What changed in this filing

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Item 1. Business

2021-11-24 compared with 2020-11-25 · 102 added, 71 removed, 146 unchanged (54% of the section changed)

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In addition, this segment provides our customers with a device management platform and other professional services to enable customers to capture and manage data from devices connected to networks.

Our IoT Solutions segment offers wireless temperature and other condition-based monitoring services as well as employee task management services.

Our IoT Solutions segment primarily consists of our SmartSense by Digi® business.

SmartSense offers wireless temperature and other condition-based monitoring services as well as employee task management services.

These solutions are focused on the following vertical markets:

food service, healthcare (primarily pharmacies) and supply chain.

These solutions are marketed as SmartSense by Digi ® .

We formed, expanded and enhanced the IoT Solutions segment primarily through four acquisitions.

food service, healthcare (primarily pharmacies and hospitals) and supply chain.

We initially formed, expanded and enhanced our SmartSense by Digi business through four acquisitions.

Following the conclusion of our fiscal 2021, we acquired Ventus Holdings in November 2021.

Ventus makes us a leader in the provision of Managed Network-as-a-Service ("MNaaS") solutions that simplify the complexity of enterprise wide area network ("WAN") connectivity for our customers.

Ventus’s portfolio includes cellular wireless and fixed line WAN solutions for an array of connectivity applications in banking, healthcare, retail, gaming, hospitality and other sectors.

We are analyzing the business segment placement of Ventus's business.

At present, we expect it will be included in our IoT Solutions segment, but a final determination is still pending.

For more in-depth descriptions of our products and services, please refer to the heading "Principal Products and Services" at the end of Part I, Item 1 of this Form 10-K.

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Information on our website is not incorporated by reference into this report or any other report we file with or furnish to the SEC.

Impact of COVID-19 and Global Economic Downturn on Our Business

As is the case with many businesses, the ongoing pandemic and related global economic downturn creates significant uncertainty regarding the nearer term outlook for the markets where we provide products and services.

The pandemic and the economic downturn it triggered represents a fluid situation that presents a wide range of potential impacts on our own business and those of our customers, vendors and other business partners.

As our products and services serve companies across a broad range of industries, in some instances we have seen demand increase while in others we have observed declines as a result of the societal impacts of the pandemic.

At present, the duration and severity of the pandemic and the resulting economic downturn remain unclear.

Present State of Our Operations

During fiscal 2020 (which ended on September 30, 2020), we took steps to lower our operating expenses as a result of the pandemic.

We continue to monitor the impacts of COVID-19 on our operations closely and could increase or take further steps to decrease expenses as we believe circumstances warrant.

Since the start of the pandemic there have not been any material changes to our assets on our balance sheet and, at present, we do not expect there to be material changes.

During the second, third and fourth fiscal quarters of 2020, we reviewed the potential impacts of the COVID-19 pandemic on goodwill and intangible assets and determined there to be no material impact at that time.

Ongoing Impacts of COVID-19

The ongoing pandemic continues to create significant uncertainty regarding the nearer term outlook for our operations and the markets where we provide products and services.

While the rollout of vaccines is well underway in many parts of the world, the pandemic (including the recent spread of more contagious variants of the virus) and related economic volatility it has caused still represents a fluid situation that presents a wide and changing range of potential impacts on our own business and those of our customers, vendors and other business partners.

We continue to take a range of actions to assure we comply with government restrictions and guidelines as well as strong practices to protect the health and well-being of our employees and our ability to continue operating our business effectively.

To date, we have been able to operate our business effectively using these measures and to maintain all internal controls as documented and posted.

For example, we have successfully operated in a remote environment to prioritize employee safety without adversely impacting our day-to-day operations.

We also have not experienced challenges in maintaining the continuity of our day-to-day business operations and do not expect to incur material expenditures to do so.

We continue to monitor travel restrictions, and border closures closely so we are positioned to mitigate the negative impacts of any future restrictions or closures.

We also continue to monitor government restrictions, mask mandates, and vaccine mandates in the locations where

we have operations.

Since the start of the pandemic there have not been any material changes to our assets on our balance sheet and, at present, we do not expect there to be material adverse changes.

During fiscal 2021, we reviewed the potential impacts of the COVID-19 pandemic on goodwill and intangible assets and determined there to be no material impact at that time .

We also reviewed the potential impacts on future risks to the business as it relates to collections, returns and other business related items.

No significant changes to these reserves have been made.

Potential Impacts on Our Supply Chain

To date, travel restrictions and border closures have only had minor impacts on our ability to obtain inventory or manufacture or deliver products or services to our customers.

