DIGI INTERNATIONAL INC

6. SEGMENT INFORMATION

We have a single segment manager over IoT Products & Services and a single manager over IoT Solutions. As a result we havetwo operating segments. Thesetwo operating segments also serve as our reportable segments: IoT Products & Services and IoT Solutions. Each operating segment is led by a single segment manager. IoT Products & Services derives revenue from the sale of products and services that help original equipment manufacturers ("OEMs"), enterprise and government customers create and deploy, secure IoT connectivity solutions. IoT Solutions derives revenue from the sale of software-based services that are enabled through the use of connected devices that utilize cellular communications.

Our CEO is our Chief Operating Decision Maker ("CODM"). The measures the CODM uses to measure profitability within each of our reportable segments is segment gross profit.

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

Total depreciation and amortization expense was (in thousands):

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

• Excluded from these amounts are $2,098 and $1,105 of transfers of inventory to property plant and equipment for subscriber assets for the three months ended December 31, 2024 and 2023, respectively.

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

*Unallocated consists of cash and cash equivalents.

7. REVENUE

Revenue Disaggregation

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

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

Contract Balances

Contract Related Assets

Our contract related assets consist of subscriber assets. Subscriber assets are equipment that we provide to customers pursuant to subscription-based contracts. In these cases, we retain the ownership of the equipment a customer uses and charge the customer subscription fees to receive our end-to-end solutions. The total net book value of subscriber assets of $23.8 million and $23.6 million as of December 31, 2024 and September 30, 2024, respectively, are included in property, equipment and improvements, net. Depreciation expense for these subscriber assets, which is included in cost of sales, was $1.9 million and $1.0 million for the three months ended December 31, 2024 and 2023, respectively.

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, 2024 and September 30, 2024.

Contract Liabilities

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

Our contract liabilities were $41.6 million and $35.0 million at December 31, 2024 and 2023, respectively.

There were contract liability balances of $36.8 million and $27.9 million as of September 30, 2024 and 2023, respectively. Of these balances, Digi recognized $9.3 million and $7.4 million as revenue in the three months ended December 31, 2024 and 2023, respectively.

Remaining Performance Obligation

As of December 31, 2024, we had approximately $162.1 million of remaining performance obligations on contracts with an original duration of one year or more. We expect to recognize revenue on approximately $79.1 million of remaining performance obligations over the next 12 months. We expect to recognize revenue from the remaining performance obligations over a range oftwo tofive years.

8. INCOME TAXES

Our income tax expense was $1.0 million for the three months ended December 31, 2024. Included in this was a net tax benefit of $0.4 million discretely related to the three months ended December 31, 2024. This benefit was the result of book stock compensation in excess of recognized tax benefits.

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

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

The total amount of unrecognized tax benefits at December 31, 2024 that, if recognized, would affect our effective tax rate was $3.4 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 $0.5 million over the next 12 months.

9. 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:

10. LEASES

All of our leases are operating leases and primarily consist of leases for office space. For any lease with an initial term in excess of 12 months, the related lease assets and lease liabilities are recognized on the condensed consolidated balance sheets as either operating or financing leases at the inception of an agreement where it is determined that a lease exists. We have lease agreements that contain both lease and non-lease components. We have elected to combine lease and non-lease components for all classes of assets. Leases with an expected term of 12 months or less are not recorded on the condensed consolidated balance sheets. Instead we recognize lease expense for these leases on a straight-line basis over the lease term.

Operating lease assets represent the right to use an underlying asset for the lease term and operating lease liabilities represent the obligation to make lease payments. These assets and liabilities are recognized based on the present value of future payments over the lease term at the commencement date. We generally use a collateralized incremental borrowing rate based on information available at the commencement date, including the lease term, in determining the present value of future payments. When determining our right-of-use assets, we generally do not include options to extend or terminate the lease unless it is reasonably certain that the option will be exercised.

