What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-03 compared with 2022-08-05 · 89 added, 153 removed, 148 unchanged (62% of the section changed)

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Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions.

Among others, these include risks related to the ongoing supply chain and transportation challenges impacting businesses globally, the ongoing COVID-19 pandemic and efforts to mitigate the same, risks related to ongoing inflationary pressures as well as present concerns about a potential recession and the ability of companies like us to operate a global business in such conditions, risks arising from the present war in Ukraine, the highly competitive market in which our company operates, rapid changes in technologies that may displace products sold by us, declining prices of networking 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 in a commercially accepted manner, potential liabilities that can arise if any of our products have design or manufacturing defects, our ability to integrate and realize the expected benefits of acquisitions such as our recently completed acquisition of Ventus, our ability to defend or settle satisfactorily any litigation, uncertainty in global economic conditions and economic conditions within particular regions of the world which could negatively affect product demand and the financial solvency of customers and suppliers, the impact of natural disasters and other events beyond our control that could negatively impact our supply chain and customers, potential unintended consequences associated with restructuring, reorganizations or other similar business initiatives that may impact our ability to retain important employees or otherwise impact our operations in unintended and adverse ways, the ability to achieve the anticipated benefits and synergies associated with acquisitions or divestitures and changes in our level of revenue or profitability 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, our Annual Report on Form 10-K for the year ended September 30, 2021, this filing on Form 10-Q and other filings, could cause our actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf.

Among others, these include risks related to the ongoing supply chain and transportation challenges impacting businesses globally, the ongoing COVID-19 pandemic and efforts to mitigate the same, risks related to ongoing inflationary pressures as well as present concerns about a potential recession and the ability of companies like us to operate a global business in such conditions, risks arising from the present war in Ukraine, the highly competitive market in which our company operates, rapid changes in technologies that may displace products sold by us, declining prices of networking 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 in a commercially accepted manner, potential liabilities that can arise if any of our products have design or manufacturing defects, our ability to integrate and realize the expected benefits of acquisitions, our ability to defend or settle satisfactorily any litigation such as, but not limited to, claims regarding intellectual property infringement that we face from time to time, uncertainty in global economic conditions and economic conditions within particular regions of the world which could negatively affect product demand and the financial solvency of customers and suppliers, the impact of natural disasters and other events beyond our control that could negatively impact our supply chain and customers, potential unintended consequences associated with restructuring, reorganizations or other similar business initiatives that may impact our ability to retain important employees or otherwise impact our operations in unintended and adverse ways, risks related to cybersecurity events, the potential for issues repaying outstanding debt if we experience a downturn in our business or encounter unexpected liabilities, and changes in our level of revenue or profitability 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 set forth in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended September 30, 2022, this filing on Form 10-Q and other filings, could cause our actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf.

Many of such factors are beyond our ability to control or predict.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.

The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, the disclosure of contingent assets and liabilities and the values of purchased assets and assumed liabilities in acquisitions.

We base our estimates on historical experience and various other assumptions that are believed to 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 not readily apparent from other sources.

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.

The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, the disclosure of contingent assets and liabilities and the values of purchased assets and assumed liabilities in acquisitions.

We base our estimates on historical experience and various other assumptions that we believed to 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 not readily apparent from other sources.

Actual results may differ from these estimates.

A description of our critical accounting policies and estimates was provided in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.

Results of our Fiscal 2022 Annual Impairment Test

Our goodwill impairment test as of June 30, 2022 indicated no impairment.

SmartSense and Ventus fair values exceeded carrying values by less than 10%.

We will continue to monitor potential impacts that could potentially affect our cash flows and market capitalization.

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

They can be affected by a variety of factors.

These include external factors such as industry and economic trends.

They also include internal factors such as changes in our business strategy and our internal forecasts.

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 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.

We are a leading global provider of business and mission-critical IoT connectivity products, services and solutions.

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In addition, this segment provides our customers with a device management platform and other professional services to enable customers to capture and manage data from devices connected to networks.

In the past this segment has benefited from significant one-time project based deployments.

During the pandemic we saw a decrease in proposals for such projects.

