What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-11-22 compared with 2022-11-23 · 147 added, 202 removed, 755 unchanged (32% of the section changed)

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Common Stock Treasury Stock Paid-In Retained Comprehensive Stockholders’

Shares Par Value Shares Value Capital Earnings Loss Equity

Balances, September 30, 2019 34,608 $ 346 6,367 $ ( 54,339 ) $ 266,567 $ 161,919 $ ( 25,515 ) $ 348,978

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

Balance on September 30, 2020 35,513 $ 355 6,353 $ ( 55,109 ) $ 279,741 $ 170,330 $ ( 23,817 ) $ 371,500

Net income — — — — — 10,366 — 10,366

Other comprehensive income — — — — — — 1,071 1,071

Employee stock purchase plan issuances — — ( 118 ) 1,021 44 — — 1,065

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

Other — — — — — ( 4 ) — ( 4 )

Employee stock purchase issuances — — ( 79 ) 694 520 — — 1,214

Taxes paid for net share settlement of share-based payment awards — — 117 ( 2,120 ) — — — ( 2,120 )

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Stock-based compensation expense — — — — 8,135 — — 8,135

Balances, September 30, 2020 35,513 355 6,353 ( 55,109 ) 279,741 170,330 ( 23,817 ) 371,500

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

Net income — — — — — 19,383 — 19,383

Other comprehensive income — — — — — — 1,071 1,071

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

Other — — — — — ( 4 ) — ( 4 )

Employee stock purchase plan issuances — — ( 79 ) 694 520 — — 1,214

Other comprehensive loss — — — — — — ( 3,308 ) ( 3,308 )

Employee stock purchase issuances — — ( 80 ) 726 774 — — 1,500

Taxes paid for net share settlement of share-based payment awards — — 102 ( 2,363 ) ( 4,299 ) — — ( 6,662 )

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Other comprehensive loss — — — — — — ( 957 ) ( 957 )

Employee stock purchase plan issuances — — ( 80 ) 726 774 — — 1,500

Taxes paid for net share settlement of share-based payment awards and options — — 102 ( 2,363 ) ( 4,299 ) — — ( 6,662 )

Issuance of stock under stock award plans 1,297 13 — — 9,492 — — 9,505

Employee stock purchase issuances — — ( 83 ) 787 1,476 — — 2,263

Taxes paid for net share settlement of share-based payment awards — — 106 ( 4,121 ) ( 193 ) — — ( 4,314 )

Issuance of stock upon under stock award plans 551 5 — — 3,922 — — 3,927

Stock-based compensation expense — — — — 13,286 — — 13,286

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We help our customers create next-generation connected products to deploy, monitor and manage critical communications infrastructures and compliance standards in demanding environments with high levels of security and reliability.

We have two reportable operating segments:

We have two reportable segments:

(i) IoT Products & Services;

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All intercompany accounts and transactions have been eliminated in consolidation.

Certain reclassifications have been made to the prior year's consolidated financial statements to conform to the current year presentation.

Accounting Estimates

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Goodwill is quantitatively tested for impairment on an annual basis as of June 30, or more frequently if events or circumstances occur which could indicate impairment.

We have two reportable operating segments, our IoT Products & Services segment and our IoT Solutions segment (see Note 4 to the consolidated financial statements).

Effective with the reorganization announcement on October 7, 2020 (see Note 10 ), our IoT Products & Services business is now structured to include four reporting units under the IoT Products & Services segment, each with a reporting manager:

We have two reportable segments:

our IoT Products & Services segment and our IoT Solutions segment (see Note 4 to the consolidated financial statements).

Effective with the reorganization announcement on October 7, 2020 (see Note 10 ), 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.

Following our acquisition of Ventus in the first fiscal quarter of 2022, IoT Solutions is comprised of two reporting units:

Ventus and SmartSense.

Ventus and SmartSense by Digi.

We have six reporting units that have been tested individually for impairment.

Due to the reorganization on October 7, 2020 (see Note 10 ), we performed an interim impairment test in addition to our annual test as of June 30, 2021.

Our goodwill impairment tests as of June 30,2022, June 30, 2021 and October 7, 2020 indicated no impairment (see Note 3 ).

Our goodwill impairment tests as of June 30, 2023, June 30,2022, June 30, 2021 and October 7, 2020 indicated no impairment (see Note 3 ).