The impacts we have experienced have primarily impacted our IoT Solutions segment.

We continue to monitor restrictions and border closures closely so we are positioned to mitigate the negative impacts of any future restrictions or closures.

It is possible, however, that future restrictions or closures could negatively harm our business.

Travel restrictions impacting people so far have not materially restrained our ability to assist our customers with on-site installation activities or product troubleshooting.

At present, we do not expect impacts on personal travel to be material to our business operations or financial results.

We have taken steps to restrain and monitor our operating expenses and therefore do not expect and such impacts to materially change the relationship between our costs and revenues.

Proactive Efforts to Mitigate the Negative Impacts of COVID-19

Like most companies, we have taken a range of actions with respect to how we operate to assure we comply with government restrictions and guidelines as well as best practices to protect the health and well-being of our employees and our ability to continue operating our business effectively.

To date, we have been able to operate our business effectively using these measures and to maintain all internal controls as documented and posted.

We also have not experienced challenges in maintaining business continuity and do not expect to incur material expenditures to do so.

However, the impacts of the pandemic and efforts to mitigate the same have remained unpredictable and it remains possible that challenges may arise in the future.

Supply Chain Disruptions

Like many companies, we are experiencing disruptions in our supply chain for a variety of reasons, including the COVID-19 pandemic, container ship backlogs, energy shortages in certain parts of the world, and components and material shortages.

This has led to shortfalls in available components we need to make products as well as increased costs both to obtain components and to transport components and products.

It has also lengthened the timelines for us to fulfill customer orders.

The severity of the disruptions is changing continuously, meaning the impact on our ability to meet demand for particular products in a timely manner has been subject to ebb and flow.

In some instances, these disruptions have been material and it is possible more material disruptions will occur.

We are taking steps to attempt to mitigate the impact of the disruptions such as placing inventory demand further out into the future to secure our allocations of components, negotiating and engaging with suppliers to reserve components, encouraging customers to place orders earlier than normal due to longer lead times and attempting (in conjunction with customers) to influence political leaders to assure components needed to make products that are essential to the health and well-being of society are prioritized to our customer’s needs by suppliers.

Some of our suppliers are also experiencing supply chain disruptions which in turn has, and may continue to, disrupt our operations.

At present the ongoing duration and severity of these disruptions is not known.

As such, we are unable to predict the ultimate impact of these disruptions on our business and financial results, which could be material.

Industry and Marketplace Conditions

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These offerings allow our customers to connect a wide range of assets to networks.

The growth of this segment was driven primarily by our acquisition of Opengear, Inc.

("Opengear") in the first quarter of fiscal 2020.

We believe the COVID-19 pandemic has impacted the results of this segment in a couple of material ways.

First, the segment historically has many products that are subject to large project-based customer deployments.

When the pandemic started during our second fiscal quarter, certain opportunities that were in our sales opportunity pipeline were deferred or delayed, often indefinitely.

Second, given the breadth of customers and industries that use our products from this segment, the pandemic presented certain new sales opportunities from customers whose own businesses encountered increased demand for our products, which bolstered our results.

The segment has a number of products that are in the mature phase of their life cycle and have been experiencing sales declines for several years.

While we expect an ongoing long-term trend of marketplace growth, the segment 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.

Given the current uncertainty in macro-economic conditions driven by the ongoing pandemic, including, but not limited to, the uncertain status of large project-based customer deployment opportunities, this segment's results during fiscal 2021 may be inconsistent.

Our IoT Solutions segment contracted in fiscal 2020 as a result of the COVID-19 pandemic and the resulting economic and operational uncertainty it created for many customers and potential customers.

The contraction was, not surprisingly, most pronounced in our second and third quarter of fiscal 2020 as customers and potential customers were focused on adjusting the way they conduct day to day operations due to the pandemic.

We did see some improvement in new sales in the fourth quarter of fiscal 2020.

While we are cautiously optimistic this trend will continue during fiscal 2021, the outlook remains uncertain as the pandemic remains ongoing and macro-economic conditions remain uncertain.

During fiscal 2020 we continued to consolidate the product offering from the four acquisitions that make up this segment as we worked to transition customers to a new SmartSense IoT Platform launched in September 2019.

This new platform integrates the platforms from the acquisitions and provides redesigned multi-sensor monitoring and reporting that affords user enhanced equipment management abilities with an asset-versus-sensor focus.

The new platform is capable of further incorporating data from multiple sensor types into a single monitoring and reporting platform, to deliver real-time and detailed information on critical business assets and equipment.

