UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



☑						QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: ~~June 30,~~December 31, 2022


☐						TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number: 001-34033

DIGI INTERNATIONAL INC.

(Exact name of registrant as specified in its charter)


Delaware						41-1532464
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)


9350 Excelsior Blvd.	Suite 700
Hopkins	Minnesota	55343
(Address of principal executive offices)		(Zip Code)

(952) 912-3444

(Registrant's telephone number, including area code)

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

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $.01 per share

DGII

The Nasdaq Stock Market LLC

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:

Large accelerated filer

☐

Accelerated filer

☑

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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 ~~July 29, 2022,~~January 26, 2023, there were ~~35,292,317~~35,743,647 shares of the registrant's $.01 par value Common Stock outstanding.

INDEX


			Page
PART I. FINANCIAL INFORMATION

ITEM 1. Unaudited Financial Statements:

Condensed Consolidated Statements of Operations			1

Condensed Consolidated Statements of Comprehensive Income			2

Condensed Consolidated Balance Sheets			3

Condensed Consolidated Statements of Cash Flows			4

Condensed Consolidated Statements of Stockholders’ Equity			5

Notes to Condensed Consolidated Financial Statements			6

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			2119

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk			2927

ITEM 4. Controls and Procedures			3028

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings			3129

ITEM 1A. Risk Factors			3129

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds			3129

ITEM 3. Defaults Upon Senior Securities			3129

ITEM 4. Mine Safety Disclosures			3129

ITEM 5. Other Information			3129

ITEM 6. Exhibits			3130

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DIGI INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


		Three months ended June 30,				Nine months ended June 30,					Three months ended December 31,
		2022		2021		2022		2021			2022		2021
		(in thousands, except per share data)									(in thousands, except per share data)
Revenue:	Revenue:									Revenue:
Product	Product	$	77,627	$	68,303	$	210,592	$	197,831	Product	$	81,755	$	63,798
Service	Service	25,890		10,776		71,895		31,695		Service	27,551		20,459
Total revenue	Total revenue	103,517		79,079		282,487		229,526		Total revenue	109,306		84,257
Cost of sales:	Cost of sales:									Cost of sales:
Cost of product	Cost of product	38,435		31,477		102,157		91,747		Cost of product	39,612		29,239
Cost of service	Cost of service	6,352		3,933		19,043		10,409		Cost of service	7,070		5,748
Amortization	Amortization	1,304		1,113		3,996		3,339		Amortization	1,103		1,389
Total cost of sales	Total cost of sales	46,091		36,523		125,196		105,495		Total cost of sales	47,785		36,376
Gross profit	Gross profit	57,426		42,556		157,291		124,031		Gross profit	61,521		47,881
Operating expenses:	Operating expenses:									Operating expenses:
Sales and marketing	Sales and marketing	18,230		15,910		51,325		46,271		Sales and marketing	19,106		15,319
Research and development	Research and development	13,968		12,374		41,199		34,822		Research and development	14,094		13,412
General and administrative	General and administrative	15,149		10,153		43,216		34,701		General and administrative	16,358		15,351
Restructuring charge		105		101		214		995

Total operating expenses	Total operating expenses	47,452		38,538		135,954		116,789		Total operating expenses	49,558		44,082
Operating income	Operating income	9,974		4,018		21,337		7,242		Operating income	11,963		3,799
Other expense, net:	Other expense, net:									Other expense, net:
Interest income		1		3		8		4
Interest expense		(5,297)		(371)		(14,665)		(1,019)
Other expense, net		(96)		(114)		(59)		(229)

Interest expense, net										Interest expense, net	(5,971)		(4,898)
Other income (expense), net										Other income (expense), net	17		(102)
Total other expense, net	Total other expense, net	(5,392)		(482)		(14,716)		(1,244)		Total other expense, net	(5,954)		(5,000)
Income before income taxes		4,582		3,536		6,621		5,998
Income (loss) before income taxes										Income (loss) before income taxes	6,009		(1,201)
Income tax provision (benefit)	Income tax provision (benefit)	456		379		(1,539)		220		Income tax provision (benefit)	230		(2,388)

Net income	Net income	$	4,126	$	3,157	$	8,160	$	5,778	Net income	$	5,779	$	1,187

Net income per common share:	Net income per common share:									Net income per common share:

Basic	Basic	$	0.12	$	0.09	$	0.23	$	0.18	Basic	$	0.16	$	0.03

Diluted	Diluted	$	0.12	$	0.09	$	0.23	$	0.18	Diluted	$	0.16	$	0.03
Weighted average common shares:	Weighted average common shares:									Weighted average common shares:
Basic	Basic	35,131		34,057		34,900		31,443		Basic	35,608		34,560
Diluted	Diluted	35,740		35,148		35,740		32,706		Diluted	36,859		35,767

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

Table of Contents

DIGI INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ~~(LOSS)~~

(UNAUDITED)


		Three months ended June 30,				Nine months ended June 30,					Three months ended December 31,
		2022		2021		2022		2021			2022		2021
		(in thousands)									(in thousands)
Net income	Net income	$	4,126	$	3,157	$	8,160	$	5,778	Net income	$	5,779	$	1,187
Other comprehensive (loss) income:
Other comprehensive income (loss):										Other comprehensive income (loss):
Foreign currency translation adjustment	Foreign currency translation adjustment	(1,359)		463		(1,519)		2,068		Foreign currency translation adjustment	1,289		(212)

Other comprehensive (loss) income		(1,359)		463		(1,519)		2,068
Other comprehensive income (loss)										Other comprehensive income (loss)	1,289		(212)
Comprehensive income	Comprehensive income	$	2,767	$	3,620	$	6,641	$	7,846	Comprehensive income	$	7,068	$	975

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

Table of Contents

DIGI INTERNATIONAL INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


		June 30, 2022		September 30, 2021			December 31, 2022		September 30, 2022
		(in thousands, except share data)					(in thousands, except share data)
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	41,515	$	152,432	Cash and cash equivalents	$	30,949	$	34,900

Accounts receivable, net	Accounts receivable, net	52,009		43,738		Accounts receivable, net	49,668		50,450
Inventories	Inventories	61,687		43,921		Inventories	80,993		73,223
Income taxes receivable	Income taxes receivable	9,784		2,698		Income taxes receivable	4,777		3,764

Other current assets	Other current assets	4,562		3,869		Other current assets	3,854		3,871

Total current assets	Total current assets	169,557		246,658		Total current assets	170,241		166,208

Property, equipment and improvements, net	Property, equipment and improvements, net	26,380		12,132		Property, equipment and improvements, net	28,374		27,594
Operating lease right-of-use assets		14,829		15,684
Intangible assets, net	Intangible assets, net	308,814		118,029		Intangible assets, net	295,663		302,064
Goodwill	Goodwill	341,708		225,522		Goodwill	341,573		340,477
Deferred tax assets		—		439
Operating lease right-of-use assets						Operating lease right-of-use assets	14,897		15,299

Other non-current assets	Other non-current assets	2,351		1,067		Other non-current assets	3,862		2,253

Total assets	Total assets	$	863,639	$	619,531	Total assets	$	854,610	$	853,895
LIABILITIES AND STOCKHOLDERS' EQUITY	LIABILITIES AND STOCKHOLDERS' EQUITY					LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Current portion of long-term debt	Current portion of long-term debt	$	15,523	$	—	Current portion of long-term debt	$	15,523	$	15,523
Accounts payable	Accounts payable	27,949		22,586		Accounts payable	30,633		32,373
Accrued compensation	Accrued compensation	12,899		12,934		Accrued compensation	11,782		14,576
Unearned revenue	Unearned revenue	18,172		13,589		Unearned revenue	20,414		19,803
Contingent consideration on acquired businesses		6,100		20

Current portion of operating lease liabilities	Current portion of operating lease liabilities	2,989		2,633		Current portion of operating lease liabilities	3,357		3,196
Other current liabilities	Other current liabilities	10,946		7,179		Other current liabilities	8,856		11,036

Total current liabilities	Total current liabilities	94,578		58,941		Total current liabilities	90,565		96,507
Income taxes payable	Income taxes payable	2,281		2,334		Income taxes payable	1,734		2,441
Deferred tax liabilities	Deferred tax liabilities	15,417		13,493		Deferred tax liabilities	10,572		9,666
Long-term debt	Long-term debt	240,702		45,799		Long-term debt	218,568		222,448

Operating lease liabilities	Operating lease liabilities	16,824		18,368		Operating lease liabilities	16,334		16,978
Other non-current liabilities	Other non-current liabilities	6,915		8,079		Other non-current liabilities	6,909		4,342

Total liabilities	Total liabilities	376,717		147,014		Total liabilities	344,682		352,382
Commitments and Contingencies (See Note 13)	Commitments and Contingencies (See Note 13)	0		0		Commitments and Contingencies (See Note 13)
Stockholders' equity:	Stockholders' equity:					Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued and outstanding	Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued and outstanding	—		—		Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued and outstanding	—		—
Common stock, $.01 par value; 60,000,000 shares authorized; 41,677,327 and 40,653,035 shares issued		417		407
Common stock, $.01 par value; 60,000,000 shares authorized; 42,198,629 and 41,950,732 shares issued						Common stock, $.01 par value; 60,000,000 shares authorized; 42,198,629 and 41,950,732 shares issued	422		420
Additional paid-in capital	Additional paid-in capital	380,083		370,699		Additional paid-in capital	389,390		385,244
Retained earnings	Retained earnings	188,852		180,692		Retained earnings	205,854		200,075
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(24,265)		(22,746)		Accumulated other comprehensive loss	(24,765)		(26,054)
Treasury stock, at cost, 6,427,026 and 6,390,645 shares		(58,165)		(56,535)
Treasury stock, at cost, 6,465,080 and 6,412,812 shares						Treasury stock, at cost, 6,465,080 and 6,412,812 shares	(60,973)		(58,172)
Total stockholders' equity	Total stockholders' equity	486,922		472,517		Total stockholders' equity	509,928		501,513
Total liabilities and stockholders' equity	Total liabilities and stockholders' equity	$	863,639	$	619,531	Total liabilities and stockholders' equity	$	854,610	$	853,895

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

Table of Contents

DIGI INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


							Three months ended December 31,
		Nine months ended June 30,					2022		2021
		2022		2021					(Restated) (1)
		(in thousands)					(in thousands)
Operating activities:	Operating activities:					Operating activities:
Net income	Net income	$	8,160	$	5,778	Net income	$	5,779	$	1,187
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, equipment and improvements	Depreciation of property, equipment and improvements	4,993		3,211		Depreciation of property, equipment and improvements	1,649		1,553
Amortization of intangible assets		20,400		11,989
Amortization						Amortization	6,957		8,559
Stock-based compensation	Stock-based compensation	6,402		6,331		Stock-based compensation	2,868		2,017

Deferred income tax provision	Deferred income tax provision	2,363		1,995		Deferred income tax provision	905		1,732

Loss on sale of property and equipment		12		65
Change in fair value of contingent consideration		—		5,772

Provision for bad debt and product returns	Provision for bad debt and product returns	906		1,520		Provision for bad debt and product returns	(148)		414
Provision for inventory obsolescence	Provision for inventory obsolescence	6,710		1,200		Provision for inventory obsolescence	3,019		600
Restructuring charge	Restructuring charge	214		995		Restructuring charge	23		109
Other	Other	(88)		84		Other	(52)		25
Changes in operating assets and liabilities (net of acquisitions)	Changes in operating assets and liabilities (net of acquisitions)	(34,618)		3,144		Changes in operating assets and liabilities (net of acquisitions)	(18,320)		(10,319)
Net cash provided by operating activities	Net cash provided by operating activities	15,454		42,084		Net cash provided by operating activities	2,680		5,877
Investing activities:	Investing activities:					Investing activities:

Acquisition of businesses, net of cash acquired	Acquisition of businesses, net of cash acquired	(347,553)		(6,312)		Acquisition of businesses, net of cash acquired	—		(347,593)

Purchase of property, equipment, improvements and certain other intangible assets	Purchase of property, equipment, improvements and certain other intangible assets	(4,218)		(1,645)		Purchase of property, equipment, improvements and certain other intangible assets	(963)		(454)
Net cash used in investing activities	Net cash used in investing activities	(351,771)		(7,957)		Net cash used in investing activities	(963)		(348,047)
Financing activities:	Financing activities:					Financing activities:
Proceeds from long-term debt	Proceeds from long-term debt	350,000		618		Proceeds from long-term debt	—		350,000
Payments of debt issuance costs						Payments of debt issuance costs	—		(13,443)
Payments on long-term debt	Payments on long-term debt	(127,050)		(15,625)		Payments on long-term debt	(4,375)		(98,118)
Payments for contingent consideration		—		(4,200)
Proceeds from issuance of stock, net of offering expenses		—		73,830

Proceeds from stock option plan transactions	Proceeds from stock option plan transactions	6,739		7,024		Proceeds from stock option plan transactions	872		4,227
Proceeds from employee stock purchase plan transactions	Proceeds from employee stock purchase plan transactions	1,100		917		Proceeds from employee stock purchase plan transactions	594		321
Taxes paid for net share settlement of share-based payment options and awards	Taxes paid for net share settlement of share-based payment options and awards	(6,476)		(1,985)		Taxes paid for net share settlement of share-based payment options and awards	(2,987)		(6,025)
Net cash provided by financing activities		224,313		60,579
Net cash (used in) provided by financing activities						Net cash (used in) provided by financing activities	(5,896)		236,962
Effect of exchange rate changes on cash and cash equivalents	Effect of exchange rate changes on cash and cash equivalents	1,087		(1,893)		Effect of exchange rate changes on cash and cash equivalents	228		(36)
Net (decrease) increase in cash and cash equivalents		(110,917)		92,813
Net decrease in cash and cash equivalents						Net decrease in cash and cash equivalents	(3,951)		(105,244)
Cash and cash equivalents, beginning of period	Cash and cash equivalents, beginning of period	152,432		54,129		Cash and cash equivalents, beginning of period	34,900		152,432
Cash and cash equivalents, end of period	Cash and cash equivalents, end of period	$	41,515	$	146,942	Cash and cash equivalents, end of period	$	30,949	$	47,188

Supplemental disclosures of cash flow information:						Supplemental disclosures of cash flow information:
Interest paid						Interest paid	$	8,466	$	2,688
Income taxes paid, net						Income taxes paid, net	565		738
Supplemental schedule of non-cash investing and financing activities:	Supplemental schedule of non-cash investing and financing activities:					Supplemental schedule of non-cash investing and financing activities:
Transfer of inventory to property, equipment and improvements	Transfer of inventory to property, equipment and improvements	$	(1,742)	$	(1,624)	Transfer of inventory to property, equipment and improvements	(1,512)		(699)
Contingent consideration recognized related to acquisition of business		$	—	$	(5,914)
Tenant improvement allowance		$	—	$	(1,000)

Accrual for purchase of property, equipment, improvements and certain other intangible assets	Accrual for purchase of property, equipment, improvements and certain other intangible assets	$	(69)	$	(14)	Accrual for purchase of property, equipment, improvements and certain other intangible assets	$	(17)	$	(16)

(1) As described in Note 2 to these condensed consolidated financial statements, we have restated the condensed consolidated statement of cash flows for the three months ended December 31, 2021.

