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Item 1. Financial Statements

2023-05-05 compared with 2023-02-03 · 134 added, 111 removed, 418 unchanged (37% of the section changed)

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three months ended December 31,

Three months ended March 31, Six months ended March 31,

2023 2022 2023 2022

(in thousands, except per share data)

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Interest expense, net ( 6,393 ) ( 4,463 ) ( 12,364 ) ( 9,361 )

Other income (expense), net 17 ( 102 )

Other income, net 47 139 64 37

Total other expense, net ( 6,346 ) ( 4,324 ) ( 12,300 ) ( 9,324 )

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

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

Income before income taxes 5,829 3,240 11,838 2,039

Income tax (benefit) provision ( 70 ) 393 160 ( 1,995 )

Net income $ 5,899 $ 2,847 $ 11,678 $ 4,034

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three months ended December 31,

Three months ended March 31, Six months ended March 31,

2023 2022 2023 2022

(in thousands)

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CONDENSED CONSOLIDATED BALANCE SHEETS

December 31, 2022 September 30, 2022

March 31, 2023 September 30, 2022

(in thousands, except share data)

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Treasury stock, at cost, 6,463,818 and 6,412,812 shares

( 61,446 ) ( 58,172 )

Total stockholders' equity 520,179 501,513

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three months ended December 31,

Six months ended March 31,

(Restated) (1)

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Stock-based compensation 6,333 4,259

Deferred income tax provision 905 1,732

Provision for bad debt and product returns ( 148 ) 414

Provision for inventory obsolescence 3,019 600

Restructuring charge 23 109

Deferred income tax (benefit) provision ( 2,739 ) 2,160

Other 107 437

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Accrual for purchase of property, equipment, improvements and certain other intangible assets $ ( 44 ) $ ( 28 )

(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.

(1) As described in Note 2 to these condensed consolidated financial statements, we have restated the condensed consolidated statement of cash flows for the six months ended March 31, 2022.

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

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

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

Net income — — — — — 2,847 — 2,847

Other comprehensive income — — — — — — 52 52

Employee stock purchase plan issuances — — ( 19 ) 173 177 — — 350

Taxes paid for net share settlement of share-based payment awards — — 19 ( 383 ) — — — ( 383 )

Issuance of stock under stock award plans 112 1 — — 1,363 — — 1,364

Stock-based compensation expense — — — — 2,242 — — 2,242

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

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

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Stock-based compensation expense — — — — 4,259 — — 4,259

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

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

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

Net income — — — — — 5,899 — 5,899

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Stock-based compensation expense — — — — 3,465 — — 3,465

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

Balances, March 31, 2023 42,325 $ 423 6,464 $ ( 61,446 ) $ 394,036 $ 211,753 $ ( 24,587 ) $ 520,179

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

Net income — — — — — 11,678 — 11,678

Other comprehensive income — — — — — — 1,467 1,467

Employee stock purchase plan issuances — — ( 40 ) 380 790 — — 1,170

Taxes paid for net share settlement of share-based payment awards — — 91 ( 3,654 ) — — — ( 3,654 )

Issuance of stock under stock award plans 375 3 — — 1,669 — — 1,672

Stock-based compensation expense — — — — 6,333 — — 6,333

Balances, March 31, 2023 42,325 $ 423 6,464 $ ( 61,446 ) $ 394,036 $ 211,753 $ ( 24,587 ) $ 520,179

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

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generally accepted accounting principles ("GAAP") for complete financial statements.

These financial statements should be read in conjunction with the financial statement disclosures in our Annual Report on Form 10-K for the year ended September 30, 2022 (the "2022 Financial Statements").

These financial statements should be read in conjunction with the financial statement disclosures in Part I, Item 1 of our Annual Report on Form 10-K for the year ended September 30, 2022 (the "2022 Financial Statements").

We use the same accounting policies in preparing quarterly and annual financial statements.

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

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.

Our condensed consolidated statement of cash flows for the six months ended March 31, 2022 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.

Subsequent to the issuance of the Company's financial statements for the quarter ended March 31, 2022, 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.

There was no impact to the condensed consolidated balance sheets, condensed consolidated statements of operations 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.

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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 December 31,

Three months ended March 31, Six months ended March 31,

2023 2022 2023 2022

Net income $ 5,899 $ 2,847 $ 11,678 $ 4,034

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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 December 31, 2022 and 2021, 234,365 and 365,099 shares outstanding were excluded, respectively.

