00008547759/30202436256612Q1falseP2Y00008547752023-10-012023-12-310000854775exch:XNAS2023-10-012023-12-3100008547752024-01-26xbrli:shares0000854775us-gaap:ProductMember2023-10-012023-12-31iso4217:USD0000854775us-gaap:ProductMember2022-10-012022-12-310000854775us-gaap:ServiceMember2023-10-012023-12-310000854775us-gaap:ServiceMember2022-10-012022-12-3100008547752022-10-012022-12-31iso4217:USDxbrli:shares00008547752023-12-3100008547752023-09-3000008547752022-09-3000008547752022-12-310000854775us-gaap:CommonStockMember2022-09-300000854775us-gaap:TreasuryStockCommonMember2022-09-300000854775us-gaap:AdditionalPaidInCapitalMember2022-09-300000854775us-gaap:RetainedEarningsMember2022-09-300000854775us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-09-300000854775us-gaap:RetainedEarningsMember2022-10-012022-12-310000854775us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-10-012022-12-310000854775us-gaap:TreasuryStockCommonMember2022-10-012022-12-310000854775us-gaap:AdditionalPaidInCapitalMember2022-10-012022-12-310000854775us-gaap:CommonStockMember2022-10-012022-12-310000854775us-gaap:CommonStockMember2022-12-310000854775us-gaap:TreasuryStockCommonMember2022-12-310000854775us-gaap:AdditionalPaidInCapitalMember2022-12-310000854775us-gaap:RetainedEarningsMember2022-12-310000854775us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-12-310000854775us-gaap:CommonStockMember2023-09-300000854775us-gaap:TreasuryStockCommonMember2023-09-300000854775us-gaap:AdditionalPaidInCapitalMember2023-09-300000854775us-gaap:RetainedEarningsMember2023-09-300000854775us-gaap:AccumulatedOtherComprehensiveIncomeMember2023-09-300000854775us-gaap:RetainedEarningsMember2023-10-012023-12-310000854775us-gaap:AccumulatedOtherComprehensiveIncomeMember2023-10-012023-12-310000854775us-gaap:TreasuryStockCommonMember2023-10-012023-12-310000854775us-gaap:AdditionalPaidInCapitalMember2023-10-012023-12-310000854775us-gaap:CommonStockMember2023-10-012023-12-310000854775us-gaap:CommonStockMember2023-12-310000854775us-gaap:TreasuryStockCommonMember2023-12-310000854775us-gaap:AdditionalPaidInCapitalMember2023-12-310000854775us-gaap:RetainedEarningsMember2023-12-310000854775us-gaap:AccumulatedOtherComprehensiveIncomeMember2023-12-310000854775us-gaap:DevelopedTechnologyRightsMember2023-12-310000854775us-gaap:DevelopedTechnologyRightsMember2023-09-300000854775us-gaap:LicensingAgreementsMember2023-12-310000854775us-gaap:LicensingAgreementsMember2023-09-300000854775us-gaap:IntellectualPropertyMember2023-12-310000854775us-gaap:IntellectualPropertyMember2023-09-300000854775us-gaap:CustomerRelationshipsMember2023-12-310000854775us-gaap:CustomerRelationshipsMember2023-09-300000854775us-gaap:NoncompeteAgreementsMember2023-12-310000854775us-gaap:NoncompeteAgreementsMember2023-09-300000854775us-gaap:OrderOrProductionBacklogMember2023-12-310000854775us-gaap:OrderOrProductionBacklogMember2023-09-300000854775dgii:CostofSalesandGeneralandAdministrativeExpenseMember2023-10-012023-12-310000854775dgii:CostofSalesandGeneralandAdministrativeExpenseMember2022-10-012022-12-310000854775dgii:IoTProductsandServicesMember2023-09-300000854775dgii:IoTSolutionsMember2023-09-300000854775dgii:IoTProductsandServicesMember2023-10-012023-12-310000854775dgii:IoTSolutionsMember2023-10-012023-12-310000854775dgii:IoTProductsandServicesMember2023-12-310000854775dgii:IoTSolutionsMember2023-12-31dgii:segmentdgii:numberOfOperatingSegments0000854775dgii:EnterpriseRoutersMember2023-12-310000854775dgii:ConsoleServersMember2023-12-310000854775dgii:OEMSolutionsMember2023-12-310000854775dgii:InfrastructureMgmtMember2023-12-310000854775dgii:SmartSenseMember2023-12-310000854775dgii:VentusMember2023-12-310000854775us-gaap:RevolvingCreditFacilityMember2023-12-070000854775us-gaap:LetterOfCreditMember2023-12-0700008547752021-12-220000854775us-gaap:SecuredDebtMember2021-12-220000854775us-gaap:RevolvingCreditFacilityMember2021-12-220000854775us-gaap:LetterOfCreditMember2021-12-220000854775dgii:SwinglineCreditFacilityMember2021-12-220000854775srt:MinimumMemberus-gaap:BaseRateMemberus-gaap:RevolvingCreditFacilityMember2023-12-31xbrli:pure0000854775us-gaap:SecuredDebtMemberdgii:FederalFundsRateMemberus-gaap:BaseRateMember2023-10-012023-12-310000854775us-gaap:SecuredDebtMemberdgii:LIBORMemberus-gaap:BaseRateMember2023-10-012023-12-310000854775srt:MinimumMemberdgii:BenchmarkRateMemberus-gaap:RevolvingCreditFacilityMember2023-10-012023-12-310000854775dgii:BenchmarkRateMembersrt:MaximumMemberus-gaap:RevolvingCreditFacilityMember2023-10-012023-12-310000854775srt:MinimumMemberus-gaap:BaseRateMemberus-gaap:RevolvingCreditFacilityMember2023-10-012023-12-310000854775srt:MaximumMemberus-gaap:BaseRateMemberus-gaap:RevolvingCreditFacilityMember2023-10-012023-12-310000854775us-gaap:SecuredDebtMember2023-12-310000854775srt:MinimumMemberus-gaap:RevolvingCreditFacilityMember2023-10-012023-12-310000854775srt:MaximumMemberus-gaap:RevolvingCreditFacilityMember2023-10-012023-12-310000854775us-gaap:RevolvingCreditFacilityMember2023-10-012023-12-310000854775dgii:PriorCreditFacilityMember2023-12-070000854775dgii:December72023CreditAgreementMember2023-12-070000854775us-gaap:RevolvingCreditFacilityMember2023-12-310000854775us-gaap:SecuredDebtMember2023-09-300000854775us-gaap:LineOfCreditMemberdgii:CreditAgreementDomain2023-12-310000854775dgii:IoTProductsandServicesMember2022-10-012022-12-310000854775dgii:IoTSolutionsMember2022-10-012022-12-310000854775us-gaap:CorporateMember2023-12-310000854775us-gaap:CorporateMember2023-09-300000854775srt:NorthAmericaMember2023-10-012023-12-310000854775srt:NorthAmericaMember2022-10-012022-12-310000854775us-gaap:EMEAMember2023-10-012023-12-310000854775us-gaap:EMEAMember2022-10-012022-12-310000854775dgii:OtherlocationsMember2023-10-012023-12-310000854775dgii:OtherlocationsMember2022-10-012022-12-310000854775us-gaap:TransferredAtPointInTimeMember2023-10-012023-12-310000854775us-gaap:TransferredAtPointInTimeMember2022-10-012022-12-310000854775us-gaap:TransferredOverTimeMember2023-10-012023-12-310000854775us-gaap:TransferredOverTimeMember2022-10-012022-12-310000854775us-gaap:EquipmentMember2023-12-310000854775us-gaap:EquipmentMember2023-09-3000008547752023-04-012023-12-310000854775srt:MinimumMember2023-04-012023-12-310000854775srt:MaximumMember2023-04-012023-12-310000854775srt:MaximumMember2023-12-310000854775dgii:The2021PlanMember2023-12-310000854775us-gaap:EmployeeStockOptionMember2023-10-012023-12-310000854775us-gaap:EmployeeStockOptionMember2022-10-012022-12-310000854775us-gaap:EmployeeStockMember2023-10-012023-12-310000854775us-gaap:EmployeeStockMember2020-01-290000854775us-gaap:EmployeeStockMember2022-10-012022-12-310000854775us-gaap:EmployeeStockMember2023-12-310000854775us-gaap:CostOfSalesMember2023-10-012023-12-310000854775us-gaap:CostOfSalesMember2022-10-012022-12-310000854775us-gaap:SellingAndMarketingExpenseMember2023-10-012023-12-310000854775us-gaap:SellingAndMarketingExpenseMember2022-10-012022-12-310000854775us-gaap:ResearchAndDevelopmentExpenseMember2023-10-012023-12-310000854775us-gaap:ResearchAndDevelopmentExpenseMember2022-10-012022-12-310000854775us-gaap:GeneralAndAdministrativeExpenseMember2023-10-012023-12-310000854775us-gaap:GeneralAndAdministrativeExpenseMember2022-10-012022-12-310000854775us-gaap:EmployeeStockOptionMember2023-09-300000854775us-gaap:EmployeeStockOptionMember2023-12-310000854775srt:MinimumMemberus-gaap:EmployeeStockOptionMember2022-10-012022-12-310000854775us-gaap:RestrictedStockUnitsRSUMember2023-09-300000854775us-gaap:PerformanceSharesMember2023-09-300000854775us-gaap:RestrictedStockUnitsRSUMember2023-10-012023-12-310000854775us-gaap:PerformanceSharesMember2023-10-012023-12-310000854775us-gaap:RestrictedStockUnitsRSUMember2023-12-310000854775us-gaap:PerformanceSharesMember2023-12-31

