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What changed in DIGI INTERNATIONAL INC's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of DIGI INTERNATIONAL INC's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+272 added−264 removedSource: 10-K (2023-11-22) vs 10-K (2022-11-23)

Top changes in DIGI INTERNATIONAL INC's 2023 10-K

272 paragraphs added · 264 removed · 206 edited across 8 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeIn addition, it allows us to reduce our fixed costs, maintain production flexibility and optimize our profits. Our products are manufactured to our designs with standard and custom components. Most of the components are available from multiple vendors. We have several single-sourced supplier relationships, either because alternative sources are not available or because the relationship is advantageous to us.
Biggest changeBy outsourcing our operations to these manufacturers, we can leverage the manufacturing strength of our vendors, which allows us to focus on new product introductions. In addition, it allows us to reduce our fixed costs, maintain production flexibility and optimize our profits. Our products are manufactured to our designs with standard and custom components.
In the "Company - Investor Relations" section of our website, we make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, our proxy statement and any amendments to these reports available free of charge as soon as reasonably practicable after these reports are filed with or furnished to the United States Securities and Exchange Commission ("SEC").
In the "Company–Investor Relations" section of our website, we make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, our annual proxy statement and any amendments to these reports available free of charge as soon as reasonably practicable after they are filed with or furnished to the United States Securities and Exchange Commission ("SEC").
With respect to many of our product and service offerings, we face competition from companies who dedicate more resources and attention to that particular offering than we are able to do given the breadth of our business. As the marketplace for IoT connectivity products and solutions continues to grow, we expect to encounter increased competition.
With respect to many of our product and service offerings, we face competition from companies who dedicate more resources and attention to that particular offering than we are able to given the breadth of our business. As the marketplace for IoT connectivity products and solutions continues to grow, we expect to encounter increased competition.
In recent periods, as a result of supply chain constraints, a significant portion of our research & development spending has been focused on the re-design or reconfiguration of existing products using different components. This has lowered our ability to focus on new product development.
In recent periods, as a result of supply chain constraints, a significant portion of our research and development spending has been focused on the re-design or reconfiguration of existing products using different components. This has lowered our ability to focus on new product development.
ITEM 1. BUSINESS General Background and Product Offerings Digi International Inc. ("Digi ® ," "we," "our," or "us") was incorporated in 1985 as a Minnesota corporation. We were reorganized as a Delaware corporation in 1989 in conjunction with our initial public offering.
ITEM 1. BUSINESS General Background and Product Offerings Digi International Inc. ("Digi ® ," "we," "our," or "us") was incorporated in 1985 as a Minnesota corporation. We reorganized as a Delaware corporation in 1989 in conjunction with our initial public offering.
Among others, IoT use cases include condition-based monitoring of perishable goods, enabling remote work by employees, automating workflows and operations and providing and maintaining secure connectivity and monitoring of operating assets. Our IoT Products & Services segment represented the majority of our sales in fiscal 2022.
Among others, IoT use cases include condition-based monitoring of perishable goods, enabling remote work by employees, automating workflows and operations and providing and maintaining secure connectivity and monitoring of operating assets. Our IoT Products & Services segment represented the majority of our sales in fiscal 2023.
Our common stock is traded on the Nasdaq Global Select Market tier of the Nasdaq Stock Market LLC under the symbol DGII. Our World Headquarters is located at 9350 Excelsior Blvd., Suite 700, Hopkins, Minnesota 55343. The telephone number at our World Headquarters is (952) 912-3444.
Our common stock trades on the Nasdaq Global Select Market tier of the Nasdaq Stock Market LLC under the symbol DGII. Our World Headquarters is located at 9350 Excelsior Blvd., Suite 700, Hopkins, Minnesota 55343. The telephone number at our World Headquarters is (952) 912-3444.
These products are designed and developed with compact form-factors, low power consumption and long product lifecycles. The latest ConnectCore products support advanced multi-core processing, security, multimedia, human-machine interface ("HMI") and other emerging technologies like machine learning. Infrastructure Management Products – These products include serial and Universal Serial Bus ("USB") solutions.
These products are designed and developed with compact form-factors, low power consumption and long product lifecycles. The latest ConnectCore products support advanced multi-core processing, security, multimedia, human-machine interface ("HMI") and other emerging technologies like machine learning. 5 Table of Contents Infrastructure Management Products – These products include serial and Universal Serial Bus ("USB") solutions.
We have two reportable operating segments under applicable accounting standards: (i) IoT Products & Services; and (ii) IoT Solutions. Our IoT Products & Services segment offers products and services that help original equipment manufacturers ("OEMs"), enterprise and government customers create and deploy, secure IoT connectivity solutions.
We have two reportable segments under applicable accounting standards: (i) IoT Products & Services; and (ii) IoT Solutions. Our IoT Products & Services segment offers products and services that help original equipment manufacturers ("OEMs") as well as enterprise and government customers create and deploy secure IoT connectivity solutions.
While our business performed well in fiscal 2022 and we expect an ongoing long-term trend of marketplace growth, each of our business segments is susceptible to downturns either because of general macro-economic conditions, the continued development of technology that can make products less competitive or even obsolete and uncertainty or changes in regulatory environments.
While our business performed well in fiscal 2023 and we expect an ongoing long-term trend of marketplace growth, each of our business segments is susceptible to downturns either because of general macro-economic conditions, the continued 1 Table of Contents development of technology that can make products less competitive or even obsolete and uncertainty or changes in regulatory environments.
Designed with security, scalability and automation in mind, Lighthouse allows engineers to control every aspect of their network through a central hub. 6 Table of Contents Technical Services - Our Technical Services provide professional services, data plan subscriptions and enhanced technical support offers to customers.
Designed with security, scalability and automation in mind, Lighthouse allows engineers to control every aspect of their network through a central hub. Technical Services – Our Technical Services provide professional services, data plan subscriptions and enhanced technical support to customers.
We compete for customers on the basis of 3 Table of Contents 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.
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, the quality and reliability of our offerings, product development capabilities, price and availability.
This industry is characterized by rapid technological advances and evolving industry standards. This market can be affected significantly by new product introductions and marketing activities of industry participants. It is possible new market entrants could market and sell disruptive technologies that impact one or more of our product or service offerings.
This market can be affected significantly by new product introductions and marketing activities of industry participants. It is possible new market entrants could market and sell disruptive technologies that impact one or more of our product or service offerings.
We believe our intellectual property has significant value and is an important factor in the marketing of our company and products. 4 Table of Contents HUMAN CAPITAL RESOURCES Digi’s workforce consists of approximately 790 employees globally as of September 30, 2022. We consider our relationship with our employees to be good.
We believe our intellectual property has significant value and is an important factor in the marketing of our company and products. HUMAN CAPITAL RESOURCES Digi’s workforce consists of 822 employees globally as of September 30, 2023. We consider our relationship with our employees to be good.
This segment sells both wired and wireless products that are either embedded into the products of OEMs or as stand-alone products. These offerings allow our customers to connect a wide range of assets to networks. This segment grew during fiscal 2022, led by increases in our cellular and console server revenues.
This segment sells both wired and wireless products that either are embedded into the products of OEMs or serve as stand-alone products. These offerings allow our customers to connect a wide range of assets to networks. This segment grew during fiscal 2023, led by increases in our OEM and Infrastructure Management revenues.
Sales Channels A significant portion of our IoT Products & Services segment sales are made through a global network of distributors, systems integrators and value added resellers ("VARs"). These third parties accounted for 50.0%, 47.0% and 37.5% of our total consolidated revenue in fiscal 2022, 2021 and 2020, respectively. Our IoT Solutions segment historically has not sold through these channels.
Sales Channels A significant portion of our IoT Products & Services segment sales are made through a global network of distributors, systems integrators and value added resellers ("VARs"). These third parties accounted for 59.9%, 50.0% and 47.0% of our total consolidated revenue in fiscal 2023, 2022 and 2021, respectively. Our IoT Solutions segment does not sell through these channels.
We continuously evaluate, modify, and enhance our internal processes and technologies to increase employee engagement, productivity, and efficiency. We are committed to promoting and cultivating an inclusive, diverse culture that welcomes and celebrates everyone without bias. In addition, we actively engage within our communities to foster and attain social equity.
We continuously evaluate, modify, and enhance our internal processes and technologies to increase employee engagement, productivity, and efficiency. We are committed to promoting and cultivating an inclusive, diverse culture that welcomes and celebrates everyone without bias.
Our products are used by many of the world’s leading telecommunications companies and Internet service providers, including, among others, AT&T, T-Mobile and Verizon. No single customer comprised more than 10% of our consolidated revenue for any of the fiscal years 2022, 2021 or 2020. Competition We compete primarily in the communications technology industry.
Our products utilize many of the world’s leading telecommunications companies and Internet service providers, including, among others, AT&T, T-Mobile and Verizon. No single customer comprised more than 10% of our consolidated revenue for any of the fiscal years 2023, 2022 or 2021.
Our benefits package provides a balance of protection along with the flexibility to meet the individual health and wellness needs of our employees. 5 Table of Contents PRINCIPAL PRODUCTS AND SERVICES Our primary products and services for each operating segment are: IoT Products & Services Segment Hardware Products Cellular Products – We provide a range of products that use cellular technology such as Long Term Evolution (“LTE”), LTE Advance Pro and 5 th Generation wireless protocols to communicate with networks.
PRINCIPAL PRODUCTS AND SERVICES Our primary products and services for each reportable segment are: IoT Products & Services Segment Hardware Products Cellular Products – We provide a range of products that use cellular technology such as Long Term Evolution (“LTE”), LTE Advance Pro and 5 th Generation wireless protocols to communicate with networks.
Compensation Philosophy Our compensation philosophy creates the framework and building blocks for our rewards strategy. We have a pay-for-performance culture that ties compensation to the performance of the individual and the company.
In addition, we actively engage within our communities to foster and attain social equity. 4 Table of Contents Compensation Philosophy Our compensation philosophy creates the framework and building blocks for our rewards strategy. We have a pay-for-performance culture that ties compensation to the performance of the individual and the company.
As disclosed elsewhere, our manufacturing operations, like those of other companies, are dependent on relationships with these suppliers who are also experiencing supply chain disruptions. If these suppliers are unable to provide a timely and reliable supply of components, we could experience manufacturing delays that could adversely affect our consolidated results of operations in a material way.
If these suppliers are unable to provide a timely and reliable supply of components, we could experience manufacturing delays that could adversely affect our consolidated results of operations in a material way.
We have established relationships with equipment vendors in a range of industries such as energy, industrial, retail, transportation, medical, and government that allow these partners to ship our products and services as component parts of their overall solutions.
Among others, relationships include: AT&T, NXP, Orange, Rogers, Silicon Laboratories, T-Mobile, Telus, Telit, Verizon, Vodafone and several other cellular carriers worldwide. We have established relationships with equipment vendors in a range of industries such as energy, industrial, retail, transportation, medical, and government that allow these partners to ship our products and services as component parts of their overall solutions.
Given the current uncertainty in macro-economic conditions, including, but not limited to, potential recessionary conditions, ongoing supply chain disruptions globally and the uncertain status of large project-based customer deployment opportunities, our results during fiscal 2023 may be inconsistent. Strategy We remain focused on taking steps that we believe will deliver consistent, long-term growth with higher levels of profitability.
Given the current uncertainty in macro-economic conditions, including, but not limited to, potential recessionary conditions, supply chain disruptions globally and the uncertain status of large project-based customer deployment opportunities, our results during fiscal 2024 may be inconsistent quarter to quarter or with historical results.
Health and Wellness We are committed to providing a competitive and comprehensive benefits package to our employees.
Health and Wellness We are committed to providing a competitive and comprehensive benefits package to our employees. Our benefits package provides a balance of protection along with the flexibility to meet the individual health and wellness needs of our employees.
Strategic Sales Relationships We maintain alliances with other industry leaders to develop and market technology solutions. These include many major communications hardware and software vendors, operating system suppliers, computer hardware manufacturers, enterprise application providers and cellular carriers. Among others, relationships include: AT&T, NXP, Orange, Rogers, Silicon Laboratories, T-Mobile, Telus, Telit, Verizon, Vodafone and several other cellular carriers worldwide.
We also maintain relationships with many other distributors both domestically and internationally. 2 Table of Contents Strategic Sales Relationships We maintain alliances with other industry leaders to develop and market technology solutions. These include many major communications hardware and software vendors, operating system suppliers, computer hardware manufacturers, enterprise application providers and cellular carriers.
We rely on third party foundries or companies who rely on third party foundries for our semiconductor devices that are Application Specific Integrated Circuits ("ASICs"). We also outsource printed circuit board production. By outsourcing our operations to these manufacturers, we can leverage the manufacturing strength of our vendors, which allows us to focus on new product introductions.
Manufacturing Operations We outsource our manufacturing operations to certain contract manufacturers, which are located primarily in Thailand, Mexico, Taiwan and China. We rely on third party foundries or companies who rely on third party foundries for our semiconductor devices that are Application Specific Integrated Circuits ("ASICs"). These foundries are located primarily in Taiwan. We also outsource printed circuit board production.
With comprehensive end-to-end security, our portfolio includes an array of connectivity applications in the banking, healthcare, retail, gaming, hospitality and other sectors. Supporting ATMs, gaming, point-of-sale, kiosks, digital signing and retail applications, Ventus works closely with its customers to customize innovative long-term MNaaS solutions.
Supporting ATMs, gaming, point-of-sale, kiosks, digital signage and retail applications, Ventus works closely with its customers to customize innovative long-term MNaaS solutions.
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.
These include embedded and wireless modules, console servers, enterprise and industrial routers as well as other infrastructure management equipment to meet our customers' IoT communication requirements. In addition, this segment provides our customers with a device management platform as well as other professional services to enable customers to capture and manage data from devices connected to networks.
In general, our business is not considered to be highly seasonal, although our first fiscal quarter revenue is often less than other quarters due to holidays and fewer business days.
In general, our sales are not considered to be highly seasonal, although our first fiscal quarter revenue is often less than other quarters due to holidays and other business days. Competition We compete primarily in the communications technology industry. This industry is characterized by rapid technological advances and evolving industry standards.
SmartSense provides condition-based monitoring services for perishable goods such as food and medicines for health-care, pharmaceutical and food industry. Ventus provides MNaaS offerings to manage and maintain network connectivity for assets such as ATMs and lottery kiosks. The offerings in this segment are offered on a subscription model and provide us with a stable base of recurring higher-margin revenues.
SmartSense by Digi provides condition-based monitoring services for perishable goods such as food and medicines for the health-care, pharmaceutical and food industries. Ventus provides MNaaS offerings to manage and maintain network connectivity for assets such as ATMs and lottery kiosks.
Research & Development and Intellectual Property Rights Due to rapidly changing technology in the communications technology industry, we believe a large part of our success depends upon the product and service development skills of our personnel as well as our ability to integrate any acquired technologies with organically developed technologies.
Further, a range of conditions and circumstances beyond our control such as global conflicts, recessionary economic conditions in various regions of the world or a recurrence of the Covid-19 pandemic could disrupt the availability of raw materials and components as well as our capacity to make and distribute our products. 3 Table of Contents Research & Development and Intellectual Property Rights Due to rapidly changing technology in the communications technology industry, we believe a large part of our success depends upon the product and service development skills of our personnel as well as our ability to integrate any acquired technologies with organically developed technologies.
This includes continuously reviewing and managing the product and solution offerings we provide to align with customer interests and meet market demand. In addition, acquisitions have helped significantly advance our offerings and driven growth and profitability, in both business segments. Over time we expect to continue to be active in making further acquisitions.
In addition, acquisitions have helped significantly advance our offerings and driven growth and profitability, in both business segments. Over time we expect to continue to be active in making further acquisitions. IoT Products & Services Segment Our IoT Products & Services segment is managed so our product management and sales personnel are aligned along specific product lines.
