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Item 1. Financial Statements

2024-02-02 compared with 2023-08-04 · 139 added, 205 removed, 344 unchanged (50% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

2023 2022 2023 2022

Three months ended December 31,

(in thousands, except per share data)

16 unchanged sentences

Interest expense, net ( 5,661 ) ( 5,971 )

Other income (expense), net 15 ( 96 ) 79 ( 59 )

Debt issuance cost write off ( 9,722 ) —

Other (expense) income, net ( 26 ) 17

Total other expense, net ( 15,409 ) ( 5,954 )

Income before income taxes 5,888 4,582 17,726 6,621

Income tax provision (benefit) ( 839 ) 456 ( 679 ) ( 1,539 )

Net income $ 6,727 $ 4,126 $ 18,405 $ 8,160

Net income per common share:

(Loss) income before income taxes ( 3,276 ) 6,009

Income tax (benefit) provision ( 222 ) 230

Net (loss) income $ ( 3,054 ) $ 5,779

Net (loss) income per common share:

Basic $ ( 0.08 ) $ 0.16

5 unchanged sentences

DIGI INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

2023 2022 2023 2022

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

Three months ended December 31,

(in thousands)

Net income $ 6,727 $ 4,126 $ 18,405 $ 8,160

Other comprehensive (loss) income:

Net (loss) income $ ( 3,054 ) $ 5,779

Other comprehensive income:

Foreign currency translation adjustment 2,948 1,289

Other comprehensive (loss) income ( 109 ) ( 1,359 ) 1,358 ( 1,519 )

Comprehensive income $ 6,618 $ 2,767 $ 19,763 $ 6,641

Other comprehensive income 2,948 1,289

Comprehensive (loss) income $ ( 106 ) $ 7,068

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

1 unchanged sentence

CONDENSED CONSOLIDATED BALANCE SHEETS

June 30, 2023 September 30, 2022

December 31, 2023 September 30, 2023

(in thousands, except share data)

3 unchanged sentences

Inventories 67,590 74,396

Income taxes receivable 2,751 3,764

Other current assets 4,799 4,112

4 unchanged sentences

Operating lease right-of-use assets 12,187 12,876

Deferred tax assets 5,192 4,884

Other non-current assets 3,916 3,788

7 unchanged sentences

Current portion of operating lease liabilities 3,216 3,352

Income taxes payable 1,179 1,116

Other current liabilities 8,754 7,138

24 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months ended June 30,

(Restated) (1)

Three months ended December 31,

(in thousands)

Operating activities:

Net income $ 18,405 $ 8,160

Adjustments to reconcile net income to net cash provided by operating activities:

Net (loss) income $ ( 3,054 ) $ 5,779

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Depreciation of property, equipment and improvements 1,813 1,649

Amortization 6,591 6,957

Write-off of debt issuance costs 9,722 —

Stock-based compensation 3,106 2,868

4 unchanged sentences

Investing activities:

Acquisition of businesses, net of cash acquired — ( 347,553 )

Purchase of property, equipment, improvements and certain other intangible assets ( 292 ) ( 963 )

2 unchanged sentences

Proceeds from long-term debt 214,062 —

Payments of debt issuance costs — ( 13,443 )

Payments on long-term debt ( 233,025 ) ( 4,375 )

2 unchanged sentences

Taxes paid for net share settlement of share-based payment options and awards ( 2,169 ) ( 2,987 )

Net cash (used in) provided by financing activities ( 28,920 ) 208,551

Net cash used in financing activities ( 20,376 ) ( 5,896 )

Effect of exchange rate changes on cash and cash equivalents 1,851 228

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Accrual for purchase of property, equipment, improvements and certain other intangible assets $ ( 10 ) $ ( 17 )

(1) As described in Note 2 to these condensed consolidated financial statements, we have restated the condensed consolidated statements of cash flows for the nine months ended June 30, 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, March 31, 2022 41,525 $ 415 6,447 $ ( 58,310 ) $ 376,579 $ 184,726 $ ( 22,906 ) $ 480,504