Recently we have seen some resumption of opportunities to make these project based sales, most notably in the areas mass transit and smart cities.

While there is no assurance we will be chosen for any such deployments, we view this renewed activity as a positive development for this segment.

Demand generally has been strong for many products in this segment during fiscal 2022 and has driven record sales bookings and backlogs that we are constrained to meet at present because of supply chain challenges.

On October 7, 2020, our Board of Directors approved a reorganization of our IoT Products & Services business segment.

The restructuring plan aligned the business segment's organization around product lines, each with a segment manager.

Under this plan, we recorded charges of $1.0 million for employee termination charges and eliminated 19 employment positions primarily in the U.S.

during the first half of fiscal 2021.

We have grouped our products under the following categories:

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

Consequently, the measure of segment operating profit used by our chief operating decision maker ("CODM") changed.

As a result, our disclosed measure of segment operating income has been updated.

For further detail on segment performance, see the Revenue by Segment, Cost of Goods Sold and Gross Profit by Segment and Operating Income sections of this Item 2.

Our IoT Solutions segment primarily consists of our SmartSense by Digi® and Ventus operating segments.

Our IoT Solutions segment primarily consists of our Managed Network-as –a-Service (“MNaaS”) business acquired last year via our acquisition of Ventus Wireless, LLC and affiliated entities (“Ventus”) and our SmartSense by Digi® business.

Ventus is a leader in the provision of MNaaS solutions that simplify the complexity of enterprise wide area network (“WAN”) connectivity for customers.

The Ventus portfolio includes cellular wireless and fixed line WAN solutions for an array of connectivity applications in banking, healthcare, retail, gaming, hospitality and other sectors.

SmartSense offers wireless temperature and other condition-based monitoring services as well as employee task management services.

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food service, healthcare (primarily pharmacies and hospitals) and supply chain.

We initially formed, expanded and enhanced our SmartSense by Digi business through four acquisitions.

Our recent acquisition of Ventus makes us a leader in the provision of MNaaS solutions that simplify the complexity of enterprise wide area network WAN connectivity for our customers and provides us with a significant base of high margin subscription based recurring revenue.

Ventus’s portfolio includes cellular wireless and fixed line WAN solutions for an array of connectivity applications in banking, healthcare, retail, gaming, hospitality and other sectors.

Given our belief in the potential of this segment, we are making targeted investments in this segment designed to enhance its performance over time.

We compete for customers on the basis of existing and 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.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

In fiscal 2023, our key operating objectives include:

• continued growth of our SmartSense by Digi ® and Ventus businesses that are the base of our IoT Solutions segment;

• delivering growth within our IoT Products & Services segment through new product introductions;

• integration of our recently acquired Ventus business.

• continuing to transition to complete solutions with software and service offerings included with our products, as this drives Annualized Recurring Revenue ("ARR"), which provides more predictable and higher margin revenues;

• delivering a higher level of customer service across our businesses.

We utilize many financial, operational, and other metrics to evaluate our financial condition and financial performance.

Below we highlight the metrics for the third quarter of fiscal 2022 that we feel are most important in these evaluations, with comparisons to the third quarter of fiscal 2021:

Below we highlight the metrics for the first quarter of fiscal 2023 that we feel are most important in these evaluations, with comparisons to the first quarter of fiscal 2022:

• Consolidated revenue was $109 million, an increase of 30%.

• Consolidated gross profit was $61.5 million, an increase of 28%.

• Consolidated operating income was $10.0 million, an increase of 148%.

• Gross profit margin was 56.3% versus 56.8%.

Gross profit margin excluding amortization was 57.3% compared to 58.5%.

• Consolidated operating income was $12.0 million, an increase of 215%.

• Net income was $5.8 million, an increase of 387%.

• Diluted earnings per share was $0.16, compared to $0.03, an increase of 433%.

• Adjusted EBITDA was $21 million, an increase of 82%.

• Adjusted net income and adjusted net income per share was $17.8 million, or $0.48 per diluted share, compared to $12.7 million, or $0.36 per diluted share, an increase of 33%.

