What changed in this filing

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Item 1. Financial Statements

2023-02-03 compared with 2022-08-05 · 147 added, 255 removed, 382 unchanged (51% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three months ended June 30, Nine months ended June 30,

2022 2021 2022 2021

Three months ended December 31,

(in thousands, except per share data)

12 unchanged sentences

General and administrative 16,358 15,351

Restructuring charge 105 101 214 995

Total operating expenses 49,558 44,082

1 unchanged sentence

Other expense, net:

Interest income 1 3 8 4

Interest expense ( 5,297 ) ( 371 ) ( 14,665 ) ( 1,019 )

Other expense, net ( 96 ) ( 114 ) ( 59 ) ( 229 )

Interest expense, net ( 5,971 ) ( 4,898 )

Other income (expense), net 17 ( 102 )

Total other expense, net ( 5,954 ) ( 5,000 )

Income before income taxes 4,582 3,536 6,621 5,998

Income (loss) before income taxes 6,009 ( 1,201 )

Income tax provision (benefit) 230 ( 2,388 )

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DIGI INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three months ended June 30, Nine months ended June 30,

2022 2021 2022 2021

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three months ended December 31,

(in thousands)

Net income $ 5,779 $ 1,187

Other comprehensive (loss) income:

Other comprehensive income (loss):

Foreign currency translation adjustment 1,289 ( 212 )

Other comprehensive (loss) income ( 1,359 ) 463 ( 1,519 ) 2,068

Other comprehensive income (loss) 1,289 ( 212 )

Comprehensive income $ 7,068 $ 975

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CONDENSED CONSOLIDATED BALANCE SHEETS

June 30, 2022 September 30, 2021

December 31, 2022 September 30, 2022

(in thousands, except share data)

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Property, equipment and improvements, net 28,374 27,594

Operating lease right-of-use assets 14,829 15,684

Intangible assets, net 295,663 302,064

Goodwill 341,573 340,477

Deferred tax assets — 439

Operating lease right-of-use assets 14,897 15,299

Other non-current assets 3,862 2,253

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Unearned revenue 20,414 19,803

Contingent consideration on acquired businesses 6,100 20

Current portion of operating lease liabilities 3,357 3,196

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months ended June 30,

Three months ended December 31,

(Restated) (1)

(in thousands)

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Depreciation of property, equipment and improvements 1,649 1,553

Amortization of intangible assets 20,400 11,989

Amortization 6,957 8,559

Stock-based compensation 2,868 2,017

Deferred income tax provision 905 1,732

Loss on sale of property and equipment 12 65

Change in fair value of contingent consideration — 5,772

Provision for bad debt and product returns ( 148 ) 414

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Proceeds from long-term debt — 350,000

Payments of debt issuance costs — ( 13,443 )

Payments on long-term debt ( 4,375 ) ( 98,118 )

Payments for contingent consideration — ( 4,200 )

Proceeds from issuance of stock, net of offering expenses — 73,830

Proceeds from stock option plan transactions 872 4,227

1 unchanged sentence

Taxes paid for net share settlement of share-based payment options and awards ( 2,987 ) ( 6,025 )

Net cash provided by financing activities 224,313 60,579

Net cash (used in) provided by financing activities ( 5,896 ) 236,962

Effect of exchange rate changes on cash and cash equivalents 228 ( 36 )

Net (decrease) increase in cash and cash equivalents ( 110,917 ) 92,813

Net decrease in cash and cash equivalents ( 3,951 ) ( 105,244 )

Cash and cash equivalents, beginning of period 34,900 152,432

Cash and cash equivalents, end of period $ 30,949 $ 47,188

Supplemental disclosures of cash flow information:

Interest paid $ 8,466 $ 2,688

Income taxes paid, net 565 738

Supplemental schedule of non-cash investing and financing activities:

Transfer of inventory to property, equipment and improvements ( 1,512 ) ( 699 )

Contingent consideration recognized related to acquisition of business $ — $ ( 5,914 )

Tenant improvement allowance $ — $ ( 1,000 )

Accrual for purchase of property, equipment, improvements and certain other intangible assets $ ( 17 ) $ ( 16 )

(1) As described in Note 2 to these condensed consolidated financial statements, we have restated the condensed consolidated statement of cash flows for the three months ended December 31, 2021.

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

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Common Stock Treasury Stock Paid-In Retained Comprehensive Stockholders'

(in thousands) Shares Par Value Shares Value Capital Earnings Income (Loss) Equity

Balances, March 31, 2021 40,442 $ 404 6,413 $ ( 56,595 ) $ 364,604 $ 172,951 $ ( 22,212 ) $ 459,152

(in thousands) Shares Par Value Shares Value Capital Earnings (Loss) Income Equity

Balances, September 30, 2021 40,653 $ 407 6,391 $ ( 56,535 ) $ 370,699 $ 180,692 $ ( 22,746 ) $ 472,517

Net income — — — — — 1,187 — 1,187

Other comprehensive income — — — — — — 463 463

Other — — — — — 8 — 8

Other comprehensive loss — — — — — — ( 212 ) ( 212 )

Employee stock purchase plan issuances — — ( 18 ) 161 160 — — 321

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Stock-based compensation expense — — — — 2,017 — — 2,017

Balances, June 30, 2021 40,512 $ 405 6,401 $ ( 56,554 ) $ 367,253 $ 176,116 $ ( 21,749 ) $ 465,471

Balances, December 31, 2021 41,413 $ 414 6,447 $ ( 58,100 ) $ 372,797 $ 181,879 $ ( 22,958 ) $ 474,032

Balances, September 30, 2022 41,950 $ 420 6,413 $ ( 58,172 ) $ 385,244 $ 200,075 $ ( 26,054 ) $ 501,513