For the transition period from                      to                     .

(Exact name of registrant as specified in its charter)

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act:

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

On January 26, 2024, there were 36,256,612 shares of the registrant's $.01 par value Common Stock outstanding.

1. BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES

The unaudited condensed consolidated financial statements of Digi International Inc. ("we", "us", "our", "Digi" or "the Company") have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission applicable to interim financial statements. While these financial statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles ("GAAP") for complete financial statements. These financial statements should be read in conjunction with the financial statement disclosures in Part I, Item 1 of our Annual Report on Form 10-K for the year ended September 30, 2023 (the "2023 Financial Statements"). We use the same accounting policies in preparing quarterly and annual financial statements. The quarterly results of operations are not necessarily indicative of the results to be expected for the full year.

2. EARNINGS (LOSS) PER SHARE

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

Digi excludes certain stock options and restricted stock unit awards that would have an anti-dilutive effect on our diluted net (loss) income per share calculation. For the three months ended December 31, 2023 and 2022, 1,563,857 and 234,365 shares outstanding were excluded, respectively.

3. SELECTED BALANCE SHEET DATA

The following table shows selected balance sheet data (in thousands):

4. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Amortizable intangible assets were (in thousands):

Amortization expense for intangible assets was $6.2 million and $6.5 million for the three months ended December 31, 2023 and 2022, respectively. Amortization expense is recorded on our condensed consolidated statements of operations within cost of sales and in general and administrative expense.

Estimated amortization expense related to intangible assets for the remainder of fiscal 2024 and the five succeeding fiscal years is (in thousands):

4. GOODWILL AND OTHER INTANGIBLE ASSETS, NET (CONTINUED)

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

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, IoT Products & Services and IoT Solutions (see Note 6). Our IoT Products & Services segment is structured to include four reporting units, each with a reporting manager: Cellular Routers, Console Servers, OEM Solutions and Infrastructure Management. Following our acquisition of Ventus in November 2021, we have two reporting units within IoT Solutions: SmartSense and Ventus. Each of these segments was tested individually for impairment during our annual impairment test completed in the third fiscal quarter of fiscal 2023.

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 affect the estimated fair values negatively. If our future operating results do not meet current forecasts or if we experience a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of one or more of our reporting units within either of our segments, we may be required to record future impairment charges for goodwill.

