the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the United States. There can be no assurance that our means ofprotecting our proprietary rights in the United States or abroad will be adequate or that competing companies will not independently develop similar technologies.Our failure to adequately protect our proprietary rights could have a material adverse effect on our competitive position and our business.From time to time, we are subject to claims and litigation regarding intellectual property rights or other claims, which could seriously harm us and require us toincur significant costs.The communications technology industry is characterized by frequent litigation regarding patent and other intellectual property rights. From time to time, wereceive notification of a third-party claim that our products infringe intellectual property rights owned by others. Any litigation to determine the validity of third-party infringement claims, whether or not determined in our favor or settled by us, may be costly and divert the efforts and attention of our management andtechnical personnel from productive tasks. This could have a material adverse effect on our ability to operate our business and service the needs of our customers.There can be no assurance that any infringement claims by third parties, regardless if they have merit, will not materially adversely affect our business, operatingresults, financial condition or prospects. In the event of an adverse ruling in any such matter, we may be required to pay substantial damages, cease themanufacture, use and sale of infringing products, discontinue the use of certain processes or be required to obtain a license under the intellectual property rights ofthe third party claiming infringement. There can be no assurance that a license would be available on reasonable terms or at all. Any limitations on our ability tomarket our products, or delays and costs associated with redesigning our products or payments of license fees to third parties, or any failure by us to develop orlicense a substitute technology on commercially reasonable terms could have a material adverse effect on our business, operating results and financial condition.We face risks associated with our international operations that could impair our ability to grow our revenue abroad as well as our overall financial condition.Our future growth may be dependent in part upon our ability to increase sales in international markets. These sales are subject to a variety of risks, includingfluctuations in currency exchange rates, tariffs, import restrictions and other trade barriers, unexpected changes in regulatory requirements, longer accountsreceivable payment cycles, potentially adverse tax consequences, and export license requirements. In addition, we are subject to the risks inherent in conductingbusiness internationally, including political and economic instability and unexpected changes in diplomatic and trade relationships. In many markets where weoperate business and cultural norms are different than those in the United States and practices that may violate laws and regulations applicable to us like theForeign Corrupt Practices Act ("FCPA") and the UK Anti-Bribery Act ("UKBA") are more commonplace. Although we have implemented policies and procedureswith the intention of ensuring compliance with these laws and regulations, our employees, contractors and agents, as well as channel partners involved in ourinternational sales, may take actions in violation of our policies. Many of our vendors and strategic business allies also have international operations and aresubject to the risks described above. Even if we are able to successfully manage the risks of international operations, our business may be adversely affected if oneor more of our business partners are not able to successfully manage these risks. There can be no assurance that one or more of these factors will not have amaterial adverse effect on our business strategy and financial condition.Our failure to comply effectively with regulatory laws pertaining to our foreign operations could have a material adverse effect on our revenue and profitability.We are required to comply with U.S. government export regulations in the sale of our products to foreign customers, including requirements to properly classifyand screen our products against a denied parties list prior to shipment. We are also required to comply with the provisions of the FCPA and all other anti-corruptionlaws, such as UKBA, of all other countries in which we do business, directly or indirectly, including compliance with the anti-bribery prohibitions and theaccounting and recordkeeping requirements of this law. Violations of the FCPA or other similar laws could trigger sanctions, including ineligibility for U.S.government insurance and financing, as well as large fines. Failure to comply with the aforementioned regulations could also deter us from selling our products ininternational jurisdictions, which could have a material adverse effect on our revenue and profitability.Foreign currency exchange rates may adversely affect our operating results.We are exposed to a variety of market risks, including the effects of changes in foreign currency exchange rates on transactions that are denominated in foreigncurrencies. Because our financial statements are denominated in U.S. Dollars and some of our13Table of Contentsrevenue is denominated in a currency other than U.S. Dollars, such as Euros, British Pounds, Yen and Canadian Dollars, our revenues and earnings may beadversely impacted if the U.S. dollar strengthens significantly against these foreign currencies.The loss of key personnel could prevent us from executing our business strategy.Our business and prospects depend to a significant degree upon the continuing contributions of our executive officers and key technical and other personnel.Competition for such personnel is intense, and there can be no assurance that we will be successful in attracting and retaining qualified personnel. Failure to attractand retain key personnel could result in our failure to execute our business strategy.Our failure to comply effectively with the requirements of applicable environmental legislation and regulation could have a material adverse effect on our revenueand profitability.Production and marketing of products in certain states and countries may subject us to environmental and other regulations. In addition, certain states and countriesmay pass new regulations requiring our products to meet certain requirements to use environmentally friendly components. The European Union has issued twodirectives relating to chemical substances in electronic products. The Waste Electrical and Electronic Equipment Directive ("WEEE") makes producers of certainelectrical and electronic equipment financially responsible for collection, reuse, recycling, treatment and disposal of equipment placed in the European Unionmarket. The Restrictions of Hazardous Substances Directive ("RoHS") bans the use of certain hazardous materials in electric and electrical equipment which areput on the market in the European Union. In the future, various countries including the United States may adopt further environmental compliance programs. If wefail to comply with these regulations, we may not be able to sell our products in jurisdictions where these regulations apply, which could have a material adverseeffect on our revenue and profitability.Negative conditions in the global credit markets may impair a portion of our investment portfolio.Our investment portfolio may consist of certificates of deposit, commercial paper, money market funds, corporate bonds and government municipal bonds. Thesemarketable securities are classified as available-for-sale and are carried at fair market value. Some of our investments could experience reduced liquidity and couldresult in an impairment charge should the impairment be considered as other-than-temporary. This loss would be recorded in our Consolidated Statements ofOperations, which could materially adversely impact our consolidated results of operations and financial condition.Unanticipated changes in our tax rates could affect our future results.Our future effective tax rates could be favorably or unfavorably affected by unanticipated changes in the mix of earnings in countries with differing statutory taxrates, changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws or our interpretation of such laws. In addition, we may be subjectto the examination of our income tax returns by the Internal Revenue Service and other U.S. and international tax authorities. We regularly assess the potentialoutcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from theseexaminations will not have an adverse effect on our consolidated operating results and financial condition.We may have additional tax liabilities.We are subject to income taxes in the United States and many foreign jurisdictions. Significant judgment is required in determining our worldwide provision forincome taxes, including our reserves for uncertain tax positions. In the ordinary course of business, there are many transactions and calculations where the ultimatetax determination is uncertain. We regularly are under audit by tax authorities. Although we believe our tax estimates are reasonable, the final determination of taxaudits could be materially different from our historical income tax provisions and accruals. The results of an audit could have a material effect on our consolidatedfinancial position, results of operations, or cash flows in the period or periods for which that determination is made.Risks Related to Our Common StockUnsolicited takeover proposals, governance change proposals, proxy contests and resulting litigation may adversely impact our operations, create uncertaintyand affect the market price and volatility of our securities.In fiscal 2017, we received an unsolicited takeover proposal and other companies in our industry have been the target of unsolicited takeover proposals in the past.In the event that a third party, such as a competitor, private equity firm or activist investor makes an unsolicited takeover proposal or proposes to change ourgovernance policies or board of directors, or makes other proposals concerning our ownership structure or operations, our review and consideration of suchproposals may be a14Table of Contentssignificant distraction for our management and employees, and could require us to expend significant time and resources. Such proposals may create uncertaintyfor our employees and this uncertainty may adversely affect our ability to retain key employees, to hire new talent or to complete acquisitions we may desire tomake. Similar uncertainty among our customers, suppliers and other business partners could cause them to terminate, or not to renew or enter into, arrangementswith us. Certain proposals may result in costly proxy contests or litigation that can disrupt our business operations or result in an adverse effect on our operatingresults. Management and employee distraction related to any such proposals also may adversely impact our ability to conduct our business optimally and pursueour strategic objectives. Such proposals, or their withdrawal, could create uncertainty among investors and potential investors as to our future direction and affectthe market price of our common stock without regard to our operational or financial performance.Certain provisions of the Delaware General Corporation Law and our charter documents have an anti-takeover effect.There exist certain mechanisms under the Delaware General Corporation Law and our charter documents that may delay, defer or prevent a change of control. Forinstance, under Delaware law, we are prohibited from engaging in certain business combinations with interested stockholders for a period of three years after thedate of the transaction in which the person became an interested stockholder unless certain requirements are met, and majority stockholder approval is required forcertain business combination transactions with interested parties.Our Certificate of Incorporation contains a "fair price" provision requiring majority stockholder approval for certain business combination transactions withinterested parties, and this provision may not be changed without the vote of at least 80% of the outstanding shares of our voting stock. Other mechanisms in ourcharter documents may also delay, defer or prevent a change of control. For instance, our Certificate of Incorporation provides that our Board of Directors hasauthority to issue series of our preferred stock with such voting rights and other powers as the Board of Directors may determine. Furthermore, we have a classifiedboard of directors, which means that our directors are divided into three classes that are elected to three-year terms on a staggered basis. Since the three-year termsof each class overlap the terms of the other classes of directors, the entire board of directors cannot be replaced in any one year. Under Delaware law, directorsserving on a classified board may not be removed by shareholders except for cause. The effect of these anti-takeover provisions may deter business combinationtransactions not approved by our Board of Directors, including acquisitions that may offer a premium over the market price to some or all stockholders.The price of our common stock has been volatile and could continue to fluctuate in the future.The market price of our common stock, like that of many other high-technology companies, has fluctuated significantly and is likely to continue to fluctuate in thefuture. During fiscal 2019, the closing price of our common stock on the Nasdaq Global Select Market ranged from $9.29 to $14.52 per share. Our closing saleprice on November 25, 2019 was $18.09 per share. Announcements by us or others regarding the receipt of customer orders, quarterly variations in operatingresults, departures of key personnel, acquisitions or divestitures, additional equity or debt financings, results of customer field trials, scientific discoveries,technological innovations, litigation, product developments, patent or proprietary rights, government regulation and general market conditions and risks may, forexample, have a significant impact on the market price of our common stock.If our stock price declines over a sustained period of time, our profits significantly decrease or our acquired businesses do not attain results that were anticipatedat the time of acquisition, we may need to recognize an impairment of our goodwill.The price of our common stock could decline. If such a decline continued over a sustained period of time, we could have an impairment of our goodwill. Ourmarket value is dependent upon certain factors, including continued future growth of our products, services and solutions. If such growth does not materialize orour forecasts are not met (including forecasts established at the time of acquisition), our profits could be significantly reduced, and our market value may decline,which could result in an impairment of our goodwill.15Table of ContentsITEM 1B. UNRESOLVED STAFF COMMENTSNone.ITEM 2. PROPERTIESThe following table contains a listing of our property locations that are material to us as of September 30, 2019:Location of PropertyUse of Facility ApproximateSquare Footage Ownership or LeaseExpiration DateHopkins, MN(Corporate headquarters)Research & development, sales, sales support,marketing and administration 59,497 January 2032 Eden Prairie, MNManufacturing and warehousing 58,000 Owned Boston, MAResearch & development, sales, sales support and marketing 13,302 August 2026 Mishawaka, INSales, technical support and administration 7,829 August 2026 Lindon, UTSales, technical support, research & development and administration 11,986 December 2020 Ismaning, GermanySales, sales support and administration 6,878 September 2022 Tampa, FLSales, sales support, marketing, research & development, technical supportand administration 6,108 March 2020In addition to the above locations, we have various other locations throughout the world that are not deemed to be material.ITEM 3. LEGAL PROCEEDINGSIn the normal course of business, we are subject to various claims and litigation, which may include, but are not limited to, patent infringement and intellectualproperty claims. While we are unable to predict the outcome of any potential claims or litigation due to the inherent unpredictability of these matters, we believethat it is possible that we could, in the future, incur judgments or enter into settlements of claims that could have a material adverse effect on our operations in anyparticular period. See Note 17 to the consolidated financial statements included in this annual report for additional information relating to legal matters.ITEM 4. MINE SAFETY DISCLOSURESNone.PART II.ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIESStock ListingOur common stock trades under the symbol DGII on the Nasdaq Global Select Market tier of the Nasdaq Stock Market LLC. On November 22, 2019 there were115 stockholders of record.Dividend PolicyWe have never paid cash dividends on our common stock. Our Board of Directors presently intends to retain all earnings for use in our business and does notanticipate paying cash dividends in the foreseeable future.16Table of ContentsIssuer Repurchases of Equity SecuritiesOn April 24, 2018, our Board of Directors authorized a program to repurchase up to $20.0 million of our common stock primarily to return capital to shareholders.This repurchase authorization expired on May 1, 2019. There were no shares repurchased under this program.The following table presents the information with respect to purchases made by or on behalf of Digi International Inc. or any “affiliated purchaser” (as defined inRule 10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stock during the fourth quarter of fiscal 2019:Period Total Number ofShares Purchased(1) Average PricePaid per Share Total Number of SharesPurchased as Part of aPublicly AnnouncedProgram Maximum Dollar Value ofShares that May Yet BePurchased Under theProgramJuly 1, 2019 - July 31, 2019 434 $13.13 — $—August 1, 2019 - August 31, 2019 1,114 $12.84 — $—September 1, 2019 - September 30, 2019 — $— — $—Total 1,548 $12.92 — $—(1)All shares reported were forfeited by employees in connection with the satisfaction of tax withholding obligations related to the vesting of restricted stockunits.Performance EvaluationThe graph below compares the total cumulative stockholders’ return on our common stock for the period from the close of the Nasdaq Stock Market - U.S.Companies on September 30, 2014 to September 30, 2019, the last day of fiscal 2019, with the total cumulative return for the Nasdaq U.S. Benchmark TR Index(the "U.S. Benchmark Index") and the Nasdaq Telecommunications Index (the "Peer Index") over the same period. We have determined that our line of business ismostly comparable to those companies in the Peer Index. The index level for the graph and table was set to $100 on September 30, 2014, for our common stock,the U.S. Benchmark Index and the Peer Index and assumes the reinvestment of all dividends. FY14 FY15 FY16 FY17 FY18 FY19Digi International Inc. $100.00 $157.20 $152.00 $141.33 $179.33 $181.60Nasdaq U.S. Benchmark TR Index $100.00 $99.29 $114.41 $135.83 $160.00 $164.75Nasdaq Telecommunications Index $100.00 $92.87 $117.06 $118.42 $122.11 $139.8217Table of ContentsITEM 6. SELECTED FINANCIAL DATA(in thousands, except per common share data amounts and number of employees)For Fiscal Years Ended September 30,2019 2018(as adjusted)* 2017(as adjusted)* 2016 2015Revenue$254,203 $226,893 $181,340 $203,005 $203,847Gross profit$119,035 $109,054 $87,233 $99,680 $97,121Sales and marketing45,801 44,517 33,955 33,847 37,574Research and development37,564 33,178 28,566 30,955 29,949General and administrative25,685 28,276 13,331 17,026 18,306Restructuring charges, net(87) 301 2,515 747 403Operating income10,072 2,782 8,866 17,105 10,889Total other income (expense), net (1)1,073 468 684 (415) 2,228Income before income taxes11,145 3,250 9,550 16,690 13,117Income tax provision (2)1,187 1,619 147 3,212 3,684Income from continuing operations9,958 1,631 9,403 13,478 9,433Income (loss) from discontinued operations, after incometaxes— — — 3,230 (2,845)Net income$9,958 $1,631 $9,403 $16,708 $6,588 Basic net income (loss) per common share: Continuing operations$0.36 $0.06 $0.36 $0.52 $0.38Discontinued operations$— $— $— $0.13 $(0.12)Net income (3)$0.36 $0.06 $0.36 $0.65 $0.27Diluted net income (loss) per common share: Continuing operations$0.35 $0.06 $0.35 $0.51 $0.37Discontinued operations$— $— $— $0.12 $(0.11)Net income (3)$0.35 $0.06 $0.35 $0.64 $0.26 Balance sheet data as of September 30, Working capital (current assets less current liabilities)$148,089 $126,473 $155,911 $171,837 $136,996Total assets$398,698 $372,146 $345,696 $336,166 $300,360Stockholders' equity$348,978 $330,493 $319,029 $300,029 $274,938Book value per common share(stockholders' equitydivided by outstanding shares)$12.36 $12.05 $12.01 $11.52 $10.98Number of employees as of September 30543 516 514 515 515*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.(1)Included in total other income (expense), net for fiscal 2015 is a $1.4 million gain from the settlement of a property and casualty insurance claim related to thereplacement of our capital equipment destroyed in the fire at our subcontract manufacturer's location in Thailand.(2)In fiscal 2019, we recorded discrete net tax benefits of $0.5 million, in fiscal 2018 we recorded discrete net tax expense of $1.5 million and in fiscal 2017 we recorddiscrete net tax benefits of $1.0 million (see Note 12 to our consolidated financial statements). In fiscal 2016, we recorded net tax benefits of $1.5 million primarilyfrom the reinstatement of the federal research and development tax credit for calendar year 2015 and the reversal of reserves due to the expiration of statutes oflimitations from U.S. and foreign tax jurisdictions. In addition, we filed amended income tax returns resulting in an additional domestic refund related to qualifiedmanufacturing activities. In fiscal 2015, we recorded net tax benefits of $0.8 million resulting from the reinstatement of the research and development tax credit forcalendar year 2014, reversal of tax reserves due to the expiration of statute of limitations from U.S. and foreign tax jurisdictions and reversal of tax reserves due to theresolution of tax audits.(3)Earnings per share are calculated by line item and may not add due to the use of rounded amounts.18Table of ContentsITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOur management’s discussion and analysis should be read in conjunction with our consolidated financial statements and other information in this Annual Reporton Form 10-K.We have omitted discussion of the earliest of the three years covered by our consolidated financial statements presented in this report because that disclosure wasalready included in our Annual Report on Form 10-K for fiscal 2018, filed with the SEC on November 21, 2018. You are encouraged to reference Part II, Item 7,within that report, for a discussion of our financial condition and result of operations for fiscal 2017 compared to fiscal 2018.FORWARD-LOOKING STATEMENTSThis discussion contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other thanstatements of historical fact are forward-looking statements. Words such as "assume," "believe," "anticipate," "intend," "estimate," "target," "may," "will,""expect," "plan," "project," "should," or "continue" or the negative thereof or other expressions, which are predictions of or indicate future events and trends andwhich do not relate to historical matters, identify forward-looking statements. Among other items, these statements relate to expectations of the businessenvironment in which the company operates, projections of future performance, perceived marketplace opportunities and statements regarding our mission andvision. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions. Among others, these include risksrelated to the highly competitive market in which our company operates, rapid changes in technologies that may displace products sold by us, declining prices ofnetworking products, our reliance on distributors and other third parties to sell our products, the potential for significant purchase orders to be canceled or changed,delays in product development efforts, uncertainty in user acceptance of our products, the ability to integrate our products and services with those of other parties ina commercially accepted manner, potential liabilities that can arise if any of our products have design or manufacturing defects, our ability to defend or settlesatisfactorily any litigation, uncertainty in global economic conditions and economic conditions within particular regions of the world which could negativelyaffect product demand and the financial solvency of customers and suppliers, the impact of natural disasters and other events beyond our control that couldnegatively impact our supply chain and customers, potential unintended consequences associated with restructuring or other similar business initiatives that mayimpact our ability to retain important employees, our ability to close the pending acquisition of Opengear, Inc. that was recently announced, the ability to achievethe anticipated benefits and synergies associated with the pending acquisition or other acquisitions or divestitures, and changes in our level of revenue orprofitability which can fluctuate for many reasons beyond our control.These and other risks, uncertainties and assumptions identified from time to time in our filings with the United States Securities and Exchange Commission,including without limitation, those described in Item 1A, Risk Factors, of this Form 10-K and subsequent quarterly reports of Form 10-Q and other filings, couldcause our future results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. Many of such factors are beyondour ability to control or predict. These forward-looking statements speak only as of the date for which they are made. We disclaim any intent or obligation toupdate any forward-looking statements, whether as a result of new information, future events or otherwise.PRESENTATION OF NON-GAAP FINANCIAL MEASURESThis report includes adjusted net income, adjusted net income per diluted share and adjusted earnings before interest, taxes and amortization ("adjustedEBITDA"), each of which is a non-GAAP financial measure.We understand that there are material limitations on the use of non-GAAP measures. Non-GAAP measures are not substitutes for GAAP measures, such as netincome, for the purpose of analyzing financial performance. The disclosure of these measures does not reflect all charges and gains that were actually recognizedby the company. These non-GAAP measures are not in accordance with, or, an alternative for measures prepared in accordance with GAAP and may be differentfrom non-GAAP measures used by other companies or presented by us in prior reports. In addition, these non-GAAP measures are not based on anycomprehensive set of accounting rules or principles. We believe that non-GAAP measures have limitations in that they do not reflect all of the amounts associatedwith our results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate our results of operations inconjunction with the corresponding GAAP measures. Additionally, Adjusted EBITDA does not reflect our cash expenditures, the cash requirements for thereplacement of depreciated and amortized assets, or changes in or cash requirements for our working capital needs.We believe that providing historical and adjusted net income and adjusted net income per diluted share, respectively, exclusive of such items as reversals of taxreserves, discrete tax benefits, restructuring charges and reversals, intangible amortization,19Table of Contentsstock-based compensation, other non-operating income/expense, adjustments to estimates of contingent consideration and acquisition-related expenses permitsinvestors to compare results with prior periods that did not include these items. Management uses the aforementioned non-GAAP measures to monitor andevaluate ongoing operating results and trends and to gain an understanding of our comparative operating performance. In addition, certain of our stockholders haveexpressed an interest in seeing financial performance measures exclusive of the impact of these matters, which while important, are not central to the coreoperations of our business. Management believes that Adjusted EBITDA, defined as EBITDA adjusted for stock-based compensation expense, acquisition-relatedexpenses, restructuring charges and recoveries, and gains from the disposition of our former corporate headquarters is useful to investors to evaluate theCompany’s core operating results and financial performance because it excludes items that are significant non-cash or non-recurring expenses reflected in theConsolidated Statements of Operations. We believe that the presentation of Adjusted EBITDA as a percentage of revenue is useful because it provides a reliableand consistent approach to measuring our performance from year to year and in assessing our performance against that of other companies. We believe thisinformation helps compare operating results and corporate performance exclusive of the impact of our capital structure and the method by which assets wereacquired.OVERVIEWWe are a leading global provider of business and mission-critical and Internet-of-Things ("IoT") connectivity products, services and solutions comprised of tworeporting segments: IoT Products & Services and IoT Solutions.In fiscal 2020, our key operating objectives include the following:•continued growth of our SmartSense by Digi® business that is the base of our IoT solutionssegment;•delivering growth within our IoT Products & Services segment through new productintroductions;•identification of strategic growth initiatives through acquisition;and•optimizing our reduced fixed cost footprint with third-partymanufacturing.Fiscal 2019 summary of results:•Consolidated revenue was $254.2 million, an increase of 12.0% over fiscal 2018. This increase was driven by growth in our IoT Solutions segment andincremental revenue from our January 2018 acquisition of Accelerated, as well as increased sales to existing customers and significant new customers andnew product introductions. A decrease in sales of our terminal servers in our network product category due to the loss of a significant customer partiallyoffset this increase.•Consolidated gross profit was $119.0 million, an increase of 9.2% percent over fiscal 2018. This increase was driven by increased revenue andincremental gross profit from our January 2018 acquisition of Accelerated. This increase was partially offset by unfavorable customer and product mix.•Consolidated operating income was $10.1 million, an increase of 262.0% percent. This increase largely was driven by increased revenue and gain on thesale of our corporate headquarters building, partially offset by an increase in operating expenses due to increased headcount and occupancy expenses.•Net income was $10.0 million, compared to net income of $1.6 million for fiscal2018.•Diluted earnings per share was $0.35, compared to $0.06, an increase of483.3%.•Adjusted EBITDA was $26.5 million, or, 10.4% of revenue, compared to $23.4 million or 10.3% of revenue in fiscal2018.•Adjusted net income and adjusted income per share was $18.7 million, or $0.65 per diluted share, compared to $16.8 million, or $0.61 per diluted share,an increase of 11.4%.Key trends regarding our existing businessThe following trends affected our financial performance in fiscal 2019 and 2018, and we expect these trends will continue to impact our results in the future:•We believe the market for IoT products and related services is in the midst of a long-term expansion. We believe our IoT Products & Services business ispositioned for modest revenue and profitability growth and that our IoT Solutions business is positioned for more significant revenue growth given thelarge total addressable market for condition monitoring and asset tracking services that is in earlier stages of adoption.20Table of ContentsITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)•As recurring revenue from subscription and device cloud monitoring services becomes a greater portion of our overall revenue, we expect gross marginsto increase as the revenue of incremental subscriptions is not offset at the same rate as expected increases in costs associated with implementing newsubscribers.•During fiscal 2018, we restructured our manufacturing operations to become more reliant on third parties. We expect this restructuring will provideincreased gross margins over time.•We expect revenues from our network product offerings within our IoT Products & Services business will decrease over time as many of these productsare in the mature phase of their product life cycles.CONSOLIDATED RESULTS OF OPERATIONSThe following table sets forth selected information derived from our Consolidated Statements of Operations, expressed as a percentage of revenue and as apercentage of change from year-to-year for the years indicated: Year ended September 30, % Increase(decrease)($ in thousands) 2019 2018(as adjusted)* 2019 compared to2018Revenue 100.0 100.0 12.0Cost of sales 53.2 51.9 14.7Gross profit 46.8 48.1 9.2Operating expenses 42.8 46.9 2.5Operating income 4.0 1.2 262.0Other income (expense), net 0.4 0.2 129.3Income before income taxes 4.4 1.4 242.9Income tax provision 0.5 0.7 (26.7)Net income 3.9% 0.7% 510.5*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.REVENUE BY SEGMENT Year ended September 30, ($ in thousands) 2019 2018(as adjusted)* % Increase(decrease)Segment: IoT Products & Services $215,287 84.7% $201,506 88.8% 6.8IoT Solutions 38,916 15.3 25,387 11.2 53.3Total revenue $254,203 100.0% $226,893 100.0% 12.0*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 6.8% increase in IoT Products & Services revenue in fiscal 2019 from fiscal 2018 primarily was the result of:•$5.4 million of incremental revenue from Accelerated, which we acquired in January 2018 (see Note 2 to our consolidated financialstatements);•increased sales of our RF and embedded product categories due to increased customer demand, some significant new customers and introductions ofsome new products; and•increased sales of our Digi Remote Manager® and supportservices.This increase partially was offset by:•decreased sales of our terminal servers in our network product category to a significant customer;and•decreased sales of our wireless designservices.21Table of ContentsITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)The 53.3% percent increase in IoT Solutions revenue in fiscal 2019 from fiscal 2018 primarily was the result of:•new customer deployments and additional product purchases from existingcustomers.COST OF GOODS SOLD AND GROSS PROFIT BY SEGMENT Year ended September 30, Basis pointincrease (decrease)($ in thousands) 2019 2018(as adjusted)* Cost of Goods Sold IoT Products & Services $114,765 53.3% $103,611 51.4% 1.9IoT Solutions 20,403 52.4% 14,228 56.0% (3.6)Total cost of goods sold $135,168 53.2% $117,839 51.9% 1.3*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which we adopted on October 1, 2018. Year ended September 30, Basis pointincrease (decrease)($ in thousands) 2019 2018(as adjusted)* Gross Profit IoT Products & Services $100,522 46.7% $97,895 48.6% (1.9)IoT Solutions 18,513 47.6% 11,159 44.0% 3.6Total gross profit $119,035 46.8% $109,054 48.1% (1.3)*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which we adopted on October 1, 2018.The 1.9 percentage point decrease in IoT Products & Services gross profit primarily was the result of:•lower sales of network products, which typically have higher grossmarginsThis decrease partially was offset by:•increased sales of our Digi Remote Manager® service. As recurring revenue increases and becomes a greater percentage of total revenue, we expect grossmargins to increase over time.The 3.6 percentage point increase in IoT Solutions gross profit primarily was the result of:•improved product pricing and increased recurring revenue from our subscriptionservices.This increase was partially offset by:•increased costs from additional sitedeploymentsOPERATING EXPENSESBelow is our operating expenses and operating expenses as a percentage of total revenue: Year ended September 30, ($ in thousands) 2019 2018(as adjusted)* $ increase(decrease) % Increase(decrease)Operating expenses: Sales and marketing $45,801 18.0 $44,517 19.6 $1,284 2.9Research and development 37,564 14.8 33,178 14.6 4,386 13.2General and administrative 25,685 10.1 28,276 12.5 (2,591) (9.2)Restructuring charges, net (87) — 301 0.1 (388) (128.9)Total operating expenses $108,963 42.9 $106,272 46.8$2,691 2.5*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, 2018.22Table of ContentsITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)The $2.7 million increase in operating expenses in fiscal 2019 from fiscal 2018 primarily was the result of:•incremental expenses for Accelerated of $2.8 million;•increased employee-related expenses due to additional headcount; and•increased professional fees, occupancy costs and depreciation expenses.This increase partially was offset by:•gain on the sale of our corporate headquarters building of $4.4 million;and•a reduction on acquisition expense of $1.3 million.OTHER INCOME, NET Year ended September 30, ($ in thousands) 2019 2018(as adjusted)* $ increase(decrease) % Increase(decrease)Other income, net: Interest income $733 0.3 $445 0.2 $288 64.7Interest expense (102) (0.1) (25) — (77) 308.0Other income, net 442 0.2 48 — 394 820.8Total other income, net $1,073 0.4 $468 0.2 $605 129.3*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 $0.6 million increase in other income in fiscal 2019 from fiscal 2018 primarily was the result of:•increased interest income of $0.3 million, driven by higher levels of marketable securities, cash and cash equivalents in fiscal 2019 and higher averageinterest rates; and•a $0.4 million increase other income, net primarily related to an increase in foreign currency gains mostly related to theEuro.INCOME TAXESOur effective income tax rates were 10.7%, 49.8% and 1.5% for fiscal 2019, 2018 and 2017, respectively. Our effective tax rate will vary based on a variety offactors. These include our overall profitability, the geographical mix of income before taxes and related statutory tax rate in each jurisdiction, and discrete events,such as settlement of audits (see Note 12 to our consolidated financial statements).INFLATIONManagement believes that during fiscal 2019, 2018 and 2017, inflation did not have a material effect on our Consolidated Statements of Operations or financialposition.23Table of ContentsITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)NON-GAAP FINANCIAL INFORMATIONBelow are reconciliations from GAAP to Non-GAAP information that we feel is important to our business:Reconciliation of Net Income to Adjusted EBITDA(In thousands) Fiscal years ended September 30, 2019 2018(as adjusted)* % of totalrevenue % of totalrevenueTotal revenue$254,203 100.0% $226,893 100.0% Net income$9,958 3.9% $1,631 0.7%Interest income, net(631) (420) Income tax expense1,187 1,619 Depreciation and amortization13,396 12,784 Stock-based compensation5,655 4,854 Gain on sale of building(4,396) — Restructuring (reversal) charge(87) 301 Acquisition expense1,390 2,670 Adjusted EBITDA$26,472 10.4% $23,439 10.3%*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.Reconciliation of Net Income and Net Income per Diluted Share toAdjusted Net Income and Adjusted Net Income per Diluted Share(In thousands, except per share amounts) Fiscal years ended September 30, 2019 2018(as adjusted)*Net income and net income per diluted share$9,958 $0.35 $1,631 $0.06Amortization8,818 0.31 9,435 0.34Stock-based compensation5,655 0.20 4,854 0.18Other non-operating income(442) (0.02) (48) —Acquisition expense1,390 0.05 2,670 0.10Acquisition earn-out adjustments1,191 0.04 1,376 0.05Restructuring (reversal) charge(87) — 301 0.01Gain on sale of building(4,396) (0.15) — —Tax effect from above net income adjustments(2,844) (0.10) (4,982) (0.18)Discrete tax (benefits) expense (1)(549) (0.02) 1,538 0.06Adjusted net income and adjusted net income per diluted share (2)$18,694 $0.65 $16,775 $0.61Diluted weighted average common shares 28,554 27,652*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.(1)For the twelve months ended September 30, 2019, discrete tax (benefits) expense primarily includes reversals of tax reserves due to the expiration of statutes of limitation.For the twelve months ended September 30, 2018, discrete tax (benefits) expense primarily includes one-time adjustments for the re-measurement of deferred tax assetsand the impact of ASU 2016-09 relating to the accounting for the tax effects of stock compensation. This was partially offset by net tax benefits for the release of avaluation allowance against U.S. federal capital loss carryforward related to the expected gains tax in fiscal 2019 as a result of the sale of our Corporate Headquartersbuilding in October 2019 and reversals of tax reserves due to the expiration of statutes of limitation and certain domestic tax credits.(2)Adjusted net income per diluted share may not add due to the use of rounded numbers.24Table of ContentsITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)LIQUIDITY AND CAPITAL RESOURCESOur liquidity requirements arise from our working capital needs, and to a lesser extent, our need to fund capital expenditures to support our current operations andfacilitate growth and expansion. We have financed our operations and capital expenditures principally with cash generated from operations. We are focused onincreasing our cash flow to fund potential future growth opportunities, including organic growth and growth through acquisition. We expect positive cash flowsfrom operations. We believe that our current cash, cash equivalents and marketable securities balances, cash generated from operations and our ability to securedebt and/or equity financing will be sufficient to fund our business operations and capital expenditures for the next twelve months and beyond.As follows, our Consolidated Statement of Cash Flows for the years ended September 30, 2019 and 2018 is summarized: Year ended September 30,($ in thousands) 2019 2018(as adjusted)*Operating activities $28,964 $(2,778)Investing activities 5,511 (23,337)Financing activities 1,113 5,827Effect of exchange rate changes on cash and cash equivalents (810) 80Net increase (decrease) in cash and cash equivalents $34,778 $(20,208)*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.Cash flows from operating activities increased $31.7 million primarily as a result of:•positive changes in net working capital of $27.2 million. Working capital improved primarily due to increased inventory in the prior fiscal year resultingfrom our manufacturing transition and strategic purchases of finished goods; and•increased net income of $8.3 million, partially offset by non-cash adjustments of $3.8 million. This primarily is related to the gain on the sale of ourcorporate headquarters building.Cash flows from investing activities increased $28.8 million primarily as a result of:•no acquisition of a business in fiscal 2019;•proceeds from the sale of our corporate headquarters building in the current fiscal year;and•a partial offset to these gains from a decrease in proceeds from marketable securities, proceeds from the disposition of businesses in the prior fiscal yearand increased purchases of property, equipment and improvements (mostly related to the build-out of our new corporate headquarters space).Cash flows from financing activities decreased $4.7 million primarily as a result of:•contingent consideration payments to the former shareholders of Accelerated, FreshTemp and Bluenica in fiscal 2019;and•decreases in proceeds from exercises of stock options and employee stock plan transactions from the prior fiscalyear.CONTRACTUAL OBLIGATIONSThe following summarizes our contractual obligations at September 30, 2019: Payments due by fiscal period($ in thousands) Total Less than 1 year 1-3 years 3-5 years ThereafterOperating leases $22,997 $2,596 $4,889 $4,151 $11,361The operating lease agreements included above primarily relate to office space. The table above does not include our contingent consideration obligations orpossible payments for uncertain tax positions. The estimated fair value of our contingent consideration at September 30, 2019 was $5.4 million and is due in fiscal2020. Our reserve for uncertain tax25Table of ContentsITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)positions, including accrued interest and penalties, was $1.8 million as of September 30, 2019. Due to the nature of the underlying liabilities and the extended timeoften needed to resolve income tax uncertainties, we cannot make reliable estimates of the amount or timing of future cash payments that may be required to settlethese liabilities. The above table also does not include those obligations for royalties under license agreements as these royalties are calculated based on futuresales of licensed products and we cannot make reliable estimates of the amount of cash payments.FOREIGN CURRENCYWe are exposed to foreign currency transaction risk associated with certain sales being denominated in Euros, British Pounds, Japanese Yen and Canadian Dollar.We also are exposed to foreign currency translation risk as the financial position and operating results of our foreign subsidiaries are translated into U.S. Dollarsfor consolidation. We manage our net asset or net liability position for U.S. dollar accounts in our foreign locations to reduce our foreign currency risk. We havenot implemented a formal hedging strategy to reduce foreign currency risk.During 2019, we had approximately $70.2 million of revenue related to foreign customers including export sales, of which $3.4 million was denominated inforeign currencies, predominantly the Euro and Canadian Dollar. During fiscal 2018 and 2017, we had approximately $65.0 million and $63.9 million,respectively, of revenue to foreign customers including export sales, of which $9.7 million and $18.2 million, respectively, were denominated in foreign currencies,predominantly the Euro and British Pound. In future periods, we expect that the majority of our sales will be in U.S. Dollar.RECENT ACCOUNTING DEVELOPMENTSFor information on new accounting pronouncements, see Note 1 to our consolidated financial statements.CRITICAL ACCOUNTING POLICIES AND ESTIMATESOur discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us tomake estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, the disclosure of contingent assets and liabilities and thevalues of purchased assets and assumed liabilities in acquisitions. We base our estimates on historical experience and various other assumptions that we believedto be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from these estimates.We believe the following critical accounting policies impact our more significant judgments and estimates used in the preparation of our consolidated financialstatements.REVENUE RECOGNITIONWe recognize hardware product revenue upon transfer of control of goods or services to customers in an amount that reflects the consideration we expect to receivein 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 thecontract;•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 FeesOur hardware product revenue is derived primarily from the sale of wired and wireless hardware products to our distributors and direct/original equipmentmanufacturer (“Direct/OEM”) customers. Product revenue generally is recognized upon shipment of the product to a customer. Sales to authorized domesticdistributors and Direct/OEM customers typically are made with certain rights of return and price adjustment provisions. Estimated reserves for future returns andpricing adjustments are established by us based on an analysis of historical patterns of returns and price adjustments as well as an analysis of authorized26Table of ContentsITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)returns compared to received returns and distribution sales for the current period. Estimated reserves for future returns and price adjustments are charged againstrevenue in the same period as the corresponding sales are recorded. Material differences between the historical trends used to determine estimated reserves andactual returns and pricing adjustments could result in a material change to our consolidated results of operations or financial position.Equipment revenue from SmartSense by Digi™ within our IoT Solutions segment is recorded as an up-front sale at its stand-alone selling price. This is because thecustomer could utilize our equipment with other monitoring services or could use our monitoring services with hardware purchased from other vendors. Ourinstallation charges from these sales are recorded when the product is installed.Subscription and Support Services RevenueOur SmartSense by Digi™ subscription revenue is recorded on a monthly basis. These subscriptions are generally in a range from one to five years, and maycontain 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 basedon the number of devices being managed or monitored. This revenue is recognized over the life of the service term and is included in our IoT Products & Servicessegment. Digi Support Services revenues are recognized over the life of the support contract and included in our IoT Products & Services segment. Some of Digi SupportServices revenue is for training and this revenue is recognized as the services are performed.Professional Services RevenueProfessional 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,which are included in our IoT Products & Services segment are recognized as the services are performed for time-and-materials contracts, or when milestones areachieved and accepted by the customer for fixed-fee contracts.Contracts with Multiple Performance ObligationsFrom time to time we have contracts from customers with multiple performance obligations. Our hardware products may be combined with our Digi RemoteManager® PaaS offering as well as other support services in an individual contract. Our SmartSense by Digi™ revenues typically are derived from contracts withmultiple performance obligations. These obligations may include: delivery of monitoring equipment that the customer either purchases out-right or uses while weretain ownership, monitoring services, providing condition alerts of assets being monitored, and recertification of sensor equipment. When we retain ownership ofthe equipment, we charge an implementation fee to the customer so they can begin using the equipment. In these instances, all revenue derived from the aboveobligations is recognized over the subscription term of the contract. If the customer purchases the equipment out-right, that portion of the revenue is recognized atthe 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 anaccounting policy election to exclude from the measurement of our revenues any sales or similar taxes we collect from customers.INVENTORIESInventories are stated at the lower of cost or net realizable value, with cost determined using the first-in, first-out method. We reduce the