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Item 1. Financial Statements

2024-05-03 compared with 2024-02-02 · 160 added, 96 removed, 387 unchanged (40% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three months ended December 31,

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

2024 2023 2024 2023

(in thousands, except per share data)

19 unchanged sentences

Total other expense, net ( 3,729 ) ( 6,346 ) ( 19,138 ) ( 12,300 )

(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:

Income before income taxes 4,422 5,829 1,146 11,838

Income tax provision (benefit) 428 ( 70 ) 206 160

Net income $ 3,994 $ 5,899 $ 940 $ 11,678

Net income per common share:

Basic $ 0.11 $ 0.16 $ 0.03 $ 0.33

5 unchanged sentences

DIGI INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

Three months ended December 31,

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

2024 2023 2024 2023

(in thousands)

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

Other comprehensive income:

Net income $ 3,994 $ 5,899 $ 940 $ 11,678

Other comprehensive (loss) income:

Foreign currency translation adjustment ( 600 ) 178 2,348 1,467

Other comprehensive income 2,948 1,289

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

Other comprehensive (loss) income ( 600 ) 178 2,348 1,467

Comprehensive income $ 3,394 $ 6,077 $ 3,288 $ 13,145

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

1 unchanged sentence

CONDENSED CONSOLIDATED BALANCE SHEETS

December 31, 2023 September 30, 2023

March 31, 2024 September 30, 2023

(in thousands, except share data)

46 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three months ended December 31,

Six months ended March 31,

(in thousands)

Operating activities:

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

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

Net income $ 940 $ 11,678

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

Depreciation of property, equipment and improvements 3,783 3,245

2 unchanged sentences

Stock-based compensation 6,579 6,333

Deferred income tax (benefit) provision ( 303 ) 905

Deferred income benefit ( 1,873 ) ( 2,739 )

Litigation accrual 6,253 —

Other ( 1,819 ) 107

Changes in operating assets and liabilities (net of acquisitions) 448 ( 15,449 )

Changes in operating assets and liabilities ( 4,612 ) ( 22,719 )

Net cash provided by operating activities 31,727 9,607

1 unchanged sentence

Purchase of property, equipment, improvements and certain other intangible assets ( 803 ) ( 2,855 )

Net cash used in investing activities ( 292 ) ( 963 )

Proceeds from sale of property, equipment, improvements and certain other intangible assets 2,228 —

Net cash provided by (used in) investing activities 1,425 ( 2,855 )

Financing activities:

21 unchanged sentences

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

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

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

Net income — — — — — 5,899 — 5,899

Other comprehensive loss — — — — — — 178 178

Employee stock purchase plan issuances — — ( 20 ) 194 382 — — 576

Taxes paid for net share settlement of share-based payment awards — — 19 ( 667 ) — — — ( 667 )

Issuance of stock under stock award plans 126 1 — — 799 — — 800

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

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

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

Net income — — — — — 11,678 — 11,678

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

3 unchanged sentences

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

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

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

Net income — — — — — 3,994 — 3,994

Other comprehensive loss — — — — — — ( 600 ) ( 600 )

Employee stock purchase plan issuances — — ( 26 ) 260 321 — — 581

Taxes paid for net share settlement of share-based payment options and awards — — 18 ( 533 ) ( 84 ) — — ( 617 )

Issuance of stock under stock award plans 105 2 — — 719 — — 721

Stock-based compensation expense — — — — 3,473 — — 3,473

Balances, March 31, 2024 42,854 $ 429 6,492 $ ( 63,683 ) $ 411,759 $ 225,785 $ ( 24,663 ) $ 549,627

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

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

Net income — — — — — 940 — 940

Other comprehensive income — — — — — — 2,348 2,348

3 unchanged sentences

Stock-based compensation expense — — — — 6,579 — — 6,579

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

Balances, March 31, 2024 42,854 $ 429 6,492 $ ( 63,683 ) $ 411,759 $ 225,785 $ ( 24,663 ) $ 549,627

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

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

EARNINGS (LOSS) PER SHARE

EARNINGS PER SHARE

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

Three months ended December 31,

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

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

2024 2023 2024 2023

Net income $ 3,994 $ 5,899 $ 940 $ 11,678

Denominator for basic net income per common share — weighted average shares outstanding 36,296 35,791 36,212 35,698

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Denominator for diluted net income per common share — adjusted weighted average shares 36,974 36,730 36,855 36,821

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.

Net income per common share, basic $ 0.11 $ 0.16 $ 0.03 $ 0.33

Net income per common share, diluted $ 0.11 $ 0.16 $ 0.03 $ 0.32

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 March 31, 2024 and 2023, 583,062 and 609,017 shares outstanding were excluded, respectively.