Recent Events Impacting Third Quarter Results

Acquisition of Ventus

On November 1, 2021, we acquired Ventus for approximately $350 million in cash.

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

(see Note 7 ).

In the first quarter of fiscal 2022, the preliminary purchase price allocation was recorded, including related determinations of fair value and income tax implications.

In the third quarter of fiscal 2022, we recorded a purchase price allocation adjustment to adjust for new information.

As a result, we have $118 million of goodwill and $211 million of other intangibles on our condensed consolidated balance sheets at June 30, 2022.

The results of operations following the acquisition date are now included in our 2022 results within our IoT Solutions segment.

• Adjusted EBITDA was $23 million, an increase of 38%.

• ARR, was $96 million at quarter end, an increase of 8%.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

CONSOLIDATED RESULTS OF OPERATIONS

The following table sets forth selected information derived from our interim condensed consolidated statements of operations:

Three months ended June 30, % incr.

Nine months ended June 30, % incr.

($ in thousands) 2022 2021 (decr.) 2022 2021 (decr.)

Three months ended December 31, % incr.

($ in thousands) 2022 2021 (decr.)

Revenue $ 109,306 100.0 % $ 84,257 100.0 % 29.7 %

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Operating income 11,963 10.9 3,799 4.5 214.9

Other expense, net (5,392) (5.2) (482) (0.6) NM (14,716) (5.2) (1,244) (0.5) NM

Income before income taxes 4,582 4.4 3,536 4.5 29.6 6,621 2.3 5,998 2.6 10.4

Other expense, net (5,954) (5.4) (5,000) (5.9) 19.1

Income (loss) before income taxes 6,009 5.5 (1,201) (1.4) NM

Income tax expense (benefit) 230 0.2 (2,388) (2.8) NM

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NM means not meaningful

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

REVENUE BY SEGMENT

Three months ended June 30, % incr.

Nine months ended June 30, % incr.

($ in thousands) 2022 2021 (decr.) 2022 2021 (decr.)

Three months ended December 31, % incr.

($ in thousands) 2022 2021 (decr.)

IoT Products & Services $ 84,342 77.2 % $ 65,744 78.0 % 28.3 %

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IoT Products & Services

IoT Products & Services revenue increased 19.4% and 11.7% for the three and nine months ended June 30, 2022, respectively, as compared to the same periods in the prior fiscal year.

This primarily was a result of:

• increased sales of console server and cellular products in both periods driven by demand for data center and edge based deployments and increased OEM sales in the third quarter.

This increase was partially offset by:

• decreased sales of infrastructure management products, driven by supply chain challenges.

IoT Products & Services revenue increased 28.3% for the three months ended December 31, 2022, as compared to the same period in the prior fiscal year.

This primarily was a result of increased sales driven by higher demand for OEM, console server and cellular products.

IoT Solutions

IoT Solutions revenue increased 93.7% and 85.9% for the three and nine months ended June 30, 2022, respectively, as compared to the same periods in the prior fiscal year.

This primarily was a result of:

• increased recurring revenue from our November 2021 acquisition of Ventus.

These increases were partially offset by:

• decreased one-time customer implementation sales, due to significant activity from a few large customers in 2021 that did not recur in 2022.

IoT Solutions revenue increased 34.8% for the three months ended December 31, 2022, as compared to the same period in the prior fiscal year.

This primarily was a result of increased sales of both SmartSense and Ventus (acquired in November 2021) offerings.

COST OF GOODS SOLD AND GROSS PROFIT BY SEGMENT

Three months ended June 30, Basis point Nine months ended June 30, Basis point

Below are our segments' cost of goods sold and gross profit as a percentage of their respective total revenue:

Three months ended December 31, Basis point

($ in thousands) 2022 2021 inc.

(decr.) 2022 2021 inc.

Cost of Goods Sold

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Total cost of goods sold $ 47,785 43.7 % $ 36,376 43.2 % 50

Three months ended June 30, Basis point Nine months ended June 30, Basis point

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Three months ended December 31, Basis point

($ in thousands) 2022 2021 inc.

(decr.) 2022 2021 inc.