For the three months ended March 31, 2023 and 2022, 609,017 and 1,129,393 shares outstanding were excluded, respectively.

For the six months ended March 31, 2023 and 2022, 416,307 and 735,611 shares outstanding were excluded, respectively.

SELECTED BALANCE SHEET DATA

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

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.

There were no assets or liabilities that are measured at fair value on a recurring basis as of March 31, 2023 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 December 31,

Three months ended March 31, Six months ended March 31,

2023 2022 2023 2022

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

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("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.

The fair value of the remaining liability for contingent consideration for the acquisition of Haxiot was $ 0.0 million at March 31, 2023 and September 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 $ 0.0 million and $ 0.3 million at December 31, 2022 and 2021, respectively.

The fair value of the remaining liability for contingent consideration for the acquisition of Ctek was $ 0.0 million at March 31, 2023 and September 30, 2022.

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 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.

The fair value of the contingent consideration at March 31, 2023 is based on the probability of achieving the specified revenue thresholds for Ctek.

As of March 31, 2023, 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):

December 31, 2022 September 30, 2022

March 31, 2023 September 30, 2022

amount Accum.

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Total $ 435,773 $ ( 146,332 ) $ 289,441 $ 435,651 $ ( 133,587 ) $ 302,064

Amortization expense was $ 6.5 million and $ 6.3 million for the three months ended December 31, 2022 and 2021, respectively.

Amortization expense was $ 6.2 million and $ 7.0 million for the three months ended March 31, 2023 and 2022.

Amortization expense was $ 12.7 million and $ 13.4 million for the six months ended March 31, 2023 and 2022, 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):

2023 (nine months) $ 19,515

2023 (six months) $ 13,317

GOODWILL AND OTHER INTANGIBLE ASSETS, NET (CONTINUED)

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

Three months ended December 31, 2022

Products and Services IoT

Three months ended March 31, 2023

Products & Services IoT

Solutions Total

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Foreign currency translation adjustment 1,269 116 1,385

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

Balance on March 31, 2023 $ 174,200 $ 167,662 $ 341,862

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

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

SmartSense and Ventus.

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

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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.

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.

INDEBTEDNESS (CONTINUED)

Following the December amendment, borrowings under the Term Loan Facility bear interest at a rate per annum equal to LIBOR with a floor of 0.50 % for an interest period of one, three or six months as selected by Digi, reset at the end of the selected interest period (or a replacement benchmark rate if LIBOR is no longer available) plus 5.00 % or a base rate plus 4.00 %.

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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 %.

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

Our weighted average interest rate at March 31, 2023 was 8.62 %.

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

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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 Term Loan is payable in quarterly installments, with the balance remaining due on 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 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

The fair value of the Term Loan and Revolving Loan approximated carrying value at March 31, 2023.

Digi made early payments against the term loan of $ 0.6 million and $ 61.3 million in six months ended March 31, 2023 and 2022, respectively.

The following table is a summary of our long-term indebtedness at March 31, 2023 and September 30, 2022 (in thousands):

Balance on March 31, 2023 Balance on September 30, 2022

Term loan $ 240,625 $ 250,000

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Total long-term debt, net of current portion $ 214,062 $ 222,448

INDEBTEDNESS (CONTINUED)

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

The following table is a summary of future maturities of our aggregate long-term debt at March 31, 2023 (in thousands):

Fiscal year Amount

2023 (nine months) $ 13,125

2023 (six months) $ 8,750

Total long-term debt $ 240,625

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

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

At March 31, 2023, 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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• OEM Solutions - Original Equipment Manufacturers ("OEM") will be a chip, rather than a boxed device.

This can come in the form of a stand-alone module, or from a systems-on-module ("SOMs").

This can come in the form of a stand-alone module or from a systems-on-module ("SOM").

While cellular connectivity is used, other communication protocols can be used such as Zigbee, Bluetooth or Radio-Frequency ("RF") based on application.