During the fourth quarter of fiscal 2023, we assessed various qualitative factors to determine whether or not an additional goodwill impairment assessment was required as of September 30, 2023, and we concluded that no additional impairment assessment was required.

Contingent Consideration

We measure our contingent consideration liabilities recognized in connection with business combinations at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy as defined in ASC 820 "Fair Value Measurement".

We used a probability-weighted discounted cash flow approach as a valuation technique to

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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determine the fair value of the contingent consideration on the acquisition date.

At each subsequent reporting period, the fair value is re-measured with the change in fair value recognized in general and administrative expense in our Consolidated

Statements of Operations.

At each subsequent reporting period, the fair value is re-measured with the change in fair value recognized in general and administrative expense in our Consolidated Statements of Operations.

Amounts, if any, paid to the seller in excess of the amount recorded on the acquisition date will be classified as cash flows used in operating activities.

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We record treasury stock at cost.

Treasury stock may be acquired from employees for tax withholding purposes related to vesting of restricted stock awards as part of our stock-based compensation program and issued pursuant to the Employee Stock Purchase Plan.

Treasury stock may be acquired from employees for tax withholding purposes related to vesting of restricted stock unit awards as part of our stock-based compensation program and issued pursuant to the Employee Stock Purchase Plan.

Revenue Recognition

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Hardware Product Revenue and SmartSense by Digi Equipment Revenue and Associated Installation Fees

Our hardware product revenue is derived primarily from the sale of wired and wireless hardware products to our distributors and direct/original equipment manufacturer (“Direct/OEM”) customers.

Our hardware product revenue is derived primarily from the sale of wired and wireless hardware products to our distributors and OEM customers.

Product revenue generally is recognized upon shipment of the product to a customer.

Sales to authorized domestic distributors and Direct/OEM customers typically are made with certain rights of return and price adjustment provisions.

Sales to authorized domestic distributors and OEM customers typically are made with certain rights of return and price adjustment provisions.

Estimated reserves for future credit returns and pricing adjustments are established based on an analysis of historical patterns of credit returns and price adjustments compared to received credit returns and distribution sales for the current period.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recently Adopted 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.

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 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of this Form 10-K.

Fiscal 2022 Acquisition

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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 $ 4.4 million incurred in fiscal 2022 have been charged to operations and are included in general and administrative expense in our consolidated statements of operations.

Costs directly related to the acquisition of $ 4.4 million incurred in fiscal 2022 were charged to operations and are included in general and administrative expense in our consolidated statements of operations.

These acquisition costs include legal, accounting, valuation and investment banking fees.

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These methodologies utilize future estimates including revenues attributable to customer relationships, tax rates, discount rates, royalty rates and obsolescence rates.

The final purchase price allocation includes an adjustment made in the fourth fiscal quarter of 2022 to reflect an update from our preliminary purchase price allocation to the valuation of the net

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ACQUISITIONS (CONTINUED)

tangible assets acquired and goodwill resulting from the acquisition.

The final purchase price allocation includes an adjustment made in the fourth fiscal quarter of 2022 to reflect an update from our preliminary purchase price allocation to the valuation of the net tangible assets acquired and goodwill resulting from the acquisition.

Included in the fair value of net tangible assets acquired was $ 0.9 million of right-of-use asset included in other non-current assets and $ 0.9 million of lease liability included in other current liabilities and other non-current liabilities associated with Ventus’ operating leases.

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It is impracticable to quantify the amount of Ventus contribution to our consolidated net income due to the business structure management uses for reporting and allocating expenses to segments.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ACQUISITIONS (CONTINUED)

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

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On March 26, 2021, we acquired Haxiot, a Dallas-based provider of low power wide area ("LPWA") wireless technology.

The results of operations are now included in our results within our IoT Products & Services segment.

Following this date, the results of operations are included within our IoT Products & Services segment.

We believe this is a complementary acquisition for us as it significantly enhances our IoT Products & Services segment by enhancing Digi's embedded systems portfolio and immediately extends the company's market reach with a complete LoRaWAN-based solutions offering.

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We funded the closing of the acquisition with $ 7.1 million of cash on hand.

The future earn-out payments are based on Haxiot revenue performance and contractually are not to exceed $ 3.0 million and $ 5.0 million for the annual periods ending December 31, 2021 and December 31, 2022.

The future earn-out payments are based on Haxiot revenue performance and contractually are not to exceed $ 3.0 million and $ 5.0 million for the annual periods ended December 31, 2021 and December 31, 2022.

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

As a result, we adjusted goodwill to $ 8.6 million and adjusted contingent consideration to $ 5.9 million.

In the fourth fiscal quarter of 2022, it was determined that the revenue thresholds would not be met and the remaining balance was adjusted down by $ 5.9 million, resulting in a fair value of $ 0.0 million for contingent consideration relating to the acquisition of Haxiot at September 30, 2022 .

For tax purposes, this acquisition is treated as a stock acquisition.

The goodwill therefore is not deductible.

Costs directly related to the acquisition of $ 0.3 million have been charged to operations in 2021.

Costs directly related to the acquisition of $ 0.3 million have been charged to operations in fiscal 2021.

These costs are included in general and administrative expense in our consolidated statements of operations.

These acquisition costs include legal, accounting, valuation and investment banking fees.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ACQUISITIONS (CONTINUED)

The following table summarizes the fair values of Haxiot assets acquired, net of $ 50 thousand of cash acquired, and liabilities assumed as of the acquisition date (in thousands).

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Total $ 12,996

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ACQUISITIONS (CONTINUED)

Acquisition of Ctek, Inc.

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The future earn-out payments are based on revenue performance outlined in the terms of the purchase agreement for the annual periods ending December 31, 2021, December 31, 2022 and December 31, 2023.

The cumulative amount of these earn-outs for the annual periods will not exceed $ 0.5 million, $ 1.0 million and $ 1.5 million, respectively.

In the fiscal fourth quarter of 2022, it was determined that the revenue thresholds would not be met and the remaining balance was adjusted down by $ 0.3 million, resulting in a fair value of $ 0.0 million for contingent consideration relating to the acquisition of Ctek at September 30, 2022.

The cumulative amount of these earn-outs for the annual periods had a max $ 0.5 million, $ 1.0 million and $ 1.5 million, respectively.

For tax purposes, this acquisition is treated as a stock acquisition.

The goodwill therefore is not deductible.

Costs directly related to the acquisition of $ 0.3 million have been charged to operations in 2021.

Costs directly related to the acquisition of $ 0.3 million have been charged to operations in fiscal 2021.

These costs are included in general and administrative expense in our consolidated statements of operations.

These acquisition costs include legal, accounting, valuation and investment banking fees.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ACQUISITIONS (CONTINUED)

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

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Total $ 12,734

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET

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2021 $ 16,534

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET (CONTINUED)

Estimated amortization expense for the next five fiscal years is as follows (in thousands):

Fiscal year Total

2023 $ 25,692

2024 (twelve months) $ 25,232

2025 $ 21,776

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

Acquisition — 118,635 118,635

Adjustments 186 ( 631 ) ( 445 )

Foreign currency translation adjustment 1,026 90 1,116

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No goodwill impairment has been recorded in any period presented.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET (CONTINUED)

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 4 ).

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

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Significant judgment is required to estimate the amount and timing of future cash flows for each reporting unit and the relative risk of achieving those cash flows.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET (CONTINUED)

Key assumptions used in the analysis were related to the determination of discount rates and forecasts of future gross margins and earnings before income taxes, depreciation and amortization margins.

The market approach indicates the fair value of a business or asset based on a comparison of the business or asset to comparable publicly traded companies or assets and transactions in its industry as well as our prior acquisitions.

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

We will continue to monitor potential COVID-19 industry and demand impacts as this could potentially affect our cash flows and market capitalization.

We will continue to monitor potential impacts to our assumptions, as any changes could potentially affect our cash flows and market capitalization.

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.

Digi conducted an analysis as of September 30, 2023 and concluded changes in market conditions from the time of the Fiscal 2023 test, conducted as of June 30,2023, were not indicative of a reduction in fair value of any of our reporting units.

Results of our Fiscal 2023 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 reporting unit.

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

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

Implied fair value for each reporting unit was calculated on a standalone basis using a weighted combination of the income approach and market approach.

The implied fair values of each reporting unit were added together along with our unallocated assets to get an indicated value of total equity to which a range of indicated value of total equity was derived.