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

Table of Contents

DIGI INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(UNAUDITED)


												Accumulated															Accumulated
								Additional				Other		Total									Additional				Other		Total
		Common Stock			Treasury Stock			Paid-In		Retained		Comprehensive		Stockholders'			Common Stock			Treasury Stock			Paid-In		Retained		Comprehensive		Stockholders'
(in thousands)	(in thousands)	Shares	Par Value		Shares	Value		Capital		Earnings		Income (Loss)		Equity		(in thousands)	Shares	Par Value		Shares	Value		Capital		Earnings		(Loss) Income		Equity
Balances, March 31, 2021		40,442	$	404	6,413	$	(56,595)	$	364,604	$	172,951	$	(22,212)	$	459,152
Balances, September 30, 2021																Balances, September 30, 2021	40,653	$	407	6,391	$	(56,535)	$	370,699	$	180,692	$	(22,746)	$	472,517
Net income	Net income	—	—		—	—		—		3,157		—		3,157		Net income	—	—		—	—		—		1,187		—		1,187
Other comprehensive income		—	—		—	—		—		—		463		463
Other		—	—		—	—		—		8		—		8
Other comprehensive loss																Other comprehensive loss	—	—		—	—		—		—		(212)		(212)

Employee stock purchase plan issuances	Employee stock purchase plan issuances	—	—		(18)	160		137		—		—		297		Employee stock purchase plan issuances	—	—		(18)	161		160		—		—		321
Taxes paid for net share settlement of share-based payment awards	Taxes paid for net share settlement of share-based payment awards	—	—		6	(119)		—		—		—		(119)		Taxes paid for net share settlement of share-based payment awards	—	—		74	(1,726)		(4,299)		—		—		(6,025)
Issuance of stock under stock award plans	Issuance of stock under stock award plans	70	1		—	—		402		—		—		403		Issuance of stock under stock award plans	760	7		—	—		4,220		—		—		4,227
Stock-based compensation expense	Stock-based compensation expense	—	—		—	—		2,110		—		—		2,110		Stock-based compensation expense	—	—		—	—		2,017		—		—		2,017
Balances, June 30, 2021		40,512	$	405	6,401	$	(56,554)	$	367,253	$	176,116	$	(21,749)	$	465,471
Balances, December 31, 2021																Balances, December 31, 2021	41,413	$	414	6,447	$	(58,100)	$	372,797	$	181,879	$	(22,958)	$	474,032

Balances, September 30, 2020		35,513	$	355	6,353	$	(55,109)	$	279,741	$	170,330	$	(23,817)	$	371,500

Balances, September 30, 2022																Balances, September 30, 2022	41,950	$	420	6,413	$	(58,172)	$	385,244	$	200,075	$	(26,054)	$	501,513
Net income	Net income	—	—		—	—		—		5,778		—		5,778		Net income	—	—		—	—		—		5,779		—		5,779
Other comprehensive income	Other comprehensive income	—	—		—	—		—		—		2,068		2,068		Other comprehensive income	—	—		—	—		—		—		1,289		1,289
Issuance of common stock, net of offering expenses		4,025	40		—	—		73,790		—		—		73,830
Other		—	—		—	—		—		8		—		8
Employee stock purchase plan issuances		—	—		(61)	540		376		—		—		916
Taxes paid for net share settlement of share-based payment awards		—	—		109	(1,985)		—		—		—		(1,985)
Issuance of stock under stock award plans		974	10		—	—		7,015		—		—		7,025
Stock-based compensation expense		—	—		—	—		6,331		—		—		6,331
Balances, June 30, 2021		40,512	$	405	6,401	$	(56,554)	$	367,253	$	176,116	$	(21,749)	$	465,471

Balances, March 31, 2022		41,525	$	415	6,447	$	(58,310)	$	376,579	$	184,726	$	(22,906)	$	480,504
Net income		—	—		—	—		—		4,126		—		4,126
Other comprehensive loss		—	—		—	—		—		—		(1,359)		(1,359)

Employee stock purchase plan issuances	Employee stock purchase plan issuances	—	—		(23)	213		217		—		—		430		Employee stock purchase plan issuances	—	—		(20)	186		408		—		—		594
Taxes paid for net share settlement of share-based payment options and awards	Taxes paid for net share settlement of share-based payment options and awards	—	—		3	(68)		—		—		—		(68)		Taxes paid for net share settlement of share-based payment options and awards	—	—		72	(2,987)		—		—		—		(2,987)
Issuance of stock under stock award plans	Issuance of stock under stock award plans	152	2		—	—		1,144		—		—		1,146		Issuance of stock under stock award plans	249	2		—	—		870		—		—		872
Stock-based compensation expense	Stock-based compensation expense	—	—		—	—		2,143		—		—		2,143		Stock-based compensation expense	—	—		—	—		2,868		—		—		2,868
Balances, June 30, 2022		41,677	$	417	6,427	$	(58,165)	$	380,083	$	188,852	$	(24,265)	$	486,922

Balances, September 30, 2021		40,653	$	407	6,391	$	(56,535)	$	370,699	$	180,692	$	(22,746)	$	472,517
Net income		—	—		—	—		—		8,160		—		8,160
Other comprehensive loss		—	—		—	—		—		—		(1,519)		(1,519)
Balances, December 31, 2022																Balances, December 31, 2022	42,199	$	422	6,465	$	(60,973)	$	389,390	$	205,854	$	(24,765)	$	509,928

Employee stock purchase plan issuances		—	—		(60)	547		554		—		—		1,101
Taxes paid for net share settlement of share-based payment awards		—	—		96	(2,177)		(4,299)		—		—		(6,476)
Issuance of stock under stock award plans		1,024	10		—	—		6,727		—		—		6,737
Stock-based compensation expense		—	—		—	—		6,402		—		—		6,402
Balances, June 30, 2022		41,677	$	417	6,427	$	(58,165)	$	380,083	$	188,852	$	(24,265)	$	486,922

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

Table of Contents

DIGI INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

Basis of Presentation

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 United States 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 our Annual Report on Form 10-K for the year ended September 30, ~~2021~~2022 (the ~~"2021~~"2022 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.

Potential Impacts of ~~Macroeconomic Conditions~~COVID-19 on our Business

~~Our business is effected by present macroeconomic conditions including the ongoing pandemic, supply chain disruptions, the war in Ukraine and inflation.~~ The impact of ~~each of these items is volatile and~~the coronavirus ("COVID-19") pandemic continues to ~~evolve. The~~unfold. While we have seen conditions improve towards pre-pandemic levels, the extent of ~~impact stemming from any individual factor or combination of factors~~the pandemic's effect on our operational and financial performance will depend in large part on future developments, which cannot be reasonably estimated at this ~~time and could vary in~~time. Future developments include changes to the duration, scope and severity ~~both individually and collectively based upon~~of the pandemic, the actions taken ~~by governments and other entities~~ to contain or mitigate ~~impacts~~its impact both within and outside the jurisdictions where we ~~operate.~~operate and the impact on governmental programs. Due to the inherent uncertainty of the situation, we are unable to predict the likely impact of the COVID-19 pandemic on our future operations, but continually monitor the risk it presents to our business. For a more detailed discussion see Part I, Item 1 in our Annual Report on Form 10-K for the year ended September 30, ~~2021 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in~~ ~~Item 2~~ ~~of this Form 10-Q.~~

~~Recently Issued Accounting Pronouncements~~

~~Adopted~~

~~In October 2021, FASB issued ASU 2021-08,~~ ~~Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.~~ ~~This update requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. We adopted this standard in the first quarter of fiscal~~ 2022.

~~Table of Contents~~

2. ~~ACQUISITIONS~~RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

~~Acquisition of Ventus~~

~~On November 1, 2021, we acquired Ventus Networks, LLC ("Ventus") for approximately $350 million in cash. The acquisition was funded through a combination~~Our condensed consolidated statement of cash ~~on hand~~flows for the three months ended December 31, 2021 has been restated for errors made with regard to the cash flow classification of debt issuance costs and debt ~~financing under a $350 million credit facility committed by BMO Harris Bank N.A.~~issuance cost amortization.

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.Immaterial Correction of Prior Period Financial Statements

~~Costs directly related~~Subsequent to the ~~acquisition~~issuance of ~~$4.2 million incurred fiscal year to date 2022 have been charged to operations and are included~~the Company's financial statements for the quarter ended December 31, 2021, the Company made certain corrections in ~~general and administrative expense in our~~the condensed consolidated statements of ~~operations. These acquisition~~cash flows related to the debt issuance costs ~~include legal, accounting, valuation~~associated with our second and ~~investment banking fees.~~

~~The following table summarizes the preliminary fair values~~third amended and restated credit agreement entered into in November and December 2021, respectively. We corrected $13.4 million of ~~Ventus~~debt issuance cost previously recorded within changes in operating assets ~~acquired~~ and liabilities ~~assumed~~(net of acquisitions) within the operating activities and correctly presented the cash outflows as payments of debt issuance costs within financing activities. We also corrected $2.3 million of amortization of debt issuance costs previously included in payments on long-term debt within financing activities and changes in operating assets and liabilities (net of acquisitions) within operating activities to amortization within operating activities. There was no impact to the ~~acquisition date (in thousands):~~


~~Cash~~	$	~~350,000~~

~~Fair value of net tangible assets acquired~~	$	~~20,735~~
~~Identifiable intangible assets:~~
~~Customer relationships~~	~~179,000~~
~~Purchased and core technology~~	~~16,000~~
~~Trademarks~~	~~16,000~~

~~Goodwill~~	~~118,265~~
~~Total~~	$	~~350,000~~

~~The~~ condensed consolidated balance ~~sheet as~~sheets, condensed consolidated statements of ~~June 30, 2022 reflects the preliminary allocation~~income or condensed consolidated statements of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. This preliminary allocation was updated in the third fiscal quarter of 2022 to reflect information not available previously. The estimated fair value of the net assets acquired, liabilities assumed and identifiable intangible assets are preliminary and remain subject to change, as preliminary purchase price allocation has not yet been completed. Included in the fair value of net tangible assets acquired was $0.7 million of right-of-use asset included in other non-current assets and $0.7 million of lease liability included in other current liabilities and other non-current liabilities associated with Ventus’s operating leases.

The preliminary 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 following consolidated pro forma information is presented as if the acquisition had occurred on October 1, 2020 (in thousands):~~

Three months ended June 30, Nine months ended June 30,
2022 2021 2022 2021
Net sales $ 103,517 $ 92,678 $ 287,552 $ 268,029
Net income (loss) 4,126 (432) 3,051 (6,157)

~~Pro forma net~~comprehensive income ~~has been adjusted to include interest expense related to debt incurred~~ as a result of these corrections. The Company determined that this restatement was not material to the acquisition, amortization on the fair value of the intangibles acquired and remove any costs incurred with the sale transaction. Net income for the nine months ended June 30, 2021 was adjusted to include acquisition-related costs of $3.1 million.condensed consolidated financial statements.