Digi conducted an analysis as of December 31, 2023 and concluded changes in market conditions from the time of the fiscal 2023 test, conducted as of June 30,2023, were not indicative of a reduction in fair value of any of our reporting units.

As of June 30, 2023, we had a total of $32.7 million of goodwill for the Enterprise Routers reporting unit, $57.1 million of goodwill for the Console Servers reporting unit, $64.6 million of goodwill for the OEM Solutions reporting unit, $20.4 million of goodwill for the Infrastructure Management reporting unit, $48.9 million of goodwill for the SmartSense reporting unit and $118.6 million of goodwill for the Ventus reporting unit. At June 30, 2023, the fair value of goodwill exceeded the carrying value for all six reporting units and no impairment was recorded.

5. INDEBTEDNESS

On December 7, 2023, Digi entered into a credit agreement (the “Credit Agreement”) with BMO Bank N.A. (“BMO”), as administrative and collateral agent, BMO Capital Markets Corp., BofA Securities, Inc. and MUFG Bank, Ltd., as joint lead arrangers and joint bookrunners, and the several banks and other financial institutions or entities from time to time party thereto as lenders (the “Lenders”). The Credit Agreement provides Digi with a senior secured credit facility (the “Credit Facility”). The Credit Facility includes a $250 million senior secured revolving credit facility (the “Revolving Loan Facility”), with an uncommitted accordion feature that provides for additional borrowing capacity of up to the greater of $95 million or one hundred percent of trailing twelve month adjusted earnings before interest, taxes, depreciation, and amortization ("EBITDA"). The Credit Facility also contains a $10 million letter of credit sublimit and $10 million swingline sub-facility. Digi may use the proceeds of the Credit Facility in the future for general corporate purposes.

Digi borrowed a total of $215 million under the Credit Facility to repay all obligations and to pay related fees and expenses under the Third Amended and Restated Credit Agreement dated as of December 22, 2021 (the “Prior Credit Facility”), by and among Digi, as the borrower, BMO, as administrative agent and collateral agent, BMO Capital Markets Corp., as sole lead arranger and bookrunner, and the other lenders from time-to-time party thereto. The Prior Credit Facility consisted of a $350 million term loan B secured loan and a $35 million revolving credit facility that included a $10 million letter of credit subfacility and $10 million swingline subfacility.

5. INDEBTEDNESS (CONTINUED)

Borrowings under the Credit Facility bear interest at a rate per annum equal to Term SOFR with a floor of 0.00% for an interest period of one, three, or six months as selected by Digi, reset at the end of the selected interest period (or a replacement benchmark rate if Term SOFR is no longer available) plus the applicable margin or a base rate plus the applicable margin. The base rate is determined by reference to the highest of BMO’s prime rate, the rate determined by BMO to be the average rate of Federal funds in the secondary market plus 0.50%, or one-month SOFR plus 1.00%. The applicable margin for loans under the Credit Facility is in a range of 1.75% to 2.75% for Term SOFR loans and 0.75% to 1.75% for base rate loans, depending on Digi’s total net leverage ratio. The initial borrowings were made at Term SOFR for a one-month interest period plus an applicable margin of 2.50%. Our weighted average interest rate for our Credit Facility was 7.96% as of December 31, 2023.

In addition to paying interest on the outstanding principal, Digi is required to pay a commitment fee on the unutilized commitments under the Credit Facility. The commitment fee is between 0.20% and 0.35% depending on Digi’s total net leverage ratio. Our weighted average Revolving Loan Facility commitment fee was 0.30% as of December 31, 2023. The Credit Facility is secured by substantially all of the property of Digi and its domestic subsidiaries.

The debt issuance costs and remaining balance under the Prior Credit Facility totaling $9.7 million at December 7, 2023 were written off and included in other expenses upon the entry into the Credit Agreement. Digi incurred an additional $1.3 million in debt issuance costs upon entry into the Credit Agreement, with this amount amortized over the term of the Credit Agreement and reported in interest expense.

The Revolving Loan is due in a lump sum payment at maturity December 7, 2028, if any amounts are drawn. The fair value of the Revolving Loan approximated carrying value at December 31, 2023.