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Other comprehensive income — — — — — — 1,289 1,289

Issuance of common stock, net of offering expenses 4,025 40 — — 73,790 — — 73,830

Other — — — — — 8 — 8

Employee stock purchase plan issuances — — ( 20 ) 186 408 — — 594

Taxes paid for net share settlement of share-based payment awards — — 109 ( 1,985 ) — — — ( 1,985 )

Issuance of stock under stock award plans 974 10 — — 7,015 — — 7,025

Stock-based compensation expense — — — — 6,331 — — 6,331

Balances, June 30, 2021 40,512 $ 405 6,401 $ ( 56,554 ) $ 367,253 $ 176,116 $ ( 21,749 ) $ 465,471

Balances, March 31, 2022 41,525 $ 415 6,447 $ ( 58,310 ) $ 376,579 $ 184,726 $ ( 22,906 ) $ 480,504

Net income — — — — — 4,126 — 4,126

Other comprehensive loss — — — — — — ( 1,359 ) ( 1,359 )

Employee stock purchase plan issuances — — ( 23 ) 213 217 — — 430

Taxes paid for net share settlement of share-based payment options and awards — — 72 ( 2,987 ) — — — ( 2,987 )

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Stock-based compensation expense — — — — 2,868 — — 2,868

Balances, June 30, 2022 41,677 $ 417 6,427 $ ( 58,165 ) $ 380,083 $ 188,852 $ ( 24,265 ) $ 486,922

Balances, September 30, 2021 40,653 $ 407 6,391 $ ( 56,535 ) $ 370,699 $ 180,692 $ ( 22,746 ) $ 472,517

Net income — — — — — 8,160 — 8,160

Other comprehensive loss — — — — — — ( 1,519 ) ( 1,519 )

Employee stock purchase plan issuances — — ( 60 ) 547 554 — — 1,101

Taxes paid for net share settlement of share-based payment awards — — 96 ( 2,177 ) ( 4,299 ) — — ( 6,476 )

Issuance of stock under stock award plans 1,024 10 — — 6,727 — — 6,737

Stock-based compensation expense — — — — 6,402 — — 6,402

Balances, June 30, 2022 41,677 $ 417 6,427 $ ( 58,165 ) $ 380,083 $ 188,852 $ ( 24,265 ) $ 486,922

Balances, December 31, 2022 42,199 $ 422 6,465 $ ( 60,973 ) $ 389,390 $ 205,854 $ ( 24,765 ) $ 509,928

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

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The quarterly results of operations are not necessarily indicative of the results to be expected for the full year.

Potential Impacts of Macroeconomic Conditions on our Business

Our business is effected by present macroeconomic conditions including the ongoing pandemic, supply chain disruptions, the war in Ukraine and inflation.

The impact of each of these items is volatile and continues to evolve.

The extent of impact stemming from any individual factor or combination of factors on our operational and financial performance will depend in large part on future developments, which cannot be reasonably estimated at this time and could vary in scope and severity both individually and collectively based upon actions taken by governments and other entities to mitigate impacts both within and outside jurisdictions where we operate.

For a more detailed discussion see Part I, Item 1 in our Annual Report on Form 10-K for the year ended September 30, 2021 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of this Form 10-Q.

Recently Issued Accounting Pronouncements

In October 2021, FASB issued ASU 2021-08, Business Combinations (Topic 805):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.

This update requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination.

We adopted this standard in the first quarter of fiscal 2022.

Acquisition of Ventus

On November 1, 2021, we acquired Ventus Networks, LLC ("Ventus") for approximately $ 350 million in cash.

The acquisition was funded through a combination of cash on hand and debt financing under a $ 350 million credit facility committed by BMO Harris Bank N.A.

For tax purposes, this acquisition was treated as an asset acquisition.

We believe this is a complementary acquisition for us as it significantly enhances our IoT Solutions segment by enhancing Digi's service portfolio and immediately extends the company's market reach with a Managed Network-as-a-Service ("MNaaS") solutions offering.

Costs directly related to the acquisition of $ 4.2 million incurred fiscal year to date 2022 have been 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 preliminary fair values of Ventus assets acquired and liabilities assumed as of the acquisition date (in thousands):

Cash $ 350,000

Fair value of net tangible assets acquired $ 20,735

Identifiable intangible assets:

Customer relationships 179,000

Purchased and core technology 16,000

Trademarks 16,000

Goodwill 118,265

Total $ 350,000

The condensed consolidated balance sheet as of June 30, 2022 reflects the preliminary allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition.

This preliminary allocation was updated in the third fiscal quarter of 2022 to reflect information not available previously.

The estimated fair value of the net assets acquired, liabilities assumed and identifiable intangible assets are preliminary and remain subject to change, as preliminary purchase price allocation has not yet been completed.

Included in the fair value of net tangible assets acquired was $ 0.7 million of right-of-use asset included in other non-current assets and $ 0.7 million of lease liability included in other current liabilities and other non-current liabilities associated with Ventus’s operating leases.

The preliminary weighted average useful life for all the identifiable intangibles listed above is estimated to be 19.2 years.

For purposes of determining fair value, the existing customer relationships identified above are assumed to have a useful life of 20.5 years, purchased and core technology is assumed to have useful life of 11 years and trademarks are assumed a useful life of 13 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.

The following consolidated pro forma information is presented as if the acquisition had occurred on October 1, 2020 (in thousands):

Three months ended June 30, Nine months ended June 30,

2022 2021 2022 2021

Net sales $ 103,517 $ 92,678 $ 287,552 $ 268,029

Net income (loss) 4,126 ( 432 ) 3,051 ( 6,157 )

Pro forma net income has been adjusted to include interest expense related to debt incurred as a result of the acquisition, amortization on the fair value of the intangibles acquired and remove any costs incurred with the sale transaction.

