DIGI INTERNATIONAL INC

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

Basis of Presentation

The unaudited condensed consolidated financial statements of Digi International Inc. ("we," "us," "our," "Digi" or "the Company") have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission applicable to interim financial statements. While these financial statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles ("GAAP") for complete financial statements. These financial statements should be read in conjunction with the financial statement disclosures in Part I, Item 1 of our Annual Report on Form 10-K for the year ended September 30, 2025. We use the same accounting policies in preparing quarterly and annual financial statements. The quarterly results of operations are not necessarily indicative of the results to be expected for the full year.

Recently Issued Accounting Standards Not Yet Adopted

In November 2024, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40), “Disaggregation of Income Statement Expenses,” which requires improved disclosures about a company’s expenses and more detailed information about the types of expenses in commonly presented expense captions. This amendment is effective for our fiscal year ending September 30, 2028 and interim periods within our fiscal year ending September 30, 2029. We currently are assessing the impact of this guidance on our disclosures.

In December 2023, FASB issued ASU 2023-09, Income Taxes (Topic 740), “Improvements to Income Tax Disclosures,” which requires enhanced transparency and decision usefulness of income tax disclosures. This amendment is effective for our fiscal year ending September 30, 2026 and interim periods within our fiscal year ending September 30, 2027. We currently are assessing the impact of this guidance on our disclosures.

2. ACQUISITIONS

Acquisition of Jolt Software, Inc. ("Jolt")

On August 18, 2025, we acquired Jolt for an estimated $148.5 million in cash. In the first quarter of fiscal 2026, we made net working capital adjustments due to an underage in the net working capital assumed in the transaction. This resulted in a decrease in consideration of $1.1 million and a reduction to goodwill of $0.9 million. In the second quarter of fiscal 2026, we made additional purchase accounting adjustments, primarily related to a $5.0 million reserve for potential product replacement (See Note 10) and a corresponding $1.3 million deferred tax asset, resulting in an increase of $3.7 million in the fair value of net tangible liabilities acquired and an increase of $3.7 million in goodwill. In the third quarter of fiscal 2026, we made additional purchase accounting adjustments for the revaluation of deferred taxes. As a result, we increased the long-term deferred tax liability balance by $0.6 million and increased goodwill by $0.6 million. These adjustments resulted in a final consideration of $147.5 million and goodwill of $53.6 million as of June 30, 2026. During the third quarter, the Company completed its valuation of the assets acquired and liabilities assumed in connection with Jolt and finalized the purchase price allocation. The purchase price allocation disclosed herein is final and no further measurement period adjustments are expected.

Acquisition of Particle Industries, Inc. ("Particle")

On January 27, 2026, we acquired Particle for approximately $50.4 million in cash. The acquisition was funded through a combination of cash on hand and a draw of $34.0 million from our existing senior secured credit facility committed by BMO Harris Bank N.A (See Note 6).

For tax purposes, this acquisition is treated as a stock acquisition. We believe this is a complementary acquisition for us as it significantly enhances our IoT Products & Services segment.

Costs directly related to the acquisition of $1.8 million incurred in fiscal 2026 were charged to operations and are included in general and administrative expense in our condensed consolidated statements of operations. These acquisition costs include legal, accounting, valuation and investment banking fees.

The following table summarizes the fair values of Particle assets acquired and liabilities assumed as of the acquisition date (in thousands):

*Includes $0.9 million in cash assumed in acquisition.

The condensed consolidated balance sheet as of June 30, 2026 reflected a preliminary allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. Purchase price allocations may be subject to future adjustments for the net assets, including intangible assets, acquired working capital balances and income tax assets and liabilities within the one-year measurement period.

The fair value of customer relationships was calculated using the multi-period excess earnings method, while purchased and core technology and trademarks were valued using the relief from royalty method. These methodologies utilize forecasts of future revenues and earnings before income taxes, depreciation and amortization, attrition rates, tax rates, discount rates, royalty rates and obsolescence rates.

The goodwill of $15.9 million arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of Particle and Digi. The goodwill from this transaction is all included in the IoT Products & Services segment.

The weighted average useful life for all the identifiable intangibles listed above is estimated to be 12 years. For purposes of determining fair value, the existing customer relationships identified above are assumed to have a useful life of 15 years, purchased and core technology is assumed to have a useful life of 9 years, trademarks are assumed to have a useful life of 12 years and noncompete agreements are assumed to have a useful life of 3 years. Useful lives for identifiable intangible assets are estimated at the time of acquisition based on the periods of time from which we expect to derive benefits from the identifiable intangible assets. The identifiable intangible assets are amortized using the straight-line method, which reflects the pattern in which the assets are expected to be consumed.

Particle's contribution to revenue and operating income for the three and nine months ended June 30, 2026 was not material. In addition, Digi’s net revenue and operating income for the three and nine months ended June 30, 2026 and 2025 would not have been materially different from reported results had the acquisition occurred on October 1, 2024.

3. EARNINGS PER SHARE

The following table is a reconciliation of the numerators and denominators in the net income per common share calculations (in thousands, except per common share data):

Digi excludes certain stock options and restricted stock unit awards that would have an anti-dilutive effect on our diluted net income per share calculation. For the three months ended June 30, 2026 and 2025,8,608 and 337,179 shares outstanding were excluded, respectively. For the nine months ended June 30, 2026 and 2025,43,981 and 206,008 shares outstanding were excluded, respectively.

4. SELECTED BALANCE SHEET DATA

The following table shows selected balance sheet data (in thousands):

5. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Amortizable intangible assets were (in thousands):

Amortization expense for intangible assets was $8.2 million and $5.2 million for the three months ended June 30, 2026 and 2025, respectively. Amortization expense for intangible assets was $23.2 million and $16.2 million for the nine months ended June 30, 2026 and 2025, respectively. Amortization expense is recorded on our condensed consolidated statements of operations within cost of sales and in general and administrative expense.

Estimated amortization expense related to intangible assets for the remainder of fiscal 2026 and the five succeeding fiscal years is (in thousands):

The changes in the carrying amount of goodwill by reportable segments are (in thousands):

Goodwill represents the excess of cost over the fair value of net identifiable assets acquired. Goodwill is tested quantitatively for impairment on an annual basis as of June 30, or more frequently if events or circumstances occur which could indicate impairment. We havetwo reportable segments that are also reporting units, IoT Products & Services and IoT Solutions (see Note 7). Each of these reporting units was tested individually for impairment during our annual impairment test completed as of the end of the third fiscal quarter of fiscal 2026.

Results of our Fiscal 2026 Annual Impairment Test

As of June 30, 2026, we had a total of $190.8 million of goodwill for the IoT Products & Services reporting unit and $220.8 million of goodwill for the IoT Solutions reporting unit. At June 30, 2026, the fair value of goodwill exceeded the carrying value for each reporting unit and no impairment was recorded.