Table of Contents

3. EARNINGS PER SHARE

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


		Three months ended June 30,				Nine months ended June 30,					Three months ended December 31,
		2022		2021		2022		2021			2022		2021
Numerator:	Numerator:									Numerator:

Net income	Net income	$	4,126	$	3,157	$	8,160	$	5,778	Net income	$	5,779	$	1,187

Denominator:	Denominator:									Denominator:
Denominator for basic net income per common share — weighted average shares outstanding	Denominator for basic net income per common share — weighted average shares outstanding	35,131		34,057		34,900		31,443		Denominator for basic net income per common share — weighted average shares outstanding	35,608		34,560
Effect of dilutive securities:	Effect of dilutive securities:									Effect of dilutive securities:
Stock options and restricted stock units	Stock options and restricted stock units	609		1,091		840		1,263		Stock options and restricted stock units	1,251		1,207
Denominator for diluted net income per common share — adjusted weighted average shares	Denominator for diluted net income per common share — adjusted weighted average shares	35,740		35,148		35,740		32,706		Denominator for diluted net income per common share — adjusted weighted average shares	36,859		35,767

Net income per common share, basic	Net income per common share, basic	$	0.12	$	0.09	$	0.23	$	0.18	Net income per common share, basic	$	0.16	$	0.03

Net income per common share, diluted	Net income per common share, diluted	$	0.12	$	0.09	$	0.23	$	0.18	Net income per common share, diluted	$	0.16	$	0.03

Digi excludes certain stock options and restricted stock unit awards that would have an anti-dilutive effect on our diluted net income per share calculation. For the three months ended ~~June 30,~~December 31, 2022 and 2021, ~~939,101~~234,365 and ~~994,096~~365,099 shares outstanding ~~were excluded, respectively. For the nine months ended June 30, 2022 and 2021, 778,573 and 864,744~~ were excluded, respectively.

4. SELECTED BALANCE SHEET DATA

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


		June 30, 2022		September 30, 2021			December 31, 2022		September 30, 2022
Accounts receivable, net:	Accounts receivable, net:					Accounts receivable, net:
Accounts receivable	Accounts receivable	$	61,005	$	51,828	Accounts receivable	$	58,037	$	58,967
Less allowance for credit losses	Less allowance for credit losses	2,354		3,934		Less allowance for credit losses	3,350		3,285
Less reserve for future credit returns and pricing adjustments	Less reserve for future credit returns and pricing adjustments	6,642		4,156		Less reserve for future credit returns and pricing adjustments	5,019		5,232
Accounts receivable, net	Accounts receivable, net	$	52,009	$	43,738	Accounts receivable, net	$	49,668	$	50,450
Inventories:	Inventories:					Inventories:
Raw materials	Raw materials	$	31,009	$	27,279	Raw materials	$	38,887	$	39,189

Work in process						Work in process	2		592
Finished goods	Finished goods	30,678		16,642		Finished goods	42,104		33,442
Inventories	Inventories	$	61,687	$	43,921	Inventories	$	80,993	$	73,223

~~Table of Contents~~

5. FAIR VALUE MEASUREMENTS

Financial assets and liabilities are classified in the following fair value hierarchy based on the lowest level input that is significant to the fair value measurement: Level 1 (unadjusted quoted prices in active markets for identical assets or liabilities); Level 2 (observable market inputs, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data).

~~The following tables provide information by level for financial~~There were no assets or liabilities that are measured at fair value on a recurring basis as of December 31, 2022 or September 30, 2022.

Table of Contents

5. FAIR VALUE MEASUREMENTS (CONTINUED)

The following table presents a reconciliation of the contingent consideration liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):

Total Fair
Value at Fair Value Measurements Using
Inputs Considered as
June 30, 2022 Level 1 Level 2 Level 3
Liabilities:
Contingent consideration on acquired business $ 6,200 $ — $ — $ 6,200
Total liabilities measured at fair value $ 6,200 $ — $ — $ 6,200

Total Fair
Value at Fair Value Measurements Using
Inputs Considered as
September 30, 2021 Level 1 Level 2 Level 3
Liabilities:
Contingent consideration on acquired business $ 6,200 $ — $ — $ 6,200
Total liabilities measured at fair value $ 6,200 $ — $ — $ 6,200

In connection with our acquisition of Opengear, Inc. in December 2019, we agreed to make contingent payments, based upon certain revenue thresholds. We paid the final installment of $10.0 million during the second quarter of fiscal 2021.


	Three months ended December 31,
	2022		2021
Fair value at beginning of period	$	—	$	6,200


Change in fair value of contingent consideration	—		—
Fair value at end of period	$	—	$	6,200

In connection with our acquisition of Haxiot, Inc. ("Haxiot") in March 2021, we agreed to make contingent earn-out payments, based upon certain revenue thresholds. In the fiscal third quarter of fiscal 2021, the preliminary purchase price allocation was updated, including related determination of fair value and income tax implications. As a result, we reduced contingent consideration by $2.1 million in the third fiscal quarter of 2021. The fair value of the remaining liability for contingent consideration for the acquisition of Haxiot was $0.0 million and $5.9 million at ~~June 30, 2022.~~December 31, 2022 and 2021, respectively.

In connection with our acquisition of Ctek, Inc. ("Ctek") in July 2021, we agreed to make contingent earn-out payments, based upon certain revenue thresholds. The fair value of the remaining liability for contingent consideration for the acquisition of Ctek was $0.0 million and $0.3 million at ~~June 30, 2022.~~

~~The following table presents a reconciliation of the contingent consideration liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):~~

Three months ended June 30, Nine months ended June 30,
2022 2021 2022 2021
Fair value at beginning of period $ 6,200 $ 8,000 $ 6,200 $ 4,228
Contingent consideration recognized for acquired business — — — 8,000
Contingent consideration payments — — — (10,000)
Change in fair value of contingent consideration — (2,100) — 3,672
Fair value at end of period $ 6,200 $ 5,900 $ 6,200 $ 5,900
December 31, 2022 and 2021, respectively.

The change in fair value of contingent consideration reflects our estimates of the probabilities of achieving the relevant targets and is discounted based on our estimated discount rate. The fair value of the contingent consideration at ~~June 30,~~December 31, 2022 is based on the probability of achieving the specified revenue thresholds for ~~Haxiot and~~ Ctek. As of December 31, 2022, contingent consideration associated with Ctek remains subject to future performance through December 31, 2023.

~~Table of Contents~~

6. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Amortizable intangible assets were (in thousands):


		June 30, 2022						September 30, 2021							December 31, 2022						September 30, 2022
		Gross carrying amount		Accum. amort.		Net		Gross carrying amount		Accum. amort.		Net			Gross carrying amount		Accum. amort.		Net		Gross carrying amount		Accum. amort.		Net
Purchased and core technology	Purchased and core technology	$	85,132	$	(54,666)	$	30,466	$	69,162	$	(50,701)	$	18,461	Purchased and core technology	$	85,034	$	(56,975)	$	28,059	$	85,016	$	(55,854)	$	29,162
License agreements	License agreements	112		(112)		—		112		(112)		—		License agreements	112		(112)		—		112		(112)		—
Patents and trademarks	Patents and trademarks	39,670		(16,972)		22,698		23,491		(14,978)		8,513		Patents and trademarks	39,773		(18,266)		21,507		39,711		(17,666)		22,045

Customer relationships	Customer relationships	309,264		(53,614)		255,650		130,278		(39,973)		90,305		Customer relationships	309,220		(63,123)		246,097		309,212		(58,355)		250,857
Non-compete agreements	Non-compete agreements	600		(600)		—		600		(600)		—		Non-compete agreements	600		(600)		—		600		(600)		—
Order backlog	Order backlog	1,000		(1,000)		—		1,000		(250)		750		Order backlog	1,000		(1,000)		—		1,000		(1,000)		—
Total	Total	$	435,778	$	(126,964)	$	308,814	$	224,643	$	(106,614)	$	118,029	Total	$	435,739	$	(140,076)	$	295,663	$	435,651	$	(133,587)	$	302,064

Amortization expense was ~~$7.0~~$6.5 million and ~~$4.1~~$6.3 million for the three months ended ~~June 30, 2022 and 2021, respectively and $20.4 million and $12.0 million for the nine months ended June 30,~~December 31, 2022 and 2021, 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 ~~2022~~2023 and the five succeeding fiscal years is (in thousands):


2022 (three months)		$	6,722
2023		$	24,996
2023 (nine months)				2023 (nine months)	$	19,515
2024	2024	$	24,282	2024	25,239
2025	2025	$	20,825	2025	21,783
2026	2026	$	20,593	2026	20,593
2027	2027	$	18,582	2027	20,593
2028				2028	20,411

Table of Contents

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

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

Nine months ended June 30, 2022
IoT
Products and Services IoT
Solutions Total
Balance on September 30, 2021 $ 175,180 $ 50,342 $ 225,522
Acquisition — 118,265 118,265
Adjustment 116 (631) (515)
Foreign currency translation adjustment (1,402) (162) (1,564)
Balance on June 30, 2022 $ 173,894 $ 167,814 $ 341,708


	Three months ended December 31, 2022
	IoT Products and Services		IoT Solutions		Total
Balance on September 30, 2022	$	172,931	$	167,546	$	340,477


Foreign currency translation adjustment	998		98		1,096
Balance on December 31, 2022	$	173,929	$	167,644	$	341,573

~~0Goodwill~~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 2two reportable segments, our IoT Products & Services segment and our IoT Solutions segment (see Note 8). ~~Effective with the reorganization announcement on October 7, 2020, our~~Our IoT Products & Services business is ~~now~~ structured to include four reporting units under the IoT Products & Services segment, each with a reporting manager: Cellular Routers, Console Servers, OEM Solutions and Infrastructure Management. ~~We had four reporting units along with our IoT Solutions segment that were tested individually for impairment during our third quarter fiscal 2021 annual impairment test.~~ Following our acquisition of Ventus in November 2021, we have 2two reporting units within our IoT Solutions ~~segment~~segment. Each of these segments was tested individually for impairment during our annual impairment test completed in ~~addition to~~ the ~~4 reporting units included in IoT Products & Services.~~third fiscal quarter of fiscal 2022.

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. If our future operating results do not meet current forecasts or

~~Table of Contents~~

~~6. GOODWILL AND OTHER INTANGIBLE ASSETS, NET (CONTINUED)~~

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.

Results of our Fiscal 2022 Annual Impairment Test

As of June 30, 2022, 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, $63.7 million of goodwill for the OEM Solutions reporting unit, $20.4 million of goodwill for the Infrastructure Management reporting unit, $49.5 million of goodwill for the SmartSense reporting unit and $118.3 million of goodwill for the ~~Ventus.~~Ventus reporting unit. At June 30, 2022, the fair value of goodwill exceeded the carrying value for all six reporting units. SmartSense and Ventus fair values exceeded carrying values by less than 10%. Implied fair value for each reporting unit was calculated on a standalone basis using a weighted combination of the income approach and market approach. The implied fair values of each reporting unit were added together along with our unallocated assets to get an indicated value of total equity to which a range of indicated value of total equity was derived. This range was compared to the total market capitalization of $852.0 million as of June 30, 2022. This implied a range of control (deficit)/ premiums of (5.6)% to 7.9%. This range of control premiums fell below the control premiums observed in the last five years in the communications equipment industry. As a result, the market capitalization reconciliation analysis proved support for the reasonableness of the fair values estimated for each individual reporting unit.

7. 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 "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 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 a committed credit ~~facilities~~facility ("Prior Credit Facility") consisting of a $200 million revolving loan.

Table of Contents

7. INDEBTEDNESS (CONTINUED)

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.

Following the December amendment, borrowings under the Term Loan Facility bear interest at a rate per annum equal to LIBOR with a floor of 0.50% for an interest period of one, three or six months as selected by Digi, reset at the end of the selected interest period (or a replacement benchmark rate if LIBOR is no longer available) plus 5.00% or a base rate plus 4.00%. The base rate is determined by reference to the highest of BMO’s prime rate, the Federal Funds Effective Rate plus 0.50%, or the one-month LIBOR for U.S. dollars plus 1.00%. The applicable margin for loans under the Revolving Credit Facility is in a range of 4.00% to 3.75% for LIBOR loans and 3.00% to 2.75% for base rate loans, depending on Digi’s consolidated leverage ratio. In addition to paying interest on the outstanding balance under the Credit Facility, we are required to pay a commitment fee on the non-utilized commitments thereunder which is also reported in interest expense. Digi elected an interest period of one month for the months of December 2021 through April 2022 and a period of six months effective May 1, 2022. Following the expiration of the election on October 31, 2022, Digi elected an interest period of one month, effective on November 1, 2022 and elected the same period on December 1, 2022. Our weighted average interest rate at ~~June 30,~~December 31, 2022 was ~~6.85%~~6.02%.

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 ~~will be~~are being amortized over the term of the amended loan and reported in interest expense.

The Term Loan is payable in quarterly installments, with the balance remaining due at November 2, 2028. The Revolving Loan is due in a lump sum payment at maturity on November 2, 2028, if any amounts are drawn. The fair value of the Term Loan and Revolving Loan approximated carrying value at ~~June 30,~~December 31, 2022.

Digi made early payments against the term loan of $50 million in December ~~2021, $11.3 million in March~~2021.

The following table is a summary of our long-term indebtedness at December 31, 2022 and ~~$20 million in June 2022.~~September 30, 2022 (in thousands):


	Balance on December 31, 2022		Balance on September 30, 2022

Term loan	$	245,625	$	250,000

Less unamortized issuance costs	(11,534)		(12,029)
Less current maturities of long-term debt	(15,523)		(15,523)
Total long-term debt, net of current portion	$	218,568	$	222,448

1110

Table of Contents

7. INDEBTEDNESS (CONTINUED)

The following table is a summary of ~~our long-term indebtedness at June 30, 2022 and September 30, 2021 (in thousands):~~

Balance at June 30, 2022 Balance at September 30, 2021
Revolving Loan $ — $ 48,118
Term loan 268,748 —
Total loans 268,748 48,118
Less unamortized issuance costs (12,523) (2,319)
Less current maturities of long-term debt (15,523) —
Total long-term debt, net of current portion $ 240,702 $ 45,799

~~The following table is a summary of~~ future maturities of our aggregate long-term debt at ~~June 30,~~December 31, 2022 (in thousands):


Fiscal year	Fiscal year	Amount		Fiscal year	Amount
2022 (three months)		$	4,375
2023		17,500
2023 (nine months)				2023 (nine months)	$	13,125
2024	2024	17,500		2024	17,500
2025	2025	17,500		2025	17,500
2026	2026	17,500		2026	17,500
2027	2027	17,500		2027	17,500
2028	2028	176,873		2028	162,500
Total long-term debt	Total long-term debt	$	268,748	Total long-term debt	$	245,625

Covenants and Security Interest

The agreements governing the Revolving Loan Facility ~~contains~~contain a number of covenants. Among other provisions, these covenants require us to maintain a certain financial ratio (net leverage ratio and minimum fixed charge ratio). At ~~June 30,~~December 31, 2022, we had no amounts drawn on the Revolving Loan Facility. Amounts borrowed under the Credit Facility are secured by substantially all of our assets.