Net income for the nine months ended June 30, 2021 was adjusted to include acquisition-related costs of $ 3.1 million.

Potential Impacts of COVID-19 on our Business

The impact of the coronavirus ("COVID-19") pandemic continues to unfold.

While we have seen conditions improve towards pre-pandemic levels, the extent of the pandemic's effect on our operational and financial performance will depend in large part on future developments, which cannot be reasonably estimated at this time.

Future developments include changes to the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact both within and outside the jurisdictions where we operate and the impact on governmental programs.

Due to the inherent uncertainty of the situation, we are unable to predict the likely impact of the COVID-19 pandemic on our future operations, but continually monitor the risk it presents to our business.

For a more detailed discussion see Part I, Item 1 in our Annual Report on Form 10-K for the year ended September 30, 2022.

RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

Our condensed consolidated statement of cash flows for the three months ended December 31, 2021 has been restated for errors made with regard to the cash flow classification of debt issuance costs and debt issuance cost amortization.

Immaterial Correction of Prior Period Financial Statements

Subsequent to the issuance of the Company's financial statements for the quarter ended December 31, 2021, the Company made certain corrections in the condensed consolidated statements of cash flows related to the debt issuance costs associated with our second and third amended and restated credit agreement entered into in November and December 2021, respectively.

We corrected $ 13.4 million of debt issuance cost previously recorded within changes in operating assets and liabilities (net of acquisitions) within the operating activities and correctly presented the cash outflows as payments of debt issuance costs within financing activities.

We also corrected $ 2.3 million of amortization of debt issuance costs previously included in payments on long-term debt within financing activities and changes in operating assets and liabilities (net of acquisitions) within operating activities to amortization within operating activities.

There was no impact to the condensed consolidated balance sheets, condensed consolidated statements of income or condensed consolidated statements of comprehensive income as a result of these corrections.

The Company determined that this restatement was not material to the condensed consolidated financial statements.

EARNINGS PER SHARE

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

Three months ended June 30, Nine months ended June 30,

2022 2021 2022 2021

Three months ended December 31,

Net income $ 5,779 $ 1,187

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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, 2022 and 2021, 939,101 and 994,096 shares outstanding were excluded, respectively.

For the nine months ended June 30, 2022 and 2021, 778,573 and 864,744 were excluded, respectively.

For the three months ended December 31, 2022 and 2021, 234,365 and 365,099 shares outstanding were excluded, respectively.

SELECTED BALANCE SHEET DATA

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Raw materials $ 38,887 $ 39,189

Work in process 2 592

Finished goods 42,104 33,442

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and Level 3 (unobservable inputs that cannot be corroborated by observable market data).

The following tables provide information by level for financial liabilities that are measured at fair value on a recurring basis (in thousands):

Value at Fair Value Measurements Using

Inputs Considered as

June 30, 2022 Level 1 Level 2 Level 3

Contingent consideration on acquired business $ 6,200 $ — $ — $ 6,200

Total liabilities measured at fair value $ 6,200 $ — $ — $ 6,200

Value at Fair Value Measurements Using

Inputs Considered as

September 30, 2021 Level 1 Level 2 Level 3

Contingent consideration on acquired business $ 6,200 $ — $ — $ 6,200

Total liabilities measured at fair value $ 6,200 $ — $ — $ 6,200

In connection with our acquisition of Opengear, Inc.

in December 2019, we agreed to make contingent payments, based upon certain revenue thresholds.

We paid the final installment of $ 10.0 million during the second quarter of fiscal 2021.

In connection with our acquisition of Haxiot, Inc.

("Haxiot") in March 2021, we agreed to make contingent earn-out payments, based upon certain revenue thresholds.

In the fiscal third quarter of fiscal 2021, the preliminary purchase price allocation was updated, including related determination of fair value and income tax implications.

As a result, we reduced contingent consideration by $ 2.1 million in the third fiscal quarter of 2021.

The fair value of the remaining liability for contingent consideration for the acquisition of Haxiot was $ 5.9 million at June 30, 2022.

In connection with our acquisition of Ctek, Inc.

("Ctek") in July 2021, we agreed to make contingent earn-out payments, based upon certain revenue thresholds.

The fair value of the remaining liability for contingent consideration for the acquisition of Ctek was $ 0.3 million at June 30, 2022.

There were no assets or liabilities that are measured at fair value on a recurring basis as of December 31, 2022 or September 30, 2022.

FAIR VALUE MEASUREMENTS (CONTINUED)

The following table presents a reconciliation of the contingent consideration liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):

Three months ended June 30, Nine months ended June 30,

2022 2021 2022 2021

Three months ended December 31,

Fair value at beginning of period $ — $ 6,200

Contingent consideration recognized for acquired business — — — 8,000

Contingent consideration payments — — — ( 10,000 )

Change in fair value of contingent consideration — —

Fair value at end of period $ — $ 6,200

In connection with our acquisition of Haxiot, Inc.

("Haxiot") in March 2021, we agreed to make contingent earn-out payments, based upon certain revenue thresholds.

The fair value of the remaining liability for contingent consideration for the acquisition of Haxiot was $ 0.0 million and $ 5.9 million at December 31, 2022 and 2021, respectively.

In connection with our acquisition of Ctek, Inc.

("Ctek") in July 2021, we agreed to make contingent earn-out payments, based upon certain revenue thresholds.

The fair value of the remaining liability for contingent consideration for the acquisition of Ctek was $ 0.0 million and $ 0.3 million at December 31, 2022 and 2021, respectively.

The change in fair value of contingent consideration reflects our estimates of the probabilities of achieving the relevant targets and is discounted based on our estimated discount rate.