This segment grew during fiscal 2021, led by increases in our embedded and console servers revenues.

The segment includes some products that are in the mature phase of their life cycle and have been experiencing sales declines for several years.

We manage this segment with more focus on profitability and more modest revenue growth expectations relative to our IoT Solutions segment.

Our IoT Solutions segment grew significantly in fiscal 2021 primarily because of increased demand for our SmartSense by Digi offerings.

In large part, the increased demand arose because for much of fiscal 2020 some customers in our target markets for these offerings paused new or expanded operating initiatives due to significant uncertainty caused by the onset of the ongoing pandemic.

During fiscal 2021 we added approximately 11,000 new sites that use our SmartSense monitoring services and now monitor in excess of 80,000 locations.

Ventus presently serves over 170,000 sites.

We manage this segment with more focus on revenue growth with more modest profitability growth relative to our IoT Product & Services segment.

On November 2, 2021 we announced our acquisition of Ventus Holdings.

This acquisition makes us a market leader in the provision of MNaaS solutions that simplify the complexity of enterprise WAN connectivity for an array of connectivity applications in banking, healthcare, retail, gaming, hospitality and other sectors.

Ventus presently serves over 170,000 sites.

We are in the process of confirming the segment reporting for this business, but presently expect it will be included in our IoT Solutions segment.

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.

Given the current uncertainty in macro-economic conditions initiated by the ongoing pandemic, including, but not limited to, ongoing supply chain disruptions globally and the uncertain status of large project-based customer deployment opportunities, our results during fiscal 2022 may be inconsistent.

We remain focused on taking steps that we believe will deliver consistent, long-term growth with higher levels of profitability.

Over the last six years, acquisitions have helped significantly advance our strategy for 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 being managed with an expectation for modest revenue and profitability growth.

Following the conclusion of fiscal 2020, we reorganized this business to align our product management and sales personnel along specific product lines (see Note 19 to our Consolidated Financial Statements).

We believe this reorganization will bring greater market focus to the product lines.

Our IoT Products & Services segment is being managed so our product management and sales personnel are aligned along specific product lines to bring greater market focus and potential growth to the product lines.

We also continue to drive efforts to pair our hardware offerings with our Digi Remote Manager® device management platform as well as other support services.

These bundled offerings allow customers to monitor and manage the performance of our hardware remotely.

We may seek to acquire hardware or other businesses that we believe can improve our market position in this segment.

During fiscal 2021 we made two acquisitions in this segment designated to improve our market position and enhance our path to recurring revenue.

On March 26, 2021, we acquired Haxiot, Inc.

("Haxiot"), a Dallas-based provider of low power wide area ("LPWA") wireless technology.

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.

On July 6, 2021, we acquired Ctek, Inc.

("Ctek"), a San Pedro, California-based provider that specializes in solutions for remote monitoring and industrial controls.

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, from complex off-shore oil rig locations to localized deployments such as municipal park lighting.

In addition, Ctek’s offering and existing client portfolio is set to further Digi’s reach in a rapidly expanding market.

IoT Solutions Segment

Our IoT Solutions segment is being managed primarily for significant revenue growth.

This segment was formed and has grown primarily through acquisitions.

While this segment still represents a modest overall portion of total revenues, we have high organic growth expectations and we intend to seek added scale and growth through acquisitions.

This business helps customers monitor temperature and other conditions important to preserve the quality of perishable or other sensitive inventories and tracks the completion of employee tasks.

Our IoT Solutions segment is being managed primarily for revenue growth.

This segment was formed through four acquisitions.

Since the last acquisition in October 2017, it has grown through sales growth.

While this segment still represents a modest overall portion of total revenues, we have high organic growth expectations and we will continue to explore added scale through acquisitions.

SmartSense by Digi helps customers monitor temperature and other conditions important to preserve the quality of perishable or other sensitive inventories and tracks the completion of employee tasks.

Our efforts have created a market-leading, high-growth hardware enabled service business with a significant recurring revenue base.

At present, this marketplace primarily is served by smaller companies that lack the infrastructure to provide hardware-enabled implementation services to customers in as effective and efficient a manner as we are able to do because of our long-standing history as an IoT hardware provider.

As of September 30, 2020, we served over 70,000 customer sites for many leading brands in the following vertical markets:

As of September 30, 2021, SmartSense by Digi served nearly 81,000 customer sites for many leading brands in the following vertical markets:

food service, healthcare (primarily pharmacies) and supply chain.

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We believe these markets comprise a large addressable market with low customer penetration.

Recent Acquisition of Ventus Holdings

On November 2, 2021 we announced our acquisition of Ventus Holdings.

This acquisition makes a us a leader MNaaS solutions that simplify the complexity of enterprise WAN connectivity for an array of applications in banking, healthcare, retail, gaming, hospitality and other sectors.

Ventus presently provides services to over 170,000 sites.

We are in the process of confirming the segment reporting for this business, but presently expect it will be included in our IoT Solutions segment.

Acquisitions and Dispositions

Since 2015, we have acquired four businesses that form the basis of our IoT Solutions segment.

Since 2018, we have acquired two businesses that are included in our IoT Products & Services segment.

In addition to our fiscal 2021 acquisitions of Haxiot and Ctek and our recent acquisition of Ventus disclosed above, we have made the following acquisitions from fiscal 2016 through fiscal 2020.

We completed the following four acquisitions that served as the basis for our SmartSense by Digi business and our IoT Solutions Segment:

In October 2015, we acquired Ontario-based Bluenica Corporation ("Bluenica").

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This acquisition more than doubled the number of customer sites we monitored while enhancing our ability to analyze data collected from our services.

In January 2018, we acquired Tampa-based Accelerated, a provider of secure, enterprise-grade, cellular (LTE) networking equipment and backup connectivity applications.

We also completed the following two acquisitions that augmented product offerings in our IoT Products & Services segment:

In January 2018, we acquired Tampa-based Accelerated Concepts, Inc.

("Accelerated"), a provider of secure, enterprise-grade, cellular (LTE) networking equipment and backup connectivity applications.

This acquisition expanded our IoT Products & Services segment by enhancing our existing cellular product lines and extended our market reach with a line of commercial routers and network appliance products.

In December 2019, we acquired New Jersey-based Opengear, Inc., a provider of secure IT infrastructure products and software.

In December 2019, we acquired New Jersey-based Opengear, Inc.

("Opengear"), a provider of secure IT infrastructure products and software.

This acquisition provides products that are complementary to our IoT Products & Services segment.

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These third parties accounted for 47.0%, 37.5% and 46.1% of our total consolidated revenue in fiscal 2021, 2020 and 2019, respectively.

Our IoT Solutions segment does not sell through these channels.

Our IoT Solutions segment historically has not sold through these channels.

We also complete sales of both IoT Products & Services and IoT Solutions through our own dedicated sales organization to OEMs, large enterprise customers and other end user customers which accounted for 53.0%, 62.5% and 53.9% of our total consolidated revenue in fiscal 2021, 2020 and 2019, respectively.

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This market can be affected significantly by new product introductions and marketing activities of industry participants.

It is possible new market entrants could market and sell disruptive technologies that impact one or more of our product or service offerings.

In addition, we may compete with other companies to acquire new businesses or technologies and the competition to secure such assets may be intense.

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We outsource our manufacturing operations to certain contract manufacturers, which are located primarily in Thailand, China, Mexico and Taiwan.

We rely on third party foundries for our semiconductor devices that are Application Specific Integrated Circuits ("ASICs").

We rely on third party foundries or companies who rely on third party foundries for our semiconductor devices that are Application Specific Integrated Circuits ("ASICs").

We also outsource printed circuit board production.

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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 relationship s with these suppliers who are also experiencing supply chain disruptions.

If these suppliers are unable to provide a timely and reliable supply of components, we could experience manufacturing delays that could adversely affect our consolidated results of operations in a material way.

In addition, since the onset of the global pandemic there has been increased attention focused on actions of the Chinese government with respect to a wide range of businesses in that country.

It is possible that changes in government policy in China could also disrupt the supply of components or end products we produce.

In general, our business is not considered to be highly seasonal, although our first fiscal quarter revenue is often less than other quarters due to holidays and fewer shipping days.

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We have established common law and registered trademark rights on a family of marks for a number of our products.

Our IoT Products & Services primarily are sold under the Digi ® , Rabbit ® and Digi XBee ® brands.

Our IoT Products & Services primarily are sold under the Digi ® , Rabbit ® , Digi XBee ® , and OpenGear ® brands.

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.

Our IoT Solutions are offered under the SmartSense by Digi ® brand, which enables organizations to drive operational excellence through sensor-based insights.

Our IoT Solutions are offered under the Ventus and SmartSense by Digi ® brands.

Our patents are applicable to specific technologies and are valid for varying periods of time based on the date of patent application or patent grant in the U.S.

and the legal term of patents in the various foreign countries where patent protection is obtained.

and the legal term of patents in the various foreign countries where patent protection is

We believe our intellectual property has significant value and is an important factor in the marketing of our company and products.

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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 and diverse culture that welcomes and celebrates everyone without bias.

In addition, we look to actively engage within our communities to foster and attain social equity.

We are committed to promoting and cultivating an inclusive, diverse culture that welcomes and celebrates everyone without bias.

In addition, we actively engage within our communities to foster and attain social equity.

Compensation Philosophy

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Cellular Products – We provide a range of products that use cellular technology such as Long Term Evolution (“LTE”) and LTE Advance Pro to communicate with networks.

These products provide a cost-effective alternative to landlines for primary or backup connectivity.

These products provide a cost-effective alternative to landlines for primary

or backup connectivity.

They are trusted by global leaders in agricultural, energy medical, lighting, transportation and other industrial markets and include:

• Cellular routers that help enterprise, government and Original Equipment Manufacturers ("OEM") customers with their mission-critical wireless connectivity needs in challenging environments.

• Cellular routers that help enterprise, government and OEM customers with their mission-critical wireless connectivity needs in challenging 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.

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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 improves efficiency and reduces the risk of costly outages.

This technology improves efficiency and reduces the risk of costly outages.

Radio-Frequency (“RF”) Products – These products which are marketed primarily under the Digi XBee ® brand include embedded wireless modules as well as off-the-shelf gateways, modems and adapters.

They are used by customers across a broad range of industries.

These products offer a wide selection of both standards-based and proprietary wireless protocols including Zigbee, Cellular, Sub-1 GHz, WiFi and Bluetooth to meet diverse application requirements of customers.

These products offer a wide selection of both standards-based and proprietary wireless protocols including Zigbee, Cellular, Sub-1 GHz, LPWA, WiFi and Bluetooth to meet diverse application requirements of customers.

Embedded System Products – Marketed under the Digi Connect, ConnectCore ® and Rabbit ® brands these are embedded system on modules ("SOMs") and single board computers that are embedded into customer products in a broad range of industries and applications.

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We also offer multiple USB solutions whose primary functions are to connect multiple USB devices, allowing them to work over a wired or wireless network without each device needing to plug into its own host computer.

These products also include battery and hardwired options for the control and monitoring of critical infrastructure.

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 deployment.

This allows customers to activate, monitor and diagnose a large number of mission-critical devices from a single point of command.

This service allows customers to activate, monitor and diagnose a large number of mission-critical devices from a single point of command.

Through a "single pane of glass," network managers can edit configurations, update firmware, and schedule and automate tasks from their desktop, tablet or phone.

Wireless Design Services - Our Digi Wireless Design Services provide customers turn-key wireless networking product development, testing, and certification for a wide range of wireless technology platforms and applications.

Lighthouse Management Software - Lighthouse is a recurring revenue cloud-based service that provides a secure environment for customers to manage their network devices by providing secure access to remote networks regardless of how they are connected or how a user interacts with the system.

Designed with security, scalability and automation in mind, Lighthouse allows engineers to control every aspect of their network through a central hub.

Technical Services - Our Technical Services provide professional services, data plan subscriptions and enhanced technical support offers to customers.

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SmartSense by Digi ® - Our SmartSense by Digi ® is an end-to-end, cost-effective system that uses sensors, gateways and cloud based applications to enable customers in food service (e.g.

groceries, schools and restaurants), healthcare (primarily pharmacies) and transportation/logistics to:

super markets, schools and restaurants), healthcare (primarily pharmacies and hospitals) and transportation/logistics to:

(i) monitor wirelessly the temperature of food and other perishable or sensitive goods, (ii) monitor facilities or pharmacies by tracking the completion of operating tasks by employees, and (iii) have visibility in the supply chain to product temperature through an end-to-end system for quality control and incident management.

Typically, customers receive hardware up-front, including gateways and sensors, and pay a monthly subscription for monitoring sensor data.

Typically, customers receive hardware up-front, including gateways and sensors, and pay for an annual subscription for monitoring sensor data.

Recent Acquistion of Ventus Holdings

We announced our acquisition of Ventus Holdings on November 2, 2021.

This acquisition makes us a leader in the provision MNaaS solutions that simplify the complexity of both wireless and fixed-line WAN connectivity.

Our portfolio includes an array of connectivity applications in the banking, healthcare, retail, gaming, hospitality and other sectors.

Supporting ATMs, gaming, point-of-sale, kiosks, digital signing and retail applications, Ventus works closely with its customers to customize innovative MNaaS solutions.

We are in the process of confirming the segment reporting for this business, but presently expect it will be included in our IoT Solutions segment.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business