8. SEGMENT INFORMATION

We have 2two reportable segments: IoT Products & Services and IoT Solutions. ~~Effective with the reorganization announcement on October 7, 2020, our~~Our IoT Products & Services business is ~~now~~ structured to include four operating segments, each with a segment manager. These 4four operating segments ~~include:~~are:

•Cellular Routers - box devices (fully enclosed) that provide connectivity typically in a place where the device can be plugged in exclusively using cellular communications.

•Console Servers - similar to cellular routers except they are exclusively for edge computing installations and data center applications (also exclusively using cellular communications).

•OEM Solutions - Original Equipment Manufacturers ("OEM") will be a chip, rather than a boxed device. This can come in the form of a stand-alone module, or from a systems-on-module ("SOMs"). While cellular connectivity is used, other communication protocols can be used such as Zigbee, Bluetooth or Radio-Frequency ("RF") based on application.

•Infrastructure Management - includes battery operated, cellular enabled connect sensors as well as other types of console server applications that are more Digi Accelerated Linux ("DAL") based than Console Servers. This operating segment has some products that do not use cellular communications, but a large part of this segment does use cellular communications.

~~Table of Contents~~

~~8. SEGMENT INFORMATION (CONTINUED)~~

Following the acquisition of Ventus on November 1, 2021, IoT Solutions is now comprised of 2two operating segments:

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

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

The operating segments included in each reportable segment have similar qualitative and quantitative factors which allow us to aggregate them under each reportable segment. The qualitative factors include similar nature of products and services, production process, type or class of customers and methods used to distribute the products. The quantitative factors include similar operating margins. Our ~~CODM~~CEO is our Chief Operating Decision Maker and reviews and makes business decisions ~~which includes a primary review of~~using consolidated information including operating income ~~but also includes~~and gross profit. Following the October 2020 reorganization, the shared general and administrative costs began being allocated to each operating segment. As a result, our disclosed measure of segment operating income has been updated for all periods presented to conform with this change.

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

Three months ended June 30, Nine months ended June 30,
2022 2021 2022 2021
Revenue
IoT Products & Services $ 79,758 $ 66,812 $ 216,872 $ 194,224
IoT Solutions 23,759 12,267 65,615 35,302
Total revenue $ 103,517 $ 79,079 $ 282,487 $ 229,526
Gross Profit
IoT Products & Services $ 42,643 $ 36,806 $ 116,779 $ 106,942
IoT Solutions 14,783 5,750 40,512 17,089
Total gross profit $ 57,426 $ 42,556 $ 157,291 $ 124,031
Operating Income (Loss)
IoT Products & Services $ 10,881 $ 6,101 $ 24,046 $ 11,954
IoT Solutions (907) (2,083) (2,709) (4,712)
Total operating income (loss) $ 9,974 $ 4,018 $ 21,337 $ 7,242
Depreciation and Amortization
IoT Products & Services $ 3,471 $ 3,181 $ 10,633 $ 9,390
IoT Solutions 5,276 1,964 14,760 5,810
Total depreciation and amortization $ 8,747 $ 5,145 $ 25,393 $ 15,200

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

Nine months ended June 30,
2022 2021
IoT Products & Services $ 1,722 $ 1,645
IoT Solutions* 2,496 —
Total expended for property, plant and equipment $ 4,218 $ 1,645

* Excluded from this amount is $1,742 and $1,624 of transfers of inventory to property plant and equipment for subscriber assets for the nine months ended June 30, 2022 and 2021, respectively.

1311

Table of Contents

8. SEGMENT INFORMATION (CONTINUED)

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


	Three months ended December 31,
	2022		2021
Revenue
IoT Products & Services	$	84,342	$	65,744
IoT Solutions	24,964		18,513
Total revenue	$	109,306	$	84,257
Gross Profit
IoT Products & Services	$	46,021	$	35,675
IoT Solutions	15,500		12,206
Total gross profit	$	61,521	$	47,881
Operating Income (Loss)
IoT Products & Services	$	12,683	$	4,116
IoT Solutions	(720)		(317)
Total operating income (loss)	$	11,963	$	3,799
Depreciation and Amortization
IoT Products & Services	$	3,292	$	3,629
IoT Solutions	4,820		4,233
Total depreciation and amortization	$	8,112	$	7,862

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


	Three months ended December 31,
	2022		2021

IoT Products & Services	$	637	$	454
IoT Solutions*	326		—
Total expended for property, plant and equipment	$	963	$	454

* Excluded from this amount is $1,512 and $699 of transfers of inventory to property plant and equipment for subscriber assets for the three months ended December 31, 2022 and 2021, respectively.

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


		June 30, 2022		September 30, 2021			December 31, 2022		September 30, 2022

IoT Products & Services	IoT Products & Services	$	398,129	$	386,934	IoT Products & Services	$	397,108	$	390,128
IoT Solutions	IoT Solutions	423,995		80,165		IoT Solutions	426,553		428,867
Unallocated*	Unallocated*	41,515		152,432		Unallocated*	30,949		34,900
Total assets	Total assets	$	863,639	$	619,531	Total assets	$	854,610	$	853,895

*Unallocated consists of cash and cash equivalents.

Table of Contents

9. REVENUE

Revenue Disaggregation

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


		Three months ended June 30,				Nine months ended June 30,					Three months ended December 31,
		2022		2021		2022		2021			2022		2021
North America, primarily the United States	North America, primarily the United States	$	83,282	$	56,965	$	223,315	$	167,406	North America, primarily the United States	$	83,465	$	66,243
Europe, Middle East & Africa	Europe, Middle East & Africa	12,265		12,543		37,139		34,769		Europe, Middle East & Africa	15,877		10,159
Rest of world	Rest of world	7,970		9,571		22,033		27,351		Rest of world	9,964		7,855
Total revenue	Total revenue	$	103,517	$	79,079	$	282,487	$	229,526	Total revenue	$	109,306	$	84,257

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


		Three months ended June 30,				Nine months ended June 30,					Three months ended December 31,
		2022		2021		2022		2021			2022		2021
Transferred at a point in time	Transferred at a point in time	$	80,858	$	70,333	$	220,049	$	203,665	Transferred at a point in time	$	85,486	$	66,535
Transferred over time	Transferred over time	22,659		8,746		62,438		25,861		Transferred over time	23,820		17,722
Total revenue	Total revenue	$	103,517	$	79,079	$	282,487	$	229,526	Total revenue	$	109,306	$	84,257

Contract Balances

Contract Related Assets

~~Contract~~Our contract related assets consist of subscriber ~~assets. These subscriber~~ assets ~~relate to fees in certain contracts~~that are equipment that we ~~charge our~~provide to customers ~~so they can begin using equipment.~~pursuant to subscription-based contracts. In these cases, we retain the ownership of the equipment that the customer ~~uses.~~uses and charge them subscription fees to receive our end-to end solutions. The total net book value of subscriber assets of ~~$15.8~~$17.1 million and ~~$1.9~~$16.5 million as of ~~June 30,~~December 31, 2022 and September 30, ~~2021,~~2022, respectively, are included in property, equipment and improvements, net. ~~The June 30, 2022 balance includes $14.1 million acquired in the acquisition of Ventus.~~ Depreciation expense for these subscriber assets, which is included in cost of sales, was ~~$0.4~~$0.9 million and ~~$0.5~~$0.8 million for the three months ended ~~June 30,~~December 31, 2022 and ~~June 30, 2021, respectively and $2.3 million and $1.4 million for the nine months ended June 30, 2022 and June 30,~~ 2021, respectively. We depreciate the cost of this equipment over its useful life.

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 December 31, 2022 and 2021.

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.

~~Table of Contents~~

~~9. REVENUE (CONTINUED)~~

Our contract liabilities were ~~$22.6~~$23.0 million and ~~$14.8~~$24.3 million at ~~June 30,~~December 31, 2022 and 2021, respectively. ~~The June 30, 2022 balance includes $2.1 million assumed from the Ventus acquisition completed in November 2021.~~

Of the ~~$24.8~~$21.6 million and ~~$16.4 million balances as of March 31, 2022 and 2021, Digi recognized $5.4 million and $4.8 million in the three months ended June 30, 2022 and 2021, respectively. Of the~~ $15.5 ~~million and $9.3~~ million balances as of September 30, ~~2021~~2022 and ~~2020,~~2021, Digi recognized ~~$12.0~~$6.1 million and ~~$8.3~~$4.9 million as revenue in the ~~nine~~three months ended ~~June 30,~~December 31, 2022 and 2021, respectively.

Remaining Transaction Price

Transaction price allocated to the remaining performance obligations represents contracted revenue that has not been recognized. This includes unearned revenue and unbilled amounts that will be recognized as revenue in future ~~periods.~~periods so long as we perform our obligations. As of ~~June 30,~~December 31, 2022, approximately ~~$22.6~~$23.0 million of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately ~~$18.2~~$20.4 million of remaining performance obligations over the next twelve months. Revenue from the remaining performance obligations we expect to recognize over a range of two to ~~seven~~five years.

Table of Contents

10. INCOME TAXES

Our income tax benefit was $1.5 million for the nine months ended June 30, 2022. Included in this benefit was a net tax benefit discretely related to the nine months ended June 30, 2022 of $2.7 million. This benefit primarily was the result of excess tax benefits recognized on stock compensation.

~~Income tax~~ expense was $0.2 million for the ~~nine~~three months ended ~~June 30, 2021.~~December 31, 2022. Included in this expense was a net tax benefit discretely related to the ~~nine~~three months ended ~~June 30, 2021~~December 31, 2022 of ~~$1.0~~$1.2 million. This benefit primarily was the result of excess tax benefits recognized on stock compensation.

Our effective tax rate will vary based on a variety of factors. These 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 settlements of audits. 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):


Unrecognized tax benefits as of September 30, ~~2021~~2022	$	~~2,908~~3,316



Decreases related to:


Expiration of statute of limitations	~~(69)~~(649)
~~Prior year income tax positions~~	~~(10)~~
Unrecognized tax benefits as of ~~June 30,~~December 31, 2022	$	~~2,829~~2,667

The total amount of unrecognized tax benefits at ~~June 30,~~December 31, 2022 that, if recognized, would affect our effective tax rate was ~~$2.7~~$2.6 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 ~~$0.7~~$0.3 million over the next 12 months.

~~Table of Contents~~

11. PRODUCT WARRANTY OBLIGATION

The following tables summarize the activity associated with the product warranty accrual (in thousands) and is included on our condensed consolidated balance sheets within other current liabilities:
Balance at Warranties Settlements Balance at
Period April 1 issued made June 30
Three months ended June 30, 2022 $ 690 $ 100 $ (38) $ 752
Three months ended June 30, 2021 $ 923 $ 16 $ (146) $ 793
Balance at Warranties Settlements Balance at
Period October 1 issued made June 30
Nine months ended June 30, 2022 $ 707 $ 295 $ (250) $ 752
Nine months ended June 30, 2021 $ 942 $ 205 $ (354) $ 793


	Balance at		Warranties		Settlements		Balance at
Period	September 30		issued		made		December 31
Three months ended December 31, 2022	$	886	$	90	$	(54)	$	922
Three months ended December 31, 2021	$	707	$	71	$	(120)	$	658

12. 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 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 twelve 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 ~~asset,~~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.

Table of Contents

12. LEASES (CONTINUED)

The following table shows the supplemental balance sheet information related to our leases (in thousands):

Balance Sheet Location June 30, 2022 September 30, 2021
Assets
Operating leases Operating lease right-of-use assets $ 14,829 $ 15,684
Total lease assets $ 14,829 $ 15,684
Liabilities
Operating leases Current portion of operating lease liabilities $ 2,989 $ 2,633
Operating leases Operating lease liabilities 16,824 18,368
Total lease liabilities $ 19,813 $ 21,001

~~Table of Contents~~

~~12. LEASES (CONTINUED)~~


	Balance Sheet Location	December 31, 2022		September 30, 2022
Assets
Operating leases	Operating lease right-of-use assets	$	14,897	$	15,299
Total lease assets		$	14,897	$	15,299

Liabilities

Operating leases	Current portion of operating lease liabilities	$	3,357	$	3,196

Operating leases	Operating lease liabilities	16,334		16,978
Total lease liabilities		$	19,691	$	20,174

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


		Three months ended June 30,				Nine months ended June 30,					Three months ended December 31,
		2022		2021		2022		2021			2022		2021
Operating lease cost	Operating lease cost	$	954	$	856	$	2,836	$	2,615	Operating lease cost	$	904	$	937
Variable lease cost	Variable lease cost	287		286		828		805		Variable lease cost	309		28
Short-term lease cost	Short-term lease cost	27		32		83		98		Short-term lease cost	25		273
Total lease cost	Total lease cost	$	1,268	$	1,174	$	3,747	$	3,518	Total lease cost	$	1,238	$	1,238

~~The following table presents supplemental information related to operating leases (in thousands):~~

Nine months ended June 30,
2022 2021
Cash paid for amounts included in the measurement of operating lease liabilities $ — $ 1,784
Right-of-use assets acquired in Ventus acquisition 699 —
Right-of-use assets obtained in exchange for new operating lease liabilities — 3,919
Non-cash tenant improvement allowance $ — $ 1,000
In November 2021, Digi acquired $0.9 million in right of-use assets and assumed $0.9 million in lease liabilities from the acquisition of Ventus that are included in the balances at December 31, 2021.

