What changed in this filing

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2023-11-22 compared with 2022-11-23 · 63 added, 24 removed, 204 unchanged (30% of the section changed)

2 unchanged sentences

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.

When we held marketable securities, we classified them as available-for-sale and they were carried at fair value.

Our investments historically consisted of money market funds, certificates of deposit, commercial paper, corporate bonds and government municipal bonds.

3 unchanged sentences

As of September 30, 2023, we had $213.6 million outstanding under our Term Loan and $0.0 million outstanding under our Revolving Loan.

Borrowings under the Term Loan Facility bear interest at a rate per annum equal to LIBOR with a floor of 0.50% for an interest period of one, three or six months as selected by Digi, reset at the end of the selected interest period (or a replacement benchmark rate if LIBOR is no longer available) plus 5.00% or a base rate plus 4.00%.

The base rate is determined by reference to the highest of BMO’s prime rate, the Federal Funds Effective Rate plus 0.5%, or the one-month LIBOR for U.S.

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.

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.

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%.

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 applicable margin for loans under the Revolving Credit Facility is in a range of 4.00-3.75% for LIBOR loans and 3.00 to 2.75% for base rate loans, depending on Digi’s consolidated leverage ratio.

The applicable margin for loans under the Revolving Credit Facility is in a range of 4.00% to 3.75% for SOFR loans and 3.00% to 2.75% for base rate loans, depending on Digi’s consolidated leverage ratio.

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.

11 unchanged sentences

We have not implemented a formal hedging strategy.

The table below compares the average monthly exchange rates of the Euro, British Pound Canadian Dollar, Indian Rupee and Australian Dollar:

The table below compares the average monthly exchange rates of the Euro, British Pound Canadian Dollar and Australian Dollar:

Fiscal year ended

4 unchanged sentences

Canadian Dollar 0.7380 0.7768 (5.0) %

Indian Rupee 0.0130 0.0131 (0.8) %

Australian Dollar 0.6423 0.7105 (9.6) %

A 10.0% change from the 2022 average exchange rate for the Euro, British Pound Canadian Dollar, Indian Rupee and Australian Dollar to the U.S.

A 10.0% change from the 2023 average exchange rate for the Euro, British Pound, Canadian Dollar and Australian Dollar to the U.S.

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.

4 unchanged sentences

Report of Independent Registered Public Accounting Firm (PCAOB ID 34 )

Report of Independent Registered Public Accounting Firm (PCAOB ID 248)

Consolidated Statements of Operations

5 unchanged sentences

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of Digi International Inc.

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").

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.

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.

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 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.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Goodwill — Cellular Routers, Smart Sense, and Ventus Reporting Units — Refer to Notes 1 and 3 to the financial statements

The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value.

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.

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.

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.

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

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.

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.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

2 unchanged sentences

We have audited the accompanying consolidated balance sheets of Digi International Inc.

(a Delaware corporation) and subsidiaries (the “Company”) as of September 30, 2022 and 2021, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2022, and the related notes and consolidated financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2022, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of September 30, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated November 23, 2022 expressed an unqualified opinion.

(a Delaware corporation) and subsidiaries (the “Company”) as of September 30, 2022, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the two years in the period ended September 30, 2022, and the related notes and consolidated financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2022, and 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.

Basis for opinion

9 unchanged sentences

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 2016.

We served as the Company’s auditor from 2016 to 2022.

Cincinnati, Ohio

20 unchanged sentences

Change in fair value of contingent consideration — ( 6,200 ) 5,772

Restructuring charge 275 995 117

Total operating expenses 202,108 178,066 156,129

1 unchanged sentence

Other expense, net:

Interest income 11 10 304

Interest expense ( 19,701 ) ( 1,395 ) ( 3,592 )

Interest expense, net ( 25,236 ) ( 19,690 ) ( 1,385 )

Other income (expense), net 59 98 ( 144 )

1 unchanged sentence

Income before income taxes 24,918 18,628 8,999

Income tax benefit ( 755 ) ( 1,367 ) ( 948 )

Income tax expense (benefit) 148 ( 755 ) ( 1,367 )

Net income $ 24,770 $ 19,383 $ 10,366

1 unchanged sentence

Basic $ 0.69 $ 0.55 $ 0.32

Diluted net income per common share:

Diluted $ 0.67 $ 0.54 $ 0.31

30 unchanged sentences

Goodwill 341,593 340,477

Deferred tax assets 4,884 —

Operating lease right-of-use assets 12,876 15,299

5 unchanged sentences

Accounts payable 17,148 32,373

Income taxes payable 1,116 96

Accrued compensation 16,427 14,576

36 unchanged sentences

Amortization 27,203 30,928 16,534

Stock-based compensation 8,578 8,135 7,237

Stock-based compensation expense 13,286 8,578 8,135

Deferred income tax provision ( 12,739 ) ( 3,387 ) ( 4,598 )

Loss on sale of property, equipment and improvements 4 89 —

Change in fair value of contingent consideration — ( 6,200 ) 5,772

Provision for bad debt and product returns 427 2,290 2,135

Provision for inventory obsolescence 6,901 1,200 2,630

(Reversal) provision for bad debt and product return ( 2,633 ) 427 2,290

Other, net ( 806 ) ( 188 ) 131

20 unchanged sentences

Taxes paid for net share settlement of share-based payment awards ( 4,314 ) ( 6,662 ) ( 2,120 )

Net cash provided by financing activities 192,782 62,242 63,603

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 )

13 unchanged sentences

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 7A. Quantitative and Qualitative Disclosures About Market Risk