The fair value of the contingent consideration at June 30, 2022 is based on the probability of achieving the specified revenue thresholds for Haxiot and Ctek.

The fair value of the contingent consideration at December 31, 2022 is based on the probability of achieving the specified revenue thresholds for Ctek.

As of December 31, 2022, contingent consideration associated with Ctek remains subject to future performance through December 31, 2023.

GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Amortizable intangible assets were (in thousands):

June 30, 2022 September 30, 2021

December 31, 2022 September 30, 2022

amount Accum.

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Total $ 435,739 $ ( 140,076 ) $ 295,663 $ 435,651 $ ( 133,587 ) $ 302,064

Amortization expense was $ 7.0 million and $ 4.1 million for the three months ended June 30, 2022 and 2021, respectively and $ 20.4 million and $ 12.0 million for the nine months ended June 30, 2022 and 2021, respectively.

Amortization expense was $ 6.5 million and $ 6.3 million for the three months ended December 31, 2022 and 2021, 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 2023 and the five succeeding fiscal years is (in thousands):

2022 (three months) $ 6,722

2023 $ 24,996

2024 $ 24,282

2025 $ 20,825

2026 $ 20,593

2027 $ 18,582

2023 (nine months) $ 19,515

GOODWILL AND OTHER INTANGIBLE ASSETS, NET (CONTINUED)

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

Nine months ended June 30, 2022

Three months ended December 31, 2022

Products and Services IoT

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Balance on September 30, 2022 $ 172,931 $ 167,546 $ 340,477

Acquisition — 118,265 118,265

Adjustment 116 ( 631 ) ( 515 )

Foreign currency translation adjustment 998 98 1,096

Balance on June 30, 2022 $ 173,894 $ 167,814 $ 341,708

Balance on December 31, 2022 $ 173,929 $ 167,644 $ 341,573

Goodwill represents the excess of cost over the fair value of net identifiable assets acquired.

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We continue to have two reportable segments, our IoT Products & Services segment and our IoT Solutions segment (see Note 8 ).

Effective with the reorganization announcement on October 7, 2020, our IoT Products & Services business is now structured to include four reporting units under the IoT Products & Services segment, each with a reporting manager:

Our IoT Products & Services business is structured to include four reporting units under the IoT Products & Services segment, each with a reporting manager:

Cellular Routers, Console Servers, OEM Solutions and Infrastructure Management.

We had four reporting units along with our IoT Solutions segment that were tested individually for impairment during our third quarter fiscal 2021 annual impairment test.

Following our acquisition of Ventus in November, 2021, we have two reporting units within our IoT Solutions segment in addition to the four reporting units included in IoT Products & Services.

Following our acquisition of Ventus in November 2021, we have two reporting units within our IoT Solutions segment.

Each of these segments was tested individually for impairment during our annual impairment test completed in the third fiscal quarter of fiscal 2022.

Assumptions and estimates to determine fair values under the income and market approaches are complex and often subjective.

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Changes in circumstances or a potential event could negatively affect the estimated fair values.

If our future operating results do not meet current forecasts or

GOODWILL AND OTHER INTANGIBLE ASSETS, NET (CONTINUED)

if we experience a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of one or more of our reporting units, we may be required to record future impairment charges for goodwill.

If our future operating results do not meet current forecasts or if we experience a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of one or more of our reporting units, we may be required to record future impairment charges for goodwill.

Results of our Fiscal 2022 Annual Impairment Test

As of June 30, 2022, we had a total of $ 32.7 million of goodwill for the Enterprise Routers reporting unit, $ 57.1 million of goodwill for the Console Servers reporting unit, $ 63.7 million of goodwill for the OEM Solutions reporting unit, $ 20.4 million of goodwill for the Infrastructure Management reporting unit, $ 49.5 million of goodwill for the SmartSense reporting unit and $ 118.3 million of goodwill for the Ventus.

At June 30, 2022, the fair value of goodwill exceeded the carrying value for all six reporting units.

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This loan replaced our syndicated senior secured credit agreement with BMO that was entered into on March 15, 2021 and replaced the remaining balance of our revolver with this new term loan.

This prior agreement provided us with committed credit facilities ("Prior Credit Facility") consisting of a $ 200 million revolving loan.

This prior agreement provided us with a committed credit facility ("Prior Credit Facility") consisting of a $ 200 million revolving loan.

INDEBTEDNESS (CONTINUED)

On December 22, 2021, Digi entered into a third amended and restated credit agreement with BMO.

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In addition to paying interest on the outstanding balance under the Credit Facility, we are required to pay a commitment fee on the non-utilized commitments thereunder which is also reported in interest expense.

Our weighted average interest rate at June 30, 2022 was 6.85 %.

Digi elected an interest period of one month for the months of December 2021 through April 2022 and a period of six months effective May 1, 2022.

Following the expiration of the election on October 31, 2022, Digi elected an interest period of one month, effective on November 1, 2022 and elected the same period on December 1, 2022.

Our weighted average interest rate at December 31, 2022 was 6.02 %.

The debt issuance costs and remaining balance under the Prior Credit Facility totaled $ 2.3 million at November 1, 2021.

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Digi incurred an additional $ 11.7 million and $ 1.7 million in debt issuance costs relating to the November 1, 2021 and December 22, 2021 amendments, respectively.

These amounts will be amortized over the term of the amended loan and reported in interest expense.

These amounts are being amortized over the term of the amended loan and reported in interest expense.

The Term Loan is payable in quarterly installments, with the balance remaining due at November 2, 2028.

The Revolving Loan is due in a lump sum payment at maturity on November 2, 2028, if any amounts are drawn.

The fair value of the Term Loan and Revolving Loan approximated carrying value at June 30, 2022.