At ~~June 30,~~December 31, 2022 the weighted average remaining lease term of our operating leases was ~~8.6~~6.8 years and the weighted average discount rate for these leases was ~~2.8%~~3.4%.

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 ~~June 30,~~December 31, 2022 (in thousands):


Fiscal year	Fiscal year	Amount		Fiscal year	Amount
2022 (three months)		$	992
2023		3,746
2023 (nine months)				2023 (nine months)	$	2,833
2024	2024	3,241		2024	3,689
2025	2025	2,821		2025	3,339
2026	2026	2,591		2026	3,122
2027	2027	1,761		2027	2,042
2028				2028	1,956
Thereafter	Thereafter	7,068		Thereafter	5,269
Total future undiscounted lease payments	Total future undiscounted lease payments	22,220		Total future undiscounted lease payments	22,250
Less imputed interest	Less imputed interest	(2,407)		Less imputed interest	(2,559)
Total reported lease liability	Total reported lease liability	$	19,813	Total reported lease liability	$	19,691

13. COMMITMENTS AND CONTINGENCIES

We lease certain of our buildings and equipment under ~~noncancelable~~non-cancelable lease agreements. Please refer to Note 12 to our condensed consolidated financial statements for additional information.

In the normal course of business, we presently 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 former 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.

1715

Table of Contents

14. STOCK-BASED COMPENSATION

Stock-based awards granted in the first fiscal quarter of 2023 were granted under the amended and restated 2021 Omnibus Incentive Plan (the "2021 Plan"). Such awards made in the first quarter of fiscal 2022 were granted under the 2021 ~~Omnibus Incentive~~ Plan ~~(as~~before it was amended and restated ~~the "2021 Plan") beginning~~at our annual meeting in January, 29, 2021. Prior to that date, such awards made in fiscal 2021 were granted under the 2020 Omnibus Incentive Plan (the "2020 Plan"). Upon stockholder approval of the 2021 Plan on January 29, 2021, we ceased granting awards under the 2020 Plan. On January 28, 2022, the stockholders approved the amendment and restatement of the 2021 Plan.2022. Shares subject to awards under the ~~2020~~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 2,400,000 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 2021 Plan is scheduled to expire on January 28, 2032. Options under the 2021 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 restricted stock units or performance stock units, we issue new shares of stock. As of ~~June 30,~~December 31, 2022, there were approximately ~~1,757,566~~1,209,045 shares available for future grants under the 2021 Plan.

Cash received from the exercise of stock options was ~~$6.7~~$0.9 million and ~~$7.0~~$4.2 million for the ~~nine~~three months ended ~~June 30,~~December 31, 2022 and ~~June 30,~~ 2021, 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 ~~nine~~three months ended ~~June 30,~~December 31, 2022 and 2021, our employees forfeited ~~96,860~~71,951 shares and ~~109,516~~611,415 shares, respectively, in order to satisfy respective withholding tax obligations of ~~$2.2~~$3.0 million and ~~$2.0~~$6.0 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 to 3,425,000 that may be purchased under the ~~plan.~~ESPP. ESPP contributions by employees were ~~$1.1~~$0.6 million and ~~$0.9~~$0.3 million for the ~~nine~~three months ended ~~June 30,~~December 31, 2022 and ~~June 30,~~ 2021, respectively. Pursuant to the ESPP, ~~60,481~~19,683 and ~~61,302~~17,936 common shares were issued to employees during the ~~nine~~three months ended ~~June 30,~~December 31, 2022 and ~~June 30,~~ 2021, respectively. Shares are issued under the ESPP from treasury stock. As of ~~June 30,~~December 31, 2022, ~~572,592~~533,165 common shares were available for future issuances under the ESPP.

~~Table of Contents~~

~~14. STOCK-BASED COMPENSATION (CONTINUED)~~

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


		Three months ended June 30,				Nine months ended June 30,					Three months ended December 31,
		2022		2021		2022		2021			2022		2021
Cost of sales	Cost of sales	$	125	$	98	$	342	$	269	Cost of sales	$	142	$	86
Sales and marketing	Sales and marketing	660		614		1,828		1,762		Sales and marketing	851		490
Research and development	Research and development	252		259		890		762		Research and development	448		322
General and administrative	General and administrative	1,106		1,139		3,342		3,538		General and administrative	1,427		1,119
Stock-based compensation before income taxes	Stock-based compensation before income taxes	2,143		2,110		6,402		6,331		Stock-based compensation before income taxes	2,868		2,017
Income tax benefit	Income tax benefit	(460)		(463)		(1,360)		(1,369)		Income tax benefit	(599)		(430)
Stock-based compensation after income taxes	Stock-based compensation after income taxes	$	1,683	$	1,647	$	5,042	$	4,962	Stock-based compensation after income taxes	$	2,269	$	1,587

Table of Contents

14. STOCK-BASED COMPENSATION (CONTINUED)

Stock Options

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


		Options Outstanding	Weighted Average Exercise Price	Weighted Average Contractual Term (in years)	Aggregate Intrinsic Value (1)			Options Outstanding	Weighted Average Exercise Price	Weighted Average Contractual Term (in years)	Aggregate Intrinsic Value (1)
Balance at September 30, 2021		2,952	$13.20
Balance on September 30, 2022							Balance on September 30, 2022	1,790	$17.29
Granted	Granted	559	22.20				Granted	64	40.80
Exercised	Exercised	(1,307)	11.49				Exercised	(64)	14.62
Forfeited / Canceled	Forfeited / Canceled	(162)	17.61				Forfeited / Canceled	(2)	14.31
Balance on June 30, 2022		2,042	$16.35	4.7	$	11,887
Balance on December 31, 2022							Balance on December 31, 2022	1,788	$18.23	4.6	$	15,900

Exercisable at June30, 2022		984	$13.74	3.5	$	10,320
Exercisable on December 31, 2022							Exercisable on December 31, 2022	965	$15.30	3.7	$	10,851

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of ~~$24.22~~$36.55 as of ~~June 30,~~December 31, 2022, 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 ~~nine~~three months ended ~~June 30,~~December 31, 2022 and 2021 was ~~$15.6~~$1.7 million and ~~during the nine months ended June 30, 2021 was $5.4 million.~~$13.3 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:

Nine months ended June 30,
2022 2021
Weighted average per option grant date fair value $10.03 $7.45
Assumptions used for option grants:
Risk free interest rate 1.25% - 3.00% 0.51% - 1.035%
Expected term 6.00 years 6.00 years
Expected volatility 45% - 46% 44% - 46%
Weighted average volatility 46% 44%
Expected dividend yield — —

~~Table of Contents~~

~~14. STOCK-BASED COMPENSATION (CONTINUED)~~


	Three months ended December 31,
	2022	2021
Weighted average per option grant date fair value	$19.98	$10.23
Assumptions used for option grants:
Risk free interest rate	3.89% - 3.98%	1.25% - 1.46%
Expected term	6.00 years	6.00 years
Expected volatility	46%	46%
Weighted average volatility	46%	46%
Expected dividend yield	—	—

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 ~~June 30,~~December 31, 2022, the total unrecognized compensation cost related to non-vested stock options was ~~$8.0~~$7.6 million and the related weighted average period over which it is expected to be recognized is approximately ~~1.5~~2.1 years.

Table of Contents

14. STOCK-BASED COMPENSATION (CONTINUED)

Non-vested Stock Units

The following table presents a summary of our non-vested restricted stock units and performance stock units as of ~~June 30,~~December 31, 2022 and changes during the ~~nine~~three months then ended (in thousands, except per common share amounts):


		RSUs			PSUs				RSUs			PSUs
		Number of Awards	Weighted Average Grant Date Fair Value		Number of Awards	Weighted Average Grant Date Fair Value			Number of Awards	Weighted Average Grant Date Fair Value		Number of Awards	Weighted Average Grant Date Fair Value
Nonvested at September 30, 2021		812	$	15.72	18	$	25.15
Nonvested on September 30, 2022								Nonvested on September 30, 2022	742	$	19.14	27	$	22.69
Granted	Granted	377	22.21		12	19.78		Granted	415	40.68		113	40.66
Vested	Vested	(290)	15.56		(3)	25.15		Vested	(182)	17.76		(5)	22.93
Canceled	Canceled	(130)	17.15		—	—		Canceled	(6)	24.55		—	—
Nonvested at June 30, 2022		769	$	18.71	27	$	22.69
Nonvested on December 31, 2022								Nonvested on December 31, 2022	969	$	28.60	135	$	37.72

As of ~~June 30,~~December 31, 2022, the total unrecognized compensation cost related to non-vested stock units was ~~$11.6~~$30.2 million. The related weighted average period over which this cost is expected to be recognized is approximately ~~2.4~~2.5 years.

15. SUBSEQUENT EVENTS

On January 27, 2023, our shareholders approved an amended and restated 2021 Omnibus Incentive Plan. This amended plan became effective on January 28, 2023 and authorized the issuance of an additional 1,100,000 shares. This plan is now scheduled to expire on January 27, 2033.

2018

Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, ~~2021,~~2022, as well as our subsequent reports on Form 10-Q and Form 8-K and any amendments to these reports.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

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.

Forward-Looking Statements

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 "assume," "believe," "anticipate," "intend," "estimate," "target," "may," "will," "expect," "plan," "potential," "project," "should," or "continue," 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, perceived marketplace opportunities 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 the ongoing supply chain and transportation challenges impacting businesses globally, the ongoing COVID-19 pandemic and efforts to mitigate the same, risks related to ongoing inflationary pressures as well as present concerns about a potential recession and the ability of companies like us to operate a global business in such conditions, risks arising from the present war in Ukraine, 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, ~~such as our recently completed acquisition of Ventus,~~ our ability to defend or settle satisfactorily any litigation such as, but not limited to, claims regarding intellectual property infringement that we face from time to time, uncertainty in global economic conditions and economic conditions within particular regions of the world which could negatively affect product demand and the financial solvency of customers and suppliers, 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, risks related to cybersecurity events, the ~~ability to achieve the anticipated benefits and synergies associated with acquisitions~~potential for issues repaying outstanding debt if we experience a downturn in our business or ~~divestitures~~encounter unexpected liabilities, 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, ~~2021,~~2022, 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our ~~condensed~~ consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of ~~our condensed~~these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, ~~revenues~~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 ~~are~~we believed to be reasonable under the circumstances, the results of which form the basis for making

Table of Contents

judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

~~Table of Contents~~

A description of our critical accounting policies and 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, ~~2021.~~

~~GOODWILL~~

~~Results of our Fiscal 2022 Annual Impairment Test~~

Our goodwill impairment test as of June 30, 2022 indicated no impairment. SmartSense and Ventus fair values exceeded carrying values by less than 10%. We will continue to monitor potential impacts that could potentially affect our cash flows and market capitalization. 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. 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.2022.

OVERVIEW

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.

Our IoT Products & Services segment offers products and services that help OEMs, enterprise and government customers create and deploy, secure IoT connectivity solutions. From embedded and wireless modules to console servers as well as enterprise and industrial routers, we provide a wide variety of communication sub-assemblies and finished products to meet our customers' IoT communication requirements. In addition, this segment provides our customers with a device management platform and other professional services to enable customers to capture and manage data from devices connected to networks. In the past this segment has benefited from significant one-time project based deployments. During the pandemic we saw a decrease in proposals for such projects. Recently we have seen some resumption of opportunities to make these project based sales, most notably in the areas mass transit and smart cities. While there is no assurance we will be chosen for any such deployments, we view this renewed activity as a positive development for this segment. Demand generally has been strong for many products in this segment during fiscal 2022 and has driven record sales bookings and backlogs that we are constrained to meet at present because of supply chain challenges.

On October 7, 2020, our Board of Directors approved a reorganization of our IoT Products & Services business segment. The restructuring plan aligned the business segment's organization around product lines, each with a segment manager. Under this plan, we recorded charges of $1.0 million for employee termination charges and eliminated 19 employment positions primarily in the U.S. during the first half of fiscal 2021. We have grouped our products under the following categories: Cellular Routers, Console Servers, OEM Solutions and Infrastructure Management. Consequently, the measure of segment operating profit used by our chief operating decision maker ("CODM") changed. As a result, our disclosed measure of segment operating income has been updated. For further detail on segment performance, see the Revenue by Segment, Cost of Goods Sold and Gross Profit by Segment and Operating Income sections of this Item 2.