carrying value of ourinventories for estimated excess and obsolete inventories equal to the difference between the cost of inventory and its estimated realizable value based uponassumptions about future product demand and market conditions. Once the new cost basis is established, the value is not increased with any changes incircumstances that would indicate an increase in value after the re-measurement. If actual product demand or market conditions are less favorable than thoseprojected by management, additional inventory write-downs may be required that could result in a material change to our consolidated results of operations orfinancial position.GOODWILLGoodwill represents the excess of cost over the fair value of identifiable assets acquired. Goodwill is tested for impairment on an annual basis as of June 30, ormore frequently if events or circumstances occur which could indicate impairment. For our27Table of ContentsITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)quantitative goodwill impairment tests, we determine the estimated fair value of each reporting unit and compare it to the carrying value of the reporting unit,including goodwill. If the carrying amount of a reporting unit is higher than its estimated fair value, an impairment loss must be recognized for the excess. Wehave two reportable operating segments, our IoT Solutions segment and our IoT Products & Services segment. Both operating segments constitute separatereporting units and both units were tested individually for impairment.The fair value of each reporting unit is determined using a weighted combination of an income and market approach. A discounted cash flow (“DCF”) method isutilized for the income approach. In developing the discounted cash flow analysis, our assumptions about future revenues, expenses, capital expenditures, andchanges in working capital are based on management’s projections, and assume a terminal growth rate thereafter. A separate discount rate is determined for eachreporting unit and these cash flows are then discounted to determine the fair value of the reporting unit. The market approach determines a value derived from theguideline company method. This market approach method estimates the price reasonably expected to be realized from the sale of the reporting unit based oncomparable companies.Assumptions and estimates to determine fair values under the income and market approaches are complex and often subjective. They can be affected by a varietyof 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 tobe 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.Results of our Fiscal 2019 Annual Impairment TestWe had a total of $104.0 million of goodwill for the IoT Products & Services reporting unit and $50.0 million of goodwill for the IoT Solutions reporting unit as ofJune 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 wereeach calculated on a standalone basis using a weighted combination of the income approach and market approach. The implied fair values of each reporting unitwere 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 totalmarket 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 fellbelow the control premiums observed in the last five years in the communications equipment industry. As a result, the market capitalization reconciliation analysisproved support for the reasonableness of the fair values estimated for each individual reporting unit.During the fourth quarter of fiscal 2019, we assessed various qualitative factors to determine whether or not an additional goodwill impairment assessment wasrequired as of September 30, 2019, and we concluded that no additional impairment assessment was required.CONTINGENT CONSIDERATIONWe measure our contingent consideration liabilities recognized in connection with business combinations at fair value on a recurring basis using significantunobservable inputs classified within Level 3 of the fair value hierarchy as defined in ASC 820 "Fair Value Measurement". We used a probability-weighteddiscounted cash flow approach as the valuation technique to determine the fair value of the contingent consideration on the acquisition date. At each subsequentreporting period, the fair value is re-measured with the change in fair value recognized in general and administrative expense in our Consolidated Statements ofOperations. Any amounts paid to the sellers in excess of the amount recorded on the acquisition date will be classified as cash flows used in operating activities.Payments to the sellers not exceeding the acquisition-date fair value of the contingent consideration will be classified as cash flows used in financing activities.INCOME TAXESWe operate in multiple tax jurisdictions both in and outside of the U.S. Accordingly, we must determine the appropriate allocation of income to each of thesejurisdictions. This determination requires us to make several estimates and assumptions. Tax audits associated with the allocation of this income, and othercomplex issues, may require an extended period of time to resolve. They also could result in adjustments to our income tax balances that are material to ourconsolidated financial position and results of operations and could result in potential cash outflows. Liabilities for uncertain tax positions are also established forpotential and ongoing audits of federal, state and international issues. We routinely monitor the potential impact of such situations and believe that liabilities areproperly stated. Valuations related to amounts owed and tax rates could be28Table of ContentsITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)impacted by changes to tax codes and our interpretation thereof, changes in statutory rates, our future taxable income levels and the results of tax audits.WARRANTIESIn general, we warrant our products to be free from defects in material and workmanship under normal use and service. The warranty periods generally range fromone to five years. We typically have the option to repair or replace products we deem defective due to material or workmanship. Estimated warranty costs areaccrued in the period that the related revenue is recognized based upon an estimated average per unit repair or replacement cost applied to the estimated number ofunits under warranty. These estimates are based upon historical warranty incidents and are evaluated on an ongoing basis to ensure the adequacy of the warrantyaccrual.We also warrant our software or firmware incorporated into our products generally for a period of one year and offer to provide a bug fix or software patch withina reasonable period. We have not accrued specifically for this warranty and have not had claims specifically related to software or firmware.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKINTEREST RATE RISKOur exposure to interest rate risk relates primarily to our investment portfolio. We do not use derivative financial instruments to hedge against interest rate risk.FOREIGN CURRENCY RISKWe are exposed to foreign currency transaction risk associated with certain sales being denominated in Euros, British Pounds, Japanese Yen or Canadian Dollarsand in certain cases, transactions in U.S.Dollars in our foreign entities. We are also exposed to foreign currency translation risk as the financial position andoperating results of our foreign subsidiaries are translated into U.S. Dollars for consolidation. We manage our net asset or net liability position for non-functionalcurrency accounts, primarily the U.S. dollar accounts in our foreign locations to reduce our foreign currency risk. In addition, as foreign currency rates fluctuate,we may from time to time, adjust the prices of our products, services and subscriptions. We have not implemented a formal hedging strategy.The table below compares the average monthly exchange rates of the Euro, British Pound, Japanese Yen and Canadian Dollar: Fiscal year endedSeptember 30, % increase 2019 2018 (decrease)Euro1.1300 1.1903 (5.1)%British Pound1.2769 1.3458 (5.1)%Japanese Yen0.0091 0.0093 (2.2)%Canadian Dollar0.7518 0.7789 (3.5)%A 10.0% change from the 2019 average exchange rate for the Euro, British Pound, Yen and Canadian Dollar to the U.S. Dollar would have resulted in a 0.1%increase or decrease in fiscal 2019 annual revenue and a 1.5% increase or decrease in stockholders' equity at September 30, 2019. The above analysis does not takeinto consideration any pricing adjustments we may make in response to changes in the exchange rates.CREDIT RISKWe have some exposure to credit risk related to our accounts receivable portfolio. Exposure to credit risk is controlled through regular monitoring of customerfinancial status, credit limits and collaboration with sales management on customer contacts to facilitate payment.29Table of ContentsITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and StockholdersDigi International Inc.Opinion on the financial statementsWe have audited the accompanying consolidated balance sheets of Digi International Inc. (a Delaware corporation) and subsidiaries (the “Company”) as ofSeptember 30, 2019 and 2018, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of thethree years in the period ended September 30, 2019, and the related notes and consolidated financial statement schedule included under Item 15 (collectivelyreferred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as ofSeptember 30, 2019 and 2018, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2019, inconformity with accounting principles generally accepted in the United States of America.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internalcontrol over financial reporting as of September 30, 2019, based on criteria established in the 2013 Internal Control–Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated November 27, 2019 expressed an unqualified opinion.Basis for opinionThese consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’sconsolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respectto the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and thePCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures toassess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Suchprocedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating theaccounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believethat our audits provide a reasonable basis for our opinion./s/ GRANT THORNTON LLPWe have served as the Company’s auditor since 2017.Minneapolis, MinnesotaNovember 27, 201930Table of ContentsITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)DIGI INTERNATIONAL INC.CONSOLIDATED STATEMENTS OF OPERATIONS Fiscal year ended September 30, 2019 2018(as adjusted)* 2017(as adjusted)* (in thousands, except per common share data)Revenue: Product$224,530 $201,737 $169,425Service29,673 25,156 11,915Total revenue254,203 226,893 181,340Cost of sales: Cost of product118,855 104,639 87,512Cost of service13,350 10,329 5,151Amortization2,963 2,871 1,444Total cost of sales135,168 117,839 94,107Gross profit119,035 109,054 87,233Operating expenses: Sales and marketing45,801 44,517 33,955Research and development37,564 33,178 28,566General and administrative25,685 28,276 13,331Restructuring charge(87) 301 2,515Total operating expenses108,963 106,272 78,367Operating income10,072 2,782 8,866Other income, net: Interest income733 445 656Interest expense(102) (25) (48)Other income, net442 48 76Total other income, net1,073 468 684Income before income taxes11,145 3,250 9,550Income tax provision1,187 1,619 147Net income$9,958 $1,631 $9,403 Net income per common share: Basic$0.36 $0.06 $0.36Diluted$0.35 $0.06 $0.35Weighted average common shares: Basic27,905 27,083 26,432Diluted28,554 27,652 27,099*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which we adopted onOctober 1, 2018.The accompanying notes are an integral part of the consolidated financial statements.31Table of ContentsITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)DIGI INTERNATIONAL INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Fiscal years ended September 30, 2019 2018(as adjusted)* 2017(as adjusted)* (in thousands)Net income$9,958 $1,631 $9,403Other comprehensive (loss) income, net of tax: Foreign currency translation adjustment(2,003) (865) 2,041Change in net unrealized gain (loss) on investments19 (31) (14)Less income tax (expense) benefit(5) 6 5Reclassification of realized loss on investments included in net income (1)— 31 —Less income tax benefit (2)— (8) —Other comprehensive (loss) income, net of tax(1,989) (867) 2,032Comprehensive income$7,969 $764 $11,435(1)Recorded in Other income, net in our Consolidated Statements ofOperations.(2)Recorded in Income tax provision in our Consolidated Statements ofOperations.*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which we adopted onOctober 1, 2018.The accompanying notes are an integral part of the consolidated financial statements.32Table of ContentsITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)DIGI INTERNATIONAL INC.CONSOLIDATED BALANCE SHEETS As of September 30, 2019 2018(as adjusted)* (in thousands, except share data)ASSETS Current assets: Cash and cash equivalents$92,792 $58,014Marketable securities— 4,736Accounts receivable, net56,417 49,819Inventories39,764 41,644Other current assets3,574 2,613Assets held for sale— 5,220Total current assets192,547 162,046Property, equipment and improvements, net13,857 8,354Identifiable intangible assets, net30,667 39,320Goodwill153,422 154,535Deferred tax assets7,330 6,600Other non-current assets875 1,291Total assets$398,698 $372,146LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable$21,183 $12,911Accrued compensation8,733 8,190Unearned revenue5,025 3,177Contingent consideration on acquired businesses5,407 5,890Other current liabilities4,110 5,405Total current liabilities44,458 35,573Income taxes payable1,192 851Deferred tax liabilities261 334Contingent consideration on acquired businesses— 4,175Other non-current liabilities3,809 720Total liabilities49,720 41,653Commitments and Contingencies (see Notes 16 & 17) 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; 34,608,003 and 33,812,838 shares issued346 338Additional paid-in capital266,567 255,936Retained earnings161,919 151,961Accumulated other comprehensive loss(25,515) (23,526)Treasury stock, at cost, 6,367,428 and 6,385,336 shares(54,339) (54,216)Total stockholders’ equity348,978 330,493Total liabilities and stockholders’ equity$398,698 $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 consolidated financial statements.33Table of ContentsITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)DIGI INTERNATIONAL INC.CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal year ended September 30, 2019 2018(as adjusted)* 2017(as adjusted)*Operating activities: (in thousands)Net income $9,958 $1,631 $9,403Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation of property, equipment and improvements 4,578 3,349 2,968Amortization of identifiable intangible assets 8,818 9,435 2,597Stock-based compensation 5,655 4,854 4,659Excess tax benefits from stock-based compensation — — (326)Deferred income tax benefit (799) (376) (2,086)(Gain) loss on sale of property, equipment and improvements (4,392) (622) 25Change in fair value of contingent consideration 1,190 1,377 (4,364)Provision for bad debt and product returns 635 1,120 361Provision for inventory obsolescence 1,874 2,056 1,850Other, net (156) 368 2,481Changes in operating assets and liabilities (net of acquisitions): Accounts receivable (6,589) (16,004) 833Inventories (1,062) (11,344) (4,904)Other assets (866) (1,412) 562Income taxes (103) 697 (3)Accounts payable 8,232 2,728 (3,536)Accrued expenses 1,991 (635) (8,045)Net cash provided by (used in) operating activities 28,964 (2,778) 2,475Investing activities: Purchase of marketable securities — — (61,964)Proceeds from maturities of marketable securities 4,750 32,032 87,105Proceeds from sale of business — 2,000 3,000Acquisition of businesses, net of cash acquired — (56,258) (30,111)Proceeds from sale of property and equipment 10,096 731 —Purchase of property, equipment, improvements and certain other intangible assets (9,335) (1,842) (1,773)Net cash provided by (used in) investing activities 5,511 (23,337) (3,743)Financing activities: Acquisition earn-out payments (3,748) — (518)Excess tax benefits from stock-based compensation — — 326Proceeds from stock option plan transactions 4,874 5,460 3,502Proceeds from employee stock purchase plan transactions 1,058 1,115 685Repurchase of common stock (1,071) (748) (938)Net cash provided by financing activities 1,113 5,827 3,057Effect of exchange rate changes on cash and cash equivalents (810) 80 706Net increase (decrease) in cash and cash equivalents 34,778 (20,208) 2,495Cash and cash equivalents, beginning of period 58,014 78,222 75,727Cash and cash equivalents, end of period $92,792 $58,014 $78,222 Supplemental disclosures of cash flow information: Interest paid $1 $10 $1Income taxes paid, net $2,048 $1,235 $2,129Supplemental schedule of non-cash investing and financing activities: Accrual for capitalized intangible asset $— $(78) $(36)Transfer of inventory to property, equipment and improvements $(1,064) $(2,159) $(421)Liability related to acquisition of business $— $(2,300) $(1,310)*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 consolidated financial statements.34Table of ContentsITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)DIGI INTERNATIONAL INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYFor fiscal years ended September 30, 2019, 2018 and 2017 (in thousands) Accumulated Additional Other Total Common Stock Treasury Stock Paid-In Retained Comprehensive Stockholders’ Shares Par Value Shares Value Capital Earnings* Loss EquityBalances, September 30, 2016 32,471 $325 6,431 $(54,209) $237,492 $141,112 $(24,691) $300,029Cumulative-effect adjustment from adoption ofASU 2014-09 — — — — — (152) — (152)Net income — — — — — 9,403 — 9,403Other comprehensive income — — — — — — 2,032 2,032Employee stock purchase plan issuances — — (72) 614 71 — — 685Repurchase of common stock — — 78 (938) — — — (938)Issuance of stock under stock award plans 537 5 — — 3,497 — — 3,502Tax impact from equity awards — — — — (191) — — (191)Stock-based compensation expense — — — — 4,659 — — 4,659Balances, September 30, 2017 33,008 330 6,437 (54,533) 245,528 150,363 (22,659) 319,029Cumulative-effect adjustment from adoption ofASU 2016-09 — — — — 52 (33) — 19Net income — — — — — 1,631 — 1,631Other comprehensive loss — — — — — — (867) (867)Employee stock purchase plan issuances — — (126) 1,065 50 — — 1,115Repurchase of common stock — — 74 (748) — — — (748)Issuance of stock under stock award plans 805 8 — — 5,452 — — 5,460Stock-based compensation expense — — — — 4,854 — — 4,854Balances, September 30, 2018 33,813 338 6,385 (54,216) 255,936 151,961 (23,526) 330,493Net income — — — — — 9,958 — 9,958Other comprehensive loss — — — — — — (1,989) (1,989)Employee stock purchase plan issuances — — (111) 948 110 — — 1,058Repurchase of common stock — — 93 (1,071) — — — (1,071)Issuance of stock under stock award plans 795 8 — — 4,866 — — 4,874Stock-based compensation expense — — — — 5,655 — — 5,655Balances, September 30, 2019 34,608 $346 6,367 $(54,339) $266,567 $161,919 $(25,515) $348,978*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 consolidated financial statements.35Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBusiness DescriptionWe are a leading global provider of business and mission-critical and IoT connectivity products, services and solutions. We help our customers create next-generation connected products to deploy, monitor and manage critical communications infrastructures and compliance standards in demanding environments withhigh levels of security and reliability. We have two reportable operating segments: (i) IoT Products & Services; and (ii) IoT Solutions.Principles of ConsolidationThe consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. All intercompany accounts and transactions havebeen eliminated in consolidation.ReclassificationsThe subcategories within total revenue and total cost of sales were redefined in 2019 into “Product” and “Service”. Prior year hardware product and services andsolutions amounts have been reclassified to conform to our fiscal 2019 presentation. There was no change to total revenue and total cost of sales for fiscal 2018 and2017 except for the adoption of ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”) discussed later in this note.Accounting EstimatesThe preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ significantly fromthose estimates.Cash EquivalentsCash equivalents consist of money market accounts and other highly liquid investments purchased with an original maturity of three months or less. The carryingamounts approximate fair value due to the short maturities of these investments. We maintain our cash and cash equivalents in bank accounts which may exceedfederally insured limits at times. We have not experienced any losses in these accounts.Marketable SecuritiesMarketable securities may consist of certificates of deposit, commercial paper, corporate bonds and government municipal bonds. All marketable securities areaccounted for as available-for-sale and are carried at fair value on our Consolidated Balance Sheets with unrealized gains and losses recorded in accumulated othercomprehensive loss within stockholders’ equity. In order to estimate the fair value for each security in our investment portfolio, we obtain quoted market prices andtrading activity for each security when available. We obtain relevant information from our investment advisor and, if warranted, may review the financial solvencyof certain security issuers.We regularly monitor and evaluate the value of our marketable securities. When assessing marketable securities for other-than-temporary declines in value, weconsider several factors. These factors include: how significant the decline in value is as a percentage of the original cost, how long the market value of theinvestment has been less than its original cost, the underlying factors contributing to a decline in the prices of securities in a single asset class, the performance ofthe issuer’s stock price in relation to the stock price of its competitors within the industry, expected market volatility, analyst recommendations, the views ofexternal investment managers, any news or financial information that has been released specific to the investee and the outlook for the overall industry in whichthe issuer operates. If events and circumstances indicate that a decline in the value of a security has occurred and is other-than-temporary, we would record acharge to other income, net.Accounts ReceivableAccounts receivable are stated at the amount we expect to collect. This amount is net of an allowance for doubtful accounts for estimated losses resulting from theinability of our customers to make required payments and a reserve for future returns and pricing adjustments. The following factors are considered whendetermining the collectability of specific customer accounts: customer creditworthiness, past transaction history with the customer, and changes in customerpayment terms or practices. In addition, overall historical collection experience, current economic industry trends, and a review of the current status of trade36Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)accounts receivable are considered when determining the required allowance for doubtful accounts. Based on our assessment, we provide for estimateduncollectible amounts through a charge to earnings and a credit to our allowance for doubtful accounts. Balances that remain outstanding after we have usedreasonable collection efforts are written off through a charge to the allowance for doubtful accounts and a credit to accounts receivable. Estimated reserves forfuture 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 ofauthorized returns compared to received returns and distribution sales for the current period. Estimated reserves for future returns and price adjustments are chargedagainst revenue in the same period as the corresponding sales are recorded.InventoriesInventories are valued at the lower of cost or net realizable value using the first-in, first-out (FIFO) method. Appropriate consideration is given to deterioration,obsolescence and other factors in evaluating net realizable value.Property, Equipment and Improvements, NetProperty, equipment and improvements are carried at cost, net of accumulated depreciation. Depreciation is provided by charges to operations using the straight-line method over the estimated asset useful lives. Furniture and fixtures, purchased software and other equipment are depreciated over a period of three to sevenyears. Building improvements and buildings are depreciated over ten and thirty-nine years, respectively. Leasehold improvements are depreciated over the shorterof the lease term or the estimated useful life of the asset. Long-lived assets to be held and used, such as property, equipment and improvements, are reviewed forimpairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.Expenditures for maintenance and repairs are charged to operations as incurred, while major renewals and betterments are capitalized. The assets and relatedaccumulated depreciation accounts are adjusted for asset retirements and disposals with the resulting gain or loss included in operations.Identifiable Intangible AssetsPurchased proven technology, license agreements, covenants not to compete and other identifiable intangible assets are recorded at fair value when acquired in abusiness acquisition, or at cost when not purchased in a business acquisition. All other identifiable intangible assets are amortized on either a straight-line basisover their estimated