Net income — — — — — 4,126 — 4,126

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

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

Taxes paid for net share settlement of share-based payment awards — — 3 ( 68 ) — — — ( 68 )

Issuance of stock under stock award plans 152 2 — — 1,144 — — 1,146

Stock-based compensation expense — — — — 2,143 — — 2,143

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

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

Net income — — — — — 5,779 — 5,779

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

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

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

2 unchanged sentences

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

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

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

Net income — — — — — 6,727 — 6,727

Other comprehensive loss — — — — — — ( 109 ) ( 109 )

Employee stock purchase plan issuances — — ( 18 ) 173 347 — — 520

Taxes paid for net share settlement of share-based payment options and awards — — 6 ( 197 ) — — — ( 197 )

Issuance of stock under stock award plans 83 1 — — 943 — — 944

Stock-based compensation expense — — — — 3,519 — — 3,519

Balances, June 30, 2023 42,408 $ 424 6,452 $ ( 61,470 ) $ 398,845 $ 218,480 $ ( 24,696 ) $ 531,583

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

Balances, September 30, 2023 42,501 $ 425 6,436 $ ( 61,506 ) $ 403,735 $ 224,845 $ ( 27,011 ) $ 540,488

Net income — — — — — 18,405 — 18,405

Net loss — — — — — ( 3,054 ) — ( 3,054 )

Other comprehensive income — — — — — — 2,948 2,948

3 unchanged sentences

Stock-based compensation expense — — — — 3,106 — — 3,106

Balances, June 30, 2023 42,408 $ 424 6,452 $ ( 61,470 ) $ 398,845 $ 218,480 $ ( 24,696 ) $ 531,583

Balances, December 31, 2023 42,749 $ 427 6,500 $ ( 63,410 ) $ 407,330 $ 221,791 $ ( 24,063 ) $ 542,075

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

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The unaudited condensed consolidated financial statements of Digi International Inc.

("we", "us", "our", "Digi" or "the Company") have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission applicable to interim financial statements.

("we", "us", "our", "Digi" or "the Company") have been prepared in accordance with the rules and regulations of the U.S.

Securities and Exchange Commission applicable to interim financial statements.

While these financial statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by U.S.

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

RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

Our condensed consolidated statement of cash flows for the nine months ended June 30, 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 June 30, 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 $ 3.2 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 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.

EARNINGS PER SHARE

EARNINGS (LOSS) PER SHARE

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

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

2023 2022 2023 2022

Net income $ 6,727 $ 4,126 $ 18,405 $ 8,160

Three months ended December 31,

Net (loss) income $ ( 3,054 ) $ 5,779

Denominator for basic net income per common share — weighted average shares outstanding 36,129 35,608

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Denominator for diluted net income per common share — adjusted weighted average shares 36,129 36,859

Net income per common share, basic $ 0.19 $ 0.12 $ 0.51 $ 0.23

Net income per common share, diluted $ 0.18 $ 0.12 $ 0.50 $ 0.23

Digi excludes certain stock options and restricted stock unit awards that would have an anti-dilutive effect on our diluted net income per share calculation.

For the three months ended June 30, 2023 and 2022, 599,957 and 939,101 shares outstanding were excluded, respectively.

For the nine months ended June 30, 2023 and 2022, 477,521 and 778,573 shares outstanding were excluded, respectively.

Net (loss) income per common share, basic $ ( 0.08 ) $ 0.16

Net (loss) income per common share, diluted $ ( 0.08 ) $ 0.16

Digi excludes certain stock options and restricted stock unit awards that would have an anti-dilutive effect on our diluted net (loss) income per share calculation.

For the three months ended December 31, 2023 and 2022, 1,563,857 and 234,365 shares outstanding were excluded, respectively.