IoT Products & Services $ 46,021 54.6 % $ 35,675 54.3 % 30

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IoT Product & Services

IoT Products & Services gross profit margin decreased 160 basis points for the three months ended June 30, 2022 as compared to the same period in the prior fiscal year.

This decrease primarily was a result of:

• increased production and distribution costs due to the continuing supply chain challenges, as well as changes in product and customer mix.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

IoT Products & Services gross profit margin decreased 130 basis points for the nine months ended June 30, 2022 as compared to the same period in the prior fiscal year.

This decrease primarily was a result of:

• increased production and distribution costs due to the continuing supply chain challenges, as well as changes in product and customer mix.

IoT Products & Services gross profit margin increased 30 basis points for the three months ended December 31, 2022 as compared to the same period in the prior fiscal year.

This increase primarily was a result of changes in product and customer mix.

IoT Solutions

The IoT Solutions gross profit margin increased 1,530 basis points for the three months ended June 30, 2022 as compared to the same periods in the prior fiscal year.

This increase primarily was a result of:

• increased recurring subscription revenue, from the acquisition of Ventus, which typically has a high gross profit margin.

The IoT Solutions gross profit margin increased 1,330 basis points for the nine months ended June 30, 2022 as compared to the same periods in the prior fiscal year.

This increase primarily was a result of:

• increased recurring subscription revenue, from the acquisition of Ventus, which typically has a high gross profit margin.

The IoT Solutions gross profit margin decreased 380 basis points for the three months ended December 31, 2022 as compared to the same period in the prior fiscal year.

This decrease primarily was a result of increased expenses for inventory reserves.

OPERATING EXPENSES

Below is our operating expenses and operating expenses as a percentage of total revenue:

Three months ended June 30, $ % Nine months ended June 30, $ %

Below are our operating expenses and operating expenses as a percentage of total revenue:

Three months ended December 31, $ %

($ in thousands) 2022 2021 incr.

(decr.) incr.

(decr.) 2022 2021 incr.

(decr.) incr.

Operating Expenses

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General and administrative 16,358 15.0 15,351 18.2 1,007 6.6

Restructuring charge 105 0.1 101 0.1 4 4.0 214 0.1 995 0.4 (781) (78.5)

Total operating expenses $ 49,558 45.3 % $ 44,082 52.3 % $ 5,476 12.4

The $8.9 million increase in operating expenses in the third quarter of fiscal 2022 from the third quarter of fiscal 2021 primarily was the result of:

• incremental operating expenses, primarily from the acquisition of Ventus.

The $19.2 million increase in operating expenses in the first three quarters of fiscal 2022 from the first three quarters of fiscal 2021 primarily was the result of:

• incremental operating expenses from our acquisitions of Haxiot, Ctek and Ventus.

This increase was partially offset by:

• $5.8 million in contingent consideration expenses in prior year and a decrease in restructuring charges.

The $5.5 million increase in operating expenses in the first quarter of fiscal 2023 from the first quarter of fiscal 2022 primarily was the result of incremental operating expenses, primarily from the acquisition of Ventus and investments in SmartSense.

OPERATING INCOME

Operating income was $10.0 million for the three months ended June 30, 2022, compared to $4.0 million for the three months ended June 30, 2021.

Operating income was $21.3 million for the nine months ended June 30, 2022, compared to $7.2 million for the nine months ended June 30, 2021.

IoT Product & Services provided operating income of $10.9 million for the three months ended June 30, 2022 compared to $6.1 million for the three months ended June 30, 2021, an increase of $4.8 million, or 78.3%.

IoT Product & Services provided operating income of $24.0 million for the nine months ended June 30, 2022 compared to $12.0 million for the nine months ended June 30, 2021, an increase of $12.1 million, or 101.2%.

Drivers for the changes in operating income for the both the quarter and year-to-date periods are described above in the revenue, gross profit and operating expenses details.

Operating income was $12.0 million for the three months ended December 31, 2022, compared to $3.8 million for the three months ended December 31, 2021.

IoT Product & Services provided operating income of $12.7 million for the three months ended December 31, 2022 compared to $4.1 million for the three months ended December 31, 2021, an increase of $8.6 million, or 208.1%.