This range was compared to the total market capitalization of $ 852.0 million as of June 30, 2022.

This implied a range of control (deficit)/ premiums of ( 5.6 )% to 7.9 %.

This range of control premiums fell below the control premiums observed in the last five years in the communications equipment industry.

As a result, the market capitalization reconciliation analysis proved support for the reasonableness of the fair values estimated for each individual reporting unit.

As of June 30, 2023, we had a total of $ 32.7 million of goodwill for the Cellular Routers reporting unit, $ 57.1 million of goodwill for the Console Servers reporting unit, $ 64.6 million of goodwill for the OEM Solutions reporting unit, $ 20.4 million of goodwill for the Infrastructure Management reporting unit, $ 48.9 million of goodwill for the SmartSense by Digi reporting unit and $ 118.6 million of goodwill for the Ventus reporting unit.

At June 30, 2023, the fair value of goodwill exceeded the carrying value for all six reporting units and no impairment was recorded.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEGMENT INFORMATION AND MAJOR CUSTOMERS

We have two reportable operating segments:

We have two reportable segments:

(i) IoT Products & Services and (ii) IoT Solutions.

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the nature of the products and services and customers differ between the two segments, discrete financial information is available through operating income for both segments and the Chief Operating Decision Maker is reviewing both segments’ financial information separately to make decisions about the allocation of resources.

Effective with the reorganization announcement on October 7, 2020 (see Note 10 ), our IoT Products & Services business is now structured to include four operating segments, each with a segment manager.

Effective with the reorganization announcement on October 7, 2020 (see Note 10 ), our IoT Products & Services business is structured to include four operating segments, each with a segment manager.

Following our acquisition of Ventus in the first fiscal quarter of 2022, IoT Solutions is comprised of two reporting units;

Ventus and SmartSense.

We have six reporting units that have been tested individually for impairment.

Ventus and SmartSense by Digi.

IoT Products & Services

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IoT Solutions

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.

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

• SmartSense by Digi - 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.

We measure our segment results primarily by reference to revenue and gross profit.

IoT Solutions revenue includes product, service and subscription revenue.

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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Our chief operating decision maker 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 are now being allocated to each operating segment.

Following the October 2020 reorganization, the shared general and administrative costs are 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.

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*Unallocated consists of cash and cash equivalents.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEGMENT INFORMATION AND MAJOR CUSTOMERS (CONTINUED)

Net property, equipment and improvements by geographic location were as follows (in thousands):

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No single customer exceeded 10% of revenue or accounts receivable for any of the periods presented.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SELECTED BALANCE SHEET DATA

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Total property, equipment and improvements, net $ 29,108 $ 27,594

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FAIR VALUE MEASUREMENTS

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There were no transfers into or out of our Level 2 financial assets during fiscal 2023.

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

The following tables provide information by level for financial assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2021 (in thousands):

Fair Value Measurements at September 30, 2021 using:

Total carrying

September 30, 2021 Quoted price in

active markets

(Level 1) Significant other

observable inputs

(Level 2) Significant

unobservable inputs

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

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

In connection with the October 2015 acquisition of Bluenica, we agreed to make contingent payments over a period of up to 4 years, subject to achieving specified revenue thresholds for sales of Bluenica products.

The fair value of the liability for contingent consideration recognized was $ 10.4 million upon acquisition.

We paid $ 0.5 million in fiscal 2017, no payments in fiscal 2018, $ 2.2 million in fiscal 2019 and the final installment of $ 2.9 million in fiscal 2020.

In connection with our acquisition of Accelerated, we agreed to make contingent payments, based upon certain sales thresholds of Accelerated products.

The fair values of the liability for contingent consideration recognized upon acquisition of Accelerated on January 22, 2018 was $ 2.3 million.

We paid the first installment of $ 3.5 million in fiscal 2019 and the final installment of $ 2.4 million in the third quarter of fiscal 2020.

There were no assets or liabilities that are measured at fair value on a recurring basis as of September 30, 2023 or 2022.

In connection with our acquisition of Opengear, we agreed to make contingent payments, based upon certain revenue thresholds.

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In the fiscal fourth quarter of 2022, it was determined that the revenue thresholds would not be met and the remaining balance was adjusted down by $ 5.9 million.

The fair value of the remaining liability for contingent consideration for the acquisition of Haxiot was $ 0.0 million at September 30, 2022.