Digi made early payments against the term loan of $ 50 million in December 2021, $ 11.3 million in March 2022 and $ 20 million in June 2022.

INDEBTEDNESS (CONTINUED)

The following table is a summary of our long-term indebtedness at June 30, 2022 and September 30, 2021 (in thousands):

Balance at June 30, 2022 Balance at September 30, 2021

Revolving Loan $ — $ 48,118

The fair value of the Term Loan and Revolving Loan approximated carrying value at December 31, 2022.

Digi made early payments against the term loan of $ 50 million in December 2021.

The following table is a summary of our long-term indebtedness at December 31, 2022 and September 30, 2022 (in thousands):

Balance on December 31, 2022 Balance on September 30, 2022

Term loan $ 245,625 $ 250,000

Total loans 268,748 48,118

Less unamortized issuance costs ( 11,534 ) ( 12,029 )

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Total long-term debt, net of current portion $ 218,568 $ 222,448

The following table is a summary of future maturities of our aggregate long-term debt at June 30, 2022 (in thousands):

INDEBTEDNESS (CONTINUED)

The following table is a summary of future maturities of our aggregate long-term debt at December 31, 2022 (in thousands):

Fiscal year Amount

2022 (three months) $ 4,375

2023 (nine months) $ 13,125

Total long-term debt $ 245,625

Covenants and Security Interest

The agreements governing the Revolving Loan Facility contains a number of covenants.

The agreements governing the Revolving Loan Facility contain a number of covenants.

Among other provisions, these covenants require us to maintain a certain financial ratio (net leverage ratio and minimum fixed charge ratio).

At June 30, 2022, we had no amounts drawn on the Revolving Loan Facility.

At December 31, 2022, we had no amounts drawn on the Revolving Loan Facility.

Amounts borrowed under the Credit Facility are secured by substantially all of our assets.

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IoT Products & Services and IoT Solutions.

Effective with the reorganization announcement on October 7, 2020, our IoT Products & Services business is now structured to include four operating segments, each with a segment manager.

These four operating segments include:

Our IoT Products & Services business is structured to include four operating segments, each with a segment manager.

These four operating segments are:

• Cellular Routers - box devices (fully enclosed) that provide connectivity typically in a place where the device can be plugged in exclusively using cellular communications.

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This operating segment has some products that do not use cellular communications, but a large part of this segment does use cellular communications.

SEGMENT INFORMATION (CONTINUED)

Following the acquisition of Ventus on November 1, 2021, IoT Solutions is now comprised of two operating segments:

• SmartSense - offers wireless temperature and other condition-based monitoring services for perishable goods such as food or medicine, as well as employee task management services.

• Ventus - provides MNaaS solutions that simplify the complexity of enterprise wide area network ("WAN") connectivity via wireless and fixed line solutions.

• Ventus - provides managed network as a service ("MNaaS") solutions that simplify the complexity of enterprise wide area network ("WAN") connectivity via wireless and fixed line solutions.

The operating segments included in each reportable segment have similar qualitative and quantitative factors which allow us to aggregate them under each reportable segment.

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The quantitative factors include similar operating margins.

Our CODM reviews and makes business decisions which includes a primary review of operating income but also includes gross profit.

Following the October 2020 reorganization, the shared general and administrative costs began being allocated to each operating segment.

As a result, our disclosed measure of segment operating income has been updated for all periods presented to conform with this change.

Our CEO is our Chief Operating Decision Maker and reviews and makes business decisions using consolidated information including operating income and gross profit.

SEGMENT INFORMATION (CONTINUED)

Summary operating results for each of our segments were (in thousands):

Three months ended June 30, Nine months ended June 30,

2022 2021 2022 2021

Three months ended December 31,

IoT Products & Services $ 84,342 $ 65,744

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Total expended for property, plant and equipment was (in thousands):

Nine months ended June 30,

Three months ended December 31,

IoT Products & Services $ 637 $ 454

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Total expended for property, plant and equipment $ 963 $ 454

* Excluded from this amount is $ 1,742 and $ 1,624 of transfers of inventory to property plant and equipment for subscriber assets for the nine months ended June 30, 2022 and 2021, respectively.

SEGMENT INFORMATION (CONTINUED)

* Excluded from this amount is $ 1,512 and $ 699 of transfers of inventory to property plant and equipment for subscriber assets for the three months ended December 31, 2022 and 2021, respectively.

Total assets for each of our segments were (in thousands):

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The following table summarizes our revenue by geographic location of our customers (in thousands):

Three months ended June 30, Nine months ended June 30,

2022 2021 2022 2021

Three months ended December 31,

North America, primarily the United States $ 83,465 $ 66,243

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The following table summarizes our revenue by the timing of revenue recognition (in thousands):

Three months ended June 30, Nine months ended June 30,

2022 2021 2022 2021

Three months ended December 31,

Transferred at a point in time $ 85,486 $ 66,535

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Contract Balances

Contract Assets

Contract assets consist of subscriber assets.

These subscriber assets relate to fees in certain contracts that we charge our customers so they can begin using equipment.

In these cases, we retain the ownership of the equipment that the customer uses.

The total net book value of subscriber assets of $ 15.8 million and $ 1.9 million as of June 30, 2022 and September 30, 2021, respectively, are included in property, equipment and improvements, net.

The June 30, 2022 balance includes $ 14.1 million acquired in the acquisition of Ventus.

Depreciation expense for these subscriber assets, which is included in cost of sales, was $ 0.4 million and $ 0.5 million for the three months ended June 30, 2022 and June 30, 2021, respectively and $ 2.3 million and $ 1.4 million for the nine months ended June 30, 2022 and June 30, 2021, respectively.

Contract Related Assets

Our contract related assets consist of subscriber assets that are equipment that we provide to customers pursuant to subscription-based contracts.