For the six months ended March 31, 2024 and 2023, 676,465 and 416,307 shares outstanding were excluded, respectively.

SELECTED BALANCE SHEET DATA

12 unchanged sentences

Amortizable intangible assets were (in thousands):

December 31, 2023 September 30, 2023

March 31, 2024 September 30, 2023

amount Accum.

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Total $ 436,063 $ ( 171,180 ) $ 264,883 $ 435,897 $ ( 158,813 ) $ 277,084

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 for intangible assets was $ 6.1 million for the three months ended March 31, 2024 and 2023.

Amortization expense for intangible assets was $ 12.3 million and $ 12.7 million for the six months ended March 31, 2024 and 2023, 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):

2024 (nine months) $ 19,058

2024 (six months) $ 13,023

GOODWILL AND OTHER INTANGIBLE ASSETS, NET (CONTINUED)

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

Three months ended December 31, 2023

Six months ended March 31, 2024

Products & Services IoT

2 unchanged sentences

Foreign currency translation adjustment 400 29 429

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

Balance on March 31, 2024 $ 174,357 $ 167,665 $ 342,022

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.

Digi conducted an analysis as of March 31, 2024 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 below carrying value of any of our reporting units.

Results of our Fiscal 2023 Annual Impairment Test

As of June 30, 2023, 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, $ 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 reporting unit and $ 118.6 million of goodwill for the Ventus 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 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.

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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 includes a $ 250 million senior secured revolving credit facility (the “Revolving Loan”), 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.

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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.

All borrowings in the period were made at Term SOFR for a one-month interest election period plus an applicable margin of 2.50 %.

Our weighted average interest rate for our Credit Facility was 7.92 % as of March 31, 2024.

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.

Our weighted average Revolving Loan commitment fee was 0.30 % as of March 31, 2024.

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

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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

The fair value of the Revolving Loan approximated carrying value at March 31, 2024.

The following table is a summary of our long-term indebtedness at March 31, 2024 and September 30, 2023 (in thousands):

Balance on March 31, 2024 Balance on September 30, 2023

Revolving Loan $ 173,000 $ —

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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 is comprised of two operating segments, SmartSense and Ventus.

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

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The qualitative factors include similar nature of products and services, production process, type or class of customers and methods used to distribute the products.

The quantitative factors include similar operating margins.

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

The quantitative factors include similar economic characteristics.

Our CEO is our Chief Operating Decision Maker ("CODM").

The measure the CODM uses to measure profitability within our IoT Products & Services reportable segment is segment operating income and segment operating income as a percentage of revenue.

IoT Products & Services segment operating income excludes certain costs that are directly attributable to reportable segments, which are unallocated to the operating segments.

These costs are primarily inventory adjustments on component balances that are common and shared by all operating segments within the IoT Products & Services reportable segment.

The measure the CODM uses to measure profitability within our IoT Solutions reportable segment is segment gross profit and segment gross profit as a percentage of revenue.

IoT Solutions segment gross profit excludes certain costs that are directly attributable to reportable segments, which are unallocated to the operating segments.

These costs are primarily inventory adjustments on component balances that are common and shared by all operating segments within the IoT Solutions reportable segment.

Immaterial Correction of Prior Period Financial Statements

Subsequent to the issuance of the Company's financial statements for the year ended September 30, 2023, the Company discovered a disclosure error related to the measure of profit and loss previously disclosed.

ASC 280-10-50-22 requires the disclosure of the measure of profit or loss as reviewed by the CODM.

Our CODM reviews the measures of profit for each operating segment excluding certain costs that are directly attributable to reportable segments, which are unallocated to the operating segments.

As a result, the Company has corrected the disclosure to separately disclose the unallocated expenses outside of the IoT Products & Services and IoT Solutions segments gross profit and operating income (loss) amounts.

The errors have no impact on the consolidated balance sheet, consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows.

Management has evaluated the misstatement and concluded it was not material to prior periods.

The comparable second fiscal quarter 2023 amounts have been corrected to reflect the correct amounts for comparative purposes and the information presented below includes the corrected disclosure for the three and six months ended March 31, 2023.

The Company will also correct previously reported financial information for such immaterial errors in future filings, as applicable (see "Part II, Item 5.

Other Information" below for additional information).