This segment generated $80 million in ARR as of September 30, 2022. We have high organic growth expectations and we will continue to explore added scale through acquisitions. SmartSense by Digi helps customers monitor temperature and other conditions important to preserve the quality of perishable or other sensitive inventories and tracks the completion of employee tasks.
This segment generated $84 million in ARR as of September 30, 2023. We have long-term high organic growth expectations and we will continue to explore added scale through acquisitions for this segment.
Distributors Our larger distributors, by sales volume, include Arrow Electronics, Avnet, Bressner Technology GmbH, Digi-Key, Express Systems & Peripherals, Ingram Micro, Mouser Electronics, Solid State Supplies, Symmetry Electronics, Synnex, Tech Data, Tokyo Electron Device and Venco Electrónica S.A. We also maintain relationships with many other distributors both domestically and internationally.
The remaining 40.1%, 50.0% and 53.0% of our total consolidated revenue in fiscal 2023, 2022 and 2021, respectively is sold through our dedicated sales organization. Distributors Our larger distributors, by sales volume, include Arrow Electronics, Avnet, Bressner Technology GmbH, Digi-Key, Express Systems & Peripherals, Ingram Micro, Mouser Electronics, Solsta, Symmetry Electronics, Synnex, Tokyo Electron Device and Venco Electrónica S.A.
The Ventus portfolio includes cellular wireless and 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.
The Ventus portfolio includes cellular wireless and fixed line WAN solutions for an array of connectivity applications in banking, healthcare, retail, gaming, hospitality and other sectors. For more in-depth descriptions of our products and services, please refer to the heading "Principal Products and Services" at the end of Part I, Item 1 of this Form 10-K.
Ventus is a leader MNaaS solutions that simplify the complexity of enterprise WAN connectivity for an array of applications in banking, healthcare, retail, gaming, hospitality and other sectors. Acquisitions and Dispositions Acquisitions In addition to our fiscal 2022 acquisition of Ventus disclosed above, we have made the following acquisitions from fiscal 2020 through fiscal 2021.
Ventus – Ventus is a leader in providing comprehensive MNaaS solutions that simplify the complexity of both wireless and fixed-line WAN connectivity. With comprehensive end-to-end security, our portfolio includes an array of connectivity applications in the banking, healthcare, retail, gaming, access control, EV charging, hospitality and other sectors.
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.
Our IoT Solutions segment consists of our SmartSense by Digi ® business and our Managed Network–as–a-Service (“MNaaS”) business acquired via our November 2021 acquisition of Ventus Wireless, LLC and affiliated entities ("Ventus"). SmartSense by Digi offers wireless temperature and other condition-based monitoring services as well as employee task management services.
We also continue to drive efforts to pair our hardware offerings with our Digi Remote Manager ® device management platform as well as other support services. These bundled offerings allow customers to monitor and manage the performance of our hardware remotely. This segment generated over $14 million in annualized recurring revenue (ARR) as of September 30, 2022.
We believe this management structure brings greater market focus and potential growth to our product lines. We also continue to drive efforts to pair our hardware offerings with our Digi Remote Manager ® device management platform as well as other support services.
Typically, customers receive hardware up-front, including gateways and sensors, and pay for an annual subscription for monitoring sensor data. Ventus Ventus is a leader in providing comprehensive MNaaS solutions that simplify the complexity of both wireless and fixed-line WAN connectivity.
Historically, customers receive hardware up-front, including gateways and sensors, and pay for an annual subscription for monitoring sensor data. However. SmartSense by Digi is increasingly pivoting to providing a comprehensive Sensing-as-a-service solution to better address customers' needs and expand its role as a leader in this solution space.
Recently we have begun to place more emphasis on the delivery of subscription-based solutions offerings for many of these products. Our IoT Solutions segment grew significantly in fiscal 2022 primarily because of our acquisition of Ventus in our first fiscal quarter. The segment is comprised primarily of our SmartSense and Ventus offerings.
Historically the revenues from this segment have been based on one-time product sales. More recently we have placed greater emphasis on selling subscription-based solutions across this product portfolio. Our IoT Solutions segment is comprised primarily of our SmartSense by Digi and Ventus offerings.
In December 2019, we acquired New Jersey-based Opengear, Inc. ("Opengear ® "), a provider of secure IT infrastructure products and software. This acquisition provides products that are complementary to our IoT Products & Services segment. In March 2021, we acquired Haxiot, Inc. ("Haxiot ® "), a provider of low power wide area ("LPWA") wireless technology.
Acquisitions and Dispositions Acquisitions In addition to our fiscal 2022 acquisition of Ventus disclosed above, we have made the following acquisitions during our fiscal years 2021 through 2023: In March 2021, we acquired Haxiot, Inc. ("Haxiot ® "), a provider of low power wide area ("LPWA") wireless technology.
Some of these competitors may have access to significantly more financial and technical resources than we possess. Manufacturing Operations We outsource our manufacturing operations to certain contract manufacturers, which are located primarily in Thailand, Mexico, Taiwan and China.
Some of these competitors may have access to significantly more financial and technical resources than we possess which could give them advantages in their ability to develop new and better offerings, to meet customer demands, to comply more quickly with new regulatory regimes and to promote and sell their products.
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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.
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These solutions focus on the following vertical markets: food service, healthcare (primarily pharmacies and hospitals) and supply chain. Ventus is a leader in the provision of MNaaS solutions that simplify the complexity of enterprise wide area network (“WAN”) connectivity for customers.
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These solutions are focused on the following vertical markets: food service, healthcare (primarily pharmacies and hospitals) and supply chain. For more in-depth descriptions of our products and services, please refer to the heading "Principal Products and Services" at the end of Part I, Item 1 of this Form 10-K. Our corporate website address is www.digi.com.
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The offerings in this segment are primarily offered on a subscription model and provide us with a stable base of recurring higher-margin revenues.
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Ongoing Impacts of Global Macro-Economic Conditions The impacts of global macro-economic conditions, driven largely by the war in Ukraine and the impacts of the Covid-19 pandemic have disrupted supply chains for a range of goods and services, continue to create significant uncertainty regarding the nearer term outlook for our operations and the markets into which we sell.
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Strategy We remain focused on taking steps that we believe will deliver consistent, long-term growth with higher levels of profitability. This includes continuously reviewing and managing the product, service and solution offerings we provide to align with customer interests and meet market demand.
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To date these conditions have primarily impacted our supply chain in adverse ways that include container ship backlogs, energy shortages in certain parts of the world, and components and material shortages. This has led to shortfalls in available components we need to make products as well as increased costs both to obtain components and to transport components and products.
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These bundled offerings are sold on a subscription basis and allow customers to monitor and manage the performance of our hardware remotely. This segment generated over $22 million in annualized recurring revenue ("ARR") as of September 30, 2023. Please see "Key Business Metrics" section in Part II, Item 7 for additional details on how ARR is measured.
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It has also lengthened the timelines for us to fulfill customer orders, increasing our backlog, and in some cases has led to an inability to meet an increasing level of demand for our products.
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IoT Solutions Segment Our IoT Solutions segment is managed with a focus on recurring traditionally high margin subscription-based revenues. We believe capturing enterprise-level deals should be a driver of growth, leveraging our direct sales model to achieve this. Our offerings provide comprehensive hardware-enabled software solutions. The segment represents nearly 25% of total revenues.
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The severity of the disruptions is changing continuously, meaning the impact on our ability to meet demand for particular products in a timely manner has been subject to ebb and flow. In some instances, these disruptions have been material and it is possible more material disruptions will occur.
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Most of the components are available from multiple vendors. We have several single-sourced supplier relationships, either because alternative sources are not available or because the relationship is advantageous to us. As disclosed elsewhere, our manufacturing operations, like those of other companies, are dependent on relationships with these suppliers who, like us, are subject to potential supply chain disruptions.
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We are taking steps to attempt to mitigate the impact of the disruptions such as placing inventory demand further out into the future to secure our allocations of components, negotiating and engaging with suppliers to reserve components, encouraging customers to place orders earlier than normal due to longer lead times and attempting (in conjunction with customers) to influence political leaders to assure components needed to make products that are essential to the health and well-being of society are prioritized to our customer’s needs by suppliers.
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In an effort to mitigate supply chain exposure, we have increased our amount of inventory on hand from historical levels and will monitor whether adjustments to inventory levels are necessary to mitigate any future exposures.
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At present the ongoing duration and severity of these disruptions is not known.
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Culture At Digi we promote cultural imperatives that drive our approach to our daily work and our customer care: • Customer focus • Start-up urgency • Positive Energy - Bring solutions to problems • Commitment to outcomes & results • Embrace Diversity & Inclusion • Caring These core values define the way we do business in our everyday actions and choices.
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As such, we are unable to predict the ultimate impact of these disruptions on our business and financial results, which could be material. 1 Table of Contents We also continuously monitor customer demand for the products and services we sell and have not seen material decreases in demand.
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The segment includes some products that are in the mature phase of their life cycle and have been experiencing sales declines for several years. We manage this segment with more focus on profitability and more modest revenue growth expectations relative to our IoT Solutions segment.
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IoT Products & Services Segment Our IoT Products & Services segment is being managed so our product management and sales personnel are aligned along specific product lines to bring greater market focus and potential growth to the product lines.
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Please see "Key Business Metrics" section in Part II, Item 7 for additional details on how ARR is measured. IoT Solutions Segment Our IoT Solutions segment is driven by recurring traditionally high margin subscription-based revenues. Following our acquisition of Ventus in the first quarter of fiscal 2022, the segment now represents approximately 25% of total revenues.
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Our efforts have created a market-leading, high-growth hardware enabled service business with a significant recurring revenue base.
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At present, this marketplace primarily is served by smaller companies that lack the infrastructure to provide hardware-enabled implementation services to customers in as effective and efficient a manner as we are able to do because of our long-standing history as an IoT hardware provider. 2 Table of Contents SmartSense by Digi presently serves many leading brands in the following vertical markets: food service, healthcare (primarily pharmacies) and supply chain.
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These markets share similar needs for continuous monitoring and asset tracking for compliance and regulatory purposes and we believe they comprise a large addressable market with low customer penetration. In November 2021, we acquired Ventus Holdings.
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We also complete sales of both IoT Products & Services and IoT Solutions through our own dedicated sales organization directly to a wide range of end user customers. This dedicated sales team accounted for 50.0%, 53.0% and 62.5% of our total consolidated revenue in fiscal 2022, 2021 and 2020, respectively.
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In an effort to mitigate supply chain exposure, we have increased our amount of inventory on hand. In addition, as a result of the global pandemic, there has been increased attention focused on actions of the Chinese government with respect to how they attempt to mitigate the impacts of the pandemic.
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Also, as a result of the war in Ukraine, governments around the world have imposed sanctions on Russia and Belarus. These situations could lead to potential adverse impacts on a wide range of businesses and could disrupt the supply of components or end-products that we produce.
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Culture As employees of Digi we are all expected to uphold the following core values that drive our culture: • Integrity • Accountability • Respect and open communication These core values define the way we do business in our everyday actions and choices.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeThere can be no assurance that our suppliers will be able to meet our future requirements for products and components in a timely fashion. In addition, the availability of many of the components we need is dependent in part on our ability to provide our suppliers with accurate forecasts of our future requirements.
Biggest changeThe impacts of these circumstances driven by supply chain stress have been material in some instances and it is possible additional material impacts could occur in the future. There can be no assurance that our suppliers will be able to meet our future requirements for products and components in a timely fashion.
To the extent our channel partners are unsuccessful selling our products or if we are unable to obtain and retain a sufficient number of high-quality channel partners, our operating results could be materially and adversely affected.
To the extent our channel partners are unsuccessful selling our products or if we are unable to obtain and retain a sufficient number of high-quality channel partners, our operating results could be affected materially and adversely.
This could have a material adverse effect on our ability to operate our business and service the needs of our customers. There can be no assurance that any infringement claims by third parties, regardless if they have merit, will not materially adversely affect our business, operating results, financial condition or prospects.
This could have a material adverse effect on our ability to operate our business and service the needs of our customers. There can be no assurance that any claims by third parties, regardless if they have merit, will not materially adversely affect our business, operating results, financial condition or prospects.
We cannot provide assurance that we will be able to compete successfully with our current and potential competitors. Such competitors may be able to more quickly develop or adapt to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of their products.
We cannot provide assurance that we will be able to compete successfully with our current and potential competitors. Such competitors may be able to more quickly develop or adapt to new or emerging technologies and changes in customer requirements, changes in regulatory requirements or devote greater resources to the development, promotion and sale of their products.
We are dependent on third parties to manufacture our products which could have adverse impacts on our business if such manufacturers encounter operating restraints or if we do not properly forecast customer demand. We are reliant on third parties to manufacture our products in countries such as China, Mexico and Thailand.
We are dependent on third parties to manufacture our products which could have adverse impacts on our business if such manufacturers encounter operating restraints or if we do not properly forecast customer demand. We are reliant on third parties to manufacture our products in countries such as Mexico, Thailand, Taiwan and China.
Finally, sanctions against and actions of the Russian government resulting from the war in Ukraine may be adverse to suppliers who we rely upon.
Sanctions against and actions of the Russian government resulting from the war in Ukraine may be adverse to suppliers who we rely upon.
Many of our vendors and strategic business allies also have international operations and are subject to the risks described above. Even if we are able to successfully manage the risks of international operations, our business may be adversely affected if one or more of our business partners are not able to successfully manage these risks.
Many of our vendors and strategic business allies also have international operations and are subject to the above described risks. Even if we are able to successfully manage the risks of international operations, our business may be adversely affected if one or more of our business relations are not able to successfully manage these risks.
Further, there are numerous companies competing with us in various segments of the market for our products, and their products may have advantages over our products in areas such as conformity to existing and emerging industry standards, interoperability with other products, management and security capabilities, performance, price, ease of use, scalability, reliability, flexibility, product features and technical support.
Further, there are numerous companies competing with us in various segments of the market for our products, and their products may have advantages over our products in areas such as conformity to existing and emerging industry standards or new regulations, interoperability with other products, management and security capabilities, performance, price, ease of use, scalability, reliability, flexibility, product features and technical support.
As such, our gross margins may be subject to decline unless we can implement cost reduction initiatives effectively to offset the impact of these factors. Our revenue may be subject to fluctuations based on the level of significant large project-based purchases. No single customer has represented more than 10% of our revenue in any of the last three fiscal years.
Our gross margins therefore may be subject to decline unless we can implement cost reduction initiatives effectively to offset the impact of these factors. Our revenue may be subject to fluctuations based on the level of significant large project-based purchases. No single customer has represented more than 10% of our revenue in any of the last three fiscal years.
There can be no guarantee in any particular instance that we will be successful in making our products interact with those of other parties in a commercially acceptable manner and, even if we do, we cannot guarantee that the resulting products and services will be effectively marketed or sold via the relationship.
There can be no guarantee in any 12 Table of Contents particular instance that we will be successful in making our products interact with those of other parties in a commercially acceptable manner and, even if we do, we cannot guarantee that the resulting products and services will be marketed effectively or sold via the relationship.
If our stock price declines over a sustained period of time, our profits significantly decrease or our acquired businesses do not attain results that were anticipated at the time of acquisition, we may need to recognize an impairment of our goodwill. 18 Table of Contents The price of our common stock could decline.
If our stock price declines over a sustained period of time, our profits significantly decrease or our acquired businesses do not attain results that were anticipated at the time of acquisition, we may need to recognize an impairment of our goodwill. The price of our common stock could decline.
These sales are subject to a variety of risks, including fluctuations in currency exchange rates, tariffs, import restrictions and other trade barriers, unexpected changes in regulatory requirements, longer accounts receivable payment cycles, potentially adverse tax consequences, and export license requirements.
These sales are subject to a variety of risks, including fluctuations in currency exchange rates, tariffs, import restrictions and other trade barriers, unexpected or very burdensome changes in regulatory requirements, longer accounts receivable payment cycles, potentially adverse tax consequences, and export license requirements.