In these cases, we retain the ownership of the equipment that the customer uses and charge them subscription fees to receive our end-to end solutions.

The total net book value of subscriber assets of $ 17.1 million and $ 16.5 million as of December 31, 2022 and September 30, 2022, respectively, are included in property, equipment and improvements, net.

Depreciation expense for these subscriber assets, which is included in cost of sales, was $ 0.9 million and $ 0.8 million for the three months ended December 31, 2022 and 2021, respectively.

We depreciate the cost of this equipment over its useful life.

Contract Assets

Contract assets at Digi consist of products and services that have been fulfilled, but for which revenue has not yet been recognized.

Our contract asset balances were immaterial as of December 31, 2022 and 2021.

Contract Liabilities

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Contract liabilities consist of unearned revenue related to annual or multi-year contracts for subscription services and related implementation fees, as well as product sales that have been invoiced, but not yet fulfilled.

REVENUE (CONTINUED)

Our contract liabilities were $ 22.6 million and $ 14.8 million at June 30, 2022 and 2021, respectively.

The June 30, 2022 balance includes $ 2.1 million assumed from the Ventus acquisition completed in November 2021.

Of the $ 24.8 million and $ 16.4 million balances as of March 31, 2022 and 2021, Digi recognized $ 5.4 million and $ 4.8 million in the three months ended June 30, 2022 and 2021, respectively.

Of the $ 15.5 million and $ 9.3 million balances as of September 30, 2021 and 2020, Digi recognized $ 12.0 million and $ 8.3 million in the nine months ended June 30, 2022 and 2021, respectively.

Our contract liabilities were $ 23.0 million and $ 24.3 million at December 31, 2022 and 2021, respectively.

Of the $ 21.6 million and $ 15.5 million balances as of September 30, 2022 and 2021, Digi recognized $ 6.1 million and $ 4.9 million as revenue in the three months ended December 31, 2022 and 2021, respectively.

Remaining Transaction Price

Transaction price allocated to the remaining performance obligations represents contracted revenue that has not been recognized.

This includes unearned revenue and unbilled amounts that will be recognized as revenue in future periods.

As of June 30, 2022, approximately $ 22.6 million of revenue is expected to be recognized from remaining performance obligations.

This includes unearned revenue and unbilled amounts that will be recognized as revenue in future periods so long as we perform our obligations.

As of December 31, 2022, approximately $ 23.0 million of revenue is expected to be recognized from remaining performance obligations.

We expect to recognize revenue on approximately $ 20.4 million of remaining performance obligations over the next twelve months .

Revenue from the remaining performance obligations we expect to recognize over a range of two to seven years .

Our income tax benefit was $ 1.5 million for the nine months ended June 30, 2022.

Included in this benefit was a net tax benefit discretely related to the nine months ended June 30, 2022 of $ 2.7 million.

This benefit primarily was the result of excess tax benefits recognized on stock compensation.

Income tax expense was $ 0.2 million for the nine months ended June 30, 2021.

Included in this expense was a net tax benefit discretely related to the nine months ended June 30, 2021 of $ 1.0 million.

Revenue from the remaining performance obligations we expect to recognize over a range of two to five years .

Our income tax expense was $ 0.2 million for the three months ended December 31, 2022.

Included in this expense was a net tax benefit discretely related to the three months ended December 31, 2022 of $ 1.2 million.

This benefit primarily was the result of excess tax benefits recognized on stock compensation.

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Expiration of statute of limitations ( 649 )

Prior year income tax positions ( 10 )

Unrecognized tax benefits as of June 30, 2022 $ 2,829

The total amount of unrecognized tax benefits at June 30, 2022 that, if recognized, would affect our effective tax rate was $ 2.7 million, after considering the impact of interest and deferred benefit items.

Unrecognized tax benefits as of December 31, 2022 $ 2,667

The total amount of unrecognized tax benefits at December 31, 2022 that, if recognized, would affect our effective tax rate was $ 2.6 million, after considering the impact of interest and deferred benefit items.

We expect that the total amount of unrecognized tax benefits will decrease by approximately $ 0.3 million over the next 12 months.

PRODUCT WARRANTY OBLIGATION

The following tables summarize the activity associated with the product warranty accrual (in thousands) and is included on our condensed consolidated balance sheets within current liabilities:

Balance at Warranties Settlements Balance at

Period April 1 issued made June 30

Three months ended June 30, 2022 $ 690 $ 100 $ ( 38 ) $ 752

Three months ended June 30, 2021 $ 923 $ 16 $ ( 146 ) $ 793

The following tables summarize the activity associated with the product warranty accrual (in thousands) and is included on our condensed consolidated balance sheets within other current liabilities:

Balance at Warranties Settlements Balance at

Period October 1 issued made June 30

Nine months ended June 30, 2022 $ 707 $ 295 $ ( 250 ) $ 752

Nine months ended June 30, 2021 $ 942 $ 205 $ ( 354 ) $ 793

Period September 30 issued made December 31

Three months ended December 31, 2022 $ 886 $ 90 $ ( 54 ) $ 922

Three months ended December 31, 2021 $ 707 $ 71 $ ( 120 ) $ 658

All of our leases are operating leases and primarily consist of leases for office space.

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We generally use a collateralized incremental borrowing rate based on information available at the commencement date, including the lease term, in determining the present value of future payments.

When determining our right-of-use asset, we generally do not include options to extend or terminate the lease unless it is reasonably certain that the option will be exercised.

When determining our right-of-use assets, we generally do not include options to extend or terminate the lease unless it is reasonably certain that the option will be exercised.

Our leases typically require payment of real estate taxes and common area maintenance and insurance.

