What changed in this filing

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Item 1A. Risk Factors

2022-11-23 compared with 2021-11-24 · 49 added, 42 removed, 322 unchanged (22% of the section changed)

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Global Supply Chain and Freight Transportation Disruptions

As we previous disclosed, like many companies, we are experiencing disruptions in our supply chain for a variety of reasons that we believe were initially triggered by the ongoing COVID-19 pandemic.

As we previously disclosed, like many companies, we are experiencing disruptions in our supply chain for a variety of reasons that we believe were initially triggered by the ongoing COVID-19 pandemic and that have now been exacerbated by the ongoing war in Ukraine.

Among others these reasons include:

labor force disruptions, container ship backlogs, physical container shortages at locations important for the global supply chain, energy disruptions in China and elsewhere and material and component shortages.

We also are monitoring policy actions by the Chinese government that could cause other disruptions in the supply and production of components and products.

labor force disruptions, container ship backlogs, physical container shortages at locations important for the global supply chain, energy disruptions in Europe, China and elsewhere, global increases in inflation and material and component shortages.

We also are monitoring policy actions by the Chinese and Russian governments as well as the evolving implementation of economic sanctions against Russia that could cause other disruptions in the supply and production of components and products.

Collectively these issues have led to shortfalls in available components we need to make products as well as increased costs to obtain components, to make products and to transport components and products.

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As an example, Ventus relies almost exclusively on a manufacturer in China for the production of the hardware it provides to its customers.

Further, as discussed elsewhere, the COVID-19 pandemic and other factors have created stress on many supply chains globally.

This has impacted on our own ability to procure certain inventory and services, in both of our business segments.

Further, as discussed elsewhere, a range of factors have created stress on many supply chains globally.

This has impacted on our own ability to procure certain inventory and services, in both

of our business segments.

Some of these impacts have been material and it is possible additional material impacts could occur in the future.

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We participate in a services and solutions model that uses both hardware and cloud-based services.

Both our SmartSense by Digi® and recently acquired Ventus offerings deploy hardware, software and cloud-based hosting.

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.

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While we believe we have a strong foundation to compete, it is uncertain whether our strategies will attract the users or generate the revenue required to be successful.

Certain customers and potential customers that use these offerings have also been adversely impacted by the COVID-19 pandemic which started during calendar year 2020 and the resulting global economic downturn could impede our ability to win and retain customers.

Certain customers and potential customers that use these offerings have also been adversely impacted by the COVID-19 pandemic that began in 2020 and the resulting global economic downturn.

This could impede our ability to win and retain customers.

We have and expect to encounter competition from other solutions providers, some of whom may have more significant resources than us with which to compete.

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• our ability to engage in successful strategic relationships with third parties such as telecommunications carriers, component makers and systems integrators;

• our ability to meet service assurance commitments required by certain contracts;

• competing effectively for market share;

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Further, in recent years we have been taking steps to expand our relationship with certain distributors who have global reach.

These expanison 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 channel partners or heighten our reliance on certain channel partners to drive sales.

To the extent our channel partners are unsuccessful selling our products or if we are unable to obtain and retain a sufficient number of high-quality channel partners, our operating results could be materially and adversely affected.

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These channel partners may have incentives to promote our competitors’ products in lieu of our products, particularly for our competitors with larger volumes of orders, more diverse product offerings and longer relationships with our distributors and resellers.

It is possible, one or more of our important channel partners may stop selling our products completely.

It is possible, one or more of our important

channel partners may stop selling our products completely.

Our channel partner sales structure could subject us to lawsuits, potential liability and reputational harm if, for example, any of our channel partners misrepresents the functionality of our products or services to customers, or violates laws or our corporate policies.

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• difficulties integrating businesses in different countries and cultures;

• effectively implementing internal controls over financial reporting;

• effectively implementing internal control over financial reporting;

• adverse effects on existing business relationships with suppliers and customers;

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• potential loss of key employees, particularly those of the acquired business

We cannot assure that we will be able to successfully integrate any businesses, products, technologies, or personnel that we have acquired or that we might acquire in the future.

