What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-11-22 compared with 2023-11-22 · 118 added, 245 removed, 657 unchanged (36% of the section changed)

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For fiscal years ended September 30, 2022, 2021 and 2020

(in thousands) Accumulated

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Net income — — — — — 19,383 — 19,383

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

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

Other — — — — — ( 4 ) — ( 4 )

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

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

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Stock-based compensation expense — — — — 8,578 — — 8,578

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

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

Net income — — — — — 24,770 — 24,770

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Net income — — — — — 22,505 — 22,505

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

Other comprehensive income — — — — — — 3,267 3,267

Employee stock purchase issuances — — ( 102 ) 998 1,209 — — 2,207

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Estimated reserves for future credit returns and price adjustments are charged against revenue in the same period as the corresponding sales are recorded.

Estimated sales returns for our distributor stock rotation program are accounted for under the guidance of Accounting Standard Codification ("ASC") 845 Nonmonetary Transactions .

The following table presents a reconciliation of the allowance for credit losses (in thousands):

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

We have two reportable segments:

We have two reportable and operating segments:

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

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

Our IoT Products & Services business is structured to include four reporting units under the IoT Products & Services segment:

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

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

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

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

Our goodwill impairment tests as of June 30, 2024, June 30,2023 and June 30, 2022 indicated no impairment (see Note 3 ).

During the fourth quarter of fiscal 2024, we assessed various qualitative factors to determine whether or not an additional goodwill impairment assessment was required as of September 30, 2024, and we concluded that no additional impairment assessment was required.

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Material differences between the historical trends used to determine estimated reserves and actual credit returns and pricing adjustments could result in a material change to our consolidated results of operations or financial position.

Estimated sales returns for our distributor stock rotation program are accounted for under the guidance of ASC 845 Nonmonetary Transactions .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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Generally, our subscription renewal charges per month are the same as the original contract term.

We derive service revenue from our Digi Remote Manager, a platform-as-a-service (“PaaS”) offering, whereby customers pay for services consumed based on the number of devices being managed or monitored.

This revenue is recognized over the life of the service term and is included in our IoT Products & Services segment.

We derive service revenue from our platform-as-a-service (“PaaS”) offerings, whereby customers pay for services consumed based on the number of devices managed or monitored per month.

Depending on the billing method set forth in the contract, we invoice our customers monthly, quarterly or annually either in advance or in arrears.

Revenue is recognized over the life of the service term as the customer simultaneously receives and consumes the services.

Because these arrangements involve repetitive services that are substantially the same from one month to the next, we apply the guidance under ASC 606-10-25-15.

We utilize a time-based output method to recognize revenue over time as this properly depicts our transfer of control to the customer.

These revenues are included in our IoT Products & Services segment.

Digi Support Services revenues are recognized over the life of the support contract and included in our IoT Products & Services segment.

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Contracts with Multiple Performance Obligations

From time to time we have contracts from customers with multiple performance obligations.

Our hardware products may be combined with our Digi Remote Manager PaaS offering as well as other support services in an individual contract.

Our SmartSense by Digi ® revenues typically are derived from contracts with multiple performance obligations.

These obligations may include:

delivery of monitoring equipment that the customer purchases out-right, monitoring services, providing condition alerts of assets being monitored, and recertification of sensor equipment.

When we retain ownership of the equipment, we charge an implementation fee to the customer so they can begin using the equipment.

In these instances, all revenue derived from the above obligations is recognized over the subscription term of the contract.

If the customer purchases the equipment out-right, that portion of the revenue is recognized at the stand-alone selling price at the time the equipment is shipped and all other revenue is recognized over the subscription term of the contract.

Some of our contracts with customers in IoT Products and Services and, to a much lesser extent, in IoT Solutions include multiple performance obligations.

In these contracts, each performance obligation is recognized at the amount of the allocated transaction price, which is determined based on each performance obligations standalone selling price ("SSP") for the distinct obligation.

The best evidence of SSP is the observable price of a product or service when we sell the goods separately in similar circumstances and to similar customers.

In instances where SSP is not directly observable, we estimate SSP using information that may include market conditions.

In some of our IoT Solution contracts we are providing subscription services, while retaining ownership of the equipment, we have determined there is a single performance obligation encompassing the various activities that are inputs into the service.

As such, all revenue derived from the service is recognized over the subscription term of the contract ratably as a series.

We have made an accounting policy election to exclude from the measurement of our revenues any sales or similar taxes we collect from customers.

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We recognize the effect of income tax positions only if those positions are more likely than not of being sustained.

Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized.

Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

Recognized income tax

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

positions are measured at the largest amount that is greater than 50% likely of being realized.

Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

Stock-Based Compensation

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Gains and losses on foreign currency exchange transactions, as well as translation gains or losses on transactions denominated in currencies other than an entity’s functional currency, are reflected in the statement of operations.

During fiscal 2023, 2022 and 2021 there were net transaction gains (losses) of $ 0.0 million, $ 0.1 million and $( 0.1 ) million, respectively that were recorded in other income, net.

During fiscal 2024, 2023 and 2022 there were net transaction (losses) gains of $( 0.1 ) million, $ 0.0 million and $ 0.1 million, respectively that were recorded in other income, net.

We manage our net asset or net liability position for U.S.

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Net income per common share, diluted $ 0.61 $ 0.67 $ 0.54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Because their effect would be anti-dilutive at period end, certain potentially dilutive shares related to stock options to purchase common shares were excluded in the above computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of our common shares.

For the years ended September 30, 2024, 2023 and 2022, such excluded stock options were 678,697 , 395,190 and 647,181 , respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal 2022 Acquisition

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Total $ 350,000

The consolidated balance sheet as of September 30, 2022 reflects the final allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition.

The consolidated balance sheet as of September 30, 2022 reflected the final allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition.

The fair value of customer relationships was calculated using the excess earnings method, while purchased and core technology and patents were valued using the relief from royalty method.

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Net income for the year ended September 30, 2021 was adjusted to include acquisition-related costs of $ 3.1 million.

Fiscal 2021 Acquisitions

Acquisition of Haxiot

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

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

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

The terms of the acquisition included an upfront cash payment as well as contingent consideration comprised of future earn-out payments.

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

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

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

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

In the fourth fiscal quarter of 2022, it was determined that the revenue thresholds would not be met and the remaining balance was adjusted down by $ 5.9 million, resulting in a fair value of $ 0.0 million for contingent consideration relating to the acquisition of Haxiot at September 30, 2023 and 2022.

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

The goodwill therefore is not deductible.

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

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

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

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

Contingent consideration 5,900

Total $ 12,996

Fair value of net tangible assets acquired $ 86

Identifiable intangible assets:

Customer relationships 3,900

Purchased and core technology 1,050

Trademarks 500

Deferred tax liability on identifiable intangible assets ( 1,145 )

Goodwill 8,605

Total $ 12,996

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ACQUISITIONS (CONTINUED)

Acquisition of Ctek, Inc.

On July 6, 2021, we acquired Ctek, Inc.

("Ctek"), a San Pedro, California-based provider that specializes in solutions for remote monitoring and industrial controls.

The results of operations of Ctek are included in our fourth quarter fiscal 2021 results within our IoT Products & Services segment.

Through the acquisition of Ctek, Digi is uniquely positioned to provide customers with both battery and hardwired options for the control and monitoring of critical infrastructure, from complex off-shore oil rig locations to localized deployments such as municipal park lighting.

In addition, Ctek’s offering and existing client portfolio is set to further Digi’s reach in a rapidly expanding market.

The terms of the acquisition included an upfront cash payment as well as contingent consideration comprised of future earn-out payments.

We funded the closing of the acquisition with $ 12.0 million of cash on hand.

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

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

In the fiscal fourth quarter of 2022, it was determined that the revenue thresholds would not be met and the remaining balance was adjusted down by $ 0.3 million, resulting in a fair value of $ 0.0 million for contingent consideration relating to the acquisition of Ctek at September 30, 2023 and 2022.

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

The goodwill therefore is not deductible.

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

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

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

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

Cash $ 12,012

Contingent consideration 300

Working capital adjustment 422

Total $ 12,734

Fair value of net tangible assets acquired $ 397

Identifiable intangible assets:

Customer relationships 5,100

Purchased and core technology 1,300

Trademarks 70

Backlog 1,000

Goodwill 4,867

Total $ 12,734

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET

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Fiscal year Total

2024 (twelve months) $ 25,232

2025 $ 21,811

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2028 $ 20,410

2029 $ 18,355

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET (CONTINUED)

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

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

Acquisitions — 118,635 118,635

Adjustments 186 ( 631 ) ( 445 )

Foreign currency translation adjustment 1,026 90 1,116

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No goodwill impairment has been recorded in any period presented.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET (CONTINUED)

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

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

We continue to have two reportable segments, our IoT Products & Services segment and our IoT Solutions segment (see Note 4 ).

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

Our IoT Products & Services business is structured to include four reporting units under the IoT Products & Services segment:

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

Due to the reorganization, we performed our fiscal third quarter 2021 annual impairment test for those four reporting units along with our IoT Solutions segment.

Following our acquisition of Ventus, IoT Solutions is comprised of two reporting units.

All six reporting units were included in our fiscal third quarter 2022 annual impairment test.

All six reporting units were included in our fiscal 2022, 2023 and 2024 annual impairment tests.

For our quantitative goodwill impairment tests, we determine the estimated fair value of each reporting unit and compare it to the carrying value of the reporting unit, including goodwill.

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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, we may be required to record future impairment charges for goodwill.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET (CONTINUED)

Results of our Fiscal 2024 Annual Impairment Test

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At June 30, 2024, the fair value of goodwill exceeded the carrying value for all six reporting units and no impairment was recorded.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Ventus fair value exceeded carrying values by less than 10%.

SEGMENT INFORMATION AND MAJOR CUSTOMERS

We have two reportable segments:

We have two reportable segments that also serve as our operating segments:

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

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The qualitative information included, but was not limited to, the following:

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

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

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

Ventus and SmartSense by Digi.

IoT Products & Services

Our IoT Products & Services segment is composed of the following four operating segments:

• 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 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 chip, or from a systems-on-module ("SOMs").

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.

IoT Solutions

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

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

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

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

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 chief operating decision maker reviews and makes business decisions which includes a primary review of operating income but also includes gross profit.

Following the October 2020 reorganization, the shared general and administrative costs are being allocated to each operating segment.

As a result, our disclosed measure of segment operating income has been updated for all periods presented to conform with this change.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEGMENT INFORMATION AND MAJOR CUSTOMERS (CONTINUED)

each segment is led by a single segment manager that reports to the Chief Operating Decision Maker (CODM), the nature of the products and services and customers differ between the two segments, discrete financial information is available through gross profit for both segments and the CODM is reviewing both segments’ financial information separately to make decisions about the allocation of resources.

IoT Products & Services derives revenue from the sale of products and services that help original equipment manufacturers ("OEMs"), enterprise and government customers create and deploy, secure IoT connectivity solutions.

IoT Solutions derives revenue from the sale of software-based services that are enabled through the use of connected devices that utilize cellular communications.

Our CEO is our CODM and the metric he uses to measure profitability within each of our reportable segments is segment gross profit.

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

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Total gross profit $ 249,906 $ 252,203 $ 216,286

Operating Income (loss)

IoT Products & Services $ 51,157 $ 41,562 $ 18,212

IoT Solutions ( 1,062 ) ( 3,342 ) ( 7,684 )

Total operating income $ 50,095 $ 38,220 $ 10,528

Depreciation and Amortization

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* Excluded from this amount is $ 12.3 million, $ 3.9 million and $ 6.2 million of transfers of inventory to property plant and equipment for subscriber assets for the year ended September 30, 2024, 2023 and 2022, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEGMENT INFORMATION AND MAJOR CUSTOMERS (CONTINUED)

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

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Total net property, equipment and improvements $ 34,915 $ 29,108

export sales represented 27.2 %, 22.1 % and 26.2 % of revenue for the fiscal years ended September 30, 2023, 2022 and 2021.

export sales represented 28.7 %, 27.2 % and 22.1 % of revenue for the fiscal years ended September 30, 2024, 2023 and 2022, respectively.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SELECTED BALANCE SHEET DATA

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Total property, equipment and improvements, net $ 34,915 $ 29,108

FAIR VALUE MEASUREMENTS

Financial assets and liabilities are classified in the 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 transfers into or out of our Level 2 financial assets during fiscal 2023.

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

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

We paid the first installment of $ 0.9 million during the third quarter of fiscal 2020.

We paid the final installment of $ 10.0 million during the second quarter of fiscal 2021.

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

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

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

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

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

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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):

Year ended September 30,

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

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

Fair value at end of period $ — $ —

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

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

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

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

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Digi refinanced the Term Loan Facility and Revolving Loan Facility under its existing credit agreement entered into on November 1, 2021, but did not receive any additional proceeds from nor modify the amounts of any facilities or subfacilities contained within that credit agreement.

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

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

Our interest rate has floor of 0.50 % for an interest period of one, three or six months as selected by Digi, reset at the end of the selected interest period plus 5.00 % or a base rate plus 4.00 %.

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

dollars plus 1.00 %.

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

In addition to paying interest on the outstanding balance under the Credit Facility, we are required to pay a commitment fee on the non-utilized commitments thereunder, which is also reported in interest expense.

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 “2023 Credit Facility”).

The 2023 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 2023 Credit Facility also contains a $ 10 million letter of credit sublimit and $ 10 million swingline sub-facility.

Digi may use the proceeds of the 2023 Credit Facility in the future for general corporate purposes.

Digi borrowed a total of $ 215 million under the 2023 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 “2021 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 2021 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.

Borrowings under the 2023 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 2023 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.

All borrowings from October through May were made at Term SOFR for a one-month interest election period plus an applicable margin of 2.50 %.

All borrowings from June through September were made at Term SOFR for a one-month interest election period plus an applicable margin of 2.25 %.

Our weighted average interest rate for our 2023 Credit Facility was 7.46 % as of September 30, 2024.

In addition to paying interest on the outstanding principal, Digi is required to pay a commitment fee on the unutilized commitments under the 2023 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 commitment fee was 0.25 % as of September 30, 2024.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INDEBTEDNESS (CONTINUED)

an interest period of one month for the months of December 2021 through April 2022 and a period of six months effective May 1, 2022.

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

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

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

The Term Loan is payable in quarterly installments, with the balance remaining due on November 2, 2028.

The Revolving Loan is due in a lump sum payment at maturity on November 2, 2028, if any amounts are drawn.

The fair value of the Term Loan and Revolving Loan approximated carrying value at September 30, 2023.

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

The debt issuance costs and remaining balance under the 2021 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 September 30, 2024.

Digi made payments against the Revolving Loan of $ 91.1 million in twelve months ended September 30, 2024.

Digi made early payments against the term loan under the 2021 Credit Facility of $ 18.9 million and $ 100.0 million in twelve months ended September 30, 2023 and 2022, respectively.

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

Year ended September 30,

Revolving loan $ 124,300 $ —

Term loan — 213,625

Total loans 124,300 213,625

Less unamortized issuance costs ( 1,115 ) ( 10,051 )

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Total long-term debt, net of current portion $ 123,185 $ 188,051

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

Fiscal year Amount

2024 $ 17,500

Total long-term debt $ 213,625

Covenants and Security Interest

The agreements governing the Credit Facility contain a number of covenants.

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

At September 30, 2023, we were in compliance with our debt covenants.

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 2023 Credit Facility are secured by substantially all of our assets.

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Fiscal year Amount

2024 (twelve months) $ 3,999

Thereafter 3,865

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Total reported lease liability $ 14,201

RESTRUCTURING

2021 Restructuring

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

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

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

during the three months ended December 31, 2020.

In the second quarter of fiscal 2021 we recorded an additional $ 0.2 million related to this restructuring.

In the third quarter of fiscal 2021 we recorded an additional $ 0.1 million related to this restructuring.

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

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

2021 Restructuring

Employee Termination Costs Total

Balance on September 30, 2020 $ — $ —

Restructuring charge 995 995

Payments ( 935 ) ( 935 )

Reversals — —

Foreign currency fluctuation ( 60 ) ( 60 )

Balance on September 30, 2021 $ — $ —

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Revenue Disaggregation

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

REVENUE (CONTINUED)

Contract Assets

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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Income before income taxes $ 22,858 $ 24,918 $ 18,628

The components of the income tax benefit are (in thousands):

The components of the income tax expense are (in thousands):

Year ended September 30,

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Federal ( 11,189 ) ( 12,131 ) ( 2,982 )

State — — ( 618 )

Foreign ( 434 ) ( 168 ) ( 97 )

Income tax (benefit) expense $ 353 $ 148 $ ( 755 )

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INCOME TAXES (CONTINUED)

Net deferred tax liability consists of (in thousands):

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Compensation costs 5,552 5,559

Deferred Revenue 7,595 5,687

Other accruals 5,805 3,324

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As of September 30, 2024, we had $ 3.2 million of tax carryforwards (net of reserves) related to state research and development tax credits.

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

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

net operating losses of $ 0.2 million and foreign tax credits of $ 0.2 million.

We also had $ 0.2 million of State net operating losses, non-U.S.

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

foreign tax credits of $ 0.1 million and foreign tax credits of $ 0.2 million.

The majority of our state research and development tax credits have a 15-year carryforward period.

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

tax credit carryforwards will expire in 2034.

Our valuation allowance for certain U.S.

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

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

and foreign attributes was $ 3.3 million at September 30, 2024 and September 30, 2023.

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

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Non-deductible executive compensation 519 373 291

Change in valuation allowance — — ( 2,187 )

Capital Loss Expiration — — 2,301

Utilization of research and development tax credits ( 5,224 ) ( 4,678 ) ( 2,780 )

Deferred balance sheet remeasure — — ( 952 )

ASU 2016-09 excess stock compensation ( 47 ) ( 1,678 ) ( 2,967 )

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deduction for foreign export sales ( 1,827 ) ( 1,419 ) ( 584 )

Global intangible low-taxed income — — 33

Other, net 121 113 45

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Prior year income tax positions — ( 159 ) ( 21 )

Settlements — — —

Expiration of statute of limitations ( 399 ) ( 953 ) ( 95 )

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We expect that it is reasonably possible that the total amounts of UTB will decrease by approximately $ 0.4 million over the next 12 months due to the expiration of various statutes of limitations.

Of the $ 3.2 million of UTB, $ 2.3 million is included in non-current income taxes payable and $ 0.9 million is included with non-current deferred tax liabilities on the consolidated balance sheets at September 30, 2023.

Of the $ 3.6 million of UTB, $ 2.7 million is included in non-current income taxes payable and $ 0.9 million is included with non-current deferred tax assets on the consolidated balance sheets at September 30, 2024.

We recognize interest and penalties related to income tax matters in income tax expense.

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

income tax examinations by tax authorities.

income tax examinations by tax authorities for years before fiscal year 2020.

At September 30, 2024, the majority of undistributed foreign earnings were taxed under the one time transition tax and the global intangible low-taxed income ("GILTI") provision of the Tax Cuts and Jobs Act of 2017.

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As of September 30, 2024, we are permanently reinvested with respect to previously non-taxed accumulated earnings in all jurisdictions.

Although we have no current need to repatriate historical foreign earnings that have not been taxed in the U.S., if we change our assertion from indefinitely reinvesting undistributed foreign earnings, we would have to accrue applicable taxes.

Undistributed foreign earnings remain indefinitely reinvested in foreign operations.

If we change our assertion from indefinitely reinvesting undistributed foreign earnings, we would have to accrue applicable taxes.

The amount of any taxes and the application of any tax credits would be determined based on the income tax laws at the time of such repatriation.

Under current tax law, we estimate the unrecognized tax liability to be immaterial.

STOCKHOLDERS' EQUITY

Public Offering of Common Stock

During March 2021 we sold 4,025,000 shares of our common stock at a public offering price of $ 19.50 per share.

The shares offered were registered pursuant to a registration statement that we filed with the Securities and Exchange Commission.

We received net proceeds of $ 73.8 million, net of transaction expenses of $ 0.3 million related to the public offering.

STOCK-BASED COMPENSATION

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

Stock-based awards granted in 2024 were granted under the Digi International Inc.

2021 Omnibus Incentive Plan (as amended and restated, 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.

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As of September 30, 2024, there were approximately 1,953,397 shares available for future grants under the Amended Plan.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK-BASED COMPENSATION (CONTINUED)

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

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

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

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Our stock option plans allow the net exercise of options.

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

No amount was forfeited in fiscal 2021.

Shares with a value of $ 0.7 million, $ 0.2 million and $ 4.3 million were forfeited to satisfy tax withholding for the year ended September 30, 2024, 2023 and 2022, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK-BASED COMPENSATION (CONTINUED)

Our equity plans and corresponding forms of award agreements generally have provisions allowing employees to elect to satisfy tax withholding obligations through the delivery of shares, having us retain a portion of shares issuable under the award or paying cash to us for the withholding.

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Stock-based compensation after income taxes $ 10,376 $ 10,446 $ 6,759

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK-BASED COMPENSATION (CONTINUED)

Stock Options

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The total intrinsic value of all options exercised during each of the twelve months ended September 30, 2024, 2023 and 2022 was $ 5.6 million, $ 5.2 million and $ 20.3 million, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK-BASED COMPENSATION (CONTINUED)

The table below 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:

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The related weighted average period over which this cost is expected to be recognized was approximately 1.5 years.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK-BASED COMPENSATION (CONTINUED)

As of September 30, 2024, the weighted average exercise price and remaining life of the stock options were (in thousands, except remaining life and exercise price):

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211 2.16 $ 17.94 211 $ 17.94

$ 18.20 - $ 21.53

205 4.21 $ 21.00 128 $ 21.08

$ 22.54 - $ 24.59

221 4.87 $ 23.87 95 $ 23.47

$ 25.15 - $ 41.16

96 4.65 $ 35.51 55 $ 33.57

$ 10.33 - $ 41.16

1,359 3.08 $ 19.00 1,101 $ 17.60

The total grant date fair value of shares vested was $ 3.0 million, $ 4.5 million and $ 3.0 million in each of fiscal 2024, 2023 and 2022, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK-BASED COMPENSATION (CONTINUED)

Non-vested Stock Units

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We provide a match of 100 % on the first 3 % of each employee’s bi-weekly contribution and a 50 % match on the next 2 % of each employee’s bi-weekly contribution.

The employer matching contribution was reinstated for all employees after a suspension effective May 3, 2020 and ending on December 31, 2020 in the United States and Canada.

We provided matching contributions of $ 3.7 million for fiscal 2024, $ 3.4 million for fiscal 2023 and $ 3.1 million for fiscal 2022.

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Please refer to Note 8 to our consolidated financial statements for additional information.

In November 2018, DimOnOff Inc., a company headquartered in Quebec City, Quebec, Canada ("DimOnOff"), which sells control systems in the building automation and street lighting markets sued us and a former distributor from whom DimOnOff purchased certain Digi products.

The suit was brought in the Superior Court of the Province of Quebec in the District of Quebec (Canada) and alleges certain Digi products it purchased and incorporated into street lighting systems in a Canadian city were defective causing some of the street lights to malfunction.

It alleged damages of just over CAD 1.0 million .

During the second quarter of fiscal 2021, the lawsuit was settled and no payment will be made by us.

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

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.

In October, 2024 we settled the lawsuit brought on October 23, 2020 by Data Logger Solutions, LLC ("Data Loggers") in Delaware Superior Court against us and our subsidiary Digi SmartSense, LLC for a payment of $ 5.7 million and a mutual release of all claims associated with the facts that led to the lawsuit.

The suit alleged that Data Loggers has not been paid certain commissions it believed it was owed and would 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.

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

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

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

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

We intend to defend the matter vigorously;

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

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

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

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 entitled Data Loggers to seek interest on this award pursuant to a statutory calculation.

Each party filed post-trial motions with respect to the jury’s verdict and a hearing on those motions was held on June 28, 2024.

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

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

The Court granted our motion, remitted the damages award to a pre-interest amount of $ 5.0 million, and denied Data Loggers’ motion.

Court rules permitted Data Loggers to accept the remitted amount or proceed to a new trial on the issue of damages.

Following the court’s ruling the parties negotiated the final settlement in lieu of further legal proceedings.

Pursuant to ASC 450 we previously made an accrual of $ 6.2 million for this matter.

We have now reversed part of this accrual in the fourth fiscal quarter to reflect the settlement amount of $ 5.7 million.

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data