Digi International Annual Report 2015

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-Kþ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended: September 30, 2015oro TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to .Commission file number: 1-34033DIGI INTERNATIONAL INC.(Exact name of registrant as specified in its charter)Delaware 41-1532464(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)11001 Bren Road East Minnetonka, Minnesota 55343(Address of principal executive offices) (Zip Code)(952) 912-3444(Registrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:Title of each class Name of each exchange on which registeredCommon Stock, par value $.01 per share The NASDAQ Global Select MarketSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þIndicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No oIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit andpost such files.) Yes þ No oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to thebest of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company oIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þThe aggregate market value of voting stock held by non-affiliates of the Registrant as of the last business day of the Registrant's most recently competed second fiscal quarter was$246,475,812 based on a closing price of $9.98 per common share as reported on the NASDAQ Global Select Market. (For purposes of this calculation all of the registrant'sdirectors and executive officers are deemed affiliates of the registrant.)Shares of common stock outstanding as of November 23, 2015: 25,299,260DOCUMENTS INCORPORATED BY REFERENCEPortions of the Registrant's Proxy Statement for its 2016 Annual Meeting of Stockholders are incorporated by reference into Part III hereto. INDEX PagePART I. Forward-Looking Statements3ITEM 1. Business3ITEM 1A. Risk Factors9ITEM 1B. Unresolved Staff Comments17ITEM 2. Properties18ITEM 3. Legal Proceedings18ITEM 4. Mine Safety Disclosures18 PART II. ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities19ITEM 6. Selected Financial Data21ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations22ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk35ITEM 8. Financial Statements and Supplementary Data36ITEM 9. Changes in and Disagreements with Accountants On Accounting and Financial Disclosure66ITEM 9A. Controls and Procedures66ITEM 9B. Other Information67 PART III. ITEM 10. Directors, Executive Officers and Corporate Governance68ITEM 11. Executive Compensation69ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters69ITEM 13. Certain Relationships and Related Transactions, and Director Independence69ITEM 14. Principal Accounting Fees and Services69 PART IV. ITEM 15. Exhibits, Financial Statement Schedules70 EX-21 EX-23 EX-24 EX-31.A EX-31.B EX-32 EX-101 INSTANCE DOCUMENT EX-101 SCHEMA DOCUMENT EX-101 CALCULATION LINKBASE DOCUMENT EX-101 DEFINITION LINKBASE DOCUMENT EX-101 LABELS LINKBASE DOCUMENT EX-101 PRESENTATION LINKBASE DOCUMENT2Table of ContentsPART I.FORWARD-LOOKING STATEMENTSThis Annual Report contains certain statements that are “forward-looking statements” as that term is defined under the Private Securities Litigation ReformAct of 1995, and within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, asamended.Words such as “assume,” “believe,” “anticipate,” “intend,” “estimate,” “target,” “may,” “will,” “expect,” “plan,” “project,” “should,” or “continue” or thenegative thereof or other expressions, which are predictions of or indicate future events and trends and which do not relate to historical matters, identifyforward-looking statements. Among other items, these statements relate to expectations of the business environment in which the company operates,projections of future performance, perceived marketplace opportunities and statements regarding our mission and vision. Such statements are not guaranteesof future performance and involve certain risks, uncertainties and assumptions, including risks related to the highly competitive market in which ourcompany operates, rapid changes in technologies that may displace products sold by us, declining prices of networking products, our reliance on distributorsand other third parties to sell our products, delays in product development efforts, uncertainty in user acceptance of our products, the ability to integrate ourproducts and services with those of other parties in a commercially accepted manner, potential liabilities that can arise if any of our products have design ormanufacturing defects, our ability to defend or settle satisfactorily any litigation, uncertainty in global economic conditions and economic conditions withinparticular regions of the world which could negatively affect product demand and the financial solvency of customers and suppliers, the impact of naturaldisasters and other events beyond our control that could negatively impact our supply chain and customers, potential unintended consequences associatedwith restructuring or other similar business initiatives that my impact our ability to retain important employees, the ability to achieve the anticipated benefitsand synergies associated with acquisitions, and changes in our level of revenue or profitability which can fluctuate for many reasons beyond our control.These and other risks, uncertainties and assumptions identified from time to time in our filings with the United States Securities and Exchange Commission,including without limitation, those described in Item 1A, Risk Factors, of this Form 10-K and subsequent quarterly reports of Form 10-Q and other filings,could cause our future results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. Many of such factorsare beyond our ability to control or predict. These forward-looking statements speak only as of the date for which they are made. We disclaim any intent orobligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.ITEM 1. BUSINESSGeneral Background and Product OfferingsDigi International Inc. (“Digi,” “we,” “our,” or “us”) was incorporated in 1985 as a Minnesota corporation. We were reorganized as a Delaware corporation in1989 in conjunction with our initial public offering. Our common stock is traded on the NASDAQ Global Select Market under the symbol DGII. Our WorldHeadquarters is located at 11001 Bren Road East, Minnetonka, Minnesota 55343. Our telephone number is (952) 912-3444.We are a leading provider of Internet of Things (IoT) networking hardware products and solutions that enable the connection, monitoring and control of localor remote physical assets by electronic means. These networking products and solutions can connect communication hardware to a physical asset, conveyinformation about the asset’s status and performance to a computer system and then use that information to improve or automate one or more processes. Theseproducts and solutions are deployed via both wired and, ever increasingly, wireless networks. Our solutions are deployed by a wide range of businesses andinstitutions. Any business that utilizes a significant number of devices, whose operation could benefit from remote monitoring or control, may realizebenefits from IoT networking.Our present portfolio primarily includes:•Wireless and wired hardware products that have been the historical foundation of our business;•Services and solutions that include the following offerings:◦Digi Cold Chain Solutions is a wireless end-to-end solution that utilizes sensors, gateways and an easy-to-use software application that enablescompanies to monitor the temperature of perishable goods effectively and economically. Our Digi Cold Chain Solutions are the result of ouracquisition of Bluenica Corporation on October 5, 2015 (see Note 18 to our Consolidated Financial Statements).3Table of Contents◦Digi Device Cloud and Digi Remote Manager™ - Digi Device Cloud (Device Cloud) is a platform as-a-service (PaaS) offering that provides a secureenvironment for customers to aggregate their interaction with a large number of disparate devices and connect enterprise applications to these devices.This allows for devices to be monitored and controlled remotely and allows customers collect, interpret and utilize data from many devices to operatetheir businesses more easily and efficiently. Digi Remote Manager™ is a complete, centralized remote device management solution that is housed onthe Digi Device Cloud and allows customers to meet service level commitments and stay compliant with Payment Card Industry (PCI) standards. DigiRemote Manager™ also allows customers to monitor, diagnose and fix remote devices without sending a technician on site.◦Wireless Design Services provide customers with turn-key wireless networking product design, testing, and certification for a wide range of wirelesstechnology platforms and applications to improve speed to market and reduce risk.◦Digi Enterprise Support Services provide technical help for customers with programming and implementation challenges related to Digi products.These services help ensure optimal performance. We also offer implementation services that support features like Digi Remote Manager™ web serviceprogramming, code debugging and review and provide API assistance for any Digi product or development kit.On October 23, 2015, West Monroe Partners, LLC purchased our Etherios CRM consulting services business, which focused on integration and configurationof enterprise resource management (ERM) systems, including customer relationship management (CRM) systems. This part of our business principallyprovided integration and configuration of salesforce.com products. For more information on this divestiture see Note 18 to the Consolidated FinancialStatements.For more in-depth descriptions of our primary hardware products, please refer to the heading “Listing of Principal Hardware Products and Services” at the endof Part I, Item 1 of this Form 10-K.Our hardware product revenue represented 91.8%, 89.7% and 88.6% of our total revenue in fiscal 2015, 2014 and 2013, respectively. Our service revenuerepresented 8.2%, 10.3% and 11.4% of our total revenue in fiscal 2015, 2014 and 2013, respectively.Our corporate website address is www.digi.com. In the “Company - Investor Relations” section of our website, we make our annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K, our proxy statement and any amendments to these reports available free of charge as soon asreasonably practicable after these reports are filed with or furnished to the United States Securities and Exchange Commission (the “SEC”). Each of thesedocuments can also be obtained free of charge (except for a reasonable charge for duplicating exhibits to our reports on Form 10-K, 10-Q or 8-K) in print byany stockholder who requests them from our investor relations personnel. The Investor Relations email address is ir@digi.com and its mailing address is:Investor Relations Administrator, Digi International Inc., 11001 Bren Road East, Minnetonka, Minnesota 55343. These reports can also be accessed via theSEC website, www.sec.gov, or via the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549. Information concerning theoperation of the SEC’s Public Reference Room can be obtained by calling 1-800-SEC-0330.Information on our website is not incorporated by reference into this report or any other report we file with or furnish to the SEC.Industry and Marketplace ConditionsLong-Term Growth ProspectsFor several years a wide range of sources have provided strong long-term growth projections for IoT hardware and software networking products and relatedservices. We believe our company is well positioned to