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

In connection with our acquisition of Ctek, we agreed to make contingent earn-out payments, based upon certain revenue thresholds (see Note 2 to the consolidated financial statements).

In the fiscal fourth quarter of 2022, it was determined that the revenue thresholds would not be met and the remaining balance was adjusted down by $ 0.3 million.

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Purchase price contingent consideration — 6,200

Contingent consideration payments — ( 10,000 )

Change in fair value of contingent consideration — ( 6,200 )

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

Due to the timing of the acquisition, the fair value of the contingent consideration at September 30, 2022 is based on the probability of achieving the specified revenue thresholds for Haxiot and Ctek.

As of September 30, 2022, contingent consideration associated with Haxiot and Ctek remain subject to future performance through December 31, 2022 and 2023, respectively.

Due to the timing of the acquisition, the fair value of the contingent consideration at September 30, 2023 is based on the probability of achieving the specified revenue thresholds for Ctek.

As of September 30, 2023, contingent consideration associated with Ctek remains subject to future performance through December 31, 2023.

On November 1, 2021, we entered into a second amended and restated credit agreement with BMO Harris Bank N.A.

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

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

Of this amount $ 1.9 million was written off and included in interest expense upon the entry into the new amendment and $ 0.4 million is being amortized over the term of the amended loan and reported in interest expense.

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

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.

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 %.

The base rate is determined by reference to the highest of BMO’s prime rate, the Federal Funds Effective Rate plus 0.50 %, or the one-month LIBOR for U.S.

Following the December amendment, borrowings under the Term Loan Facility bore interest at a rate based on LIBOR until the discontinuation of LIBOR on June 30, 2023.

Following this date, borrowings under the Term Loan Facility are subject to a rate based on the Secured Overnight Financing Rate ("SOFR") with a credit spread adjustment to adjust for the change in reference rate ranging from 0.10% to 0.40%, depending on Digi's interest election.

Our interest rate has 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 plus 5.00 % or a base rate plus 4.00 %.

The base rate is determined by reference to the highest of BMO’s prime rate, the Federal Funds Effective Rate plus 0.50 %, or the one-month SOFR for U.S.

dollars plus 1.00 %.

The applicable margin for loans under the Revolving Credit Facility is in a range of 4.00 % to 3.75 % for LIBOR loans and 3.00 % to 2.75 % for base rate loans, depending on Digi’s consolidated leverage ratio.

The applicable margin for loans under the Revolving Credit Facility is in a range of 4.00 % to 3.75 % for SOFR loans and 3.00 % to 2.75 % for base rate loans, depending on Digi’s consolidated leverage ratio.

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 September 30, 2022 was 6.85 %.

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

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.

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 September 30, 2022.

Digi made early payments against the term loan of $ 50 million in December 2021, $ 11.3 million in March 2022, $ 20 million in June 2022 and $ 18.7 million in September 2022 for a total of $ 100 million in fiscal 2022.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INDEBTEDNESS (CONTINUED)

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 has elected the same periods each subsequent month.

Our weighted average interest rate for our Term Loan Facility as of September 30, 2023 was 10.44 %.

Our weighted average Revolving Loan Facility commitment fee was 0.20 % as of September 30, 2023.

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 September 30, 2023.

Digi made early payments against the term loan of $ 18.9 million and $ 100.0 million in twelve months ended September 30, 2023 and 2022, respectively.

The following table is a summary of our long-term indebtedness (in thousands):

Year ended September 30,

Revolving loan $ — $ 48,118

Term loan $ 213,625 $ 250,000

Total loans 250,000 48,118

Less unamortized issuance costs ( 10,051 ) ( 12,029 )

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The following table summarizes the activity associated with the product warranty accrual (in thousands) and is listed on our consolidated balance sheets within other current liabilities:

Balance at Warranties Settlements Balance at

Fiscal year October 1 accrued made September 30

2022 $ 707 $ 537 $ ( 358 ) $ 886

2021 $ 942 $ 244 $ ( 479 ) $ 707

Year ended September 30,

2023 2022 2021

Balance at beginning of period $ 886 $ 707 $ 942

Warranties accrued 355 537 244

Settlements made ( 469 ) ( 358 ) ( 479 )

Balance at end of period $ 772 $ 886 $ 707

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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Total lease cost $ 5,240 $ 4,986

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LEASES (CONTINUED)

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

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Right-of-use assets obtained in exchange for new operating lease liabilities $ 276 $ 2,615

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LEASES (CONTINUED)

September 30, 2023

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Fiscal year Amount

2024 (twelve months) $ 3,999

Thereafter 5,705

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

The restructuring plan aligns the business segment's organization around product lines.

