What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-03 compared with 2024-02-02 · 128 added, 60 removed, 169 unchanged (53% of the section changed)

5 unchanged sentences

This discussion contains forward-looking statements that are based on management’s current expectations and assumptions.

These statements often can be identified by the use of forward-looking terminology such as "anticipate," "assume," "believe," "continue," "estimate," "expect," "intend," "may," "plan," "potential," "project," "should," "target," or "will" or the negative thereof or other variations thereon or similar terminology.

Among other items, these statements relate to expectations of the business environment in which Digi operates, projections of future performance, inventory levels, perceived marketplace opportunities, interest expense and statements regarding our mission and vision.

These statements often can be identified by the use of forward-looking terminology such as "assume," "believe," "continue," "estimate," "expect," "intend," "may," "plan," "potential," "project," "should," or "will" or the negative thereof or other variations thereon or similar terminology.

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

17 unchanged sentences

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

Below we highlight the metrics for the first quarter of fiscal 2024 that we feel are most important in these evaluations, with comparisons to the first quarter of fiscal 2023:

Below we highlight the metrics for the second quarter of fiscal 2024 that we feel are most important in these evaluations, with comparisons to the second quarter of fiscal 2023:

• Consolidated revenue was $108 million, a decrease of 3%.

1 unchanged sentence

• Gross profit margin was 57.9%, an increase of 130 basis points.

• Net loss was $3 million, compared to net income of $6 million.

• Net loss per diluted share was $0.08, driven by the $0.26 impact of the term B debt issuance cost write off, compared to net income per diluted share of $0.16.

• Net income was $4 million, compared to net income of $6 million.

• Net income per diluted share was $0.11, compared to $0.16.

• Adjusted net income and adjusted net income per share was $17.9 million, or $0.49 per diluted share, compared to $18.2 million, or $0.50 per diluted share.

1 unchanged sentence

• ARR was $110 million at quarter end, an increase of 11%.

In recent periods, we have experienced longer than expected sales cycles with respect to many contracts and projects of potential significance.

We believe this is related to macroeconomic conditions and are uncertain as to when and to what degree sales cycles will return to more normal conditions, but expect this to adversely impact our results in the second half of fiscal 2024.

CONSOLIDATED RESULTS OF OPERATIONS

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

Three months ended December 31, % incr.

($ in thousands) 2023 2022 (decr.)

Three months ended March 31, % incr.

Six months ended March 31, % incr.

($ in thousands) 2024 2023 (decr.) 2024 2023 (decr.)

Revenue $ 107,702 100.0 % $ 111,144 100.0 % (3.1) % $ 213,791 100.0 % $ 220,450 100.0 % (3.0) %

4 unchanged sentences

Other expense, net (3,729) (3.5) (6,346) (5.7) (41.2) (19,138) (9.0) (12,300) (5.6) 55.6

Income before income taxes (3,276) (3.1) 6,009 5.5 NM

Income tax (benefit) expense (222) (0.2) 230 0.2 NM

Net income $ (3,054) (2.9) % $ 5,779 5.3 % NM

Income before income taxes 4,422 4.1 5,829 5.2 (24.1) 1,146 0.5 11,838 5.4 (90.3)

Income tax expense (benefit) 428 0.4 (70) (0.1) NM 206 0.1 160 0.1 28.8

Net income $ 3,994 3.7 % $ 5,899 5.3 % (32.3) $ 940 0.4 % $ 11,678 5.3 % (92.0) %

NM means not meaningful

1 unchanged sentence

REVENUE BY SEGMENT

Three months ended December 31, % incr.

($ in thousands) 2023 2022 (decr.)

Three months ended March 31, % incr.

Six months ended March 31, % incr.

($ in thousands) 2024 2023 (decr.) 2024 2023 (decr.)

IoT Products & Services $ 83,390 77.4 % $ 85,893 77.3 % (2.9) % $ 165,413 77.4 % $ 170,235 77.2 % (2.8) %

2 unchanged sentences

IoT Products & Services

IoT Products & Services revenue decreased 2.7% for the three months ended December 31, 2023, as compared to the same period in the prior fiscal year.

This decrease was driven by decreases in sales volume of Console Server and Cellular products, partially offset by growth in sales of OEM products.

IoT Products & Services revenue decreased $2.5 million for the three months ended March 31, 2024, as compared to the same period in the prior fiscal year, consisting of an approximate $4.6 million decrease in product sales volume, with no material impact from pricing, from our Console Server and Cellular product lines partially offset by growth in OEM and $2.1 million in service revenue growth.

IoT Products & Services revenue decreased $4.8 million for the six months ended March 31, 2024, as compared to the same period in the prior fiscal year, consisting of an approximate $8.8 million decrease in product sales volume, with no material impact from pricing, from our Console Server and Cellular product lines partially offset by growth in OEM and $4.0 million in service revenue growth.

IoT Solutions

IoT Solutions revenue decreased 3.6% for the three months ended December 31, 2023, as compared to the same period in the prior fiscal year.

This decrease was primarily driven by one-time revenue reductions in Ventus, partially offset by increases in sales volume in SmartSense.

ARR was $108 million as of December 31, 2023, compared to $96 million as of December 31, 2022.

IoT Products & Services ARR was $23 million as of December 31, 2023, compared to $14 million as of December 31, 2022.

IoT Solutions ARR was $85 million as of December 31, 2023, compared to $82 million as of December 31, 2022.

IoT Solutions revenue decreased $0.9 million for the three months ended March 31, 2024, as compared to the same period in the prior fiscal year, consisting of a $1.0 million decrease in one time services volume and a $0.8 million decrease in hardware sales offset by a $0.9 million increase in recurring revenue.

IoT Solutions revenue decreased $1.8 million for the six months ended March 31, 2024, as compared to the same period in the prior fiscal year, consisting of a $2.3 million decrease in one time services volume and a $1.0 million decrease in hardware sales offset by a $1.5 million increase in recurring revenue.

ARR was $110 million as of March 31, 2024, compared to $99 million as of March 31, 2023.

IoT Products & Services ARR was $23 million as of March 31, 2024, compared to $17 million as of March 31, 2023.

This increase primarily was due to growth in the subscription base for Console Server services, complemented by growth in other business lines.

IoT Solutions ARR was $87 million as of March 31, 2024, compared to $82 million as of March 31, 2023, primarily driven by growth in SmartSense.

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

COST OF GOODS SOLD AND GROSS PROFIT BY SEGMENT

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

Three months ended December 31, Basis point

Three months ended March 31, Basis point

($ in thousands) 2024 2023* inc.

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Total cost of goods sold $ 45,384 42.1 % $ 47,290 42.5 % (40)

IoT Products & Services Operating Segments Gross Profit $ 45,061 54.0 % $ 47,477 55.3 % (130)

Unallocated IoT Products & Services Expenses — — (360) (0.4) 40

Total IoT Products & Services Segment Gross Profit 45,061 54.0 47,117 54.9 (90)

IoT Solutions Operating Segments Gross Profit 17,257 71.0 16,377 64.9 610

Unallocated IoT Solutions Expenses — — % (622) (2.5) % 250

Total IoT Solutions Segment Gross Profit 17,257 71.0 % 15,755 62.4 % 860

Total gross profit $ 62,318 57.9 % $ 62,872 56.6 % 130

Six months ended March 31, Basis point

($ in thousands) 2024 2023* inc.

Cost of Goods Sold

IoT Products & Services $ 75,158 45.4 % $ 76,084 44.7 % 70

IoT Solutions 13,880 28.7 % 17,712 35.3 % (660)

Total cost of goods sold $ 89,038 41.6 % $ 93,796 42.5 % (90)

IoT Products & Services Operating Segments Gross Profit $ 90,255 54.6 % $ 94,151 55.3 % (70)

Unallocated IoT Products & Services Expenses (1,335) (0.8) % (1,013) (0.6) % (20)

Total IoT Products & Services Segment Gross Profit 88,920 53.8 % 93,138 54.7 % (90)

IoT Solutions Operating Segments Gross Profit 34,498 71.3 % 32,503 64.7 % 660

Unallocated IoT Solutions Expenses — — % (1,248) (2.5) % 250

Total IoT Solutions Segment Gross Profit 34,498 71.3 % 31,255 62.2 % 910

Total gross profit $ 123,418 57.7 % $ 124,393 56.4 % 130

*Prior periods have been restated as discussed in Note 6.

IoT Product & Services

IoT Products & Services gross profit margin decreased 110 basis points for the three months ended December 31, 2023 as compared to the same period in the prior fiscal year.

This decrease was driven primarily by decreased volume in Console Server, partially offset by increased sales and higher margin mix in OEM.

IoT Solutions

The IoT Solutions gross profit margin increased 950 basis points for the three months ended December 31, 2023 as compared to the same period in the prior fiscal year.

This increase was primarily the result of increased revenue and margins in SmartSense.

IoT Products & Services gross profit margin decreased 90 basis points for the three months ended March 31, 2024 as compared to the same period in the prior fiscal year.

This decrease was driven by decreased volume as well as mix across Console Server and Cellular product lines.

The change in unallocated gross profit as compared to the prior fiscal year is attributable to lower, unallocated inventory related expenses.

IoT Products & Services gross profit margin decreased 90 basis points for the six months ended March 31, 2024 as compared to the same period in the prior fiscal year.

This decrease was driven by decreased volume as well as mix across Console Server

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

and Cellular product lines.

The change in unallocated gross profit as compared to the prior fiscal year is attributable to higher, unallocated inventory related expenses.

IoT Solutions

The IoT Solutions gross profit margin increased 860 basis points for the three months ended March 31, 2024 as compared to the same period in the prior fiscal year.

This increase was the result of growth in higher margin ARR subscription revenues.

The change in unallocated gross profit as compared to the prior fiscal year is attributable to lower, unallocated inventory related expenses.

The IoT Solutions gross profit margin increased 910 basis points for the six months ended March 31, 2024 as compared to the same period in the prior fiscal year.

This increase was the result of growth in higher margin ARR subscription revenues.

The change in unallocated gross profit as compared to the prior fiscal year is attributable to lower, unallocated inventory related expenses.

OPERATING EXPENSES

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

Three months ended December 31, $ %

Three months ended March 31, $ % Six months ended March 31, $ %

($ in thousands) 2024 2023 incr.

(decr.) incr.

(decr.) 2024 2023 incr.

(decr.) incr.

Operating Expenses

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Total operating expenses $ 54,167 50.3 % $ 50,697 45.6 % $ 3,470 6.8 % $ 103,134 48.2 % $ 100,255 45.5 % $ 2,879 2.9 %

The $0.6 million decrease in operating expenses in the first quarter of fiscal 2024 from the first quarter of fiscal 2023 was primarily the result of decreases in general and administrative expenses, partially offset by increases in sales and marketing and research and development expenses.

The $3.5 million increase in operating expenses for the three months ended March 31, 2024, as compared to the same period in the prior fiscal year was primarily the result of a $6.3 million increase to litigation reserves partially offset by a $2.1 million gain on the sale of an intangible asset and $0.7 million decrease in non-labor expenses.

The $2.9 million increase in operating expenses for the six months ended March 31, 2024, as compared to the same period in the prior fiscal year was primarily the result of was primarily the result of a $6.3 million increase to litigation reserves partially offset by a $2.1 million gain on the sale of an intangible asset and $1.3 million decrease in non-labor expenses.

OPERATING INCOME

Three months ended December 31,

Three months ended March 31,

($ in thousands) 2024 2023* incr.

1 unchanged sentence

Operating Income (Loss)

IoT Products & Services $ 10,341 $ 12,683 $ (2,342) (18.5) %

IoT Solutions 1,792 (720) 2,512 NM

IoT Products & Services Operating Segments Operating Income $ 13,643 $ 14,239 $ (596) (4.2) %

Unallocated IoT Products & Services Expenses (11) (1,274) 1,263 NM

Total IoT Products & Services Segment Operating Income 13,632 12,965 667 5.1

IoT Solutions Operating Segments Operating Loss (5,481) (14) (5,467) NM

Unallocated IoT Solutions Expenses — (776) 776 (100.0)

Total IoT Solutions Segment Operating Loss (5,481) (790) (4,691) NM

Total operating income $ 8,151 $ 12,175 $ (4,024) (33.1) %

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

Six months ended March 31,

($ in thousands) 2024 2023* incr.

(decr.) incr.

Operating Income (Loss)

IoT Products & Services Operating Segments Operating Income $ 25,343 $ 28,654 $ (3,311) (11.6) %

Unallocated IoT Products & Services Expenses (1,370) (3,006) 1,636 NM

Total IoT Products & Services Segment Operating Income 23,973 25,648 (1,675) (6.5)

IoT Solutions Operating Segments Operating Loss (3,689) 16 (3,705) NM

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

Total IoT Solutions Segment Operating Loss (3,689) (1,510) (2,179) 144.3 %

Total operating income $ 20,284 $ 24,138 $ (3,854) (16.0) %

NM means not meaningful

Drivers for the changes in operating income for the periods presented are described above in the revenue and gross profit details.

*Prior periods have been restated as discussed in Note 6.

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

The change in Unallocated IoT Products & Service operating income not explained by the change in gross profit is attributable to lower, unallocated incentive compensation for both the three months and six months ending March 31, 2024.

OTHER EXPENSE, NET

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

Three months ended December 31, $ %

Three months ended March 31, $ % Six months ended March 31, $ %

($ in thousands) 2024 2023 incr.

(decr.) incr.

(decr.) 2024 2023 incr.

(decr.) incr.

Other expense, net

Interest expense, net $ (3,697) (3.5) % $ (6,393) (5.8) % $ 2,696 (42.2) % (9,358) (4.5) % (12,364) (5.6) % 3,006 (24.3) %

Debt issuance cost write off (9,722) (9.2) — — (9,722) 100.0

Other expense, net (26) — 17 — (43) NM

Debt issuance cost write off — — — — — NM (9,722) (4.5) — — (9,722) NM

Other expense, net (32) — 47 0.1 (79) NM (58) — 64 — (122) NM

Total other expense, net $ (3,729) (3.5) % $ (6,346) (5.7) % $ 2,617 (41.2) % $ (19,138) (9.0) % $ (12,300) (5.6) % $ (6,838) 55.6 %

NM means not meaningful

Other expense, net, increased $9.5 million for the three months ended December 31, 2023, as compared to the same period in the prior fiscal year.

This increase was driven by the debt issuance cost expense realized upon the extinguishment of our prior credit facility (see Note 5 to the condensed consolidated financial statements for additional information).

Other expense, net, decreased $2.6 million for the three months ended March 31, 2024, as compared to the same period in the prior fiscal year.

This decrease was driven by a reduction in interest expense due to a decrease in average debt outstanding and our effective interest rate.

Other expense, net, increased $6.8 million for the six months ended March 31, 2024, as compared to the same period in the prior fiscal year.

This increase was driven by the debt issuance cost expense realized upon the extinguishment of our prior credit facility partially offset by a decrease in our average debt outstanding and our effective interest rate on debt (see Note 5 to the condensed consolidated financial statements for additional information).

See Note 8 to the condensed consolidated financial statements for discussion of income taxes.

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

KEY BUSINESS METRIC

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NON-GAAP FINANCIAL INFORMATION

This report includes adjusted net income, adjusted net income per diluted share and adjusted earnings before interest, taxes and amortization ("Adjusted EBITDA"), each of which is a non-GAAP financial measure.

This report includes adjusted net income, adjusted net income per diluted share and adjusted earnings before interest, taxes and

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

amortization ("Adjusted EBITDA"), each of which is a non-GAAP financial measure.

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

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

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

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

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

Reconciliation of Net Income to Adjusted EBITDA

(In thousands)

Three months ended December 31,

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

2024 2023 2024 2023

revenue % of total

Total revenue $ 107,702 100.0 % $ 111,144 100.0 % $ 213,791 100.0 % $ 220,450 100.0 %

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

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

Interest expense, net 3,697 6,393 9,358 12,364

Debt issuance cost write off — — 9,722 —

Income tax (benefit) provision (222) 230

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

Depreciation and amortization 8,066 7,846 16,117 15,958

Stock-based compensation 3,473 3,465 6,579 6,333

Litigation accrual 6,253 — 6,253 —

Gain on asset sale (2,129) — (2,129) —

Restructuring charge 43 23 146 46

1 unchanged sentence

Adjusted EBITDA $ 23,825 22.1 % $ 23,863 21.5 % $ 47,131 22.0 % $ 47,227 21.4 %

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

Reconciliation of Net Income and Net Income per Diluted Share to

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(In thousands, except per share amounts)

Three months ended December 31,

Net (loss) income and net (loss) income per diluted share $ (3,054) $ (0.08) $ 5,779 $ 0.16

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

2024 2023 2024 2023

Net income and net income per diluted share $ 3,994 $ 0.11 $ 5,899 $ 0.16 $ 940 $ 0.03 $ 11,678 $ 0.32