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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 December 31,

Three months ended March 31, Six months ended March 31,

2023 2022 2023 2022

IoT Products & Services $ 85,893 $ 71,370 $ 170,235 $ 137,114

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IoT Solutions ( 790 ) ( 1,485 ) ( 1,510 ) ( 1,802 )

Total operating income (loss) $ 11,963 $ 3,799

Total operating income $ 12,175 $ 7,564 $ 24,138 $ 11,363

Depreciation and Amortization

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Total depreciation and amortization $ 7,846 $ 8,784 $ 15,958 $ 16,646

SEGMENT INFORMATION (CONTINUED)

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

Three months ended December 31,

Six months ended March 31,

IoT Products & Services $ 2,260 $ 1,664

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Total expended for property, plant and equipment $ 2,768 $ 1,664

* 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.

* Excluded from this amount is $ 2,685 and $ 1,215 of transfers of inventory to property plant and equipment for subscriber assets for the six months ended March 31, 2023 and 2022, 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 December 31,

Three months ended March 31, Six months ended March 31,

2023 2022 2023 2022

North America, primarily the United States $ 77,809 $ 73,790 $ 161,274 $ 140,033

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

Three months ended December 31,

Three months ended March 31, Six months ended March 31,

2023 2022 2023 2022

Transferred at a point in time $ 87,088 $ 72,656 $ 172,574 $ 139,191

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Contract Related Assets

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

Our contract related assets consist of subscriber assets, which 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.

The total net book value of subscriber assets of $ 17.3 million and $ 16.5 million as of March 31, 2023 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 $ 1.1 million for the three months ended March 31, 2023 and 2022, respectively.

Depreciation expense for these subscriber assets $ 1.8 million and $ 1.9 million for the six months ended March 31, 2023 and 2022, respectively.

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

REVENUE (CONTINUED)

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.

Our contract asset balances were immaterial as of March 31, 2023 and September 30, 2022.

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.

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.

Our contract liabilities were $ 25.7 million and $ 24.8 million at March 31, 2023 and 2022, respectively.

Of the $ 23.0 million and $ 24.3 million balances as of December 31, 2022 and 2021, Digi recognized $ 5.9 million and $ 5.0 million as revenue in the three months ended March 31, 2023 and 2022, respectively.

Of the $ 21.6 million and $ 15.5 million balances as of September 30, 2022 and 2021, Digi recognized $ 10.6 million and $ 10.0 million as revenue in the six months ended March 31, 2023 and 2022, 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 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 .

As of March 31, 2023, we had approximately $ 106.5 million of remaining performance obligations on contracts with an original duration of one year or more.

We expect to recognize revenue on approximately $ 54.6 million of remaining performance obligations over the next 12 months.

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.

Our income tax expense was $ 0.2 million for the six months ended March 31, 2023.

Included in this expense was a net tax benefit discretely related to the six months ended March 31, 2023 of $ 1.7 million.

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

Our effective tax rate will vary based on a variety of factors.

These include our overall profitability, the geographical mix of income before taxes and related statutory tax rate in each jurisdiction, and tax items discretely related to the period, such as settlements of audits.

These factors include our overall profitability, the geographical mix of income before taxes and related statutory tax rate in each jurisdiction, and tax items discretely related to the period, such as settlements of audits.

We may record other benefits or expenses in the future that are specific to a particular quarter such as expiration of statutes of limitation, the completion of tax audits, or legislation that is enacted in both U.S.

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Expiration of statute of limitations ( 649 )

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.

Unrecognized tax benefits as of March 31, 2023 $ 2,667

The total amount of unrecognized tax benefits at March 31, 2023 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.

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Balance at Warranties Settlements Balance at

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

Period December 31 issued made March 31

Three months ended March 31, 2023 $ 922 $ 78 $ ( 164 ) $ 836

Three months ended March 31, 2022 $ 658 $ 124 $ ( 92 ) $ 690

Balance at Warranties Settlements Balance at

Period September 30 issued made March 31

Six months ended March 31, 2023 $ 886 $ 168 $ ( 218 ) $ 836

Six months ended March 31, 2022 $ 707 $ 195 $ ( 212 ) $ 690

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

For any lease with an initial term in excess of twelve months, the related lease assets and lease liabilities are recognized on the condensed consolidated balance sheets as either operating or financing leases at the inception of an agreement where it is determined that a lease exists.

For any lease with an initial term in excess of 12 months, the related lease assets and lease liabilities are recognized on the condensed consolidated balance sheets as either operating or financing leases at the inception of an agreement where it is determined that a lease exists.

We have lease agreements that contain both lease and non-lease components.

We have elected to combine lease and non-lease components for all classes of assets.

Leases with an expected term of twelve months or less are not recorded on the condensed consolidated balance sheets.