capitalize on this potential growth given our present market position as a leading provider of IoTnetworking products and our long-standing experience and expertise in developing and deploying these solutions.We believe IoT networking is poised for strong long term growth in our view for these primary reasons:•The cost of deploying sensors and transmitting data used to capture and share information from equipment, machines and other devices is fallingrapidly; and•Businesses and institutions desire to operate more efficiently and productively in a competitive global marketplace.With tens of billions of electronic devices deployed around the world, we believe the capacity of organizations to conduct more efficient operations bygathering and analyzing data is immense. The willingness of organizations to deploy networking4Table of Contentsproducts and applications to capture and analyze that data will depend on how efficiently these networking solutions can be deployed and maintained andthe expected benefits to be derived in doing so. We believe a critical element in our ability to grow our business will be our ability to develop and market IoTnetworking solutions at price points that can provide customers with a demonstrable return on their investment operating in mission-critical applications.Market ConditionsIn fiscal 2015, the marketplace for IoT products and services generally expanded. Within our own business this expansion was most pronounced for cellularrouters and gateways and RF products that are used by customers to connect equipment and machine data to networks using wireless technology. We expectthis growth trend to continue in fiscal 2016, although it is susceptible to downturns in general economic conditions as well as uncertainty or changes in theregulatory environments. These impacts may be more pronounced in certain industries. For instance, in fiscal 2015 the oil and gas marketplace for IoTnetworking products and services was more challenging than in prior years because the price for these natural resources declined significantly.StrategyLong-Term GoalOur primary long-term goal is to continue to be a leading global provider of IoT networking hardware and solutions that enables electronic devices to beprovisioned, maintained, monitored, analyzed and managed remotely by businesses. In our present business, IoT networking includes the followingcomponents that can be provided together or separately:•custom designed or off-the-shelf hardware that enables the delivery of data from devices to networks;•software applications that allow customers to monitor and manage networked devices. For instance, our Digi Cold Chain solutions are deployedwith applications that enable customers to monitor the performance of refrigeration units on any computer or smart-phone with an easy to configureand intuitive user interface;•our Device Cloud, which aggregates and hosts device data securely as well as related software applications such as our Digi Remote DeviceManager; and•professional services such as those offered by our Wireless Design Services group that help customers define front-end requirements for theirproducts and deploy IoT solutions.Current Status of Our BusinessFollowing the appointment of Ronald E. Konezny as our Chief Executive Officer (CEO) in December 2014, we have been focused on driving the scale andleverage of our businesses, simplifying our operations and improving our profitability. While this remains an ongoing effort, we have taken or expect to takea number of actions such as:•In the second quarter of fiscal 2015, we restructured our services business so the ongoing costs associated with our operations were more aligned toour ability to generate revenue.•In the second quarter of fiscal 2015, we closed our operations in India.•Throughout fiscal 2015, we continued an initiative we started in fiscal 2014 to globally expand our relationships with large distributors such asDigiKey. We believe this will strengthen our sales channel and enable us to more easily service our customers around the world.•In October 2015, we sold our Etherios CRM consulting business to West Monroe Partners, LLC. While we initially acquired Etherios in large partbecause we believed it would help drive engagements with companies looking to deploy IoT solutions within their businesses, we were notrewarded in the marketplace as we had hoped. In turn, we were operating a business that was not fully tied to our core expertise. The divestiturebrings more focus to our core business and is expected to increase our profitability by lowering our operating expenses.•In the first quarter of fiscal 2016, we plan to consolidate office locations in the Minneapolis area, moving our Wireless Design Services team from anoffice in downtown Minneapolis to our World Headquarters in suburban Minnetonka.•We have placed greater emphasis on controlling operating expenses across all areas of our business.5Table of Contents•During fiscal 2015, we started an initiative to reduce the number of product stock keeping units (SKUs) we produce, which we believe will havesignificant implications on our ability to manage inventory effectively, improve channel stocking strategies and control costs.In addition to the above initiatives, we also have been examining ways to expand the scope and scale of our business to enhance our existing operations. InOctober 2015, we acquired Bluenica Corporation, a company that uses wireless sensors, gateways and a software application to enable companies to monitorthe temperature of food and other perishable goods remotely. The acquisition leverages our existing strength as a provider of IoT hardware and relatedsoftware while providing us with a recurring revenue stream. We intend to investigate other potential investments that we believe could compliment ourexisting business.Acquisitions and DispositionsOn October 5, 2015, we acquired Bluenica Corporation, a company focused on temperature monitoring of perishable goods in the food industry by usingwireless sensors which are installed in grocery and convenience stores, restaurants, and in products during shipment and storage to ensure that quality,freshness and public health requirements are met (see Note 18 to our Consolidated Financial Statements). Bluenica forms the basis of the Digi Cold Chainsolutions business.On October 31, 2012, we acquired Etherios, Inc., a provider of consulting and professional services that uses a new cloud-based method for integratingmachines into core business process via the salesforce.com service cloud (see Note 2 to our Consolidated Financial Statements). On October 23, 2015, weentered into a stock purchase agreement with West Monroe Partners, LLC, pursuant to which they acquired this business (see Note 18 to our ConsolidatedFinancial Statements).These are the only acquisitions and dispositions we have completed in the past five years. We will continue to evaluate strategic opportunities to acquirebusinesses as they arise.Sales ChannelsWe sell our products through a global network of distributors, systems integrators and value added resellers (VARs). We also complete sales through our owndedicated sales organization to original equipment manufacturers (OEMs) and other customers.DistributorsOur larger distributors, based on sales we make to them, include A-Unit Electronic Co., Ltd., Anewtech Systems Pte Ltd., Anixter International, ArrowElectronics, Inc., Atlantik Elektronik GmbH, Avnet, Digi-Key Corporation, Express Systems & Peripherals, Future Electronics, Ingram Micro, MelchoniS.p.A., Miel, Mouser Electronics, Novotech, Scansource Corporation, Solid State Supplies, Ltd., Synnex, Tech Data Corporation and Tokyo Electron DeviceLtd. We also maintain relationships with many other distributors in the U.S., Canada, Europe, Asia Pacific and Latin America.Strategic Sales RelationshipsWe maintain alliances with other industry leaders to develop and market technology solutions. These include many major communications hardware andsoftware vendors, operating system suppliers, computer hardware manufacturers, enterprise application providers and cellular carriers. Among others, partnersinclude: AT&T, Bell Mobility, Ericsson, Freescale, Qualcomm, Rogers, Silicon Laboratories, Sprint, Telus, Verizon and several other cellular carriersworldwide. Furthermore, we maintain a worldwide network of authorized developers that extends our reach into certain other technology applications andgeographical regions.We have established relationships with equipment vendors in a range of industries such as energy, industrial, retail, transportation, medical, and governmentthat allow the vendors to ship our products and services as component parts of their overall solutions. Our products are used by many of the world’s leadingtelecommunications companies and Internet service providers, including AT&T Inc., Sprint Nextel Corp. and Verizon Communications Inc.No single customer comprised more than 10% of our consolidated revenue for any of the years ended September 30, 2015, 2014 or 2013.6Table of ContentsCompetitionWe compete primarily in the communications technology industry, which is characterized by rapid technological advances and evolving industry standards.The market can be affected significantly by new product introductions and marketing activities of industry participants. In addition, we may compete withother companies to acquire new businesses or technologies and the competition to secure such assets may be intense. We compete for customers on the basisof existing and planned product features, service and software application capabilities, company reputation, brand recognition, technical support, alliancerelationships, quality and reliability, product development capabilities, price and availability. While no competitor offers a comparable range of productsand services, various companies do compete with us with respect to one or more of our products or solutions. We believe that as the marketplace for IoTconnectivity products and solutions continues to grow and as we continue to expand our product and service offerings, it is likely we will encounterincreased competition, some of whom may have access to significantly more financial and technical resources than we possess.Manufacturing OperationsOur manufacturing operations are conducted through a combination of internal manufacturing and external subcontractors specializing in various parts of themanufacturing process. We rely on third party foundries for our semiconductor devices that are Application Specific Integrated Circuits (ASICs) and weoutsource printed circuit board production. This approach allows us to reduce our fixed costs, maintain production flexibility and optimize our profits.Our products are manufactured to our designs with standard and semi-custom components. Most of these components are available from multiple vendors.We have several single-sourced supplier relationships, either because alternative sources are not available or because the relationship is advantageous to us.If these suppliers are unable to provide a timely and reliable supply of components, we could experience manufacturing delays that could adversely affect ourconsolidated results of operations in a material way. For instance, in November 2014 a fire disrupted the operations at one of our contract manufacturers inThailand. We utilized alternate suppliers, as well as expanded production at our own manufacturing facility to mitigate the impact of the supply chaindisruption resulting from the fire.SeasonalityIn 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 andfewer shipping days.Working CapitalWe fund our business operations through a combination of cash and cash equivalents, marketable securities and cash generated from operations. We believethat our current financial resources, cash generated from operations, and our capacity for debt and/or equity financing will be sufficient to fund our businessoperations for the next twelve months and beyond.Research & Development and Intellectual Property RightsDuring fiscal years 2015, 2014 and 2013, our research and development expenditures were $32.0 million, $29.8 million and $30.3 million, respectively.Due to rapidly changing technology in the communications technology industry, we believe a large part of our success depends upon the product and servicedevelopment skills of our personnel as well as our ability to integrate any acquired technologies with organically developed technologies.Our proprietary rights and technology are protected by a combination of copyrights, patents, trade secrets and trademarks.We have established common law and registered trademark rights on a family of marks for a number of our products. Our products and services primarily aresold under the Digi, Rabbit® and Xbee® brands. We believe that the Digi and Rabbit® brands have established strong identities with our targeted customerbase and our customers associate the Digi brand with “reliability” and the Rabbit® brand with “ease of integration.” We believe that our customers associateXbee® 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 inproduct reliability and ease of integration and use. Our Etherios® brand was sold in connection with the sale of Etherios, Inc. in October 2015.