The restructuring plan aligned the business segment's organization around product lines.

Under this plan, we recorded a charge of $ 0.7 million for employee termination charges and eliminated 19 employment positions primarily in the U.S.

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The charges relating to this restructuring were fully paid during the fourth quarter of fiscal 2021.

2020 Restructuring

In second quarter of fiscal 2020, we recorded and re-aligned our product management group within IoT Products & Services segment and eliminated two employment positions.

We recorded $ 38 thousand for employee termination charges.

This was fully paid during the second quarter of fiscal 2020.

In the third quarter of fiscal 2020, we recorded $ 95 thousand of restructuring for employee termination charges primarily within our IoT Solutions segment.

This resulted in the elimination of 22 employment positions.

This restructuring was completed in the fourth quarter of fiscal 2020.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RESTRUCTURING (CONTINUED)

Below is a summary of the restructuring charges and other activity within the restructuring accrual (in thousands):

2021 Restructuring 2020 Restructuring

Employee Termination Costs Employee Termination Costs Total

Balance at September 30, 2019 $ — $ — $ —

Restructuring charge — 133 133

Payments — ( 117 ) ( 117 )

Reversals — ( 16 ) ( 16 )

Foreign currency fluctuation — — —

Balance at September 30, 2020 — — —

2021 Restructuring

Employee Termination Costs Total

Balance on September 30, 2020 $ — $ —

Restructuring charge 995 995

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Foreign currency fluctuation ( 60 ) ( 60 )

Balance at September 30, 2021 $ — $ — $ —

Balance on September 30, 2021 $ — $ —

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Revenue Disaggregation

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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.

Contract Related Assets

Our contract related assets consist of subscriber assets.

Subscriber assets are equipment that we provide to customers pursuant to subscription-based contracts.

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

The total net book value of subscriber assets of $ 16.6 million and $ 16.5 million as of September 30, 2023 and September 30, 2022, respectively, are included in property, equipment and improvements, net.

The September 30, 2022 balance includes $ 14.7 million acquired in the acquisition of Ventus.

Depreciation expense for these subscriber assets, which is included in cost of sales, was $ 3.2 million and $ 1.9 million for the year ended September 30, 2022 and September 30, 2021, respectively.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

REVENUE (CONTINUED)

Depreciation expense for these subscriber assets was $ 3.8 million and $ 3.2 million for the twelve months ended September 30, 2023 and 2022, respectively.

We depreciate the cost of this equipment over its useful life and include these expenses in cost of sales.

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 September 30, 2023 and September 30, 2022.

Contract Liabilities

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Our contract liabilities were $ 27.9 million and $ 21.6 million at September 30, 2023 and 2022, respectively.

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

Of the $ 15.5 million and $ 9.3 million balances as of September 30, 2021 and 2020, Digi recognized $ 13.2 million and $ 7.5 million in the year ended September 30, 2022 and 2021, respectively.

Remaining Transaction Price

Transaction price allocated to the remaining performance obligations represents contracted revenue that has not been recognized, which includes unearned revenue and unbilled amounts that will be recognized as revenue in future periods.

As of September 30, 2022 approximately $ 21.6 million of revenue is expected to be recognized from remaining performance obligations for subscriptions contracts.

We expect to recognize revenue on approximately $ 19.8 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 years to five years .

Of the $ 21.6 million and $ 15.5 million balances as of September 30, 2022 and 2021, Digi recognized $ 17.5 million and $ 13.2 million as revenue in the twelve months ended September 30, 2023 and 2022, respectively.

Remaining Performance Obligation

As of September 30, 2023, we had approximately $ 152.5 million of remaining performance obligations on contracts with an original duration of one year or more.