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

The Credit Agreement requires Digi to maintain a minimum interest coverage ratio of 3.00 to 1.00 and a total net leverage ratio not to exceed 3.00 to 1.00, with certain exceptions for a covenant holiday of up to 3.50 to 1.00 after certain material acquisitions. The total net leverage ratio is defined as the ratio of Digi’s consolidated total funded indebtedness minus unrestricted cash as of such date up to a maximum amount not to exceed $50 million, to consolidated EBITDA for such period. The Credit Agreement also contains other customary affirmative and negative covenants, including covenants that restrict the ability of Digi and its subsidiaries to incur additional indebtedness, dispose of significant assets, make certain investments, including any acquisitions other than permitted acquisitions, make certain restricted payments, enter into sale and leaseback transactions or grant additional liens on its assets, subject to certain limitations. Amounts borrowed under the Credit Facility are secured by substantially all of our assets.

6. SEGMENT INFORMATION

We have two reportable segments: IoT Products & Services and IoT Solutions. IoT Products & Services is structured to include four operating segments, each with a segment manager. These four operating segments are Cellular Routers, Console Servers, OEM Solutions and Infrastructure Management. IoT Products & Services derives revenue from the sale of connectivity products and solutions. These products and solutions include enclosed router devices in Cellular Routers, enclosed devices for edge computing and data center applications in Console Servers, chip modules in OEM Solutions and sensors in Infrastructure Management, as well as our cloud based remote manager application and extended support and monitoring of devices sold. IoT Solutions is comprised of two operating segments. These operating segments are SmartSense and Ventus. IoT Solutions derives revenue from the sale of monitoring and networking service solutions. These solutions include wireless condition-based monitoring services in SmartSense and Managed Network-as-a-Service ("MNaaS") in Ventus.

The operating segments included in each reportable segment have similar qualitative and quantitative factors, which allow us to aggregate them under each reportable segment. The qualitative factors include similar nature of products and services, production process, type or class of customers and methods used to distribute the products. The quantitative factors include similar operating margins. Our CEO is our Chief Operating Decision Maker and reviews and makes business decisions using consolidated information such as operating income and gross profit.

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

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

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

6. SEGMENT INFORMATION (CONTINUED)

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

*Unallocated consists of cash and cash equivalents.

7. REVENUE

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

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

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 $16.7 million and $16.6 million as of December 31, 2023 and September 30, 2023, respectively, are included in property, equipment and improvements, net. Depreciation expense for these subscriber assets, which is included in cost of sales, was $1.0 million and $0.9 million for the three months ended December 31, 2023 and 2022, respectively. We depreciate the cost of this equipment over its useful life.

Contract assets at Digi consist of products and services that have been fulfilled, but for which revenue has not yet been recognized. Our contract asset balances were immaterial as of December 31, 2023 and September 30, 2023.

Contract liabilities consist of unearned revenue related to annual or multi-year contracts for subscription services and related implementation fees, as well as product sales that have been invoiced, but not yet fulfilled. The timing of revenue recognition may differ from the timing of invoicing to customers. Customers are invoiced for subscription services on a monthly, quarterly or annual basis.

7. REVENUE (CONTINUED)

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

There were contract liability balances of $27.9 million and $21.6 million balances as of September 30, 2023 and 2022. Of these balances, Digi recognized $7.4 million and $6.1 million as revenue in the three months ended December 31, 2023 and 2022, respectively.

As of December 31, 2023, we had approximately $156.9 million of remaining performance obligations on contracts with an original duration of one year or more. We expect to recognize revenue on approximately $67.5 million of remaining performance obligations over the next 12 months. We expect to recognize revenue from the remaining performance obligations over a range of two to five years.

8. INCOME TAXES

Our income tax benefit was $0.2 million for the three months ended December 31, 2023. Included in this was a net tax liability of $0.2 million discretely related to the three months ended December 31, 2023. This liability primarily was the result of book stock compensation in excess of recognized tax benefits.

