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What changed in DIGI INTERNATIONAL INC's 10-K — 2023 vs 2024

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Paragraph-level year-over-year comparison of DIGI INTERNATIONAL INC's 2023 and 2024 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 2024 report.

+250 added−249 removedSource: 10-K (2024-11-22) vs 10-K (2023-11-22)

Top changes in DIGI INTERNATIONAL INC's 2024 10-K

250 paragraphs added · 249 removed · 214 edited across 8 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeFurther, 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.
Biggest changeResearch & 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.
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.
Our common stock trades on the Nasdaq Global Select Market tier of the Nasdaq Stock Market LLC (the "Nasdaq") 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.
The offerings in this segment are primarily offered on a subscription model and provide us with a stable base of recurring higher-margin revenues.
The offerings in this segment are primarily offered on a subscription model and provide us with a stable base of higher-margin recurring revenues.
They are trusted by global leaders in agricultural, energy medical, lighting, digital signage, gaming, electric charging and transportation, as well as other industrial and enterprise markets including: • Cellular routers that help enterprise, government, industrial, transportation and OEM customers with their mission-critical wireless connectivity needs in challenging, remote and mobile environments. • Cellular modules that help OEM customers embed cellular communications abilities into their products so they can deploy and manage intelligent and secure cellular connected products.
These products are trusted by global leaders in agricultural, energy medical, lighting, digital signage, gaming, electric charging and transportation, as well as other industrial and enterprise markets including: • Cellular routers that help enterprise, government, industrial, transportation and OEM customers with their mission-critical wireless connectivity needs in challenging, remote and mobile environments. • Cellular modules that help OEM customers embed cellular communications abilities into their products so they can deploy and manage intelligent and secure cellular connected products.
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.
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 device management platform services, as well as other professional services to enable customers to capture and manage data from devices connected to networks.
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.
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 fewer business days. Competition We compete primarily in the communications technology industry. This industry is characterized by rapid technological advances and evolving industry standards.
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.
IoT Solutions Segment Our IoT Solutions segment is managed with a focus on recurring typically 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.
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.
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 with integrity in our everyday actions and choices.
Services Digi Remote Manager – Digi Remote Manager is a recurring revenue cloud-based service that provides a secure environment for customers to manage their connected device for the full deployment lifecycle. This service enables customers to activate, monitor, diagnose, reset, update and/or upgrade their entire network of mission-critical devices from a single point of command.
Services Digi Remote Manager – Digi Remote Manager is a recurring revenue cloud-based service that provides a secure environment for customers to manage their connected device for the full deployment lifecycle. This service enables customers to activate, monitor, diagnose, reset, update and/or upgrade their mission-critical devices from a single point of command.
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.
Among others, IoT use cases include providing and maintaining secure connectivity and monitoring of operating assets, condition-based monitoring of perishable goods, enabling remote work by employees and automating workflows and operations. Our IoT Products & Services segment represented the majority of our sales in fiscal 2024.
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 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 2024, 2023 or 2022.
These services ensure customers get to market quickly, minimize risk, and ensure customer success with their Digi solution.
These services help customers get to market quickly, minimize risk, and ensure customer success with their Digi solution.
We believe that the Digi and Rabbit brands have established strong identities with our targeted customer base and our customers associate the Digi brand with "reliability" and the Rabbit brand with "ease of integration." We believe that our customers associate Digi XBee with "ease of use." Many of our customers choose us because they are building a very complex system solution and they want the highest level in product reliability and ease of integration and use.
We believe that the Digi and Rabbit brands have established strong identities with our targeted customer base and our customers associate the Digi brand with "reliability" and the Rabbit brand with "ease of integration." We believe that our customers associate Digi XBee with 3 Table of Contents "ease of use." Many of our customers choose us because they are building a very complex system solution and they want the highest level in product reliability and ease of integration and use.
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 remaining 43.3%, 40.1% and 50.0% of our total consolidated revenue in fiscal 2024, 2023 and 2022, 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.
Professional services include solution planning and implementation services to customers who purchase our products such as site planning, implementation management, application development and customer training. Data plan subscriptions are offered to customers wishing to enable cellular connectivity on our products. Enhanced technical support provides priority, in-depth technical support consultations with our experienced support team.
Professional services include solution planning and implementation services to customers who purchase our products such as site planning, implementation management, application development and customer training. Data plan 5 Table of Contents subscriptions are offered to customers wishing to enable cellular connectivity on our products. Enhanced technical support provides priority, in-depth technical support consultations with our experienced support team.
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 also maintain relationships with many other distributors both domestically and internationally. 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 provide balanced compensation programs that focus on the following five key elements: • Pay-for-performance - Reward and recognize leading contributors and high potentials; • External market based - Pay levels that are competitive with respect to the labor market in which we compete for talent; • Internal equity - Providing for fair pay relationships within the Company; • Fiscal responsibility - Providing affordable programs that are within our budget; and • Legal compliance - Ensure the organization is legally compliant in all states and countries in which we operate.
We provide balanced compensation programs that focus on the following five key elements: • Pay-for-performance - Reward and recognize leading contributors and high potentials; • External market based - Pay levels that are competitive with respect to the labor market in which we compete for talent; • Internal equity - Providing for fair pay relationships within the Company; • Fiscal responsibility - Providing affordable programs that are within our budget; and • Legal compliance - Ensure the organization is legally compliant with all laws applicable to our business.
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.
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 56.7%, 59.9% and 50.0% of our total consolidated revenue in fiscal 2024, 2023 and 2022, respectively. Our IoT Solutions segment does not sell through these channels.
These products primarily are used by IT organizations in large enterprises to maximize the availability of services to their customers and employees, and provide business continuity in the event of a network failure. This technology improves efficiency and reduces the risk of costly outages.
These products primarily are used by IT organizations in large enterprises to maximize the availability of services to their customers and employees, and provide business continuity in the event of a network failure. This technology is deployed because it generally improves efficiency and reduces the risk of costly outages.
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.
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 and other emerging technologies like machine learning. Infrastructure Management Products – These products include serial and Universal Serial Bus ("USB") solutions.
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.
These bundled offerings are sold on a subscription basis and allow customers to monitor and manage the performance of our hardware remotely. As of September 30, 2024 the (Annualized Recurring Revenue ("ARR") of this segment was $24 million. Please see "Key Business Metrics" section in Part II, Item 7 for additional details on how ARR is measured.
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.
While 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.
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.
Manufacturing Operations We outsource our manufacturing operations to certain contract manufacturers, which are located primarily in Thailand, Mexico, Taiwan, Cambodia 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.
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.
Given the current uncertainty in macro-economic conditions, including, but not limited to, potential recessionary conditions, global geopolitical conditions, supply 1 Table of Contents chain disruptions globally and the uncertain status of large project-based customer deployment opportunities, our results during fiscal 2025 may be inconsistent quarter to quarter or with historical results.
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.
Among others, relationships include: AT&T, AWS, Google, Kore, Novotech, NXP, Orange, Qualcomm, Silicon Laboratories, T-Mobile, Telus, Verizon, Vodafone, Westbase and several other cellular carriers worldwide. 2 Table of Contents 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.
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.
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 social equity.
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.
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 805 employees globally as of September 30, 2024. We believe we have a good working relationship with our employees.
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. 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.
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. In addition, it allows us to reduce our fixed costs, maintain production flexibility and optimize our profits.
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.
Our benefits package provides a balance of protection along with the flexibility to meet the individual health and wellness needs of our employees. 4 Table of Contents 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.
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.
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.
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.
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 well as the greater general business scale of some of these competitors.
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.
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. 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.
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.
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. Historically the revenues from this segment have been based on one-time product sales.
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.
More recently we have placed greater emphasis on selling subscription-based solutions across this product portfolio. For example, during fiscal 2024 we launched the Digi LifeCycle Assurance subscription solution, and we recently announced the launch of the Digi 360 subscription solution. Our IoT Solutions segment is comprised primarily of our SmartSense by Digi and Ventus offerings.
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.
Health and Wellness We are committed to providing a competitive and comprehensive benefits package to our employees.
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.
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.
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.
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, as shown by the launch of the Digi LifeCycle Assurance subscription solution and the recently announced launch of the Digi 360 subscription solution.
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.
In addition, acquisitions historically have helped significantly advance our offerings and driven growth and profitability, in both business segments. While our last acquisition was completed in fiscal 2022, we do expect to continue to be active in making further acquisitions.
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.