SELECTED BALANCE SHEET DATA

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Inventories $ 67,590 $ 74,396

FAIR VALUE MEASUREMENTS

Financial assets and liabilities are classified in the following fair value hierarchy based on the lowest level input that is significant to the fair value measurement:

Level 1 (unadjusted quoted prices in active markets for identical assets or liabilities);

Level 2 (observable market inputs, other than quoted prices included in Level 1);

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

2023 2022 2023 2022

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

Change in fair value of contingent consideration — — — —

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

In connection with our acquisition of Haxiot, Inc.

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

The fair value of the remaining liability for contingent consideration for the acquisition of Haxiot was $ 0.0 million at June 30, 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 at June 30, 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 June 30, 2023 is based on the probability of achieving the specified revenue thresholds for Ctek.

As of June 30, 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):

June 30, 2023 September 30, 2022

December 31, 2023 September 30, 2023

amount Accum.

7 unchanged sentences

Total $ 436,068 $ ( 165,147 ) $ 270,921 $ 435,897 $ ( 158,813 ) $ 277,084

Amortization expense was $ 6.3 million and $ 7.0 million for the three months ended June 30, 2023 and 2022, respectively.

Amortization expense was $ 19.0 million and $ 20.4 million for the nine months ended June 30, 2023 and 2022, respectively.

Amortization expense for intangible assets was $ 6.2 million and $ 6.5 million for the three months ended December 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 2024 and the five succeeding fiscal years is (in thousands):

2023 (three months) $ 7,142

2024 (nine months) $ 19,058

GOODWILL AND OTHER INTANGIBLE ASSETS, NET (CONTINUED)

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

Nine months ended June 30, 2023

Three months ended December 31, 2023

Products & Services IoT

2 unchanged sentences

Foreign currency translation adjustment 567 264 831

Balance on June 30, 2023 $ 174,746 $ 167,546 $ 342,292

Balance on December 31, 2023 $ 174,524 $ 167,900 $ 342,424

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

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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 within either of our segments, we may be required to record future impairment charges for goodwill.

Digi conducted an analysis as of December 31, 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

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

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

This agreement provides us with a senior secured credit facility (the "Credit Facility") consisting of a $ 350 million term loan B secured loan (the “Term Loan Facility”) and a $ 35 million revolving credit facility (the “Revolving Loan Facility”) with an uncommitted option to increase incremental loans under the Credit Facility, subject to an incremental cap.

The Revolving Loan Facility includes a $ 10 million letter of credit subfacility and $ 10 million swingline subfacility.

Digi may use proceeds of the Revolving Loan Facility in the future for general corporate purposes.

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

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

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.

On December 7, 2023, Digi entered into a credit agreement (the “Credit Agreement”) with BMO Bank N.A.

(“BMO”), as administrative and collateral agent, BMO Capital Markets Corp., BofA Securities, Inc.

and MUFG Bank, Ltd., as joint lead arrangers and joint bookrunners, and the several banks and other financial institutions or entities from time to time party thereto as lenders (the “Lenders”).

The Credit Agreement provides Digi with a senior secured credit facility (the “Credit Facility”).

The Credit Facility includes a $ 250 million senior secured revolving credit facility (the “Revolving Loan Facility”), with an uncommitted accordion feature that provides for additional borrowing capacity of up to the greater of $ 95 million or one hundred percent of trailing twelve month adjusted earnings before interest, taxes, depreciation, and amortization ("EBITDA").

The Credit Facility also contains a $ 10 million letter of credit sublimit and $ 10 million swingline sub-facility.

Digi may use the proceeds of the Credit Facility in the future for general corporate purposes.

Digi borrowed a total of $ 215 million under the Credit Facility to repay all obligations and to pay related fees and expenses under the Third Amended and Restated Credit Agreement dated as of December 22, 2021 (the “Prior Credit Facility”), by and among Digi, as the borrower, BMO, as administrative agent and collateral agent, BMO Capital Markets Corp., as sole lead arranger and bookrunner, and the other lenders from time-to-time party thereto.