Our effective tax rate will vary based on a variety of factors. These factors include our overall profitability, the geographical mix of income before taxes and related statutory tax rate in each jurisdiction, and tax items discretely related to the period, such as tax impacts of stock compensation as there are no open audits during the period. We may record other benefits or expenses in the future that are specific to a particular quarter such as expiration of statutes of limitation, the completion of tax audits, or legislation that is enacted in both U.S. and foreign jurisdictions.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is (in thousands):

The total amount of unrecognized tax benefits at December 31, 2023 that, if recognized, would affect our effective tax rate was $3.0 million, after considering the impact of interest and deferred benefit items. We expect that the total amount of unrecognized tax benefits will decrease by approximately $0.4 million over the next 12 months.

9. PRODUCT WARRANTY OBLIGATION

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

			Three months ended December 31,
			2023						2022
Balance at beginning of period			$	772					$	886
Warranties accrued			94						90
Settlement made			(85)						(54)
Balance at end of period			$	781					$	922

10. 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 12 months, the related lease assets and lease liabilities are recognized on the condensed 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 expected term of 12 months or less are not recorded on the condensed 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 assets, 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):

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):

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

10. LEASES (CONTINUED)

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

11. COMMITMENTS AND CONTINGENCIES

We lease certain of our buildings and equipment under non-cancelable lease agreements. Please refer to Note 10 to our condensed consolidated financial statements for additional information.

Data Logger Solutions, LLC ("Data Loggers") brought suit in Delaware Superior Court against us and our subsidiary Digi SmartSense, LLC in October, 2020. The suit alleges that Data Loggers has not been paid certain commissions it believes it is owed and will continue to be owed under a Reseller Agreement entered between Data Loggers and TempAlert. SmartSense is the successor of interest of TempAlert and terminated the Reseller Agreement in 2019. Data Loggers claims it is entitled to actual, speculative and punitive damages in connection with its allegations. A trial is scheduled to commence in February 2024. We intend to defend the matter vigorously; however, there can be no assurance that we will be successful in such defense. We are unable to estimate the total costs to defend the matter or the potential liability to us in the event that we are not successful in our defense.

In addition to the matters discussed above, in the normal course of business, we are presently, and expect in the future to be, subject to various claims and litigation with third parties such as non-practicing intellectual property entities as well as customers, vendors and/or employees. There can be no assurance that any claims by third parties, if proven to have merit, will not materially adversely affect our business, liquidity or financial condition.

12. STOCK-BASED COMPENSATION

Stock-based awards granted in the first fiscal quarter of 2024 and 2023 were granted under the amended and restated 2021 Omnibus Incentive Plan (the "2021 Plan"). Shares subject to awards under the 2021 Plan or any prior plans that are forfeited, canceled, returned to us for failure to satisfy vesting requirements, settled in cash or otherwise terminated without payment also will be available for grant under the 2021 Plan. The authority to grant options under the 2021 Plan and set other terms and conditions rests with the Compensation Committee of the Board of Directors.

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

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

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. When employees make this election, we retain a portion of shares issuable under the award. Tax withholding obligations are otherwise fulfilled by the employee paying cash to us for the withholding. During the three months ended December 31, 2023 and 2022, our employees forfeited 87,792 shares and 71,951 shares, respectively, in order to satisfy withholding tax obligations of $2.1 million and $3.0 million, respectively.

We sponsor an Employee Stock Purchase Plan as amended and restated as of December 10, 2019, October 29, 2013, December 4, 2009 and November 27, 2006 (the "ESPP"), covering all domestic employees with at least 90 days of continuous service and who are customarily employed at least 20 hours per week. The ESPP 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 ESPP, ratified by our stockholders on January 29, 2020, increased the total number of shares that may be purchased under the ESPP to 3,425,000. ESPP contributions by employees were $0.5 million and $0.6 million for the three months ended December 31, 2023 and 2022, respectively. Pursuant to the ESPP, 23,665 and 19,683 common shares were issued to employees during the three months ended December 31, 2023 and 2022, respectively. Shares are issued under the ESPP from treasury stock. As of December 31, 2023, 446,562 common shares were available for future issuances under the ESPP.