SEGMENT INFORMATION (CONTINUED)

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

Three months ended December 31,

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

2024 2023 2024 2023

IoT Products & Services $ 83,390 $ 85,893 $ 165,413 $ 170,235

1 unchanged sentence

Total revenue $ 107,702 $ 111,144 $ 213,791 $ 220,450

IoT Products & Services $ 43,859 $ 46,021

IoT Solutions 17,241 15,500

IoT Products & Services Operating Segments Gross Profit $ 45,061 $ 47,477 $ 90,255 $ 94,151

Unallocated IoT Products & Services Expenses — ( 360 ) ( 1,335 ) ( 1,013 )

Total IoT Products & Services Segment Gross Profit 45,061 47,117 88,920 93,138

IoT Solutions Operating Segments Gross Profit 17,257 16,377 34,498 32,503

Unallocated IoT Solutions Expenses — ( 622 ) — ( 1,248 )

Total IoT Solutions Segment Gross Profit 17,257 15,755 34,498 31,255

Total gross profit $ 62,318 $ 62,872 $ 123,418 $ 124,393

Operating Income (Loss)

IoT Products & Services $ 10,341 $ 12,683

IoT Solutions 1,792 ( 720 )

IoT Products & Services Operating Segments Operating Income $ 13,643 $ 14,239 $ 25,343 $ 28,654

Unallocated IoT Products & Services Expenses ( 11 ) ( 1,274 ) ( 1,370 ) ( 3,006 )

Total IoT Products & Services Segment Operating Income 13,632 12,965 23,973 25,648

IoT Solutions Operating Segments Operating (Loss) Income ( 5,481 ) ( 14 ) ( 3,689 ) 16

Unallocated IoT Solutions Expenses — ( 776 ) — ( 1,526 )

Total IoT Solutions Segment Operating Loss ( 5,481 ) ( 790 ) ( 3,689 ) ( 1,510 )

Total operating income $ 8,151 $ 12,175 $ 20,284 $ 24,138

4 unchanged sentences

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

Three months ended December 31,

Six months ended March 31,

IoT Products & Services $ 336 $ 2,260

1 unchanged sentence

Total expended for property, plant and equipment $ 669 $ 2,768

* 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)

* Excluded from these amounts are $ 4,046 and $ 2,685 of transfers of inventory to property plant and equipment for subscriber assets for the six months ended March 31, 2024 and 2023, respectively.

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

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

Three months ended December 31,

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

2024 2023 2024 2023

North America, primarily the United States $ 72,398 $ 77,809 $ 152,093 $ 161,274

3 unchanged sentences

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

Three months ended December 31,

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

2024 2023 2024 2023

Transferred at a point in time $ 80,574 $ 87,088 $ 159,968 $ 172,574

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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 $ 16.7 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.

The total net book value of subscriber assets of $ 18.5 million and $ 16.6 million as of March 31, 2024 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 $ 1.2 million and $ 0.9 million for the three months ended March 31, 2024 and 2023, respectively.

Depreciation expense for these subscriber assets, which is included in cost of sales, was $ 2.2 million and $ 1.8 million for the six months ended March 31, 2024 and 2023, respectively.

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

1 unchanged sentence

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

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

Our contract asset balances were immaterial as of March 31, 2024 and September 30, 2023.

Contract Liabilities

2 unchanged sentences

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

Our contract liabilities were $ 38.0 million and $ 25.7 million at March 31, 2024 and 2023, respectively.

There were contract liability balances of $ 35.0 million and $ 23.0 million balances as of December 31, 2023 and 2022, respectively.

Of these balances, Digi recognized $ 8.3 million and $ 5.9 million as revenue in the three months ended March 31, 2024 and 2023, respectively.

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

Digi recognized $ 13.3 million and $ 10.6 million as revenue in the six months ended March 31, 2024 and 2023, 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 December 31, 2023, we had approximately $ 156.9 million of remaining performance obligations on contracts with an original duration of one year or more.

As of March 31, 2024, we had approximately $ 151.2 million of remaining performance obligations on contracts with an original duration of one year or more.

We expect to recognize revenue on approximately $ 67.2 million of remaining performance obligations over the next 12 months.

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.

Our income tax expense was $ 0.2 million for the six months ended March 31, 2024.

Included in this was a net tax liability of $ 0.1 million discretely related to the six months ended March 31, 2024.

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

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Expiration of statute of limitations ( 32 )

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.

Unrecognized tax benefits as of March 31, 2024 $ 3,130

The total amount of unrecognized tax benefits at March 31, 2024 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.

1 unchanged sentence

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,

Three months ended March 31,

Balance at beginning of period $ 781 $ 922

2 unchanged sentences

Balance at end of period $ 774 $ 836

Six months ended March 31,

Balance at beginning of period $ 772 $ 886

Warranties accrued 170 168

Settlement made ( 168 ) ( 218 )

Balance at end of period $ 774 $ 836

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 December 31, 2023 September 30, 2023

Balance Sheet Location March 31, 2024 September 30, 2023

Operating leases Operating lease right-of-use assets $ 11,488 $ 12,876

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

Three months ended December 31,

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

2024 2023 2024 2023

Operating lease cost $ 930 $ 867 $ 1,821 $ 1,771

2 unchanged sentences

Total lease cost $ 1,274 $ 1,228 $ 2,509 $ 2,466

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 %.

At March 31, 2024, the weighted average remaining lease term of our operating leases was 6.1 years and the weighted average discount rate for these leases was 4.9 %.

LEASES (CONTINUED)

The table below reconciles the undiscounted cash flows for each of the first five years as well as all the remaining years to the operating lease liabilities recorded on the condensed consolidated balance sheet as of December 31, 2023 (in thousands):

Fiscal year Amount

2024 (nine months) $ 3,197

2024 (six months) $ 2,216

Thereafter 3,865

5 unchanged sentences

Please refer to Note 10 to our condensed consolidated financial statements for additional information.

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.

As previously disclosed, Data Logger Solutions, LLC ("Data Loggers") brought suit in Delaware Superior Court against us and our subsidiary Digi SmartSense, LLC on October 23, 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 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 March 2024, a jury found Digi liable for breach of contract and awarded Data Loggers damages of approximately $ 11.6 million.

Delaware law also entitles Data Loggers to interest on this award pursuant to a statutory calculation.

Each party has filed post-trial motions with respect to the jury’s verdict.

Our motions seek to have the case retried or to remit the award of damages.

The plaintiffs are seeking to expand the award of damages for attorney’s fees and additional interest.

While these post-trial motions are pending, each party’s right to appeal is stayed and remains in place.

Pursuant to ASC 450 we have accrued a $ 6.3 million liability with respect to this case.

The accrual reflects a reasonable estimate of probable loss based on information currently available to us.

The ultimate loss, if any, to Digi could be materially different from the amount we have accrued and we cannot predict or estimate the duration or ultimate outcome of this matter.

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.

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

As of December 31, 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.

As of March 31, 2024, there were approximately 1,870,487 shares available for future grants under the 2021 Plan.

Cash received from the exercise of stock options was $ 0.9 million and $ 1.7 million for the six months ended March 31, 2024 and 2023, respectively.

STOCK-BASED COMPENSATION (CONTINUED)

2 unchanged sentences

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

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.

During the six months ended March 31, 2024 and 2023, our employees forfeited 106,227 shares and 90,985 shares, respectively, in order to satisfy withholding tax obligations of $ 2.7 million and $ 3.7 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.

1 unchanged sentence

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 $ 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.

ESPP contributions by employees were $ 1.1 million and $ 1.2 million for the six months ended March 31, 2024 and 2023, respectively.

Pursuant to the ESPP, 50,171 and 39,979 common shares were issued to employees during the six months ended March 31, 2024 and 2023, respectively.

Shares are issued under the ESPP from treasury stock.

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

As of March 31, 2024, 420,056 common shares were available for future issuances under the ESPP.

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

Three months ended December 31,

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

2024 2023 2024 2023

Cost of sales $ 175 $ 161 $ 356 $ 303

12 unchanged sentences

Forfeited / Canceled ( 17 ) 29.97

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 three months ended December 31, 2023 and 2023 was $ 0.4 million and $ 1.7 million, respectively.

Balance on March 31, 2024 1,557 $ 18.92 3.6 $ 20,785

Exercisable on March 31, 2024 1,152 $ 17.20 3.1 $ 17,160

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $ 31.93 as of March 31, 2024, which would have been received by the option holders had all option holders exercised their options as of that date.

STOCK-BASED COMPENSATION (CONTINUED)

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

The total intrinsic value of all options exercised during the six months ended March 31, 2024 and 2023 was $ 1.8 million and $ 2.6 million, respectively.

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

Three months ended December 31,

Six months ended March 31,

Weighted average per option grant date fair value $ 12.44 $ 19.92

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

As of December 31, 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.

As of March 31, 2024, the total unrecognized compensation cost related to non-vested stock options was $ 3.4 million and the related weighted average period over which it is expected to be recognized is approximately 1.3 years.

Non-vested Stock Units

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

The following table presents a summary of our non-vested restricted stock units and performance stock units as of March 31, 2024 and changes during the six months then ended (in thousands, except per common share amounts):

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

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Canceled ( 41 ) 30.16 ( 17 ) 28.94

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.

Nonvested on March 31, 2024 870 $ 29.97 210 $ 30.86

As of March 31, 2024, the total unrecognized compensation cost related to non-vested restricted stock units and performance stock units was $ 22.4 million and $ 0.9 million, respectively.

The related weighted average period over which these costs are expected to be recognized was approximately 2.1 years and 0.3 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