We cannot assure that we will be able to integrate successfully any businesses, products, technologies, or personnel that we have acquired or that we might acquire in the future.

Any such integration failure could disrupt our business and have a material adverse effect on our consolidated financial condition and results of operations.

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We could also be exposed to litigation as a result of any consummated or unconsummated acquisition.

The businesses of Accelerated, which we acquired in fiscal 2018, and Ventus, which we acquired in fiscal 2022, are subject to significant customer concentration.

In the second quarter of fiscal 2018, we acquired Accelerated.

The businesses of Accelerated, which we acquired in fiscal 2018, Opengear, which we acquired in fiscal 2019, and Ventus, which we acquired in fiscal 2022, are subject to significant customer concentration.

In 2018, we acquired Accelerated.

While Accelerated has many customers, its business historically has been highly dependent on its relationship with a single telecommunications carrier customer.

Any disruption or difficulties in securing or renewing contractual relationships with this customer, maintaining such relationship on favorable terms or any other disruption in our business with this customer could have an adverse impact on our business, results of operations, financial condition and prospects.

In the first quarter of fiscal 2019, we acquired Opengear.

While Opengear has many customers, its business historically has been significantly concentrated on its relationships with a few large customers.

Any disruption or difficulties in securing or renewing contractual relationships with any of these customers, maintaining such relationships on favorable terms or any other

disruption in our business with one or more of these customers could have an adverse impact on our business, results of operations, financial condition and prospects.

In the first quarter of fiscal 2022, we acquired Ventus.

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Any disruption or difficulties in securing or renewing contractual relationships with any of these customers, maintaining such relationships on favorable terms or any other disruption in our business with one or more of these customers could have an adverse impact on our business, results of operations, financial condition and prospects.

In addition, some larger customers may demand discounts and rebates.

As a result, our future revenue opportunities may be limited, and we may face pricing pressures, which in turn could adversely impact our gross margin and our profitability.

The loss of, reduction in, or pricing discounts associated with orders from any key customer would significantly reduce our revenue and harm our business.

Furthermore, delays in payment and/or extended payment terms from any of our key or larger customers could have a material negative impact on our cash flows and working capital to support our business operations.

SmartSense by Digi remains subject to the risks faced by a business operating in an emerging market.

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Additional risks that relate to SmartSense by Digi, include, but are not limited to:

• We have not traditionally sold products or services to restaurants, pharmacies, hospitals and other similar businesses, which are a focus for SmartSense by Digi®.

• SmartSense by Digi offerings are deployed in part to help assure perishable goods are safely preserved.

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Governments continue to impose tariffs on various products and components which may impact the pricing of certain components and inventories and could have a material adverse effect on our competitive standing in the marketplace and our financial results.

Ongoing power outages in Asia and Europe could also have a material adverse effect ability to obtain components for our products from our foreign suppliers.

Potential power outages, most notably in recent times in Asia and Europe could also have a material adverse effect ability to obtain components for our products from our foreign suppliers.

Additional challenges could occur if these suppliers allocate materials and components to other customers.

Finally, the Chinese government recently has implemented policies that adversely have impacted various industries in that nation and it is possible they may take actions in the future that are adverse to suppliers who we rely upon.

The Chinese government in recent years has implemented policies that adversely have impacted various industries in that nation and it is possible they may take actions in the future that are adverse to suppliers who we rely upon.

Finally, sanctions against and actions of the Russian government resulting from the war in Ukraine may be adverse to suppliers who we rely upon.

We face risks associated with our international operations that could impair our ability to grow our revenue abroad as well as our overall financial condition.

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Many of our vendors and strategic business allies also have international operations and are subject to the risks described above.

Even if we are able to successfully manage the risks of international operations, our business may be adversely affected if one or more of our business partners are not able to

successfully manage these risks.

Even if we are able to successfully manage the risks of international operations, our business may be adversely affected if one or more of our business partners are not able to successfully manage these risks.

There can be no assurance that one or more of these factors will not have a material adverse effect on our business strategy and financial condition.

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Our future success will depend on our ability to enhance our existing products, to introduce new products to meet changing customer requirements and emerging technologies, and to demonstrate the performance advantages and cost-effectiveness of our products over competing products.

Failure by us to modify our products to support new alternative technologies or failure

to achieve widespread customer acceptance of such modified products could cause us to lose market share and cause our revenue to decline.

Failure by us to modify our products to support new alternative technologies or failure to achieve widespread customer acceptance of such modified products could cause us to lose market share and cause our revenue to decline.

Further, if our competitors offer better service capabilities associated with the implementation and use of their products, our business could be impacted negatively.

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Further, new or emerging technologies, technological trends or changes in customer requirements may result in certain companies with whom we maintain strategic relationships de-emphasizing their dealings with us or becoming potential competitors in the future.

We also have limited, if any, control as to

other business activities of these parties and we could experience reputational harm because of our association with such parties if they fail to execute on business initiatives, are accused of breaking the law or otherwise suffer reputational harm for other reasons.

We also have limited, if any, control as to other business activities of these parties and we could experience reputational harm because of our association with such parties if they fail to execute on business initiatives, are accused of breaking the law or otherwise suffer reputational harm for other reasons.

All of these factors could materially and adversely impact our business and results of operations.

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The ability of these manufacturers to provide us with the timely provision of finished products is subject to a number of disruptions beyond their control such as, among others:

the availability of components from suppliers, labor shortages caused by the ongoing COVID-19 pandemic, energy shortages such as those recently encountered in China, changes in government regulations or other factors.

the availability of components from suppliers, labor shortages such as those caused by the ongoing COVID-19 pandemic, energy shortages such as those from time to time encountered in China, changes in government regulations or other factors.

If we do not properly forecast customer demands for products any lengthening in lead times or disruptions in service could result in lost revenues and adversely impact our business, results of operation, financial condition and prospects.

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If this strategy were successful, it could apply downward pressure on our gross margins.

While part of our longer term strategy is to sell software applications and IoT solutions such as SmartSense by Digi® and our newly acquired Ventus offerings, which may provide recurring revenues at relatively high gross margins, these types of offerings are still at early stages of adoption by customers and their sales growth is not necessarily predictable or assured.

While part of our longer term strategy is to sell software applications and IoT solutions such as SmartSense by Digi and Ventus offerings, which may provide recurring revenues at relatively high gross margins, these types of offerings are still at early stages of adoption by customers and their sales growth is not necessarily predictable or assured.

As such, our gross margins may be subject to decline unless we can implement cost reduction initiatives effectively to offset the impact of these factors.

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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® business certain customers have outsized deployments relative to other customers.

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 this business based upon the scale of new deployments in different financial periods.

Our Ventus operations could be subject to similar issues with respect to new or potential new customers.

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.

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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.

On November 1, 2021, Digi entered into a second amended and restated credit agreement consisting of a $350 million term loan B secured loan (the "Term Loan") and a $35 million revolving credit facility (the "Revolving Credit Facility", and together with the Term Loan, the "Loan").

On December 22, 2021, Digi entered into a third amended and restated credit agreement, which amended and restated the second amended and restated credit agreement entered into on November 1, 2021, consisting of a $350 million term loan B secured loan (the "Term Loan") and a $35 million revolving credit facility (the "Revolving Credit Facility", and together with the Term Loan, the "Loan").

This Loan replaced our syndicated senior secured credit agreement with BMO that was entered into on March 15, 2021 and replaced the remaining balances of our term loan and revolver.

The $35 million revolving credit facility, which presently is undrawn, includes a $10 million letter of credit subfacility and $10 million swingline subfacility.

Amounts under the Term Loan will be repaid in quarterly installments on the last day of each fiscal quarter, with an annual amortization rate of 1%.

Amounts under the Term Loan are being repaid in quarterly installments on the last day of each fiscal quarter, with an annual amortization rate of 5% of the original aggregate principal amount of the term loans, commencing on June 30, 2022.

The remaining outstanding balance under the Term Loan is due to be repaid in full after seven years.

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These risks may increase our costs and could damage our brand and reputation.

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 our newly acquired 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 Remote Manager and Ventus offerings, we expect to store, convey and potentially process significant amounts of data produced by devices.

Further many of our business applications now exist within cloud platforms that are managed by third parties, which also adds risk from breach of third parties.

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These types of security incidents could also lead to lawsuits, regulatory investigations and increased legal liability, including in some cases contractual costs related to customer notification and fraud monitoring.

Further, as the regulatory focus on privacy and data security issues

continues to increase and worldwide laws and regulations concerning the protection of information become more complex, the potential risks and costs of compliance to our business are expected to intensify.

Further, as the regulatory focus on privacy and data security issues continues to increase and worldwide laws and regulations concerning the protection of information become more complex, the potential risks and costs of compliance to our business are expected to intensify.

Our products operate with and are dependent on products and components across a broad ecosystem.

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In addition, certain states and countries may pass new regulations requiring our products to meet certain requirements to use environmentally friendly components.

The European Union has issued two directives relating to chemical substances in electronic products.

The Waste Electrical and Electronic Equipment Directive ("WEEE") 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 ("RoHS") bans the use of certain hazardous

materials in electric and electrical equipment which are put on the market in the European Union.

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.

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.

In the future, various countries including the United States may adopt further environmental compliance programs .

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Unsolicited takeover proposals, governance change proposals, proxy contests and resulting litigation may adversely impact our operations, create uncertainty and affect the market price and volatility of our securities.

In fiscal 2017, we received an unsolicited takeover proposal and other companies in our industry have been the target of unsolicited takeover proposals in the past.

In 2017, we received an unsolicited takeover proposal and other companies in our industry have been the target of unsolicited takeover proposals in the past.

In the event that a third party, such as a competitor, private equity firm or activist investor makes an unsolicited takeover proposal or proposes to change our governance policies or board of directors, or makes other proposals concerning our ownership structure or operations, our review and consideration of such proposals may be a significant distraction for our management and employees, and could require us to expend significant time and resources.

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Our market value is dependent upon certain factors, including continued future growth of our products, services and solutions.

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.

As discussed in other risk factors, there could be circumstances beyond our control, such as impacts from the current COVID-19 pandemic that could exacerbate the conditions that would lead to such an impairment.

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.

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

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Our financial condition could be impacted if our wireless carriers increase the prices of their services or suffer operational or technical failures.

Natural disasters could impact our supply chain and customers negatively resulting in an adverse impact to our revenue and profitability.

Certain of our components and other materials used in producing our products are from regions susceptible to natural disasters beyond our control, such as the COVID-19 pandemic.

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.

Certain of our components and other materials used in producing our products are from regions susceptible to natural disasters or other events beyond our control, such as the COVID-19 pandemic or the ongoing war in Ukraine.

These and other events beyond our control can adversely impact our supply chains and our business.

If we are unable to procure necessary materials, we could experience a disruption to our supply chain that would hinder our ability to produce our products in a timely manner.

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In addition, our customers may not follow their normal purchasing patterns or temporarily cease purchasing from us due to impacts to their businesses in the region, creating unexpected fluctuations or decreases in our revenue and profitability.

Natural disasters could have material adverse impacts on our business.

Natural disasters, wars and other events beyond our control could have material adverse impacts on our business.

UNRESOLVED STAFF COMMENTS

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 1A. Risk Factors