The Prior Credit Facility consisted of a $ 350 million term loan B secured loan and a $ 35 million revolving credit facility that included a $ 10 million letter of credit subfacility and $ 10 million swingline subfacility.

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 %.

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.

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.

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.

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 has elected the same periods each subsequent month.

Following the discontinuation of LIBOR on June 30, 2023, borrowings under the Term Loan Facility will be subject to the Secured Overnight Financing Rate (SOFR).

Our weighted average interest rate for our Term Loan Facility as of June 30, 2023 was 10.16 %.

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

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.

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 June 30, 2023.

Digi made early payments against the term loan of $ 16.3 million and $ 81.3 million in nine months ended June 30, 2023 and 2022, respectively.

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

Balance on June 30, 2023 Balance on September 30, 2022

Borrowings under the Credit Facility bear interest at a rate per annum equal to Term SOFR with a floor of 0.00 % 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 Term SOFR is no longer available) plus the applicable margin or a base rate plus the applicable margin.

The base rate is determined by reference to the highest of BMO’s prime rate, the rate determined by BMO to be the average rate of Federal funds in the secondary market plus 0.50 %, or one-month SOFR plus 1.00 %.

The applicable margin for loans under the Credit Facility is in a range of 1.75 % to 2.75 % for Term SOFR loans and 0.75 % to 1.75 % for base rate loans, depending on Digi’s total net leverage ratio.

The initial borrowings were made at Term SOFR for a one-month interest period plus an applicable margin of 2.50 %.

Our weighted average interest rate for our Credit Facility was 7.96 % as of December 31, 2023.

In addition to paying interest on the outstanding principal, Digi is required to pay a commitment fee on the unutilized commitments under the Credit Facility.

The commitment fee is between 0.20 % and 0.35 % depending on Digi’s total net leverage ratio.

Our weighted average Revolving Loan Facility commitment fee was 0.30 % as of December 31, 2023.

The Credit Facility is secured by substantially all of the property of Digi and its domestic subsidiaries.

The debt issuance costs and remaining balance under the Prior Credit Facility totaling $ 9.7 million at December 7, 2023 were written off and included in other expenses upon the entry into the Credit Agreement.

Digi incurred an additional $ 1.3 million in debt issuance costs upon entry into the Credit Agreement, with this amount amortized over the term of the Credit Agreement and reported in interest expense.

The Revolving Loan is due in a lump sum payment at maturity December 7, 2028, if any amounts are drawn.

The fair value of the Revolving Loan approximated carrying value at December 31, 2023.

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

Balance on December 31, 2023 Balance on September 30, 2023

Revolving loan $ 196,000 $ —

Term loan — 213,625

Total loans 196,000 213,625

Less unamortized issuance costs ( 1,316 ) ( 10,051 )

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Total long-term debt, net of current portion $ 194,684 $ 188,051

The following table is a summary of future maturities of our aggregate long-term debt at June 30, 2023 (in thousands):

Fiscal year Amount

2023 (three months) $ 4,375

Total long-term debt $ 220,625

Covenants and Security Interest

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

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

At June 30, 2023, we had no amounts drawn on the Revolving Loan Facility.

The Credit Agreement requires Digi to maintain a minimum interest coverage ratio of 3.00 to 1.00 and a total net leverage ratio not to exceed 3.00 to 1.00, with certain exceptions for a covenant holiday of up to 3.50 to 1.00 after certain material acquisitions.

The total net leverage ratio is defined as the ratio of Digi’s consolidated total funded indebtedness minus unrestricted cash as of such date up to a maximum amount not to exceed $50 million, to consolidated EBITDA for such period.

The Credit Agreement also contains other customary affirmative and negative covenants, including covenants that restrict the ability of Digi and its subsidiaries to incur additional indebtedness, dispose of significant assets, make certain investments, including any acquisitions other than permitted acquisitions, make certain restricted payments, enter into sale and leaseback transactions or grant additional liens on its assets, subject to certain limitations.