As of September 30, 2024 the ARR of this segment was $92 million. We have long-term high organic growth expectations. Acquisitions and Dispositions Acquisitions Our acquisition of Ventus in fiscal 2022 described above is the only acquisition we have completed during our fiscal years 2022 through 2024.
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.
In recent quarters, inventory on hand has returned to historical levels, but we will continue to monitor whether adjustments to inventory levels are necessary.
Removed
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.
Added
While it is possible we will complete smaller transactions, we primarily are focusing our efforts for future potential acquisitions on opportunities of scale with the potential to enhance subscription based recurring revenue.
Removed
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.
Added
In addition, we recently have announced our intention to discontinue the production and sale of certain older products in our IoT Products & Services Segment which are not core to our long-term growth objectives.
Removed
This acquisition enhanced our IoT Products & Services segment by enhancing Digi's embedded systems portfolio and immediately extending the company's market reach with a complete LoRaWAN-based solutions offering. In July 2021, we acquired Ctek, Inc. ("Ctek"), a provider that specializes in solutions for remote monitoring and industrial controls.
Added
IoT Products & Services Segment Our IoT Products & Services segment is managed so our product management, research and development and sales personnel are aligned along specific product lines. We believe this management structure brings greater market focus and potential growth to our product lines.
Removed
Through the acquisition of Ctek, Digi is uniquely positioned to provide customers with both battery and hardwired options for the control and monitoring of critical infrastructure, furthering Digi’s reach in a rapidly expanding market.
Added
As the marketplace for IoT connectivity products and solutions continues to grow, we expect to encounter increased competition.
Removed
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.
Added
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 a global pandemic could disrupt the availability of raw materials and components as well as our capacity to make and distribute our products.
Removed
These products provide a cost-effective, more flexible alternative to landlines for primary or backup connectivity.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeThese risks associated with credit and debt are more pronounced for the parties with whom we do business and ourselves in the current environment which has seen interest rates rise rapidly, especially if they remain elevated for an extended period of time We cannot predict either the timing or duration of an economic downturn in the economy, should one occur.
Biggest changeTo the extent we incur debt, we may be unable to adhere to financial covenants or to service the debt. These risks associated with credit and debt are more pronounced for the parties with whom we do business and ourselves in the current high interest rate environment which has seen interest rates rise rapidly.
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.
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 of if they have merit, will not materially adversely affect our business, operating results, financial condition or prospects.
Although Ventus has many customers, its business historically has been significantly concentrated on its relationships with fewer than twenty customers and it also serves a significant number of customers in the financial and gaming terminal industries. Likewise, our SmartSense by Digi business services a significant number of customers in the pharmaceutical, medical facility and retail food industries.
Although Ventus has many customers, its business historically has been significantly concentrated on its relationships with fewer than twenty customers and it also serves a significant number of customers in the financial and gaming terminal industries. Likewise, our SmartSense by Digi business services a significant number of large customers in the retail pharmaceutical, medical facility and retail food industries.
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.
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. In the past, certain customers and potential customers that use these offerings were adversely impacted by the Covid-19 pandemic and the resulting global economic downturn.
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.
These sales are subject to a variety of risks, including fluctuations in currency exchange rates, tariffs, import restrictions and other trade barriers, geopolitical tensions, unexpected or very burdensome changes in regulatory requirements, longer accounts receivable payment cycles, potentially adverse tax consequences, and export license requirements.
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.
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 years or the ongoing wars in Ukraine and the Middle East.
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.
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 marketed effectively or sold via the relationship.
As we continue to direct a substantial portion of our sales and development efforts toward broader based solutions, such as SmartSense by Digi, the Digi Remote Manager and Ventus offerings, we expect to store, convey and potentially process significant amounts of data produced by devices.
As we continue to direct a substantial portion of our sales and development efforts toward broader based solutions, such as SmartSense by Digi, the Digi 9 Table of Contents Remote Manager and Ventus offerings, we expect to store, convey and potentially process significant amounts of data produced by devices.
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.
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.
The Term Loan contains some affirmative covenants and the Revolving Credit Facility contains customary affirmative and negative covenants, including covenants that restrict the ability of Digi and its subsidiaries to incur additional indebtedness, dispose of significant assets, make certain investments, including any acquisitions other than permitted acquisitions, make certain payments, enter into sale and leaseback transactions, grant liens on its assets or rate management transactions, subject to certain limitations.
The Credit Facility contains customary affirmative and negative covenants, including covenants that restrict the ability of Digi and its subsidiaries to incur additional indebtedness, dispose of significant assets, make certain investments, including any acquisitions other than permitted acquisitions, make certain payments, enter into sale and leaseback transactions, grant liens on its assets or rate management transactions, subject to certain limitations.
If such growth does not materialize or our forecasts are not met (including forecasts established at the time of acquisition), our profits could be significantly reduced, and our market value may decline, which could result in an impairment of our goodwill.
If such growth does not materialize or our forecasts are not met (including forecasts established at the time of acquisition), our profits could be significantly reduced, and our market value may decline, which 17 Table of Contents could result in an impairment of our goodwill.
Finally, the introduction of new regulations by governments may also impact the availability, delivery or certain components or our ability to use certain components because of, among other potential reasons, the materials those components may contain or the location of the supplier of the component or certain materials contained in the component.
Finally, the introduction of new regulations by governments may also impact the availability, delivery or certain components or our ability 10 Table of Contents to use certain components because of, among other potential reasons, the materials those components may contain or the location of the supplier of the component or certain materials contained in the component.
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.
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.
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.
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, or supply chain issues that are beyond our control.
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.
In addition, our distributors and resellers may market, sell and support products and services that are competitive with ours, and they may devote more resources to the marketing, sales and support of such 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.
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 may be able to sell hardware products.
Our ability to comply with such financial covenants may be affected by events beyond our control, which could result in a default under the Credit Agreement; such default may have a material adverse effect on our business, financial condition, operating results or cash flows.
We are also required to comply with several financial covenants under the Credit Agreement. Our ability to comply with such financial covenants may be affected by events beyond our control, which could result in a default under the Credit Agreement; such default may have a material adverse effect on our business, financial condition, operating results or cash flows.
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.
To the extent our distributors and resellers are unsuccessful selling our products or if we are unable to obtain and retain a sufficient number of high-quality distributors and resellers, our operating results could be affected materially and adversely.
Our future effective tax rates could be favorably or unfavorably affected by unanticipated changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws or our interpretation of such laws.
Unanticipated changes in our tax rates could affect our future results. 14 Table of Contents Our future effective tax rates could be favorably or unfavorably affected by unanticipated changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws or our interpretation of such laws.
These expansion efforts may increase the percent of our revenue driven through channel partners or heighten our reliance on certain channel partners to drive sales.
These expansion efforts may increase the percent of our revenue driven through distributors and resellers or heighten our reliance on certain distributors and resellers to drive sales.
For fiscal 2023, 2022, and 2021, respectively, our research and development expenses were 13.2%, 14.2% and 15.1% of our revenue.
For fiscal 2024, 2023, and 2022, respectively, our research and development expenses were 14.2%, 13.2% and 14.2% of our revenue.
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.
There exist certain mechanisms under the Delaware General Corporation Law and our charter documents that may delay, defer or prevent a change of control.
Our current and potential competitors have or may develop one or more of the following significant advantages over us in the product areas where they compete with us: • tighter focus on an individual product or product category; • greater financial, technical and marketing resources; • barriers to transition to our products; • higher brand recognition across larger geographic regions; • more comprehensive product features and functionality; • longer-standing cooperative relationships with OEM and end-user customers; • superior customer service capacity and quality; • longer operating history; and • larger customer base.
Our current and potential competitors have or may develop one or more of the following significant advantages over us in the product areas where they compete with us: • tighter focus on an individual product or product category; • greater financial, technical and marketing resources; • barriers to transition to our products; • higher brand recognition across larger geographic regions; • more comprehensive product features and functionality, including, but not limited to, with respect to product security; • longer-standing cooperative relationships with OEM and end-user customers; • superior customer service capacity and quality; • longer operating history; and • larger customer base. 11 Table of Contents We cannot provide assurance that we will be able to compete successfully with our current and potential competitors.
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 failure to comply effectively with the requirements of applicable environmental, data privacy and security legislation and regulation could have a material adverse effect on our revenue and profitability. Production, sale and marketing of products and services in certain states and countries may subject us to environmental, data privacy and security regulations.
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.
Natural disasters, wars and other events beyond our control could have material adverse impacts on our business. 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.
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.
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.
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.
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.
Although we have implemented policies and procedures with the intention of ensuring compliance with these laws and regulations, our employees, contractors and agents, as well as channel partners involved in our international sales, may take actions in violation of our policies.