useful lives of three to twelve years or based on the pattern in which the asset is consumed. Useful lives for identifiable intangible assets areestimated at the time of acquisition based on the periods of time from which we expect to derive benefits from the identifiable intangible assets. Amortization ofpurchased and core technology is included in cost of sales in the Consolidated Statements of Operations. Amortization of all other acquired identifiable intangibleassets is charged to operating expenses as a component of general and administrative expense.Identifiable intangible assets are reviewed for impairment whenever events or circumstances indicate that undiscounted expected future cash flows are notsufficient to recover the carrying value amount. We measure impairment loss by utilizing a cash flow valuation technique using the income approach. Impairmentlosses, if any, would be recorded in the period the impairment is identified. There were no impairments identified in fiscal 2019, 2018 or 2017.GoodwillGoodwill represents the excess of cost over the fair value of identifiable assets acquired. Goodwill is quantitatively tested for impairment on an annual basis as ofJune 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 4 to the consolidated financialstatements). As a result, we concluded that the IoT Solutions segment and the IoT Products & Services segment constitute separate reporting units for purposes ofthe ASC 350-20-35 "Goodwill Measurement of Impairment" assessment and both units were tested individually for impairment.For our quantitative goodwill impairment tests, we determine the estimated fair value of each reporting unit and compare it to the carrying value of the reportingunit. If the carrying amount of a reporting unit is higher than its estimated fair value, an37Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)impairment loss must be recognized for the excess. Fair values for both reporting units were each estimated on a standalone basis using a weighted combination ofthe 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. Acommonly used variation of the income approach used to value a business is the discounted cash flow (“DCF”) method. The DCF method is a valuation techniquein which the value of a business is estimated on the earnings capacity, or available cash flow, of that business. Earnings capacity represents the earnings availablefor distribution to stockholders after consideration of the reinvestment required for future growth. Significant judgment is required to estimate the amount andtiming 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 orassets and transactions in its industry as well as prior company or asset transactions. This approach can be estimated through the guideline company method. Thismethod indicates fair value of a business by comparing it to publicly traded companies in similar lines of business. After identifying and selecting the guidelinecompanies, we make judgments about the comparability of the companies based on size, growth rates, profitability, risk, and return on investment in order toestimate market multiples. These multiples are then applied to the reporting units to estimate a fair value.Assumptions and estimates to determine fair values are complex and often subjective. They can be affected by a variety of factors, including external factors suchas industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. For example, if our future operatingresults 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 fairvalue of one or more of our reporting units, we may be required to record future impairment charges for goodwill.Contingent ConsiderationWe measure our contingent consideration liabilities recognized in connection with business combinations at fair value on a recurring basis using significantunobservable inputs classified within Level 3 of the fair value hierarchy as defined in ASC 820 "Fair Value Measurement". We used a probability-weighteddiscounted cash flow approach as a valuation technique to determine the fair value of the contingent consideration on the acquisition date. At each subsequentreporting period, the fair value is re-measured with the change in fair value recognized in general and administrative expense in our Consolidated Statements ofOperations. Amounts, if any, paid to the seller in excess of the amount recorded on the acquisition date will be classified as cash flows used in operating activities.Payments to the seller not exceeding the acquisition-date fair value of the contingent consideration will be classified as cash flows used in financing activities.WarrantiesIn general, we warrant our hardware products to be free from defects in material and workmanship under normal use and service. The warranty periods generallyrange from one to five years. We typically have the option to either repair or replace hardware products we deem defective with regard to material or workmanship.Estimated warranty costs are accrued in the period that the related revenue is recognized based upon an estimated average per unit repair or replacement costapplied to the estimated number of units under warranty. These estimates are based upon historical warranty incidents and are evaluated on an ongoing basis toensure the adequacy of the warranty accrual.We also warrant our software or firmware incorporated into our products generally for a period of one year and offer to provide a bug fix or software patch withina reasonable period. We have not accrued specifically for this warranty and have not had claims specifically related to software or firmware. We are notresponsible for, and do not warrant that, custom software versions, created by OEM customers based upon our software source code, will function in a particularway, will conform to any specifications or are fit for any particular purpose. Further, we do not indemnify these customers from any third-party liability as itrelates to or arises from any customization or modifications made by the OEM customer.Treasury Stock We record treasury stock at cost. Treasury stock may be acquired from employees for tax withholding purposes related to vesting of restricted stock awards as partof our stock-based compensation program.38Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)Revenue RecognitionWe recognize hardware product revenue upon transfer of control of goods or services to customers in an amount that reflects the consideration we expect to receivein 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 thecontract;•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 FeesOur hardware product revenue is derived primarily from the sale of wired and wireless hardware products to our distributors and Direct/OEM customers. Productrevenue generally is recognized upon shipment of the product to a customer. Sales to authorized domestic distributors and Direct/OEM customers typically aremade with certain rights of return and price adjustment provisions. Estimated reserves for future returns and pricing adjustments are established by us based on ananalysis of historical patterns of returns and price adjustments as well as an analysis of authorized returns compared to received returns and distribution sales for thecurrent 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 changeto our consolidated results of operations or financial position. We have applied consistent methodologies for estimating reserves for future returns and pricingadjustments for all periods presented.Equipment revenue from SmartSense by Digi™ within our IoT Solutions segment is recorded as an up-front sale at its stand-alone selling price. This is because thecustomer could utilize our equipment with other monitoring services or could use our monitoring services with hardware purchased from other vendors. Ourinstallation charges from these sales are recorded when the product is installed.Subscription and Support Services RevenueOur SmartSense by Digi™ subscription revenue is recorded on a monthly basis. These subscriptions are generally in a range from one to five years, and maycontain 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 basedon the number of devices being managed or monitored. This revenue is recognized over the life of the service term and is included in our IoT Products & Servicessegment. Digi Support Services revenues are recognized over the life of the support contract and included in our IoT Products & Services segment. Some of Digi SupportServices revenue is for training and this revenue is recognized as the services are performed.Professional Services RevenueProfessional 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,which are included in our IoT Products & Services segment are recognized as the services are performed for time-and-materials contracts, or when milestones areachieved and accepted by the customer for fixed-fee contracts.Contracts with Multiple Performance ObligationsFrom time to time we have contracts from customers with multiple performance obligations. Our hardware products may be combined with our Digi RemoteManager® PaaS offering as well as other support services in an individual contract. Our SmartSense by Digi™ revenues typically are derived from contracts withmultiple performance obligations. These obligations39Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)may include: delivery of monitoring equipment that the customer either purchases out-right or uses while we retain ownership, monitoring services, providingcondition alerts of assets being monitored, and recertification of sensor equipment. When we retain ownership of the equipment, we charge an implementation feeto the customer so they can begin using the equipment. In these instances, all revenue derived from the above obligations is recognized over the subscription termof 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 theequipment is shipped and all other revenue is recognized over the subscription term of the contract. We have made an accounting policy election to exclude fromthe measurement of our revenues any sales or similar taxes we collect from customers.Research and DevelopmentResearch and development costs are expensed when incurred. Research and development costs include compensation, allocation of corporate costs, depreciation,utilities, professional services and prototypes. Software and firmware development costs are expensed as incurred until the point that both the technologicalfeasibility and the proven marketability of the product are established. To date, the time period between the establishment of technological feasibility andcompletion of software development has been short and no significant development costs have been incurred during that period. Accordingly, we have notcapitalized any software development costs to date.Income TaxesDeferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financialreporting amounts at each year end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affecttaxable income. Income tax expense is equal to the tax payable for the period and the change during the period in deferred tax assets and liabilities as well aschanges in income tax reserves. We maintain valuation allowances unless it is more likely than not that all or a portion of the deferred tax assets will be realized.Changes in valuation allowances from period to period are included in our tax provision in the period of change. We recognize the effect of income tax positionsonly if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greaterthan 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.Stock-Based CompensationStock-based compensation expense represents the cost of employee services received in exchange for an award of equity instruments based on the grant date fairvalue of the award. This cost must be recognized over the period during which an employee is required to provide the service (usually the vesting period).Foreign Currency TranslationFinancial position and results of operations of our international subsidiaries are measured using local currencies as the functional currency, except our Singaporelocation which uses the U.S. Dollar as its functional currency. Assets and liabilities of these operations are translated at the exchange rates in effect at the end ofeach reporting period. For our larger international subsidiaries, statements of operations accounts are translated at the daily rate. For all other internationalsubsidiaries, our statements of operations accounts are translated at the weighted average rates of exchange prevailing during each reporting period. Translationadjustments arising from the use of differing currency exchange rates from period to period are included in accumulated other comprehensive loss in stockholders’equity. Gains and losses on foreign currency exchange transactions, as well as translation gains or losses on transactions denominated in currencies other than anentity’s functional currency, are reflected in the statement of operations. During fiscal 2019, 2018 and 2017 there were net transaction gains of $0.4 million, $0.1million and $0.1 million, respectively that were recorded in other income, net. We manage our net asset or net liability position for U.S. dollar accounts in ourforeign locations to reduce our foreign currency risk. We have not implemented a formal hedging strategy.Comprehensive IncomeOur comprehensive income is comprised of net income, foreign currency translation adjustments and unrealized gains and losses on available-for-sale marketablesecurities. These items are charged or credited to the accumulated other comprehensive loss account in stockholders’ equity.40Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)Net Income Per Common ShareBasic net income per common share is calculated based on the weighted average number of common shares outstanding during the period. Diluted net income percommon share is computed by dividing net income by the weighted average number of common and potentially dilutive common shares outstanding during theperiod. Potentially dilutive common shares of our stock result from common stock options and restricted stock units. We use the treasury stock method to calculatethe weighted-average shares used in the diluted earnings per share computation. Under this method the proceeds from exercise of an option, any amount ofcompensation cost for future service that we have not yet recognized, and the amount of estimated tax benefits that would be recorded in paid-in capital when theoption is exercised are assumed to have been used to repurchase shares in the current period.The following table is a reconciliation of the numerators and denominators in the net income per common share calculations (in thousands, except per commonshare data): Fiscal year ended September 30, 2019 2018(as adjusted)* 2017(as adjusted)*Numerator: Net income$9,958 $1,631 $9,403Denominator: Denominator basic net income per common share — weighted average shares outstanding27,905 27,083 26,432Effect of dilutive securities: Stock options and restricted stock units649 569 667Denominator diluted net income per common share — adjusted weighted average shares28,554 27,652 27,099 Net income per common share, basic$0.36 $0.06 $0.36Net income per common share, diluted$0.35 $0.06 $0.35*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.Because their effect would be anti-dilutive at period end, certain potentially dilutive shares related to stock options to purchase common shares were excluded inthe above computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of our common shares. AtSeptember 30, 2019, 2018 and 2017, such excluded stock options were 744,513, 925,063 and 1,142,322, respectively.Recent Accounting DevelopmentsAdoptedIn May 2017, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2017-09, Compensation-Stock Compensation (Topic718): Scope of Modification Accounting. This ASU provided guidance as to which changes to the terms or conditions of a share-based payment award require anentity to apply modification accounting. The amendments in this update are to be applied prospectively to an award modified on or after the adoption date. ThisASU was adopted by us on October 1, 2018 and has not had an impact on our consolidated financial statements.In January 2017, FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU eliminatesthe 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 entityshould perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and recognize an impairmentcharge 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 reportingunit. The standard, which should be applied prospectively, is effective for our fiscal year ending September 30, 2021. Early adoption is permitted. This ASU wasadopted by us on October 1, 2018 and has not had 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. This ASUprovides guidance on eight specific cash flow issues, thereby reducing the diversity in practice in41Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)how certain transaction are classified in the statement of cash flows. This ASU was adopted by us on October 1, 2018 and has not had an impact on ourconsolidated financial statements.In January 2016, FASB issued ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. ThisASU requires equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) to be measured at fair valuewith changes in fair value to be recognized in net income. This ASU also simplifies the impairment assessment of equity investments without readily determinablefair values. This ASU also has changed the presentation and disclosure requirements for financial instruments. In addition, this ASU has clarified the guidancerelated to valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. This ASUwas adopted by us on October 1, 2018 and has not had an impact on our consolidated financial statements.In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”). This ASU requires that revenue is recognized for the transfer ofgoods 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 establishestiming associated with recognizing revenues and amortizing costs, associated with contracts. FASB has issued several amendments to ASU 2014-09, includingclarifications on disclosure of prior-period performance obligations and remaining performance obligations. The guidance permits two methods of adoption, one ofwhich 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 ourfinancial statements. First, in instances where we retain ownership of equipment a customer uses, we charge an implementation fee to the customer so they canbegin using the equipment. We depreciate this cost of the equipment over its useful life (typically three years). Second, we capitalize and amortize commissionspaid to sales personnel or agents on service contracts. If the commissions earned during an accounting period exceed our capitalization threshold, they will beamortized 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 the following 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 fiscal2019;•for completed contracts that have variable consideration, we will use the as-invoiced amount for all of our time and materials contracts and contractsrelating to Digi Remote Manager® in instances where the contracts do not include free service; and•we will expense incremental costs of obtaining a contract when incurred if the amortization period of the asset is one year orless.As follows, the adoption of the standard related to the new revenue recognition impacted our reported results: Fiscal year ended September 30, 2018(in thousands, except per common share data) As Reported Impact of Adoption* As AdjustedRevenue $228,366 $(1,473) $226,893Cost of sales 119,483 (1,644) 117,839Gross profit 108,883 171 109,054Operating expenses 106,561 (289) 106,272Operating income $2,322 $460 $2,782Net income $1,303 $328 $1,631Diluted earnings per share $0.05 $0.01 $0.06*The impact of the adoption of ASU 2014-09 solely impacts the results of our IoT Solutions segment.42Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Fiscal year ended September 30, 2017(in thousands, except per common share data) As Reported Impact of Adoption* As AdjustedRevenue $181,634 $(294) $181,340Cost of sales 94,460 (353) 94,107Gross profit 87,174 59 87,233Operating expenses 78,367 — 78,367Operating income $8,807 $59 $8,866Net income $9,366 $37 $9,403Diluted earnings per share $0.35 $— $0.35*The impact of the adoption of ASU 2014-09 solely impacts the results of our IoT Solutions segment. September 30, 2018(in thousands) As Reported Impact of Adoption As AdjustedAccounts receivable, net $50,817 $(998) $49,819Property, equipment and improvements, net $6,270 $2,084 $8,354Deferred tax assets $6,665 $(65) $6,600Unearned revenue current $2,579 $598 $3,177Other non-current liabilities $510 $210 $720Retained earnings $151,748 $213 $151,961 September 30, 2017(in thousands) As Reported Impact of Adoption As AdjustedAccounts receivable, net $28,855 $— $28,855Property, equipment and improvements, net $12,801 $440 $13,241Deferred tax assets $9,211 $67 $9,278Unearned revenue current $1,343 $469 $1,812Other non-current liabilities $654 $153 $807Retained earnings $150,478 $(115) $150,363We recognized $0.2 million reduction to retained earnings as of September 30, 2016 related to the adoption of the new accounting standards related to revenuerecognition. There was no impact to total cash provided by or used in operating, financing or investing on our Consolidated Statements of Cash Flows as a result ofour adoption of these new accounting standards.Not Yet AdoptedIn June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This ASUreplaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses. This update is intended toprovide financial statement users with more decision-useful information about the expected credit losses. This ASU is effective for us in the first quarter endingDecember 31, 2020. Entities may early adopt beginning after December 15, 2018. We are evaluating the impact of adopting ASU 2016-13 on our consolidatedfinancial statements.In February 2016, FASB issued ASU 2016-02, Leases (Topic 842), which provides for comprehensive changes to lease accounting. This ASU requires that alessee 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 inthe first quarter of fiscal 2020, following the modified retrospective application approach. We are substantially complete with our implementation efforts, whichhave included identification and analysis of our lease portfolio, analysis and evaluation of the new reporting and disclosure requirements of43Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)the new guidance, and an evaluation of our lease-related processes and internal controls. The adoption of this standard will result in reflecting a right-of-use assetand lease liability on our consolidated balance sheet in the first quarter of fiscal 2020 of approximately $14.1 million and $17.9 million, respectively. In adoptingthe 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 do not expect this standard to have a significant impact on our consolidated results of operations or consolidatedstatements of cash flows. We have identified new and updated existing internal controls and processes to support measurement, recognition and disclosure underthis new standard. Such changes were not deemed to be material to our overall system of internal controls.2. ACQUISITIONSFiscal 2018 AcquisitionsAcquisition of Accelerated Concepts, Inc.On January 22, 2018, we purchased all the outstanding stock of Accelerated, a Tampa-based provider of secure, enterprise-grade, cellular (LTE) networkingequipment for primary and backup connectivity applications, for cash of $16.4 million (excluding cash acquired of $0.2 million) and future earn-out payments.