Drivers for the changes in operating income for the period are described above in the revenue, gross profit and operating expenses details.

IoT Solutions had an operating loss of $0.7 million for the three months ended December 31, 2022 compared to an operating loss of $0.3 million for the three months ended December 31, 2021, an increase of $0.4 million, or 127.1%.

Primary drivers for the changes in operating loss for the period included higher inventory reserve expense and our investment in the SmartSense business.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

IoT Solutions had an operating loss of $0.9 million for the three months ended June 30, 2022 compared to an operating loss of $2.1 million for the three months ended June 30, 2021, a decrease of $1.2 million, or 56.5%.

IoT Solutions incurred an operating loss of $2.7 million for the nine months ended June 30, 2022 compared to $4.7 million for the nine months ended June 30, 2021, a decrease of $2.0 million, or 42.5%.

Drivers for the changes in operating loss for the both the quarter and year-to-date periods are described above in the revenue, gross profit and operating expenses details.

Below are our other expenses, net and other expenses, net as a percentage of total revenue:

OTHER EXPENSE, NET

Three months ended June 30, $ % Nine months ended June 30, $ %

Three months ended December 31, $ %

($ in thousands) 2022 2021 incr.

(decr.) incr.

(decr.) 2022 2021 incr.

(decr.) incr.

Other expense, net

Interest income $ 1 — % $ 3 — % $ (2) NM $ 8 — % $ 4 — % $ 4 NM

Interest expense (5,297) (5.1) % (371) (0.5) % (4,926) NM (14,665) (5.2) % (1,019) (0.4) % (13,646) NM

Other expense, net (96) (0.1) % (114) (0.1) % 18 NM (59) — % (229) (0.1) % 170 NM

Total other expense, net $ (5,392) (5.2) % $ (482) (0.6) % $ (4,910) NM $ (14,716) (5.2) % $ (1,244) (0.5) % $ (13,472) NM

NM means not meaningful

Other expense, net, increased $4.9 million and $13.5 million for the three and nine months ended June 30, 2022, respectively, as compared to the same period in the prior fiscal year.

The increase was primarily a result of an increase to our interest expense as we refinanced our revolving loan with a new credit facility in November 2021 and wrote off a portion of the deferred financing fees associated with our prior credit facility to fund the acquisition of Ventus.

(see Note 7 to the condensed consolidated financial statements).

Interest expense, net (5,971) (5.5) % (4,898) (5.8) % (1,073) 21.9

Other expense, net 17 — % (102) (0.1) % 119 (116.7)

Total other expense, net $ (5,954) (5.4) % $ (5,000) (5.9) % $ (954) 19.1

Other expense, net, increased $1.0 million for the three months ended December 31, 2022, as compared to the same period in the prior fiscal year.

The increase was primarily a result of an increase to our interest expense due to an increase in our effective interest rate (see Note 7 to the condensed consolidated financial statements).

See Note 9 to the condensed consolidated financial statements for discussion of income taxes.

KEY BUSINESS METRIC

ARR represents the annualized monthly value of all billable subscription contracts, measured at the end of any fiscal period.

ARR should be viewed independently of revenue and deferred revenue and is not intended to replace or forecast either of these items.

Digi management uses ARR to manage and assess the growth of our subscription revenue business.

We believe ARR is an indicator of the scale of our subscription business.

NON-GAAP FINANCIAL INFORMATION

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Non-GAAP measures are not substitutes for GAAP measures for the purpose of analyzing financial performance.

The disclosure of these measures does not reflect all charges and gains that were actually recognized by Digi.

The disclosure of these measures does not reflect all charges and gains that actually were recognized by Digi.

These non-GAAP measures are not in accordance with, or, an alternative for measures prepared in accordance with GAAP and may be different from non-GAAP measures used by other companies or presented by us in prior reports.

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Management believes that Adjusted EBITDA, defined as EBITDA adjusted for stock-based compensation expense, acquisition-related expenses, restructuring charges and reversals and changes in fair value of contingent consideration is useful to investors to evaluate our core operating results and financial performance because it excludes items that are significant non-cash or non-recurring expenses reflected in the consolidated statements of operations.