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 is7Table of Contentsobtained. We believe our intellectual property has significant value and is an important factor in the marketing of our company and products.BacklogBacklog as of September 30, 2015 and 2014 was $27.2 million and $26.2 million, respectively. The majority of the backlog at September 30, 2015 isexpected to be shipped in fiscal 2016. Backlog as of any particular date is not necessarily indicative of our future sales trends.EmployeesWe had 565 employees on September 30, 2015. We consider our relations with our employees to be good. Approximately 50 employees were included in thesale of Etherios, Inc. in October 2015 and consequently their employment with us was terminated.Geographic Areas and Currency RisksOur customers are located throughout North America, Europe, Middle East & Africa (EMEA), Asia Pacific and Latin America. We are exposed to foreigncurrency transaction risk associated with certain sales being denominated in Euros, British Pounds and Japanese Yen and foreign currency translation risk asthe financial position and operating results of our foreign subsidiaries are translated into U.S. Dollars for consolidation. We manage our net asset or netliability position for U.S. dollar accounts in our foreign locations to reduce our foreign currency risk. We have not implemented a formal hedging strategy toreduce foreign currency risk.During 2015, we had approximately $76.3 million of revenue related to foreign customers including export sales, of which $21.3 million was denominated inforeign currency, predominantly the Euro and British Pound. During 2014 and 2013, we had approximately $76.3 million and $78.8 million, respectively, ofrevenue to foreign customers including export sales, of which $23.3 million and $24.3 million, respectively, were denominated in foreign currency,predominantly the Euro and British Pound. In future periods, we expect a significant portion of sales will continue to be made in Euros and British Pounds.Financial information about geographic areas appears in Note 4 to our Consolidated Financial Statements in this Form 10-K.PRINCIPAL HARDWARE PRODUCTS AND SERVICESHardware ProductsCellular routers and gateways - Cellular routers provide connectivity for devices over a cellular data network. They can be used as a cost effectivealternative to landlines for primary or backup connectivity for remote locations and devices. These products have been certified by the major wirelessproviders in North America and abroad, including AT&T®, Verizon Wireless®, Sprint®, Bell Mobility and Rogers. Cellular gateway products enable devicesor groups of devices to be networked in locations where there is no existing network or where access to a network is prohibited. All of our cellular productsinclude a unique remote management platform that provides secure management of devices across remote networks and can all use the Device Cloud forremote management. In addition, application connectivity, management and customization are enabled via the Device Cloud platform for many of theseproducts.Radio Frequency (RF) - Our RF products are small box or module products that utilize a variety of wireless protocols for PC-to-device or device-to-deviceconnectivity, often in locations where deploying a wired network is not possible either because of cost, disruption or impracticality. By supporting ZigBee®,Wi-Fi® and other radio frequency "RF" technologies, we can meet most customer application requirements. In conjunction with one of our gateways, RFproducts can be connected into the Device Cloud for remote management, application connectivity and customization.Embedded - Our Connect, Rabbit®, and ARM-based embedded systems on module, and single board computers are designed and developed with smallfootprints, low power consumption and software, making them ideal for medical, transportation and industrial device manufacturers. A number of thesemodules can be connected directly to the Device Cloud, enabling remote management and remote application connectivity. Also included in our embeddedgrouping are our chips (or microprocessors) that provides the “brains” and processing power of an intelligent electronic device or communication sub-system.Some of our higher volume customers choose to purchase chips and build their own products. Chips are low cost but require the highest level of developmentexpertise. We do not develop chips and use Commercial-Off-the-Shelf (COTS) technology from companies such as Freescale and Ember for our products.8Table of ContentsNetwork - Our network product category consists of:•Console servers - Our console servers provide a secure remote graphical access to computer systems and network equipment that can communicatewith virtually any server or device.•USB - Our Universal Serial Bus (USB) solutions include USB-to-serial converters that offer instant I/O expansion for peripheral device connectivity.We also offer USB over IP products that connect USB and serial devices on a wired or wireless LAN, while eliminating the need to locally-attachedhost PCs. In addition, we also offer multiport USB hubs which offer a simple solution for adding switched USB ports to a PC, server or thin client.•Serial servers - Our serial servers (also known as device servers and terminal servers) provide secure, reliable and flexible serial-to-Ethernetintegration of most devices into wired Ethernet networks. They are used for a variety of applications such as automation, robotics control,centralized device monitoring and management, data acquisition and point-of-sale applications.ServicesDigi Cold Chain Solutions - Our Digi Cold Chain Solutions is an end-to-end, cost-effective system that uses sensors, gateways and a cloud based applicationto enable customers such as restaurants, groceries and convenience stores to monitor wirelessly the temperature of food and other perishable goods. Our DigiCold Chain Solutions was introduced as a result of our acquisition of Bluenica Corporation on October 5, 2015 (see Note 18 to our Consolidated FinancialStatements).Digi Device Cloud and Digi Remote Manager™ - Our Digi Device Cloud is a platform as-a-service (PaaS) offering that provides a secure environment forcustomers to aggregate their interaction with a large number of disparate devices and connect them to enterprise applications. This allows for devices to bemonitored and controlled remotely and allows customers to collect, interpret and utilize data from many devices to operate their businesses more easily andefficiently. The Digi Remote Manager™ is a complete centralized remote device management solution that is housed on the Digi Device Cloud and allowscustomers to meet service level commitments and stay compliant with Payment Card Industry (PCI) standards. Digi Remote Manager™ also allows customersto monitor, diagnose and fix remote devices without sending a technician on site.Wireless Design Services - Our Wireless Design Services provide customers turn-key wireless networking product designs, testing, and certification for awide range of wireless technology platforms and applications.Digi Enterprise Support Services - Our Enterprise Support Services provide technical help for customers with programming and implementation challengesrelated to Digi products. These services help minimize design risk and ensure optimal performance. We also offer implementation services that cover supportfor features like Digi Remote Manager™ web service programming, code debugging and review and application program interface (API) assistance for anyDigi product or development kit.Etherios CRM Services - Our Etherios team provided professional consulting services that are focused on integration and configuration of enterpriseresource management (ERM) systems including customer relationship management (CRM) systems. Our Etherios team had capabilities that span operationalstrategy, technical design and architecture, system integration, implementation, program management, and change management services principally onsalesforce.com projects. On October 23, 2015, we sold our Etherios business, which included Etherios CRM Services (see Note 18 to the ConsolidatedFinancial Statements).ITEM 1A. RISK FACTORSMultiple risk factors exist which could have a material effect on our operations, results of operations, profitability, financial position, liquidity, capitalresources and common stock.Risks Relating to Our BusinessOur dependence on new product development and the rapid technological change that characterizes our industry makes us susceptible to loss of marketshare resulting from competitors’ product introductions and enhancements, service capabilities and similar risks.Our industry is characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions, short product life cycles incertain instances and rapidly changing customer requirements. The introduction of products and enhancements embodying new technologies and theemergence of new industry standards can render existing products obsolete and unmarketable.9Table of ContentsOur future success will depend on our ability to enhance our existing products, to introduce new products to meet changing customer requirements andemerging technologies, and to demonstrate the performance advantages and cost-effectiveness of our products over competing products. Failure by us tomodify our products to support new alternative technologies or failure to achieve widespread customer acceptance of such modified products could cause usto lose market share and cause our revenue to decline. Further, if competitors offer better service capabilities associated with the implementation and use ofproducts in communication networks, our business could be impacted negatively.We may experience delays in developing and marketing product enhancements or new products that respond to technological change, evolving industrystandards and changing customer requirements. There