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

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

These four operating segments are:

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

• Console Servers - similar to cellular routers except they are exclusively for edge computing installations and data center applications (also exclusively using cellular communications);

• 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 ("SOM").

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

• Infrastructure Management - includes battery operated, cellular enabled connect sensors as well as other types of console server applications that are more Digi Accelerated Linux ("DAL") based than Console Servers.

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

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

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

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

These four operating segments are Cellular Routers, Console Servers, OEM Solutions and Infrastructure Management.

IoT Products & Services derives revenue from the sale of connectivity products and solutions.

These products and solutions include enclosed router devices in Cellular Routers, enclosed devices for edge computing and data center applications in Console Servers, chip modules in OEM Solutions and sensors in Infrastructure Management, as well as our cloud based remote manager application and extended support and monitoring of devices sold.

IoT Solutions is comprised of two operating segments.

These operating segments are SmartSense and Ventus.

IoT Solutions derives revenue from the sale of monitoring and networking service solutions.

These solutions include wireless condition-based monitoring services in SmartSense and Managed Network-as-a-Service ("MNaaS") in Ventus.

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

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The quantitative factors include similar operating margins.

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

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

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

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

2023 2022 2023 2022

Three months ended December 31,

IoT Products & Services $ 82,023 $ 84,342

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Total depreciation and amortization $ 8,051 $ 8,112

SEGMENT INFORMATION (CONTINUED)

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

Nine months ended June 30,

Three months ended December 31,

IoT Products & Services $ 37 $ 637

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Total expended for property, plant and equipment $ 219 $ 963

* Excluded from these amounts are $ 3,175 and $ 1,742 of transfers of inventory to property plant and equipment for subscriber assets for the nine months ended June 30, 2023 and 2022, respectively.

* Excluded from these amounts are $ 1,105 and $ 1,512 of transfers of inventory to property plant and equipment for subscriber assets for the three months ended December 31, 2023 and 2022, respectively.

SEGMENT INFORMATION (CONTINUED)

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

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

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

2023 2022 2023 2022

Three months ended December 31,

North America, primarily the United States $ 79,695 $ 83,465

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

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

2023 2022 2023 2022

Three months ended December 31,

Transferred at a point in time $ 79,394 $ 85,486

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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 $ 16.9 million and $ 16.5 million as of June 30, 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 $ 1.0 million and $ 0.4 million for the three months ended June 30, 2023 and 2022, respectively.

Depreciation expense for these subscriber assets was $ 2.8 million and $ 2.3 million for the nine months ended June 30, 2023 and 2022, respectively.

The total net book value of subscriber assets of $ 16.7 million and $ 16.6 million as of December 31, 2023 and September 30, 2023, respectively, are included in property, equipment and improvements, net.

Depreciation expense for these subscriber assets, which is included in cost of sales, was $ 1.0 million and $ 0.9 million for the three months ended December 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 June 30, 2023 and September 30, 2022.

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

Contract Liabilities

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.

The timing of revenue recognition may differ from the timing of invoicing to customers.

Customers are invoiced for subscription services on a monthly, quarterly or annual basis.

Our contract liabilities were $ 26.5 million and $ 22.6 million at June 30, 2023 and 2022, respectively.

Of the $ 25.7 million and $ 24.8 million balances as of March 31, 2023 and 2022, Digi recognized $ 6.7 million and $ 5.4 million as revenue in the three months ended June 30, 2023 and 2022, respectively.

Of the $ 21.6 million and $ 15.5 million balances as of September 30, 2022 and 2021, Digi recognized $ 18.9 million and $ 12.0 million as revenue in the nine months ended June 30, 2023 and 2022, respectively.

REVENUE (CONTINUED)

Our contract liabilities were $ 35.0 million and $ 23.0 million at December 31, 2023 and 2022, respectively.

There were contract liability balances of $ 27.9 million and $ 21.6 million balances as of September 30, 2023 and 2022.