Violations of the FCPA or other similar laws could trigger sanctions, including ineligibility for U.S. government insurance and financing, as well as large fines. Failure to comply with the aforementioned regulations could also deter us from selling our products in international jurisdictions, which could have a material adverse effect on our revenue and profitability.
Violations of export regulations, the FCPA or other similar laws or other laws and regulations could trigger sanctions, including ineligibility for U.S. government insurance and financing, as well as large fines. 10 Table of Contents Failure to comply with the aforementioned regulations could also deter us from selling our products in international jurisdictions, which could have a material adverse effect on our revenue and profitability.
We have indicated that we would be willing to realize lower levels of gross margins from customers in return for long-term, binding purchase commitments. If this strategy were successful, it could apply downward pressure on our gross margins.
We have indicated 13 Table of Contents that we would be willing to realize lower levels of gross margins from customers in return for long-term, binding purchase commitments. If this strategy were successful, it could apply downward pressure on our gross margins.
Also, there can be no assurance that diverting our management’s attention to this business will not have a material adverse effect on our other existing businesses, any of which may have a material adverse effect on our results of operations, financial condition and prospects.
Also, there can be no assurance that diverting our management’s attention to these businesses will not have a material adverse effect on our other existing businesses, any of which may have a material adverse effect on our results of operations, financial condition and prospects.
From time to time, we are subject to claims and litigation regarding intellectual property rights or other claims, which could seriously harm us and require us to incur significant costs. The communications technology industry is characterized by frequent litigation regarding patent and other intellectual property rights.
From time to time, we are subject to claims and litigation regarding intellectual property rights or other claims pertaining to our business, which could seriously harm us and require us to incur significant costs. The communications technology industry is characterized by frequent litigation regarding patent and other intellectual property rights.
Despite available security measures and other precautions, the infrastructure and transmission methods used by our products and services may be vulnerable to interception, attack or other disruptive problems. Continued high-profile data breaches at other companies evidence an external environment that is becoming increasingly hostile to information security.
Despite available security measures and other precautions, the infrastructure and transmission methods used by our products and services or otherwise associated with our operations may be vulnerable to interception, attack or other disruptive problems. Continued high-profile data breaches at other companies evidence an external environment that is becoming increasingly hostile to information security.
Further, as the regulatory focus on privacy and data security issues continues to increase and worldwide laws and regulations concerning the protection of information become more complex, the potential risks and costs of compliance to our business are expected to intensify. Our products operate with and are dependent on products and components across a broad ecosystem.
Further, as the regulatory focus on privacy and data security issues continues to increase and worldwide laws and regulations concerning the protection of information continue to become more complex, the potential risks and costs of compliance to our business are expected to intensify. 15 Table of Contents Our products operate with and are dependent on products and components across a broad ecosystem.
It is possible we will see revenue fluctuations in this business based upon the scale of new deployments in different financial periods. Our failure to complete one or a series of significant sales opportunities in a particular fiscal period could have a material adverse effect on our revenue for that period.
It is possible we will see revenue fluctuations in these businesses based upon the scale of new deployments in different financial periods. Our failure to complete one or a series of significant sales opportunities in a particular fiscal period could have a material adverse effect on our revenue for that period.
There can be no assurance that the outcomes from these examinations will not have an adverse effect on our consolidated operating results and financial condition. We may have additional tax liabilities. 14 Table of Contents We are subject to income taxes in the United States and many foreign jurisdictions.
There can be no assurance that the outcomes from these examinations will not have an adverse effect on our consolidated operating results and financial condition. We may have additional tax liabilities. We are subject to income taxes in the United States and many foreign jurisdictions.
In addition, the future introductions or announcements of products by us or one of our competitors embodying new technologies or changes in industry standards or regulations or customer requirements could render our then-existing products obsolete or unmarketable.
In addition, the future introductions or announcements of products by us or one of our competitors embodying new technologies or changes in industry standards or regulations or customer requirements could render our then-existing products 11 Table of Contents obsolete or unmarketable.
For these and other reasons, the sales cycle associated with certain of our products is typically lengthy and is subject to a number of significant risks, such as end users’ internal purchasing reviews, that are beyond our control.
For these and other reasons, the sales cycle associated with certain of our products is typically lengthy and is subject to a number of significant risks, such as end users’ internal purchasing reviews, as well as availability of capital for deployments, that are beyond our control.
We face risks associated with our international operations that could impair our ability to grow our revenue abroad as well as our overall financial condition. 10 Table of Contents Our future growth may be dependent in part upon our ability to increase sales in international markets.
We face risks associated with our international operations that could impair our ability to grow our revenue abroad as well as our overall financial condition. Our future growth may be dependent in part upon our ability to increase sales in international markets.
Failure to attract and retain key personnel could result in our failure to execute our business strategy. Risks Related to Economic and Market Conditions 13 Table of Contents Our consolidated operating results and financial condition may be adversely impacted by worldwide economic conditions and credit tightening.
Failure to attract and retain key personnel could result in our failure to execute our business strategy. Risks Related to Economic and Market Conditions Our consolidated operating results and financial condition may be adversely impacted by worldwide economic conditions and credit tightening.
In the event of an adverse ruling in any such matter, we may be required to pay substantial damages, cease the manufacture, use and sale of infringing products, discontinue the use of certain processes or be required to obtain a license under the intellectual property rights of the third party claiming infringement.
In the event of an adverse ruling in any such matter, we may be required to pay substantial damages, cease engaging in or make alterations to certain business activities, cease the manufacture, use and sale of infringing products, discontinue the use of certain processes or be required to obtain a license under the intellectual property rights of the third party claiming infringement.
As a result, our future revenue opportunities may be limited, and we may face pricing pressures, which in turn could adversely impact our gross margin and our profitability. The loss of, reduction in, or pricing discounts associated with orders from any key customer would significantly reduce our revenue and harm our business.
As a result, our future revenue opportunities with these customers may be limited, and we may face pricing pressures, which in turn could adversely impact our gross margin and our profitability. The loss of, reduction in, or pricing discounts associated with orders from key customers may significantly reduce our revenue and harm our business.
These channel partners may have incentives to promote our competitors’ products in lieu of our products, particularly for our competitors with larger volumes of orders, more diverse product offerings and longer relationships with our distributors and resellers. It is possible, one or more of our important 8 Table of Contents channel partners may stop selling our products completely.
These distributors and resellers may have incentives to promote our competitors’ products in lieu of our products, particularly for our competitors with larger volumes of orders, more diverse product offerings and longer relationships with our distributors and resellers. It is possible one or more of our important distributors and resellers may stop selling our products completely.
While we believe we have a strong foundation to compete, it is uncertain whether our strategies will attract the users or generate the revenue required to be successful. Certain customers and potential customers that use these offerings have also been adversely impacted by the COVID-19 pandemic that began in 2020 and the resulting global economic downturn.
While we believe we have a strong foundation to compete, it is uncertain whether our strategies will attract the users or generate the revenue required to be successful. Certain customers and potential customers that use these offerings were adversely impacted by the Covid-19 pandemic and the resulting global economic downturn.
Technology and Cybersecurity Risks We are subject to various cybersecurity risks, which are particularly acute in cloud-based technologies that we and other third parties operate that form a part of our solutions. These risks may increase our costs and could damage our brand and reputation.
Technology and Cybersecurity Risks We are subject to various cybersecurity risks, which are particularly acute in cloud-based technologies that we and other third parties operate that form a part of our solutions or that we rely on to conduct our operations. These risks may increase our costs and could damage our brand and reputation.
Our failure to comply effectively with the requirements of applicable environmental legislation and regulation could have a material adverse effect on our revenue and profitability. Production and marketing of products in certain states and countries may subject us to environmental and other regulations.
Our failure to comply effectively with the requirements of applicable legislation and regulation, including but not limited to environmental rules and regulations, could have a material adverse effect on our revenue and profitability. Production and marketing of products in certain states and countries may subject us to environmental and other regulations.
Our future success will depend on our ability to enhance our existing products, to introduce new products to meet changing customer requirements and emerging technologies, and to demonstrate the performance advantages and cost-effectiveness of our products over competing products.
Our future success will depend on our ability to enhance our existing products, to introduce new products to meet changing customer requirements and emerging technologies as well as potential regulatory changes, and to demonstrate the performance advantages and cost-effectiveness of our products over competing products.
Our ability to sustain and grow our business depends in large part on the success of our channel partner distributors and resellers. A substantial portion of our revenue is generated through sales by channel partner distributors and resellers. Further, in recent years we have been taking steps to expand our relationship with certain distributors who have global reach.
Our ability to sustain and grow our business depends in large part on the success of our third party distributors and resellers. A substantial portion of our revenue is generated through sales by third party distributors and resellers. Further, for several years we have been taking steps to expand our relationship with certain distributors who have global reach.
We cannot provide assurances we will be successful in operating and continuing to grow this business. • Our ability to succeed with the SmartSense by Digi offerings will depend in large part on our ability to provide customers with hardware and software products that are easy to deploy and offer features and functionality that address the needs of particular businesses.
We cannot provide assurances we will be successful in operating and continuing to grow either of these businesses. • Our ability to succeed with the offerings of these businesses will depend in large part on our ability to provide customers with hardware and software products that are easy to deploy and offer features and functionality that address the needs of particular businesses.
We also employ significant human and financial resources to develop and deploy these offerings. As we work to grow and scale these offerings, these investments have and can adversely impacted our gross margins and profitability and may continue to do so in the future.
We also employ significant human and financial resources to develop and deploy these offerings. As we work to grow and scale these offerings, these investments have impacted previously and may impact adversely in the future our gross margins and profitability.
The ability of these manufacturers to provide us with the timely provision of finished products is subject to a number of disruptions beyond their control such as, among others: the availability of components from suppliers, labor shortages such as those caused by the ongoing COVID-19 pandemic, energy shortages such as those from time to time encountered in China, changes in government regulations or other factors.
The ability of these manufacturers to provide us with the timely provision of finished products is subject to a number of disruptions beyond their control such as, among others: the availability of components from suppliers, labor shortages, energy shortages such as those from time to time encountered in China, changes in government regulations, tensions with foreign governments or other factors.
For fiscal 2022, 2021, and 2020, respectively, our research and development expenses were 14.2%, 15.1% and 15.7% of our revenue.
For fiscal 2023, 2022, and 2021, respectively, our research and development expenses were 13.2%, 14.2% and 15.1% of our revenue.
Our channel partner sales structure could subject us to lawsuits, potential liability and reputational harm if, for example, any of our channel partners misrepresents the functionality of our products or services to customers, or violates laws or our corporate policies.
Our distributor and reseller sales structure could subject us to lawsuits, potential liability and reputational harm if, for example, any of these parties misrepresents the functionality of our products or services to customers, or violates laws or our corporate policies.
There exist certain mechanisms under the Delaware General Corporation Law and our charter documents that may delay, defer or prevent a change of control.
Certain provisions of the Delaware General Corporation Law and our charter documents have an anti-takeover effect. There exist certain mechanisms under the Delaware General Corporation Law and our charter documents that may delay, defer or prevent a change of control.
This presents a potential risk of loss in the event of a malfunction or failure of our offerings. • SmartSense by Digi has a limited history with us in a marketplace that is nascent in its development and has numerous competitors.
In each case, there is a potential risk of loss in the event of a malfunction or failure in our offerings. • SmartSense by Digi has a limited history with us in a marketplace that is relatively early in its development and has numerous competitors.
This could impede our ability to win and retain customers. We have and expect to encounter competition from other solutions providers, some of whom may have more significant resources than us with which to compete.
Any future economic slowdown could impede our ability to win and retain customers. We have and expect to encounter competition from other solutions providers, some of whom may have more significant resources than us.
The operation of SmartSense by Digi will be subject to significant additional risks that are not necessarily related to our legacy products and services. Additional risks that relate to SmartSense by Digi, include, but are not limited to: • SmartSense by Digi offerings are deployed in part to help assure perishable goods are safely preserved.
The operation of each of these businesses can therefore be subject to significant additional risks that are not necessarily related to our more established products and services. Additional risks that relate to IoT Solutions, include, but are not limited to: • SmartSense by Digi offerings are deployed in part to help assure perishable goods are safely preserved.
In the future, various countries including the United States may adopt further environmental compliance programs . If we fail to comply with these regulations, we may not be able to sell our products in jurisdictions where these regulations apply, which could have a material adverse effect on our revenue and profitability.
In the future, various governments may adopt further environmental compliance programs or other rules or regulations that may impact our business operations . If we fail to comply with these regulations, we may not be able to sell our products in jurisdictions where these regulations apply, which could have a material adverse effect on our revenue and profitability.
In addition, our channel partners may market, sell and support products and services that are competitive with ours, and may devote more resources to the marketing, sales and support of such products.
In addition, our distributors and resellers may market, sell and support products and services that are competitive with ours, and 7 Table of Contents they may devote more resources to the marketing, sales and support of such products.
There can be no assurance that we will recover our investments in SmartSense by Digi or that we will realize significant and consistent profits from this business.
There can be no assurance that we will recover our investments in SmartSense by Digi or Ventus or that we will realize ongoing and consistent profits from these businesses.
If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments on the Loan, we will be in default. We are also required to comply with several financial covenants under the Credit Agreement.
The remaining outstanding balance under the Term Loan is due to be repaid in full after seven years. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments on the Loan, we will be in default. We are also required to comply with several financial covenants under the Credit Agreement.
These types of security incidents could also lead to lawsuits, regulatory investigations and increased legal liability, including in some cases contractual costs related to customer notification and fraud monitoring.
The costs we would incur to address and fix these incidents could significantly increase our expenses. These types of security incidents could also lead to lawsuits, regulatory investigations and increased legal liability, including in some cases contractual costs related to customer notification and fraud monitoring.
There can be no assurance that a license would be available on reasonable terms or at all.
There can be no assurance with respect to an infringement claim that a license would be available on reasonable terms or at all.
In addition, certain states and countries may pass new regulations requiring our products to meet certain requirements to use environmentally friendly components. The European Union has issued two directives relating to chemical substances in 17 Table of Contents electronic products.
In addition, certain states and countries may pass new regulations requiring our products to meet certain requirements to use environmentally friendly components or to avoid the procurement of materials and components from certain places in the world. For instance, the European Union has issued two directives relating to chemical substances in electronic products.
If a cyberattack or other security incident were to allow unauthorized access to or modification of our customers’ data or our own data, whether due to a failure with our systems or related systems operated by third parties, we could suffer damage to our brand and reputation. 16 Table of Contents The costs we would incur to address and fix these incidents could significantly increase our expenses.
If a cyberattack or other security incident were to allow unauthorized access to or modification of our customers’ data or our own data, whether due to a failure with our systems or related systems operated by third parties, we could suffer damage to our brand and reputation.
Our business operations and financial results could be adversely affected by the effects of a widespread outbreak of contagious disease or other material adverse widespread public health development, such as the outbreak of the COVID-19 respiratory illness caused by a novel coronavirus first identified in Wuhan, Hubei Province, China in 2020.
Our sales and operations globally face risks related to health epidemics or pandemics that could disrupt our operations and adversely impact our sales and operating results. 9 Table of Contents Our business operations and financial results could be adversely affected by the effects of a widespread outbreak of contagious disease or other material adverse widespread public health development, such as the outbreak of the Covid-19 respiratory illness caused by a novel coronavirus first identified in Wuhan, Hubei Province, China in 2019.
Amounts under the Term Loan are being repaid in quarterly installments on the last day of each fiscal quarter, with an annual amortization rate of 5% of the original aggregate principal amount of the term loans, commencing on June 30, 2022. The remaining outstanding balance under the Term Loan is due to be repaid in full after seven years.
Amounts under the Term Loan are being repaid in quarterly installments on the last day of each fiscal quarter, with an annual 14 Table of Contents amortization rate of 5% of the original aggregate principal amount of the term loans, commencing on June 30, 2022.