We expect to recognize revenue on approximately $ 88.4 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 .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The components of income before income taxes are (in thousands):

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Income tax (benefit) expense $ 148 $ ( 755 ) $ ( 1,367 )

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INCOME TAXES (CONTINUED)

Net deferred tax liability consists of (in thousands):

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Non-current deferred tax liability ( 1,812 ) ( 9,666 )

Net deferred tax liability $ ( 9,666 ) $ ( 13,054 )

Net deferred tax asset (liability) $ 3,072 $ ( 9,666 )

Depreciation and amortization $ ( 3,362 ) $ ( 4,930 )

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Identifiable intangible assets ( 25,276 ) ( 24,308 )

Net deferred tax liability $ ( 9,666 ) $ ( 13,054 )

Research and development costs 9,089 —

Net deferred tax asset (liability) $ 3,072 $ ( 9,666 )

As of September 30, 2023, we had $ 4.1 million of tax carryforwards (net of reserves) related to state research and development tax credits.

We also had $ 0.5 million of carryforwards consisting of a U.S.

We also had $ 0.6 million of carryforwards consisting of U.S.

net operating losses of $ 0.2 million, non-U.S.

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The majority of our non-U.S.

net operating losses have an unlimited carryforward period.

tax credit carryforwards will expire in 2034.Our valuation allowance for certain U.S.

and foreign locations was $ 3.0 million at September 30, 2022 and $ 2.2 million at September 30, 2021.

The increase in valuation allowance is primarily the result of additional reserves against R&D credits.

net operating losses and tax credit carryforwards have an unlimited carryforward period.

Our valuation allowance for certain U.S.

and foreign attributes was $ 3.3 million at September 30, 2023 and $ 3.0 million at September 30, 2022.

The increase in valuation allowance is primarily the result of additional reserves against state research and development credits.

The deferred tax assets realized could vary if there are differences in the timing or amount of future reversals of existing deferred tax liabilities or changes in the amounts of future taxable income.

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During fiscal 2023 and 2022, there were insignificant amounts of interest and penalties related to income tax matters in income tax expense.

We accrued $ 0.1 million in interest and no penalties related to unrecognized tax benefits as of September 30, 2022 and 2021.

We accrued $ 0.1 million in interest and penalties related to unrecognized tax benefits as of September 30, 2023 and 2022.

These accrued interest and penalties are included in our non-current income taxes payable on our consolidated balance sheets.

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With few exceptions, we are no longer subject to state and local or non-U.S.

income tax examinations by tax authorities for years before fiscal year 2018.

We are currently under U.S.

federal examination for fiscal years 2018 , and there is otherwise very limited audit activity of our income tax returns in U.S.

state jurisdictions or international jurisdictions.

At September 30, 2022, the majority of undistributed foreign earnings are taxed under the one time transition tax and the global intangible low-taxed income ("GILTI") provision of the Tax Cuts and Jobs Act of 2017.

income tax examinations by tax authorities.

At September 30, 2023, the majority of undistributed foreign earnings were taxed under the one time transition tax and the global intangible low-taxed income ("GILTI") provision of the Tax Cuts and Jobs Act of 2017.

Additionally, the previously un-taxed accumulated undistributed foreign earnings from prior fiscal years are still permanently reinvested and, as such, we have not accrued additional U.S.

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STOCK-BASED COMPENSATION

Stock-based awards were granted under the amended and restated 2021 Omnibus Incentive Plan (the "Amended Plan") beginning January 29, 2022.

Prior to that date, such awards made in fiscal 2022 were granted under the 2021 Omnibus Incentive Plan (the "2021 Plan").

Upon stockholder approval of the Amended Plan, we ceased granting awards under the 2021 Plan.

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 Amended Plan.

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

The Amended 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.

Stock-based awards granted in 2023 were granted under the amended and restated 2021 Omnibus Incentive Plan (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 3,500,000 common shares in connection with awards of stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based full value awards or other stock-based awards.

Eligible participants include our employees, our affiliates, non-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 Amended Plan typically vest over a four -year period and will expire if unexercised after seven years from the date of grant.

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.

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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

Upon exercise of options or settlement of vested RSUs or PSUs, we issue new shares of stock.

As of September 30, 2023, there were approximately 2,365,365 shares available for future grants under the Amended Plan.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK-BASED COMPENSATION (CONTINUED)

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

As of September 30, 2022, there were approximately 1,793,203 shares available for future grants under the Amended Plan.