Although we have implemented policies and procedures with the intention of ensuring compliance with these laws and regulations, our employees, contractors and agents, as well as channel partners involved in our international sales, may take actions in violation of our policies. Many of our vendors and strategic business allies also have international operations and are subject to the above-described risks.
There can be no assurance that the steps taken by us in this regard will be adequate to prevent the misappropriation of our technology. Our pending patent applications may be denied and any patents, once issued, may be circumvented by our competitors. Furthermore, there can be no assurance that others will not develop technologies that are superior to our technologies.
Our pending patent applications may be denied and any patents, once issued, may be circumvented by our competitors. Furthermore, there can be no assurance that others will not develop technologies that are superior to our technologies.
Even if we enhance existing products and develop new products, applications and services that are accepted by our target markets, the net revenue from these products, applications and services may not be sufficient to justify our investment in research and development.
Even if we enhance existing products and develop new products, applications and services that are accepted by our target markets, the net revenue from these products, applications and services may not be sufficient to justify our investment in research and development. 12 Table of Contents Many of our products, applications and services have been developed through a combination of internally developed technologies and acquired technologies.
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.
In other areas of our business, we offer hosted services and cloud-based platform, software applications, and supporting products and services. 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.
Government and Political Risks Our inability to obtain the appropriate telecommunications carrier certifications or approvals from governmental regulatory bodies could impede our ability to grow revenue in our wireless products. The sale of our wireless products in certain geographical markets is sometimes dependent on the ability to gain telecommunications carrier certifications and/or approvals by certain governmental bodies.
The sale of our wireless products in certain geographical markets is sometimes dependent on the ability to gain telecommunications carrier certifications and/or approvals by certain governmental bodies.
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.
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.
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, our products operate with and are dependent on products and components across a broad ecosystem. 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.
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.
During fiscal 2024, the closing price of our common stock on the Nasdaq Global Select Market ranged from $22.07 to $32.82 per share. Our closing sale price on November 8, 2024 was $25.29 per share.
From time to time, we receive notification of a third-party claim that our products allegedly infringe intellectual property rights owned by others.
The communications technology industry is characterized by frequent litigation regarding patent and other intellectual property rights. From time to time, we receive notification of a third-party claim that our products allegedly infringe intellectual property rights owned by others.
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.
Our ability to continue to develop products, applications and services could be partially dependent on finding and acquiring new technologies in the marketplace. 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.
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.
Risks Related to Economic and Market Conditions Our consolidated operating results and financial condition may be adversely impacted by worldwide economic and credit conditions.
Our business and prospects depend to a significant degree upon the continuing contributions of our executive officers and key technical and other personnel. Competition for such personnel is intense, and in the current environment of large numbers of workers leaving their current employment for new opportunities, there can be no assurance that we will be successful in retaining qualified personnel.
Competition for such personnel is intense, and in the current environment of large numbers of workers leaving their current employment for new opportunities, there can be no assurance that we will be successful in 13 Table of Contents retaining qualified personnel. Failure to attract and retain key personnel could result in our failure to execute our business strategy.
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.
Further, as the regulatory focus on data privacy and 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. In addition, cybersecurity is an issue that is becoming increasingly regulated.
As regulations take effect or evolve it is possible we may encounter issues being fully compliant with these legal standards which could result in material adverse effects on our business. Risks Related to Our Intellectual Property Our ability to compete could be jeopardized if we are unable to protect our intellectual property rights.
As regulations take effect or evolve it is possible we may encounter issues being fully compliant with these legal standards which could result in material adverse effects on our business. Issues related to the of artificial intelligence may result in regulatory or legal action, damage our reputation, or harm our business.
However, many of our customers make significant one-time hardware purchases for large projects that are not repeated. As a result, our revenue may be subject to significant fluctuations based on whether we are able to close significant project based sales opportunities. In addition, in our SmartSense by Digi and Ventus businesses certain customers have outsized deployments relative to other customers.
No single customer has represented more than 10% of our revenue in any of the last three fiscal years. However, many of our customers make significant one-time hardware purchases for large projects that are not repeated. As a result, our revenue may be subject to significant fluctuations based on whether we are able to close significant project-based sales opportunities.
As such, we expect that our revenue from these products will continue to decline over time. As a result, our future prospects depend in part on our ability to acquire or develop and successfully market additional products that address growth markets. Unanticipated changes in our tax rates could affect our future results.
As a result, our future prospects depend in part on our ability to acquire or develop and successfully market additional products that address growth markets.
The Waste Electrical and Electronic Equipment Directive makes producers of certain electrical and electronic equipment financially responsible for collection, reuse, recycling, treatment and disposal of equipment placed in the European Union market. The Restrictions of Hazardous Substances Directive bans the use of certain hazardous materials in electric and electrical equipment which are put on the market in the European Union.
For example, the European Union has issued two directives relating to chemical substances in electronic products. The Waste Electrical and Electronic Equipment Directive makes producers of certain electrical and electronic equipment financially responsible for collection, reuse, recycling, treatment and disposal of equipment placed in the European Union market.
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.
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.
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.
If we fail to comply with these regulations, we may not be able to sell our 16 Table of Contents products and services in jurisdictions where these regulations apply or subject us to fines or penalties, which could have a material adverse effect on our revenue and profitability.
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.
As such, their sales growth is not necessarily predictable or assured. 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.
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.
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. Additionally, it is probable that new competitors or new alliances among existing competitors could emerge and rapidly acquire significant market share.
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.
In addition, our competitors may be more effective at using AI in their operations, products and services, which may put us at a competitive disadvantage. 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.
Natural disasters, wars and other events beyond our control could impact our supply chain and customers negatively resulting in an adverse impact to our revenue and profitability.
Our financial condition could be impacted if our wireless carriers increase the prices of their services or suffer operational or technical failures. Natural disasters, wars and other events beyond our control could impact our supply chain and customers negatively resulting in an adverse impact to our revenue and profitability.
Competitive and Reputational Risks We face intense competition from established companies that may have significant advantages over us and our products. The market for our products is intensely competitive.
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. Competitive and Reputational Risks We face intense competition from established companies that may have significant advantages over us and our products. The market for our products is intensely competitive.
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.
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.
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.
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.
These disruptions also caused us to order significant amounts of inventory as we were uncertain whether we would otherwise be able to procure necessary parts and components to meet customer needs. As a result, we have held elevated levels of inventory compared to historical norms.
Further, in recent years supply chains globally have experienced stress due to a range of factors. This has impacted our own ability to procure certain inventory and services. These disruptions also caused us to order significant amounts of inventory as we were uncertain whether we would otherwise be able to procure necessary parts and components to meet customer needs.
We participate in a services and solutions model that uses both hardware and cloud-based services. Both our SmartSense by Digi and Ventus offerings deploy hardware, software and cloud-based hosting. In other areas of our business we offer hosted services and cloud-based platform, software applications, and supporting products and services.
Our participation in a services and solutions model, using hardware and cloud-based services, presents execution and competitive risks. We participate in a services and solutions model that uses both hardware and cloud-based services. Both our SmartSense by Digi and Ventus offerings as well as our Digi 360 and Digi LifeCycle Assurance offerings deploy hardware, software and cloud-based hosting.
As discussed in other risk factors, there could be circumstances beyond our control that could exacerbate the conditions that would lead to such an impairment. Risks Relating to Our Industry We are dependent on wireless communication networks owned and controlled by others.
As discussed in other risk factors, there could be circumstances beyond our control that could exacerbate the conditions that would lead to such an impairment. ITEM 1B. UNRESOLVED STAFF COMMENTS None.
Our revenue could decline if we are unable to deliver continued access to digital cellular wireless carriers that we depend on to provide sufficient network capacity, reliability and security to our customers. Our financial condition could be impacted if our wireless carriers increase the prices of their services or suffer operational or technical failures.
Risks Relating to Our Industry We are dependent on wireless communication networks owned and controlled by others. Our revenue could decline if we are unable to deliver continued access to digital cellular wireless carriers that we depend on to provide sufficient network capacity, reliability and security to our customers.
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.
Furthermore, delays in payment and/or extended payment terms from larger customers could have a disproportionate and material negative impact on our cash flows and working capital to support our business operations. 7 Table of Contents 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.
Part of our longer term strategy is to sell software applications and IoT solutions such as SmartSense by Digi and Ventus offerings as well as selling hardware together with bundled services on a subscription basis.
Part of our strategy is to sell software applications and IoT solutions such as SmartSense by Digi, Ventus offerings and hardware bundled with services on a subscription basis. 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.