can be no assurance that we will not experience difficulties that could delay or prevent the successfuldevelopment, introduction, and marketing of these products or product enhancements, or that our new products and product enhancements will meet therequirements of the marketplace adequately and achieve any significant or sustainable degree of market acceptance in existing or additional markets. Inaddition, the future introductions or announcements of products by us or one of our competitors embodying new technologies or changes in industrystandards or customer requirements could render our then-existing products obsolete or unmarketable. This risk may become more pronounced as newcompetitors enter the marketplace, especially if these competitors have more resources than us to develop and market new products and technologies andprovide related services. There can be no assurance that the introduction or announcement of new product offerings by us or one or more of our competitorswill not cause customers to defer their purchase of our existing products, which could cause our revenue to decline.Our participation in a services and solutions model, using cloud-based services, presents execution and competitive risks.We are deploying a services and solutions model using our own internally developed hosted services and cloud-based platform, software applications, andsupporting products and services. We are employing significant human and financial resources to develop and deploy this cloud-based platform and relatedsoftware applications and services. As we are working to grow and scale this part of our business, these investments have impacted our gross margins andprofitability adversely in the past and may continue to do so in the future. While we believe our wireless, device networking and connectivity expertise,investments in infrastructure, and our innovative environment provide us with a strong foundation to compete, it is uncertain whether our strategies willattract the users or generate the revenue required to be successful. We expect to encounter competition from other solutions providers, many of whom mayhave more significant resources than us with which to compete. Whether we are successful in this business model depends on a number of factors, including:•our ability to put in place the infrastructure to deploy and evolve our solutions effectively and continuously ;•the features and functionality of our platform relative to any competing platforms as well as our ability to market our platform effectively;•our ability to engage in successful strategic relationships with third parties such as telecommunications carriers, chip makers and systems integrators;•competing effectively for market share; and•deploying complete end-to-end solutions that meet the needs of the marketplace generally as well as the particular requirements of our customers moreeffectively and efficiently than competitive solutions.We intend to continue to devote significant resources to our research and development, which, if not successful, could cause a decline in our revenue andharm our business.We intend to continue to devote significant resources to research and development in the coming years to enhance and develop additional products. For thefiscal years ended 2015, 2014 and 2013, our research and development expenses comprised 15.1%, 15.5% and 15.5%, respectively, of our revenue. If we areunable to develop new products, applications and services as a result of our research and development efforts, or if the products, applications and services wedevelop are not successful, our business could be harmed. Even if we develop new products, applications and services that are accepted by our target markets,the net revenue from these products, applications and services may not be sufficient to justify our investment in research and development.Many of our products, applications and services have been developed through a combination of internally developed technologies and acquiredtechnologies. Our ability to continue to develop new products, applications and services partially is dependent on finding and acquiring new technologies inthe marketplace. Even if we identify new technologies that we believe would be complementary to our internally developed technologies, we may not besuccessful in obtaining those technologies or we may not be able to acquire the technologies at a price that is acceptable to us.10Table of ContentsA substantial portion of our development efforts have been directed toward the development of new products targeted to manufacturers of intelligent,network-enabled devices and other embedded systems in various markets, including markets in which networking solutions for embedded systems have nothistorically been sold, such as markets for industrial automation equipment and medical equipment.Our gross margins may be subject to decline.Our gross margins may be subject to decline which could decrease our overall profitability and impact our financial performance adversely. Many of thehardware products we sell are approaching the end of their product life cycle. These mature hardware products typically sell at higher gross margins than ourother product and service offerings. In fiscal 2015, sales of mature hardware products represented about 37.2% of our overall revenue. For several yearsrevenues from the sale of these mature hardware products have been declining at a rate of between 1% and 10%, a trend we expect to continue. In addition,ongoing cost pressures in our industry create downward pressure on the prices at which we and other manufacturers can sell hardware products. We also haveindicated that we would be willing to realize lower levels of gross margins from customers in return for long-term, binding purchase commitments, a strategythat, if successful, could also put downward pressure on our gross margins. While part of our longer term strategy is to sell software applications and IoTsolutions such as Digi Cold Chain which can provide recurring revenues at relatively high gross margin, these types of offerings are at early stages ofadoption by customers and their sales growth is not necessarily predictable or assured. As such, our gross margins may be subject to decline unless we canimplement cost reduction initiatives effectively to offset the impact of these factors.Certain of our products are sold into mature markets, which could limit our ability to continue to generate revenue from these products.Many of our hardware products are sold into mature markets that are characterized by a trend of declining demand. As the overall market for these maturehardware products decreases due to the adoption of new technologies, we expect that our revenue from these products will continue to decline. As a result,our future prospects depend in part on our ability to acquire or develop and successfully market additional products that address growth markets.Our failure to anticipate or manage product transitions effectively could have a material adverse effect on our revenue and profitability.From time to time, we or our competitors may announce new products, capabilities, or technologies that may replace or shorten the life cycles of our existingproducts. Announcements of currently planned or other new products may cause customers to defer or stop purchasing our products until new productsbecome available. Furthermore, the introduction of new or enhanced products requires us to manage the transition from older product inventories and ensurethat adequate supplies of new products can be delivered to meet customer demand. Our failure to anticipate the revenue declines associated with olderproducts or manage transitions from older products effectively could result in inventory obsolescence and also have a material adverse effect on our revenueand profitability.Our failure to compete successfully in our highly competitive market could result in reduced prices and loss of market share.The market in which we operate is characterized by rapid technological advances and evolving industry standards. The market can be affected significantlyby new product introductions and marketing activities of industry participants. Certain of our competitors and potential competitors may have greaterfinancial, technological, manufacturing, marketing, and personnel resources than us. In addition, the amount of competition we face in the marketplace maychange and grow as the market for our industry grows and new entrants enter the marketplace. Present and future competitors may be able to identify newmarkets and develop products more quickly, which are superior to those developed by us. They may also adapt new technologies faster, devote greaterresources to research and development, promote products more aggressively, and price products more competitively than us. Competition may also intensifyor we may no longer be able to compete effectively in the markets in which we compete.Our ability to sustain and grow our business depends in large part on the success of our channel partner distributors and resellers.A substantial part of our revenue is generated through sales by channel partner distributors and resellers. Sales through our channel partners accounted for59.1%, 59.9% and 59.1% of our total revenue in fiscal 2015, 2014 and 2013 respectively. Further, in recent years we have been taking steps to expand ourrelationship with certain distributors who have global reach, an effort that could potentially increase the percent of our revenue driven through channelpartners or our reliance on certain channel partners to drive sales. To the extent our channel partners are unsuccessful in selling our products or if we areunable to obtain and retain a sufficient number of high-quality channel partners, our operating results could be materially and11Table of Contentsadversely affected. In addition, our channel partners may also market, sell and support products and services that are competitive with ours, and may devotemore resources to the marketing, sales and support of such products. They also may have incentives to promote our competitors’ products in lieu of ourproducts, particularly for our competitors with larger volumes of orders, more diverse product offerings and a longer relationship with our distributors andresellers. In these cases, one or more of our important channel partners may stop selling our products completely. Our channel partner sales structure alsocould subject us to lawsuits, potential liability and reputational harm if, for example, any of our channel partners misrepresents the functionality of ourproducts or services to customers, or violates laws or our corporate policies. If we fail to manage our existing or future sales channel partners effectively, ourbusiness and operating results could be materially and adversely affected.Our ability to grow our business is dependent in part on strategic relationships we develop and maintain with third parties as well as our ability tointegrate and assure use of our products and services in coordination with the products and services of certain strategic partners in a commerciallyacceptable manner.We believe that our ability to increase our sales depends in part on maintaining and strengthening relationships with parties such as telecommunicationscarriers, systems integrators, enterprise application providers and other strategic technology companies. Once a relationship is established, we likely willdedicate significant time and resources to it in an effort to advance our business interests and there is no assurance any strategic relationship