Leases with an expected term of 12 months or less are not recorded on the condensed consolidated balance sheets.

Instead we recognize lease expense for these leases on a straight-line basis over the lease term.

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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 December 31, 2022 September 30, 2022

Balance Sheet Location March 31, 2023 September 30, 2022

Operating leases Operating lease right-of-use assets $ 14,179 $ 15,299

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Total lease liabilities $ 18,865 $ 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 December 31,

Three months ended March 31, Six months ended March 31,

2023 2022 2023 2022

Operating lease cost $ 867 $ 945 $ 1,771 $ 1,882

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Total lease cost $ 1,228 $ 1,241 $ 2,466 $ 2,479

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 %.

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 December 31, 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 March 31, 2022.

Digi acquired $ 0.2 million in right-of-use assets in exchange for new operating lease liabilities in the three and six months ended March 31, 2023.

At March 31, 2023, the weighted average remaining lease term of our operating leases was 6.9 years and the weighted average discount rate for these leases was 4.5 %.

Fiscal year Amount

2023 (nine months) $ 2,833

2023 (six months) $ 2,033

Thereafter 5,705

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

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.

In addition, the costs associated with defending ourselves in litigation may be significant regardless of whether the claim has merit.

STOCK-BASED COMPENSATION

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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.

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.

STOCK-BASED COMPENSATION (CONTINUED)

As of March 31, 2023, there were approximately 2,340,956 shares available for future grants under the 2021 Plan.

Cash received from the exercise of stock options was $ 1.7 million and $ 5.6 million for the six months ended March 31, 2023 and 2022, 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 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.

During the six months ended March 31, 2023 and 2022, our employees forfeited 90,985 shares and 630,181 shares, respectively, in order to satisfy respective withholding tax obligations of $ 3.7 million and $ 6.4 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 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.

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

ESPP contributions by employees were $ 1.2 million and $ 0.7 million for the six months ended March 31, 2023 and 2022, respectively.

Pursuant to the ESPP, 39,979 and 36,987 common shares were issued to employees during the six months ended March 31, 2023 and 2022, respectively.

Shares are issued under the ESPP from treasury stock.

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

As of March 31, 2023, 512,869 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 December 31,

Three months ended March 31, Six months ended March 31,

2023 2022 2023 2022

Cost of sales $ 161 $ 131 $ 303 $ 217

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Stock-based compensation after income taxes $ 2,728 $ 1,772 $ 4,997 $ 3,359

STOCK-BASED COMPENSATION (CONTINUED)

Stock Options

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Forfeited / Canceled ( 34 ) 20.69

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.

Balance on March 31, 2023 1,708 $ 18.23 4.5 $ 15,189

Exercisable on March 31, 2023 1,012 $ 15.60 3.6 $ 11,090

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $ 33.68 as of March 31, 2023, which would have been received by the option holders had all option holders exercised their options as of that date.

STOCK-BASED COMPENSATION (CONTINUED)

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 three months ended December 31, 2022 and 2021 was $ 1.7 million and $ 13.3 million, respectively.

The total intrinsic value of all options exercised during the six months ended March 31, 2023 and 2022 was $ 2.6 million and $ 13.9 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:

Three months ended December 31,

Six months ended March 31,

Weighted average per option grant date fair value $ 19.92 $ 10.23

Assumptions used for option grants:

Risk free interest rate 3.89% - 3.98% 1.25% - 1.46%

Risk free interest rate minimum 3.77 % - 3.98 %

1.25 % - 1.82 %

Expected term 6.00 years 6.00 years

Expected volatility 46 % 46 %

Expected volatility minimum 46 % 45 % - 46 %

Weighted average volatility 46 % 46 %

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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 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)

As of March 31, 2023, the total unrecognized compensation cost related to non-vested stock options was $ 6.5 million and the related weighted average period over which it is expected to be recognized is approximately 1.9 years.

Non-vested Stock Units

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):

The following table presents a summary of our non-vested restricted stock units and performance stock units as of March 31, 2023 and changes during the six 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

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Canceled ( 32 ) 26.51 — —

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.

Nonvested on March 31, 2023 892 $ 29.86 135 $ 37.72

As of March 31, 2023, the total unrecognized compensation cost related to non-vested stock units was $ 27.9 million.

The related weighted average period over which this cost is expected to be recognized is approximately 2.3 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