We believe that the presentation of Adjusted EBITDA as a percentage of revenue is useful because it provides a reliable and consistent approach to measuring our performance from year to year and in assessing

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

our performance against that of other companies.

We believe this information helps compare operating results and corporate performance exclusive of the impact of our capital structure and the method by which assets were acquired.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Below are reconciliations from GAAP to Non-GAAP information that we feel is important to our business:

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(In thousands)

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

2022 2021 2022 2021

revenue % of total

Three months ended December 31,

revenue % of total

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Stock-based compensation 2,868 2,017

Changes in fair value of contingent consideration — — — 5,772

Restructuring charge 23 109

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Adjusted EBITDA $ 23,364 21.4 % $ 16,970 20.1 %

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Reconciliation of Net Income and Net Income per Diluted Share to

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(In thousands, except per share amounts)

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

2022 2021 2022 2021

Three months ended December 31,

Net income and net income per diluted share $ 5,779 $ 0.16 $ 1,187 $ 0.03

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Stock-based compensation 2,868 0.08 2,017 0.06

Other non-operating income 96 — 114 — 59 — 229 0.01

Other non-operating (expense) income (17) — 102 —

Acquisition expense 381 0.01 3,285 0.09

Changes in fair value of contingent consideration — — — — — — 5,772 0.18

Restructuring charge 23 — 109 —

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(4,869) (0.14) (3,006) (0.08)

Discrete tax benefits (2)

Discrete tax expenses (benefits) (2)

1,192 0.03 (2,175) (0.06)

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(1) The tax effect from the above adjustments assumes an estimated effective tax rate of 18.0% for fiscal 2023 and fiscal 2022 based on adjusted net income.

(2) For the three and nine months ended June 30, 2022 and June 30, 2021, discrete tax benefits primarily are a result of excess tax benefits recognized on stock compensation.

(2) For the three months ended December 31, 2022 and 2021, discrete tax expenses (benefits) primarily are a result of changes in excess tax benefits recognized on stock compensation.

(3) Adjusted net income per diluted share may not add due to the use of rounded numbers.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

LIQUIDITY AND CAPITAL RESOURCES

Historically we have financed our operations and capital expenditures principally with funds generated from operations.

In fiscal 2022 we issued debt to fund our acquisition of Ventus.

Our liquidity requirements arise from our working capital needs, and to a lesser extent, our need to fund capital expenditures to support our current operations and facilitate growth and expansion.

On November 1, 2021, we entered into a second amended and restated credit agreement consisting of a $350 million term loan B secured loan and a $35 million revolving credit facility.

On December 2, 2021, we entered into a third amended and restated credit agreement.

Digi refinanced the Term Loan Facility and Revolving Loan Facility under its existing credit agreement entered into on November 1, 2021, but did not receive any additional proceeds from nor modify the amounts of any facilities or subfacilities contained within that credit agreement.

The credit agreement consists of a $350 million term loan B secured loan and a $35 million revolving credit facility.

The $35 million revolving credit facility, which presently has no outstanding balance, includes a $10 million letter of credit subfacility and $10 million swingline subfacility.

During the first quarter of fiscal 2022, we repaid all outstanding balances under the credit facility entered into on March 21, 2021.

As of June 30, 2022, $35.0 million remained available under the Revolving Loan, which included $10 million available for a letter of credit subfacility and $10 million available under a swingline subfacility, the outstanding amounts of which decrease the available commitment.

As of December 31, 2022, $35.0 million remained available under the Revolving Loan, which included $10 million available for a letter of credit subfacility and $10 million available under a swingline subfacility, the outstanding amounts of which decrease the available commitment.

For additional information regarding the terms of our Credit Facility, including the Revolving Loan and its subfacilities, see Note 7 to our condensed consolidated financial statements.

We expect positive cash flows from operations for the foreseeable future.

Our third fiscal quarter operating cash flows were negatively impacted by changes in operating assets and liabilities (net of acquisitions) that we do not anticipate in future periods.