Acquisitions could disrupt our business and seriously harm our financial condition. We will continue to consider acquisitions of businesses, products or technologies. In the event of any future acquisitions, we could issue stock that would dilute our current stockholders’ percentage ownership, incur additional debt, assume liabilities or incur large and immediate write-offs.
In the event of any future acquisitions, we could issue stock that would dilute our current stockholders’ percentage ownership, incur additional debt, assume liabilities or incur large and immediate write-offs.
We expect this general trend of declining sales for many of our mature products to continue and the pace of the decline may accelerate. In addition, rising prices for goods and services due to inflation along with ongoing cost pressures in our industry create downward pressure on the prices at which we and other manufacturers can sell hardware products.
In addition, rising prices for goods and services due to inflation along with ongoing cost pressures in our industry create downward pressure on the prices at which we and other manufacturers can sell hardware products.
It is important for us to maintain solutions and related infrastructure that are perceived by our customers and other parties with whom we do business as providing reasonable levels of reliability and security.
This data may include confidential or proprietary information, intellectual property or personally identifiable information of our customers or other third parties with whom they do business. It is important for us to maintain solutions and related infrastructure that are perceived by our customers and other parties with whom we do business as providing reasonable levels of reliability and security.
Furthermore, delays in payment and/or extended payment terms from any of our key or larger customers could have a material negative impact on our cash flows and working capital to support our business operations. SmartSense by Digi remains subject to the risks faced by a business operating in an emerging market.
Furthermore, delays in payment and/or extended payment terms from larger customers 8 Table of Contents could have a disproportionate and material negative impact on our cash flows and working capital to support our business operations. The businesses of our IoT Solutions segment are subject to the risks faced by businesses operating in emerging markets.
If we are required to identify alternative suppliers for any of our required components, qualification and pre-production periods could be lengthy and may cause an increase in component costs and delays in providing products to customers.
As an example of force majeure, a fire in November 2014 disrupted the operations at one of our contract manufacturers in Thailand. If we are required to identify alternative suppliers for any of our required components, qualification and pre-production periods could be lengthy and may cause an increase in component costs and delays in providing products to customers.
From time to time, we receive notification of a third-party claim that our products infringe intellectual property rights owned by others. Any litigation to determine the validity of third-party infringement claims, whether or not determined in our favor or settled by us, may be costly and divert the efforts and attention of our management and technical personnel from productive tasks.
Any litigation to determine the validity of third-party infringement claims or other litigation claims made against us, whether or not determined in our favor or settled by us, may be costly and divert the efforts and attention of our management and technical personnel from productive tasks.
We depend on manufacturing relationships and on limited-source suppliers, and any disruptions in these relationships may cause damage to our customer relationships. We procure all parts and certain services involved in the production of our products and subcontract most of our product manufacturing to outside firms that specialize in such services.
We procure all parts and certain services involved in the production of our products and subcontract most of our product manufacturing to outside firms that specialize in such services.
In light of these risks and uncertainties, we may not be able to establish or maintain the market share of SmartSense by Digi, integrate it successfully into our other operations or take full advantage of businesses we have acquired or may acquire in the future.
In light of these risks and uncertainties, we may not be able to establish or maintain the market share of these businesses or take full advantage of businesses we may acquire in the future related to either of these businesses.
This could cause significant diversion of management’s attention and out-of-pocket expenses for us. We could also be exposed to litigation as a result of any consummated or unconsummated acquisition. The businesses of Accelerated, which we acquired in fiscal 2018, Opengear, which we acquired in fiscal 2019, and Ventus, which we acquired in fiscal 2022, are subject to significant customer concentration.
This could cause significant diversion of management’s attention and out-of-pocket expenses for us. We could also be exposed to litigation as a result of any consummated or unconsummated acquisition. Certain parts of our business are subject to customer concentrations.
In 2018, we acquired Accelerated. While Accelerated has many customers, its business historically has been highly dependent on its relationship with a single telecommunications carrier customer.
Although Accelerated has many customers, its business historically has been highly dependent on its relationship with a single telecommunications carrier customer. We acquired Opengear in fiscal 2019. Although Opengear has many customers, its business historically has been significantly concentrated on its relationships with a few large customers. We acquired Ventus in fiscal 2022.
If there is a security vulnerability in one of these components, and if there is a security exploit targeting it, we could face increased costs, reduced revenue, liability claims or damage to our reputation or competitive position. Risks Related to Our Intellectual Property Our ability to compete could be jeopardized if we are unable to protect our intellectual property rights.
If there is a security vulnerability in one of these components, and if there is a security exploit targeting it, we could face increased costs, reduced revenue, liability claims or damage to our reputation or competitive position. In addition, cybersecurity is an issue that is becoming increasingly regulated.
In addition, we may be forced to increase our allowance for credit losses and our days sales outstanding may increase, which would have a negative impact on our cash position, liquidity and financial condition. To the extent we incur debt, we may be unable to adhere to financial covenants or to service the debt.
If this occurs, our revenue may be reduced, thereby having a negative impact on our results of operations. In addition, we may be forced to increase our allowance for credit losses and our days sales outstanding may increase, which would have a negative impact on our cash position, liquidity and financial condition.
Additionally, it is probable that new competitors or new alliances among existing competitors could emerge and rapidly acquire significant market share. 11 Table of Contents Our dependence on new product development and the rapid technological change that characterizes our industry make us susceptible to loss of market share resulting from competitors’ product introductions and enhancements, service capabilities and similar risks.
Our dependence on new product development and the rapid technological change that characterizes our industry make us susceptible to loss of market share resulting from competitors’ product introductions and enhancements, service capabilities and similar risks as well as from regulatory changes.
Our customers may find it difficult to gain sufficient credit in a timely manner, which could result in an impairment of their ability to place orders with us or to make timely payments to us for previous purchases. If this occurs, our revenue may be reduced, thereby having a negative impact on our results of operations.
Our customers or suppliers may find it difficult to gain sufficient credit or service existing credit in a timely manner, which could result in an impairment of their ability to process or place orders with us, deliver inventory or services to us in the case of suppliers or to make timely payments to us for previous purchases in the case of customers.
The results of an audit could have a material effect on our consolidated financial position, results of operations, or cash flows in the period or periods for which that determination is made. 15 Table of Contents Credit and Liquidity Risks Failure to comply with the covenants under our credit facility may have a material adverse effect on our ability to access additional capital and/or create an event of default.
Credit and Liquidity Risks Failure to comply with the covenants under our credit facility may have a material adverse effect on our ability to access additional capital and/or create an event of default.
Even if we identify new technologies that we believe would be complementary to our internally developed technologies, we may not be successful in obtaining those technologies or integrating them effectively with our existing technologies. 12 Table of Contents Our ability to grow our business is dependent in part on strategic relationships we develop and maintain with third parties as well as our ability to integrate and assure use of our products and services in coordination with the products and services of certain strategic partners in a commercially acceptable manner.
Our ability to grow our business is dependent in part on strategic relationships we develop and maintain with third parties as well as our ability to integrate and assure use of our products and services in coordination with the products and services of certain strategic partners in a commercially acceptable manner.
Announcements of currently planned or other new or enhanced products may cause customers to defer or stop purchasing our products until these products become available. Furthermore, the introduction of new or enhanced products requires us to manage the transition from older product inventories and ensure that adequate supplies of new or enhanced products can be delivered to meet customer demand.
Furthermore, the introduction of new or enhanced products because of customer requirement, regulation or otherwise may require us to manage the transition from older product inventories and ensure that adequate supplies of new or enhanced products can be delivered to meet customer demand.
During fiscal 2022, the closing price of our common stock on the Nasdaq Global Select Market ranged from $18.54 to $37.44 per share. Our closing sale price on November 17, 2022 was $39.50 per share.
During fiscal 2023, the closing price of our common stock on the Nasdaq Global Select Market ranged from $27.00 to $42.94 per share. Our closing sale price on November 20, 2023 was $25.29 per share.
While part of our longer term strategy is to sell software applications and IoT solutions such as SmartSense by Digi and Ventus offerings, which may provide recurring revenues at relatively high gross margins, these types of offerings are still at early stages of adoption by customers and their sales growth is not necessarily predictable or assured.
These sales may provide recurring revenues at relatively high gross margins, but these types of offerings are still in the earlier stages of adoption by customers. As such, their sales growth is not necessarily predictable or assured.
In addition, ocean freight delays may occur as a result of labor problems, weather delays, expediting orders for third parties or customs issues. Any extended delay in receipt of the component parts could eliminate anticipated cost savings and have a material adverse effect on our customer relationships and profitability.
Any extended delay in receipt of the component parts could eliminate anticipated cost savings and have a material adverse effect on our customer relationships and profitability.
Certain of our components and other materials used in producing our products are from regions susceptible to natural disasters or other events beyond our control, such as the COVID-19 pandemic or the ongoing war in Ukraine. These and other events beyond our control can adversely impact our supply chains and our business.
Certain of our components and other materials used in producing our products are from regions susceptible to natural disasters or other events beyond our control, such as the Covid-19 pandemic that was highly disruptive to businesses during the last few 17 Table of Contents years or the ongoing wars in Ukraine and the Middle East.
Our gross margins may be subject to declines which could decrease our overall profitability and impact our financial performance adversely. Some of the hardware products we sell are approaching the end of their product life cycles. These mature hardware products have sold historically at higher gross margins than our other product and service offerings.
Some of the hardware products we sell are approaching the end of their product life cycles. These mature hardware products have sold historically at higher gross margins than our other product and service offerings. We expect this general trend of declining sales for many of our mature products to continue and the pace of the decline may accelerate.
We cannot predict either the timing or duration of an economic downturn in the economy, should one occur. Any downturn could have a material adverse impact on our business, results of operations, financial condition and prospects. Our gross margins may be subject to decline.
Any downturn could have a material adverse impact on our business, results of operations, financial condition and prospects. Our gross margins may be subject to decline. Our gross margins may be subject to declines which could decrease our overall profitability and impact our financial performance adversely.
Such proposals may create uncertainty for our employees and this uncertainty may adversely affect our ability to retain key employees, to hire new talent or to complete acquisitions we may desire to make. Similar uncertainty among our customers, suppliers and other business partners could cause them to terminate, or not to renew or enter into, arrangements with us.
Such proposals may create uncertainty for our employees and this uncertainty may adversely affect our ability to retain key 16 Table of Contents employees, to hire new talent or to complete acquisitions we may desire to make.
The customer desire for ease of deployment has been heightened by the COVID-19 pandemic that commenced during 2020. We may face challenges and delays in the development of this business as the marketplace for products and services evolves to meet the needs and desires of customers.
We may face challenges and delays in the development of these businesses as the marketplace for products and services evolves to meet the needs and desires of customers.
Risks Relating to Our Foreign Operations Our use of suppliers in other parts of the world involves risks that could negatively impact us. We purchase a number of components from suppliers in other parts of the world. Product delivery times may be extended due to the distances involved, requiring more lead time in ordering.
Risks Relating to Our Foreign Operations Our use of suppliers in other parts of the world as well as our purchases of components containing certain materials involves risks that could negatively impact us. We purchase many components from suppliers in other parts of the world.
Any disruption or difficulties in securing or renewing contractual relationships with any of these customers, maintaining such relationships on favorable terms or any other disruption in our business with one or more of these customers could have an adverse impact on our business, results of operations, financial condition and prospects. In addition, some larger customers may demand discounts and rebates.
Both Ventus and SmartSense by Digi produce significant ARR. Any disruption or difficulties in any of the industries these businesses serve could have an adverse impact on our business, results of operations (including, but not limited to, ARR), financial condition and prospects. In addition, some larger customers may demand discounts and rebates.
Although we believe our tax estimates are reasonable, the final determination of tax audits could be materially different from our historical income tax provisions and accruals.
Although we believe our tax estimates are reasonable, the final determination of tax audits could be materially different from our historical income tax provisions and accruals. The results of an audit could have a material effect on our consolidated financial position, results of operations, or cash flows in the period or periods for which that determination is made.
Such proposals, or their withdrawal, could create uncertainty among investors and potential investors as to our future direction and affect the market price of our common stock without regard to our operational or financial performance. Certain provisions of the Delaware General Corporation Law and our charter documents have an anti-takeover effect.
Management and employee distraction related to any such proposals also may adversely impact our ability to conduct our business optimally and pursue our strategic objectives. Such proposals, or their withdrawal, could create uncertainty among investors and potential investors as to our future direction and affect the market price of our common stock without regard to our operational or financial performance.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changePROPERTIES The following table contains a listing of our property locations that are material to us as of September 30, 2022: Location of Property Use of Facility Segment Approximate Square Footage Ownership or Lease Expiration Date Hopkins, MN (Corporate headquarters) Research & development, sales, sales support, marketing and administration IoT Products & Services 59,497 January 2032 Eden Prairie, MN Manufacturing and warehousing IoT Products & Services 58,000 Owned Sandy, UT Sales, technical support, research & development, administration, manufacturing and warehousing IoT Products & Services 35,466 December 2030 Norwalk, CT Sales, sales support, technical support, research & development, administration, manufacturing and warehousing IoT Solutions 14,115 July 2027 Boston, MA Research & development, sales, sales support and marketing IoT Solutions 13,302 August 2026 Queensland, Australia Research & development IoT Products & Services 12,422 November 2023 Mishawaka, IN Sales, technical support and administration IoT Solutions 7,829 August 2026 Ismaning, Germany Sales, sales support and administration IoT Products & Services 6,878 September 2022 Edison, NJ Administration IoT Products & Services 6,223 March 2025 In addition to the above locations, we have various other locations throughout the world that are not deemed to be material.
Biggest changePROPERTIES The following table contains a listing of our property locations that are material to us as of September 30, 2023: Location of Property Use of Facility Segment Approximate Square Footage Ownership or Lease Expiration Date Hopkins, MN (World headquarters) Research & development, sales, sales support, marketing and administration IoT Products & Services 59,497 January 2032 Eden Prairie, MN Manufacturing and warehousing IoT Products & Services 58,000 Owned Sandy, UT Sales, technical support, research & development, administration, manufacturing and warehousing IoT Products & Services 35,466 December 2030 Norwalk, CT Sales, sales support, technical support, research & development, administration, manufacturing and warehousing IoT Solutions 14,115 July 2027 Boston, MA Research & development, sales, sales support and marketing IoT Solutions 13,302 August 2026 Queensland, Australia Research & development IoT Products & Services 12,422 November 2026 Mishawaka, IN Sales, technical support and administration IoT Solutions 7,829 August 2026 Edison, NJ Administration IoT Products & Services 6,223 March 2025 In addition to the above locations, we have various other locations throughout the world that are not deemed to be material.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeITEM 3. LEGAL PROCEEDINGS In the normal course of business, we are subject to various claims and litigation, which may include, but are not limited to, patent infringement and intellectual property claims.
Biggest changeITEM 3. LEGAL PROCEEDINGS In the normal course of business, we are subject to various claims and litigation, which may include, but are not limited to, patent infringement and intellectual property claims, employment claims and claims involving customers or vendors.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeAmong 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, 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, the ability to achieve the anticipated benefits and synergies associated with acquisitions or divestitures and changes in our level of revenue or profitability which can fluctuate for many reasons beyond our control.