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

The following table summarizes our stock option activity (in thousands, except per common share amounts):

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

The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price. The total intrinsic value of all options exercised during the three months ended December 31, 2023 and 2023 was $0.4 million and $1.7 million, respectively.

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

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

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

As of December 31, 2023, the total unrecognized compensation cost related to non-vested restricted stock units and performance stock units was $24.2 million and $1.4 million, respectively. The related weighted average period over which these costs are expected to be recognized was approximately 2.6 years and 0.8 years, respectively.

Our management's discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended September 30, 2023, as well as our subsequent reports on Form 10-Q and Form 8-K and any amendments to these reports.

This Form 10-Q contains certain statements that are "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995, and within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

This discussion contains forward-looking statements that are based on management’s current expectations and assumptions. These statements often can be identified by the use of forward-looking terminology such as "anticipate," "assume," "believe," "continue," "estimate," "expect," "intend," "may," "plan," "potential," "project," "should," "target," or "will" or the negative thereof or other variations thereon or similar terminology. Among other items, these statements relate to expectations of the business environment in which Digi operates, projections of future performance, inventory levels, perceived marketplace opportunities, interest expense and statements regarding our mission and vision. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions. Among others, these include risks related to ongoing and varying inflationary and deflationary pressures around the world and the monetary policies of governments globally as well as present concerns about a potential recession, the ability of companies like us to operate a global business in such conditions as well as negative effects on product demand and the financial solvency of customers and suppliers in such conditions, risks related to ongoing supply chain challenges that continue to impact businesses globally, risks related to cybersecurity, risks arising from the present wars in Ukraine and the Middle East, the highly competitive market in which our company operates, rapid changes in technologies that may displace products sold by us, declining prices of networking products, our reliance on distributors and other third parties to sell our products, the potential for significant purchase orders to be canceled or changed, delays in product development efforts, uncertainty in user acceptance of our products, the ability to integrate our products and services with those of other parties in a commercially accepted manner, potential liabilities that can arise if any of our products have design or manufacturing defects, our ability to integrate and realize the expected benefits of acquisitions, our ability to defend or settle satisfactorily any litigation, the impact of natural disasters and other events beyond our control that could negatively impact our supply chain and customers, potential unintended consequences associated with restructuring, reorganizations or other similar business initiatives that may impact our ability to retain important employees or otherwise impact our operations in unintended and adverse ways, and changes in our level of revenue or profitability which can fluctuate for many reasons beyond our control.

These and other risks, uncertainties and assumptions identified from time to time in our filings with the United States Securities and Exchange Commission, including without limitation, those set forth in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended September 30, 2023, subsequent filings, as well as this filing on Form 10-Q and other filings, could cause our actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. Many of such factors are beyond our ability to control or predict. These forward-looking statements speak only as of the date for which they are made. We disclaim any intent or obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, the disclosure of contingent assets and liabilities and the values of purchased assets and assumed liabilities in acquisitions. We base our estimates on historical experience and various other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

A description of our critical accounting estimates was provided in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the fiscal year ended September 30, 2023.

We are a leading global provider of business and mission-critical IoT connectivity products, services and solutions. Our business is comprised of two reporting segments: IoT Products & Services and IoT Solutions.

In fiscal 2024, our key operating objectives include:

•continuing to transition to complete solutions with software and service offerings included with our products, as this drives Annualized Recurring Revenue ("ARR"), which provides more predictable and higher margin revenue; and

•delivering a higher level of customer service across our businesses.

We utilize many financial, operational, and other metrics to evaluate our financial condition and financial performance. Below we highlight the metrics for the first quarter of fiscal 2024 that we feel are most important in these evaluations, with comparisons to the first quarter of fiscal 2023:

•Consolidated revenue was $106 million, a decrease of 3%.

•Consolidated gross profit was $61 million, a decrease of 1%.

•Gross profit margin was 57.6%, an increase of 130 basis points.

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

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

•Adjusted net income and adjusted net income per share was $17.6 million, or $0.48 per diluted share, compared to $17.8 million, or $0.48 per diluted share.