Of these balances, Digi recognized $ 7.4 million and $ 6.1 million as revenue in the three months ended December 31, 2023 and 2022, respectively.

Remaining Performance Obligation

As of June 30, 2023, we had approximately $ 154.7 million of remaining performance obligations on contracts with an original duration of one year or more.

As of December 31, 2023, we had approximately $ 156.9 million of remaining performance obligations on contracts with an original duration of one year or more.

We expect to recognize revenue on approximately $ 67.5 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 benefit was $ 0.7 million for the nine months ended June 30, 2023.

Included in this was a net tax benefit discretely related to the nine months ended June 30, 2023 of $ 2.9 million.

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

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

Our income tax benefit was $ 0.2 million for the three months ended December 31, 2023.

Included in this was a net tax liability of $ 0.2 million discretely related to the three months ended December 31, 2023.

This liability primarily was the result of book stock compensation in excess of recognized tax benefits.

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

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 ( 32 )

Prior year income tax positions 100

Unrecognized tax benefits as of June 30, 2023 $ 2,767

The total amount of unrecognized tax benefits at June 30, 2023 that, if recognized, would affect our effective tax rate was $ 2.7 million, after considering the impact of interest and deferred benefit items.

Unrecognized tax benefits as of December 31, 2023 $ 3,130

The total amount of unrecognized tax benefits at December 31, 2023 that, if recognized, would affect our effective tax rate was $ 3.0 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 $ 0.4 million over the next 12 months.

PRODUCT WARRANTY OBLIGATION

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

Balance at Warranties Settlements Balance at

Period March 31 issued made June 30

Three months ended June 30, 2023 $ 836 $ 135 $ ( 117 ) $ 854

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

Balance at Warranties Settlements Balance at

Period September 30 issued made June 30

Nine months ended June 30, 2023 $ 886 $ 303 $ ( 335 ) $ 854

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

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

Three months ended December 31,

Balance at beginning of period $ 772 $ 886

Warranties accrued 94 90

Settlement made ( 85 ) ( 54 )

Balance at end of period $ 781 $ 922

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

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

Balance Sheet Location June 30, 2023 September 30, 2022

Balance Sheet Location December 31, 2023 September 30, 2023

Operating leases Operating lease right-of-use assets $ 12,187 $ 12,876

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Total lease liabilities $ 16,549 $ 17,341

LEASES (CONTINUED)

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

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

2023 2022 2023 2022

Three months ended December 31,

Operating lease cost $ 891 $ 904

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Total lease cost $ 1,235 $ 1,238

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 June 30, 2022.

Digi acquired $ 0.1 million and $ 0.3 million in right-of-use assets in exchange for new operating lease liabilities in the three and nine months ended June 30, 2023, respectively.

At June 30, 2023, the weighted average remaining lease term of our operating leases was 6.7 years and the weighted average discount rate for these leases was 4.4 %.

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 June 30, 2023 (in thousands):

At December 31, 2023, the weighted average remaining lease term of our operating leases was 6.3 years and the weighted average discount rate for these leases was 4.5 %.

LEASES (CONTINUED)

Fiscal year Amount

2023 (three months) $ 1,131

2024 (nine months) $ 3,197

Thereafter 3,865

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Please refer to Note 10 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, competitors and/or former 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.

A trial is scheduled to commence in February 2024.

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.

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

STOCK-BASED COMPENSATION

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

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

Stock-based awards granted in the first fiscal quarter of 2024 and 2023 were granted under the amended and restated 2021 Omnibus Incentive Plan (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 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.

As of December 31, 2023, there were approximately 1,881,637 shares available for future grants under the 2021 Plan.

Cash received from the exercise of stock options was $ 0.2 million and $ 0.9 million for the three months ended December 31, 2023 and 2022, respectively.

STOCK-BASED COMPENSATION (CONTINUED)

As of June 30, 2023, there were approximately 2,325,333 shares available for future grants under the 2021 Plan.