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We recognize the related rent expense on a straight-line basis from the commencement date to the end of the lease term.

LEASES (CONTINUED)

The following table shows the supplemental balance sheet information related to our leases (in thousands):

Balance Sheet Location June 30, 2022 September 30, 2021

Balance Sheet Location December 31, 2022 September 30, 2022

Operating leases Operating lease right-of-use assets $ 14,897 $ 15,299

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Total lease liabilities $ 19,691 $ 20,174

LEASES (CONTINUED)

The following were the components of our lease cost which is recorded in both cost of goods sold and selling, general and administrative expense (in thousands):

Three months ended June 30, Nine months ended June 30,

2022 2021 2022 2021

Three months ended December 31,

Operating lease cost $ 904 $ 937

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Total lease cost $ 1,238 $ 1,238

The following table presents supplemental information related to operating leases (in thousands):

Nine months ended June 30,

Cash paid for amounts included in the measurement of operating lease liabilities $ — $ 1,784

Right-of-use assets acquired in Ventus acquisition 699 —

Right-of-use assets obtained in exchange for new operating lease liabilities — 3,919

Non-cash tenant improvement allowance $ — $ 1,000

At June 30, 2022 the weighted average remaining lease term of our operating leases was 8.6 years and the weighted average discount rate for these leases was 2.8 %.

The table below reconciles the undiscounted cash flows for each of the first five years as well as all the remaining years to the operating lease liabilities recorded on the condensed consolidated balance sheet as of June 30, 2022 (in thousands):

In November 2021, Digi acquired $ 0.9 million in right of-use assets and assumed $ 0.9 million in lease liabilities from the acquisition of Ventus that are included in the balances at December 31, 2021.

At December 31, 2022 the weighted average remaining lease term of our operating leases was 6.8 years and the weighted average discount rate for these leases was 3.4 %.

Fiscal year Amount

2022 (three months) $ 992

2023 (nine months) $ 2,833

Thereafter 5,269

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COMMITMENTS AND CONTINGENCIES

We lease certain of our buildings and equipment under noncancelable lease agreements.

We lease certain of our buildings and equipment under non-cancelable lease agreements.

Please refer to Note 12 to our condensed consolidated financial statements for additional information.

In the normal course of business, we are presently, and expect in the future to be, subject to various claims and litigation with third parties such as non-practicing intellectual property entities as well as customers, vendors and/or former employees.

In the normal course of business, we presently are, and expect in the future to be, subject to various claims and litigation with third parties such as non-practicing intellectual property entities as well as customers, vendors and/or former employees.

There can be no assurance that any claims by third parties, if proven to have merit, will not materially adversely affect our business, liquidity or financial condition.

STOCK-BASED COMPENSATION

Stock-based awards were granted under the 2021 Omnibus Incentive Plan (as amended and restated, the "2021 Plan") beginning January 29, 2021.

Prior to that date, such awards made in fiscal 2021 were granted under the 2020 Omnibus Incentive Plan (the "2020 Plan").

Upon stockholder approval of the 2021 Plan on January 29, 2021, we ceased granting awards under the 2020 Plan.

On January 28, 2022, the stockholders approved the amendment and restatement of the 2021 Plan.

Stock-based awards granted in the first fiscal quarter of 2023 were granted under the amended and restated 2021 Omnibus Incentive Plan (the "2021 Plan").

Such awards made in the first quarter of fiscal 2022 were granted under the 2021 Plan before it was amended and restated at our annual meeting in January, 2022.

Shares subject to awards under the 2021 Plan or any prior plans that are forfeited, canceled, returned to us for failure to satisfy vesting requirements, settled in cash or otherwise terminated without payment also will be available for grant under the 2021 Plan.

The authority to grant options under the 2021 Plan and set other terms and conditions rests with the Compensation Committee of the Board of Directors.

The 2021 Plan authorizes the issuance of up to 2,400,000 common shares in connection with awards of stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based full value awards or other stock-based awards.

Eligible participants include our employees, our affiliates, non-employee directors of our Company and any consultant or advisor who is a natural person and provides services to us or our affiliates.

Options that have been granted under the 2021 Plan typically vest over a four-year period and will expire if unexercised after seven years from the date of grant.

Restricted stock unit awards ("RSUs") that have been granted to directors typically vest in one year .

RSUs that have been granted to executives and employees typically vest in January over a four-year period.

Performance stock unit awards ("PSUs") that have been granted to an executive will vest based on achievement of a cumulative adjusted earnings per share metric measured over a three-year period.

Share-based compensation expenses recorded for this performance award is reevaluated at each reporting period based on the probability of achievement of the goal.

The 2021 Plan is scheduled to expire on January 28, 2032.

Options under the 2021 Plan can be granted as either incentive stock options or non-statutory stock options.

The exercise price of options and the grant date price of RSUs and PSUs is determined by our Compensation Committee but will not be less than the fair market value of our common stock based on the closing price as of the date of grant.

Upon exercise of options or settlement of vested restricted stock units or performance stock units, we issue new shares of stock.

As of June 30, 2022, there were approximately 1,757,566 shares available for future grants under the 2021 Plan.

Cash received from the exercise of stock options was $ 6.7 million and $ 7.0 million for the nine months ended June 30, 2022 and June 30, 2021, respectively.

As of December 31, 2022, there were approximately 1,209,045 shares available for future grants under the 2021 Plan.

Cash received from the exercise of stock options was $ 0.9 million and $ 4.2 million for the three months ended December 31, 2022 and 2021, respectively.

Our equity plans and corresponding forms of award agreements generally have provisions allowing employees to elect to satisfy tax withholding obligations through the delivery of shares.

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Tax withholding obligations are otherwise fulfilled by the employee paying cash to us for the withholding.