Our IoT Solutions segment primarily consists of our Managed Network-as –a-Service (“MNaaS”) business acquired last year via our acquisition of Ventus Wireless, LLC and affiliated entities (“Ventus”) and our SmartSense by Digi® business. Ventus is a leader in the provision of MNaaS solutions that simplify the complexity of enterprise wide area network (“WAN”) connectivity for customers. The Ventus portfolio includes cellular wireless and ~~Ventus operating segments.~~fixed line WAN solutions for an array of connectivity applications in banking, healthcare, retail, gaming, hospitality and other sectors. SmartSense offers wireless temperature and other condition-based monitoring services as well as employee task management services. These solutions are focused on the following vertical markets: food service, healthcare (primarily pharmacies and hospitals) and supply chain. We initially formed, expanded and enhanced our SmartSense by Digi business through four acquisitions. Our recent acquisition of Ventus makes us a leader in the provision of MNaaS solutions that simplify the complexity of enterprise wide area network WAN connectivity for our customers and provides us with a significant base of high margin subscription based recurring revenue. Ventus’s portfolio includes cellular wireless and fixed line WAN solutions for an array of connectivity applications in banking, healthcare, retail, gaming, hospitality and other sectors. Given our belief in the potential of this segment, we are making targeted investments in this segment designed to enhance its performance over time.

We compete for customers on the basis of existing and planned product features, service and software application capabilities, company reputation, brand recognition, technical support, alliance relationships, quality and reliability, product development capabilities, price and availability.

In fiscal 2023, 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 revenues; 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 2023 that we feel are most important in these evaluations, with comparisons to the first quarter of fiscal 2022:

•Consolidated revenue was $109 million, an increase of 30%.

•Consolidated gross profit was $61.5 million, an increase of 28%.

•Gross profit margin was 56.3% versus 56.8%. Gross profit margin excluding amortization was 57.3% compared to 58.5%.

•Consolidated operating income was $12.0 million, an increase of 215%.

•Net income was $5.8 million, an increase of 387%.

•Diluted earnings per share was $0.16, compared to $0.03, an increase of 433%.

•Adjusted net income and adjusted net income per share was $17.8 million, or $0.48 per diluted share, compared to $12.7 million, or $0.36 per diluted share, an increase of 33%.

•Adjusted EBITDA was $23 million, an increase of 38%.

•ARR, was $96 million at quarter end, an increase of 8%.

Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

~~In fiscal 2022, our key operating objectives include:~~

•~~continued growth of our SmartSense by Digi~~® ~~and Ventus businesses that are the base of our IoT Solutions segment;~~

•~~delivering growth within our IoT Products & Services segment through new product introductions; and~~

•~~integration of our recently acquired Ventus business.~~

We utilize many financial, operational, and other metrics to evaluate our financial condition and financial performance. Below we highlight the metrics for the third quarter of fiscal 2022 that we feel are most important in these evaluations, with comparisons to the third quarter of fiscal 2021:

•~~Consolidated revenue was $104 million, an increase of 31%.~~

•~~Consolidated gross profit was $57.4 million, an increase of 35%.~~

•~~Consolidated operating income was $10.0 million, an increase of 148%.~~

•~~Gross profit margin was 55.5% versus 53.8%. Gross profit margin excluding amortization was 56.7% compared to 55.2%.~~

•~~Net income was $4.1 million, an increase of 31%.~~

•~~Diluted earnings per share was $0.12, compared to $0.09, an increase of 33%.~~

•~~Adjusted EBITDA was $21 million, an increase of 82%.~~

•~~Adjusted net income and adjusted net income per share was $15.9 million, or $0.45 per diluted share, compared to $8.7 million, or $0.25 per diluted share, an increase of 80%.~~

~~Recent Events Impacting Third Quarter Results~~

~~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 an amended and restated credit facility committed by BMO Harris Bank N.A. (see ~~Note 7~~). In the first quarter of fiscal 2022, the preliminary purchase price allocation was recorded, including related determinations of fair value and income tax implications. In the third quarter of fiscal 2022, we recorded a purchase price allocation adjustment to adjust for new information. As a result, we have $118 million of goodwill and $211 million of other intangibles on our condensed consolidated balance sheets at June 30, 2022. The results of operations following the acquisition date are now included in our 2022 results within our IoT Solutions segment.

CONSOLIDATED RESULTS OF OPERATIONS

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


		Three months ended June 30,								% incr.		Nine months ended June 30,								% incr.			Three months ended December 31,								% incr.
($ in thousands)	($ in thousands)	2022				2021				(decr.)		2022				2021				(decr.)		($ in thousands)	2022				2021				(decr.)
Revenue	Revenue	$	103,517	100.0	%	$	79,079	100.0	%	30.9	%	$	282,487	100.0	%	$	229,526	100.0	%	23.1	%	Revenue	$	109,306	100.0	%	$	84,257	100.0	%	29.7	%
Cost of sales	Cost of sales	46,091		44.5		36,523		46.2		26.2		125,196		44.3		105,495		46.0		18.7		Cost of sales	47,785		43.7		36,376		43.2		31.4
Gross profit	Gross profit	57,426		55.5		42,556		53.8		34.9		157,291		55.7		124,031		54.0		26.8		Gross profit	61,521		56.3		47,881		56.8		28.5
Operating expenses	Operating expenses	47,452		45.8		38,538		48.7		23.1		135,954		48.1		116,789		50.9		16.4		Operating expenses	49,558		45.3		44,082		52.3		12.4
Operating income	Operating income	9,974		9.6		4,018		5.1		148.2		21,337		7.6		7,242		3.2		194.6		Operating income	11,963		10.9		3,799		4.5		214.9
Other expense, net	Other expense, net	(5,392)		(5.2)		(482)		(0.6)		NM		(14,716)		(5.2)		(1,244)		(0.5)		NM		Other expense, net	(5,954)		(5.4)		(5,000)		(5.9)		19.1
Income before income taxes		4,582		4.4		3,536		4.5		29.6		6,621		2.3		5,998		2.6		10.4
Income (loss) before income taxes																						Income (loss) before income taxes	6,009		5.5		(1,201)		(1.4)		NM
Income tax expense (benefit)	Income tax expense (benefit)	456		0.4		379		0.5		20.3		(1,539)		(0.5)		220		0.1		NM		Income tax expense (benefit)	230		0.2		(2,388)		(2.8)		NM
Net income	Net income	$	4,126	4.0	%	$	3,157	4.0	%	30.7		$	8,160	2.9	%	$	5,778	2.5	%	41.2		Net income	$	5,779	5.3	%	$	1,187	1.4	%	386.9

NM means not meaningful

REVENUE BY SEGMENT


	Three months ended December 31,								% incr.
($ in thousands)	2022				2021				(decr.)
Revenue
IoT Products & Services	$	84,342	77.2	%	$	65,744	78.0	%	28.3	%
IoT Solutions	24,964		22.8		18,513		22.0		34.8
Total revenue	$	109,306	100.0	%	$	84,257	100.0	%	29.7	%

IoT Products & Services

IoT Products & Services revenue increased 28.3% for the three months ended December 31, 2022, as compared to the same period in the prior fiscal year. This primarily was a result of increased sales driven by higher demand for OEM, console server and cellular products.

IoT Solutions

IoT Solutions revenue increased 34.8% for the three months ended December 31, 2022, as compared to the same period in the prior fiscal year. This primarily was a result of increased sales of both SmartSense and Ventus (acquired in November 2021) offerings.

COST OF GOODS SOLD AND GROSS PROFIT BY SEGMENT

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


	Three months ended December 31,								Basis point
($ in thousands)	2022				2021				inc. (decr.)
Cost of Goods Sold
IoT Products & Services	$	38,321	45.4	%	$	30,069	45.7	%	(30)
IoT Solutions	9,464		37.9	%	6,307		34.1	%	380
Total cost of goods sold	$	47,785	43.7	%	$	36,376	43.2	%	50

Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

~~REVENUE BY SEGMENT~~

Three months ended June 30, % incr. Nine months ended June 30, % incr.
($ in thousands) 2022 2021 (decr.) 2022 2021 (decr.)
Revenue
IoT Products & Services $ 79,758 77.0 % $ 66,812 84.5 % 19.4 % $ 216,872 76.8 % $ 194,224 84.6 % 11.7
IoT Solutions 23,759 23.0 12,267 15.5 93.7 65,615 23.2 35,302 15.4 85.9
Total revenue $ 103,517 100.0 % $ 79,079 100.0 % 30.9 % $ 282,487 100.0 % $ 229,526 100.0 % 23.1

~~IoT Products & Services~~

IoT Products & Services revenue increased 19.4% and 11.7% for the three and nine months ended June 30, 2022, respectively, as compared to the same periods in the prior fiscal year. This primarily was a result of:

•~~increased sales of console server and cellular products in both periods driven by demand for data center and edge based deployments and increased OEM sales in the third quarter.~~

~~This increase was partially offset by:~~

•~~decreased sales of infrastructure management products, driven by supply chain challenges.~~

~~IoT Solutions~~

IoT Solutions revenue increased 93.7% and 85.9% for the three and nine months ended June 30, 2022, respectively, as compared to the same periods in the prior fiscal year. This primarily was a result of:

•~~increased recurring revenue from our November 2021 acquisition of Ventus.~~

~~These increases were partially offset by:~~

•~~decreased one-time customer implementation sales, due to significant activity from a few large customers in 2021 that did not recur in 2022.~~

~~COST OF GOODS SOLD AND GROSS PROFIT BY SEGMENT~~

Three months ended June 30, Basis point Nine months ended June 30, Basis point
($ in thousands) 2022 2021 inc. (decr.) 2022 2021 inc. (decr.)
Cost of Goods Sold
IoT Products & Services $ 37,115 46.5 % $ 30,006 44.9 % 160 $ 100,093 46.2 % $ 87,282 44.9 % 130
IoT Solutions 8,976 37.8 % 6,517 53.1 % (1,530) 25,103 38.3 % 18,213 51.6 % (1,330)
Total cost of goods sold $ 46,091 44.5 % $ 36,523 46.2 % (170) $ 125,196 44.3 % $ 105,495 46.0 % (170)


		Three months ended June 30,								Basis point	Nine months ended June 30,								Basis point		Three months ended December 31,								Basis point
($ in thousands)	($ in thousands)	2022				2021				inc. (decr.)	2022				2021				inc. (decr.)	($ in thousands)	2022				2021				inc. (decr.)
Gross Profit	Gross Profit																			Gross Profit
IoT Products & Services	IoT Products & Services	$	42,643	53.5	%	$	36,806	55.1	%	(160)	$	116,779	53.8	%	$	106,942	55.1	%	(130)	IoT Products & Services	$	46,021	54.6	%	$	35,675	54.3	%	30
IoT Solutions	IoT Solutions	14,783		62.2	%	5,750		46.9	%	1,530	40,512		61.7	%	17,089		48.4	%	1,330	IoT Solutions	15,500		62.1	%	12,206		65.9	%	(380)
Total gross profit	Total gross profit	$	57,426	55.5	%	$	42,556	53.8	%	170	$	157,291	55.7	%	$	124,031	54.0	%	170	Total gross profit	$	61,521	56.3	%	$	47,881	56.8	%	(50)

IoT Product & Services

IoT Products & Services gross profit margin ~~decreased 160~~increased 30 basis points for the three months ended ~~June 30,~~December 31, 2022 as compared to the same period in the prior fiscal year. This increase primarily was a result of changes in product and customer mix.

IoT Solutions

The IoT Solutions gross profit margin decreased 380 basis points for the three months ended December 31, 2022 as compared to the same period in the prior fiscal year. This decrease primarily was a result ~~of:~~of increased expenses for inventory reserves.

•~~increased production~~OPERATING EXPENSES

Below are our operating expenses and ~~distribution costs due~~operating expenses as a percentage of total revenue:


	Three months ended December 31,								$		%
($ in thousands)	2022				2021				incr. (decr.)		incr. (decr.)

Operating Expenses
Sales and marketing	$	19,106	17.5	%	$	15,319	18.2	%	$	3,787	24.7
Research and development	14,094		12.9		13,412		15.9		682		5.1
General and administrative	16,358		15.0		15,351		18.2		1,007		6.6

Total operating expenses	$	49,558	45.3	%	$	44,082	52.3	%	$	5,476	12.4

The $5.5 million increase in operating expenses in the first quarter of fiscal 2023 from the first quarter of fiscal 2022 primarily was the result of incremental operating expenses, primarily from the acquisition of Ventus and investments in SmartSense.

OPERATING INCOME

Operating income was $12.0 million for the three months ended December 31, 2022, compared to $3.8 million for the ~~continuing supply chain challenges, as well as~~three months ended December 31, 2021.

IoT Product & Services provided operating income of $12.7 million for the three months ended December 31, 2022 compared to $4.1 million for the three months ended December 31, 2021, an increase of $8.6 million, or 208.1%. Drivers for the changes in ~~product~~operating income for the period are described above in the revenue, gross profit and ~~customer mix.~~operating expenses details.

IoT Solutions had an operating loss of $0.7 million for the three months ended December 31, 2022 compared to an operating loss of $0.3 million for the three months ended December 31, 2021, an increase of $0.4 million, or 127.1%. Primary drivers for the changes in operating loss for the period included higher inventory reserve expense and our investment in the SmartSense business.