Cash received from the exercise of stock options was $ 2.6 million and $ 6.7 million for the nine months ended June 30, 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 nine months ended June 30, 2023 and 2022, our employees forfeited 97,171 shares and 96,860 shares, respectively, in order to satisfy respective withholding tax obligations of $ 3.9 million and $ 2.2 million, respectively.

During the three months ended December 31, 2023 and 2022, our employees forfeited 87,792 shares and 71,951 shares, respectively, in order to satisfy withholding tax obligations of $ 2.1 million and $ 3.0 million, respectively.

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

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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 $ 1.7 million and $ 1.1 million for the nine months ended June 30, 2023 and 2022, respectively.

Pursuant to the ESPP, 58,081 and 60,481 common shares were issued to employees during the nine months ended June 30, 2023 and 2022, respectively.

ESPP contributions by employees were $ 0.5 million and $ 0.6 million for the three months ended December 31, 2023 and 2022, respectively.

Pursuant to the ESPP, 23,665 and 19,683 common shares were issued to employees during the three months ended December 31, 2023 and 2022, respectively.

Shares are issued under the ESPP from treasury stock.

As of June 30, 2023, 494,767 common shares were available for future issuances under the ESPP.

As of December 31, 2023, 446,562 common shares were available for future issuances under the ESPP.

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

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

2023 2022 2023 2022

Three months ended December 31,

Cost of sales $ 181 $ 142

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Forfeited / Canceled ( 10 ) 23.17

Balance on June 30, 2023 1,640 $ 18.43 4.1 $ 34,471

Exercisable on June 30, 2023 1,046 $ 15.99 3.5 $ 24,481

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $ 39.39 as of June 30, 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)

Balance on December 31, 2023 1,611 $ 18.89 3.8 $ 12,533

Exercisable on December 31, 2023 1,137 $ 16.89 3.3 $ 10,656

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $ 26.00 as of December 31, 2023, which would have been received by the option holders had all option holders exercised their options as of that date.

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

The total intrinsic value of all options exercised during the nine months ended June 30, 2023 and 2022 was $ 4.1 million and $ 15.6 million, respectively.

The total intrinsic value of all options exercised during the three months ended December 31, 2023 and 2023 was $ 0.4 million and $ 1.7 million, respectively.

STOCK-BASED COMPENSATION (CONTINUED)

The following table shows the weighted average fair value, which was determined based upon the fair value of each option on the grant date utilizing the Black-Scholes option-pricing model and the related assumptions:

Nine months ended June 30,

Three months ended December 31,

Weighted average per option grant date fair value $ 12.44 $ 19.98

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

As of June 30, 2023, the total unrecognized compensation cost related to non-vested stock options was $ 5.7 million and the related weighted average period over which it is expected to be recognized is approximately 1.6 years.

As of December 31, 2023, the total unrecognized compensation cost related to non-vested stock options was $ 4.1 million and the related weighted average period over which it is expected to be recognized is approximately 1.5 years.

Non-vested Stock Units

The following table presents a summary of our non-vested restricted stock units and performance stock units as of June 30, 2023 and changes during the nine months then ended (in thousands, except per common share amounts):

The following table presents a summary of our non-vested restricted stock units and performance stock units as of December 31, 2023 and changes during the three months then ended (in thousands, except per common share amounts):

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

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Canceled ( 9 ) 32.07 ( 7 ) 25.15

Nonvested on June 30, 2023 889 $ 30.14 135 $ 37.72

As of June 30, 2023, the total unrecognized compensation cost related to non-vested stock units was $ 25.8 million.

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

Nonvested on December 31, 2023 941 $ 29.39 220 $ 30.92

As of December 31, 2023, the total unrecognized compensation cost related to non-vested restricted stock units and performance stock units was $ 24.2 million and $ 1.4 million, respectively.

The related weighted average period over which these costs are expected to be recognized was approximately 2.6 years and 0.8 years, respectively.

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