•Adjusted EBITDA was $23 million, or 22.0% of revenue, compared to $23 million or 21.4% of revenue.

•ARR was $108 million at quarter end, an increase of 13%.

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

IoT Products & Services revenue decreased 2.7% for the three months ended December 31, 2023, as compared to the same period in the prior fiscal year. This decrease was driven by decreases in sales volume of Console Server and Cellular products, partially offset by growth in sales of OEM products.

IoT Solutions revenue decreased 3.6% for the three months ended December 31, 2023, as compared to the same period in the prior fiscal year. This decrease was primarily driven by one-time revenue reductions in Ventus, partially offset by increases in sales volume in SmartSense.

ARR was $108 million as of December 31, 2023, compared to $96 million as of December 31, 2022. IoT Products & Services ARR was $23 million as of December 31, 2023, compared to $14 million as of December 31, 2022. IoT Solutions ARR was $85 million as of December 31, 2023, compared to $82 million as of December 31, 2022.

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

IoT Products & Services gross profit margin decreased 110 basis points for the three months ended December 31, 2023 as compared to the same period in the prior fiscal year. This decrease was driven primarily by decreased volume in Console Server, partially offset by increased sales and higher margin mix in OEM.

The IoT Solutions gross profit margin increased 950 basis points for the three months ended December 31, 2023 as compared to the same period in the prior fiscal year. This increase was primarily the result of increased revenue and margins in SmartSense.

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

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

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

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

Other expense, net, increased $9.5 million for the three months ended December 31, 2023, as compared to the same period in the prior fiscal year. This increase was driven by the debt issuance cost expense realized upon the extinguishment of our prior credit facility (see Note 5 to the condensed consolidated financial statements for additional information).

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

ARR represents the annualized monthly value of all billable subscription contracts, measured at the end of any fiscal period. ARR should be viewed independently of revenue and deferred revenue and is not intended to replace or forecast either of these items. Digi management uses ARR to manage and assess the growth of our subscription revenue business. We believe ARR is an indicator of the scale of our subscription business.

NON-GAAP FINANCIAL INFORMATION

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

Non-GAAP measures are not substitutes for GAAP measures for the purpose of analyzing financial performance. The disclosure of these measures does not reflect all charges and gains that actually were recognized by Digi. These non-GAAP measures are not in accordance with, or, an alternative for measures prepared in accordance with GAAP and may be different from non-GAAP measures used by other companies or presented by us in prior reports. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. We believe that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP. We believe these measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures. Additionally, Adjusted EBITDA does not reflect our cash expenditures, the cash requirements for the replacement of depreciated and amortized assets, or changes in or cash requirements for our working capital needs. We believe that providing historical and adjusted net income and adjusted net income per diluted share, respectively, exclusive of such items as reversals of tax reserves, discrete tax benefits, restructuring charges and reversals, intangible amortization, stock-based compensation, other non-operating income/expense, adjustments to estimates of contingent consideration, acquisition-related expenses and interest expense related to acquisition permits investors to compare results with prior periods that did not include these items. Management uses the aforementioned non-GAAP measures to monitor and evaluate ongoing operating results and trends and to gain an understanding of our comparative operating performance. In addition, certain of our stockholders have expressed an interest in seeing financial performance measures exclusive of the impact of these matters, which while important, are not central to the core operations of our business. Management believes that Adjusted EBITDA, defined as EBITDA adjusted for stock-based compensation expense, acquisition-related expenses, restructuring charges and reversals and changes in fair value of contingent consideration is useful to investors to evaluate our core operating results and financial performance because it excludes items that are significant non-cash or non-recurring expenses reflected in the consolidated statements of operations. We believe that the presentation of Adjusted EBITDA as a percentage of revenue is useful because it provides a reliable and consistent approach to measuring our performance from year to year and in assessing our performance against that of other companies. We believe this information helps compare operating results and corporate performance exclusive of the impact of our capital structure and the method by which assets were acquired.

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

(In thousands)

(In thousands, except per share amounts)