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 ofAccelerated products. The first installment was based on revenues from January 22, 2018 through January 21, 2019 and the second installment will be based onrevenues from January 22, 2019 through January 21, 2020. If certain revenue thresholds are met, the cumulative amount of these earn-outs will be $6.5 million. InApril 2019, we paid $3.5 million for the first installment. The fair value of the remaining contingent consideration was $2.5 million at September 30, 2019 (seeNote 8 to the consolidated financial statements).For the year ended September 30, 2018, the amounts of revenue and net income included in the Consolidated Statements of Operations from the acquisition date ofJanuary 22, 2018 were $22.2 million and $2.8 million, respectively. Costs directly related to the acquisition of $0.3 million incurred in fiscal 2018 have beencharged directly to operations and are included in general and administrative expense in our Consolidated Statements of Operations. These acquisition costsinclude legal, accounting and valuation fees.Acquisition of TempAlert LLCOn October 20, 2017, we purchased all the outstanding interests of TempAlert, a Boston-based provider of automated, real-time temperature monitoring and taskmanagement solutions for cash of $40.7 million (excluding cash acquired of $0.6 million) and future earn-out payments. Purchase accounting related to theacquisition 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 forthe period ended December 31, 2019, will not exceed $45.0 million. The fair value of the contingent consideration was zero at September 30, 2019 (see Note 8 tothe consolidated financial statements).For the year ended September 30, 2018, the amount of revenue included in the Consolidated Statements of Operations from the acquisition date of October 20,2017 was $17.0 million. Costs directly related to the acquisition of $1.1 million, $1.4 million and $0.4 million incurred in fiscal years 2019, 2018 and 2017,respectively, have been charged directly to operations and are included in general and administrative expense in our Consolidated Statements of Operations. Theseacquisition costs include legal, accounting, valuation and success fees.Fiscal 2017 AcquisitionsAcquisition of SMART Temps®, LLCOn January 9, 2017, we purchased all of the outstanding interests of SMART Temps®, LLC ("SMART Temps®"), an Indiana-based provider of real-timetemperature management for pharmacies, education, and hospital settings as well as real-time44Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS2. ACQUISITIONS (CONTINUED)temperature management for blood bank, laboratory environments, restaurants, and grocery for cash of $28.8 million (excluding cash acquired of $0.5 million) andfuture earn-out payments. SMART Temps® results have been included in our consolidated financial statements within the IoT Solutions segment since the date ofacquisition. Purchase accounting related to the acquisition was finalized during fiscal 2017.The earn-out payments were scheduled to be paid after December 31, 2017 which is the end of the earn-out period. The cumulative amount of those earn-outpayments could not exceed $7.2 million. The fair value of this contingent consideration was zero at December 31, 2017 and no earn-out was paid (see Note 8 to theconsolidated financial statements).Acquisition of FreshTemp®, LLCOn November 1, 2016, we purchased all of the outstanding interests of FreshTemp®, LLC ("FreshTemp®"), a Pittsburgh-based provider of temperature monitoringand automated task management solutions for the food industry for cash of $1.7 million and future earn-out payments. FreshTemp® results have been included inour consolidated financial statements within the IoT Solutions segment since the date of acquisition. Purchase accounting related to the acquisition was finalizedduring fiscal 2017.The earn-out payments were based on revenue related to certain customer contracts entered into by June 30, 2017. The final calculation date was on June 30, 2018.The cumulative amount of these earn-out payments could not exceed $2.3 million. We made a final payment of $0.2 million during the first quarter of fiscal 2019.3. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NETIdentifiable Intangible Assets, NetAmortizable identifiable intangible assets, net as of September 30, 2019 and 2018 were comprised of the following (in thousands): September 30, 2019 September 30, 2018 Grosscarryingamount Accum.amort. Net Grosscarryingamount Accum.amort. NetPurchased and core technology$57,699 $(50,986) $6,713 $58,102 $(48,693) $9,409License agreements102 (74) 28 102 (46) 56Patents and trademarks14,577 (11,970) 2,607 15,701 (12,242) 3,459Customer relationships46,315 (25,266) 21,049 46,605 (21,049) 25,556Non-compete agreements600 (330) 270 600 (210) 390Order backlog1,800 (1,800) — 1,800 (1,350) 450Total$121,093 $(90,426) $30,667 $122,910 $(83,590) $39,320Amortization expense is included in our Consolidated Statements of Operations in cost of sales and general and administrative expense. Amortization expense incost of sales includes amortization for purchased and core technology and certain patents and trademarks.Amortization expense for fiscal years 2019, 2018 and 2017 was as follows (in thousands):Fiscal yearTotal2019$8,8182018$9,4352017$2,59745Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS3. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET (CONTINUED)Estimated amortization expense for the next five years is as follows (in thousands):Fiscal yearTotal2020$8,2772021$7,4342022$6,5902023$4,3922024$3,689GoodwillThe changes in the carrying amount of goodwill by reportable segments are (in thousands): Fiscal years ended September 30, IoTProducts and Services IoTSolutions TotalBalance on September 30, 2017$98,981 $33,014 $131,995Acquisitions5,663 17,553 23,216Foreign currency translation adjustment(286) (390) (676)Balance on September 30, 2018$104,358 $50,177 $154,535Foreign currency translation adjustment(839) (274) (1,113)Balance at September 30, 2019$103,519 $49,903 $153,422No goodwill impairment has been recorded in any period presented.4. SEGMENT INFORMATION AND MAJOR CUSTOMERSWe have two reportable operating segments for purposes of ASC 280-10-50 “Segment Reporting”: (i) IoT Products & Services and (ii) IoT Solutions. Thisdetermination was made by considering both qualitative and quantitative information. The qualitative information included, but was not limited to, the following:the nature of the products and services and customers differ between the two segments, the Chief Operating Decision Maker is reviewing both segments’ operatingresults separately and makes decisions about the allocation of resources, and discrete financial information is available through operating income (loss) for bothsegments.IoT Products & ServicesOur IoT Products & Services segment is composed of the following communications products and development services:•Cellular routers and gateways;•Radio frequency ("RF") products which include our Digi XBee® modules as well as other RFsolutions;•Embedded products which include Digi Connect® and Rabbit® embedded systems on module and single boardcomputers;•Network products which include console and serial servers and USB connectedproducts;•Digi Wireless DesignServices;•Digi Remote Manager®;and•Digi Support Services which offers various levels of technical services for development assistance, consulting andtraining.46Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS4. SEGMENT INFORMATION AND MAJOR CUSTOMERS (CONTINUED)IoT SolutionsOur IoT Solutions segment offers wireless temperature and other condition-based monitoring services as well as employee task management services. Thesesolutions are focused on these vertical markets: food service, retail, healthcare (primarily pharmacies), transportation/logistics and education. The solutions aremarketed as SmartSense by Digi™. We have formed, expanded and enhanced the IoT Solutions segment through acquisition.We measure our segment results primarily by reference to revenue and operating income. IoT Solutions revenue includes product, service and subscriptionrevenue. Certain costs incurred at the corporate level are allocated to our segments. These costs include information technology, employee benefits and sharedfacility services. The information technology and shared facility costs are allocated based on headcount and the employee benefits costs are allocated based oncompensation costs.Summary operating results for each of our segments were as follows (in thousands): Fiscal years ended September 30, 2019 2018(as adjusted)* 2017(as adjusted)*Revenue IoT Products & Services$215,287 $201,506 $174,237IoT Solutions38,916 25,387 7,103Total revenue$254,203 $226,893 $181,340Operating income (loss) IoT Products & Services$18,674 $14,923 $12,804IoT Solutions(8,602) (12,141) (3,938)Total operating income$10,072 $2,782 $8,866Depreciation and amortization IoT Products & Services$6,102 $6,040 $3,575IoT Solutions7,294 6,744 1,990Total depreciation and amortization$13,396 $12,784 $5,565*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): Fiscal years ended September 30, 2019 2018 2017IoT Products & Services$8,863 $1,773 $1,738IoT Solutions472 69 35Total expended for property, plant and equipment$9,335 $1,842 $1,773Total assets for each of our segments were as follows (in thousands): As of September 30, 2019 2018(as adjusted)*IoT Products & Services $215,651 $209,574IoT Solutions 90,255 99,822Unallocated** 92,792 62,750Total assets $398,698 $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, current marketable securities and long-term marketable securities.47Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS4. SEGMENT INFORMATION AND MAJOR CUSTOMERS (CONTINUED)Net property, equipment and improvements by geographic location were as follows (in thousands): As of September 30, 2019 2018(as adjusted)*United States $13,400 $8,240International, primarily Europe 457 114Total net property, equipment and improvements $13,857 $8,354*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.Our U.S. export sales represented 28.5%, 30.1% and 37.2% of revenue for the fiscal years ended September 30, 2019, 2018 and 2017. No single customer exceeded10% of revenue for any of the periods presented. At September 30, 2019, we had one customer, whose accounts receivable balance represented 14.7% of totalaccounts receivable. At September 30, 2018, we had one customer, whose accounts receivable balance represented 12.2% of total accounts receivable.5. SALE OF BUILDINGOn 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 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 valuationallowance. As a result of this sale, 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 andadministrative expense. During the fiscal year ended September 30, 2019, we paid $5.8 million for leasehold improvements to build out our new headquartersspace. These improvements are being depreciated over 10 years, which is the estimated useful life of the improvements.48Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS6. SELECTED BALANCE SHEET DATA (in thousands) As of September 30, 2019 2018(as adjusted)*Accounts receivable, net: Accounts receivable$60,062 $53,164Less allowance for doubtful accounts968 785Less reserve for future returns and pricing adjustments2,677 2,560Total accounts receivable, net$56,417 $49,819 Inventories: Raw materials$12,308 $22,047Work in process565 525Finished goods26,891 19,072Total inventories$39,764 $41,644 Property, equipment and improvements, net: Land$570 $570Buildings2,338 2,338Improvements7,646 1,698Equipment17,440 15,803Purchased software4,030 3,966Furniture and fixtures2,963 3,350Subscriber assets3,750 2,673Total property, equipment and improvements, gross38,737 30,398Less accumulated depreciation and amortization24,880 22,044Total property, equipment and improvements, net$13,857 $8,354*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.At September 30, 2018 there was $5.2 million of assets held for sale on our Consolidated Balance Sheet, which consisted of land, buildings and improvementsrelated to our former Minnetonka, Minnesota headquarters. On October 2, 2018, we sold this facility to Minnetonka Leased Housing Associates II, LLLP (see Note5 to our consolidated financial statements).7. MARKETABLE SECURITIESOur marketable securities historically consist of certificates of deposit, commercial paper, corporate bonds and government municipal bonds. At September 30,2019 we did not hold any marketable securities. At September 30, 2018 our marketable securities were (in thousands): AmortizedCost (1) UnrealizedGains UnrealizedLosses Fair Value (1)Current marketable securities: Certificates of deposit$4,756 $— $(20) $4,736Total marketable securities$4,756 $— $(20) $4,736(1)Included in amortized cost and fair value is purchased and accrued interest of $6.49Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS7. MARKETABLE SECURITIES (CONTINUED)The following table shows the fair values and gross unrealized losses of our available-for-sale securities that have been in a continuous unrealized loss positiondeemed to be temporary, aggregated by investment category (in thousands): September 30, 2018 Less than 12 Months More than 12 Months Fair Value Unrealized Losses Fair Value Unrealized LossesCertificates of deposit$— $— $4,736 $(20)Total$— $— $4,736 $(20)8. FAIR VALUE MEASUREMENTSFinancial 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); andLevel 3 (unobservable inputs that cannot be corroborated by observable market data). There were no transfers into or out of our Level 2 financial assets duringfiscal 2019.The following tables provide information by level for financial assets and liabilities that are measured at fair value on a recurring basis (in thousands): Fair Value Measurements at September 30, 2019 using: Total carryingvalue atSeptember 30, 2019 Quoted price inactive markets(Level 1) Significant otherobservable inputs(Level 2) Significantunobservable inputs(Level 3)Assets: Money market$56,700 $56,700 $— $—Total assets measured at fair value$56,700 $56,700 $— $—Liabilities: Contingent consideration on acquired business$5,407 $— $— $5,407Total liabilities measured at fair value$5,407 $— $— $5,407 Fair Value Measurements at September 30, 2018 using: Total carryingvalue atSeptember 30, 2018 Quoted price inactive markets(Level 1) Significant otherobservable inputs(Level 2) Significantunobservable inputs(Level 3)Assets: Money market$24,318 $24,318 $— $—Certificates of deposit4,736 — 4,736 —Total assets measured at fair value$29,054 $24,318 $4,736 $—Liabilities: Contingent consideration on acquired business$10,065 $— $— $10,065Total liabilities measured at fair value$10,065 $— $— $10,065In connection with the October 2015 acquisition of Bluenica, we may be required to make contingent payments over a period of up to four years, subject toachieving specified revenue thresholds for sales of Bluenica products. The fair value of the liability for contingent consideration recognized was $10.4 million uponacquisition and was $2.9 million at September 30, 2019. We paid $0.5 million in fiscal 2017, no payments in fiscal 2018 and $2.2 million in fiscal 2019.50Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS8. FAIR VALUE MEASUREMENTS (CONTINUED)In connection with the November 2016 acquisition of FreshTemp®, we were required to make a contingent payment after June 30, 2018, for revenue related tospecific 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 finalpayment of $0.2 million during 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 contingentconsideration was zero, both upon acquisition and at September 30, 2019.In connection with our acquisition of Accelerated, we agreed to make contingent payments, based upon certain sales thresholds of Accelerated products (see Note2 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 September 30, 2019 were $2.3 million and $2.5 million, respectively. The increase was a result of Accelerated outperforming initial revenueexpectations. We made the first installment of $3.5 million in fiscal 2019.The following table presents a reconciliation of the contingent consideration liability measured at fair value on a recurring basis using significant unobservableinputs (Level 3) (in thousands): Fiscal year ended September 30, 2019 2018Fair value at beginning of period $10,065 $6,388Purchase price contingent consideration — 2,300Contingent consideration payments (5,848) —Change in fair value of contingent consideration 1,190 1,377Fair value at end of period $5,407 $10,065The change in fair value of contingent consideration reflects our estimate of the probability of achieving the relevant targets and is discounted based on ourestimated discount rate. We have estimated the fair value of the contingent consideration at September 30, 2019 based on the probability of achieving the specifiedrevenue thresholds of 100% for Bluenica, 0% for TempAlert, and a range of 70% to 100% for Accelerated. As of September 30, 2019, contingent considerationassociated with the acquisition of Accelerated remains subject to future performance through January 21, 2020.9. PRODUCT WARRANTY OBLIGATIONThe following table summarizes the activity associated with the product warranty accrual (in thousands) and is listed on our Consolidated Balance Sheets withincurrent liabilities: Balance at Warranties Settlements Balance atFiscal yearOctober 1 issued made September 302019$1,172 $305 $(465) $1,0122018$987 $759 $(574) $1,1722017$1,033 $679 $(725) $98710. RESTRUCTURINGManufacturing TransitionAs announced on April 3, 2018, we transferred the manufacturing functions of our Eden Prairie, Minnesota operations facility to existing contract manufacturesuppliers. As a result, 53 employment positions in total were eliminated, resulting in restructuring charges amounting to approximately $0.5 million for employeecosts during the third and fourth quarters of fiscal 2018. The payments associated with these charges were completed in the first half of fiscal 2019.51Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS10. RESTRUCTURING (CONTINUED)2017 RestructuringIn May 2017, we approved a restructuring plan primarily impacting our France location, which is now closed. We also eliminated certain employment positions inthe U.S. The restructuring was the result of a decision to consolidate our France operations to our Europe, Middle East and Africa ("EMEA") headquarters inMunich. The total restructuring charges amounted to $2.5 million, which included $2.3 million of employee costs and $0.2 million of contract termination costsduring the third quarter of fiscal 2017. These actions resulted in an elimination of 10 employment positions in the U.S. and 8 employment positions in France. Thepayments associated with these charges were completed during the first half of fiscal 2019.Below is a summary of the restructuring charges and other activity within the restructuring accrual all of which is included in our IoT Products & Services segment(in thousands): ManufacturingTransition 2017 Restructuring Employee TerminationCosts EmployeeTerminationCosts Other TotalBalance at September 30, 2016$— $— $— $—Restructuring charge— 2,258 257 2,515Payments— (845) (141) (986)Foreign currency fluctuation— 115 12 127Balance at September 30, 2017$— $1,528 $128 $1,656Restructuring charge504 — — 504Payments(357) (1,035) (161) (1,553)Reversals— (244) 41 (203)Foreign currency fluctuation— 44 5 49Balance at September 30, 2018$147 $293 $13 $453Payments(108) (233) (18) (359)Reversals(39) (53) 5 (87)Foreign currency fluctuation— (7) — (7)Balance at September 30, 2019$— $— $— $—11. REVENUERevenue DisaggregationThe following summarizes our revenue by geographic location of our customers: Fiscal years ended September 30,($ in thousands)2019 2018(as adjusted)* 2017(as adjusted)*North America, primarily the United States$184,022 $161,924 $117,455Europe, Middle East & Africa39,896 39,211 39,403Rest of world30,285 25,758 24,482Total revenue$254,203 $226,893 $181,340*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which we adopted on October 1,2018.52Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS11. REVENUE (CONTINUED)The following summarizes our revenue by the timing of revenue recognition: Fiscal years ended September 30,($ in thousands)2019 2018(as adjusted)* 2017(as adjusted)*Transferred at a point in time$231,387 $212,448 $176,567Transferred over time22,816 14,445 4,773Total revenue$254,203 $226,893 $181,340*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 BalancesContract AssetsContract assets consist of subscriber assets. These subscriber assets relate to fees in certain contracts that we charge our customers so they can begin usingequipment. In these cases, we retain the ownership of the equipment that the customer uses. The total net book value of subscriber assets was $2.1 million at bothSeptember 30, 2019 and September 30, 2018 and is included in property, equipment and improvements, net. Depreciation expense for these subscriber assets was$1.1 million, $0.5 million and $0.1 million for fiscal 2019, 2018 and 2017, respectively. We depreciate the cost of this equipment over its useful life (typicallythree years).Contract LiabilitiesThe timing of revenue recognition may differ from the timing of invoicing to customers. Customers are invoiced for subscription services in advance on a monthly,quarterly or annual basis. Contract liabilities consist of unearned revenue related to annual or multi-year contracts for subscription services and relatedimplementation fees for our IoT Solutions segment and our Digi Remote Manager® services in our IoT Products & Services segment.Changes in unearned revenue were: Fiscal year endedSeptember 30,($ in thousands) 2019Unearned revenue, beginning of period* $3,933Billings 43,071Revenue recognized (41,979)Unearned revenue, end of period $5,025*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 PriceTransaction price allocated to the remaining performance obligations represents contracted revenue that has not been recognized, which includes unearned revenueand unbilled amounts that will be recognized as revenue in future periods. As of September 30, 2019 approximately $14.9 million of revenue is expected to berecognized from remaining performance obligations for subscriptions contracts. We expect to recognize revenue on approximately $6.8 million of remainingperformance obligations over the next twelve months. Revenue from the remaining performance obligations we expect to recognize over a range of two to fiveyears.53Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS12. INCOME TAXESThe components of income before income taxes are (in thousands): Fiscal year ended September 30, 2019 2018(as adjusted)* 2017(as adjusted)*United States$7,981 $(2,427) $5,229International3,164 5,677 4,321Income before income taxes$11,145 $3,250 $9,550*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 components of the income tax provision are (in thousands): Fiscal year ended September 30, 2019 2018(as adjusted)* 2017(as adjusted)*Current: Federal$950 $526 $312State290 57 165Foreign746 1,412 1,756Deferred: U.S.(825) (536) (1,432)Foreign26 160 (654)Income tax provision$1,187 $1,619 $147*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 deferred tax asset consists of (in thousands): As of September 30, 2019 2018(as adjusted)*Non-current deferred tax asset$7,330 $6,600Non-current deferred tax liability(261) (334)Net deferred tax asset$7,069 $6,266 Depreciation and amortization$(480) $(856)Inventories536 740Compensation costs3,675 3,388Other accruals3,870 1,422Tax credit carryforwards4,911 7,063Valuation allowance(3,810) (3,291)Identifiable intangible assets(1,633) (2,298)Other— 98Net deferred tax asset$7,069 $6,266*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.As of September 30, 2019, we had $2.4 million of tax carryforwards (net of reserves) related to federal and state research and development tax credits. We also had$2.6 million of carryforwards (net, tax effected) consisting of a U.S. capital loss of $2.2 million, $0.1 million of other U.S. tax attributes, and non-U.S. netoperating losses of $0.3 million. The majority of our federal research and development tax credits have a 20-year carryforward period. The state research anddevelopment tax credits have a 15-year carryforward period. The majority of our non-U.S. net operating losses have an unlimited carryforward period. Our non-U.S. tax credit carryforwards will expire in 2032. Our U.S. capital loss carryforward will expire in 2020.54Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS12. INCOME TAXES (CONTINUED)Our valuation allowance for certain U.S. and foreign locations was $3.8 million at September 30, 2019 and $3.3 million at September 30, 2018. The increase invaluation allowance is primarily the result of state research and development credits generated. The deferred tax assets realized could vary if there are differencesin the timing or amount of future reversals of existing deferred tax liabilities or changes in the amounts of future taxable income. If future taxable incomeprojections are not realized, an additional valuation allowance may be required. This would be reflected as income tax expense at the time that any such change infuture taxable income is determined.The reconciliation of the statutory federal income tax amount to our income tax provision is (in thousands): Fiscal year ended September 30, 2019 2018(as adjusted)* 2017(as adjusted)*Statutory income tax amount$2,341 $809 $3,249Increase (decrease) resulting from: State taxes, net of federal benefits196 (71) 124Manufacturing deduction— (364) (150)Transaction costs— 79 —Employee stock purchase plan59 56 79Foreign operations225 318 (142)Non-deductible executive compensation171 27 —Change in valuation allowance520 (994) 77Utilization of research and development tax credits(2,112) (1,971) (1,405)One-time transition tax— 250 —Deferred balance sheet remeasure9 2,727 —ASU 2016-09 excess stock compensation(56) 643 —Contingent consideration250 388 (1,172)Changes from provision to return(511) (554) (196)Adjustment of tax contingency reserves146 193 (370)Other, net(51) 83 53Income tax provision$1,187 $1,619 $147*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 Tax Cuts & Jobs Act of 2017 was enacted in the U.S. on December 22, 2017. We applied the guidance in Staff Accounting Bulletin ("SAB") 118 whenaccounting for the enactment-date income tax effects of this act in fiscal 2018. At September 30, 2018 we had not fully completed our accounting for theenactment effects of this act. We, however, had recorded a provisional estimate of the effects on our existing deferred tax balances and the one-time transition tax.The provision tax expense recorded in fiscal 2018 was $3.0 million. In the first quarter of fiscal 2019 we completed our accounting for the enactment date incometax effects of this act, and there were no significant adjustments to the provisional amounts recorded in fiscal 2018. In addition, certain provisions of this actbecame effective for us in fiscal 2019. The estimated tax impacts of these provisions are included in our effective tax rate for the current period.55Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS12. INCOME TAXES (CONTINUED)A reconciliation of the beginning and ending amount of unrecognized tax benefits is (in thousands): Fiscal year ended September 30, 2019 2018 2017Unrecognized tax benefits at beginning of fiscal year$1,561 $1,335 $1,708Increases related to: Prior year income tax positions9 39 21Current year income tax positions314 315 257Decreases related to: Prior year income tax positions(34) — —Expiration of statute of limitations(137) (128) (651)Unrecognized tax benefits at end of fiscal year$1,713 $1,561 $1,335The total amount of unrecognized tax benefits ("UTB") at September 30, 2019 that, if recognized, would affect our effective tax rate was $1.6 million. We expectthat it is reasonably possible that the total amounts of UTB will decrease by approximately $0.3 million over the next 12 months due to the expiration of variousstatutes of limitations. Of the $1.7 million of UTB, $1.1 million is included in non-current income taxes payable and $0.6 million is included with non-currentdeferred tax assets on the Consolidated Balance Sheets at September 30, 2019.We recognize interest and penalties related to income tax matters in income tax expense. During fiscal 2019 and 2018, there were insignificant amounts of interestand penalties related to income tax matters in income tax expense. We accrued interest and penalties related to unrecognized tax benefits of $0.1 million at bothSeptember 30, 2019 and 2018. These accrued interest and penalties are included in our non-current income taxes payable on our Consolidated Balance Sheets.We operate in multiple tax jurisdictions both in the U.S. and outside of the U.S. and face audits from various tax authorities regarding transfer pricing, tax credits,and other matters. Accordingly, we must determine the appropriate allocation of income to each of these jurisdictions. This determination requires us to makeseveral estimates and assumptions. Tax audits associated with the allocation of this income, and other complex issues, may require an extended period of time toresolve and may result in adjustments to our income tax balances in those years that are material to our Consolidated Balance Sheets and results of operations.We file a U.S. federal income tax return and income tax returns in various states and foreign jurisdictions. With few exceptions, we are no longer subject to stateand local or non-U.S. income tax examinations by tax authorities for years before fiscal year 2015. We are currently under U.S. federal examination for fiscal year2017, and there is very limited audit activity of our income tax returns in U.S. state jurisdictions or international jurisdictions.At September 30, 2019, the majority of undistributed foreign earnings are taxed under the one time transition tax and the global intangible low-taxed income("GILTI") provision of the Tax Cuts and Jobs Act of 2017. Additionally, the previously un-taxed accumulated undistributed foreign earnings from fiscal 2018 arestill permanently reinvested and, as such, we have not accrued additional U.S. tax. It is our position that the earnings of our foreign subsidiaries are to be reinvestedindefinitely to fund current operations and provide for future international expansion opportunities and only repatriate earnings to the extent that U.S. taxes havealready been recorded. As of September 30, 2019, we are permanently reinvested with respect to previously taxed accumulated earnings in all jurisdictions.Although we have no current need to repatriate historical foreign earnings that have not been taxed in the U.S., if we change our assertion from indefinitelyreinvesting undistributed foreign earnings, we would have to accrue applicable taxes. The amount of any taxes and the application of any tax credits would bedetermined based on the income tax laws at the time of such repatriation. Under current tax law, we estimate the unrecognized tax liability to be immaterial.56Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS13. STOCK-BASED COMPENSATIONStock-based awards were granted under the 2019 Omnibus Incentive Plan (the “2019 Plan”) beginning February 4, 2019 and, prior to that, were granted under the2018 Omnibus Incentive Plan (the “2018 Plan”). Upon stockholder approval of the 2019 Plan, we ceased granting awards under any prior plan. Shares subject toawards under prior plans that are forfeited, canceled, returned to us for failure to satisfy vesting requirements, settled in cash or otherwise terminated withoutpayment 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 theCompensation Committee of our Board of Directors. We also have awards outstanding under our 2017 Omnibus Incentive Plan, 2016 Omnibus Plan, 2014Omnibus Plan, 2013 Omnibus Incentive Plan and the 2000 Omnibus Stock Plan, as amended and restated as of December 4, 2009.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-employeedirectors 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 underthe 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 December 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 (“ISOs”) ornon-statutory stock options (“NSOs”). The exercise price of options and the grant date price of restricted stock units shall be determined by our CompensationCommittee but shall not be less than the fair market value of our common stock based on the closing price on the date of grant. As of September 30, 2019, therewere approximately 1,399,866 shares available for future grants under the 2019 Plan.The 2018 Plan, under which grants ceased upon approval of the 2019 Plan, authorized the issuance of up to 1,500,000 common shares in connection with awards ofstock options, stock appreciation rights, restricted stock, restricted stock units, performance-based full value awards or other stock-based awards. Eligibleparticipants included our employees, our affiliates, non-employee directors of our Company and any consultant or advisor who is a natural person and providedservices to us or our affiliates. Options that have been granted under the 2018 Plan typically vested over a four-year period and expired if unexercised after sevenyears from the date of grant. RSUs that were granted to directors typically vested in one year. RSUs that were granted to executives and employees typically vestedin January over a four-year period. Awards may no longer be granted under the 2018 Plan as grants ceased upon approval of the 2019 Plan effective February 4,2019 at the Annual Meeting of Stockholders. The exercise price of options and the grant date price of restricted stock units was determined by our CompensationCommittee but could not be less than the fair market value of our common stock based on the closing price on the date of grant.Our equity plans and corresponding forms of award agreements generally have provisions allowing employees to elect to satisfy tax withholding obligationsthrough the delivery of shares, having us retain a portion of shares issuable under the award or paying cash to us for the withholding. During fiscal 2019, 2018 and2017 our employees forfeited 93,128, 74,204 and 49,684 shares, respectively in order to satisfy $1.1 million, $0.7 million and $0.7 million, respectively, ofwithholding tax obligations related to stock-based compensation, pursuant to terms of awards under our board and shareholder-approved compensation plans.We sponsor an Employee Stock Purchase Plan, as amended and restated as of October 29, 2013, December 4, 2009 and November 27, 2006 (the "Purchase Plan"),covering all domestic employees with at least 90 days of continuous service and who are customarily employed at least 20 hours per week. The Purchase Planallows eligible participants the right to purchase common stock on a quarterly basis at the lower of 85% of the market price at the beginning or end of each three-month offering period. The most recent amendments to the Purchase Plan, ratified by our stockholders on January 27, 2014, increased the total number of shares to2,800,000 that may be purchased under the plan. Employee contributions to the Purchase Plan were $1.1 million, $1.1 million and $0.7 million in fiscal 2019, 2018and 2017, respectively. Pursuant to the Purchase Plan, 111,036, 125,446, and 72,594 shares of common stock were issued to employees during fiscal 2019, 2018and 2017, respectively. Shares are issued under the Purchase Plan from treasury stock. As of September 30, 2019, 204,540 shares of common stock were availablefor future issuances under the Purchase Plan.57Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS13. STOCK-BASED COMPENSATION (CONTINUED)Stock-based compensation expense is included in the consolidated results of operations as (in thousands): Fiscal year ended September 30, 2019 2018 2017Cost of sales$174 $195 $213Sales and marketing1,708 1,492 1,348Research and development996 516 656General and administrative2,777 2,651 2,442Stock-based compensation before income taxes5,655 4,854 4,659Income tax benefit(1,174) (1,017) (1,536)Stock-based compensation after income taxes$4,481 $3,837 $3,123Stock OptionsBelow is a summary of our stock options as of September 30, 2019 and changes during the twelve months then ended (in thousands, except per common shareamounts): OptionsOutstanding Weighted AverageExercised Price Weighted AverageContractual Term (inyears) AggregateIntrinsic Value(1)Balance at September 30, 2018 3,526 $10.49 Granted 736 12.01 Exercised (540) 9.02 Forfeited / Canceled (374) 12.39 Balance at September 30, 2019 3,348 $10.85 4.0 $9,295 Exercisable at September 30, 2019 2,209 $16.45 3.2 $7,027(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $13.62 as of September 30, 2019, which wouldhave 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 optionsexercised during each of the twelve months ended September 30, 2019, 2018 and 2017 was $2.1 million, $1.2 million and $0.9 million, respectively.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: Fiscal year ended September 30, 2019 2018 2017Weighted average per option grant date fair value$4.48 $3.98 $4.63Assumptions used for option grants: Risk free interest rate1.60% - 2.93% 2.12% - 2.89% 1.46% - 1.96%Expected term6.00 years 6.00 years 6.00 yearsExpected volatility33% - 35% 33% - 34% 33% - 34%Weighted average volatility34% 33% 34%Expected dividend yield0% 0% 0%The fair value of each option award granted during the periods presented was estimated using the Black-Scholes option valuation model that uses the assumptionsnoted in the above table. Expected volatilities are based on the historical volatility of our stock. We use historical data to estimate option exercise and employeetermination information within the valuation model. The expected term of options granted is derived from the vesting period and historical information andrepresents the period of58Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS13. STOCK-BASED COMPENSATION (CONTINUED)time that options granted are expected to be outstanding. The risk-free rate used is the zero-coupon U.S. Treasury bond rate in effect at the time of the grant whosematurity equals the expected term of the option.As of September 30, 2019, the total unrecognized compensation cost related to non-vested stock-based compensation arrangements, net of expected forfeitures, was$4.3 million. The related weighted average period over which this cost is expected to be recognized was approximately 2.7 years.As of September 30, 2019, the weighted average exercise price and remaining life of the stock options were (in thousands, except remaining life and exerciseprice):Options Outstanding Options ExercisableRange of Exercise Prices Options Outstanding Weighted AverageRemainingContractual Life (InYears) Weighted AverageExercise Price Number of SharesVested Weighted AverageExercise Price$7.40 - $9.03 533 3.28 $8.20 524 $8.18$9.04 - $9.95 507 2.37 $9.65 460 $9.64$9.96 - $10.40 481 5.17 $10.34 215 $10.34$10.41 - $11.23 649 3.56 $10.94 416 $10.78$11.24 - $12.63 676 4.85 $12.09 329 $12.31$12.64 - $13.76 491 4.87 $13.57 254 $13.50$13.77 - $14.75 11 1.82 $14.75 11 $14.75$7.40 - $14.75 3,348 4.01 $10.85 2,209 $10.45The total grant date fair value of shares vested was $3.5 million, $3.3 million and $2.4 million in each of fiscal 2019, 2018 and 2017, respectively.Non-vested Restricted Stock UnitsBelow is a summary of our non-vested restricted stock units as of September 30, 2019 and changes during the twelve months then ended (in thousands, except percommon share amounts): Number of Awards Weighted AverageGrant Date Fair ValueNonvested at September 30, 2018674 $11.05Granted626 $11.89Vested(255) $10.45Canceled(157) $12.04Nonvested at September 30, 2019888 $11.65As of September 30, 2019, the total unrecognized compensation cost related to non-vested restricted stock units was $7.5 million. The related weighted averageperiod over which this cost is expected to be recognized was approximately 1.4 years.14. COMMON STOCK REPURCHASECommon Stock Repurchase ProgramOn April 24, 2018 our Board of Directors authorized a program to repurchase up to $20.0 million of our common stock primarily to return capital to shareholders.This repurchase authorization expired on May 1, 2019. There were no shares repurchased under this program.On May 2, 2017, our Board of Directors authorized a program to repurchase up to $20.0 million of our common stock primarily to return capital to shareholders.This repurchase authorization expired on May 1, 2018. Shares repurchased under the program59Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS14. COMMON STOCK REPURCHASE (CONTINUED)could be made through open market and privately negotiated transactions from time to time and in amounts that management deemed appropriate. The amount andtiming of share repurchases depended upon market conditions and other corporate considerations. During the third quarter of fiscal 2017, we repurchased 28,691shares for $0.3 million. No further repurchases of common stock were made under this program.15. EMPLOYEE BENEFIT PLANSWe currently have a savings and profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code (the Code), whereby eligible employees maycontribute up to 25% of their pre-tax earnings subject to certain limits under law.We provide a match of 100% on the first 3% of each employee’s bi-weekly contribution and a 50% match on the next 2% of each employee’s bi-weeklycontribution. In addition, we may make contributions to the plan at the discretion of the Board of Directors. We provided matching contributions of $1.8 millionfor fiscal 2019, $1.6 million for fiscal 2018 and $1.4 million for fiscal 2017.16. COMMITMENTSIn October 2018, we signed a thirteen-year lease agreement for our new headquarters located in Hopkins, Minnesota. We have minimum total lease obligations of$14.8 million under this lease with Colfin Midwest NNN Investor, LLC for 59,497 square feet of office space. In April 2019, we received $3.3 million for a tenantimprovement allowance associated with our new headquarters. We have entered into various other operating lease agreements for office facilities and equipment, the last of which expires in fiscal 2032. The office facility leasesgenerally 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 astraight-line basis over the term of the lease.The following schedule reflects future minimum rental commitments at September 30, 2019 under noncancelable operating leases (in thousands):Fiscal year Amount2020 $2,5962021 2,5752022 2,3142023 2,0562024 2,095Thereafter 11,361Total minimum payments required $22,997The following schedule shows the composition of total rental expense for all operating leases for the years ended September 30 (in thousands): Fiscal year ended September 30, 2019 2018 2017Total rental expense$2,947 $1,735 $1,34217. CONTINGENCIESIn November 2018, DimOnOff Inc., a company headquartered in Quebec City, Quebec, Canada (“DimOnOff”), which sells control systems in the buildingautomation and street lighting markets sued us and a former distributor from whom DimOnOff purchased certain of our products. The suit was brought in theSuperior Court of the Province of Quebec in the District of Quebec (Canada) and alleges certain Digi products it purchased and incorporated into street lightingsystems 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 defendourselves 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, which may include, but are not limitedto, patent infringement and intellectual property claims. While we are unable to predict60Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS17. CONTINGENCIES (CONTINUED)the outcome of any potential claims or litigation due to the inherent unpredictability of these matters, we believe that it is possible that we could, in the future,incur judgments or enter into settlements of claims that could have a material adverse effect on our operations in any particular period.18. QUARTERLY FINANCIAL DATA (UNAUDITED)(in thousands, except per common share data) Quarter ended Dec. 31 March 31 June 30 Sept. 30Fiscal 2019 Revenue$62,313 $65,764 $61,166 $64,960Gross profit$29,783 $30,329 $28,328 $30,595Net income (1)$4,682 $1,342 $1,648 $2,286Net income per common share - basic$0.17 $0.05 $0.06 $0.08Net income per common share - diluted$0.17 $0.05 $0.06 $0.08 Fiscal 2018 (as adjusted) (2) Revenue$44,955 $54,548 $62,272 $65,118Gross profit$21,959 $26,834 $29,648 $30,613Net (loss) income (1)$(4,487) $(126) $2,904 $3,340Net (loss) income per common share - basic$(0.17) $— $0.11 $0.12Net (loss) income per common share - diluted$(0.17) $— $0.10 $0.12(1)During fiscal 2019, we recorded a discrete tax benefit of $0.1 million in the first quarter of fiscal 2019 resulting from reversal of income tax reserves dueto the expiration of the statutes of limitation as well as excess tax benefits recognized on stock compensation. In the second quarter of fiscal 2019 werecorded a discrete tax benefit of $0.2 million related to the recording of federal and state net operating losses as well as the reversal of income taxreserves due to the expiration of the statutes of limitation. In the third quarter of fiscal 2019, we recorded a discrete tax benefit of $0.3 million fromreversal of income tax reserves due to the expiration of the statutes of limitation as well as adjustments from the filing of the federal and foreign incometax returns.During fiscal 2018, we recorded discrete tax expense of $2.8 million in the first quarter of fiscal 2018, $0.2 million in the second quarter of fiscal 2018and $0.1 million in the third quarter of fiscal 2018 resulting from new U.S. tax legislation that was enacted during the first quarter of fiscal 2018 and theadoption of ASU 2016-09 relating to the accounting for the tax effects of stock compensation. In the fourth quarter of fiscal 2018, we recorded a net taxbenefit of $1.5 million for the release of a valuation allowance against U.S. federal capital loss carryforward due to expected capital gains tax in fiscal2019 resulting from the sale of our corporate headquarters building in October 2018 (see Note 5 to the consolidated financial statements).(2)Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which weadopted on October 1, 2018.19. SUBSEQUENT EVENTOn November 7, 2019, we entered in to an agreement and plan of merger to acquire Opengear, Inc., a privately-held provider of secure IT infrastructure productsand software for approximately $140 million in cash with a potential for contingent consideration of up to an additional $15 million based on revenue performancethrough 2020. The acquisition will be funded through a combination of cash on hand and debt financing under a $150 million credit facility committed by BMOHarris Bank N.A. We expect to complete preliminary purchase accounting in the first quarter of fiscal 2020. The acquired company will be included within our IoTProducts & Services segment. The acquisition is subject to routine closing conditions, including federal anti-trust review.61Table of ContentsITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.ITEM 9A. CONTROLS AND PROCEDURESThis Annual Report on Form 10-K includes the certifications attached as Exhibit 31.A and Exhibit 31.B of our Chief Executive Officer and Chief FinancialOfficer required by Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). This Item 9A includes information concerning thecontrols and control evaluations referred to in those certifications.Evaluation of Disclosure Controls and ProceduresWe maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to provide reasonableassurance that information required to be disclosed in our reports filed or submitted under the Exchange Act) is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management of the Company,including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.Management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the design and operation ofour disclosure controls and procedures as of September 30, 2019. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concludedthat, as of September 30, 2019, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d - 15(e) under the Security Exchange Act of 1934, asamended) were effective and provide reasonable assurance on the reliability of the Company's financial reporting and the preparation of its financial statements forexternal purposes in accordance with generally accepted accounting principles.Management’s Report on Internal Control Over Financial ReportingManagement is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) underthe Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of our consolidated financial statements for external purposes in accordance with generally accepted accounting principles.Management, with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financialreporting as of September 30, 2019.In making this assessment, management used the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") inInternal Control–Integrated Framework (2013). Based on this assessment, management concluded that the Company's internal control over financial reporting waseffective as of September 30, 2019 based on Internal Control–Integrated Framework (2013) issued by the COSO.The effectiveness of our internal control over financial reporting as of September 30, 2019 has been audited by Grant Thornton LLP, an independent registeredpublic accounting firm, as stated in their report, which is included herein.Changes in Internal Control Over Financial ReportingThere have been no changes in our internal control over financial reporting during the quarterly period ended September 30, 2019 that have materially affected, orare reasonably likely to materially affect, our internal control over financial reporting.62Table of ContentsReport of Independent Registered Public Accounting FirmBoard of Directors and StockholdersDigi International Inc.Opinion on internal control over financial reportingWe have audited the internal control over financial reporting of Digi International Inc. (a Delaware corporation) and subsidiaries (the "Company") as of September30, 2019, based on criteria established in the 2013 Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the TreadwayCommission ("COSO"). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30,2019, based on criteria established in the 2013 Internal Control–Integrated Framework issued by COSO.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidatedfinancial statements of the Company as of and for the year ended September 30, 2019, and our report dated November 27, 2019 expressed an unqualified opinionon those consolidated financial statements.Basis for opinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting ("Management’s Report"). Ourresponsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registeredwith the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules andregulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understandingof internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness ofinternal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our auditprovides a reasonable basis for our opinion.Definition and limitations of internal control over financial reportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only inaccordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance withthe policies or procedures may deteriorate./s/ GRANT THORNTON LLPMinneapolis, MinnesotaNovember 27, 201963Table of ContentsITEM 9B. OTHER INFORMATIONDeparture of Principal OfficerEffective March 1, 2019, Jon A. Nyland, Vice President of Manufacturing Operations of the Company, resigned from all positions within our Company. Inconnection with his departure and in accordance with the terms of his existing employment agreement with the Company, Mr. Nyland received severance paymentstotaling $116,000, representing six months of salary. In addition, Mr. Nyland is entitled to receive a pro-rata bonus based on the number of months worked in fiscal2019 and the Company's actual performance against annual objectives. In light of our transition to third-party manufacturing during fiscal 2019, we did not seek tofill the vacancy created by his departure.PART III.ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEIncorporated into this item by reference is the information appearing under the headings "Proposal No. 1 - Election of Directors", "Security Ownership of PrincipalStockholders and Management" and, if applicable, "Delinquent Section 16(a) Reports" in our Proxy Statement for our 2020 Annual Meeting of Stockholders weintend to file with the SEC (the "Proxy Statement").Information about our Executive OfficersAs of the date of filing this Form 10-K, the following individuals were executive officers of the Registrant:Name Age PositionRonald E. Konezny 51 President and Chief Executive OfficerJames J. Loch 47 Senior Vice President, Chief Financial Officer and TreasurerKevin C. Riley 58 President, IoT SolutionsTracy L. Roberts 57 Vice President of Technology ServicesDavid H. Sampsell 51 Vice President of Corporate Development, General Counsel and Corporate SecretaryTerrence G. Schneider 53 Vice President Supply Chain ManagementMichael A. Ueland 51 President, IoT Products and ServicesRonald E. Konezny has served as a member of our Board of Directors and as our President and Chief Executive Officer since December 2014. From 2013 toDecember 2014, he served as Vice President, Global Transportation and Logistics at Trimble Navigation Limited, a global provider of navigation and range-finding equipment and related solutions. From 2011 to 2013, he served as General Manager of Trimble’s Global Transportation and Logistics division. From 2007to 2013, he served as Chief Executive Officer of PeopleNet, Inc., a provider of telematics solutions for the transportation industry, which was acquired by Trimblein 2011. Mr. Konezny founded PeopleNet in 1996 and served in various other roles, including Chief Technology Officer, Chief Financial Officer and ChiefOperating Officer, before serving as its Chief Executive Officer. James J. Loch has served as Senior Vice President, Chief Financial Officer and Treasurer since May 2019. Prior to joining us, Mr. Loch most recently served asSenior Vice President of Finance and Chief Financial officer of Nilfisk, Inc., a Denmark-owned company based in Minneapolis that manufactures professionalcleaning equipment, from May 2016 to February 2019. From May 2015 to May 2016, he was an independent consultant focused on projects including duediligence, business planning, back office reorganization and product research. Previously, he served at Honeywell Building Solutions, a division of HoneywellInternational, as Chief Financial Officer (Americas) from 2008 to 2012 and then as Vice President — Sales from 2012 to May 2015.Kevin C. Riley has served as President, IoT Solutions since November 2018 and previously served as Senior Vice President and Chief Operating Officer betweenJanuary 2016 and October 2018 and prior to that he served as Senior Vice President of Global Sales between 2013 and January 2016. Prior to joining us, Mr. Rileyserved as Senior Vice President - Global Markets for Infor Global Solutions, an enterprise software solutions company, where he led four global business units toprofitable growth from 2010 to 2011. He served as Vice President and General Manager at Oracle, an enterprise software company, from 2008 to 2010, andPresident of Global Knowledge Software from 2002 until Global Knowledge Software's acquisition by Oracle in 2008. He also served as President and ChiefOperating Officer for Learn2 Corporation from 1999 to 2002.64Table of ContentsITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE (CONTINUED)Tracy L. Roberts has served as Vice President of Information Technology since 2005 and Vice President of Technology Services since 2013. She also previouslyserved as Vice President of Human Resources from 2005 until May 2016. Prior to joining us, Ms. Roberts served as Director of Human Resources at NovartisNutrition Corporation where she was responsible for the medical nutritional business unit. Ms. Roberts held various human resource and marketing positions atCray Research (now known as Silicon Graphics) from 1983 to 1996.David H. Sampsell has served as Vice President of Corporate Development, General Counsel and Corporate Secretary since January 2015. He had previouslyserved as Vice President, General Counsel and Corporate Secretary since 2011. Prior to joining us, Mr. Sampsell worked as corporate counsel at ADCTelecommunications, Inc., a supplier of network infrastructure products and services, from 1999 until 2011. Prior to joining ADC, Mr. Sampsell was an attorney inprivate practice with Leonard, Street and Deinard, P.A. from 1996 to 1999 and Moore & Van Allen, PLLC from 1993 to 1996.Terrence G. Schneider has served as Vice President of Supply Chain Management since February 2019. From June 2016 to February 2019, he served as VicePresident of Product Management. Prior to joining us, Terry held several senior-level leadership positions at PeopleNet, Inc. from 2009 to 2011 and thetransportation and logistics business unit of Trimble Navigation Limited, PeopleNet's parent company from 2012 to June 2016 where he served as Vice PresidentSupply Chain.Michael A. Ueland has served as President, IoT Products and Services since November 2018 and previously served as Senior Vice President of Global Sales fromOctober 2016 to October 2018. Prior to joining us, Mr. Ueland served as President for Telit Americas from March 2014 to October 2016 and as Senior VicePresident & General Manager for Telit Wireless Solutions from 2011 to March 2014. From 2006 to 2011 he held various other positions with Telit WirelessSolutions. Earlier, Mr. Ueland held various leadership positions with Motorola and RAMAR Technology.Code of Ethics/Code of ConductWe have in place a "code of ethics" within the meaning of Rule 406 of Regulation S-K, which is applicable to our senior financial management, includingspecifically our principal executive officer, principal financial officer and controller. A copy of this financial code of ethics is available on our website(www.digi.com) under the "Company - Investor Relations - Corporate Governance" caption. We intend to satisfy our disclosure obligations regarding anyamendment to, or a waiver from, a provision of this code of ethics by posting such information on the same website. We also have a "code of conduct" that appliesto all directors, officers and employees, a copy of which is available through our website (www.digi.com) under the "Company - Investor Relations - CorporateGovernance" caption.ITEM 11. EXECUTIVE COMPENSATIONIncorporated into this item by reference is the information appearing under the heading "Compensation of Directors," "Executive Compensation," and theinformation regarding compensation committee interlocks and insider participation under the heading "Proposal No. 1 - Election of Directors" in our ProxyStatement.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSIncorporated into this item by reference is the information appearing under the headings "Security Ownership of Principal Stockholders and Management" and"Equity Compensation Plan Information" in our Proxy Statement.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEIncorporated into this item by reference is the information regarding director independence under the heading "Proposal No. 1 - Election of Directors" and theinformation regarding related person transactions under the heading "Related Person Transaction Approval Policy" on our Proxy Statement.ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESIncorporated into this item by reference is the information under "Proposal No. 3 - Ratification of Independent Registered Public Accounting Firm" in our ProxyStatement.65Table of ContentsPART IV.ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES(a) Consolidated Financial Statement and Schedules of the Company (filed as part of this Annual Report on Form 10-K) 1.Consolidated Statements of Operations for fiscal years ended September 30, 2019, 2018 and 2017 Consolidated Statements of Comprehensive Income for fiscal years ended September 30, 2019, 2018 and 2017 Consolidated Balance Sheets as of September 30, 2019 and 2018 Consolidated Statements of Cash Flows for fiscal years ended September 30, 2019, 2018 and 2017 Consolidated Statements of Stockholders’ Equity for fiscal years ended September 30, 2019, 2018 and 2017 Notes to Consolidated Financial Statements 2.Schedule of Valuation and Qualifying Accounts 3.Report of Independent Registered Certified Public Accounting Firm(b) ExhibitsUnless otherwise indicated, all documents incorporated into this Annual Report on Form 10-K by reference to a document filed with the SEC are located underSEC file number 1-34033. Exhibit Number Description Method of Filing 2(a) Equity Purchase Agreement with Schechter Tech LLC (d/b/a TempAlert LLC) dated as of October 20, 2017*(1) Incorporated byReference 3(a) Restated Certificate of Incorporation of the Company, as amended (2) Incorporated byReference 3(b) Amended and Restated By-Laws of the Company (3) Incorporated byReference 4 Description of Securities Filed Electronically 10(a) Digi International Inc. Employee Stock Purchase Plan as amended and restated as of October 29, 2013** (4) Incorporated byReference 10(b) Digi International Inc. 2000 Omnibus Stock Plan, as amended and restated as of December 4, 2009** (5) Incorporated byReference 10(b)(i) Form of Notice of Grant of Stock Options and Option Agreement (for grants under Digi International Inc.2000 Omnibus Stock Plan before January 26, 2010)** (6) Incorporated byReference 10(b)(ii) Form of Notice of Grant of Stock Options and Option Agreement (amended form for grants under DigiInternational Inc. 2000 Omnibus Stock Plan on or after January 26, 2010 provided Addendum 1A applies onlyto certain grants made on and after November 22, 2011)** (7) Incorporated byReference 10(c) Digi International Inc. 2013 Omnibus Incentive Plan** (8) Incorporated byReference 10(c)(i) Form of Notice of Grant of Stock Options and Option Agreement including Addenda to Option Agreementthat may apply to certain grants (for grants under Digi International Inc. 2013 Omnibus Incentive Plan)** (9) Incorporated byReference 10(d) Digi International Inc. 2014 Omnibus Incentive Plan** (10) Incorporated byReference10(d)(i) Form of Notice of Grant of Stock Options and Option Agreement including Addenda to Option Agreementthat may apply to certain grants (for grants under Digi International Inc. 2014 Omnibus Incentive Plan)**(11) Incorporated byReference 10(d)(ii) Form of (Executive) Restricted Stock Unit Award Agreement (for awards under Digi International Inc. 2014Omnibus Incentive Plan)** (12) Incorporated byReference 66Table of ContentsITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (CONTINUED) Exhibit Number Description Method of Filing 10(e) Digi International Inc. 2016 Omnibus Incentive Plan** (13) Incorporated byReference 10(e)(i) Form of (Executive) Restricted Stock Unit Award Agreement (for awards under Digi International Inc. 2016Omnibus Incentive Plan)** (14) Incorporated byReference 10(e)(ii) Form of (Employee) Restricted Stock Unit Award Agreement (for awards under Digi International Inc. 2016Omnibus Incentive Plan)** (15) Incorporated byReference 10(e)(iii) Form of Notice of Grant of Stock Options and Option Agreement (for grants under Digi International Inc.2016 Omnibus Incentive Plan)** (16) Incorporated byReference 10(f) Digi International Inc. 2017 Omnibus Incentive Plan** (17) Incorporated byReference 10(f)(i) Form of (Executive) Restricted Stock Unit Award Agreement (for awards under Digi International Inc. 2017Omnibus Incentive Plan)** (18) Incorporated byReference 10(f)(ii) Form of (Employee) Restricted Stock Unit Award Agreement (for awards under Digi International Inc 2017Omnibus Incentive Plan)** (19) Incorporated byReference 10(f)(iii) Form of Notice of Grant of Stock Options and Option Agreement (for grants under Digi International Inc.2017 Omnibus Incentive Plan)** (20) Incorporated byReference 10(g) Digi International Inc. 2018 Omnibus Incentive Plan** (21) Incorporated byReference 10(g)(i) Form of (Director) Restricted Stock Unit Award Agreement (for grants under Digi International Inc. 2018Omnibus Incentive Plan)** (22) Incorporated byReference 10(g)(ii) Form of (Executive) Restricted Stock Unit Award Agreement (for grants under Digi International Inc. 2018Omnibus Incentive Plan)** (23) Incorporated byReference 10(g)(iii) Form of (Employee) Restricted Stock Unit Award Agreement (for grants under Digi International Inc. 2018Omnibus Incentive Plan)** (24) Incorporated byReference 10(g)(iv) Form of Notice of Grant of Stock Options and Option Agreement (for grants under Digi International Inc.2018 Omnibus Incentive Plan)** (25) Incorporated byReference 10(h) Digi International Inc. 2019 Omnibus Incentive Plan** (26) Incorporated byReference 10(h)(i) Form of (Director) Restricted Stock Unit Award Agreement (for grants under Digi International Inc. 2019Omnibus Incentive Plan)** (27) Incorporated byReference 10(h)(ii) Form of (Executive) Restricted Stock Unit Award Agreement (for grants under Digi International Inc. 2019Omnibus Incentive Plan)** (28) Incorporated byReference 10(h)(iii) Form of (Employee) Restricted Stock Unit Award Agreement (for grants under Digi International Inc. 2019Omnibus Incentive Plan)** (29) Incorporated byReference 10(h)(iv) Form of Notice of Grant of Stock Options and Option Agreement (for grants under Digi International Inc.2019 Omnibus Incentive Plan)** (30) Incorporated byReference 10(i) Form of indemnification agreement with directors and officers of the Company** (31) Incorporated byReference 10(j) Employment Agreement between the Company and Ronald E. Konezny dated November 26, 2014** (32) Incorporated byReference 10(k) Agreement between the Company and Jon A. Nyland dated September 17, 2013** (33) Incorporated byReference 10(l) Offer letter with David H. Sampsell dated as of April 8, 2011** (34) Incorporated byReference 67Table of ContentsITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (CONTINUED) Exhibit Number Description Method of Filing 10(m) Employment Agreement with Kevin C. Riley dated January 23, 2013** (35) Incorporated byReference 10(n) Offer letter with Gokul V. Hemmady dated June 11, 2018** (36) Incorporated byReference 10(o) Offer letter with Michael A. Ueland dated September 27, 2016** Filed Electronically 10(p) Offer letter with Michael A. Ueland dated October 29, 2018** (37) Incorporated byReference 10(q) Offer letter with James J. Loch dated May 1, 2019** (38) Incorporated byReference 21 Subsidiaries of the Company Filed Electronically 23 Consent of Grant Thornton LLP Filed Electronically 24 Powers of Attorney Filed Electronically 31(a) Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer Filed Electronically 31(b) Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer Filed Electronically 32 Section 1350 Certification Filed Electronically 101 The following financial statements from the Annual Report on Form 10-K for the year ended September 30,2019: (i) Consolidated Statements of Operations, (ii) Consolidated Statements of Comprehensive Income, (iii)Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements ofStockholders' Equity, and (vi) Notes to Consolidated Financial Statements. Filed Electronically____________________________*Certain schedules and exhibits have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit willbe furnished to the Securities and Exchange Commission upon request.**Management compensatory contract or arrangement required to be included as an exhibit to this Annual Report on Form 10-K.(1)Incorporated by reference to Exhibit 2.1 to the Company's Form 8-K filed on October 25,2017.(2)Incorporated by reference to Exhibit 3(a) to the Company’s Form 10‑K for the year ended September 30, 1993(File no. 0‑17972).(3)Incorporated by reference to Exhibit 3(b) to the Company's Form 8-K dated August 28,2017.(4)Incorporated by reference to Exhibit 99 to the Company's Registration Statement on Form S-8 filed on March 12, 2014 (Fileno. 333‑194522).(5)Incorporated by reference to Exhibit 10(a) to the Company's Form 8-K filed on January 29,2010.(6)Incorporated by reference to Exhibit 10(o) to the Company's Form 10-K for the year ended September 30,2008.(7)Incorporated by reference to Exhibit 10(e)(ii) to the Company's Form 10-K for the year ended September 30,2011.(8)Incorporated by reference to Exhibit 99 to the Company’s Registration Statement on Form S-8 filed on April 16, 2013 (File no. 333-187949).(9)Incorporated by reference to Exhibit 10(a)(i) to the Company’s Form 10-Q for the quarter ended March 31,2013.(10)Incorporated by reference to Exhibit 99 to the Company’s Registration Statement on Form S-8 filed on March 12, 2014(File no. 333‑194518).(11)Incorporated by reference to Exhibit 10(b)(i) to the Company’s Form 10-Q for the quarter ended March 31,2014.(12)Incorporated by reference to Exhibit 10(a) to the Company’s Form 10-Q for the quarter ended June 30,2014.68Table of ContentsITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (CONTINUED)(13)Incorporated by reference to Appendix A to the Company’s definitive proxy statement on Schedule 14A filed December 11,2015.(14)Incorporated by reference to Exhibit 10(a)(ii) to the Company’s Form 10-Q for the quarter ended March 31,2016.(15)Incorporated by reference to Exhibit 10(a)(iii) to the Company’s Form 10-Q for the quarter ended March 31,2016.(16)Incorporated by reference to Exhibit 10(a)(iv) to the Company’s Form 10-Q for the quarter ended March 31,2016.(17)Incorporated by reference to Appendix A to the Company's definitive proxy statement on Schedule 14A filed December 16,2016.(18)Incorporated by reference to Exhibit 10(b)(ii) to the Company's Form 10-Q for the quarter ended March 31,2017.(19)Incorporated by reference to Exhibit 10(b)(iii) to the Company's Form 10-Q for the quarter ended March 31,2017.(20)Incorporated by reference to Exhibit 10(b)(iv) to the Company's Form 10-Q for the quarter ended March 31,2017.(21)Incorporated by reference to Appendix A to the Company’s definitive proxy statement on Schedule 14A filed December 8,2017.(22)Incorporated by reference to Exhibit 10(a)(i) to the Company's Form 10-Q for the quarter ended March 31,2018.(23)Incorporated by reference to Exhibit 10(a)(ii) to the Company's Form 10-Q for the quarter ended March 31,2018.(24)Incorporated by reference to Exhibit 10(a)(iii) to the Company's Form 10-Q for the quarter ended March 31,2018.(25)Incorporated by reference to Exhibit 10(a)(iv) to the Company's Form 10-Q for the quarter ended March 31,2018.(26)Incorporated by reference to Appendix A to the Company's definitive proxy statement on Schedule 14A filed December 14,2018.(27)Incorporated by reference to Exhibit 10(a)(i) to the Company's Form 10-Q for the quarter ended March 31,2019.(28)Incorporated by reference to Exhibit 10(a)(ii) to the Company's Form 10-Q for the quarter ended March 31,2019.(29)Incorporated by reference to Exhibit 10(a)(iii) to the Company's Form 10-Q for the quarter ended March 31,2019.(30)Incorporated by reference to Exhibit 10(a)(iv) to the Company's Form 10-Q for the quarter ended March 31,2019.(31)Incorporated by reference to Exhibit 10 to the Company’s Form 10‑Q for the quarter ended June 30,2010.(32)Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K dated December 3,2014.(33)Incorporated by reference to Exhibit 10(l) to the Company's Form 10-K for the year ended September 30,2013.(34)Incorporated by reference to Exhibit 10(m) to the Company's Form 10-K for the year ended September 30,2013.(35)Incorporated by reference to Exhibit 10(a) to the Company's Form 10-Q for the quarter ended March 31,2017.(36)Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed June 15,2018.(37)Incorporated by reference to Exhibit 10.O to the Company's Form 10-K filed November 21,2018.(38)Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed May 10,2019.ITEM 16. FORM 10-K SUMMARYNone.69Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized, on November 27, 2019. DIGI INTERNATIONAL INC. By: /s/ Ronald E. Konezny Ronald E. KoneznyPresident, Chief Executive Officer and DirectorPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and inthe capacities indicated on November 27, 2019. By: /s/ Ronald E. Konezny Ronald E. KoneznyPresident, Chief Executive Officer and Director(Principal Executive Officer) By: /s/ James J. Loch James J. LochSenior Vice President, Chief Financial Officer and Treasurer(Principal Financial Officer and Principal Accounting Officer) By:* Satbir KhanujaDirector By:* Christopher D. HeimDirector By:* Hatem H. NaguibDirector By:* Sally J. SmithDirector By:* Spiro C. LazarakisDirector*Ronald E. Konezny, by signing his name hereto, does hereby sign this document on behalf of each of the above named directors of the Registrant pursuant toPowers of Attorney duly executed by such persons. By: /s/ Ronald E. Konezny Ronald E. KoneznyAttorney-in-fact70Table of ContentsSCHEDULE II - VALUATION AND QUALIFYING ACCOUNTSDIGI INTERNATIONAL INC.(in thousands) Additions Description Balance atbeginning ofperiod Charged to costsand expenses Charged toOtherAccounts Deductions Balance atend of periodValuation allowance - deferred tax assets September 30, 2019 $3,291 $529 $— $10 $3,810September 30, 2018 $5,952 $521 $— $3,182 $3,291September 30, 2017 $5,914 $136 $— $98 $5,952 Valuation account - doubtful accounts September 30, 2019 (1) $785 $635 $— $452(4) $968September 30, 2018 (1) $341 $729 $40(2) $325(4) $785September 30, 2017 $209 $127 $20(3) $15(4) $341 Reserve for future returns and pricing adjustments September 30, 2019 $2,560 $12,640 $— $12,523 $2,677September 30, 2018 $2,169 $10,715 $— $10,324 $2,560September 30, 2017 $1,991 $10,447 $— $10,269 $2,169(1)Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which weadopted on October 1, 2018.(2)Established through purchase accounting relating to the acquisition ofTempAlert(3)Established through purchase accounting relating to the acquisition of SMARTTemps® (4)Uncollectible accounts charged against allowance, net ofrecoveries71DESCRIPTION OF CAPITAL STOCKThe summary of the general terms and provisions of the capital stock of Digi International Inc. (the “Company”) set forth below does not purport to be completeand is subject to and qualified by reference to the Company’s Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”) and Amendedand Restated By‑Laws of the Company (the “By-laws,” and together with the Certificate of Incorporation, the “Charter Documents”), each of which isincorporated herein by reference and attached as an exhibit to the Company’s most recent Annual Report on Form 10-K filed with the Securities and ExchangeCommission. For additional information, please read the Company’s Charter Documents and the applicable provisions of the General Corporation Law ofDelaware (the “DGCL”).Authorized CapitalThe Company is authorized to issue up to 60,000,000 shares of common stock, with a par value of $.01 per share, and 2,000,000 shares of preferred stock, with apar value of $.01 (the “Preferred Stock”). The Company’s Board of Directors has the power and authority to fix by resolution any designation, series, voting power,preference, right, qualification, limitation, restriction, dividend, time and price of redemption and conversion right with respect to the Preferred Stock. As ofNovember 18, 2019, there were 28,314,196 shares of the Company’s common stock were issued and outstanding and there were no shares of Preferred Stock wereissued and outstanding.Voting RightsThe holders of shares of the Company’s common stock are entitled to one vote per share on all matters voted upon by the Company’s stockholders. TheCompany’s common stock does not have cumulative voting rights, and, accordingly, holders of more than 50% of the outstanding shares of common stock will beable to elect all of the members of the Board of Directors. If the number of candidates exceeds the number of members to be elected to the Board of Directors, theymay be elected by plurality vote. The following significant corporate transactions require approval by the affirmative vote of at least 80% of the outstanding sharesentitled to vote, voting together as a single class: (i) Business Combinations with Interested Stockholders (as described below), (ii) amendments to Articles Fifthand Sixth of the Certificate of Incorporation and (iii) amendments to By-laws proposed by stockholders. Other matters to be voted upon by the holders of commonstock normally require the affirmative vote of a majority of the shares present at the particular stockholders meeting. The holders of the Preferred Stock shall notbe entitled to vote nor receive notice of any meeting of stockholders at which they are not entitled to vote unless the Board of Directors so provides.Dividend RightsAfter satisfaction of the dividend rights of holders of Preferred Stock, the holders of shares of the Company’s common stock are entitled to receive dividends, ifany, in such amounts as may be declared from time to time by the Company’s Board of Directors in its discretion out of any funds legally available therefor and aspermitted by the DGCL.Liquidation RightsIn the event of the Company’s dissolution, liquidation or winding-up, the holders of shares of common stock are entitled to share ratably in any assets of theCompany remaining after payment in full of creditors and preferred stockholders to the extent of any liquidation preferences.No Preemptive RightsThere are no preemptive, subscription, conversion, redemption or sinking fund rights pertaining to the common stock. The absence of preemptive rights couldresult in a dilution of the interest of investors should additional common stock be issued.ListingThe Company’s common stock is currently traded on the Nasdaq Stock Market under the symbol “DGII.”Warrants and Other RightsAs of November 18, 2019, (i) options to purchase an aggregate of up to 3,250,651 common stock with a weighted average exercise price of $10.87 per share andexpiration dates ranging from November 14, 2019 to August 13, 2026 and (ii) restricted stock units representing the potential issuance of up to 850,203 commonstock in the aggregate were outstanding. All such stock-based awards were governed by equity plans established by the Board of Directors and ratified bystockholders. As of the same date, an additional 1,457,404 shares remained available for future awards under the plan.As of the same date, there were no warrants or other rights to purchase common stock outstanding.Anti-Takeover ProvisionsThe Charter Documents and the DGCL contain certain provisions that may discourage an unsolicited takeover of the Company or make an unsolicited takeover ofthe Company more difficult. The following are some of the more significant anti-takeover provisions that are applicable to the Company:Business Combinations with Interested StockholdersThe Certificate of Incorporation provides that, in addition to any affirmative vote required by law or by the Charter Documents, (a) any merger or consolidation ofthe Company or any Subsidiary with (i) any Interested Stockholder (a person who (i) is the beneficial owner of Voting Stock representing twenty percent (20%) ormore of the votes entitled to be cast by the holders of all then outstanding shares of Voting Stock; or (ii) is an Affiliate or Associate of the Company and at anytime within the two-year period immediately prior to the date in questions was the beneficial owner of Voting Stock representing 20% or more of the votes entitledto be cast by the holders of all then outstanding shares of Voting Stock) or (ii) any other corporation (whether or not itself an Interested Stockholder) which is orafter such merger or consolidation would be an affiliate or associate of an Interested Stockholder, (b) any sale, lease, exchange, mortgage, pledge, transfer or otherdisposition (in one transaction or a series of transactions) with any Interested Stockholder or any affiliate or associate of any Interested Stockholder involving anyassets or securities of the Company, any subsidiary or any Interested Stockholder or any affiliate or associate of any Interested Stockholder having an aggregatefair market value equal to or greater than 10% of the book value of the consolidated assets of the Company, (c) the adoption of any plan or proposal for theliquidation or dissolution of the Company proposed by or on behalf of an Interested Stockholder or any affiliate or associate of any Interested Stockholder, (d) anyreclassification of securities (including any reverse stock split), or recapitalization of the Company, or any merger or consolidation of the Company with any of itssubsidiaries or any other transaction (whether or not with or otherwise involving an Interested Stockholder) that has the effect, directly or indirectly, of increasingthe proportionate share of any class or series of Capital Stock, or any securities convertible into Capital Stock or into equity securities of any subsidiary, that isbeneficially owned by any Interested Stockholder or any affiliate or associate of any Interested Stockholder, or (e) any agreement, contract or other arrangementproviding for any one or more of the actions specified in the foregoing clauses (a) - (d), shall require the affirmative vote of not less than 80% of the votes entitledto be cast by the holders of all then outstanding shares of Voting Stock, voting together as a single class. The foregoing restriction does not apply to (i) transactionsapproved by a majority (whether such approval is made prior to or subsequent to the acquisition of beneficial ownership of the Voting Stock that caused theInterested Stockholder to become an Interested Stockholder) of the Continuing Directors (any member of the Board of Directors of the Company, while suchperson is a member of the Board of Directors, who was a member of the Board prior to the time that the Interested Stockholder involved in the BusinessCombination in questions became an Interested Stockholder, and any member of the Board of Directors, whose election, or nomination for election by theCompany’s Stockholders, was approved by vote of a majority of the Continuing Directors; provided, however, that in no event shall an Interested Stockholderinvolved in the Business Combination in question or any Affiliate, Associate or representative of such Interested Stockholder be deemed to be a ContinuingDirector); or (ii) transactions in which all stockholders receive a specified consideration per share and such transaction meets the additional conditions set forth inArticle Sixth of the Certificate of Incorporation. The affirmative vote of the holders of at least 80% percent or more of the Voting Stock of the Company, votingtogether as a single class, is required to amend or repeal this provision of the Certificate.Delaware Anti-Takeover LawIn general, Section 203 of the DGCL prohibits a Delaware corporation with a class of voting stock listed on a national securities exchange or held of record by2,000 or more stockholders from engaging in a “Business Combination” (as defined below) with an “Interested Stockholder” (as defined below) for a three-yearperiod following the time that this stockholder becomes an interested stockholder, unless the Business Combination is approved in a prescribed manner. ABusiness Combination includes, among other things, a merger, asset or stock sale or other transaction resulting in a financial benefit to the Interested Stockholder.An Interested Stockholder is a person who, together with affiliates and associates, owns, or did own within three years prior to the determination of InterestedStockholder status, 15% or more of the corporation’s voting stock.Under Section 203, a Business Combination between a corporation and an Interested Stockholder is prohibited for seven years unless it satisfies one of thefollowing conditions:•Before the stockholder became an Interested Stockholder, the Board of Directors approved either the Business Combination or the transaction whichresulted in the stockholder becoming an Interested Stockholder;•Upon consummation of the transaction which resulted in the stockholder becoming an Interested Stockholder, the Interested Stockholder owned at least85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stockoutstanding, shares owned by persons who are directors and also officers, and employee stock plans, in some instances; or•At or after the time the stockholder became an Interested Stockholder, the Business Combination was approved by the Board of Directors of thecorporation and authorized at an annual or special meeting of the stockholders by the affirmative vote of at least two-thirds of the outstanding votingstock which is not owned by the Interested Stockholder.The DGCL permits a corporation to opt out of, or choose not to be governed by, its anti-takeover statute by expressly stating so in its original certificate ofincorporation (or subsequent amendment to its certificate of incorporation or bylaws approved by its stockholders). The Certificate of Incorporation does notcontain a provision expressly opting out of the application of Section 203 of the DGCL; therefore, the Company is subject to the anti-takeover statute.Special Meetings of StockholdersThe Company’s By-laws provide that a special meeting of stockholders may be called only by the Chairman or the Chief Executive Officer and shall be called byeither such officer upon the written request of a majority of the Board of Directors or by a committee of the Board of Directors which has been duly designated bythe Board of Directors, and whose powers and authority, as expressly provided in a resolution of the Board of Directors, include the power to call such meetings.Stockholder Action by Unanimous Written ConsentThe Company’s Certificate of Incorporation provides that all stockholder action by written consent must be unanimous.Advance Notice of Stockholder Business Proposals and NominationsThe Company’s By-laws include an advance notice procedure for stockholder proposals to be brought before an annual meeting of stockholders, includingproposed nominations of candidates for election to the Board of Directors. Stockholders at an annual meeting will only be able to consider proposals ornominations specified in the notice of meeting or brought before the meeting by or at the direction of the Board of Directors, or by a stockholder that has deliveredtimely written notice in proper form to the Company’s secretary of the business or mailed to and received at the principal executive office of the Company to bebrought before the meeting. These provisions could have the effect of delaying stockholder actions that may be favored by the holders of a majority of theCompany’s outstanding voting securities until the next stockholder meeting, or may discourage or deter a potential acquirer from conducting a solicitation ofproxies to elect its own slate of directors or otherwise attempt to obtain control of the Company. Classified Board of DirectorsThe Company’s Certificate of Incorporation provides that directors will be divided into three classes and elected for staggered terms. At each annual meeting,approximately one third of the directors will be elected to serve a three-year term. Directors serving staggered terms can be removed from office only for cause.Authority of the Board of DirectorsThe Board of Directors has the power to issue any or all of the shares of the Company’s capital stock, including the authority to establish one or more series ofPreferred Stock and to fix the powers, preferences, rights and limitations of such class or series, without seeking stockholder approval, and the right to fillvacancies of the Board of Directors (including a vacancy created by an increase in the size of the Board of Directors). Under the Certificate of Incorporation, theCompany’s Board of Directors has the authority to adopt and change the By-laws upon the affirmative vote of the number of directors which shall constitute,under the provisions of the Company’s By-laws, the action of the Board of Directors.Exhibit 10.oSeptember 27, 2016Michael Ueland216 Bridle Creek DriveCary, North Carolina 27513Dear Mike,On behalf of Digi International Inc., I am pleased to offer you employment as Senior Vice President, Global Sales reporting to Kevin Riley, COO. (Please seeContingent Offer section below.)CompensationYour annualized total compensation target for this position is $425,000. The annualized base salary is $250,000 with an annualized incentive target of $175,000.You will participate in Digi International’s Executive Incentive Plan. The FY16 plan provides an annual incentive payment based on EBITDA performanceprovided that threshold revenue and EBITDA performance for the fiscal year are achieved. The plan also provides for quarterly payment for the first, second andthird quarter of the fiscal year if threshold revenue and EBITDA targets are achieved. All payments are pro-rated based on length of service in the fiscal year.Initial Equity AwardWe will recommend to the Board of Directors a grant of 100,000 stock options. The options will have a per share exercise price equal to the closing sale price of ashare of common stock on the Grant Date. Options will vest over four years at a rate of 25% upon completion of one year, then proportionate monthly vestingthereafter. The stock option agreement will contain a change in control provision that provides for accelerated vesting if within one year following a change incontrol, your employment is terminated either by the Company without cause or by you for good reason. The Grant Date will be the first day that the DigiInternational trading window reopens in October.In addition, we will recommend to the Board of Directors a Restricted Stock award of 50,000 shares. This award will vest 25% annually on the anniversary of theGrant Date. Restricted Stock Award Agreement will contain the same change in control provision.BenefitsDigi offers a comprehensive benefit program which includes Medical, Dental, Vision, Life and Disability Insurance, Medical and Dependent Care ReimbursementPlans, 401(K) Savings Plan, and an Employee Stock Purchase Plan and a Tuition Reimbursement Program.You will be eligible for participation in Digi's health insurance programs on the first day of active employment with the company and will be eligible forparticipation in the 401(K) Savings Plan on the first day of the month following date of hire. You will be eligible to participate in the Digi International StockPurchase Plan on the first of any January, April, July or October following your hire date.You will be eligible to participate in Digi’s $500,000 Executive Life Insurance program. If accepted by the carrier, Digi International will pay the full annualpremium. This is in additional to the basic optional life insurance programs offered to all employees.Vacation eligibility begins on the date of hire. Upon hire, you will receive four weeks of vacation. You will not accrue above or below this amount regardless oftime take. Should you leave the company at any point in the future, you will be paid for four weeks of accrued vacation.Digi International will establish mutually agreed remote office accommodations.Severance AgreementIf Digi International should terminate your employment at any time in the future for reasons other than Cause, you will be provided with the following severancepackage in exchange for a full release of claims against the Company:1.Six months of base salary in effect at time of termination. This shall be paid in a lump sum as soon as administratively feasible after the later of the dateof termination or the date the release of claims has become irrevocable.2.A pro-rata bonus based on number of months worked in the fiscal year prior to a qualifying termination and the Company's actual performance againstannual objectives. This pro-rata bonus shall be paid no later than 2.5 months after the close of fiscal year in which the qualifying termination occurs.For purposes of this agreement, "Cause" shall mean only the following: (i) indictment or conviction of, or a plea of nolo contendere to, (A) any felony (other thanany felony arising out of negligence), or any misdemeanor involving moral turpitude with respect to the Company, or (B) any crime or offense involvingdishonesty with respect to the Company; (ii) theft or embezzlement of Company property or commission of similar acts involving dishonesty or moral turpitude:(iii) material negligence in the performance of your job duties after notice; (iv) failure to devote substantially all of his working time and efforts during normalbusiness hours to the Company's business; of (v) knowing engagement in conduct which is materially injurious to the Company.Exhibit 10.oContingent OfferThis offer of employment is contingent upon the following:1.Approval of the offer by the Compensation Committee of the Board of Directors and your election as an Officer by the Board ofDirectors.2.Your signature on the enclosed Digi International Employment, Confidential Information, and Arbitration Agreement. Your signature constitutesacceptance of the terms and conditions contained in the Agreement, so please read it thoroughly prior to signing. This agreement must be signed prior toyour first day of employment.3.A finding of "no issue" with your background and reference check. Digi International has partnered with Verified Credentials, a background screeningorganization, to administer confidential background checks. Within 48 hours, we ask you to visit Verified Credentials website athttp://myvci.com/digiinternationalinc to complete a personal questionnaire using your full legal name including middle initial. If you are unable to accessthe internet within this timeframe, please contact us directly to further assist you in the process. Delay in completion of the online personal questionnairecould delay in the start date of your employment.4.Completion of the MDA Leadership Assessment prior to startdate.5.Digi's determination that you are not subject to any agreement with any former employer or any other party that would prohibit you from working in theposition of Senior Vice President, Global Sales.Commencement Date and Offer AcceptanceWe would like you to start on October 26, 2016. Please inform me of your acceptance of this offer by September 30, 2016 and acknowledge your acceptance bysigning one of the enclosed copies.Sincerely,Digi International Inc./s/ Mary MaruskaMary MaruskaDirector, Human ResourcesOffer accepted:/s/ Michael Ueland October 26, 2016 Michael Ueland Start DateExhibit 21Subsidiaries of the CompanyName JurisdictionAccelerated Concepts, Inc. Florida, United StatesAccelerated Concepts Pty Ltd. AustraliaDigi International Canada Inc. Ontario, CanadaDigi International GmbH GermanyDigi International (HK) Ltd. Hong KongDigi International Kabushikikaisha JapanDigi International Limited United KingdomDigi International SARL FranceDigi International Spain S.A. SpainDigi m2m Solutions India Pvt. Ltd. IndiaDigi Wireless Singapore Pte. Ltd. SingaporeDigi SmartSense, LLC Delaware, United StatesFreshTemp, LLC Pennsylvania, United StatesITK International Inc. Delaware, United StatesSMART Temps, L.L.C. Indiana, United StatesExhibit 23CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe have issued our reports dated November 27, 2019, with respect to the consolidated financial statements and internal control over financial reporting included inthe Annual Report of Digi International Inc. on Form 10‑K for the year ended September 30, 2019. We consent to the incorporation by reference of said reports inthe Registration Statements of Digi International Inc. on Forms S-8 (File Nos. 333-187949, 333-144872, 333-169427, 333-169428, 333-194518, 333-194522, 333-209958, 333-218002, 333-225308, and 333-231365)./s/ GRANT THORNTON LLPMinneapolis, MinnesotaNovember 27, 2019Exhibit 24DIGI INTERNATIONAL INC.Power of AttorneyThe undersigned director of Digi International Inc., a Delaware corporation, does hereby make, constitute and appoint James J. Loch and David H. Sampsell,and either of them, the undersigned’s true and lawful attorney-in-fact and agent, with power of substitution, for the undersigned and in the undersigned’s name,place and stead, to sign and affix the undersigned’s name as such director of said corporation to an Annual Report on Form 10-K or other applicable form for thefiscal year ended September 30, 2019, and all amendments thereto, to be filed by said corporation with the U.S. Securities and Exchange Commission, Washington,D.C. (the “SEC”), and to file the same with all exhibits thereto and other supporting documents in connection therewith with the SEC, granting unto said attorneys-in-fact, and either of them, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powersherein expressly granted.IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned’s hand this 25th day of November, 2019. /s/ Ronald E. Konezny Ronald E. Konezny Exhibit 24DIGI INTERNATIONAL INC.Power of AttorneyThe undersigned director of Digi International Inc., a Delaware corporation, does hereby make, constitute and appoint Ronald E. Konezny and James J. Loch,and either of them, the undersigned’s true and lawful attorney-in-fact and agent, with power of substitution, for the undersigned and in the undersigned’s name,place and stead, to sign and affix the undersigned’s name as such director of said corporation to an Annual Report on Form 10-K or other applicable form for thefiscal year ended September 30, 2019, and all amendments thereto, to be filed by said corporation with the U.S. Securities and Exchange Commission, Washington,D.C. (the “SEC”), and to file the same with all exhibits thereto and other supporting documents in connection therewith with the SEC, granting unto said attorneys-in-fact, and either of them, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powersherein expressly granted.IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned’s hand this 25th day of November, 2019. /s/ Satbir Khanuja Satbir Khanuja Exhibit 24DIGI INTERNATIONAL INC.Power of AttorneyThe undersigned director of Digi International Inc., a Delaware corporation, does hereby make, constitute and appoint Ronald E. Konezny and James J. Loch,and either of them, the undersigned’s true and lawful attorney-in-fact and agent, with power of substitution, for the undersigned and in the undersigned’s name,place and stead, to sign and affix the undersigned’s name as such director of said corporation to an Annual Report on Form 10-K or other applicable form for thefiscal year ended September 30, 2019, and all amendments thereto, to be filed by said corporation with the U.S. Securities and Exchange Commission, Washington,D.C. (the “SEC”), and to file the same with all exhibits thereto and other supporting documents in connection therewith with the SEC, granting unto said attorneys-in-fact, and either of them, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powersherein expressly granted.IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned’s hand this 25th day of November, 2019. /s/ Christopher D. Heim Christopher D. Heim Exhibit 24DIGI INTERNATIONAL INC.Power of AttorneyThe undersigned director of Digi International Inc., a Delaware corporation, does hereby make, constitute and appoint Ronald E. Konezny and James J. Loch,and either of them, the undersigned’s true and lawful attorney-in-fact and agent, with power of substitution, for the undersigned and in the undersigned’s name,place and stead, to sign and affix the undersigned’s name as such director of said corporation to an Annual Report on Form 10-K or other applicable form for thefiscal year ended September 30, 2019, and all amendments thereto, to be filed by said corporation with the U.S. Securities and Exchange Commission, Washington,D.C. (the “SEC”), and to file the same with all exhibits thereto and other supporting documents in connection therewith with the SEC, granting unto said attorneys-in-fact, and either of them, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powersherein expressly granted.IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned’s hand this 25th day of November, 2019. /s/ Hatem H. Naguib Hatem H. Naguib Exhibit 24DIGI INTERNATIONAL INC.Power of AttorneyThe undersigned director of Digi International Inc., a Delaware corporation, does hereby make, constitute and appoint Ronald E. Konezny and James J. Loch,and either of them, the undersigned’s true and lawful attorney-in-fact and agent, with power of substitution, for the undersigned and in the undersigned’s name,place and stead, to sign and affix the undersigned’s name as such director of said corporation to an Annual Report on Form 10-K or other applicable form for thefiscal year ended September 30, 2019, and all amendments thereto, to be filed by said corporation with the U.S. Securities and Exchange Commission, Washington,D.C. (the “SEC”), and to file the same with all exhibits thereto and other supporting documents in connection therewith with the SEC, granting unto said attorneys-in-fact, and either of them, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powersherein expressly granted.IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned’s hand this 18th day of November, 2019. /s/ Sally J. Smith Sally J. Smith Exhibit 24DIGI INTERNATIONAL INC.Power of AttorneyThe undersigned director of Digi International Inc., a Delaware corporation, does hereby make, constitute and appoint Ronald E. Konezny and James J. Loch,and either of them, the undersigned’s true and lawful attorney-in-fact and agent, with power of substitution, for the undersigned and in the undersigned’s name,place and stead, to sign and affix the undersigned’s name as such director of said corporation to an Annual Report on Form 10-K or other applicable form for thefiscal year ended September 30, 2019, and all amendments thereto, to be filed by said corporation with the U.S. Securities and Exchange Commission, Washington,D.C. (the “SEC”), and to file the same with all exhibits thereto and other supporting documents in connection therewith with the SEC, granting unto said attorneys-in-fact, and either of them, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powersherein expressly granted.IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned’s hand this 25th day of November, 2019. /s/ Spiro C. Lazarakis Spiro C. Lazarakis Exhibit No. 31(a)CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Ronald E. Konezny, certify that:1. I have reviewed this annual report on Form 10-K of Digi International Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant andhave:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to providereasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generallyaccepted accounting principles;(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter(the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’sinternal control over financial reporting; and5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’sauditors and the audit committee of the Registrant’s Board of Directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the Registrant’s ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financialreporting. November 27, 2019/s/ Ronald E. Konezny Ronald E. Konezny President, Chief Executive Officer and Director Exhibit No. 31(b)CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, James J. Loch, certify that:1. I have reviewed this annual report on Form 10-K of Digi International Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant andhave:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to providereasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generallyaccepted accounting principles;(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter(the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’sinternal control over financial reporting; and5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’sauditors and the audit committee of the Registrant’s Board of Directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the Registrant’s ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financialreporting. November 27, 2019/s/ James J. Loch James J. Loch Senior Vice President, Chief Financial Officer and Treasurer Exhibit No. 32CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, each of the undersigned certifies that:(1) The Annual Report on Form 10-K of the Company for the year ended September 30, 2019 (the "Report") fully complies with the requirements of section 13(a)or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. November 27, 2019 /s/ Ronald E. Konezny Ronald E. Konezny President, Chief Executive Officer and Director November 27, 2019 /s/ James J. Loch James J. Loch Senior Vice President, Chief Financial Officer and Treasurer

Continue reading text version or see original annual report in PDF format above