Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
We may be exposed to interest rate risk should we decide to invest in marketable securities. When we held marketable securities, we classified them as available-for-sale and were carried at fair value. Our investments historically consisted of money market funds, certificates of deposit, commercial paper, corporate bonds and government municipal bonds. Our investment policy specifies the types of eligible investments and minimum credit quality of our investments, as well as diversification and concentration limits which mitigate our risk. 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, 2021, we had no amounts outstanding under our Term Loan and $48.1 million outstanding under our Revolving Loan. Prior to May 4, 2020, borrowings under the Credit Facility bore interest rates based on an underlying variable benchmark plus applicable margin based on our total leverage ("ABR"); this interest rate was reset quarterly. Effective May 4, 2020, borrowings under the Credit Facility bear a variable interest rate of LIBOR plus an applicable margin spread from 3.25% to 1.25%. The amount of the applicable margin spread is a function of our leverage ratio and is reset monthly. Based on the balance sheet position for both the Term Loan and Revolving Loan at September 30, 2021, the annualized effect of a 25 basis point change in interest rates would increase or decrease our interest expense by $0.1 million. For additional information, see Note 7 to our consolidated financial statements. For our Credit Facility, interest rate changes generally do not affect the fair value of the debt instruments, but do impact future earnings and cash flows, assuming other factors are held constant.
FOREIGN CURRENCY RISK
We are exposed to foreign currency transaction risk associated with certain sales being denominated in Canadian Dollars and in certain cases, transactions in U.S. Dollars in our foreign entities. We are also exposed to foreign currency translation risk as the financial position and operating results of our foreign subsidiaries are translated into U.S. Dollars for consolidation. We manage our net asset or net liability position for non-functional currency accounts, primarily the U.S. dollar accounts in our foreign locations to reduce our foreign currency risk. In addition, as foreign currency rates fluctuate, we may from time to time, adjust the prices of our products, services and subscriptions. We have not implemented a formal hedging strategy.
The table below compares the average monthly exchange rates of the Euro, British Pound, Japanese Yen and Canadian Dollar:
Fiscal year ended
September 30, % increase
2021 2020 (decrease)
Euro 1.1951 1.1268 6.1 %
British Pound 1.2718 1.2722 — %
Japanese Yen 0.0093 0.0093 — %
Canadian Dollar 0.7911 0.7441 6.3 %
A 10.0% change from the 2021 average exchange rate for the Euro, British Pound, Yen and Canadian Dollar to the U.S. Dollar would have resulted in an immaterial increase or decrease in fiscal 2021 annual revenue and a 0.9% increase or decrease in stockholders' equity at September 30, 2021. 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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Independent Registered Public Accounting Firm
38
Consolidated Statements of Operations
39
Consolidated Statements of Comprehensive Income
40
Consolidated Balance Sheets
41
Consolidated Statements of Cash Flows
42
Consolidated Statements of Stockholders' Equity
43
Notes to the Consolidated Financial Statements
44
1. Summary of Significant Accounting Policies
44
2. Acquisitions
49
3. Goodwill and Other Identifiable Intangible Assets, Net
52
4. Segment Information and Major Customers
55
5. Selected Balance Sheet Data
57
6. Fair Value Measurements
58
7. Indebtedness
59
8. Product Warranty Obligation
60
9. Leases
60
10. Restructuring
62
11. Revenue
63
12. Income Taxes
64
13. Stockholder's Equity
68
14. Stock-Based Compensation
68
15. Employee Benefit Plans
71
16. Commitments and Contingencies
71
17. Subsequent Events
71
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Digi International Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Digi International Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of September 30, 2021 and 2020, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2021, and the related notes and consolidated financial statement schedule included under Item 15a (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2021, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of September 30, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated November 24, 2021 expressed an unqualified opinion.
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. 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. 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. Such procedures included examining, on a test basis, evidence supporting 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. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical matters.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2017.
Minneapolis, Minnesota
November 24, 2021
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
DIGI INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended September 30,
2021 2020 2019
(in thousands, except per common share data)
Revenue:
Product $ 265,805 $ 248,374 $ 224,530
Service 42,827 30,897 29,673
Total revenue 308,632 279,271 254,203
Cost of sales:
Cost of product 124,065 118,322 118,855
Cost of service 13,412 12,490 13,350
Amortization 4,498 4,487 2,963
Total cost of sales 141,975 135,299 135,168
Gross profit 166,657 143,972 119,035
Operating expenses:
Sales and marketing 61,909 52,761 45,801
Research and development 46,623 43,765 37,564
General and administrative 46,602 36,012 25,685
Restructuring charge (reversal) 995 117 ( 87 )
Total operating expenses 156,129 132,655 108,963
Operating income 10,528 11,317 10,072
Other (expense) income, net:
Interest income 10 304 733
Interest expense ( 1,395 ) ( 3,592 ) ( 102 )
Other (expense) income, net ( 144 ) ( 566 ) 442
Total other (expense) income, net ( 1,529 ) ( 3,854 ) 1,073
Income before income taxes 8,999 7,463 11,145
Income tax (benefit) expense ( 1,367 ) ( 948 ) 1,187
Net income $ 10,366 $ 8,411 $ 9,958
Net income per common share:
Basic $ 0.32 $ 0.29 $ 0.36
Diluted $ 0.31 $ 0.28 $ 0.35
Weighted average common shares:
Basic 32,111 28,849 27,905
Diluted 33,394 29,546 28,554
The accompanying notes are an integral part of the consolidated financial statements.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
DIGI INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended September 30,
2021 2020 2019
(in thousands)
Net income $ 10,366 $ 8,411 $ 9,958
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment 1,071 1,698 ( 2,003 )
Change in net unrealized gain (loss) on investments — — 19
Less income tax (expense) benefit — — ( 5 )
Other comprehensive income (loss), net of tax 1,071 1,698 ( 1,989 )
Comprehensive income $ 11,437 $ 10,109 $ 7,969
The accompanying notes are an integral part of the consolidated financial statements.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
DIGI INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
As of September 30,
2021 2020
(in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents $ 152,432 $ 54,129
Accounts receivable, net 43,738 59,227
Inventories 43,921 51,568
Other current assets 6,567 5,134
Total current assets 246,658 170,058
Property, equipment and improvements, net 12,132 11,507
Identifiable intangible assets, net 118,029 121,248
Goodwill 225,522 210,135
Deferred tax assets 439 389
Operating lease right-of-use assets 15,684 14,334
Other non-current assets 1,067 1,011
Total assets $ 619,531 $ 528,682
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt $ — $ 1,972
Accounts payable 22,586 28,067
Accrued compensation 12,934 9,372
Unearned revenue 13,589 7,691
Contingent consideration on acquired businesses 20 4,228
Current portion of operating lease liabilities 2,633 2,527
Other current liabilities 7,179 7,373
Total current liabilities 58,941 61,230
Income taxes payable 2,334 1,958
Deferred tax liabilities 13,493 17,171
Long-term debt 45,799 58,980
Operating lease liabilities 18,368 16,193
Other non-current liabilities 8,079 1,650
Total liabilities 147,014 157,182
Commitments and Contingencies (see Note 1 6 )
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; 40,653,035 and 35,512,843 shares issued
407 355
Additional paid-in capital 370,699 279,741
Retained earnings 180,692 170,330
Accumulated other comprehensive loss ( 22,746 ) ( 23,817 )
Treasury stock, at cost, 6,390,645 and 6,353,094 shares
( 56,535 ) ( 55,109 )
Total stockholders’ equity 472,517 371,500
Total liabilities and stockholders’ equity $ 619,531 $ 528,682
The accompanying notes are an integral part of the consolidated financial statements.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
DIGI INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
2021 2020 2019
Operating activities: (in thousands)
Net income $ 10,366 $ 8,411 $ 9,958
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, equipment and improvements 4,343 4,545 4,578
Amortization of identifiable intangible assets 16,534 14,754 8,818
Stock-based compensation 8,135 7,237 5,655
Deferred income tax provision ( 4,598 ) ( 3,357 ) ( 799 )
Loss (gain) on sale of property, equipment and improvements 89 — ( 4,392 )
Change in fair value of contingent consideration 5,772 ( 128 ) 1,190
Provision for bad debt and product returns 2,290 2,135 635
Provision for inventory obsolescence 1,200 2,630 1,874
Other, net 42 366 ( 156 )
Changes in operating assets and liabilities (net of acquisitions):
Accounts receivable 11,467 5,539 ( 6,589 )
Inventories 4,679 ( 11,133 ) ( 1,062 )
Other assets ( 1,657 ) ( 704 ) ( 866 )
Income taxes 165 ( 1,100 ) ( 103 )
Accounts payable ( 5,578 ) 3,205 8,232
Accrued expenses 4,474 2,078 1,991
Net cash provided by operating activities 57,723 34,478 28,964
Investing activities:
Proceeds from maturities of marketable securities — — 4,750
Acquisition of businesses, net of cash acquired ( 19,108 ) ( 136,098 ) —
Proceeds from sale of property, equipment and improvements — — 10,096
Purchase of property, equipment, improvements and certain other intangible assets ( 2,257 ) ( 899 ) ( 9,335 )
Net cash (used in) provided by investing activities ( 21,365 ) ( 136,997 ) 5,511
Financing activities:
Proceeds from long-term debt 617 119,018 —
Payments on long-term debt ( 15,624 ) ( 55,893 ) —
Payments for contingent consideration ( 4,200 ) ( 4,698 ) ( 3,748 )
Proceeds from issuances of stock, net of offering expenses 73,830 — —
Proceeds from stock option plan transactions 8,525 5,902 4,874
Proceeds from employee stock purchase plan transactions 1,214 1,065 1,058
Taxes paid for net share settlement of share-based payment awards ( 2,120 ) ( 1,791 ) ( 1,071 )
Net cash provided by financing activities 62,242 63,603 1,113
Effect of exchange rate changes on cash and cash equivalents ( 297 ) 253 ( 810 )
Net increase (decrease) in cash and cash equivalents 98,303 ( 38,663 ) 34,778
Cash and cash equivalents, beginning of period 54,129 92,792 58,014
Cash and cash equivalents, end of period $ 152,432 $ 54,129 $ 92,792
Supplemental disclosures of cash flow information:
Interest paid $ 917 $ 3,009 $ 1
Income taxes paid, net $ 3,684 $ 3,686 $ 2,048
Supplemental schedule of non-cash investing and financing activities:
Accrual for property, equipment, improvements and certain other intangibles assets $ ( 98 ) $ ( 26 ) $ —
Tenant improvement allowance $ 1,000 $ — $ —
Transfer of inventory to property, equipment and improvements $ ( 1,838 ) $ ( 1,363 ) $ ( 1,064 )
Liability related to acquisition of business $ ( 6,200 ) $ ( 5,100 ) $ —
Term debt refinanced as credit facility $ 50,000 $ — $ —
The accompanying notes are an integral part of the consolidated financial statements.
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