Biggest changeAmong others, these include risks related to ongoing and varying inflationary and deflationary pressures around the world and the monetary policies of governments globally as well as present concerns about a potential recession and the ability of companies like us to operate a global business in such conditions as well as negative effects on product demand and the financial solvency of customers and suppliers in such conditions, risks related to ongoing supply chain challenges that continue to impact businesses globally, risks arising from the present war in Ukraine and the Middle East, the highly competitive market in which our company operates, rapid changes in technologies that may displace products sold by us, declining prices of networking products, our reliance on distributors and other third parties to sell our products, the potential for significant purchase orders to be canceled or changed, delays in product development efforts, uncertainty in user acceptance of our products, the ability to integrate our products and services with those of other parties in a commercially accepted manner, potential liabilities that can arise if any of our products have design or manufacturing defects, our ability to integrate and realize the expected benefits of acquisitions, our ability to defend or settle satisfactorily any litigation, the impact of natural disasters and other events beyond our control that could negatively impact our supply chain and customers, potential unintended consequences associated with restructuring, reorganizations or other similar business initiatives that may impact our ability to retain important employees or otherwise impact our operations in unintended and adverse ways, and changes in our level of revenue or profitability which can fluctuate for many reasons beyond our control.
These and other risks, uncertainties and assumptions identified from time to time in our filings with the United States Securities and Exchange Commission, including without limitation, those set forth in Item 1A, Risk Factors, of this Annual Report on Form 10-K and other quarterly filings on Form 10-Q and other subsequent filings, could cause our actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf.
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 this Annual Report on Form 10-K, subsequent filings 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. 23 Table of Contents ITEM 7.
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. 21 Table of Contents ITEM 7.
We have determined that our line of business is mostly comparable to those companies in the Peer Index. The index level for the graph and table was set to $100 on September 30, 2017, for our common stock, the U.S. Benchmark Index and the Peer Index and assumes the reinvestment of all dividends.
We have determined that our line of business is mostly comparable to those companies in the Peer Index. The index level for the graph and table was set to $100 on September 30, 2018, for our common stock, the U.S. Benchmark Index and the Peer Index and assumes the reinvestment of all dividends.
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.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Form 10-K 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.
You are encouraged to reference Part II, Item 7, within that report, for a discussion of our financial condition and result of operations for fiscal 2020 compared to fiscal 2021.
You are encouraged to reference Part II, Item 7, within that report, for a discussion of our financial condition and result of operations for fiscal 2021 compared to fiscal 2022.
Issuer Repurchases of Equity Securities 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 fourth quarter of fiscal 2022: 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 July 1, 2022 - July 31, 2022 — $ — — $ — August 1, 2022 - August 31, 2022 5,530 $ 33.58 — $ — September 1, 2022 - September 30, 2022 — $ — — $ — Total 5,530 $ — — $ — (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. 21 Table of Contents Performance Evaluation The graph below compares the total cumulative stockholders’ return on our common stock for the period from the close of the Nasdaq Stock Market - U.S.
Issuer Repurchases of Equity Securities 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 fourth quarter of fiscal 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 July 1, 2023 - July 31, 2023 — $ — — $ — August 1, 2023 - August 31, 2023 8,841 $ 30.61 — $ — September 1, 2023 - September 30, 2023 — $ — — $ — Total 8,841 $ 30.61 — $ — (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. 19 Table of Contents Performance Evaluation The graph below compares the total cumulative stockholders’ return on our common stock for the period from the close of the Nasdaq Stock Market - U.S.
We have omitted discussion of the earliest of the three years covered by our consolidated financial statements presented in this report because that disclosure was already included in our Annual Report on Form 10-K for fiscal 2021, filed with the SEC on November 24, 2021.
We have omitted discussion of the earliest of the three years covered by our consolidated financial statements presented in this report because that disclosure was already included in our Annual Report on Form 10-K for fiscal 2022, filed with the SEC on November 23, 2022.
Companies on September 30, 2017 to September 30, 2022, the last day of fiscal 2021, with the total cumulative return for the Nasdaq U.S. Benchmark TR Index (the "U.S. Benchmark Index") and the Nasdaq Telecommunications Index (the "Peer Index") over the same period.
Companies on September 30, 2018 to September 30, 2023, the last day of fiscal 2021, with the total cumulative return for the Nasdaq U.S. Benchmark TR Index (the "U.S. Benchmark Index") and the Nasdaq Telecommunications Index (the "Peer Index") over the same period.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Stock Listing Our common stock is listed under the symbol DGII on the Nasdaq Global Select Market tier of the Nasdaq Stock Market LLC. On November 17, 2022 there were 103 stockholders of record.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Stock Listing Our common stock is listed under the symbol DGII on the Nasdaq Global Select Market tier of the Nasdaq Stock Market LLC. On November 20, 2023 there were 97 stockholders of record.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONSOLIDATED RESULTS OF OPERATIONS The following table sets forth selected information derived from our consolidated statements of operations, expressed as a percentage of revenue and as a percentage of change from year-to-year for the years indicated: Year ended September 30, % Increase (decrease) 2022 2021 2022 compared to 2021 Revenue 100.0 100.0 — Cost of sales 44.3 46.0 (1.7) Gross profit 55.7 54.0 1.7 Operating expenses 45.9 50.6 (4.7) Operating income 9.8 3.4 6.4 Other expense, net (5.0) (0.5) (4.5) Income before income taxes 4.8 2.9 1.9 Income tax benefit (0.2) (0.5) 0.3 Net income 5.0 % 3.4 % 1.6 REVENUE BY SEGMENT Year ended September 30, ($ in thousands) 2022 2021 % Increase (decrease) Revenue IoT Products & Services $ 297,645 76.7 % $ 264,173 85.6 % 12.7 IoT Solutions 90,580 23.3 44,459 14.4 103.7 Total revenue $ 388,225 100.0 % $ 308,632 100.0 % 25.8 IoT Products & Services IoT Products & Services revenue increased 12.7% for fiscal 2022, as compared to fiscal 2021.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONSOLIDATED RESULTS OF OPERATIONS The following table sets forth selected information derived from our consolidated statements of operations, expressed as a percentage of revenue and as a percentage of change from year-to-year for the years indicated: Year ended September 30, % Increase (decrease) 2023 2022 2023 compared to 2022 Revenue 100.0 100.0 — Cost of sales 43.3 44.3 (1.0) Gross profit 56.7 55.7 1.0 Operating expenses 45.4 45.9 (0.5) Operating income 11.3 9.8 1.5 Other expense, net (5.7) (5.0) (0.7) Income before income taxes 5.6 4.8 0.8 Income tax benefit — (0.2) 0.2 Net income 5.6 % 5.0 % 0.6 REVENUE BY SEGMENT Year ended September 30, ($ in thousands) 2023 2022 % Increase (decrease) Revenue IoT Products & Services $ 345,680 77.7 % $ 297,645 76.7 % 16.1 IoT Solutions 99,169 22.3 90,580 23.3 9.5 Total revenue $ 444,849 100.0 % $ 388,225 100.0 % 14.6 IoT Products & Services IoT Products & Services revenue increased 16.1% for fiscal 2023, as compared to fiscal 2022.
Gross profit margin excluding amortization was 57.1% compared to 55.5%. • Consolidated operating income was $38 million, compared to $11 million, an increase of 263%. • Net income was $19 million, compared to $10 million, an increase of 87%. • Diluted earnings per share was $0.54, compared to $0.31, an increase of 74%. • Adjusted net income was $60 million , or $1.66 per diluted share, compared to $36 million , or $1.08 per diluted share, an increase of 54% . • Adjusted EBITDA was $79 million , or, 20.5% of revenue, compared to $48 million or 15.6% of revenue. • Annualized Recurring Revenue, or ARR, was over $94 million at year end, an increase of 149%. • We completed the acquisition of Ventus in the first fiscal quarter of 2022.
Below we highlight the metrics for fiscal 2023 that we feel are most important in these evaluations, with comparisons to fiscal 2022: • Consolidated revenue was $445 million, an increase of 15%. • Consolidated gross profit was $252 million, an increase of 17%. • Gross profit margin was 56.7% versus 55.7%. • Net income was $25 million, compared to $19 million, an increase of 28%. • Diluted earnings per share was $0.67, compared to $0.54, an increase of 24%. • Adjusted net income was $74 million , or $1.99 per diluted share, compared to $60 million , or $1.66 per diluted share, an increase of 20% . • Adjusted EBITDA was $97 million , or 21.7% of revenue, compared to $79 million or 20.5% of revenue. • ARR was over $106 million at the end of the fiscal year, an increase of 12%.
IoT Solutions IoT Solutions revenue increased 103.7% for fiscal 2022, as compared to fiscal 2021. This primarily was the result of: • the additional recurring revenue from our November 2021 acquisition of Ventus.
This primarily was the result of growth in the volume of sales in our OEM and Infrastructure Management product lines. IoT Solutions IoT Solutions revenue increased 9.5% for fiscal 2023, as compared to fiscal 2022.
We believe our IoT Products & Services business is positioned for modest revenue and profitability growth and that our IoT Solutions business is positioned for more significant revenue and profitability growth given the large total addressable market for condition monitoring and asset tracking services that is in earlier stages of adoption. • As recurring revenue from subscription and cloud monitoring services becomes a greater portion of our overall revenue, we expect gross margins to increase as the revenue of incremental subscriptions is not offset at the same rate as expected increases in costs associated with implementing new subscribers. 24 Table of Contents ITEM 7.
In addition, to the above macro conditions, we believe the following trends will continue to impact our business in fiscal 2024 and beyond: • We believe the market for Industrial IoT products and services is in the midst of a long-term expansion across a broad range of industries and solutions. • As recurring revenue from subscription and cloud monitoring services becomes a greater portion of our overall revenue, delivering at higher gross margins rates than one-time revenue, we expect gross margin rates to expand. 22 Table of Contents ITEM 7.
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FY17 FY18 FY19 FY20 FY21 FY22 Digi International Inc. $ 100.00 $ 126.89 $ 128.49 $ 147.45 $ 198.77 $ 316.42 Nasdaq U.S. Benchmark TR Index $ 100.00 $ 117.79 $ 121.29 $ 140.05 $ 184.89 $ 151.60 Nasdaq Telecommunications Index $ 100.00 $ 103.11 $ 118.07 $ 121.84 $ 134.26 $ 97.54 22 Table of Contents ITEM 7.
Added
FY18 FY19 FY20 FY21 FY22 FY23 Digi International Inc. $ 100.00 $ 101.26 $ 116.21 $ 156.65 $ 257.03 $ 200.74 Nasdaq U.S.
Removed
In fiscal 2022, our key operating objectives included: • continued growth of both SmartSense by Digi and Ventus 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.
Added
Benchmark TR Index $ 100.00 $ 102.97 $ 118.89 $ 156.96 $ 128.70 $ 155.13 Nasdaq Telecommunications Index $ 100.00 $ 114.51 $ 118.16 $ 130.21 $ 94.60 $ 112.75 ITEM 6. [RESERVED] 20 Table of Contents ITEM 7.
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During the course of fiscal 2022, the supply chain difficulties presently impacting businesses globally continued to affect our business. We devoted significant time and resources towards mitigating these impacts during the fiscal year. We utilize many financial, operational, and other metrics to evaluate our financial condition and financial performance.
Added
In fiscal 2023, our key operating objectives included: • continuing to transition to complete solutions with software and service offerings included with our products, as this drives ARR, which provides more predictable and higher margin revenues; and • delivering a higher level of services across our businesses.
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Below we highlight the metrics for fiscal 2022 that we feel are most important in these evaluations, with comparisons to fiscal 2021: • Consolidated revenue was $388 million, an increase of 26%. • Consolidated gross profit was $216 million, an increase of 30%. • Gross profit margin was 55.7% versus 54.0%.
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During fiscal 2023 we delivered on these objectives by increasing ARR by 12% from the end of fiscal 2022 to the end of fiscal 2023. This included an increase of 47% in our Products and Services business segment and 5% in our Solutions business segment.
Removed
Recent Events Impacting Fiscal 2022 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 ).
Added
We also believe our high service levels are evidenced by an overall increase in revenues of 15% from fiscal 2022 to fiscal 2023. We utilize many financial, operational, and other metrics to evaluate our financial condition and financial performance.
Removed
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 fourth quarter of fiscal 2022, we recorded purchase price allocation adjustments to adjust for new information.
Added
Key trends regarding our existing business There are a number of circumstances globally that we are monitoring for potential impacts on our business. While the Covid-19 pandemic has ceased disrupting daily life, new variants of the virus continue to emerge. If any of these are considered dangerous, governments may react with a return to more restrictive policies.
Removed
As a result, in our final purchase price allocation we have $119 million of goodwill and $211 million of other intangibles on our consolidated balance sheets at September 30, 2022. The results of operations following the acquisition date are now included in our 2022 results within our IoT Solutions segment.
Added
Global economic conditions and political tensions also have the ability to cause business disruptions. For instance, because of the war in Ukraine sanctions remain imposed on trade with Russia and Belarus which has the potential to disrupt the supply of raw materials needed to make components.
Removed
Key trends regarding our existing business The following trends affected our financial performance in fiscal 2022 and 2021, and we expect these trends will continue to impact our results in the future: • We believe the market for IoT products and related services is in the midst of a long-term expansion.
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Political tensions between China and western governments have become more heightened which could lead to similar disruptions. And the ongoing war in the Middle East could have a range of negative impacts for the global economy such as increases in the price of oil which could impact transportation costs.
Removed
This primarily was the result of: • increased sales of console server and cellular products driven by demand for data center and edge based deployments and increased OEM sales in the second half of 2022. This increase was partially offset by: • decreased sales of infrastructure management products, driven by supply chain challenges.
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Central banks globally have increased interest rates significantly in an effort to combat inflation which has heightened concerns of recession in many regions of the world.
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This increase 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. 25 Table of Contents ITEM 7.
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These situations could all lead to potential adverse impacts on a wide range of businesses and could disrupt supply chains and impact the businesses of our vendors and customers in ways that could impact our sales. With respect to supply chain, conditions did improve during fiscal 2023, but we still experience shortages of some important components.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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: Year ended September 30, Basis point increase (decrease) ($ in thousands) 2022 2021 Cost of Goods Sold IoT Products & Services $ 137,528 46.2 % $ 119,701 45.3 % 90 IoT Solutions 34,411 38.0 % 22,274 50.1 % (1,210) Total cost of goods sold $ 171,939 44.3 % $ 141,975 46.0 % (170) Year ended September 30, Basis point increase (decrease) ($ in thousands) 2022 2021 Gross Profit IoT Products & Services $ 160,117 53.8 % $ 144,472 54.7 % (90) IoT Solutions 56,169 62.0 % 22,185 49.9 % 1,210 Total gross profit $ 216,286 55.7 % $ 166,657 54.0 % 170 IoT Product & Services IoT Products & Services gross profit margin decreased 90 basis points for fiscal 2022 as compared to the prior fiscal year.
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These supply chain shortages have led to component purchases at levels that were higher than historical trends to assure we could meet customer demand which drove higher levels of inventory. We increased our inventory write downs in the fourth fiscal quarter of 2023.
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This decrease primarily was a result of: • increased production 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 1,210 basis points for fiscal 2022 as compared to the prior fiscal year.
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We expect the supply chain to continue to normalize in fiscal 2024 as we work through elevated inventory levels.
Removed
This increase primarily was a result of: • additional recurring subscription revenue, from the acquisition of Ventus, which typically has a high gross profit margin. 26 Table of Contents
Added
This was the result of growth in the volume of sales in both our SmartSense by Digi and Ventus offerings, as well as 2022 results excluding the results of Ventus prior to our November acquisition. ARR ARR was $106 million as of September 30, 2023, compared to $95 million as of September 30, 2022.
Added
IoT Products & Services ARR was $22 million as of September 30, 2023, compared to $15 million as of September 30, 2022. IoT Solutions ARR was $84 million as of September 30, 2023, compared to $80 million as of September 30, 2022.
Added
These increases in ARR in both business segments were driven by the expansion of business with existing customers who purchase on a subscription basis as well as sales to new customers.
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While it is possible to experience a loss of subscription based customer business due to contraction of a customer’s business or through competition, in general we believe if we provide a high level of service to our subscription based customers our level of ARR will continue to increase over time. 23 Table of Contents

Item 6. [Reserved]

Selected Financial Data — reserved (removed by SEC in 2021)

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Biggest changeITEM 6. Selected Financial Data #SectionPage# ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 23 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 35 ITEM 8. Financial Statements and Supplementary Data 36 ITEM 9. Changes in and Disagreements with Accountants On Accounting and Financial Disclosure 70 ITEM 9A. Controls and Procedures 71
Biggest changeITEM 6. [Reserved] 20 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 21 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 32 ITEM 8. Financial Statements and Supplementary Data 33 ITEM 9. Changes in and Disagreements with Accountants On Accounting and Financial Disclosure 66 ITEM 9A. Controls and Procedures 67

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OPERATING EXPENSES Below are our operating expenses and operating expenses as a percentage of total revenue: Year ended September 30, ($ in thousands) 2022 2021 $ increase (decrease) % Increase (decrease) Operating expenses: Sales and marketing $ 70,366 18.1 % $ 61,909 20.1 % $ 8,457 13.7 Research and development 55,098 14.2 46,623 15.1 8,475 18.2 General and administrative 58,527 15.1 40,830 13.2 17,697 43.3 Change in fair value of contingent consideration (6,200) (1.6) 5,772 1.9 (11,972) 100.0 Restructuring charges, net 275 0.1 995 0.3 (720) (72.4) Total operating expenses $ 178,066 45.9 % $ 156,129 50.6 % $ 21,937 14.1 The $21.9 million increase in operating expenses in fiscal 2022 from fiscal 2021 primarily was the result of: • incremental operating expenses from our acquisitions of Ventus, Haxiot and Ctek.
Biggest changeOPERATING EXPENSES Below are our operating expenses and operating expenses as a percentage of total revenue: Year ended September 30, ($ in thousands) 2023 2022 $ increase (decrease) % Increase (decrease) Operating expenses: Sales and marketing $ 81,681 18.3 % $ 70,366 18.1 % $ 11,315 16.1 % Research and development 58,648 13.2 55,098 14.2 3,550 6.4 General and administrative 61,779 13.9 58,802 15.2 2,977 5.1 Change in fair value of contingent consideration — — (6,200) (1.6) 6,200 N/M Total operating expenses $ 202,108 45.4 % $ 178,066 45.9 % $ 24,042 13.5 % The $24.0 million increase in operating expenses in fiscal 2023 from fiscal 2022 primarily was the result of no fair value changes of contingent consideration in 2023 compared to a $6.2 million gain in 2022, incremental investments in Opengear and SmartSense by Digi, an increase in stock-based compensation expense and an increase in costs associated with ongoing litigation. 24 Table of Contents ITEM 7.
The disclosure of these measures does not reflect all charges and gains that 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.
The disclosure of these measures does not reflect all charges and gains that actually were recognized by Digi. These non-GAAP measures are not in accordance with, or, an alternative for measures prepared in accordance with GAAP and may be different from non-GAAP measures used by other companies or presented by us in prior reports.
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.
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 expense, 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.
If the carrying amount of a reporting unit is higher than its estimated fair value, an impairment loss must be recognized for the excess. We have two reportable operating segments, our IoT Products & Services segment and our IoT Solutions segment (see Note 4 to the consolidated financial statements).
If the carrying amount of a reporting unit is higher than its estimated fair value, an impairment loss must be recognized for the excess. We have two reportable segments, our IoT Products & Services segment and our IoT Solutions segment (see Note 4 to the consolidated financial statements).
Effective with the reorganization announcement on October 7, 2020 (see Note 10 ), our IoT Products & Services business is 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.
Effective with the reorganization announcement on October 7, 2020 (see Note 10 ), our IoT Products & Services business is structured to include four reporting units under the IoT Products & Services segment, each with a reporting manager: Cellular Routers, Console Servers, OEM Solutions and Infrastructure Management.
A discounted cash flow (“DCF”) method is utilized for the income approach. In developing the discounted cash flow analysis, our assumptions about future revenues, expenses, capital expenditures, and changes in working capital are based on management’s projections, and assume a terminal growth rate thereafter.
A discounted cash flow (“DCF”) method is utilized for the income approach. In developing the DCF analysis, our assumptions about future revenues, expenses, capital expenditures, and changes in working capital are based on management’s projections, and assume a terminal growth rate thereafter.
As of September 30, 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 see Note 7 to our consolidated financial statements.
As of September 30, 2023, $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 (see Note 7 to our consolidated financial statements).
We believe ARR is an indicator of the scale of our subscription revenue business and is less subject to seasonality and contract term changes than other metrics. 27 Table of Contents ITEM 7.
We believe ARR is an indicator of the scale of our subscription revenue business and is less subject to seasonality and contract term changes than other metrics. 25 Table of Contents ITEM 7.
We believe the following critical accounting policies impact our more significant judgments and estimates used in the preparation of our consolidated financial statements. 31 Table of Contents ITEM 7.
We believe the following critical accounting policies impact our more significant judgments and estimates used in the preparation of our consolidated financial statements. 29 Table of Contents ITEM 7.
Professional Services Revenue Professional services revenue is derived from our Digi Wireless Design Services contracts on either on a time-and-materials or a fixed-fee basis. These revenues, which are included in our IoT Products & Services segment are recognized as the services are performed for time-and-materials contracts or as invoiced for fixed-fee contracts.
Professional Services Revenue Professional services revenue is derived from our Digi Wireless Design Services contracts on either on a time-and-materials or a fixed-fee basis. These revenues are one-time in nature, are included in our IoT Products & Services segment and are recognized as the services are performed for time-and-materials contracts or as invoiced for fixed-fee contracts.
FOREIGN CURRENCY 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.
FOREIGN CURRENCY We are not exposed to a significant amount of 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.
Following our acquisition of Ventus in the first fiscal quarter of 2022, IoT Solutions is comprised of two reporting units; Ventus and SmartSense. We have six reporting units that have been tested individually for impairment. The fair value of each reporting unit is determined using a weighted combination of an income and market approach.
Following our acquisition of Ventus in the first fiscal quarter of 2022, IoT Solutions is comprised of two reporting units; Ventus and SmartSense by Digi. Each of our six reporting units have been tested individually for impairment. The fair value of each reporting unit is determined using a weighted combination of an income and market approach.
The table above does not include our possible payments for uncertain tax positions. Our reserve for uncertain tax positions, including accrued interest and penalties, was $3.3 million as of September 30, 2022.
The table above does not include our possible payments for uncertain tax positions. Our reserve for uncertain tax positions, including accrued interest and penalties, was $3.2 million as of September 30, 2023.
Digi Support Services revenues are recognized over the life of the support contract and included in our IoT Products & Services segment. Some of Digi Support Services revenue is for training and this revenue is recognized as the services are performed.
Digi Support Services revenues are recognized over the life of the support contract and included in our IoT Products & Services segment. Some of Digi Support Services revenue is one-time in nature for training and this revenue is recognized as the services are performed.
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. 29 Table of Contents ITEM 7.
We expect positive cash flows from operations. 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. 27 Table of Contents ITEM 7.
For the twelve months ended September 30, 2021,discrete tax benefits include excess tax benefits recognized on stock compensation, an adjustment of our state deferred tax rate due to the Opengear acquisition and expiring statute of limitations. (3) Adjusted net income per diluted share may not add due to the use of rounded numbers.
(2) For the twelve months ended September 30, 2023 and September 30, 2022, discrete tax benefits include excess tax benefits recognized on stock compensation and expiring statute of limitations. (3) Adjusted net income per diluted share may not add due to the use of rounded numbers.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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) Year ended September 30, 2022 2021 Net income and net income per diluted share 19,383 $ 0.54 $ 10,366 $ 0.31 Amortization 27,195 0.76 16,534 0.50 Stock-based compensation 8,578 0.24 8,135 0.24 Other non-operating expense (98) — 144 — Acquisition and integration expense 4,605 0.13 2,098 0.06 Changes in fair value of contingent consideration (6,200) (0.17) 5,772 0.17 Restructuring charge 275 0.01 995 0.03 Interest expense, net 19,690 0.54 1,404 0.04 Tax effect from above net income adjustments (1) (9,901) (0.28) (6,627) (0.20) Discrete tax benefits (2) (3,933) (0.11) (2,674) (0.07) Adjusted net income and adjusted net income per diluted share (3) $ 59,594 $ 1.66 $ 36,147 $ 1.08 Diluted weighted average common shares 35,995 33,394 (1) The tax effect from the above adjustments assumes and estimated effective tax rate of 18.0% for fiscal 2022 and 2021 based on adjusted net income.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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) Year ended September 30, 2023 2022 Net income and net income per diluted share 24,770 $ 0.67 $ 19,383 $ 0.54 Amortization 25,226 0.68 27,195 0.76 Stock-based compensation expense 13,286 0.36 8,578 0.24 Other non-operating expense (59) — (98) — Acquisition and integration expense 940 0.03 4,605 0.13 Changes in fair value of contingent consideration — — (6,200) (0.17) Restructuring charge 141 — 275 0.01 Interest expense, net 25,236 0.68 19,690 0.54 Tax effect from above net income adjustments (1) (18,488) (0.50) (9,901) (0.28) Discrete tax benefits (2) 2,490 0.07 (3,933) (0.11) Adjusted net income and adjusted net income per diluted share (3) $ 73,542 $ 1.99 $ 59,594 $ 1.66 Diluted weighted average common shares 36,869 35,995 (1) The tax effect from the above adjustments assumes an estimated effective tax rate of 18.0% for fiscal 2023 and 2022 based on adjusted net income.
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 reporting unit.
Results of our Fiscal 2023 Annual Impairment Test As of June 30, 2023, we had a total of $32.7 million of goodwill for the Cellular Routers reporting unit, $57.1 million of goodwill for the Console Servers reporting unit, $64.6 million of goodwill for the OEM Solutions reporting unit, $20.4 million of goodwill for the Infrastructure Management reporting unit, $48.9 million of goodwill for the SmartSense by Digi reporting unit and $118.6 million of goodwill for the Ventus reporting unit.
RECENT ACCOUNTING DEVELOPMENTS For information on new accounting pronouncements, see Note 1 to our consolidated financial statements. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.
CRITICAL ACCOUNTING ESTIMATES Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.
During 2022 and 2021, we had approximately $85.8 million and $80.7 million, respectively, of revenue related to foreign customers including export sales, of which $0.8 million were denominated in foreign currencies, predominantly the Canadian Dollar.
During 2023, 2022 and 2021, we had approximately $121.1 million, $85.8 million and $80.7 million, respectively, of revenue related to foreign customers including export sales, of which $0.8 million were denominated in foreign currencies, predominantly the Canadian Dollar. In future periods, we continue to expect that the majority of our sales will be in U.S. Dollar.
Cash flows used in investing activities decreased $328.2 million primarily as a result of: • an increase of $328.4 million used for acquisitions, primarily related to our November 2021 acquisition of Ventus (see Note 2 to the consolidated financial statements).
Cash flows used in investing activities decreased $345.2 million primarily as a result of: • no acquisitions occurring in fiscal 2023 compared to $347.5 million used for acquisitions in fiscal 2022, primarily related to our November 2021 acquisition of Ventus (see Note 2 to the consolidated financial statements).
We will continue to monitor potential COVID-19 industry and demand impacts as this could potentially affect our cash flows and market capitalization.
We will continue to monitor potential impacts to our assumptions, as any changes could potentially affect our cash flows and market capitalization.
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) Year ended September 30, 2022 2021 % of total revenue % of total revenue Total revenue $ 388,225 100.0 % $ 308,632 100.0 % Net income 19,383 5.0 % $ 10,366 3.4 % Interest expense (income), net 19,690 1,385 Income tax (benefit) (755) (1,367) Depreciation and amortization 33,839 20,877 Stock-based compensation 8,578 8,135 Changes in fair value of contingent consideration (6,200) 5,772 Restructuring charge 275 995 Acquisition and integration expense 4,605 2,098 Adjusted EBITDA $ 79,415 20.5 % $ 48,261 15.6 % 28 Table of Contents ITEM 7.
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) Year ended September 30, 2023 2022 % of total revenue % of total revenue Total revenue $ 444,849 100.0 % $ 388,225 100.0 % Net income 24,770 5.6 % $ 19,383 5.0 % Interest expense, net 25,236 19,690 Income tax (benefit) 148 (755) Depreciation and amortization 31,979 33,839 Stock-based compensation expense 13,286 8,578 Changes in fair value of contingent consideration — (6,200) Restructuring charge 141 275 Acquisition and integration expense 940 4,605 Adjusted EBITDA $ 96,500 21.7 % $ 79,415 20.5 % 26 Table of Contents ITEM 7.
(see Note 7 to the condensed consolidated financial statements). INCOME TAXES Our effective income tax benefit rates were (4.1)%, (15.2)% and (12.7)% for fiscal 2022, 2021 and 2020, respectively. Our effective tax rate will vary based on a variety of factors.
INCOME TAXES Our effective income tax benefit rates were 0.6%, (4.1)% and (15.2)% for fiscal 2023, 2022 and 2021, respectively. Our effective tax rate will vary based on a variety of factors.
In these instances, all revenue derived from the above obligations is recognized over the subscription term of the contract. If the customer purchases the equipment 32 Table of Contents ITEM 7.
In these instances, all revenue derived from the above obligations is recognized over the subscription term of the contract. If the customer purchases the equipment out-right, that portion of the revenue is recognized at the stand-alone selling price at the time the equipment is shipped and all 30 Table of Contents ITEM 7.
Once the new cost basis is established, the value is not increased with any changes in circumstances that would indicate an increase in value after the re-measurement.
These estimates are subject to uncertainty and involve the use of historical data and future market expectations. Once the new cost basis is established, the value is not increased with any changes in circumstances that would indicate an increase in value after the re-measurement.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As follows, our consolidated statement of cash flows for the years ended September 30, 2022 and 2021 is summarized: Year ended September 30, ($ in thousands) 2022 2021 Operating activities $ 37,740 $ 57,723 Investing activities (349,528) (21,365) Financing activities 192,782 62,242 Effect of exchange rate changes on cash and cash equivalents 1,474 (297) Net increase (decrease) in cash and cash equivalents $ (117,532) $ 98,303 Cash flows from operating activities decreased $20.0 million primarily as a result of: • an increase in operating assets and liabilities (net of acquisitions) during the period of $25.3 million, including a $41.4 million increase in inventory, compared to a decrease of $13.6 million in fiscal 2021, • a decrease in the fair value of contingent consideration of $6.2 million in 2022 compared to an increase of $5.8 million in fiscal 2021, and • a decrease in the provision for bad debt.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As follows, our consolidated statements of cash flows for the years ended September 30, 2023 and 2022 is summarized: Year ended September 30, ($ in thousands) 2023 2022 Operating activities $ 36,751 $ 37,740 Investing activities (4,345) (349,528) Financing activities (34,500) 192,782 Effect of exchange rate changes on cash and cash equivalents (1,113) 1,474 Net decrease in cash and cash equivalents $ (3,207) $ (117,532) Cash flows from operating activities decreased $1.0 million primarily as a result of: • an increase in net operating assets and liabilities (net of acquisitions) during fiscal 2023 of $19.1 million, compared to $18.4 million in fiscal 2022, • a decrease in amortization expense, and • increases in deferred income tax benefits (provisions) and provisions for bad debt.
We reduce the carrying value of our inventories for estimated excess and obsolete inventories equal to the difference between the cost of inventory and its estimated realizable value based upon assumptions about future product demand and market conditions. These estimates are subject to uncertainty and involve the use of historical data and future market expectations.
INVENTORIES Inventories are stated at the lower of cost or net realizable value, with cost determined using the first-in, first-out method. We reduce the carrying value of our inventories for estimated excess and obsolete inventories equal to the difference between the cost of inventory and its estimated realizable value based upon assumptions about future product demand and market conditions.
Cash flows from financing activities increased $130.5 million primarily as a result of: • an increase of $350.0 million in proceeds from the Term Loan issued in November 2021.
Cash flows from financing activities decreased $227.3 million primarily as a result of: • no proceeds from loans in fiscal 2023 compared to $350.0 million in proceeds from the Term Loan issued in November 2021 in fiscal 2022, and • a reduction in proceeds from stock plan transactions.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTRACTUAL OBLIGATIONS The following summarizes our contractual obligations at September 30, 2022: Payments due by fiscal period ($ in thousands) Total Less than 1 year 1-3 years 3-5 years Thereafter Operating leases $ 22,356 $ 3,835 $ 6,490 $ 4,807 $ 7,224 Revolving loan 250,000 17,500 35,000 35,000 162,500 Interest on long-term debt 82,793 16,778 29,953 24,684 11,378 Total $ 355,149 $ 38,113 $ 71,443 $ 64,491 $ 181,102 The operating lease agreements included above primarily relate to office space.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTRACTUAL OBLIGATIONS The following summarizes our contractual obligations at September 30, 2023: Payments due by fiscal period ($ in thousands) Total Less than 1 year 1-3 years 3-5 years Thereafter Operating leases $ 20,276 $ 3,999 $ 6,634 $ 3,938 $ 5,705 Revolving loan 213,625 17,500 35,000 35,000 126,125 Interest on long-term debt 90,492 21,978 37,442 29,977 1,095 Total $ 324,393 $ 43,477 $ 79,076 $ 68,915 $ 132,925 The operating lease agreements included above primarily relate to office space.
Additionally, during the second quarter of fiscal 2021 we sold 4,025,000 shares of our common stock and received net proceeds of $73.8 million. We expect positive cash flows from operations.
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. During the second quarter of fiscal 2021 we sold 4,025,000 shares of our common stock and received net proceeds of $73.8 million (see Note 13 to our consolidated financial statements).
We have made an accounting policy election to exclude from the measurement of our revenues any sales or similar taxes we collect from customers. INVENTORIES Inventories are stated at the lower of cost or net realizable value, with cost determined using the first-in, first-out method.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS other revenue is recognized over the subscription term of the contract. We have made an accounting policy election to exclude from the measurement of our revenues any sales or similar taxes we collect from customers.
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.
At June 30, 2023, the fair value of goodwill exceeded the carrying value for all six reporting units and no impairment was recorded. 31
KEY BUSINESS METRICS Annualized Recurring Revenue ("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 item. Digi management uses ARR to manage and assess the growth of our subscription revenue business.
KEY BUSINESS METRICS Annualized Recurring Revenue, or ARR, represents the annualized monthly value of all billable subscription contracts, measured at the end of any fiscal period. Subscriptions primarily include contracts for term-based equipment usage, the delivery of data insights, extended warranty coverage or customer service coverage.
This increase was partially offset by: • a $5.8 million increase in contingent consideration in prior year compared to a $6.2 million reduction in 2022 and a decrease in restructuring charges.
These decreases were partially offset by: • no changes in the fair value of contingent consideration in fiscal 2023 compared to a decrease of $6.2 million in fiscal 2022, and • increases in stock compensation expense and net income.
This increase was partially offset by: • payments of debt issuance costs of $13.4 million, • $73.8 million in proceeds from stock issuance in Q2 2021, • payments of $48.1 million upon the closing of the Term Loan issued in November 2021 to retire the previous credit facility, and • early payments of $100.0 million on the new Term Loan issued in November 2021 compared to $15.6 million in debt payments in fiscal 2021 on the previous credit facility (see Note 7 to the condensed consolidated financial statements). 30 Table of Contents ITEM 7.
This decrease was partially offset by: • payments on debt of $36.4 million in fiscal 2023 compared to $148.1 million in fiscal 2022, • no payments of debt issuance costs in fiscal 2023 compared to $13.4 million in fiscal 2022, • an increase in ESPP proceeds, and • a decrease in taxes paid for net share settlements. 28 Table of Contents ITEM 7.
Removed
OTHER EXPENSE, NET Year ended September 30, ($ in thousands) 2022 2021 $ increase (decrease) % Increase (decrease) Other expense, net: Interest income $ 11 — $ 10 — % $ 1 10.0 Interest expense (19,701) (5.1) % (1,395) (0.5) (18,306) 1,312.3 Other expense, net 98 — (144) — 242 (168.1) Total other expense, net $ (19,592) (5.1) % $ (1,529) (0.5) % $ (18,063) 1,181.4 The $18.1 million increase in other expense in fiscal 2022 from fiscal 2021 primarily was the result of: • an increase to our interest expense as we refinanced our revolving loan with a new credit facility in November 2021 and wrote off a portion of the deferred financing fees associated with our prior credit facility to fund the acquisition of Ventus.
Added
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COST OF GOODS SOLD AND GROSS PROFIT BY SEGMENT Below are our segments' cost of goods sold and gross profit as a percentage of their respective total revenue: Year ended September 30, Basis point increase (decrease) ($ in thousands) 2023 2022 Cost of Goods Sold IoT Products & Services $ 157,722 45.6 % $ 137,528 46.2 % (60) IoT Solutions 34,924 35.2 % 34,411 38.0 % (280) Total cost of goods sold $ 192,646 43.3 % $ 171,939 44.3 % (100) Year ended September 30, Basis point increase (decrease) ($ in thousands) 2023 2022 Gross Profit IoT Products & Services $ 187,958 54.4 % $ 160,117 53.8 % 60 IoT Solutions 64,245 64.8 % 56,169 62.0 % 280 Total gross profit $ 252,203 56.7 % $ 216,286 55.7 % 100 IoT Product & Services IoT Products & Services gross profit margin increased 60 basis points for fiscal 2023 as compared to the prior fiscal year.
Removed
(2) For the twelve months ended September 30, 2022, discrete tax benefits include excess tax benefits recognized on stock compensation and expiring statute of limitations.
Added
This increase was primarily the result of a reduction in the price of component purchases due to eased inflationary pressures partially offset by write-downs of inventory. IoT Solutions The IoT Solutions gross profit margin increased 280 basis points for fiscal 2023 as compared to the prior fiscal year.
Removed
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 December 22, 2021, Digi entered into a third amended and restated credit agreement with BMO.
Added
This increase was primarily the result of growth in higher margin ARR subscription revenues.
Removed
These decreases were partially offset by: • an increase in the provision for inventory of $5.7 million in fiscal 2022. • increases in depreciation and amortization expenses, deferred income tax benefits and net income.
Added
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OTHER EXPENSE, NET Year ended September 30, ($ in thousands) 2023 2022 $ increase (decrease) % Increase (decrease) Other expense, net: Interest expense, net $ (25,236) (5.7) % $ (19,690) (5.1) % $ (5,546) 28.2 % Other expense, net 59 — 98 — (39) (39.8) Total other expense, net $ (25,177) (5.7) % $ (19,592) (5.1) % $ (5,585) 28.5 % The $5.6 million increase in other expense in fiscal 2023 from fiscal 2022 primarily was the result of an increase in our interest expense due to an increase in our effective interest rate (see Note 7 to the condensed consolidated financial statements).
Removed
During fiscal 2020, we had approximately $65.8 million of revenue to foreign customers including export sales, of which $1.7 million was denominated in foreign currencies, predominantly the Euro and British Pound. In future periods, we continue to expect that the majority of our sales will be in U.S. Dollar.
Added
ARR excludes one-time items such as non-bundled hardware sales, professional services and wireless design services. Contracts with known, future expiration dates are included in ARR through their expiration date as long as collection is deemed likely. ARR should be viewed independently of revenue and deferred revenue and is not intended to replace or forecast either item.
Removed
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS out-right, that portion of the revenue is recognized at the stand-alone selling price at the time the equipment is shipped and all other revenue is recognized over the subscription term of the contract.
Added
Digi management uses ARR to manage and assess the growth of our subscription revenue business. Because ARR does not have a consistent definition, it is unlikely to be compared to the similarly titled measurements of other companies.
Removed
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 33 Table of Contents ITEM 7.
Added
Our outstanding debt as of September 30, 2023 was issued under a third amended and restated credit agreement Digi entered with BMO on December 22, 2021.
Removed
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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.
Added
This increase was partially offset by: • an increase in purchases of property, equipment, improvements and certain other intangible assets.
Removed
As a result, the market capitalization reconciliation analysis proved support for the reasonableness of the fair values estimated for each individual reporting unit.
Added
Digi conducted an analysis as of September 30, 2023 and concluded changes in market conditions from the time of the fiscal 2023 test, conducted as of June 30,2023, were not indicative of a reduction in fair value of any of our reporting units.
Removed
CONTINGENT CONSIDERATION We measure our contingent consideration liabilities recognized in connection with business combinations at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy as defined in ASC 820 "Fair Value Measurement".
Removed
We used a probability-weighted discounted cash flow approach as the valuation technique to determine the fair value of the contingent consideration on the acquisition date. At each subsequent reporting period, the fair value is re-measured with the change in fair value recognized in general and administrative expense in our consolidated statements of operations.
Removed
Any amounts paid to the sellers in excess of the amount recorded on the acquisition date will be classified as cash flows used in operating activities. Payments to the sellers not exceeding the acquisition-date fair value of the contingent consideration will be classified as cash flows used in financing activities.
Removed
INCOME TAXES We operate in multiple tax jurisdictions both in and outside of the U.S. Accordingly, we must determine the appropriate allocation of income to each of these jurisdictions. This determination requires us to make several estimates and assumptions.
Removed
Tax audits associated with the allocation of this income, and other complex issues, may require an extended period of time to resolve. They also could result in adjustments to our income tax balances that are material to our consolidated financial position and results of operations and could result in potential cash outflows.
Removed
Liabilities for uncertain tax positions are also established for potential and ongoing audits of federal, state and international issues. We routinely monitor the potential impact of such situations and believe that liabilities are properly stated.
Removed
Valuations related to amounts owed and tax rates could be impacted by changes to tax codes and our interpretation thereof, changes in statutory rates, our future taxable income levels and the results of tax audits. 34 Table of Contents

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

21 edited+14 added−0 removed11 unchanged
Biggest changeCONSOLIDATED STATEMENTS OF CASH FLOWS Year ended September 30, 2022 2021 2020 Operating activities: (in thousands) Net income $ 19,383 $ 10,366 $ 8,411 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property, equipment and improvements 6,644 4,343 4,545 Amortization 30,928 16,534 14,754 Stock-based compensation 8,578 8,135 7,237 Deferred income tax provision (3,387) (4,598) (3,357) Loss on sale of property, equipment and improvements 4 89 — Change in fair value of contingent consideration (6,200) 5,772 (128) Provision for bad debt and product returns 427 2,290 2,135 Provision for inventory obsolescence 6,901 1,200 2,630 Other, net (192) 42 366 Changes in operating assets and liabilities (net of acquisitions): Accounts receivable (541) 11,467 5,539 Inventories (41,369) 4,679 (11,133) Other assets (545) (1,657) (704) Income taxes (1,305) 165 (1,100) Accounts payable 7,281 (5,578) 3,205 Accrued expenses 11,133 4,474 2,078 Net cash provided by operating activities 37,740 57,723 34,478 Investing activities: Acquisition of businesses, net of cash acquired (347,554) (19,108) (136,098) Purchase of property, equipment, improvements and certain other intangible assets (1,974) (2,257) (899) Net cash used in investing activities (349,528) (21,365) (136,997) Financing activities: Proceeds from long-term debt 350,000 617 119,018 Payments of debt issuance costs (13,443) — — Payments on long-term debt (148,118) (15,624) (55,893) Payments for contingent consideration — (4,200) (4,698) Proceeds from issuances of stock, net of offering expenses — 73,830 — Proceeds from stock option plan transactions 9,505 8,525 5,902 Proceeds from employee stock purchase plan transactions 1,500 1,214 1,065 Taxes paid for net share settlement of share-based payment awards (6,662) (2,120) (1,791) Net cash provided by financing activities 192,782 62,242 63,603 Effect of exchange rate changes on cash and cash equivalents 1,474 (297) 253 Net (decrease) increase in cash and cash equivalents (117,532) 98,303 (38,663) Cash and cash equivalents, beginning of period 152,432 54,129 92,792 Cash and cash equivalents, end of period $ 34,900 $ 152,432 $ 54,129 Supplemental disclosures of cash flow information: Interest paid $ 14,209 $ 917 $ 3,009 Income taxes paid, net $ 4,333 $ 3,684 $ 3,686 Supplemental schedule of non-cash investing and financing activities: Accrual for property, equipment, improvements and certain other intangibles assets $ (191) $ (98) $ (26) Tenant improvement allowance $ — $ (1,000) $ — Transfer of inventory to property, equipment and improvements $ (6,237) $ (1,838) $ (1,363) Liability related to acquisition of business $ — $ (6,200) $ (5,100) Term debt refinanced as credit facility $ — $ 50,000 $ — The accompanying notes are an integral part of the consolidated financial statements. 41 Table of Contents
Biggest changeCONSOLIDATED STATEMENTS OF CASH FLOWS Year ended September 30, 2023 2022 2021 Operating activities: (in thousands) Net income $ 24,770 $ 19,383 $ 10,366 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property, equipment and improvements 6,753 6,644 4,343 Amortization 27,203 30,928 16,534 Stock-based compensation expense 13,286 8,578 8,135 Deferred income tax provision (12,739) (3,387) (4,598) Change in fair value of contingent consideration — (6,200) 5,772 (Reversal) provision for bad debt and product return (2,633) 427 2,290 Other, net (806) (188) 131 Changes in operating assets and liabilities (net of acquisitions): Accounts receivable (2,925) (541) 11,467 Inventories (5,062) (34,468) 5,879 Other assets (1,214) (545) (1,657) Income taxes 4,088 (1,305) 165 Accounts payable (15,503) 7,281 (5,578) Accrued expenses 1,533 11,133 4,474 Net cash provided by operating activities 36,751 37,740 57,723 Investing activities: Acquisition of businesses, net of cash acquired — (347,554) (19,108) Purchase of property, equipment, improvements and certain other intangible assets (4,345) (1,974) (2,257) Net cash used in investing activities (4,345) (349,528) (21,365) Financing activities: Proceeds from long-term debt — 350,000 617 Payments of debt issuance costs — (13,443) — Payments on long-term debt (36,375) (148,118) (15,624) Payments for contingent consideration — — (4,200) Proceeds from issuances of stock, net of offering expenses — — 73,830 Proceeds from stock option plan transactions 3,926 9,505 8,525 Proceeds from employee stock purchase plan transactions 2,263 1,500 1,214 Taxes paid for net share settlement of share-based payment awards (4,314) (6,662) (2,120) Net cash (used in) provided by financing activities (34,500) 192,782 62,242 Effect of exchange rate changes on cash and cash equivalents (1,113) 1,474 (297) Net (decrease) increase in cash and cash equivalents (3,207) (117,532) 98,303 Cash and cash equivalents, beginning of period 34,900 152,432 54,129 Cash and cash equivalents, end of period $ 31,693 $ 34,900 $ 152,432 Supplemental disclosures of cash flow information: Interest paid $ 26,351 $ 14,209 $ 917 Income taxes paid, net $ 8,693 $ 4,333 $ 3,684 Supplemental schedule of non-cash investing and financing activities: Accrual for property, equipment, improvements and certain other intangibles assets $ (277) $ (191) $ (98) Tenant improvement allowance $ — $ — $ (1,000) Transfer of inventory to property, equipment and improvements $ (3,889) $ (6,237) $ (1,838) Liability related to acquisition of business $ — $ — $ (6,200) Term debt refinanced as credit facility $ — $ — $ 50,000 The accompanying notes are an integral part of the consolidated financial statements. 40 Table of Contents
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED) DIGI INTERNATIONAL INC.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED) DIGI INTERNATIONAL INC.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED) DIGI INTERNATIONAL INC.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED) DIGI INTERNATIONAL INC.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK We may be exposed to interest rate risk should we decide to invest in marketable securities. When we held marketable securities, we classified them as available-for-sale and were carried at fair value.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK We may be exposed to interest rate risk should we decide to invest in marketable securities. When we held marketable securities, we classified them as available-for-sale and they were carried at fair value.
CREDIT RISK We have some 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 on customer contacts to facilitate payment. 35 Table of Contents ITEM 8.
CREDIT RISK We have some 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 on customer contacts to facilitate payment. 32 Table of Contents ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Report of Independent Registered Public Accounting Firm (PCAOB ID 248) 37 Consolidated Statements of Operations 38 Consolidated Statements of Comprehensive Income 39 Consolidated Balance Sheets 40 Consolidated Statements of Cash Flows 41 Consolidated Statements of Stockholders' Equity 42 Notes to the Consolidated Financial Statements 43 36 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Digi International Inc.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Report of Independent Registered Public Accounting Firm (PCAOB ID 34) 34 Report of Independent Registered Public Accounting Firm (PCAOB ID 248) 36 Consolidated Statements of Operations 37 Consolidated Statements of Comprehensive Income 38 Consolidated Balance Sheets 39 Consolidated Statements of Cash Flows 40 Consolidated Statements of Stockholders' Equity 41 Notes to the Consolidated Financial Statements 42 33 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Digi International Inc.
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.
The applicable margin for loans under the Revolving Credit Facility is in a range of 4.00% to 3.75% for SOFR loans and 3.00% to 2.75% for base rate loans, depending on Digi’s consolidated leverage ratio.
(a Delaware corporation) and subsidiaries (the “Company”) as of September 30, 2022 and 2021, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2022, and the related notes and consolidated financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”).
(a Delaware corporation) and subsidiaries (the “Company”) as of September 30, 2022, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the two years in the period ended September 30, 2022, and the related notes and consolidated financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2022, in conformity with accounting principles generally accepted in the United States of America.
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2022, and the results of its operations and its cash flows for each of the two years in the period ended September 30, 2022, in conformity with accounting principles generally accepted in the United States of America.
Based on the balance sheet position for both the Term Loan and Revolving Loan at September 30, 2022, the annualized effect of a 25 basis point change in interest rates would increase or decrease our interest expense by $0.6 million. For additional information, see Note 7 to our consolidated financial statements.
Based on the balance sheet position for both the Term Loan and Revolving Loan at September 30, 2023, the annualized effect of a 25 basis point change in interest rates would increase or decrease our interest expense by $0.5 million. For additional information, see Note 7 to our consolidated financial statements.
Dollar would have resulted in an immaterial increase or decrease in fiscal 2022 annual revenue and a 1.2% increase or decrease in stockholders' equity at September 30, 2022. The above analysis does not take into consideration any pricing adjustments we may make in response to changes in the exchange rates.
Dollar would have resulted in an immaterial increase or decrease in fiscal 2023 annual revenue and a 1.0% increase or decrease in stockholders' equity at September 30, 2023. The above analysis does not take into consideration any pricing adjustments we may make in response to changes in the exchange rates.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of September 30, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated November 23, 2022 expressed an unqualified opinion.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 22, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting.
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 base rate is determined by reference to the highest of BMO’s prime rate, the Federal Funds Effective Rate plus 0.50%, or the one-month SOFR for U.S. dollars plus 1.00%.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year ended September 30, 2022 2021 2020 (in thousands) Net income $ 19,383 $ 10,366 $ 8,411 Other comprehensive (loss) income, net of tax: Foreign currency translation adjustment (3,308) 1,071 1,698 Other comprehensive (loss) income, net of tax (3,308) 1,071 1,698 Comprehensive income $ 16,075 $ 11,437 $ 10,109 The accompanying notes are an integral part of the consolidated financial statements. 39 Table of Contents ITEM 8.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year ended September 30, 2023 2022 2021 (in thousands) Net income $ 24,770 $ 19,383 $ 10,366 Other comprehensive (loss) income, net of tax: Foreign currency translation adjustment (957) (3,308) 1,071 Other comprehensive (loss) income, net of tax (957) (3,308) 1,071 Comprehensive income $ 23,813 $ 16,075 $ 11,437 The accompanying notes are an integral part of the consolidated financial statements. 38 Table of Contents ITEM 8.
Critical audit matters Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.
Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.
The table below compares the average monthly exchange rates of the Euro, British Pound Canadian Dollar, Indian Rupee and Australian Dollar: Fiscal year ended September 30, % increase 2022 2021 (decrease) Euro 1.1057 1.1951 (7.5) % British Pound 1.1377 1.2718 (10.5) % Canadian Dollar 0.7768 0.7911 (1.8) % Indian Rupee 0.0130 0.0131 (0.8) % Australian Dollar 0.7105 0.7510 (5.4) % A 10.0% change from the 2022 average exchange rate for the Euro, British Pound Canadian Dollar, Indian Rupee and Australian Dollar to the U.S.
The table below compares the average monthly exchange rates of the Euro, British Pound Canadian Dollar and Australian Dollar: Fiscal year ended September 30, % increase 2023 2022 (decrease) Euro 1.0679 1.1057 (3.4) % British Pound 1.2183 1.1377 7.1 % Canadian Dollar 0.7380 0.7768 (5.0) % Australian Dollar 0.6423 0.7105 (9.6) % A 10.0% change from the 2023 average exchange rate for the Euro, British Pound, Canadian Dollar and Australian Dollar to the U.S.
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%.
Borrowings under the Term Loan Facility are subject to a rate based on SOFR, 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 plus 5.00% or a base rate plus 4.00%.
CONSOLIDATED STATEMENTS OF OPERATIONS Year ended September 30, 2022 2021 2020 (in thousands, except per common share data) Revenue: Product $ 290,170 $ 265,805 $ 248,374 Service 98,055 42,827 30,897 Total revenue 388,225 308,632 279,271 Cost of sales: Cost of product 140,615 124,065 118,322 Cost of service 26,027 13,412 12,490 Amortization 5,297 4,498 4,487 Total cost of sales 171,939 141,975 135,299 Gross profit 216,286 166,657 143,972 Operating expenses: Sales and marketing 70,366 61,909 52,761 Research and development 55,098 46,623 43,765 General and administrative 58,527 40,830 36,140 Change in fair value of contingent consideration (6,200) 5,772 (128) Restructuring charge 275 995 117 Total operating expenses 178,066 156,129 132,655 Operating income 38,220 10,528 11,317 Other expense, net: Interest income 11 10 304 Interest expense (19,701) (1,395) (3,592) Other income (expense), net 98 (144) (566) Total other expense, net (19,592) (1,529) (3,854) Income before income taxes 18,628 8,999 7,463 Income tax benefit (755) (1,367) (948) Net income $ 19,383 $ 10,366 $ 8,411 Net income per common share: Basic $ 0.55 $ 0.32 $ 0.29 Diluted $ 0.54 $ 0.31 $ 0.28 Weighted average common shares: Basic 35,031 32,111 28,849 Diluted 35,995 33,394 29,546 The accompanying notes are an integral part of the consolidated financial statements. 38 Table of Contents ITEM 8.
CONSOLIDATED STATEMENTS OF OPERATIONS Year ended September 30, 2023 2022 2021 (in thousands, except per common share data) Revenue: Product $ 331,162 $ 290,170 $ 265,805 Service 113,687 98,055 42,827 Total revenue 444,849 388,225 308,632 Cost of sales: Cost of product 161,451 140,615 124,065 Cost of service 27,233 26,027 13,412 Amortization 3,962 5,297 4,498 Total cost of sales 192,646 171,939 141,975 Gross profit 252,203 216,286 166,657 Operating expenses: Sales and marketing 81,681 70,366 61,909 Research and development 58,648 55,098 46,623 General and administrative 61,779 58,802 41,825 Change in fair value of contingent consideration — (6,200) 5,772 Total operating expenses 202,108 178,066 156,129 Operating income 50,095 38,220 10,528 Other expense, net: Interest expense, net (25,236) (19,690) (1,385) Other income (expense), net 59 98 (144) Total other expense, net (25,177) (19,592) (1,529) Income before income taxes 24,918 18,628 8,999 Income tax expense (benefit) 148 (755) (1,367) Net income $ 24,770 $ 19,383 $ 10,366 Net income per common share: Basic $ 0.69 $ 0.55 $ 0.32 Diluted net income per common share: Diluted $ 0.67 $ 0.54 $ 0.31 Weighted average common shares: Basic 35,820 35,031 32,111 Diluted 36,869 35,995 33,394 The accompanying notes are an integral part of the consolidated financial statements. 37 Table of Contents ITEM 8.
CONSOLIDATED BALANCE SHEETS As of September 30, 2022 2021 (in thousands, except share data) ASSETS Current assets: Cash and cash equivalents $ 34,900 $ 152,432 Accounts receivable, net 50,450 43,738 Inventories 73,223 43,921 Deferred tax assets 3,764 2,698 Other current assets 3,871 3,869 Total current assets 166,208 246,658 Property, equipment and improvements, net 27,594 12,132 Identifiable intangible assets, net 302,064 118,029 Goodwill 340,477 225,522 Operating lease right-of-use assets 15,299 15,684 Other non-current assets 2,253 1,506 Total assets $ 853,895 $ 619,531 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Current portion of long-term debt $ 15,523 $ — Accounts payable 32,373 22,586 Accrued compensation 14,576 12,934 Unearned revenue 19,803 13,589 Current portion of operating lease liabilities 3,196 2,633 Other current liabilities 11,036 7,199 Total current liabilities 96,507 58,941 Income taxes payable 2,441 2,334 Deferred tax liabilities 9,666 13,493 Long-term debt 222,448 45,799 Operating lease liabilities 16,978 18,368 Other non-current liabilities 4,342 8,079 Total liabilities 352,382 147,014 Commitments and Contingencies (see Note 16 ) Stockholders’ equity: Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued and outstanding — — Common stock, $.01 par value; 60,000,000 shares authorized; 41,950,732 and 40,653,035 shares issued 420 407 Additional paid-in capital 385,244 370,699 Retained earnings 200,075 180,692 Accumulated other comprehensive loss (26,054) (22,746) Treasury stock, at cost, 6,412,812 and 6,390,645 shares (58,172) (56,535) Total stockholders’ equity 501,513 472,517 Total liabilities and stockholders’ equity $ 853,895 $ 619,531 The accompanying notes are an integral part of the consolidated financial statements. 40 Table of Contents ITEM 8.
CONSOLIDATED BALANCE SHEETS As of September 30, 2023 2022 (in thousands, except share data) ASSETS Current assets: Cash and cash equivalents $ 31,693 $ 34,900 Accounts receivable, net 55,997 50,450 Inventories 74,396 73,223 Deferred tax assets — 3,764 Other current assets 4,112 3,871 Total current assets 166,198 166,208 Property, equipment and improvements, net 29,108 27,594 Identifiable intangible assets, net 277,084 302,064 Goodwill 341,593 340,477 Deferred tax assets 4,884 — Operating lease right-of-use assets 12,876 15,299 Other non-current assets 3,788 2,253 Total assets $ 835,531 $ 853,895 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Current portion of long-term debt $ 15,523 $ 15,523 Accounts payable 17,148 32,373 Income taxes payable 1,116 96 Accrued compensation 16,427 14,576 Unearned revenue 25,274 19,803 Current portion of operating lease liabilities 3,352 3,196 Other current liabilities 7,138 10,940 Total current liabilities 85,978 96,507 Income taxes payable 2,308 2,441 Deferred tax liabilities 1,812 9,666 Long-term debt 188,051 222,448 Operating lease liabilities 13,989 16,978 Other non-current liabilities 2,905 4,342 Total liabilities 295,043 352,382 Commitments and Contingencies (see Note 16 ) Stockholders’ equity: Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued and outstanding — — Common stock, $.01 par value; 60,000,000 shares authorized; 42,501,150 and 41,950,732 shares issued 425 420 Additional paid-in capital 403,735 385,244 Retained earnings 224,845 200,075 Accumulated other comprehensive loss (27,011) (26,054) Treasury stock, at cost, 6,436,204 and 6,412,812 shares (61,506) (58,172) Total stockholders’ equity 540,488 501,513 Total liabilities and stockholders’ equity $ 835,531 $ 853,895 The accompanying notes are an integral part of the consolidated financial statements. 39 Table of Contents ITEM 8.
We determined that there are no critical matters. /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2016. Cincinnati, Ohio November 23, 2022 37 Table of Contents ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED) DIGI INTERNATIONAL INC.
We believe that our audits provide a reasonable basis for our opinion. /s/ GRANT THORNTON LLP We served as the Company’s auditor from 2016 to 2022. Cincinnati, Ohio November 23, 2022 36 Table of Contents ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED) DIGI INTERNATIONAL INC.
As of September 30, 2022, we had $250.0 million outstanding under our Term Loan and $0.0 million outstanding under our Revolving Loan.
As of September 30, 2023, we had $213.6 million outstanding under our Term Loan and $0.0 million outstanding under our Revolving Loan. Following an amendment in December 2021, borrowings under the Term Loan Facility bore interest at a rate based on LIBOR until the discontinuation of LIBOR on June 30, 2023.
Added
Following this date, borrowings under the Term Loan Facility are subject to a rate based on the Secured Overnight Financing Rate ("SOFR") with a credit spread adjustment to adjust for the change in reference rate ranging from 0.10% to 0.40%, depending on Digi's interest election.
Added
Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of Digi International Inc. and subsidiaries (the "Company") as of September 30, 2023, the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows, for the year ended September 30, 2023, and the related notes and the schedule listed in the Table of Contents at Item 15 (collectively referred to as the "financial statements").
Added
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2023, and the results of its operations and its cash flows for the year ended September 30, 2023, in conformity with accounting principles generally accepted in the United States of America.
Added
The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Added
Goodwill — Cellular Routers, Smart Sense, and Ventus Reporting Units — Refer to Notes 1 and 3 to the financial statements The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value.
Added
The Company used a combination of the income approach and market approach to estimate fair value, which requires management to make significant estimates and assumptions, specifically related to the determination of discount rates and forecasts of future gross margins and earnings before income taxes, depreciation, and amortization (“EBITDA”) margins used in the income approach.
Added
Changes in these assumptions could have a significant impact on the fair value. The goodwill balance was $342.3 million as of June 30, 2023, of which $32.7 million, $48.9 million, and $118.6 million was allocated to the Cellular Routers, Smart Sense, and Ventus reporting units, respectively.
Added
We identified goodwill for the Cellular Routers, Smart Sense, and Ventus reporting units as a critical audit matter because of the significant judgments made by management to estimate the fair value of these reporting units, specifically related to the determination of discount rates and forecasts of future gross margins and EBITDA margins.
Added
This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing 34 Table of Contents audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to selection of the discount rates and future assumptions of gross margins and EBITDA margins.
Added
How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the discount rates and forecasts of future gross margins and EBITDA margins used by management to estimate the fair value of the Cellular Routers, Smart Sense and Ventus reporting units included the following, among others: • We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the Cellular Routers, Smart Sense, and Ventus reporting units, such as controls related to management’s selection of the discount rates and forecasts of future gross margins and EBITDA margins. • We evaluated management’s ability to accurately forecast future gross margins and EBITDA margins by comparing actual results to management’s historical forecasts. • We evaluated the reasonableness of management’s gross margin and EBITDA margin forecasts by comparing the forecasts to: ◦ Historical gross margins and EBITDA margins. ◦ Forecasted information included in Company press releases as well as in industry reports for the Company and certain of its peer companies. • With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) discount rates by: ◦ Testing the source information underlying the determination of the discount rates and the mathematical accuracy of the calculations. ◦ Developing a range of independent estimates and comparing those to the discount rates selected by management. /s/ DELOITTE & TOUCHE LLP Minneapolis, Minnesota November 22, 2023 We have served as the Company’s auditor since 2022. 35 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Digi International Inc.
Added
Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits.
Added
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB.
Added
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Added
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

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