Our leases typically require payment of real estate taxes and common area maintenance and insurance. These components comprise the majority of our variable lease cost and are excluded from the present value of our lease obligations. Fixed payments may contain predetermined fixed rent escalations. We recognize the related rent expense on a straight-line basis from the commencement date to the end of the lease term.

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

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

At December 31, 2024, the weighted average remaining lease term of our operating leases was 5.8 years and the weighted average discount rate for these leases was 4.7%.

10. LEASES (CONTINUED)

The table below reconciles the undiscounted cash flows for each of the first five years as well as all the remaining years to the operating lease liabilities recorded on the condensed consolidated balance sheet as of December 31, 2024 (in thousands):

11. COMMITMENTS AND CONTINGENCIES

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

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

12. STOCK-BASED COMPENSATION

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

As of December 31, 2024, there were approximately 1,358,842 shares available for future grants under the 2021 Plan.

Cash received from the exercise of stock options was $1.8 million and $0.2 million for the three months ended December 31, 2024 and 2023, respectively.

Our equity plans and corresponding forms of award agreements generally have provisions allowing employees to elect to satisfy tax withholding obligations through the delivery of shares. When employees make this election, we retain a portion of shares issuable under the award. Tax withholding obligations are otherwise fulfilled by the employee paying cash to us for the withholding. During the three months ended December 31, 2024 and 2023, our employees forfeited 100,011 shares and 87,792 shares, respectively, in order to satisfy withholding tax obligations of $3.2 million and $2.1 million, respectively.

12. STOCK-BASED COMPENSATION (CONTINUED)

We sponsor an Employee Stock Purchase Plan as amended and restated as of December 10, 2019, October 29, 2013, December 4, 2009 and November 27, 2006 (the "ESPP"), covering all domestic employees with at least 90 days of continuous service and who are customarily employed at least 20 hours per week. The ESPP allows eligible participants the right to purchase common stock on a quarterly basis at the lower of 85% of the market price at the beginning or end of each three-month offering period. The most recent amendments to the ESPP, ratified by our stockholders on January 29, 2020, increased the total number of shares that may be purchased under the ESPP to 3,425,000. ESPP contributions by employees were $0.5 million for the three months ended December 31, 2024 and 2023. Pursuant to the ESPP,22,311 and 23,665 common shares were issued to employees during the three months ended December 31, 2024 and 2023, respectively. Shares are issued under the ESPP from treasury stock. As of December 31, 2024,346,186 common shares were available for future issuances under the ESPP.

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

Stock Options

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

(1)The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $30.23 as of December 31, 2024, which would have been received by the option holders had all option holders exercised their options as of that date.

12. STOCK-BASED COMPENSATION (CONTINUED)

The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price. The total intrinsic value of all options exercised during the three months ended December 31, 2024 and 2023 was $7.8 million and $0.4 million, respectively.

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

The fair value of each option award granted during the periods presented was estimated using the Black-Scholes option valuation model that uses the assumptions noted in the above table. Expected volatilities are based on the historical volatility of our stock. We use historical data to estimate option exercise and employee termination information within the valuation model. The expected term of options granted is derived from the vesting period and historical information and represents the period of time that options granted are expected to be outstanding. The risk-free rate used is the zero-coupon U.S. Treasury bond rate in effect at the time of the grant whose maturity equals the expected term of the option.

As of December 31, 2024, the total unrecognized compensation cost related to non-vested stock options was $3.2 million and the related weighted average period over which it is expected to be recognized is approximately 2.1 years.

Non-vested Stock Units

The following table presents a summary of our non-vested restricted stock units and performance stock units as of December 31, 2024 and changes during the three months then ended (in thousands, except per common share amounts):

As of December 31, 2024, the total unrecognized compensation cost related to non-vested restricted stock units and performance stock units was $27.4 million and $2.1 million, respectively. The related weighted average period over which these costs are expected to be recognized was approximately 2.4 years and 0.8 years, respectively.