If we fail to manage our existing or future sales through distributors and resellers effectively, our business and operating results could be materially and adversely affected. Acquisitions could disrupt our business and seriously harm our financial condition. We will continue to consider acquisitions of businesses, products or technologies.
Because of the lengthy sales cycle and the large size of certain customer orders, if orders forecasted for a specific customer are not realized or delayed, our operating results could be materially adversely affected. 6 Table of Contents Acquisitions could disrupt our business and seriously harm our financial condition. We will continue to consider acquisitions of businesses, products or technologies.
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.
In addition, ocean freight delays may occur as a result of labor problems, weather delays, expediting orders for third parties, customs issues, geopolitical tensions, or other events beyond our control. 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.
We have made targeted investments to provide enhanced and new products into these mature markets and believe this may mitigate declining demand. However, over the longer term, the overall market for these hardware products is expected to decrease due to the adoption of new technologies.
Some of our hardware products are sold into mature markets that are characterized by a trend of declining demand. We have made targeted investments to provide enhanced and new products into these mature markets and believe this may mitigate declining demand.
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.
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.
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.
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.
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. The conflict in the Middle East may cause shipping disruptions and increased transport costs that could have a material adverse effect on our ability to obtain components from our foreign suppliers and our financial results.
Product delivery times may be extended due to the distances involved or events beyond our control, requiring more lead time in ordering. In addition, ocean freight delays may occur as a result of labor problems, weather delays, expediting orders for third parties, customs issues or other events beyond our control.
We purchase many components from suppliers in other parts of the world. Product delivery times may be extended due to the distances involved or events beyond our control, requiring more lead time in ordering.
Our ability to compete depends in part on our proprietary rights and technology. Our proprietary rights and technology are protected by a combination of copyrights, patents, trade secrets and trademarks. We enter into confidentiality agreements with our employees, and sometimes with our customers, potential customers and other third parties, and limit access to the distribution of our proprietary information.
Risks Related to Our Intellectual Property Our ability to compete could be jeopardized if we are unable to protect our intellectual property rights. Our ability to compete depends in part on our proprietary rights and technology. Our proprietary rights and technology are protected by a combination of copyrights, patents, trade secrets and trademarks.
Some of our products are sold into mature markets, which could limit our ability to continue to generate revenue from these products. Some of our hardware products are sold into mature markets that are characterized by a trend of declining demand.
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. Some of our products are sold into mature markets, which could limit our ability to continue to generate revenue from these products.
The 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.
There 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.
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.
In addition, in our SmartSense by Digi and Ventus businesses certain customers have outsized deployments relative to other customers. It is possible we will see revenue fluctuations in these businesses based upon the scale of new deployments in different financial periods.
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. Delays or lost revenue could be caused by other factors beyond our control, including late deliveries by vendors of components, or force majeure events.
Delays or lost revenue could be caused by other factors beyond our control, including late deliveries by vendors of components, or force majeure events. As an example of force majeure, a fire in November 2014 disrupted the operations at one of our contract manufacturers in Thailand.
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. Certain proposals may result in costly proxy contests or litigation that can disrupt our business operations or result in an adverse effect on our operating results.
Certain proposals may result in costly proxy contests or litigation that can disrupt our business operations or result in an adverse effect on our operating results. 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.
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.
The Prior Credit Facility consisted of a $350 million term loan B secured loan and a $35 million revolving credit facility that included a $10 million letter of credit subfacility and $10 million swingline subfacility. 15 Table of Contents 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.
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.
Technology and Cybersecurity Risks We are subject to various cybersecurity risks, including risk to our products, solutions, and internal systems. These risks may increase our costs and could damage our brand and reputation. Our products and software may contain unknown security vulnerabilities that could be exploited by bad actors.
Removed
Further, in recent years supply chains globally have experienced 6 Table of Contents stress due to a range of factors. This continues to impact our own ability to procure certain inventory and services.
Added
As a result, at times we held elevated levels of inventory compared to historical norms. The impacts of these circumstances driven by supply chain stress were material in some instances and it is possible additional material impacts could occur in the future.
Removed
Because of the lengthy sales cycle and the large size of certain customer orders, if orders forecasted for a specific customer are not realized or delayed, our operating results could be materially adversely affected. Our participation in a services and solutions model, using hardware and cloud-based services, presents execution and competitive risks.
Added
While we may consider smaller acquisitions that present a lower level of the below stated risks, we publicly have signaled our intent to focus our efforts more on acquisitions that would enhance the scale our business. Such acquisitions offer greater upside to our business, but also present greater risks.
Removed
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.
Added
If we fail to manage our existing or future sales through distributors and resellers effectively, our business and operating results could be materially and adversely affected. 8 Table of Contents The businesses of our IoT Solutions segment are subject to the risks faced by businesses operating in emerging markets.

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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, 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.
Biggest changePROPERTIES The following table contains a listing of our property locations that were material to us as of September 30, 2024: 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 changeSee Note 16 to the consolidated financial statements included in this annual report for additional information relating to legal matters.
Biggest changeSee Note 13 to the consolidated financial statements included in this annual report for additional information relating to legal matters.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeBelow 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%.
Biggest changeBelow we highlight the metrics for fiscal 2024 that we feel are most important in these evaluations, with comparisons to fiscal 2023: • Revenue was $424 million, a decrease of 5%. • Gross profit margin was 58.9%, an increase of 220 basis points. • Net income was $23 million, compared to $25 million. • Net income per diluted share was $0.61, compared to $0.67. • Adjusted net income per diluted share was $1.99 , flat year over year. • Adjusted EBITDA was $98 million, an increase of 2%. • ARR was over $116 million at the end of the fiscal year, an increase of 9%.
Among others, these include risks related to ongoing and varying inflationary and deflationary pressures around the world and the monetary policies of governments globally as well as present concerns about a potential recession 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.
Among others, these include risks related to ongoing and varying inflationary and deflationary pressures around the world and the monetary policies of governments globally as well as present and ongoing concerns about a potential recession, the ability of companies like us to operate a global business in such conditions as well as negative effects on product demand and the financial solvency of customers and suppliers in such conditions, risks related to ongoing supply chain challenges that continue to impact businesses globally, risks related to cybersecurity, risks arising from the present wars in Ukraine and the Middle East, the highly competitive market in which our company operates, rapid changes in technologies that may displace products sold by us, declining prices of networking products, our reliance on distributors and other third parties to sell our products, the potential for significant purchase orders to be canceled or changed, delays in product development efforts, uncertainty in user acceptance of our products, the ability to integrate our products and services with those of other parties in a commercially accepted manner, potential liabilities that can arise if any of our products have design or manufacturing defects, our ability to integrate and realize the expected benefits of acquisitions, our ability to defend or settle satisfactorily any litigation, the impact of natural disasters and other events beyond our control that could negatively impact our supply chain and customers, potential unintended consequences associated with restructuring, reorganizations or other similar business initiatives that may impact our ability to retain important employees or otherwise impact our operations in unintended and adverse ways, and changes in our level of revenue or profitability which can fluctuate for many reasons beyond our control.
Forward-Looking Statements This discussion contains forward-looking statements that are based on management’s current expectations and assumptions. These statements often can be identified by the use of forward-looking terminology such as "assume," "believe," "anticipate," "intend," "estimate," "target," "may," "will," "expect," "plan," "potential," "project," "should," or "continue," or the negative thereof or other variations thereon or similar terminology.
Forward-Looking Statements This discussion contains forward-looking statements that are based on management’s current expectations and assumptions. These statements often can be identified by the use of forward-looking terminology such as "assume," "believe," "continue," "estimate," "expect," "intend," "may," "plan," "potential," "project," "should," or "will" or the negative thereof or other variations thereon or similar terminology.
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.
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. 22 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, 2018, 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, 2019, for our common stock, the U.S. Benchmark Index and the Peer Index and assumes the reinvestment of all dividends.
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.
In fiscal 2024, 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.
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.
In addition, to the above macro conditions, we believe the following trends will continue to impact our business in fiscal 2025 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. 23 Table of Contents ITEM 7.
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.
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 2022 compared to fiscal 2023.
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.
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 2023, filed with the SEC on November 22, 2023.
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.
Companies on September 30, 2019 to September 30, 2024, the last day of fiscal 2024, 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.
Among other items, these statements relate to expectations of the business environment in which Digi operates, projections of future performance, perceived marketplace opportunities and statements regarding our mission and vision. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions.
Among other items, these statements relate to expectations of the business environment in which Digi operates, projections of future performance, inventory levels, perceived marketplace opportunities, debt repayments, attributions of potential acquisitions and statements regarding our mission and vision. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions.
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.
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 2024: 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, 2024 - July 31, 2024 91 $ 23.35 — $ — August 1, 2024 - August 31, 2024 1,907 $ 27.12 — $ — September 1, 2024 - September 30, 2024 64 $ 27.70 — $ — Total 2,062 $ 26.97 — $ — (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. 20 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 - U.S.
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.
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. On November 8, 2024 there were 95 stockholders of record.
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.
During fiscal 2024 we delivered on these objectives by increasing ARR by 9% from the end of fiscal 2023 to the end of fiscal 2024. This included an increase of 9% in our Products and Services business segment and 10% in our Solutions business segment.
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.
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) 2024 2023 2024 compared to 2023 Revenue 100.0 100.0 — Cost of sales 41.1 43.3 (2.2) Gross profit 58.9 56.7 2.2 Operating expenses 47.6 45.4 2.2 Operating income 11.3 11.3 — Other expense, net (5.9) (5.7) (0.2) Income before income taxes 5.4 5.6 (0.2) Income tax expense 0.1 — 0.1 Net income 5.3 % 5.6 % (0.3) REVENUE BY SEGMENT Year ended September 30, ($ in thousands) 2024 2023 % Increase (decrease) Revenue IoT Products & Services $ 324,444 76.5 % $ 345,680 77.7 % (6.1) IoT Solutions 99,602 23.5 99,169 22.3 0.4 Total revenue $ 424,046 100.0 % $ 444,849 100.0 % (4.7) IoT Products & Services IoT Products & Services revenue decreased 6.1% for fiscal 2024, as compared to fiscal 2023.
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.
Political tensions between China and other nations have become more heightened which could lead to similar issues. And the ongoing war in the Middle East has led to disruptions in shipping and could cause other issues such as an increase in the price of oil which could impact transport costs.
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.
For instance, many Western governments have imposed a range of trade restrictions on Chinese products and components that if expanded could lead to disruptions in our business. Due to 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.
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.
With respect to supply chain, conditions continued to improve during fiscal 2024, but we still experience shortages of some important components. These supply chain shortages led to component purchases at levels that were higher than historical trends to assure we could meet customer demand. This drove higher levels of inventory, which in recent quarters has normalized.
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.
Monetary and fiscal policies have fluctuated in different parts of the world to deal with both inflationary and deflationary pressures. These situations could all lead to potential adverse impacts on a wide range of businesses and could impact the businesses of our vendors and customers in ways that could impact our sales.
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.
We utilize many financial, operational, and other metrics to evaluate our financial condition and financial performance.
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.
IoT Solutions ARR was $92 million as of September 30, 2024, compared to $84 million as of September 30, 2023, driven by growth in both SmartSense and Ventus. 24 Table of Contents
FY18 FY19 FY20 FY21 FY22 FY23 Digi International Inc. $ 100.00 $ 101.26 $ 116.21 $ 156.65 $ 257.03 $ 200.74 Nasdaq U.S.
FY19 FY20 FY21 FY22 FY23 FY24 Digi International Inc. $ 100.00 $ 114.76 $ 154.70 $ 254.04 $ 225.04 $ 202.13 Nasdaq U.S.
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.
Key trends regarding our existing business There are a number of circumstances globally that we are monitoring for potential impacts on our business. Global economic conditions and political tensions have the ability to cause business disruptions.
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.
The decline was partially offset by $3.5 million of service revenue growth. IoT Solutions IoT Solutions revenue increased 0.4% for fiscal 2024, as compared to fiscal 2023. The increase consisted of a $5.6 million increase in recurring revenue offset by a $3.2 million decrease in one time services volume and a $2.0 million decrease in hardware sales.
Removed
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.
Added
Benchmark TR Index $ 100.00 $ 115.46 $ 152.43 $ 124.98 $ 156.73 $ 204.31 Nasdaq Telecommunications Index $ 100.00 $ 103.19 $ 113.71 $ 82.61 $ 100.78 $ 125.05 ITEM 6. [RESERVED] 21 Table of Contents ITEM 7.
Removed
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.
Added
In addition, because of supply chain shortages in prior years customers of some of our products stockpiled inventory to assure a steady supply was readily available for their needs. In turn, these same customers have now slowed purchases as they work through those stockpiles. We expect the effects on demand to impact future sales of some products during fiscal 2025.
Removed
We expect the supply chain to continue to normalize in fiscal 2024 as we work through elevated inventory levels.
Added
The decrease consisted of a $24.7 million decline in product sales volume, with no material impact from pricing. The decrease was driven by lower demand for some products, as some customers bled down inventory stockpiled from when supply chains were stressed, as well as certain prior year project-based sales not reoccurring.
Removed
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
These results reflect some customers reducing the scope of their operations and others electing to make new deployments by obtaining hardware under a subscription contract versus purchasing hardware and obtaining only services under subscription. ARR ARR was $116 million as of September 30, 2024, compared to $106 million as of September 30, 2023.
Removed
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.
Added
IoT Products & Services ARR was $24 million as of September 30, 2024, compared to $22 million as of September 30, 2023. This increase was due to growth in the subscription base across remote management platforms and extended warranty offerings.
Removed
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)

1 edited+0 added−0 removed0 unchanged
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
Biggest changeITEM 6. [Reserved] 21 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 22 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 33 ITEM 8. Financial Statements and Supplementary Data 34 ITEM 9. Changes in and Disagreements with Accountants On Accounting and Financial Disclosure 64 ITEM 9A. Controls and Procedures 65

Item 7. Management's Discussion & Analysis

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

42 edited+5 added−9 removed27 unchanged
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 $6.2 million gain in 2022, incremental investments in Opengear and SmartSense by Digi, an increase in stock-based compensation expense and an increase in costs associated with ongoing litigation. 24 Table of Contents ITEM 7.
Biggest changeOPERATING EXPENSES Below are our operating expenses and operating expenses as a percentage of total revenue: Year ended September 30, ($ in thousands) 2024 2023 $ increase (decrease) % Increase (decrease) Operating Expenses Sales and marketing $ 83,278 19.7 % $ 81,681 18.3 % $ 1,597 2.0 % Research and development 60,289 14.2 58,648 13.2 1,641 2.8 General and administrative 58,250 13.7 61,779 13.9 (3,529) (5.7) Total operating expenses $ 201,817 47.6 % $ 202,108 45.4 % $ (291) (0.1) % The $0.3 million decrease in operating expenses in fiscal 2024 from fiscal 2023 was the result of a $3.9 decrease in non-labor expense and a $2.1 million gain on the sale of an intangible asset, partially offset by a $5.7 million increase to litigation reserves. 25 Table of Contents ITEM 7.
(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.
(2) For the twelve months ended September 30, 2024 and September 30, 2023, 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.
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.
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 31 Table of Contents ITEM 7.
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.
Results of our Fiscal 2024 Annual Impairment Test As of June 30, 2024, we had a total of $32.7 million of goodwill for the Cellular Routers reporting unit, $57.1 million of goodwill for the Console Servers reporting unit, $64.2 million of goodwill for the OEM Solutions reporting unit, $20.4 million of goodwill for the Infrastructure Management reporting unit, $48.9 million of goodwill for the SmartSense by Digi reporting unit and $118.6 million of goodwill for the Ventus reporting unit.
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 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. 26 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.
We believe the following critical accounting policies impact our more significant judgments and estimates used in the preparation of our consolidated financial statements. 30 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.
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. 28 Table of Contents ITEM 7.
LIQUIDITY AND CAPITAL RESOURCES Historically we have financed our operations and capital expenditures principally with funds generated from operations. In fiscal 2021 we issued an equity offering and in fiscal 2022 we issued debt to fund our acquisition of Ventus.
LIQUIDITY AND CAPITAL RESOURCES Historically we have financed our operations and capital expenditures principally with funds generated from operations. In fiscal 2022 we issued debt to fund our acquisition of Ventus.
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.
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 $3.6 million as of September 30, 2024.
Contracts with Multiple Performance Obligations From time to time we have contracts from customers with multiple performance obligations. Our hardware products may be combined with our Digi Remote Manager PaaS offering as well as other support services in an individual contract. Our SmartSense by Digi revenues typically are derived from contracts with multiple performance obligations.
Our hardware products may be combined with our Digi Remote Manager PaaS offering as well as other support services in an individual contract. Our SmartSense by Digi revenues typically are derived from contracts with multiple performance obligations.
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.
INCOME TAXES Our effective income tax expense (benefit) rates were 1.5%, 0.6% and (4.1)% for fiscal 2024, 2023 and 2022, respectively. Our effective tax rate will vary based on a variety of factors.
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.
Some of Digi Support Services revenue is one-time in nature for training and this revenue is recognized as the services are performed. Professional Services Revenue Professional services revenue is derived from our Digi Wireless Design Services contracts on either on a time-and-materials or a fixed-fee basis.
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.
In future periods, we continue to expect that the majority of our sales will be in U.S. Dollar. 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.
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.
This revenue is recognized over the life of the service term and is included in our IoT Products & Services segment. Digi Support Services revenues are recognized over the life of the support contract and included in our IoT Products & Services segment.
We will continue to monitor potential impacts to our assumptions, as any changes could potentially affect our cash flows and market capitalization.
Changes in circumstances or a potential event could negatively affect the estimated fair values. We will continue to monitor potential impacts to our assumptions, as any changes could potentially affect our cash flows and market capitalization.
At June 30, 2023, the fair value of goodwill exceeded the carrying value for all six reporting units and no impairment was recorded. 31
At June 30, 2024, the fair value of goodwill exceeded the carrying value for all six reporting units and no impairment was recorded. Ventus fair value exceeded carrying values by less than 10%. 32
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.
ARR should be viewed independently of revenue and deferred revenue and is not intended to replace or forecast either item. We use 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.
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.
During 2024, 2023 and 2022, we had approximately $121.6 million, $121.1 million and $85.8 million, respectively, of revenue related to foreign customers including export sales, of which $0.4 million, $0.8 million and $0.8 million, respectively, were denominated in foreign currencies, predominantly the Canadian Dollar.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COST OF GOODS SOLD AND GROSS PROFIT BY SEGMENT Below are our segments' cost of goods sold and gross profit as a percentage of their respective total revenue: Year ended September 30, Basis point increase (decrease) ($ 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.
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) 2024 2023 Cost of Goods Sold IoT Products & Services $ 147,243 45.4 % $ 157,722 45.6 % (20) IoT Solutions 26,897 27.0 % 34,924 35.2 % (820) Total cost of goods sold $ 174,140 41.1 % $ 192,646 43.3 % (220) Year ended September 30, Basis point increase (decrease) ($ in thousands) 2024 2023 Gross Profit IoT Products & Services $ 177,201 54.6 % $ 187,958 54.4 % 20 IoT Solutions 72,705 73.0 % 64,245 64.8 % 820 Total gross profit $ 249,906 58.9 % $ 252,203 56.7 % 220 IoT Product & Services IoT Products & Services gross profit margin increased 20 basis points for fiscal 2024 as compared to the prior fiscal year.
This market approach method estimates the price reasonably expected to be realized from the sale of the reporting unit based on comparable companies. Assumptions and estimates to determine fair values under the income and market approaches are complex and often subjective. They can be affected by a variety of factors. These include external factors such as industry and economic trends.
The market approach determines a value derived from the guideline company method. This market approach method estimates the price reasonably expected to be realized from the sale of the reporting unit based on comparable companies. Assumptions and estimates to determine fair values under the income and market approaches are complex and often subjective.
They also include internal factors such as changes in our business strategy and our internal forecasts. We believe we made a reasonable estimate with the assumptions used to calculate the fair values of our two reporting segments. Changes in circumstances or a potential event could negatively affect the estimated fair values.
They can be affected by a variety of factors. These include external factors such as industry and economic trends. They also include internal factors such as changes in our business strategy and our internal forecasts. We believe we made a reasonable estimate with the assumptions used to calculate the fair values of our two reporting segments.
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.
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, 2024 2023 Net income and net income per diluted share $ 22,505 $ 0.61 $ 24,770 $ 0.67 Amortization 24,552 0.66 25,226 0.68 Stock-based compensation expense 13,159 0.36 13,286 0.36 Other non-operating expense, net 94 — (59) — Acquisition expense, net (127) — 940 0.03 Litigation accrual 5,700 0.15 — — Changes in fair value of contingent consideration (2,111) (0.06) — — Restructuring charge 430 0.01 141 — Interest expense, net 15,415 0.42 25,236 0.68 Debt issuance cost write off 9,722 0.26 — — Tax effect from above net income adjustments (1) (17,005) (0.45) (18,488) (0.50) Discrete tax expenses (2) 1,212 0.03 2,490 0.07 Adjusted net income and adjusted net income per diluted share (3) $ 73,546 $ 1.99 $ 73,542 $ 1.99 Diluted weighted average common shares 36,984 36,869 (1) The tax effect from the above adjustments assumes an estimated effective tax rate of 18.0% for fiscal 2024 and 2023 based on adjusted net income.
These include our overall profitability, the geographical mix of income before taxes and related statutory tax rate in each jurisdiction, and discrete events, such as settlement of audits (see Note 12 to our consolidated financial statements).
These include our overall profitability, the geographical mix of income before taxes and related statutory tax rate in each jurisdiction, and discrete events, such as settlement of audits (see Note 10 to our consolidated financial statements). KEY BUSINESS METRICS ARR, represents the annualized monthly value of all billable subscription contracts, measured at the end of any fiscal period.
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.
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. A separate discount rate is determined for each reporting unit and these cash flows are then discounted to determine the fair value of the reporting unit.
We also derive service revenue from our Digi Remote Manager, a platform-as-a-service (“PaaS”) offering, whereby customers pay for services consumed based on the number of devices being managed or monitored. This revenue is recognized over the life of the service term and is included in our IoT Products & Services segment.
Generally, our subscription renewal charges per month are the same as the original contract term. We also derive service revenue from our Digi Remote Manager, a platform-as-a-service (“PaaS”) offering, whereby customers pay for services consumed based on the number of devices being managed or monitored.
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.
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, 2024 2023 % of total revenue % of total revenue Total revenue $ 424,046 100.0 % $ 444,849 100.0 % Net income 22,505 5.3 % $ 24,770 5.6 % Interest expense, net 15,415 25,236 Debt issuance cost write off 9,722 — Income tax expense 353 148 Depreciation and amortization 33,064 31,979 Stock-based compensation expense 13,159 13,286 Litigation accrual 5,700 — Changes in fair value of contingent consideration (2,111) — Restructuring charge 430 141 Acquisition expense, net (127) 940 Adjusted EBITDA $ 98,110 23.1 % $ 96,500 21.7 % 27 Table of Contents ITEM 7.
Installation service charges from these sales are recorded when the product is installed. Subscription and Support Services Revenue Our SmartSense by Digi ® and Ventus subscription revenue is based on contracts with at least an annual term and is recorded on a monthly basis.
Subscription and Support Services Revenue Our SmartSense by Digi ® and Ventus subscription revenue is based on contracts with at least an annual term and is recorded on a monthly basis. These subscriptions are generally in a range from one to five years, and may contain an evergreen renewal provision.
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.
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. A discounted cash flow (“DCF”) method is utilized for the income approach.
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 $18.4 million in fiscal 2022, • a decrease in amortization expense, and • increases in deferred income tax benefits (provisions) and provisions for bad debt.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As follows, our consolidated statements of cash flows for the years ended September 30, 2024 and 2023 is summarized: Year ended September 30, ($ in thousands) 2024 2023 Operating activities $ 83,092 $ 36,751 Investing activities 3 (4,345) Financing activities (89,048) (34,500) Effect of exchange rate changes on cash and cash equivalents 1,770 (1,113) Net decrease in cash and cash equivalents $ (4,183) $ (3,207) Cash flows from operating activities increased $46.3 million as a result of: • a $11.7 million increase in net operating assets for fiscal 2024 compared to a $21.7 million decrease in fiscal 2023, • a $9.7 million debt issuance cost write-off included in net income in fiscal 2024, • a $5.7 million litigation accrual included in net income in fiscal 2024.
Material differences between the historical trends used to determine estimated reserves and actual credit returns and pricing adjustments could result in a material change to our consolidated results of operations or financial position. Equipment revenue from SmartSense by Digi within our IoT Solutions segment is recognized upon shipment of the equipment to a customer.
Estimated reserves for future credit returns and price adjustments are charged against revenue in the same period as the corresponding sales are recorded. Material differences between the historical trends used to determine estimated reserves and actual credit returns and pricing adjustments could result in a material change to our consolidated results of operations or financial position.
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.
Subscriptions primarily include contracts for term-based equipment usage, the delivery of data insights, extended warranty coverage or customer service coverage. 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.
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.
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. 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.
This increase was primarily the result of growth in higher margin ARR subscription revenues.
This increase was the result of growth in higher margin ARR subscription revenues, favorable mix within one time volume and a reduction in inventory adjustments.
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.
This increase was driven by increased recurring revenue at high margin rates and by a reduction in inventory adjustments and reduced inflationary pressures, partially offset by decreased product volume. IoT Solutions The IoT Solutions gross profit margin increased 820 basis points for fiscal 2024 as compared to the prior fiscal year.
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 $5.6 million increase in other expense in fiscal 2023 from fiscal 2022 primarily was the result of an increase in our interest expense due to an increase in our effective interest rate (see Note 7 to the condensed consolidated financial statements).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OTHER EXPENSE, NET Year ended September 30, ($ in thousands) 2024 2023 $ increase (decrease) % Increase (decrease) Other expense, net Interest expense, net $ (15,415) (3.7) % $ (25,236) (5.7) % $ 9,821 (38.9) % Debt issuance cost write off (9,722) (2.3) — — (9,722) NM Other expense, net (94) — 59 — (153) NM Total other expense, net $ (25,231) (6.0) % $ (25,177) (5.7) % $ (54) 0.2 % The $0.1 million increase in other expense in fiscal 2024 from fiscal 2023 was driven by the $9.7 million debt issuance cost expense realized upon the extinguishment of our prior credit facility partially offset by a decrease in our average debt outstanding and our effective interest rate on debt(see Note 6 to the condensed consolidated financial statements).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTRACTUAL OBLIGATIONS The following summarizes our contractual obligations at September 30, 2023: Payments due by fiscal period ($ 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTRACTUAL OBLIGATIONS The following summarizes our contractual obligations at September 30, 2024: Payments due by fiscal period ($ in thousands) Total Less than 1 year 1-3 years 3-5 years Thereafter Operating leases $ 16,768 $ 3,791 $ 5,375 $ 3,737 $ 3,865 Revolving loan 124,300 — — 124,300 — Total $ 141,068 $ 3,791 $ 5,375 $ 128,037 $ 3,865 The operating lease agreements included above primarily relate to office space.
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.
These increases were partially offset by: • a $2.3 million decrease in net income in fiscal 2024 • and a $2.2 million increase in gains from the sale of assets in fiscal 2024.
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).
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 7, 2023, we entered into a credit agreement.
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).
For additional information regarding the terms of our Credit Facility, including the Revolving Loan and its subfacilities, see Note 6 to our condensed consolidated financial statements. The Credit Agreement replaced our prior credit agreement that consisted of a $350 million term loan B secured loan and a $35 million revolving credit facility.
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.
Cash flows from financing activities decreased $54.5 million as a result of: • debt payments of $304.7 million in fiscal 2024, including $213.6 million to retire our prior credit facility, and payments of $91.1 million against our new credit facility, compared to debt payments of $36.4 million in fiscal 2023. • and a $1.0 million decrease in proceeds from stock option plan transactions.
The credit agreement consists of a $350 million term loan B secured loan and a $35 million revolving credit facility. The $35 million revolving credit facility, which presently has no outstanding balance, includes a $10 million letter of credit subfacility and $10 million swingline subfacility.
The $35 million revolving credit facility included a $10 million letter of credit subfacility and $10 million swingline subfacility. We expect positive cash flows from operations.
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.
These were partially offset by: • net proceeds of $214.1 million from the issuance of a new credit facility • and a $0.7 million decrease in taxes paid for net share settlement of share-based payment options and awards. 29 Table of Contents ITEM 7.
Removed
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.
Added
The Credit Agreement provides Digi with a $250 million senior secured revolving credit facility, with an uncommitted accordion feature that provides for additional borrowing capacity of up to the greater of $95 million or one hundred percent of trailing twelve month adjusted earnings before interest, taxes, depreciation, and amortization.
Removed
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.
Added
The Credit Facility also contains a $10 million letter of credit sublimit and $10 million swingline sub-facility. Digi used the proceeds to retire the remaining balance of the prior credit agreement and may use the proceeds in the future for general corporate purposes.
Removed
Digi refinanced the Term Loan Facility and Revolving Loan Facility under its existing credit agreement entered into on November 1, 2021, but did not receive any additional proceeds from nor modify the amounts of any facilities or subfacilities contained within that credit agreement.
Added
Cash flows used in investing activities decreased $4.3 million as a result of: • a $2.2 million increase in proceeds from the sale of property, equipment, improvements and certain other intangible assets • and a $2.1 million decrease in purchases of property, equipment, improvements and certain other intangible assets.
Removed
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).
Added
Equipment revenue from SmartSense by Digi within our IoT Solutions segment is recognized upon shipment of the equipment to a customer. Installation service charges from these sales are recorded when the product is installed.
Removed
This increase was partially offset by: • an increase in purchases of property, equipment, improvements and certain other intangible assets.
Added
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. Contracts with Multiple Performance Obligations From time to time we have contracts from customers with multiple performance obligations.
Removed
Estimated reserves for future credit returns and price adjustments are charged against revenue in the same period as the corresponding sales are recorded. Estimated sales returns for our distributor stock rotation program are accounted for under the guidance of ASC 845 Nonmonetary Transactions .
Removed
These subscriptions are generally in a range from one to five years, and may contain an evergreen renewal provision. Generally, our subscription renewal charges per month are the same as the original contract term.
Removed
A separate discount rate is determined for each reporting unit and these cash flows are then discounted to determine the fair value of the reporting unit. The market approach determines a value derived from the guideline company method.
Removed
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.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

31 edited+1 added−2 removed13 unchanged
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
Biggest changeCONSOLIDATED STATEMENTS OF CASH FLOWS Year ended September 30, 2024 2023 2022 Operating activities: (in thousands) Net income $ 22,505 $ 24,770 $ 19,383 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property, equipment and improvements 8,511 6,753 6,644 Amortization 25,106 27,203 30,928 Write-off of debt issuance costs 9,722 — — Stock-based compensation expense 13,159 13,286 8,578 Deferred income tax provision (11,761) (12,739) (3,387) Change in fair value of contingent consideration — — (6,200) Litigation accrual 5,700 — — Other, net (1,540) (806) (188) Changes in operating assets and liabilities (net of acquisitions): Accounts receivable (13,641) (5,558) (114) Inventories 8,786 (5,062) (34,468) Other assets (107) (1,214) (545) Income taxes 2,281 4,088 (1,305) Accounts payable 6,448 (15,503) 7,281 Accrued expenses 7,923 1,533 11,133 Net cash provided by operating activities 83,092 36,751 37,740 Investing activities: Acquisition of businesses, net of cash acquired — — (347,554) Purchase of property, equipment, improvements and certain other intangible assets (2,226) (4,345) (1,974) Proceeds from sales of intangibles 2,229 — — Net cash provided by (used in) investing activities 3 (4,345) (349,528) Financing activities: Proceeds from long-term debt 214,062 — 350,000 Payments of debt issuance costs — — (13,443) Payments on long-term debt (304,725) (36,375) (148,118) Proceeds from stock option plan transactions 2,978 3,926 9,505 Proceeds from employee stock purchase plan transactions 2,206 2,263 1,500 Taxes paid for net share settlement of share-based payment awards (3,569) (4,314) (6,662) Net cash (used in) provided by financing activities (89,048) (34,500) 192,782 Effect of exchange rate changes on cash and cash equivalents 1,770 (1,113) 1,474 Net decrease in cash and cash equivalents (4,183) (3,207) (117,532) Cash and cash equivalents, beginning of period 31,693 34,900 152,432 Cash and cash equivalents, end of period $ 27,510 $ 31,693 $ 34,900 Supplemental disclosures of cash flow information: Interest paid $ 14,763 $ 26,351 $ 14,209 Income taxes paid, net $ 7,306 $ 8,693 $ 4,333 Supplemental schedule of non-cash investing and financing activities: Accrual for property, equipment, improvements and certain other intangibles assets $ (164) $ (277) $ (191) Transfer of inventory to property, equipment and improvements $ (12,252) $ (3,889) $ (6,237) The accompanying notes are an integral part of the consolidated financial statements. 41 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.
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.
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 audit 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.
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.
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, 2024, 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, 2024, expressed an unqualified opinion on the Company's internal control over financial reporting.
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").
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, 2024, the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows, for the year ended September 30, 2024, and the related notes and the schedule listed in the Table of Contents at Item 15 (collectively referred to as the "financial statements").
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.
Dollar would have resulted in an immaterial increase or decrease in fiscal 2024 annual revenue and a 1.0% increase or decrease in stockholders' equity at September 30, 2024. The above analysis does not take into consideration any pricing adjustments we may make in response to changes in the exchange rates.
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.
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. 33 Table of Contents ITEM 8.
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.
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2024, and the results of its operations and its cash flows for the year ended September 30, 2024, in conformity with accounting principles generally accepted in the United States of America.
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.
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 audit in accordance with the standards of the PCAOB.
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.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
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.
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 audit.
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.
How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the discount rates and forecasts of revenue growth rate, future gross margins, EBITDA margins, revenue multiples within the Cellular Routers reporting unit and EBITDA multiples within the Ventus reporting unit 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 revenue growth rate, gross margins, EBITDA margins, revenue multiples within the Cellular Routers reporting unit, and EBITDA multiples within the Ventus reporting unit. • We evaluated management’s ability to accurately forecast revenue growth rate, gross margins and EBITDA margins by comparing actual results to management’s historical forecasts. • We evaluated the reasonableness of management’s revenue growth rate, gross margin and EBITDA margin forecasts by comparing the forecasts to: ◦ Historical revenue growth rate, 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. • With the assistance of our fair value specialists, we evaluated the revenue multiples within the Cellular Routers reporting unit and EBITDA multiples within the Ventus reporting unit, including testing the underlying source information and mathematical accuracy of the calculations, and comparing the multiples selected by management to its guideline companies. /s/ Deloitte & Touche LLP Minneapolis, Minnesota November 22, 2024 We have served as the Company’s auditor since 2022. 36 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Digi International Inc.
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.
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 discount rates and forecasts of future revenue growth rate, gross margins and earnings before income taxes, depreciation, and amortization (“EBITDA”) margins used in the income approach.
Opinion on the financial statements We have audited the accompanying consolidated balance sheets of Digi International Inc.
Opinion on the financial statements We have audited the accompanying consolidated balance sheet of 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.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Report of Independent Registered Public Accounting Firm (PCAOB ID 34) 35 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 34 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of 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.
We believe that our audit provides 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 37 Table of Contents ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED) DIGI INTERNATIONAL INC.
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.
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 the year then ended, 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, 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.
Based on the balance sheet position for both the Revolving Loan at September 30, 2024, the annualized effect of a 25-basis point change in interest rates would increase or decrease our interest expense by $0.3 million. For additional information, see Note 6 to our consolidated financial statements.
We do not use derivative financial instruments to hedge against interest rate risk because the majority of our investments mature in less than one year. We are exposed to market risks related to fluctuations in interest rates on amounts borrowed under the Credit Facility.
We do not use derivative financial instruments to hedge against interest rate risk because the majority of our investments mature in less than one year. We are exposed to market risks related to fluctuations in interest rates on amounts borrowed under the Credit Facility. As of September 30, 2024, we had $124.3 million outstanding under our Credit Facility.
(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”).
(a Delaware corporation) and subsidiaries (the “Company”) as of September 30, 2022 (not presented herein), the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the year then ended, and the related notes and consolidated financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”).
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.
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 35 Table of Contents audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to selection of the discount rates and forecasts of future revenue growth rate, gross margins, EBITDA margins and revenue multiples within the Cellular Routers reporting unit and EBITDA multiples within Ventus reporting unit.
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.
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.
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.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year ended September 30, 2024 2023 2022 (in thousands) Net income $ 22,505 $ 24,770 $ 19,383 Other comprehensive income (loss), net of tax: Foreign currency translation adjustment 3,267 (957) (3,308) Other comprehensive income (loss), net of tax 3,267 (957) (3,308) Comprehensive income $ 25,772 $ 23,813 $ 16,075 The accompanying notes are an integral part of the consolidated financial statements. 39 Table of Contents ITEM 8.
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.
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 2024 2023 (decrease) Euro 1.1111 1.0679 4.0 % British Pound 1.3221 1.2183 8.5 % Canadian Dollar 0.7381 0.7380 — % Australian Dollar 0.6773 0.6423 5.4 % A 10.0% change from the 2024 average exchange rate for the Euro, British Pound, Canadian Dollar and Australian Dollar to the U.S.
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.
The applicable margin for loans under the Credit Facility is in a range of 1.75% to 2.75% for Term SOFR loans and 0.75% to 1.75% for base rate loans, depending on Digi’s total net leverage ratio.
The 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%.
The base rate is determined by reference to the highest of BMO’s prime rate, the rate determined by BMO to be the average rate of Federal funds in the secondary market plus 0.50%, or one-month SOFR plus 1.00%.
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 STATEMENTS OF OPERATIONS Year ended September 30, 2024 2023 2022 (in thousands, except per common share data) Revenue: Product $ 304,540 $ 331,162 $ 290,170 Service 119,506 113,687 98,055 Total revenue 424,046 444,849 388,225 Cost of sales: Cost of product 144,790 161,451 140,615 Cost of service 25,537 27,233 26,027 Amortization 3,813 3,962 5,297 Total cost of sales 174,140 192,646 171,939 Gross profit 249,906 252,203 216,286 Operating expenses: Sales and marketing 83,278 81,681 70,366 Research and development 60,289 58,648 55,098 General and administrative 58,250 61,779 58,802 Change in fair value of contingent consideration — — (6,200) Total operating expenses 201,817 202,108 178,066 Operating income 48,089 50,095 38,220 Other expense, net: Interest expense, net (15,415) (25,236) (19,690) Debt issuance cost write off (9,722) — — Other (expense) income, net (94) 59 98 Total other expense, net (25,231) (25,177) (19,592) Income before income taxes 22,858 24,918 18,628 Income tax expense (benefit) 353 148 (755) Net income $ 22,505 $ 24,770 $ 19,383 Net income per common share: Basic $ 0.62 $ 0.69 $ 0.55 Diluted net income per common share: Diluted $ 0.61 $ 0.67 $ 0.54 Weighted average common shares: Basic 36,316 35,820 35,031 Diluted 36,984 36,869 35,995 The accompanying notes are an integral part of the consolidated financial statements. 38 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.
CONSOLIDATED BALANCE SHEETS As of September 30, 2024 2023 (in thousands, except share data) ASSETS Current assets: Cash and cash equivalents $ 27,510 $ 31,693 Accounts receivable, net 69,640 55,997 Inventories 53,357 74,396 Prepaid expenses and other current assets 3,940 4,112 Total current assets 154,447 166,198 Property, equipment and improvements, net 34,915 29,108 Identifiable intangible assets, net 252,909 277,084 Goodwill 342,774 341,593 Deferred tax assets 16,141 4,884 Operating lease right-of-use assets 10,207 12,876 Other non-current assets 3,682 3,788 Total assets $ 815,075 $ 835,531 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Current portion of long-term debt $ — $ 15,523 Accounts payable 23,759 17,148 Income taxes payable 2,549 1,116 Accrued compensation 13,995 16,427 Unearned revenue 30,556 25,274 Current portion of operating lease liabilities 2,973 3,352 Other current liabilities 15,505 7,138 Total current liabilities 89,337 85,978 Income taxes payable 2,749 2,308 Deferred tax liabilities 1,308 1,812 Long-term debt 123,185 188,051 Operating lease liabilities 11,228 13,989 Other non-current liabilities 6,233 2,905 Total liabilities 234,040 295,043 Commitments and Contingencies (see Note 13 ) 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; 42,996,725 and 42,501,150 shares issued 430 425 Additional paid-in capital 420,413 403,735 Retained earnings 247,350 224,845 Accumulated other comprehensive loss (23,744) (27,011) Treasury stock, at cost, 6,449,364 and 6,436,204 shares (63,414) (61,506) Total stockholders’ equity 581,035 540,488 Total liabilities and stockholders’ equity $ 815,075 $ 835,531 The accompanying notes are an integral part of the consolidated financial statements. 40 Table of Contents ITEM 8.
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.
The goodwill balance was $341.9 million as of June 30, 2024, 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.
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%.
Borrowings under the Credit Facility bear interest at a rate per annum equal to Term SOFR with a floor of 0.00% for an interest period of one, three, or six months as selected by Digi, reset at the end of the selected interest period (or a replacement benchmark rate if Term SOFR is no longer available) plus the applicable margin or a base rate plus the applicable margin.
Removed
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
The determination of the fair value using the market approach requires management to make significant estimates and assumptions related to revenue multiples within the Cellular Routers reporting unit and EBITDA multiples within the Ventus reporting unit. Changes in these assumptions could have a significant impact on the fair value.
Removed
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.

Other DGII 10-K year-over-year comparisons