2422

Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

IoT Products & Services gross profit margin decreased 130 basis points for the nine months ended June 30, 2022 as compared to the same period in the prior fiscal year. This decrease primarily was a result of:

•~~increased production~~Below are our other expenses, net and ~~distribution costs due to the continuing supply chain challenges, as well as changes in product and customer mix.~~

~~IoT Solutions~~

The IoT Solutions gross profit margin increased 1,530 basis points for the three months ended June 30, 2022 as compared to the same periods in the prior fiscal year. This increase primarily was a result of:

•~~increased recurring subscription revenue, from the acquisition of Ventus, which typically has a high gross profit margin.~~

The IoT Solutions gross profit margin increased 1,330 basis points for the nine months ended June 30, 2022 as compared to the same periods in the prior fiscal year. This increase primarily was a result of:

•~~increased recurring subscription revenue, from the acquisition of Ventus, which typically has a high gross profit margin.~~

~~OPERATING EXPENSES~~

~~Below is our operating~~other expenses, ~~and operating expenses~~net as a percentage of total revenue:

Three months ended June 30, $ % Nine months ended June 30, $ %
($ in thousands) 2022 2021 incr.
(decr.) incr.
(decr.) 2022 2021 incr.
(decr.) incr.
(decr.)
Operating Expenses
Sales and marketing $ 18,230 17.6 % $ 15,910 20.1 % $ 2,320 14.6 $ 51,325 18.2 % $ 46,271 20.2 % $ 5,054 10.9 %
Research and development 13,968 13.5 12,374 15.6 1,594 12.9 41,199 14.6 34,822 15.2 6,377 18.3
General and administrative 15,149 14.6 10,153 12.8 4,996 49.2 43,216 15.3 34,701 15.1 8,515 24.5
Restructuring charge 105 0.1 101 0.1 4 4.0 214 0.1 995 0.4 (781) (78.5)
Total operating expenses $ 47,452 45.8 % $ 38,538 48.7 % $ 8,914 23.1 $ 135,954 48.1 % $ 116,789 50.9 % $ 19,165 16.4 %
OTHER EXPENSE, NET

~~The $8.9 million increase in operating expenses in the third quarter of fiscal 2022 from the third quarter of fiscal 2021 primarily was the result of:~~


	Three months ended December 31,								$		%
($ in thousands)	2022				2021				incr. (decr.)		incr. (decr.)

Other expense, net

Interest expense, net	(5,971)		(5.5)	%	(4,898)		(5.8)	%	(1,073)		21.9
Other expense, net	17		—	%	(102)		(0.1)	%	119		(116.7)
Total other expense, net	$	(5,954)	(5.4)	%	$	(5,000)	(5.9)	%	$	(954)	19.1

•~~incremental operating expenses, primarily from the acquisition of Ventus.~~

~~The $19.2 million increase in operating expenses in the first three quarters of fiscal 2022 from the first three quarters of fiscal 2021 primarily was the result of:~~

•~~incremental operating expenses from our acquisitions of Haxiot, Ctek and Ventus.~~

~~This increase was partially offset by:~~

•~~$5.8 million in contingent consideration expenses in prior year and a decrease in restructuring charges.~~

~~OPERATING INCOME~~

~~Operating income was $10.0~~Other expense, net, increased $1.0 million for the three months ended ~~June 30,~~December 31, 2022, compared to $4.0 million for the three months ended June 30, 2021. Operating income was $21.3 million for the nine months ended June 30, 2022, compared to $7.2 million for the nine months ended June 30, 2021.

IoT Product & Services provided operating income of $10.9 million for the three months ended June 30, 2022 compared to $6.1 million for the three months ended June 30, 2021, an increase of $4.8 million, or 78.3%. IoT Product & Services provided operating income of $24.0 million for the nine months ended June 30, 2022 compared to $12.0 million for the nine months ended June 30, 2021, an increase of $12.1 million, or 101.2%. Drivers for the changes in operating income for the both the quarter and year-to-date periods are described above in the revenue, gross profit and operating expenses details.

~~Table of Contents~~

~~ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)~~

IoT Solutions had an operating loss of $0.9 million for the three months ended June 30, 2022 compared to an operating loss of $2.1 million for the three months ended June 30, 2021, a decrease of $1.2 million, or 56.5%. IoT Solutions incurred an operating loss of $2.7 million for the nine months ended June 30, 2022 compared to $4.7 million for the nine months ended June 30, 2021, a decrease of $2.0 million, or 42.5%. Drivers for the changes in operating loss for the both the quarter and year-to-date periods are described above in the revenue, gross profit and operating expenses details.

~~OTHER EXPENSE, NET~~

Three months ended June 30, $ % Nine months ended June 30, $ %
($ in thousands) 2022 2021 incr.
(decr.) incr.
(decr.) 2022 2021 incr.
(decr.) incr.
(decr.)
Other expense, net
Interest income $ 1 — % $ 3 — % $ (2) NM $ 8 — % $ 4 — % $ 4 NM
Interest expense (5,297) (5.1) % (371) (0.5) % (4,926) NM (14,665) (5.2) % (1,019) (0.4) % (13,646) NM
Other expense, net (96) (0.1) % (114) (0.1) % 18 NM (59) — % (229) (0.1) % 170 NM
Total other expense, net $ (5,392) (5.2) % $ (482) (0.6) % $ (4,910) NM $ (14,716) (5.2) % $ (1,244) (0.5) % $ (13,472) NM

~~NM means not meaningful~~

~~Other expense, net, increased $4.9 million and $13.5 million for the three and nine months ended June 30, 2022, respectively,~~ as compared to the same period in the prior fiscal year. The increase was primarily a result of an increase to our interest expense ~~as we refinanced~~due to an increase in our ~~revolving loan with a new credit facility in November 2021 and wrote off a portion of the deferred financing fees associated with our prior credit facility to fund the acquisition of Ventus.~~effective interest rate (see Note 7 to the condensed consolidated financial statements).

INCOME TAXES

See Note 109 to the condensed consolidated financial statements for discussion of income taxes.

KEY BUSINESS METRIC

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 ~~actually~~ 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

~~Table of Contents~~

~~ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)~~

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.

Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

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

Reconciliation of Net Income to Adjusted EBITDA

(In thousands)


		Three months ended June 30,								Nine months ended June 30,									Three months ended December 31,
		2022				2021				2022				2021					2022				2021
				% of total revenue				% of total revenue				% of total revenue				% of total revenue					% of total revenue				% of total revenue
Total revenue	Total revenue	$	103,517	100.0	%	$	79,079	100.0	%	$	282,487	100.0	%	$	229,526	100.0	%	Total revenue	$	109,306	100.0	%	$	84,257	100.0	%

Net income	Net income	$	4,126			$	3,157			$	8,160			$	5,778			Net income	$	5,779			$	1,187
Interest expense, net	Interest expense, net	5,296				368				14,657				1,015				Interest expense, net	5,971				4,898
Income tax expense (benefit)	Income tax expense (benefit)	456				379				(1,539)				220				Income tax expense (benefit)	230				(2,388)
Depreciation and amortization	Depreciation and amortization	8,747				5,148				25,393				15,200				Depreciation and amortization	8,112				7,862
Stock-based compensation	Stock-based compensation	2,143				2,110				6,402				6,331				Stock-based compensation	2,868				2,017
Changes in fair value of contingent consideration		—				—				—				5,772

Restructuring charge	Restructuring charge	105				101				214				995				Restructuring charge	23				109
Acquisition expense	Acquisition expense	175				313				4,256				937				Acquisition expense	381				3,285
Adjusted EBITDA	Adjusted EBITDA	$	21,048	20.3	%	$	11,576	14.6	%	$	57,543	20.4	%	$	36,248	15.8	%	Adjusted EBITDA	$	23,364	21.4	%	$	16,970	20.1	%

Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Reconciliation of Net Income and Net Income per Diluted Share to

Adjusted Net Income and Adjusted Net Income per Diluted Share

(In thousands, except per share amounts)


		Three months ended June 30,								Nine months ended June 30,									Three months ended December 31,
		2022				2021				2022				2021					2022				2021
Net income and net income per diluted share	Net income and net income per diluted share	$	4,126	$	0.12	$	3,157	$	0.09	$	8,160	$	0.23	$	5,778	$	0.18	Net income and net income per diluted share	$	5,779	$	0.16	$	1,187	$	0.03
Amortization	Amortization	7,046		0.20		4,101		0.12		20,400		0.57		11,989		0.37		Amortization	6,463		0.18		6,309		0.18
Stock-based compensation	Stock-based compensation	2,143		0.06		2,110		0.06		6,402		0.18		6,331		0.19		Stock-based compensation	2,868		0.08		2,017		0.06
Other non-operating income		96		—		114		—		59		—		229		0.01
Other non-operating (expense) income																		Other non-operating (expense) income	(17)		—		102		—
Acquisition expense	Acquisition expense	175		—		313		0.01		4,256		0.12		937		0.03		Acquisition expense	381		0.01		3,285		0.09
Changes in fair value of contingent consideration		—		—		—		—		—		—		5,772		0.18

Restructuring charge	Restructuring charge	105		—		101		—		214		0.01		995		0.03		Restructuring charge	23		—		109		—
Interest expense, net	Interest expense, net	5,296		0.15		378		0.01		14,657		0.40		1,028		0.03		Interest expense, net	5,971		0.16		4,898		0.14

Tax effect from the above adjustments (1)	Tax effect from the above adjustments (1)	(2,497)		(0.07)		(1,026)		(0.03)		(8,263)		(0.23)		(4,494)		(0.14)		Tax effect from the above adjustments (1)	(4,869)		(0.14)		(3,006)		(0.08)
Discrete tax benefits (2)		(556)		(0.02)		(512)		(0.01)		(2,746)		(0.07)		(764)		(0.02)
Discrete tax expenses (benefits) (2)																		Discrete tax expenses (benefits) (2)	1,192		0.03		(2,175)		(0.06)
Adjusted net income and adjusted net income per diluted share (3)	Adjusted net income and adjusted net income per diluted share (3)	$	15,934	$	0.45	$	8,736	$	0.25	$	43,139	$	1.21	$	27,801	$	0.85	Adjusted net income and adjusted net income per diluted share (3)	$	17,791	$	0.48	$	12,726	$	0.36
Diluted weighted average common shares	Diluted weighted average common shares			35,740				35,148				35,740				32,706		Diluted weighted average common shares			36,859				35,767

(1)The tax effect from the above adjustments assumes an estimated effective tax rate of 18.0% for fiscal ~~2022~~2023 and fiscal ~~2021~~2022 based on adjusted net income.

(2)For the three ~~and nine~~ months ended ~~June 30,~~December 31, 2022 and ~~June 30,~~ 2021, discrete tax ~~benefits~~expenses (benefits) primarily are a result of changes in excess tax benefits recognized on stock compensation.

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

~~Table of Contents~~

~~ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)~~

LIQUIDITY AND CAPITAL RESOURCES

Historically we have financed our operations and capital expenditures principally with funds generated from operations. In fiscal 2022 we issued debt to fund our acquisition of Ventus. Our liquidity requirements arise from our working capital needs, and to a lesser extent, our need to fund capital expenditures to support our current operations and facilitate growth and expansion.

On ~~November 1,~~December 2, 2021, we entered into a ~~second~~third amended and restated credit agreement. Digi refinanced the Term Loan Facility and Revolving Loan Facility under its existing credit agreement ~~consisting~~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. The credit agreement consists of a $350 million term loan B secured loan and a $35 million revolving credit facility. The $35 million revolving credit facility, which presently has no outstanding balance, includes a $10 million letter of credit subfacility and $10 million swingline subfacility. During the first quarter of fiscal 2022, we repaid all outstanding balances under the credit facility entered into on March 21, 2021. As of ~~June 30,~~December 31, 2022, $35.0 million remained available under the Revolving Loan, which included $10 million available for a letter of credit subfacility and $10 million available under a swingline subfacility, the outstanding amounts of which decrease the available commitment. For additional information regarding the terms of our Credit Facility, including the Revolving Loan and its subfacilities, see Note 7 to our condensed consolidated financial statements.

We expect positive cash flows from operations for the foreseeable future. ~~Our third fiscal quarter operating cash flows were negatively impacted by changes in operating assets and liabilities (net of acquisitions) that we do not anticipate in future periods.~~ We believe that our current cash and cash equivalents balances, cash generated from operations and our ability to borrow under our credit facility will be sufficient to fund our business operations and capital expenditures for the next twelve months and beyond. ~~As follows, our condensed consolidated statements of cash flows for the nine months ended June 30, 2022 and 2021 is summarized:~~

Nine months ended June 30,
($ in thousands) 2022 2021
Operating activities $ 15,454 $ 42,084
Investing activities (351,771) (7,957)
Financing activities 224,313 60,579
Effect of exchange rate changes on cash and cash equivalents 1,087 (1,893)
Net increase (decrease) in cash and cash equivalents $ (110,917) $ 92,813

~~Cash flows from operating activities decreased $26.6 million primarily as a result of:~~

•~~an increase in operating assets and liabilities (net of acquisitions) during the period of $34.6 million compared to a decrease of $3.1 million in the nine months ended June 30, 2021, and~~

•~~a reduction of $5.8 million in contingent consideration fair value changes from the nine months ended June 30,2021.~~

~~These increases were partially offset by:~~

•~~increases in depreciation and amortization expenses, the provision for inventory obsolescence and net income.~~

~~Cash flows used in investing activities increased $343.8 million almost entirely as a result of:~~

•~~an increase of $341.2 million used for acquisitions, primarily related to our November 2021 acquisition of Ventus (see~~ ~~Note 2~~ ~~to the condensed consolidated financial statements).~~

~~Cash flows from financing activities increased $163.7 million primarily as a result of:~~

•~~an increase of $350.0 million in proceeds from the Term Loan issued in November 2021.~~

~~This increase was partially offset by:~~

•~~$73.8 million in proceeds from stock issuance in Q2 2021,~~

•~~payments of $45.8 million upon the closing of the Term Loan issued in November 2021 to retire the previous credit facility, and~~

2825

Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

As follows, our condensed consolidated statements of cash flows for the three months ended December 31, 2022 and 2021 is summarized:


	Three months ended December 31,
	2022		2021
($ in thousands)			Restated (1)
Operating activities	$	2,680	$	5,877
Investing activities	(963)		(348,047)
Financing activities	(5,896)		236,962
Effect of exchange rate changes on cash and cash equivalents	228		(36)
Net increase (decrease) in cash and cash equivalents	$	(3,951)	$	(105,244)

(1)We have restated the condensed consolidated statement of cash flows for the three months ended December 31, 2021. For additional information, see Note 2 to our condensed consolidated financial statements.

Cash flows from operating activities decreased $3.2 million primarily as a result of:

•~~early payments~~an increase in operating assets and liabilities (net of ~~$81.3~~acquisitions) in the three months ended December 31, 2022 of $18.3 million oncompared to an increase of $10.3 million in the ~~new~~three months ended December 31, 2021 and

•an increase in stock-based compensation expense.

These changes were partially offset by:

•increases in net income and the provision for inventory obsolescence and decreases in the provisions for deferred income tax and bad debt and amortization expense.

Cash flows used in investing activities decreased $347.1 million primarily as a result of:

•no amounts used for the acquisition of businesses in the three months ended December 31, 2022 compared to $347.6 million used for acquisitions in the three months ended December 31, 2021, primarily related to our November 2021 acquisition of Ventus.

Cash flows from financing activities decreased $242.9 million primarily as a result of:

•no proceeds from debt in the first fiscal quarter of 2023 compared to $350.0 million in proceeds from the Term Loan issued in ~~November 2021~~the first fiscal quarter of 2022, and

•a $3.4 million decrease in proceeds from stock issuances.

These changes were partially offset by:

•debt payments of $4.4 million in the first fiscal quarter of 2023 compared to ~~$15.6~~$98.1 million in ~~debt payments in~~the first fiscal ~~2021 on the previous credit facility~~quarter of 2022 (see Note 7 to the condensed consolidated financial statements).,

•a decrease of $13.4 million in debt issuance cost payments, and

•a $3.0 million decrease in taxes paid for net share settlements.

Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

CONTRACTUAL OBLIGATIONS

The following table summarizes our contractual obligations at ~~June 30,~~December 31, 2022:


		Payments due by fiscal period											Payments due by fiscal period
($ in thousands)	($ in thousands)	Total		Less than 1 year		1-3 years		3-5 years		Thereafter		($ in thousands)	Total		Less than 1 year		1-3 years		3-5 years		Thereafter
Operating leases	Operating leases	$	22,220	$	3,802	$	7,646	$	4,153	$	6,619	Operating leases	$	22,250	$	3,755	$	6,886	$	4,873	$	6,736
Contingent consideration		6,200		6,100		100		—		—
Term Loan	Term Loan	268,748		17,500		35,000		35,000		181,248		Term Loan	245,625		17,500		35,000		35,000		158,125
Interest on long-term debt	Interest on long-term debt	93,503		18,012		32,640		27,293		15,558		Interest on long-term debt	104,038		21,979		38,764		31,887		11,408
Total	Total	$	390,671	$	45,414	$	75,386	$	66,446	$	203,425	Total	$	371,913	$	43,234	$	80,650	$	71,760	$	176,269

The operating lease agreements included above primarily relate to office space. The table above does not include possible payments for uncertain tax positions. Our reserve for uncertain tax positions, including accrued interest and penalties, was ~~$2.8~~$2.7 million as of ~~June 30,~~December 31, 2022. Due to the nature of the underlying liabilities and the extended time often needed to resolve income tax uncertainties, we cannot make reliable estimates of the amount or timing of future cash payments that may be required to settle these liabilities. The above table also does not include those obligations for royalties under license agreements as these royalties are calculated based on future sales of licensed products and we cannot make reliable estimates of the amount of cash payments.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

For information on new accounting pronouncements, see Note 1 to our condensed consolidated financial statements.

~~Table of Contents~~

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to ongoing market risk related to changes in interest rates and foreign currency exchange rates.

INTEREST RATE RISK

We are exposed to market risks related to fluctuations in interest rates on amounts borrowed under the Credit Facility. As of ~~June 30,~~December 31, 2022, we had ~~$268.7~~$245.6 million outstanding under our Term Loan. Borrowings under the Term Loan Facility bear interest at a rate per annum equal to LIBOR with a floor of 0.50% for an interest period of one, three or six months as selected by Digi, reset at the end of the selected interest period (or a replacement benchmark rate if LIBOR is no longer available) plus 5.00% or a base rate plus 4.00%. The base rate is determined by reference to the highest of BMO’s prime rate, the Federal Funds Effective Rate plus 0.5%, or the one-month LIBOR for U.S. dollars plus 1.00%. The applicable margin for loans under the Revolving Credit Facility is in a range of 4.00-3.75% for LIBOR loans and 3.00 to 2.75% for base rate loans, depending on Digi’s consolidated leverage ratio. Digi bases the interest period election on an assessment of the interest rate environment conducted on a monthly basis. Digi presently expects to continue to elect a one month interest period, unless conditions change. Based on the balance sheet position for the Revolving Loan at ~~June 30,~~December 31, 2022, the annualized effect of a 25 basis point change in interest rates would increase or decrease our interest expense by ~~$0.7~~$0.6 million. For additional information, see Note 76 to our condensed consolidated financial statements. For our Credit Facility, interest rate changes generally do not affect the fair value of the debt instruments, but do impact future earnings and cash flows, assuming other factors are held constant. If interest rates remain elevated, we will continue to see interest expenses that are higher than historical amounts.

FOREIGN CURRENCY RISK

We are not exposed to foreign currency transaction risk associated with sales transactions as the majority of our sales are denominated in U.S. Dollars. We are exposed to foreign currency translation risk as the financial position and operating results of our foreign subsidiaries are translated into U.S. Dollars for consolidation. We manage our net asset or net liability position for non-functional currency accounts, primarily the U.S. Dollar accounts in our foreign locations to reduce our foreign currency risk. We have not implemented a formal hedging strategy.

A 10% change in the average exchange rate for the Euro, British Pound, ~~Japanese Yen~~Australian Dollar and Canadian Dollar to the U.S. Dollar during the first ~~nine~~three months of fiscal ~~2022~~2023 would have resulted in a ~~0.6%~~1.0% increase or decrease in stockholders' equity due to foreign currency translation.

Table of Contents

CREDIT RISK

We have exposure to credit risk related to our accounts receivable portfolio. Exposure to credit risk is controlled through regular monitoring of customer financial status, credit limits and collaboration with sales management and customer contacts to facilitate payment.

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to our management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in our internal control over financial reporting that occurred during the ~~nine~~three months ended ~~June 30,~~December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

3028

Table of Contents

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The disclosure set forth in Note 13 to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q is incorporated herein by reference.

ITEM 1A. RISK FACTORS

There have been no material changes in our risk factors from those previously disclosed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended September 30, ~~2021 and in Item 1A of Part II of our Quarterly Reports on Form 10-Q filed subsequent to that Annual Report.~~2022.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table presents the information with respect to purchases made by or on behalf of Digi International Inc. or any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stock during the ~~third~~first quarter of fiscal ~~2022:~~2023:

Period
Total Number of Shares Purchased(1)
Average Price Paid per Share Total Number of Shares Purchased as Part of a Publicly Announced Program Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program
April 1, 2022 - April 30, 2022 — $ — — $ —
May 1, 2022 - May 31, 2022 3,354 $ 20.20 — $ —
June 1, 2022 - June 30, 2022 — $ — — $ —
3,354 $ 20.20 — $ —


Period	Total Number of Shares Purchased(1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of a Publicly Announced Program	Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program
October 1, 2022 - October 31, 2022	—	$	—	—	$	—
November 1, 2022 - November 30, 2022	54,056	$	41.87	—	$	—
December 1, 2022 - December 31, 2022	17,895	$	40.41	—	$	—
	71,951	$	41.51	—	$	—

(1) All shares reported were forfeited by employees in connection with the satisfaction of tax withholding obligations related to the vesting of restricted stock units.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

~~None.~~Immaterial Correction of Prior Period Financial Statements

As discussed in

Note 2 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, the Company discovered immaterial misstatements in the condensed consolidated statements of cash flows related to the debt issuance costs associated with our second and third amended and restated credit agreement entered into in November and December 2021, respectively. These misstatements were present in the Q1, Q2 and Q3 2022 Form 10-Q filings. The Company has corrected the comparable Q1 condensed financial statements in Part 1, Item 1 of this Form 10-Q and plans to correct the comparable Q2 2022 and Q3 2022 condensed consolidated financial statements that will be presented in the Q2 2023 and Q3 2023 Form 10-Q filings, respectively.

3129

Table of Contents

The following tables reflect the effects of the correction on all affected line items of the Company's previously reported condensed consolidated financial statements to be presented as comparative in the Form 10-Q for the three months ended March 31, 2023 and June 30, 2023:


CORRECTED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)

	Six Months ended March 31, 2022						Nine Months ended June 30, 2022
	As Previously Reported		Adjustment		As Corrected		As Previously Reported		Adjustment		As Corrected
Amortization	$	13,354	$	2,744	$	16,098	$	20,400	$	3,238	$	23,638
Changes in operating assets and liabilities (net of acquisitions)	(37,272)		13,018		(24,254)		(34,618)		12,524		(22,094)
Net cash (used for) provided by operating activities	(4,004)		15,762		11,758		15,454		15,762		31,216
Payments of debt issuance costs	—		(13,443)		(13,443)		—		(13,443)		(13,443)
Payments on long-term debt	(107,050)		(2,319)		(109,369)		(127,050)		(2,319)		(129,369)
Net cash provided by (used in) financing activities	$	242,810	$	(15,762)	$	227,048	$	224,313	$	(15,762)	$	208,551

Table of Contents

ITEM 6. EXHIBITS



Exhibit No.		Description	Method of Filing
3	(a)	Restated Certificate of Incorporation of the Company, as amended (1)	Incorporated by Reference

3	(b)	Amended and Restated By-Laws of the Company (2)	Incorporated by Reference

10	~~(a)~~	Purchase Agreement dated as of November 1, 2021 by and among Keith Charette, Steven Glaser, The Keith R. Charette DE Incomplete – Gift Non-Grantor Trust, Ventus Networks, LLC, Ventus Holdings, LLC, Ventus IP Holdings, LLC, Ventus Wireless Services, Inc., Ventus Wireless CA, Inc., VClipz, Inc., and Digi International Inc. ~~(3)~~	~~Incorporated by Reference~~

10	(b)	Second Amended and Restated Credit Agreement dated as of November 1, 2021, by and among Digi International Inc., as the Borrower, BMO Harris Bank N.A., as administrative agent and collateral agent, BMO Capital Markets Corp., as sole lead arranger and book runner, and the other lenders from time to time party thereto. ~~(4)~~	~~Incorporated by Reference~~

10	~~(c)~~	Third Amended and Restated Credit Agreement dated December 22, 2021, by and among Digi International Inc. as the Borrower, BMO Harris Bank N.A., as the administrative agent and collateral agent, BMO Capital Markets Corp, as the sole lead arranger and book runner, and other lenders from time-to-time party thereto. ~~(5)~~	~~Incorporated by Reference~~

10	~~(d)~~	Digi International Inc. 2021 Omnibus Incentive Plan, as amended and restated ~~(6)~~(3)	Incorporated by Reference

31	(a)	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer	Filed Electronically

31	(b)	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer	Filed Electronically

32		Section 1350 Certification	Filed Electronically

101		The following materials from Digi International Inc.'s Quarterly Report on Form 10-Q for the fiscal period ended ~~June 30,~~December 31, 2022, as filed with the Security and Exchange Commission, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations; (ii) Condensed Consolidated Statements of Comprehensive Income; (iii) Condensed Consolidated Balance Sheets; (iv) Condensed Consolidated Statements of Cash Flows; (v) Condensed Consolidated Statements of Stockholders' Equity; and (vi) the Notes to the Condensed Consolidated Financial Statements.	Filed Electronically

104		The cover page from Digi International Inc.'s Quarterly Report on Form 10-Q for the period ended ~~June 30,~~December 31, 2022 is formatted in iXBRL (included in Exhibit 101).

____________

* Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Digi agrees to furnish to the Commission a copy of any omitted schedule upon request.

** Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-Q.

(1)Incorporated by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended September 30, 1993.

(2)Incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on April 30, 2020.

(3)Incorporated by reference to Exhibit ~~2.1 to the Company's Current Report on Form 8-K filed on November 2, 2021.~~

~~(4)Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on November 2, 2021.~~

~~(5)Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on December 23, 2021.~~

~~(6)Incorporated by reference to Exhibit~~ 10.1 to the Company's Current Report on Form 8-K filed on February ~~2, 2022.~~1, 2023.

3231

Table of Contents

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

DIGI INTERNATIONAL INC.

Date:

~~August 5, 2022~~February 3, 2023

By:

/s/ James J. Loch

James J. Loch

Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Authorized Officer)

3332


	Total Fair Value at		Fair Value Measurements Using Inputs Considered as
	June 30, 2022		Level 1		Level 2		Level 3







Liabilities:
Contingent consideration on acquired business	$	6,200	$	—	$	—	$	6,200
Total liabilities measured at fair value	$	6,200	$	—	$	—	$	6,200


	Balance at June 30, 2022		Balance at September 30, 2021
Revolving Loan	$	—	$	48,118
Term loan	268,748		—
Total loans	268,748		48,118
Less unamortized issuance costs	(12,523)		(2,319)
Less current maturities of long-term debt	(15,523)		—
Total long-term debt, net of current portion	$	240,702	$	45,799