The 2021 Plan, under which grants ceased upon approval of the Amended Plan, authorized the issuance of up to 1,400,000 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 included our employees, our affiliates, non-employee directors of our Company and any consultant or advisor who is a natural person and provided services to us or our affiliates.

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

Restricted stock unit awards ("RSUs") that were granted to directors typically vested in one year.

RSUs that were granted to executives and employees typically vested in January over a four -year period.

Awards may no longer be granted under the 2021 Plan as grants ceased upon approval of the Amended Plan effective January 29, 2022 at the Annual Meeting of Stockholders.

The exercise price of options and the grant date price of restricted stock units was determined by our Compensation Committee but could be less than the fair market value of our common stock based on the closing price on the date of grant.

Stock-based awards granted in 2022 and 2021 were granted under the 2021 Plan before amendments were made to increase the number of authorized shares.

There were no other material changes to the plan made in the amendments.

Cash received from the exercise of stock options was $ 3.9 million, $ 9.5 million and $ 8.5 million for the year ended September 30, 2023, 2022 and 2021, respectively.

Our stock option plans allow the net exercise of options.

Shares with a value of $ 4.3 million were forfeited to satisfy tax withholding for the year ended September 30, 2022, and no amounts were forfeited in fiscal 2021 or 2020.

Shares with a value of $ 0.2 million and $ 4.3 million were forfeited to satisfy tax withholding for the year ended September 30, 2023 and 2022, respectively.

No amount was forfeited in fiscal 2021.

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, having us retain a portion of shares issuable under the award or paying cash to us for the withholding.

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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 66 40.59

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Forfeited / Canceled ( 41 ) 20.24

Balance on June 30, 2022 1,790 $ 17.29 4.7 $ 29,095

Exercisable at June30, 2022 846,530 $ 14.26 3.6 $ 16,325

Balance on September 30, 2023 1,553 $ 18.52 3.89 $ 14,167

Exercisable on September 30, 2023 1,062 $ 16.24 3.37 $ 11,451

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $ 27.00 as of September 30, 2023, which would have been received by the option holders had all option holders exercised their options as of that date.

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Risk free interest rate 3.50% - 4.15%

1.25% - 3.00%

0.51% - 1.04%

Expected term 6.00 years 6.00 years 6.00 years

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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 463 $ 39.96 113 $ 40.66

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Canceled ( 63 ) $ 26.65 — $ —

Nonvested at June 30, 2022 742 $ 19.14 27 $ 22.69

As of September 30, 2022, the total unrecognized compensation cost related to non-vested restricted stock units was $ 10.7 million.

The related weighted average period over which this cost is expected to be recognized was approximately 2.1 years.

Nonvested on September 30, 2023 846 $ 30.56 135 $ 37.72

As of September 30, 2023, the total unrecognized compensation cost related to non-vested restricted stock units and performance stock units was $ 19.3 million and $3.4 million, respectively.

The related weighted average period over which these costs are expected to be recognized was approximately 2.1 years and 1.8 years, respectively.

EMPLOYEE BENEFIT PLANS

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However, we will be providing DimOnOff reduced product pricing on a limited number of products for an amount substantially lower than what was claimed in the lawsuit.

In addition to the matter discussed above, 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 employees.

Data Logger Solutions, LLC ("Data Loggers") brought suit in Delaware Superior Court against us and our subsidiary Digi SmartSense, LLC in October, 2020.

The suit alleges that Data Loggers has not been paid certain commissions it believes it is owed and will continue to be owed under a Reseller Agreement entered between Data Loggers and TempAlert.

SmartSense is the successor of interest of TempAlert and terminated the Reseller Agreement in 2019.

Data Loggers claims it is entitled to actual, speculative and punitive damages in connection with its allegations.

Digi and SmartSense have made counterclaims against Data Loggers for breach of contract.

Each party has submitted a motion for summary judgement in this case and a hearing is scheduled for January 2024.

Pending a decision on each party’s summary judgement motion, a trial presently is scheduled to commence in February 2024.

We believe we have strong defenses against the allegations asserted by Data Loggers.

We intend to defend the matter vigorously;

however, there can be no assurance that we will be successful in such defense.

We are unable to estimate the total costs to defend the matter or the potential liability to us in the event that we are not successful in our defense.

In addition to the matters discussed above, 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 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.

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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-K

Item 8. Financial Statements and Supplementary Data