We believe that our current cash and cash equivalents balances, cash generated from operations and our ability to borrow under our credit facility will be sufficient to fund our business operations and capital expenditures for the next twelve months and beyond.

As follows, our condensed consolidated statements of cash flows for the nine months ended June 30, 2022 and 2021 is summarized:

Nine months ended June 30,

($ in thousands) 2022 2021

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

As follows, our condensed consolidated statements of cash flows for the three months ended December 31, 2022 and 2021 is summarized:

Three months ended December 31,

($ in thousands) Restated (1)

Operating activities $ 2,680 $ 5,877

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

(1) We have restated the condensed consolidated statement of cash flows for the three months ended December 31, 2021.

For additional information, see Note 2 to our condensed consolidated financial statements.

Cash flows from operating activities decreased $3.2 million primarily as a result of:

• an increase in operating assets and liabilities (net of acquisitions) during the period of $34.6 million compared to a decrease of $3.1 million in the nine months ended June 30, 2021, and

• a reduction of $5.8 million in contingent consideration fair value changes from the nine months ended June 30,2021.

These increases were partially offset by:

• increases in depreciation and amortization expenses, the provision for inventory obsolescence and net income.

Cash flows used in investing activities increased $343.8 million almost entirely as a result of:

• an increase of $341.2 million used for acquisitions, primarily related to our November 2021 acquisition of Ventus (see Note 2 to the condensed consolidated financial statements).

Cash flows from financing activities increased $163.7 million primarily as a result of:

• an increase of $350.0 million in proceeds from the Term Loan issued in November 2021.

This increase was partially offset by:

• $73.8 million in proceeds from stock issuance in Q2 2021,

• payments of $45.8 million upon the closing of the Term Loan issued in November 2021 to retire the previous credit facility, and

• an increase in operating assets and liabilities (net of acquisitions) in the three months ended December 31, 2022 of $18.3 million compared to an increase of $10.3 million in the three months ended December 31, 2021 and

• an increase in stock-based compensation expense.

These changes were partially offset by:

• increases in net income and the provision for inventory obsolescence and decreases in the provisions for deferred income tax and bad debt and amortization expense.

Cash flows used in investing activities decreased $347.1 million primarily as a result of:

• no amounts used for the acquisition of businesses in the three months ended December 31, 2022 compared to $347.6 million used for acquisitions in the three months ended December 31, 2021, primarily related to our November 2021 acquisition of Ventus.

Cash flows from financing activities decreased $242.9 million primarily as a result of:

• no proceeds from debt in the first fiscal quarter of 2023 compared to $350.0 million in proceeds from the Term Loan issued in the first fiscal quarter of 2022, and

• a $3.4 million decrease in proceeds from stock issuances.

These changes were partially offset by:

• debt payments of $4.4 million in the first fiscal quarter of 2023 compared to $98.1 million in the first fiscal quarter of 2022 (see Note 7 to the condensed consolidated financial statements),

• a decrease of $13.4 million in debt issuance cost payments, and

• a $3.0 million decrease in taxes paid for net share settlements.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

• early payments of $81.3 million on the new Term Loan issued in November 2021 compared to $15.6 million in debt payments in fiscal 2021 on the previous credit facility (see Note 7 to the condensed consolidated financial statements).

CONTRACTUAL OBLIGATIONS

The following table summarizes our contractual obligations at June 30, 2022:

The following table summarizes our contractual obligations at December 31, 2022:

Payments due by fiscal period

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Operating leases $ 22,250 $ 3,755 $ 6,886 $ 4,873 $ 6,736

Contingent consideration 6,200 6,100 100 — —

Term Loan 245,625 17,500 35,000 35,000 158,125

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The table above does not include possible payments for uncertain tax positions.

Our reserve for uncertain tax positions, including accrued interest and penalties, was $2.8 million as of June 30, 2022.

Our reserve for uncertain tax positions, including accrued interest and penalties, was $2.7 million as of December 31, 2022.

Due to the nature of the underlying liabilities and the extended time often 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 settle these liabilities.

3 unchanged sentences

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 2. Management’s Discussion and Analysis