During the nine months ended June 30, 2022 and 2021, our employees forfeited 96,860 shares and 109,516 shares, respectively, in order to satisfy respective withholding tax obligations of $ 2.2 million and $ 2.0 million, respectively.

During the three months ended December 31, 2022 and 2021, our employees forfeited 71,951 shares and 611,415 shares, respectively, in order to satisfy respective withholding tax obligations of $ 3.0 million and $ 6.0 million, respectively.

We sponsor an Employee Stock Purchase Plan as amended and restated as of December 10, 2019, October 29, 2013, December 4, 2009 and November 27, 2006 (the "ESPP"), covering all domestic employees with at least 90 days of continuous service and who are customarily employed at least 20 hours per week.

The ESPP allows 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 ESPP, ratified by our stockholders on January 29, 2020, increased the total number of shares to 3,425,000 that may be purchased under the plan.

ESPP contributions by employees were $ 1.1 million and $ 0.9 million for the nine months ended June 30, 2022 and June 30, 2021, respectively.

Pursuant to the ESPP, 60,481 and 61,302 common shares were issued to employees during the nine months ended June 30, 2022 and June 30, 2021, respectively.

The most recent amendments to the ESPP, ratified by our stockholders on January 29, 2020, increased the total number of shares to 3,425,000 that may be purchased under the ESPP.

ESPP contributions by employees were $ 0.6 million and $ 0.3 million for the three months ended December 31, 2022 and 2021, respectively.

Pursuant to the ESPP, 19,683 and 17,936 common shares were issued to employees during the three months ended December 31, 2022 and 2021, respectively.

Shares are issued under the ESPP from treasury stock.

As of June 30, 2022, 572,592 common shares were available for future issuances under the ESPP.

STOCK-BASED COMPENSATION (CONTINUED)

As of December 31, 2022, 533,165 common shares were available for future issuances under the ESPP.

The following table shows stock-based compensation expense that is included in the consolidated results of operations (in thousands):

Three months ended June 30, Nine months ended June 30,

2022 2021 2022 2021

Three months ended December 31,

Cost of sales $ 142 $ 86

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Stock-based compensation after income taxes $ 2,269 $ 1,587

STOCK-BASED COMPENSATION (CONTINUED)

Stock Options

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Options Outstanding Weighted Average Exercise Price Weighted Average Contractual Term (in years) Aggregate Intrinsic Value (1)

Balance at September 30, 2021 2,952 $ 13.20

Balance on September 30, 2022 1,790 $ 17.29

Granted 64 40.80

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Forfeited / Canceled ( 2 ) 14.31

Balance on June 30, 2022 2,042 $ 16.35 4.7 $ 11,887

Exercisable at June30, 2022 984 $ 13.74 3.5 $ 10,320

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $ 24.22 as of June 30, 2022, which would have been received by the option holders had all option holders exercised their options as of that date.

Balance on December 31, 2022 1,788 $ 18.23 4.6 $ 15,900

Exercisable on December 31, 2022 965 $ 15.30 3.7 $ 10,851

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $ 36.55 as of December 31, 2022, which would have been received by the option holders had all option holders exercised their options as of that date.

The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price.

The total intrinsic value of all options exercised during the nine months ended June 30, 2022 was $ 15.6 million and during the nine months ended June 30, 2021 was $ 5.4 million.

The total intrinsic value of all options exercised during the three months ended December 31, 2022 and 2021 was $ 1.7 million and $ 13.3 million, respectively.

The following table 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:

Nine months ended June 30,

Three months ended December 31,

Weighted average per option grant date fair value $ 19.98 $ 10.23

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Expected dividend yield — —

STOCK-BASED COMPENSATION (CONTINUED)

The fair value of each option award granted during the periods presented was estimated using the Black-Scholes option valuation model that uses the assumptions noted in the above table.

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Treasury bond rate in effect at the time of the grant whose maturity equals the expected term of the option.

As of June 30, 2022, the total unrecognized compensation cost related to non-vested stock options was $ 8.0 million and the related weighted average period over which it is expected to be recognized is approximately 1.5 years.

As of December 31, 2022, the total unrecognized compensation cost related to non-vested stock options was $ 7.6 million and the related weighted average period over which it is expected to be recognized is approximately 2.1 years.

STOCK-BASED COMPENSATION (CONTINUED)

Non-vested Stock Units

The following table presents a summary of our non-vested restricted stock and performance stock units as of June 30, 2022 and changes during the nine months then ended (in thousands, except per common share amounts):

The following table presents a summary of our non-vested restricted stock units and performance stock units as of December 31, 2022 and changes during the three months then ended (in thousands, except per common share amounts):

Number of Awards Weighted Average Grant Date Fair Value Number of Awards Weighted Average Grant Date Fair Value

Nonvested at September 30, 2021 812 $ 15.72 18 $ 25.15

Nonvested on September 30, 2022 742 $ 19.14 27 $ 22.69

Granted 415 40.68 113 40.66

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Canceled ( 6 ) 24.55 — —

Nonvested at June 30, 2022 769 $ 18.71 27 $ 22.69

As of June 30, 2022, the total unrecognized compensation cost related to non-vested stock units was $ 11.6 million.

Nonvested on December 31, 2022 969 $ 28.60 135 $ 37.72

As of December 31, 2022, the total unrecognized compensation cost related to non-vested stock units was $ 30.2 million.

The related weighted average period over which this cost is expected to be recognized is approximately 2.5 years.

SUBSEQUENT EVENTS

On January 27, 2023 , our shareholders approved an amended and restated 2021 Omnibus Incentive Plan.

This amended plan became effective on January 28, 2023 and authorized the issuance of an additional 1,100,000 shares.

This plan is now scheduled to expire on January 27, 2033 .

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements