Item 8. Financial Statements and Supplementary Data
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
DIGI INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands) Accumulated
Additional Other Total
Common Stock Treasury Stock Paid-In Retained Comprehensive Stockholders’
Shares Par Value Shares Value Capital Earnings (Loss) Income Equity
Balance on September 30, 2021 40,653 $ 407 6,391 $ ( 56,535 ) $ 370,699 $ 180,692 $ ( 22,746 ) $ 472,517
Net income — — — — — 19,383 — 19,383
Other comprehensive loss — — — — — — ( 3,308 ) ( 3,308 )
Employee stock purchase issuances — — ( 80 ) 726 774 — — 1,500
Taxes paid for net share settlement of share-based payment awards — — 102 ( 2,363 ) ( 4,299 ) — — ( 6,662 )
Issuance of stock under stock award plans 1,297 13 — — 9,492 — — 9,505
Stock-based compensation expense — — — — 8,578 — — 8,578
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
Other comprehensive loss — — — — — — ( 957 ) ( 957 )
Employee stock purchase issuances — — ( 83 ) 787 1,476 — — 2,263
Taxes paid for net share settlement of share-based payment awards — — 106 ( 4,121 ) ( 193 ) — — ( 4,314 )
Issuance of stock under stock award plans 551 5 — — 3,922 — — 3,927
Stock-based compensation expense — — — — 13,286 — — 13,286
Balances, September 30, 2023 42,501 425 6,436 ( 61,506 ) 403,735 224,845 ( 27,011 ) 540,488
Net income — — — — — 22,505 — 22,505
Other comprehensive income — — — — — — 3,267 3,267
Employee stock purchase issuances — — ( 102 ) 998 1,209 — — 2,207
Taxes paid for net share settlement of share-based payment awards — — 115 ( 2,906 ) ( 663 ) — — ( 3,569 )
Issuance of stock upon under stock award plans 496 5 — — 2,973 — — 2,978
Stock-based compensation expense — — — — 13,159 — — 13,159
Balances, September 30, 2024 42,997 $ 430 6,449 $ ( 63,414 ) $ 420,413 $ 247,350 $ ( 23,744 ) $ 581,035
The accompanying notes are an integral part of the consolidated financial statements.
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description
We are a leading global provider of business and mission-critical IoT connectivity products, services and solutions. We help our customers create next-generation connected products to deploy, monitor and manage critical communications infrastructures and compliance standards in demanding environments with high levels of security and reliability. We have two reportable segments: (i) IoT Products & Services; and (ii) IoT Solutions.
Principles of Consolidation
The consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to the prior year's consolidated financial statements to conform to the current year presentation.
Accounting Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ significantly from those estimates.
Cash and Cash Equivalents
Cash equivalents consist of money market accounts and other highly liquid investments purchased with an original maturity of three months or less. The carrying amounts approximate fair value due to the short maturities of these investments. We maintain our cash and cash equivalents in bank accounts which may exceed federally insured limits at times. We have not experienced any losses in these accounts.
Accounts Receivable
Accounts receivable are stated at the amount we expect to collect. This amount is net of an allowance for credit losses for estimated losses resulting from the inability of our customers to make required payments and a reserve for future credit returns and pricing adjustments. The following factors are considered when determining the collectability of specific customer accounts: customer creditworthiness, past transaction history with the customer, and changes in customer payment terms or practices. In addition, overall historical collection experience, current economic industry trends, and a review of the current status of trade accounts receivable are considered when determining the required allowance for credit losses. Based on our assessment, we provide for estimated uncollectible amounts through a charge to earnings and a credit to our allowance for credit losses. Balances that remain outstanding after we have used reasonable collection efforts are written off through a charge to the allowance for credit losses and a credit to accounts receivable. Estimated reserves for future credit returns and pricing adjustments are established based on an analysis of historical patterns of credit returns and price adjustments compared to received credit returns and distribution sales for the current period. Estimated reserves for future credit returns and price adjustments are charged against revenue in the same period as the corresponding sales are recorded.
The following table presents a reconciliation of the allowance for credit losses (in thousands):
Year ended September 30,
2024 2023
Balance at beginning of period $ 1,693 $ 3,285
Additions 2,090 1,134
Uncollectible accounts charged to allowance, net of recoveries ( 2,221 ) ( 2,726 )
Balance at end of period $ 1,562 $ 1,693
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories
Inventories are valued at the lower of cost or net realizable value using the first-in, first-out ("FIFO") method. Appropriate consideration is given to deterioration, obsolescence and other factors in evaluating net realizable value.
Property, Equipment and Improvements, Net
Property, equipment and improvements are carried at cost, net of accumulated depreciation. Depreciation is provided by charges to operations using the straight-line method over the estimated asset useful lives. Furniture and fixtures, purchased software and other equipment are depreciated over a period of three years to ten years . Building improvements and buildings are depreciated over ten years and 39 years, respectively. Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful life of the asset. Long-lived assets to be held and used, such as property, equipment and improvements, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Expenditures for maintenance and repairs are charged to operations as incurred, while major renewals and betterments are capitalized. The assets and related accumulated depreciation accounts are adjusted for asset retirements and disposals with the resulting gain or loss included in operations.
Identifiable Intangible Assets
Purchased proven technology, license agreements, covenants not to compete and other identifiable intangible assets are recorded at fair value when acquired in a business acquisition, or at cost when not purchased in a business acquisition. All other identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives of three years to 20.5 years. Useful lives for identifiable intangible assets are estimated at the time of acquisition based on the periods of time from which we expect to derive benefits from the identifiable intangible assets. Amortization of purchased and core technology is included in cost of sales in the Consolidated Statements of Operations. Amortization of all other acquired identifiable intangible assets is charged to operating expenses as a component of general and administrative expense.
Identifiable intangible assets are reviewed for impairment whenever events or circumstances indicate that undiscounted expected future cash flows are not sufficient to recover the carrying value amount. Impairment losses, if any, are recorded in the period the impairment is identified. There were no impairments identified in fiscal 2024, 2023 or 2022.
Goodwill
Goodwill represents the excess of cost over the fair value of 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 have two reportable and operating segments: our IoT Products & Services segment and our IoT Solutions segment (see Note 4 to the consolidated financial statements). 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. 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. We have six reporting units that have been tested individually for impairment.
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.
Contingent Consideration
We measure our contingent consideration liabilities recognized in connection with business combinations at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy as defined in ASC 820 "Fair Value Measurement." We used a probability-weighted discounted cash flow approach as a valuation technique to
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
determine the fair value of the contingent consideration on the acquisition date. At each subsequent reporting period, the fair value is re-measured with the change in fair value recognized in general and administrative expense in our Consolidated Statements of Operations. Amounts, if any, paid to the seller in excess of the amount recorded on the acquisition date will be classified as cash flows used in operating activities. Payments to the seller not exceeding the acquisition-date fair value of the contingent consideration will be classified as cash flows used in financing activities.
Warranties
In general, we warrant our hardware products to be free from defects in material and workmanship under normal use and service. The warranty periods generally range from one year to five years . We typically have the option to either repair or replace hardware products we deem defective with regard to material or workmanship. Estimated warranty costs are accrued in the period that the related revenue is recognized based upon an estimated average per unit repair or replacement cost applied to the estimated number of units under warranty. These estimates are based upon historical warranty incidents and are evaluated on an ongoing basis to ensure the adequacy of the warranty accrual.
We also warrant our software or firmware incorporated into our products generally for a period of one year and offer to provide a bug fix or software patch within a reasonable period. We have not accrued specifically for this warranty and have not had claims specifically related to software or firmware. We are not responsible for, and do not warrant that, custom software versions, created by OEM customers based upon our software source code, will function in a particular way, will conform to any specifications or are fit for any particular purpose. Further, we do not indemnify these customers from any third-party liability as it relates to or arises from any customization or modifications made by the OEM customer.
Treasury Stock
We record treasury stock at cost. Treasury stock may be acquired from employees for tax withholding purposes related to vesting of restricted stock unit awards as part of our stock-based compensation program and issued pursuant to the Employee Stock Purchase Plan.
Revenue Recognition
We recognize hardware product revenue upon transfer of control of goods or services to customers in an amount that reflects the consideration we expect to receive in exchange for those goods or services.
We determine the amount of revenue to be recognized through application of the following steps:
• identification of the contract, or contracts with a customer;
• identification of the performance obligations in the contract;
• determination of the transaction price;
• allocation of the transaction price to the performance obligations in the contract; and
• recognition of revenue when or as we satisfy the performance obligations.
Hardware Product Revenue and SmartSense by Digi Equipment Revenue and Associated Installation Fees
Our hardware product revenue is derived primarily from the sale of wired and wireless hardware products to our distributors and OEM customers. Product revenue generally is recognized upon shipment of the product to a customer. Sales to authorized domestic distributors and OEM customers typically are made with certain rights of return and price adjustment provisions. Estimated reserves for future credit returns and pricing adjustments are established based on an analysis of historical patterns of credit returns and price adjustments compared to received credit returns and distribution sales for the current period. Estimated reserves for future credit returns and price adjustments are charged against revenue in the same period as the corresponding sales are recorded. 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.
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Equipment revenue from SmartSense by Digi and Ventus within our IoT Solutions segment is recognized upon shipment of the equipment to a customer. Installation service charges from these sales are recorded when the product is installed.
Subscription and Support Services Revenue
Our SmartSense by Digi and Ventus subscription revenue is recorded on a monthly basis. These subscriptions are generally in a range from one year to five years , and may contain an evergreen renewal provision. Generally, our subscription renewal charges per month are the same as the original contract term.
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. Some of Digi Support Services revenue is for training and this revenue is recognized as the services are performed.
Professional Services Revenue
Professional services revenue is derived from our Digi Wireless Design Services contracts on either on a time-and-materials or a fixed-fee basis. These revenues, which are included in our IoT Products & Services segment are recognized as the services are performed for time-and-materials contracts or as invoiced for fixed-fee contracts.
Contracts with Multiple Performance Obligations
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.
Research and Development
Research and development costs are expensed when incurred. Research and development costs include compensation, allocation of corporate costs, depreciation, utilities, professional services and prototypes. Software and firmware development costs are expensed as incurred until the point that both the technological feasibility and the proven marketability of the product are established. To date, the time period between the establishment of technological feasibility and completion of software development has been short and no significant development costs have been incurred during that period. Accordingly, we have not capitalized any software development costs to date.
Income Taxes
Deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Income tax expense is equal to the tax payable for the period and the change during the period in deferred tax assets and liabilities as well as changes in income tax reserves. We maintain valuation allowances unless it is more likely than not that all or a portion of the deferred tax assets will be realized. Changes in valuation allowances from period to period are included in our tax provision in the period of change. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax
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1. 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
Stock-based compensation expense represents the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. This cost must be recognized over the period during which an employee is required to provide the service (usually the vesting period).
Foreign Currency Translation
Financial position and results of operations of our international subsidiaries are measured using local currencies as the functional currency. Assets and liabilities of these operations are translated at the exchange rates in effect at the end of each reporting period. For our international subsidiaries, our statements of operations accounts are translated at the weighted average rates of exchange prevailing during each reporting period. Translation adjustments arising from the use of differing currency exchange rates from period to period are included in accumulated other comprehensive loss in stockholders’ equity. 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 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. dollar accounts in our foreign locations to reduce our foreign currency risk. We have not implemented a formal hedging strategy.
Comprehensive Income
Our comprehensive income is comprised of net income, foreign currency translation adjustments and unrealized gains and losses on available-for-sale marketable securities. These items are charged or credited to the accumulated other comprehensive loss account in stockholders’ equity.
Net Income Per Common Share
Basic net income per common share is calculated based on the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted average number of common and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares of our stock result from common stock options and restricted stock units. We use the treasury stock method to calculate the weighted-average shares used in the diluted earnings per share computation. Under this method the proceeds from exercise of an option, any amount of compensation cost for future service that we have not yet recognized, and the amount of estimated tax benefits that would be recorded in paid-in capital when the option is exercised are assumed to have been used to repurchase shares in the current period.
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):
Year ended September 30,
2024 2023 2022
Numerator:
Net income $ 22,505 $ 24,770 $ 19,383
Denominator:
Denominator basic net income per common share — weighted average shares outstanding 36,316 35,820 35,031
Effect of dilutive securities:
Stock options and restricted stock units 668 1,049 964
Denominator diluted net income per common share — adjusted weighted average shares 36,984 36,869 35,995
Net income per common share, basic $ 0.62 $ 0.69 $ 0.55
Net income per common share, diluted $ 0.61 $ 0.67 $ 0.54
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1. 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.
2. ACQUISITIONS
Fiscal 2022 Acquisition
Acquisition of Ventus
On November 1, 2021, we acquired Ventus for approximately $ 350 million in cash. The acquisition was funded through a combination of cash on hand and debt financing under a $ 350 million credit facility committed by BMO Harris Bank N.A.
For tax purposes, this acquisition was treated as an asset acquisition. We believe this is a complementary acquisition for us as it significantly enhances our IoT Solutions segment by enhancing Digi's service portfolio and immediately extends the company's market reach with a Managed Network-as-a-Service ("MNaaS") solutions offering.
Costs directly related to the acquisition of $ 4.4 million incurred in fiscal 2022 were charged to operations and are included in general and administrative expense in our consolidated statements of operations. These acquisition costs include legal, accounting, valuation and investment banking fees.
The following table summarizes the fair values of Ventus assets acquired and liabilities assumed as of the acquisition date (in thousands):
Cash $ 350,000
Fair value of net tangible assets acquired $ 20,365
Identifiable intangible assets:
Customer relationships 179,000
Purchased and core technology 16,000
Trademarks 16,000
Goodwill 118,635
Total $ 350,000
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. These methodologies utilize future estimates including revenues attributable to customer relationships, tax rates, discount rates, royalty rates and obsolescence rates. The final purchase price allocation includes an adjustment made in the fourth fiscal quarter of 2022 to reflect an update from our preliminary purchase price allocation to the valuation of the net tangible assets acquired and goodwill resulting from the acquisition. Included in the fair value of net tangible assets acquired was $ 0.9 million of right-of-use asset included in other non-current assets and $ 0.9 million of lease liability included in other current liabilities and other non-current liabilities associated with Ventus’ operating leases.
The weighted average useful life for all the identifiable intangibles listed above is estimated to be 19.2 years. For purposes of determining fair value, the existing customer relationships identified above are assumed to have a useful life of 20.5 years, purchased and core technology is assumed to have useful life of 11 years and trademarks are assumed a useful life of 13 years. Useful lives for identifiable intangible assets are estimated at the time of acquisition based on the periods of time from which we expect to derive benefits from the identifiable intangible assets. The identifiable intangible assets are amortized using the straight-line method which reflects the pattern in which the assets are expected to be consumed.
The fiscal 2022 consolidated results include $ 54.3 million in revenue contributed by the acquired Ventus business. It is impracticable to quantify the amount of Ventus contribution to our consolidated net income due to the business structure management uses for reporting and allocating expenses to segments.
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2. ACQUISITIONS (CONTINUED)
The following consolidated pro forma information is presented as if the acquisition had occurred on October 1, 2020 (in thousands):
Year ended September 30,
2022 2021
Net sales $ 393,290 $ 360,820
Net income (loss) $ 14,274 $ ( 2,701 )
Pro forma net income has been adjusted to include interest expense related to debt incurred as a result of the acquisition, amortization on the fair value of the intangibles acquired and remove any costs incurred with the sale transaction. Net income for the year ended September 30, 2021 was adjusted to include acquisition-related costs of $ 3.1 million.
3. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET
Identifiable Intangible Assets, Net
Amortizable identifiable intangible assets, net as of September 30, 2024 and 2023 were comprised of the following (in thousands):
September 30, 2024 September 30, 2023
Gross
carrying
amount Accum.
amort. Net Gross
carrying
amount Accum.
amort. Net
Purchased and core technology $ 85,041 $ ( 63,654 ) $ 21,387 $ 85,032 $ ( 59,833 ) $ 25,199
License agreements 112 ( 112 ) — 112 ( 112 ) —
Patents and trademarks 40,335 ( 22,047 ) 18,288 39,957 ( 19,888 ) 20,069
Customer relationships 309,223 ( 95,989 ) 213,234 309,196 ( 77,380 ) 231,816
Non-compete agreements 600 ( 600 ) — 600 ( 600 ) —
Order backlog 1,000 ( 1,000 ) — 1,000 ( 1,000 ) —
Total $ 436,311 $ ( 183,402 ) $ 252,909 $ 435,897 $ ( 158,813 ) $ 277,084
Amortization expense is included in our consolidated statements of operations in cost of sales and general and administrative expense. Amortization expense in cost of sales includes amortization for purchased and core technology and certain patents and trademarks.
Amortization expense for fiscal years 2024, 2023 and 2022 was as follows (in thousands):
Fiscal year Total
2024 $ 24,553
2023 $ 25,226
2022 $ 27,195
Estimated amortization expense for the next five fiscal years is as follows (in thousands):
Fiscal year Total
2025 $ 21,811
2026 $ 21,579
2027 $ 21,579
2028 $ 20,410
2029 $ 18,355
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3. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET (CONTINUED)
The changes in the carrying amount of goodwill by reportable segments are (in thousands):
IoT
Products & Services IoT
Solutions Total
Balance on September 30, 2022 $ 172,931 $ 167,546 $ 340,477
Foreign currency translation adjustment 1,026 90 1,116
Balance on September 30, 2023 $ 173,957 $ 167,636 $ 341,593
Foreign currency translation adjustment 1,136 45 1,181
Balance on September 30, 2024 $ 175,093 $ 167,681 $ 342,774
No goodwill impairment has been recorded in any period presented.
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 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. Following our acquisition of Ventus, IoT Solutions is comprised of two reporting units. 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. If the carrying amount of a reporting unit is higher than its estimated fair value, then an impairment loss must be recognized for the excess. Fair values for the six reporting units were each estimated on a standalone basis using a weighted combination of the income approach and market approach.
The income approach indicates the fair value of a business based on the value of the cash flows the business or asset can be expected to generate in the future. A commonly used variation of the income approach used to value a business is the discounted cash flow (“DCF”) method. The DCF method is a valuation technique in which the value of a business is estimated on the earnings capacity, or available cash flow, of that business. Earnings capacity represents the earnings available for distribution to stockholders after consideration of the reinvestment required for future growth. Significant judgment is required to estimate the amount and timing of future cash flows for each reporting unit and the relative risk of achieving those cash flows. Key assumptions used in the analysis were related to the determination of discount rates and forecasts of future gross margins and earnings before income taxes, depreciation and amortization margins. The market approach indicates the fair value of a business or asset based on a comparison of the business or asset to comparable publicly traded companies or assets and transactions in its industry as well as our prior acquisitions. This approach can be estimated through the guideline company method. This method indicates fair value of a business by comparing it to publicly traded companies in similar lines of business. After identifying and selecting the guideline companies, we make judgments about the comparability of the companies based on size, growth rates, profitability, risk, and return on investment in order to estimate market multiples. These multiples are then applied to the reporting units to estimate a fair value.
Assumptions and estimates to determine fair values under the income and market approaches are complex and often subjective. They can be affected by a variety of factors. These include external factors such as industry and economic trends. They also include internal factors such as changes in our business strategy and our internal forecasts. Changes in circumstances or a potential event could negatively affect the estimated fair values. We will continue to monitor potential impacts to our assumptions, as any changes could potentially affect our cash flows and market capitalization. If our future operating results do not meet current forecasts or if we experience a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of one or more of our reporting units, we may be required to record future impairment charges for goodwill.
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3. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET (CONTINUED)
Results of our Fiscal 2024 Annual Impairment Test
As of June 30, 2024, 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, $ 64.2 million of goodwill for the OEM Solutions reporting unit, $ 20.4 million of goodwill for the Infrastructure Management reporting unit, $ 48.9 million of goodwill for the SmartSense by Digi reporting unit and $ 118.6 million of goodwill for the Ventus reporting unit. At June 30, 2024, the fair value of goodwill exceeded the carrying value for all six reporting units and no impairment was recorded. Ventus fair value exceeded carrying values by less than 10%.
4. SEGMENT INFORMATION AND MAJOR CUSTOMERS
We have two reportable segments that also serve as our operating segments: (i) IoT Products & Services and (ii) IoT Solutions. This determination was made by considering both qualitative and quantitative information. The qualitative information included, but was not limited to, the following: 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):
Year ended September 30,
2024 2023 2022
Revenue
IoT Products & Services $ 324,444 $ 345,680 $ 297,645
IoT Solutions 99,602 99,169 90,580
Total revenue $ 424,046 $ 444,849 $ 388,225
Gross Profit
IoT Products & Services $ 177,201 $ 187,958 $ 160,117
IoT Solutions 72,705 64,245 56,169
Total gross profit $ 249,906 $ 252,203 $ 216,286
Depreciation and Amortization
IoT Products & Services $ 12,446 $ 12,544 $ 13,974
IoT Solutions 20,615 19,432 19,865
Total depreciation and amortization $ 33,061 $ 31,976 $ 33,839
Total expended for property, plant and equipment was as follows (in thousands):
Year ended September 30,
2024 2023 2022
IoT Products & Services $ 1,005 $ 588 $ 1,952
IoT Solutions* 845 3,510 22
Total expended for property, plant and equipment $ 1,850 $ 4,098 $ 1,974
* 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.
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4. SEGMENT INFORMATION AND MAJOR CUSTOMERS (CONTINUED)
Total assets for each of our segments were as follows (in thousands):
As of September 30,
2024 2023
IoT Products & Services $ 376,998 $ 384,018
IoT Solutions 410,567 419,820
Unallocated* 27,510 31,693
Total assets $ 815,075 $ 835,531
*Unallocated consists of cash and cash equivalents.
Net property, equipment and improvements by geographic location were as follows (in thousands):
As of September 30,
2024 2023
United States $ 34,416 $ 28,631
International, primarily Europe 499 477
Total net property, equipment and improvements $ 34,915 $ 29,108
Our U.S. 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.
5. SELECTED BALANCE SHEET DATA
The following table shows selected balance sheet data (in thousands):
As of September 30,
2024 2023
Accounts receivable, net:
Accounts receivable $ 78,672 $ 61,880
Less allowance for credit losses 1,562 1,693
Less reserve for future credit returns and pricing adjustments 7,470 4,190
Total accounts receivable, net $ 69,640 $ 55,997
Inventories:
Raw materials $ 18,669 $ 29,974
Work in process 52 66
Finished goods 34,636 44,356
Total inventories $ 53,357 $ 74,396
Property, equipment and improvements, net:
Land $ 570 $ 570
Buildings 2,338 2,338
Improvements 11,794 11,703
Equipment 18,422 17,909
Purchased software 5,186 5,143
Furniture and fixtures 2,436 2,459
Subscriber assets 40,787 28,532
Total property, equipment and improvements, gross 81,533 68,654
Less accumulated depreciation and amortization 46,618 39,546
Total property, equipment and improvements, net $ 34,915 $ 29,108
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6. INDEBTEDNESS
On November 1, 2021, we entered into a second amended and restated credit agreement with BMO Harris Bank N.A. ("BMO"). This agreement provides us with a senior secured credit facility (the "2021 Credit Facility") consisting of a $ 350 million term loan B secured loan (the “Term Loan Facility”) and a $ 35 million revolving credit facility (the “Revolving Loan Facility”) with an uncommitted option to increase incremental loans under the 2021 Credit Facility, subject to an incremental cap. The Revolving Loan Facility includes a $ 10 million letter of credit subfacility and $ 10 million swingline subfacility. Digi may use proceeds of the Revolving Loan Facility in the future for general corporate purposes. This loan replaced our syndicated senior secured credit agreement with BMO that was entered into on March 15, 2021 and replaced the remaining balance of our revolver with this new term loan. This prior agreement provided us with committed credit facilities ("Prior Credit Facility") consisting of a $ 200 million revolving loan.
The debt issuance costs and remaining balance under the Prior Credit Facility totaled $ 2.3 million at November 1, 2021. Of this amount $ 1.9 million was written off and included in interest expense upon the entry into the new amendment and $ 0.4 million is being amortized over the term of the amended loan and reported in interest expense. Digi incurred an additional $ 11.7 million and $ 1.7 million in debt issuance costs relating to the November 1, 2021 and December 22, 2021 amendments, respectively. These amounts are being amortized over the term of the amended loan and reported in interest expense.
On December 22, 2021, Digi entered into a third amended and restated credit agreement with BMO. Digi refinanced the Term Loan Facility and Revolving Loan Facility under its existing credit agreement entered into on November 1, 2021, but did not receive any additional proceeds from nor modify the amounts of any facilities or subfacilities contained within that credit agreement.
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.
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6. INDEBTEDNESS (CONTINUED)
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,
2024 2023
Revolving loan $ 124,300 $ —
Term loan — 213,625
Total loans 124,300 213,625
Less unamortized issuance costs ( 1,115 ) ( 10,051 )
Less current maturities of long-term debt — ( 15,523 )
Total long-term debt, net of current portion $ 123,185 $ 188,051
Covenants and Security Interest
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.
7. PRODUCT WARRANTY OBLIGATION
The following table summarizes the activity associated with the product warranty accrual (in thousands) and is listed on our consolidated balance sheets within other current liabilities:
Year ended September 30,
2024 2023 2022
Balance at beginning of period $ 772 $ 886 $ 707
Warranties accrued 568 355 537
Settlements made ( 407 ) ( 469 ) ( 358 )
Balance at end of period $ 933 $ 772 $ 886
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8. LEASES
All of our leases are operating leases and primarily consist of leases for office space. For any lease with an initial term in excess of twelve months, the related lease assets and lease liabilities are recognized on our consolidated balance sheets as either operating or financing leases at the inception of an agreement where it is determined that a lease exists. We have lease agreements that contain both lease and non-lease components. We have elected to combine lease and non-lease components for all classes of assets. Leases with an initial term of twelve months or less are not recorded on our consolidated balance sheets. Instead we recognize lease expense for these leases on a straight-line basis over the lease term.
Operating lease assets represent the right to use an underlying asset for the lease term and operating lease liabilities represent the obligation to make lease payments. These assets and liabilities are recognized based on the present value of future payments over the lease term at the commencement date. We generally use a collateralized incremental borrowing rate based on information available at the commencement date, including the lease term, in determining the present value of future payments. When determining our right-of-use asset, we generally do not include options to extend or terminate the lease unless it is reasonably certain that the option will be exercised.
Our leases typically require payment of real estate taxes and common area maintenance and insurance. These components comprise the majority of our variable lease cost and are excluded from the present value of our lease obligations. Fixed payments may contain predetermined fixed rent escalations. We recognize the related rent expense on a straight-line basis from the commencement date to the end of the lease term.
The following table shows the supplemental balance sheet information related to our leases (in thousands):
Balance Sheet Location September 30, 2024 September 30, 2023
Assets
Operating leases Operating lease right-of-use assets $ 10,207 $ 12,876
Total lease assets $ 10,207 $ 12,876
Liabilities
Operating leases Current portion of operating lease liabilities $ 2,973 $ 3,352
Operating leases Operating lease liabilities 11,228 13,989
Total lease liabilities $ 14,201 $ 17,341
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):
Statement of Operations Location Year ended
September 30, 2024 Year ended
September 30, 2023
Operating lease cost Cost of goods sold and SG&A $ 3,531 $ 3,815
Variable lease cost Cost of goods sold and SG&A 1,263 1,332
Short-term lease cost Cost of goods sold and SG&A 114 93
Total lease cost $ 4,908 $ 5,240
The following table presents supplemental information related to operating leases (in thousands):
Year ended
September 30, 2024 Year ended
September 30, 2023
Cash paid for amounts included in the measurement of operating lease liabilities $ 3,065 $ 2,965
Right-of-use assets obtained in exchange for new operating lease liabilities $ 440 $ 276
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8. LEASES (CONTINUED)
September 30, 2024
Weighted average remaining lease term - operating leases 5.9 years
Weighted average discount rate - operating leases 4.80 %
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 Consolidated Balance Sheet as of September 30, 2024 (in thousands):
Fiscal year Amount
2025 $ 3,791
2026 3,307
2027 2,068
2028 1,897
2029 1,840
Thereafter 3,865
Total future undiscounted lease payments 16,768
Less imputed interest ( 2,567 )
Total reported lease liability $ 14,201
9. REVENUE
Revenue Disaggregation
The following table summarizes our revenue by geographic location of our customers:
Year ended September 30,
($ in thousands) 2024 2023 2022
North America, primarily the United States $ 302,491 $ 323,714 $ 302,409
Europe, Middle East & Africa 64,890 69,980 53,612
Rest of world 56,665 51,155 32,204
Total revenue $ 424,046 $ 444,849 $ 388,225
The following table summarizes our revenue by the timing of revenue recognition:
Year ended September 30,
($ in thousands) 2024 2023 2022
Transferred at a point in time $ 313,421 $ 345,119 $ 302,535
Transferred over time 110,625 99,730 85,690
Total revenue $ 424,046 $ 444,849 $ 388,225
Contract Balances
Contract Related Assets
Our contract related assets consist of subscriber assets. Subscriber assets are equipment that we provide to customers pursuant to subscription-based contracts. In these cases, we retain the ownership of the equipment a customer uses and charge the customer subscription fees to receive our end-to-end solutions. The total net book value of subscriber assets of $ 23.6 million and $ 16.6 million as of September 30, 2024 and September 30, 2023, respectively, are included in property, equipment and improvements, net. Depreciation expense for these subscriber assets was $ 5.3 million and $ 3.8 million for the twelve months ended September 30, 2024 and 2023, respectively. We depreciate the cost of this equipment over its useful life and include these expenses in cost of sales.
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9. REVENUE (CONTINUED)
Contract Assets
Contract assets at Digi consist of products and services that have been fulfilled, but for which revenue has not yet been recognized. Our contract asset balances were immaterial as of September 30, 2024 and September 30, 2023.
Contract Liabilities
The timing of revenue recognition may differ from the timing of invoicing to customers. Customers are invoiced for subscription services on a monthly, quarterly or annual basis. Contract liabilities consist of unearned revenue related to annual or multi-year contracts for subscription services and related implementation fees, as well as product sales that have been invoiced, but not yet fulfilled.
Our contract liabilities were $ 36.8 million and $ 27.9 million at September 30, 2024 and 2023, respectively.
Of the $ 27.9 million and $ 21.6 million balances as of September 30, 2023 and 2022, Digi recognized $ 20.0 million and $ 17.5 million as revenue in the twelve months ended September 30, 2024 and 2023, respectively.
Remaining Performance Obligation
As of September 30, 2024, we had approximately $ 151.0 million of remaining performance obligations on contracts with an original duration of one year or more. We expect to recognize revenue on approximately $ 73.9 million of remaining performance obligations over the next 12 months. Revenue from the remaining performance obligations we expect to recognize over a range of two to five years .
10. INCOME TAXES
The components of income before income taxes are (in thousands):
Year ended September 30,
2024 2023 2022
United States $ 19,088 $ 21,149 $ 13,220
International 3,770 3,769 5,408
Income before income taxes $ 22,858 $ 24,918 $ 18,628
The components of the income tax expense are (in thousands):
Year ended September 30,
2024 2023 2022
Current:
Federal $ 9,149 $ 9,894 $ 281
State 1,995 1,955 766
Foreign 832 598 1,277
Deferred:
Federal ( 11,189 ) ( 12,131 ) ( 2,982 )
Foreign ( 434 ) ( 168 ) ( 97 )
Income tax (benefit) expense $ 353 $ 148 $ ( 755 )
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10. INCOME TAXES (CONTINUED)
Net deferred tax liability consists of (in thousands):
As of September 30,
2024 2023
Non-current deferred tax asset $ 16,141 $ 4,884
Non-current deferred tax liability ( 1,308 ) ( 1,812 )
Net deferred tax asset (liability) $ 14,833 $ 3,072
Depreciation and amortization $ ( 4,735 ) $ ( 3,362 )
Lease asset ( 2,283 ) ( 2,866 )
Lease liability 3,183 3,897
Inventories 6,614 6,407
Compensation costs 5,552 5,559
Deferred Revenue 7,595 5,687
Other accruals 5,805 3,324
Tax credit carryforwards 3,854 3,867
Valuation allowance ( 3,317 ) ( 3,254 )
Identifiable intangible assets ( 25,533 ) ( 25,276 )
Research and development costs 18,098 9,089
Net deferred tax asset (liability) $ 14,833 $ 3,072
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 $ 0.2 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. The majority of our non-U.S. net operating losses and tax credit carryforwards have an unlimited carryforward period. Our non-U.S. tax credit carryforwards will expire in 2034. Our valuation allowance for certain U.S. 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. If future taxable income projections are not realized, an additional valuation allowance may be required. This would be reflected as income tax expense at the time that any such change in future taxable income is determined.
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10. INCOME TAXES (CONTINUED)
The reconciliation of the statutory federal income tax amount to our income tax benefit is (in thousands):
Year ended September 30,
2024 2023 2022
Statutory income tax amount $ 4,800 $ 5,233 $ 3,912
Increase (decrease) resulting from:
State taxes, net of federal benefits 401 636 85
Transaction costs — — 2
Employee stock purchase plan 159 165 98
Foreign operations 1,751 984 1,552
Non-deductible executive compensation 519 373 291
Utilization of research and development tax credits ( 5,224 ) ( 4,678 ) ( 2,780 )
ASU 2016-09 excess stock compensation ( 47 ) ( 1,678 ) ( 2,967 )
Contingent consideration — — ( 1,239 )
Changes from provision to return ( 791 ) 181 413
Adjustment of tax contingency reserves 491 238 417
U.S. deduction for foreign export sales ( 1,827 ) ( 1,419 ) ( 584 )
Other, net 121 113 45
Income tax (benefit) expense $ 353 $ 148 $ ( 755 )
A reconciliation of the beginning and ending amount of unrecognized tax benefits is (in thousands):
Year ended September 30,
2024 2023 2022
Unrecognized tax benefits at beginning of fiscal year $ 3,162 $ 3,316 $ 2,908
Increases related to:
Prior year income tax positions 71 100 —
Current year income tax positions 768 858 524
Decreases related to:
Prior year income tax positions — ( 159 ) ( 21 )
Expiration of statute of limitations ( 399 ) ( 953 ) ( 95 )
Unrecognized tax benefits at end of fiscal year $ 3,602 $ 3,162 $ 3,316
The total amount of unrecognized tax benefits ("UTB") at September 30, 2024 that, if recognized, would affect our effective tax rate was $ 3.4 million. 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 $ 3.6 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. During fiscal 2024 and 2023, there were insignificant amounts of interest and penalties related to income tax matters in income tax expense. We accrued $ 0.1 million in interest and penalties related to unrecognized tax benefits as of September 30, 2024 and 2023. These accrued interest and penalties are included in our non-current income taxes payable on our consolidated balance sheets.
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10. INCOME TAXES (CONTINUED)
We operate in multiple tax jurisdictions both in the U.S. and outside of the U.S. and face audits from various tax authorities regarding transfer pricing, tax credits, and other matters. Accordingly we must determine the appropriate allocation of income to each of these jurisdictions. This determination requires us to make several estimates and assumptions. Tax audits associated with the allocation of this income, and other complex issues, may require an extended period of time to resolve and may result in adjustments to our income tax balances in those years that are material to our consolidated balance sheets and results of operations.
We file a U.S. federal income tax return and income tax returns in various states and foreign jurisdictions. With few exceptions, we are no longer subject to state and local or non-U.S. income tax examinations by tax authorities for years before fiscal year 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. Additionally, the previously un-taxed accumulated undistributed foreign earnings from prior fiscal years are still permanently reinvested and, as such, we have not accrued additional U.S. tax. It is our position that the earnings of our foreign subsidiaries are to be reinvested indefinitely to fund current operations and provide for future international expansion opportunities and only repatriate earnings to the extent that U.S. taxes have already been recorded. As of September 30, 2024, we are permanently reinvested with respect to previously non-taxed accumulated earnings in all jurisdictions.
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.
11. STOCK-BASED COMPENSATION
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. The authority to grant options under the 2021 Plan and set other terms and conditions rests with the Compensation Committee of the Board of Directors.
The 2021 Plan authorizes the issuance of up to 3,500,000 common shares in connection with awards of stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based full value awards or other stock-based awards. Eligible participants include our employees, our affiliates, non-employee directors of our Company and any consultant or advisor who is a natural person and provides services to us or our affiliates. Options that have been granted under the 2021 Plan typically vest over a four -year period and will expire if unexercised after seven years from the date of grant. Restricted stock unit awards ("RSUs") that have been granted to directors typically vest in one year. RSUs that have been granted to executives and employees typically vest in January over a four -year period. Performance stock unit awards ("PSUs") that have been granted to an executive will vest based on achievement of a cumulative adjusted earnings per share metric measured over a three -year period. Share-based compensation expenses recorded for this performance award is reevaluated at each reporting period based on the probability of achievement of the goal. The Amended Plan is scheduled to expire on January 28, 2032. Options under the Amended Plan can be granted as either incentive stock options or non-statutory stock options. The exercise price of options and the grant date price of RSUs and PSUs is determined by our Compensation Committee but will not be less than the fair market value of our common stock based on the closing price as of the date of grant. Upon exercise of options or settlement of vested RSUs or PSUs, we issue new shares of stock. As of September 30, 2024, there were approximately 1,953,397 shares available for future grants under the Amended Plan.
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.
Cash received from the exercise of stock options was $ 3.0 million, $ 3.9 million and $ 9.5 million for the year ended September 30, 2024, 2023 and 2022, respectively. Our stock option plans allow the net exercise of options. 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.
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11. 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. During fiscal 2024, 2023 and 2022 our employees forfeited 114,889 , 106,012 and 102,392 shares, respectively in order to satisfy $ 2.9 million, $ 4.1 million and $ 2.4 million, respectively, of withholding tax obligations related to stock-based compensation, pursuant to terms of awards under our board and shareholder-approved compensation plans.
We sponsor an Employee Stock Purchase Plan, as amended and restated as of December 10, 2019 (the "Purchase Plan"), covering all domestic employees with at least 90 days of continuous service and who are customarily employed at least 20 hours per week. The Purchase Plan allows eligible participants the right to purchase common stock on a quarterly basis at the lower of 85 % of the market price at the beginning or end of each three-month offering period. The most recent amendments to the Purchase Plan, ratified by our stockholders on January 29, 2020, increased the total number of shares to 3,425,000 that may be purchased under the plan. Employee contributions to the Purchase Plan were $ 2.2 million, $ 2.3 million and $ 1.5 million in fiscal 2024, 2023 and 2022, respectively. Pursuant to the Purchase Plan, 101,730 , 82,621 , and 80,225 shares of common stock were issued to employees during fiscal 2024, 2023 and 2022, respectively. Shares are issued under the Purchase Plan from treasury stock. As of September 30, 2024, 368,497 shares of common stock were available for future issuances under the Purchase Plan.
Stock-based compensation expense is included in the consolidated results of operations as (in thousands):
Year ended September 30,
2024 2023 2022
Cost of sales $ 698 $ 628 $ 466
Sales and marketing 4,617 4,107 2,503
Research and development 1,931 1,777 1,236
General and administrative 5,913 6,774 4,373
Stock-based compensation before income taxes 13,159 13,286 8,578
Income tax benefit ( 2,783 ) ( 2,840 ) ( 1,819 )
Stock-based compensation after income taxes $ 10,376 $ 10,446 $ 6,759
Stock Options
Below is a summary of our stock options as of September 30, 2024 and changes during the twelve months then ended (in thousands, except per common share amounts):
Options Outstanding Weighted Average Exercise Price Weighted Average Contractual Term (in years) Aggregate Intrinsic Value (1)
Balance on September 30, 2023 1,553 $ 18.52
Granted 87 24.60
Exercised ( 199 ) 28.04
Forfeited / Canceled ( 59 ) 25.13
Balance on September 30, 2024 1,382 $ 19.01 3.07 $ 12,414
Exercisable on September 30, 2024 1,101 $ 17.60 2.65 $ 11,321
(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $ 27.53 as of September 30, 2024, 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 each of the twelve months ended September 30, 2024, 2023 and 2022 was $ 5.6 million, $ 5.2 million and $ 20.3 million, respectively.
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11. 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:
Year ended September 30,
2024 2023 2022
Weighted average per option grant date fair value $ 12.45 $ 19.87 $ 10.37
Assumptions used for option grants:
Risk free interest rate 3.78 % - 4.68 %
3.50 % - 4.15 %
1.25 % - 3.00 %
Expected term 6.00 years 6.00 years 6.00 years
Expected volatility 46 % - 48%
46 %
45 % - 46 %
Weighted average volatility 46 % 46 % 46 %
Expected dividend yield 0 % 0 % 0 %
The fair value of each option award granted during the periods presented was estimated using the Black-Scholes option valuation model that uses the assumptions noted in the above table. Expected volatilities are based on the historical volatility of our stock. We use historical data to estimate option exercise and employee termination information within the valuation model. The expected term of options granted is derived from the vesting period and historical information and represents the period of time that options granted are expected to be outstanding. The risk-free rate used is the zero-coupon U.S. Treasury bond rate in effect at the time of the grant whose maturity equals the expected term of the option.
As of September 30, 2024, the total unrecognized compensation cost related to non-vested stock-based compensation arrangements was $ 2.8 million. The related weighted average period over which this cost is expected to be recognized was approximately 1.5 years.
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):
Options Outstanding Options Exercisable
Range of Exercise Prices Options Outstanding Weighted Average Remaining Contractual Life (In Years) Weighted Average Exercise Price Number of Shares Vested Weighted Average Exercise Price
$ 10.33 - $ 11.87
224 1.25 $ 11.64 224 $ 11.64
$ 12.48 - $ 16.75
268 2.61 $ 15.41 261 $ 15.37
$ 17.10 - $ 17.53
134 2.68 $ 17.22 127 $ 17.22
$ 17.94 - $ 17.94
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.
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11. STOCK-BASED COMPENSATION (CONTINUED)
Non-vested Stock Units
The following table presents a summary of our non-vested restricted stock units as of September 30, 2024 and changes during the twelve months then ended (in thousands, except per common share amounts):
RSUs PSUs
Number of Awards Weighted Average Grant Date Fair Value Number of Awards Weighted Average Grant Date Fair Value
Nonvested on September 30, 2023 846 $ 30.56 135 $ 37.72
Granted 373 $ 25.17 141 $ 24.93
Vested ( 287 ) $ 25.23 ( 30 ) $ 37.11
Canceled ( 86 ) $ 28.81 ( 26 ) $ 29.61
Nonvested on September 30, 2024 846 $ 30.15 220 $ 30.55
As of September 30, 2024, the total unrecognized compensation cost related to non-vested restricted stock units and performance stock units was $ 17.7 million and $ 1.8 million, respectively. The related weighted average period over which these costs are expected to be recognized was approximately 1.9 years and 0.2 years, respectively.
12. EMPLOYEE BENEFIT PLANS
We currently have a savings and profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code, whereby eligible employees may contribute up to 25 % of their pre-tax earnings subject to certain limits under law.
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. We provided matching contributions of $ 3.7 million for fiscal 2024, $ 3.4 million for fiscal 2023 and $ 3.1 million for fiscal 2022. In addition, we may make contributions to the plan at the discretion of the Board of Directors.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. COMMITMENTS AND CONTINGENCIES
Leases
We lease certain of our buildings and equipment under noncancelable lease agreements. Please refer to Note 8 to our consolidated financial statements for additional information.
Litigation
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 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. There can be no assurance that any claims by third parties, if proven to have merit, will not materially adversely affect our business, liquidity or financial condition.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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