Amortization 6,097 0.16 6,251 0.17 12,335 0.33 12,714 0.35

2 unchanged sentences

Acquisition expense — — 307 0.01 (61) — 688 0.02

Litigation accrual 6,253 0.17 — — 6,253 0.17 — —

Gain on asset sale (2,129) (0.06) — — (2,129) (0.06) — —

Restructuring charge 43 — 23 — 146 — 46 —

3 unchanged sentences

(3,593) (0.10) (4,626) (0.12) (7,506) (0.20) (9,495) (0.27)

Discrete tax (benefits) expenses (2)

Discrete tax expenses (benefits) (2)

81 — 557 0.02 (101) — 1,749 0.05

3 unchanged sentences

(1) The tax effect from the above adjustments assumes an estimated effective tax rate of 18.0% for fiscal 2024 and fiscal 2023 based on adjusted net income.

(2) For the three months ended December 31, 2023 and 2022, discrete tax (benefit) expense primarily are a result of changes in excess tax benefits recognized on stock compensation.

(2) For the three and six months ended March 31, 2024 and 2023, discrete tax expenses (benefits) primarily are a result of changes in excess tax benefits recognized on stock compensation.

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

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We believe that our current cash and cash equivalents balances, cash generated from operations and our ability to borrow under our credit facility will be sufficient to fund our business operations and capital expenditures for the next 12 months and beyond.

Our condensed consolidated statements of cash flows for the three months ended December 31, 2023 and 2022 are summarized as follows:

Three months ended December 31,

Our condensed consolidated statements of cash flows for the six months ended March 31, 2024 and 2023 are summarized as follows:

Six months ended March 31,

($ in thousands) 2024 2023

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Cash flows from operating activities increased $22.1 million primarily as a result of:

• a $0.4 million decrease in net operating assets for the first quarter of fiscal 2024 compared to a $15.4 million increase in the first quarter of fiscal 2023

• and a $9.7 million debt issuance cost write-off included in net loss in the first quarter of fiscal 2024.

• a $4.6 million increase in net operating assets for the first six months of fiscal 2024 compared to a $22.6 million increase in the first six months of fiscal 2023,

• a $9.7 million debt issuance cost write-off included in net income

• and a $6.3 million litigation accrual in included in net income.

These were partially offset by:

• a $10.7 million decrease in net income

• and a $1.2 million increase in deferred income tax benefit.

• and a $2.2 million increase in gains from the sale of assets.

Cash flows used in investing activities decreased $4.3 million primarily as a result of:

• a decrease in purchases of property, equipment, improvements and certain other intangible assets.

Cash flows used in financing activities increased $14.5 million primarily as a result of:

• debt payments of $233 million in the first quarter of fiscal 2024, including $213.6 million to retire our prior credit facility, an early payment of $1.9 million against our prior credit facility and a payment of $17.5 million against our new credit facility, compared to debt payments of $4.4 million in the first quarter of fiscal 2023,

• increases in debt issuance costs,

• a $2.1 million increase in proceeds from the sale of property, equipment, improvements and certain other intangible assets

• and a $2.2 million decrease in purchases of property, equipment, improvements and certain other intangible assets.

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

Cash flows used in financing activities increased $32.5 million primarily as a result of:

• debt payments of $256 million in the first six months of fiscal 2024, including $213.6 million to retire our prior credit facility, an early payment of $1.9 million against our prior credit facility and a payment of $40.5 million against our new credit facility, compared to debt payments of $9.4 million in the first six months of fiscal 2023

• and decreases in proceeds from stock option plan and employee stock purchase plan transactions.

These were partially offset by:

• gross proceeds of $215.4 million from the issuance of a new credit facility and

• a decrease in taxes paid for net share settlement of share-based payment options and awards.

• net proceeds of $214.1 million from the issuance of a new credit facility

• and a decrease in taxes paid for net share settlement of share-based payment options and awards.

CONTRACTUAL OBLIGATIONS

The following table summarizes our contractual obligations at December 31, 2023:

The following table summarizes our contractual obligations at March 31, 2024:

Payments due by fiscal period

5 unchanged sentences

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

Our reserve for uncertain tax positions, including accrued interest and penalties, was $3.1 million as of December 31, 2023.

Our reserve for uncertain tax positions, including accrued interest and penalties, was $2.3 million as of March 31, 2024.

Due to the nature of the underlying liabilities and the extended time often needed to resolve income tax uncertainties, we cannot make reliable estimates of the amount or timing of future cash payments that may be required to settle these liabilities.

2 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis