What changed in this filing

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2024-11-22 compared with 2023-11-22 · 35 added, 39 removed, 228 unchanged (25% of the section changed)

7 unchanged sentences

We are exposed to market risks related to fluctuations in interest rates on amounts borrowed under the Credit Facility.

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.

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% 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.

As of September 30, 2024, we had $124.3 million outstanding under our Credit Facility.

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.

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%.

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.

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.

33 unchanged sentences

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

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

Opinion on the Financial Statements

19 unchanged sentences

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.

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.

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.

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.

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.

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.

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.

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 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.

2 unchanged sentences

◦ 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

3 unchanged sentences

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Board of Directors and Stockholders

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, 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.

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

(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”).

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.

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.

Our responsibility is to express an opinion on the Company’s financial statements based on our audit.

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 conducted our audit 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.

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.

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.

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.

We believe that our audit provides a reasonable basis for our opinion.

/s/ GRANT THORNTON LLP

26 unchanged sentences

Interest expense, net ( 15,415 ) ( 25,236 ) ( 19,690 )

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

Debt issuance cost write off ( 9,722 ) — —

Other (expense) income, net ( 94 ) 59 98

Total other expense, net ( 25,231 ) ( 25,177 ) ( 19,592 )

17 unchanged sentences

Net income $ 22,505 $ 24,770 $ 19,383

Other comprehensive (loss) income, net of tax:

Other comprehensive income (loss), net of tax:

Foreign currency translation adjustment 3,267 ( 957 ) ( 3,308 )

Other comprehensive (loss) income, net of tax ( 957 ) ( 3,308 ) 1,071

Other comprehensive income (loss), net of tax 3,267 ( 957 ) ( 3,308 )

Comprehensive income $ 25,772 $ 23,813 $ 16,075

9 unchanged sentences

Inventories 53,357 74,396

Deferred tax assets — 3,764

Other current assets 4,112 3,871

Prepaid expenses and other current assets 3,940 4,112

Total current assets 154,447 166,198

49 unchanged sentences

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

1 unchanged sentence

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

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

Litigation accrual 5,700 — —

Other, net ( 1,540 ) ( 806 ) ( 188 )

10 unchanged sentences

Purchase of property, equipment, improvements and certain other intangible assets ( 2,226 ) ( 4,345 ) ( 1,974 )

Net cash used in investing activities ( 4,345 ) ( 349,528 ) ( 21,365 )

Proceeds from sales of intangibles 2,229 — —

Net cash provided by (used in) investing activities 3 ( 4,345 ) ( 349,528 )

Financing activities:

2 unchanged sentences

Payments on long-term debt ( 304,725 ) ( 36,375 ) ( 148,118 )

Payments for contingent consideration — — ( 4,200 )

Proceeds from issuances of stock, net of offering expenses — — 73,830

Proceeds from stock option plan transactions 2,978 3,926 9,505

3 unchanged sentences

Effect of exchange rate changes on cash and cash equivalents 1,770 ( 1,113 ) 1,474

Net (decrease) increase in cash and cash equivalents ( 3,207 ) ( 117,532 ) 98,303

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

5 unchanged sentences

Accrual for property, equipment, improvements and certain other intangibles assets $ ( 164 ) $ ( 277 ) $ ( 191 )

Tenant improvement allowance $ — $ — $ ( 1,000 )

Transfer of inventory to property, equipment and improvements $ ( 12,252 ) $ ( 3,889 ) $ ( 6,237 )

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.

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