will generateenough revenue to offset the significant resources we use to advance the relationship. Parties with whom we establish strategic relationships may also workwith companies that compete with us. We also have limited, if any, control as to whether these parties devote adequate resources to promoting, selling, andimplementing our products. Further, new or emerging technologies, technological trends or changes in customer requirements may result in certaincompanies with whom we maintain strategic relationships de-emphasizing their dealings with us or becoming potential competitors in the future. We alsohave limited, if any, control as to other business activities of these parties and we could experience reputational harm because of our association with suchparties if they fail to execute on business initiatives, are accused of breaking the law or otherwise suffer reputational harm for other reasons. All of thesefactors could materially and adversely impact our business and results of operations.In some cases we expect the establishment of a strategic relationship with a third party to result in integrations of our products or services with those of otherparties. Identifying appropriate parties for these relationships as well as negotiating and documenting business agreements with them requires significanttime and resources. We expect these agreements typically to be non-exclusive and not to prohibit the other party from working with our competitors oroffering competing services. Once the relationship is established we may also encounter difficulties in combining our products and services in acommercially acceptable manner. We expect this type of dynamic where our ability to realize sales opportunities is dependent on how our products andservices interact with those sold by third parties may become more common as the marketplace in our industry evolves. There can be no guaranty in anyparticular instance that we will be successful in making our products interact with those of other parties in a commercially acceptable manner and, even if wedo, we cannot guaranty the resulting products and services will be marketed or sold effectively via the relationship.We are subject to various cybersecurity risks, which are particularly acute in the cloud-based technologies operated by us and other third parties that forma part of our solutions. 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 the Device Cloud and Digi ColdChain solutions, we expect to store, convey and potentially process increasing amounts of data produced by devices. This data may include confidential orproprietary information, intellectual property or personally identifiable information of our customers or other third parties with whom they do business. It isimportant for us to maintain solutions and related infrastructure that are perceived by our customers and other parties with whom we do business to provide areasonable level of reliability and security. Despite available security measures and other precautions, the infrastructure and transmission methods used byour products and services may be vulnerable to interception, attack or other disruptive problems. Continued high-profile data breaches at other companiesevidence an external environment that is becoming increasingly hostile to information security. Improper disclosure of data or perception that our datasecurity is insufficient could harm our reputation, give rise to legal proceedings, or subject our company to liability under laws that protect data, any ofwhich could result in increased costs and loss of revenue.If a cyberattack or other security incident were to allow unauthorized access to or modification of our customers’ data or our own data, whether due to afailure with our systems or related systems operated by third parties, we could suffer damage to our brand and reputation. The costs we would incur to addressand fix these incidents could significantly increase our expenses. These types of security incidents could also lead to lawsuits, regulatory investigations andincreased legal liability, including in some cases contractual costs related to customer notification and fraud monitoring. Further, as regulatory focus onprivacy and12Table of Contentsdata security issues continues to increase and worldwide laws and regulations concerning the protection of information become more complex, the potentialrisks and costs of compliance to our business will intensify.Acquisitions could disrupt our business and seriously harm our financial condition.We will continue to consider acquisitions of complementary businesses, products or technologies. In the event of any future acquisitions, we could issuestock that would dilute our current stockholders’ percentage ownership, incur debt, assume liabilities, or incur large and immediate write-offs.Our operation of any acquired business also involves numerous risks, including but not limited to:•problems combining the purchased operations, technologies, or products;•unanticipated costs;•diversion of management’s attention from our core business;•difficulties integrating businesses in different countries and cultures;•adverse effects on existing business relationships with suppliers and customers;•risks associated with entering markets in which we have no or limited prior experience; and•potential loss of key employees, particularly those of the purchased organization.We cannot assure that we will be able to successfully integrate any businesses, products, technologies, or personnel that we have acquired or that we mightacquire in the future and any failure to do so could disrupt our business and have a material adverse effect on our consolidated financial condition and resultsof operations. Moreover, from time to time, we may enter into negotiations for a proposed acquisition, but be unable or unwilling to consummate theacquisition under consideration. This could cause significant diversion of management’s attention and out-of-pocket expenses for us. We could also beexposed to litigation as a result of any consummated or unconsummated acquisition.If we fail to establish and maintain effective internal control over financial reporting, our ability to accurately report our financial results could beadversely affected.If any material weakness in our internal control over financial reporting is discovered or occurs in the future, our consolidated financial statements maycontain material misstatements and we could be required to restate our financial results. Further, regardless of how well designed, operated and evaluated itmay be, any system of internal control over financial reporting can provide only reasonable, not absolute, assurance that its objective will be satisfied. Wecannot be certain that, in the future, material weaknesses will not exist or otherwise be discovered. If we fail to maintain effective internal control overfinancial reporting, the accuracy and timing of our financial reporting may be adversely affected by misstatements or restatements of our consolidatedfinancial statements, our business and financial condition could be harmed. Further, we experienced a material weakness in internal control in fiscal 2014.While this material weakness has been remediated, investors may lose confidence in our reported financial information and the market price of our commonshares may decline if we experience any further material weaknesses.Our consolidated operating results and financial condition may be adversely impacted by worldwide economic conditions and credit tightening.If worldwide economic conditions experience a significant downturn, these conditions may make it difficult or impossible for our customers and suppliers toaccurately forecast and plan future business activities, which may cause them to slow or suspend spending on products and services. Our customers may findit difficult to gain sufficient credit in a timely manner, which could result in an impairment of their ability to place orders with us or to make timely paymentsto us for previous purchases. If this occurs, our revenue may be reduced, thereby having a negative impact on our results of operations. In addition, we may beforced to increase our allowance for doubtful accounts and our days sales outstanding may increase, which would have a negative impact on our cashposition, liquidity and financial condition. We cannot predict either the timing or duration of an economic downturn in the economy, should one occur.13Table of ContentsOur revenue may be subject to fluctuations based on the level of significant one time purchases.No single customer has represented more than 10% of our revenue in any of the last three fiscal years. However, many of our customers make significant one-time hardware purchases for large projects that are not repeated. As a result, our revenue may be subject to significant fluctuations based on whether we areable to close significant sales opportunities. Our failure to complete one or a series of significant sales opportunities in a particular fiscal period could have amaterial adverse effect on our revenue for that period.The long and variable sales cycle for certain of our products makes it more difficult for us to predict our operating results and manage our business.The sale of our products and services can involve a significant technical evaluation and commitment of capital and other resources by potential customersand end users, as well as delays frequently associated with end users’ internal procedures to deploy new technologies within their products and to test andaccept new technologies. For these and other reasons, the sales cycle associated with certain of our products is typically lengthy and is subject to a number ofsignificant risks, such as end users’ internal purchasing reviews, that are beyond our control. Because of the lengthy sales cycle and the large size of certaincustomer orders, if orders forecasted for a specific customer are not realized or delayed, our operating results could be materially adversely affected.We depend on manufacturing relationships and on limited-source suppliers, and any disruptions in these relationships may cause damage to our customerrelationships.We procure all parts and certain services involved in the production of our products and subcontract most of our product manufacturing to outside firms thatspecialize in such services. Although most of the components of our products are available from multiple vendors, we have several single-source supplierrelationships, either because alternative sources are not available or because the relationship is advantageous to us. There can be no assurance that oursuppliers will be able to meet our future requirements for products and components in a timely fashion. In addition, the availability of many of thesecomponents to us is dependent in part on our ability to provide our suppliers with accurate forecasts of our future requirements. Delays or lost revenue couldbe caused by other factors beyond our control, including late deliveries by vendors of components, or force majeure events. For instance, a fire in November2014 disrupted the operations at one of our contract manufacturers in Thailand. If we are required to identify alternative suppliers for any of our requiredcomponents, qualification and pre-production periods could be lengthy and may cause an increase in component costs and delays in providing products tocustomers. Any extended interruption in the supply of any of the key components currently obtained from limited sources could disrupt our operations andhave a material adverse effect on our customer relationships and profitability.Our inability to obtain the appropriate telecommunications carrier certifications or approvals from governmental regulatory bodies could impede ourability to grow revenue in our wireless products.The sale of our wireless products in certain geographical markets is sometimes dependent on the ability to gain telecommunications carrier certificationsand/or approvals by certain governmental bodies. Failure to obtain these approvals, or delays in receiving the approvals, could impact our ability to enterour targeted markets or to compete effectively or at all in these markets and could have an adverse impact on our revenue.We are dependent on wireless communication networks owned and controlled by others.Our revenue could decline if we are unable to deliver continued access to digital cellular wireless carriers that we depend on to provide sufficient networkcapacity, reliability and security to our customers. Our financial condition could be impacted if our wireless carriers were to increase the prices of theirservices, or to suffer operational or technical failures.The impact of natural disasters could negatively impact our supply chain and customers 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. If we are unable to procurenecessary materials, we could experience a disruption to our supply chain that would hinder our ability to produce our products in a timely manner, or causeus to seek other sources of supply, which may be more costly or which we may not be able to procure on a timely basis. We also risk damage to any tooling,equipment or inventory at the supplier’s facilities. For instance, flooding in October 2011 and a fire in November 2014 disrupted the operations at one of ourcontract manufacturers in Thailand. In addition, our customers may not follow their normal purchasing patterns or temporarily cease purchasing from us dueto impacts to their businesses in the region, creating unexpected fluctuations or decreases in our14Table of Contentsrevenue and profitability. Natural disasters in other parts of the world on which our operations are reliant also could have material adverse impacts on ourbusiness.Our use of suppliers in other parts of the world involves risks that could negatively impact us.We purchase a number of components from suppliers in other parts of the world. Product delivery times may be extended due to the distances involved,requiring more lead time in ordering. In addition, ocean freight delays may occur as a result of labor problems, weather delays or expediting and customsissues. Any extended delay in receipt of the component parts could eliminate anticipated cost savings and have a material adverse effect on our customerrelationships and profitability.Our ability to compete could be jeopardized if we are unable to protect our intellectual property rights.Our ability to compete depends in part on our proprietary rights and technology. Our proprietary rights and technology are protected by a combination ofcopyrights, patents, trade secrets and trademarks.We enter into confidentiality agreements with our employees, and sometimes with our customers, potential customers and other third parties, and limit accessto the distribution of our proprietary information. There can be no assurance that the steps taken by us in this regard will be adequate to prevent themisappropriation of our technology. Our pending patent applications may be denied and any patents, once issued, may be circumvented by our competitors.Furthermore, there can be no assurance that others will not develop technologies that are superior to our technologies. Despite our efforts to protect ourproprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Inaddition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the United States. There can be no assurance thatour means of protecting our proprietary rights in the United States or abroad will be adequate or that competing companies will not independently developsimilar technologies. Our failure to adequately protect our proprietary rights could have a material adverse effect on our competitive position and result inloss of revenue.From time to time, we are subject to claims and litigation regarding intellectual property rights or other claims, which could seriously harm us and requireus to incur significant costs.The communications technology industry is characterized by frequent litigation regarding patent and other intellectual property rights. From time to time, wereceive notification of a third-party claim that our products infringe other intellectual property rights. Any litigation to determine the validity of third-partyinfringement claims, whether or not determined in our favor or settled by us, may be costly and divert the efforts and attention of our management andtechnical personnel from productive tasks, which could have a material adverse effect on our ability to operate our business and service the needs of ourcustomers. There can be no assurance that any infringement claims by third parties, regardless if they have merit, will not materially adversely affect ourbusiness, operating results or financial condition. In the event of an adverse ruling in any such matter, we may be required to pay substantial damages, ceasethe manufacture, use and sale of infringing products, discontinue the use of certain processes or be required to obtain a license under the intellectual propertyrights of the third party claiming infringement. There can be no assurance that a license would be available on reasonable terms or at all. Any limitations onour ability to market our products, or delays and costs associated with redesigning our products or payments of license fees to third parties, or any failure byus to develop or license a substitute technology on commercially reasonable terms could have a material adverse effect on our business, operating results andfinancial condition.We face risks associated with our international operations and expansion that could impair our ability to grow our revenue abroad as well as our overallfinancial condition.We believe that our future growth is dependent in part upon our ability to increase sales in international markets. These sales are subject to a variety of risks,including fluctuations in currency exchange rates, tariffs, import restrictions and other trade barriers, unexpected changes in regulatory requirements, longeraccounts receivable payment cycles, potentially adverse tax consequences, and export license requirements. In addition, we are subject to the risks inherentin conducting business internationally, including political and economic instability and unexpected changes in diplomatic and trade relationships. In manymarkets where we operate business and cultural norms are different than those in the United States and practices that may violate laws and regulationsapplicable to us like the Foreign Corrupt Practices Act (FCPA) and the UK Anti-Bribery Act (UKBA) are more commonplace. Although we have implementedpolicies and procedures with the intention of ensuring compliance with these laws and regulations, our employees, contractors and agents, as well as channelpartners involved in our international sales, may take actions in violation of our policies. Many of our vendors and strategic business allies also haveinternational operations and are subject to the risks described above. Even if we are able to successfully manage the risks of international operations, ourbusiness 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 oneor more of these factors will not have a material adverse effect on our business strategy and financial condition.15Table of ContentsOur failure to comply effectively with regulatory laws pertaining to our foreign operations could have a material adverse effect on our revenue andprofitability.We are required to comply with U.S. government export regulations in the sale of our products to foreign customers, including requirements to properlyclassify and screen our products against a denied parties list prior to shipment. We are also required to comply with the provisions of the FCPA and all otheranti-corruption laws, such as UKBA, of all other countries in which we do business, directly or indirectly, including compliance with the anti-briberyprohibitions and the accounting and recordkeeping requirements of this law. Violations of the FCPA or other similar laws could trigger sanctions, includingineligibility for U.S. government insurance and financing, as well as large fines. Failure to comply with the aforementioned regulations could also deter usfrom selling our products in international jurisdictions, which could have a material adverse effect on our revenue and profitability.Foreign currency exchange rates may adversely affect our operating results.We are exposed to a variety of market risks, including the effects of changes in foreign currency exchange rates on transactions that are denominated inforeign currencies. Because our financial statements are denominated in U.S. Dollars and approximately 10% of our revenue is denominated in a currencyother than U.S. Dollars, such as Euros, British Pounds and Yen, our revenues and earnings may be adversely impacted if the U.S. dollar strengthenssignificantly against these foreign currencies.The loss of key personnel could prevent us from executing our business strategy.Our business and prospects depend to a significant degree upon the continuing contributions of our executive officers and key technical and other personnel.Competition for such personnel is intense, and there can be no assurance that we will be successful in attracting and retaining qualified personnel. Failure toattract and retain key personnel could result in our failure to execute our business strategy.Our failure to comply effectively with the requirements of applicable environmental legislation and regulation could have a material adverse effect on ourrevenue and profitability.Production and marketing of products in certain states and countries may subject us to environmental and other regulations. In addition, certain states andcountries may pass new regulations requiring our products to meet certain requirements to use environmentally friendly components. The European Unionhas issued two directives relating to chemical substances in electronic products. The Waste Electrical and Electronic Equipment Directive (WEEE) makesproducers of certain electrical and electronic equipment financially responsible for collection, reuse, recycling, treatment and disposal of equipment placedin the European Union market. The Restrictions of Hazardous Substances Directive (RoHS) bans the use of certain hazardous materials in electric andelectrical equipment which are put on the market in the European Union. In the future, China and other countries including the United States are expected toadopt further environmental compliance programs. If we fail to comply with these regulations, we may not be able to sell our products in jurisdictions wherethese regulations apply, which could have a material adverse effect on our revenue and profitability.Negative conditions in the global credit markets may impair a portion of our investment portfolio.Our investment portfolio consists of certificates of deposit, commercial paper, money market funds, corporate bonds and government municipal bonds. Thesemarketable securities are classified as available-for-sale and are carried at fair market value. Some of our investments could experience reduced liquidity andcould result in an impairment charge should the impairment be considered as other-than-temporary. This loss would be recorded in our consolidatedstatement of operations, which could materially adversely impact our consolidated results of operations and financial condition.Unanticipated changes in our tax rates could affect our future results.Our future effective tax rates could be favorably or unfavorably affected by unanticipated changes in the mix of earnings in countries with differing statutorytax rates, changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws or our interpretation of such laws. In addition, we may besubject to the examination of our income tax returns by the Internal Revenue Service and other U.S. and international tax authorities. We regularly assess thepotential outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that theoutcomes from these examinations will not have an effect on our consolidated operating results and financial condition.16Table of ContentsWe may have additional tax liabilities.We are subject to income taxes in the United States and many foreign jurisdictions. Significant judgment is required in determining our worldwide provisionfor income taxes, including our reserves for uncertain tax positions. In the ordinary course of business, there are many transactions and calculations where theultimate tax determination is uncertain. We regularly are under audit by tax authorities. Although we believe our tax estimates are reasonable, the finaldetermination of tax audits could be materially different from our historical income tax provisions and accruals. The results of an audit could have a materialeffect on our consolidated financial position, results of operations, or cash flows in the period or periods for which that determination is made.Risks Related to Our Common StockThe price of our common stock has been volatile and could continue to fluctuate in the future.The market price of our common stock, like that of many other high-technology companies, has fluctuated significantly and is likely to continue to fluctuatein the future. During fiscal year 2015, the closing price of our common stock on the NASDAQ Global Select Market ranged from $7.14 to $11.86 per share.Our closing sale price on November 23, 2015 was $12.50 per share. Announcements by us or others regarding the receipt of customer orders, quarterlyvariations in operating results, departures of key personnel, acquisitions or divestitures, additional equity or debt financings, results of customer field trials,scientific discoveries, technological innovations, litigation, product developments, patent or proprietary rights, government regulation and general marketconditions and risks may, for example, have a significant impact on the market price of our common stock.If our stock price declines over a sustained period of time or our profits significantly decrease, we may need to recognize an impairment of our goodwill.The price of our common stock could decline. If such a decline continued over a sustained period of time, we could have an impairment of our goodwill. Ourmarket value is dependent upon certain factors, including continued future growth of our products and solutions. If such growth does not materialize or ourforecasts are not met, our profits could be significantly reduced and our market value may decline, which could result in an impairment of our goodwill.Goodwill is tested for impairment on an annual basis as of June 30, or more frequently if events or circumstances occur which could indicate impairment.Certain provisions of the Delaware General Corporation Law and our charter documents have an anti-takeover effect.There exist certain mechanisms under the Delaware General Corporation Law and our charter documents that may delay, defer or prevent a change of control.For instance, under Delaware law, we are prohibited from engaging in certain business combinations with interested stockholders for a period of three yearsafter the date of the transaction in which the person became an interested stockholder unless certain requirements are met, and majority stockholder approvalis required for certain business combination transactions with interested parties.Our Certificate of Incorporation contains a “fair price” provision requiring majority stockholder approval for certain business combination transactions withinterested parties, and this provision may not be changed without the vote of at least 80% of the outstanding shares of our voting stock. Other mechanisms inour charter documents may also delay, defer or prevent a change of control. For instance, our Certificate of Incorporation provides that our Board of Directorshas authority to issue series of our preferred stock with such voting rights and other powers as the Board of Directors may determine. Furthermore, we have aclassified board of directors, which means that our directors are divided into three classes that are elected to three-year terms on a staggered basis. Since thethree-year terms of each class overlap the terms of the other classes of directors, the entire board of directors cannot be replaced in any one year. UnderDelaware law, directors serving on a classified board may not be removed by shareholders except for cause. Also, pursuant to the terms of our shareholderrights plan, each outstanding share of common stock has one attached right. The rights will cause substantial dilution of the ownership of a person or groupthat attempts to acquire us on terms not approved by the Board of Directors and may have the effect of deterring hostile takeover attempts. The effect of theseanti-takeover provisions may deter business combination transactions not approved by our Board of Directors, including acquisitions that may offer apremium over the market price to some or all stockholders.ITEM 1B. UNRESOLVED STAFF COMMENTSNone.17Table of ContentsITEM 2. PROPERTIESThe following table contains a listing of our significant property locations as of September 30, 2015:Location of PropertyUse of Facility ApproximateSquare Footage Ownership or LeaseExpiration DateMinnetonka, MN(Corporate headquarters)Research & development, sales, sales support,marketing and administration 130,000 Owned Eden Prairie, MNManufacturing and warehousing 58,000 Owned Minneapolis, MNEngineering services 16,837 November 2016 Waltham, MAResearch & development, sales and sales support 4,249 October 2020 Rochester, MNEngineering services 3,090 September 2016 Lindon, UTSales, technical support, research & development and administration 11,986 December 2020 Herndon, VASales, marketing and technical support 2,416 October 2017 Hong Kong, ChinaSales, marketing and administration 1,656 April 2016 Beijing, ChinaSales, marketing and administration 3,149 November 2016 Shanghai, ChinaSales, marketing and administration 1,991 May 2017 Dortmund, GermanySales, sales support, marketing and administration 9,293 March 2016 Ismaning, GermanySales, sales support and marketing 6,878 September 2019 Neuilly sur Seine, FranceSales and marketing 2,895 January 2018 Logrono, SpainSales, research & development and administration 3,228 November 2018 Tokyo, JapanSales 1,371 Perpetual SingaporeSales, marketing and administration 3,498 April 2017In addition to the above locations, we perform sales activities in various other locations in Europe which are not deemed to be principal locations and whichare not listed above. In connection with our sale of the Etherios business on October 23, 2015, we no longer maintain operations in Chicago, IL, Dallas, TX orSan Francisco, CA.ITEM 3. LEGAL PROCEEDINGSIn the normal course of business, we are subject to various claims and litigation, which may include, but are not limited to, patent infringement andintellectual property claims. While we are unable to predict the outcome of any potential claims or litigation due to the inherent unpredictability of thesematters, we believe that it is possible that we could, in the future, incur judgments or enter into settlements of claims that could have a material adverse effecton our operations in any particular period.ITEM 4. MINE SAFETY DISCLOSURESNone.18Table of ContentsPART II.ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIESStock ListingOur common stock trades under the symbol DGII on the NASDAQ Global Select Market tier of the NASDAQ Stock Market LLC. On November 23, 2015 therewere 129 shareholders of record.The high and low sale prices for our common stock for each quarter during the years ended September 30, 2015 and 2014, as reported on the NASDAQ StockMarket LLC, were:Stock Prices2015 First Second Third FourthHigh $9.45 $10.78 $10.69 $12.08Low $6.90 $8.23 $8.95 $9.39 2014 First Second Third FourthHigh $12.50 $12.75 $10.73 $9.53Low $9.39 $9.38 $7.90 $7.46Dividend PolicyWe have never paid cash dividends on our common stock. Our Board of Directors presently intends to retain all earnings for use in our business, except forperiodic stock repurchases, and does not anticipate paying cash dividends in the foreseeable future.Issuer Repurchases of Equity SecuritiesOn October 28, 2014, our Board of Directors authorized a program to repurchase up to $15.0 million of our common stock, primarily to return capital toshareholders and to support our employee stock purchase program. This repurchase authorization began on November 1, 2014 and expired on October 31,2015. Shares repurchased under this program were permitted either through open market or privately negotiated transactions from time to time and inamounts that management deemed appropriate. There were no shares repurchased under this program.On October 29, 2013, our Board of Directors authorized a program to repurchase up to $20.0 million of our common stock. We repurchased 287,787 sharesfor $2.2 million under this program during the first quarter of fiscal 2015. This repurchase authorization expired on October 31, 2014.19Table of ContentsITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIES (CONTINUED)Performance EvaluationThe graph below compares the total cumulative stockholders’ return on our Common Stock for the period from the close of the NASDAQ Stock Market - U.S.Companies on September 30, 2010 to September 30, 2015, the last day of fiscal 2015, with the total cumulative return for the NASDAQ U.S. Benchmark TRIndex (the "U.S. Benchmark Index") and the NASDAQ Telecommunications Index (the “Peer Index”) over the same period. We have determined that our lineof business is mostly comparable to those companies in the Peer Index. The index level for the graph and table was set to $100 on September 30, 2010, forour Common Stock, the U.S. Benchmark Index and the Peer Index and assumes the reinvestment of all dividends. FY10 FY11 FY12 FY13 FY14 FY15Digi International Inc. $100.00 $115.91 $107.06 $105.27 $79.03 $124.24U.S. Benchmark Index $100.00 $99.95 $130.07 $158.04 $186.25 $184.93Peer Index $100.00 $109.03 $144.98 $147.45 $167.13 $155.2120Table of ContentsITEM 6. SELECTED FINANCIAL DATA(in thousands, except per common share data amounts and number of employees)For Fiscal Years Ended September 30,2015 2014 2013 2012 2011Revenue (1)$212,858 $192,701 $195,381 $190,558 $204,160Gross profit$98,031 $90,484 $100,123 $100,337 $106,588Sales and marketing39,544 40,576 40,513 39,242 39,549Research and development32,047 29,789 30,327 30,767 31,642General and administrative (2)19,514 19,913 21,423 18,188 18,206Restructuring charges, net509 81 313 1,259 154Operating income6,417 125 7,547 10,881 17,037Total other income (expense), net (3)2,228 672 691 16 (522)Income before income taxes8,645 797 8,238 10,897 16,515Income tax provision (benefit) (4)2,057 (954) 2,433 3,282 5,496Net income$6,588 $1,751 $5,805 $7,615 $11,019 Net income per common share - basic$0.27 $0.07 $0.22 $0.30 $0.44Net income per common share - diluted$0.26 $0.07 $0.22 $0.29 $0.43 Balance sheet data as of September 30, Working capital (current assets less current liabilities)$136,996 $125,927 $127,672 $155,035 $142,406Total assets$300,360 $290,459 $299,930 $293,403 $283,875Stockholders' equity$274,938 $265,298 $274,243 $270,834 $260,693Book value per common share (stockholders' equity divided byoutstanding shares)$10.98 $10.88 $10.73 $10.45 $10.17Number of employees as of September 30565 649 686 643 691(1)Etherios, acquired on October 31, 2012, provided $11.0 million of revenue in fiscal 2013.(2)Included in general and administrative expense in fiscal 2013 is $1.5 million ($1.0 million after tax) related to the patent infringement lawsuitsettlement for U.S. Ethernet Innovations. (See Note 16 to our Consolidated Financial Statements).(3)Included in total other income (expense), net for fiscal 2015 is a $1.4 million gain from the settlement of a property and casualty insurance claimrelated to the replacement of our capital equipment destroyed in the fire at our subcontract manufacturer's location in Thailand.(4)In fiscal 2015, 2014 and 2013, we recorded net tax benefits of $0.9 million, $1.4 million and $0.8 million, respectively (see Note 10 to ourConsolidated Financial Statements). In fiscal 2012 we recorded $1.5 million of additional research and development tax credits pertaining to priorfiscal years and reversed tax reserves for closure of various jurisdiction's tax matters and tax rate reductions in foreign jurisdictions. In fiscal 2011,we reversed $0.7 million of income tax reserves from various jurisdictions, primarily foreign, related to the expiration of the statute of limitations.21Table of ContentsITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOur management’s discussion and analysis should be read in conjunction with our consolidated financial statements and other information in this AnnualReport on Form 10-K for the fiscal year ended September 30, 2015.OVERVIEWWe provide a wide range of wireless products for the IoT, a cloud computing platform tailored to enable monitoring and remote control of devices anddevelopment services to help customers get to market fast with wireless devices and applications. Our solution set is capable of allowing any device tocommunicate with any application, anywhere in the world.We have a single operating and reporting segment. Our revenue consists of hardware product revenue and service revenue. Our hardware product offeringsare comprised of our cellular routers and gateways, RF, embedded and network products. Our service offerings include wireless design services, Digi DeviceCloud (which includes Digi Remote Manager™) and enterprise support services. CRM consulting services are included in our fiscal 2015, 2014 and 2013financial results. That business was sold during the first fiscal quarter of 2016 to West Monroe Partners, LLC. Digi Cold Chain solutions, which was formed inOctober 2015 through our acquisition of Bluenica Corporation, is also one of our service offerings. For more information on our acquisition and disposition,see Note 18 to our Consolidated Financial Statements.We utilize many financial, operational, and other metrics to evaluate our financial condition and financial performance. Below we highlight the fiscal 2015metrics that we feel are most important in these evaluations:•Revenue was $212.9 Million. We recorded record annual revenue in fiscal 2015. Our revenue increased by $20.2 million, or 10.5%, compared torevenue of approximately $192.7 million in fiscal 2014. The increase in revenue was primarily attributable to increases in revenue in our cellularrouter and gateway products and RF modules.•Gross Margin was 46.1%. Our gross margin decreased as a percentage of revenue to 46.1% in fiscal 2015 from 47.0% in fiscal 2014. This decreaseprimarily was related to our hardware product gross margin, which was 48.3% in fiscal 2015, compared to 50.4% in the prior fiscal year. Our growthproducts increased as a percent of our total revenue in fiscal 2015, which created a decrease in gross margin as these products typically have a lowergross margin than our mature products. Additionally we incurred additional manufacturing expenses to recover from the impact of the fire at oursubcontract manufacturer in Thailand that took place in November 2014. This was offset partially by an increase in service gross margin. Servicegross margin for fiscal 2015 was 21.2% compared to 17.0% in the prior fiscal year as service gross margin benefited from improved utilization ofconsulting labor in connection with the restructuring of our CRM business in the second quarter of fiscal 2015.•Net Income was $6.6 Million and Earnings Per Diluted Share were $0.26. Our net income increased by $4.8 million, or 276.2%, compared to netincome of $1.8 million in fiscal 2014. Earnings per diluted share were $0.26 in fiscal 2015, compared to $0.07 in fiscal 2014. The increases in bothnet income and earnings per diluted share resulted from an increase in gross profit of $7.5 million in fiscal 2015 partially offset by an increase inoperating expenses of $1.3 million compared to the prior fiscal year. Our net income in fiscal 2015 also included $1.4 million of insurance proceedsassociated with the fire at our subcontract manufacturer.•Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization adjusted for gain from insurance recovery (Adjusted EBITDA) was $12.9Million. Our Adjusted EBITDA was $12.9 million, or 6.1% of revenue, in fiscal 2015, compared to $7.8 million, or 4.0% of revenue, in fiscal 2014.We believe that the presentation of Adjusted EBITDA as a percentage of revenue, which is a non-GAAP financial measure, is useful because itprovides a consistent approach to measuring our performance from year to year and to assess our performance against that of other companies. Wealso believe this information helps compare operating results and corporate performance exclusive of the impact of our capital structure and themethod by which assets were acquired. Earnings before interest, taxes, depreciation and amortization (EBITDA) is used as an internal metric forexecutive compensation, as well as incentive compensation for the rest of the employee base. It is monitored quarterly for these purposes. Below is atable reconciling net income to Adjusted EBITDA (in thousands):22Table of ContentsITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Year ended September 30, 2015 2014 % of totalrevenue % of totalrevenueTotal revenue $212,858 100.0 % $192,701 100.0 %Net income $6,588 3.1 % $1,751 0.9 %Gain from insurance recovery (1,375) (0.7) — —Interest income, net (214) (0.1) (171) (0.1)Income tax provision (benefit) 2,057 1.0 (954) (0.5)Depreciation and amortization 5,859 2.8 7,146 3.7Adjusted earnings before interest, taxes, depreciation and amortization adjusted forgain from insurance recovery $12,915 6.1 % $7,772 4.0 %•Our Balance Sheet was Positively Impacted by Investing and Financing Decisions. Our current ratio was 6.9 to 1 at September 30, 2015, comparedto 6.8 to 1 at September 30, 2014. Cash and cash equivalents and marketable securities, including long-term marketable securities, increased $13.9million to $105.8 million at September 30, 2015 from $91.9 million at September 30, 2014. During fiscal 2015, we repurchased $2.2 million of ourcommon stock (see Note 12 to our Consolidated Financial Statements).We accomplished a number of key initiatives in fiscal 2015 and also faced significant challenges relative to our business.Accomplishments•We hired a new Chief Executive Officer, Ronald E. Konezny, and a new Chief Financial Officer, Michael Goergen, following the retirementannouncements of former CEO, Joseph Dunsmore, in fiscal 2014 and former CFO, Steven Snyder, in fiscal 2015. We also elected a new director,Spiro C. Lazarakis.•We achieved record annual revenues of approximately $213 million in fiscal 2015 that, together with an increased focus on our operating expenses,drove a more than 275% increase in our net income.•Our cellular products experienced over 45% revenue growth vs. fiscal 2014. We believe this growth rate significantly outpaced the industry average.•Our RF products experienced over 18% revenue growth vs. fiscal 2014 despite headwinds relative to customers in industries facing economicdifficulties such as oil and gas producers.•We expanded relationships with key customers of our embedded products which should provide us with steady streams of revenue for several years.•We expanded relationships with key distribution partners such as Mouser, Avnet and DigiKey to include global territories. We believe this furtherstrengthens our ability to service customers outside of North America.•We restructured our services business during the second quarter of fiscal 2015 and completed the sale of our CRM consulting business in the firstquarter of fiscal 2016. These actions are expected to improve our business focus, cost structure and profitability.•In early October, 2015 we completed the acquisition of Bluenica Corporation, which will serve as the basis for our Digi Cold Chain solution. Weanticipate this industry-focused solution will provide us with a solid foundation of recurring revenue and a higher margin business.Challenges•A key contract manufacturer in Thailand suffered a fire during the first quarter of fiscal 2015 that disrupted our manufacturing operations during thefirst half of fiscal 2015.•Our services business experienced a revenue decline of 12.6% during fiscal 2015 vs. fiscal 2014, including an approximate $2.0 million decline forWireless Design Services.23Table of ContentsITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)•As expected, our network products continued to experience revenue decline. In fiscal 2015 these products were down approximately 6% in fiscal2015 as compared to fiscal 2014. This ongoing trend presents a challenge to us as these products produce higher gross margins than other productswe sell. We expect continued future decreases in network product revenue of 5% to 15% annually.•Our EMEA sales were challenged by macro-economic conditions. Currency fluctuations in the region had a negative impact of $3.2 million on ourrevenue in fiscal 2015 as compared to fiscal 2014.CONSOLIDATED RESULTS OF OPERATIONSThe following table sets forth selected information derived from our Consolidated Statements of Operations, expressed in dollars and as a percentage ofrevenue and as a percentage of change from year-to-year for the years indicated. Year ended September 30, % Increase (decrease)($ in thousands) 2015 2014 2013 2015compared to2014 2014compared to2013Revenue: Hardware product $195,497 91.8% $172,846 89.7 % $173,078 88.6% 13.1 % (0.1)%Service 17,361 8.2 19,855 10.3 22,303 11.4 (12.6) (11.0)Total revenue 212,858 100.0 192,701 100.0 195,381 100.0 10.5 (1.4)Cost of sales: Cost of hardware product 101,155 47.5 85,737 44.5 82,276 42.1 18.0 4.2Cost of service 13,672 6.4 16,480 8.5 12,982 6.7 (17.0) 26.9Total cost of sales 114,827 53.9 102,217 53.095,258 48.8 12.3 7.3Gross profit 98,031 46.1 90,484 47.0100,123 51.2 8.3 (9.6)Operating expenses: Sales and marketing 39,544 18.6 40,576 21.1 40,513 20.7 (2.5) 0.2Research and development 32,047 15.1 29,789 15.5 30,327 15.5 7.6 (1.8)General and administrative 19,514 9.2 19,913 10.3 21,423 11.0 (2.0) (7.0)Restructuring charges, net 509 0.2 81 — 313 0.2 528.4 (74.1)Total operating expenses 91,614 43.1 90,359 46.992,576 47.4 1.4 (2.4)Operating income 6,417 3.0 125 0.17,547 3.8 5,033.6 (98.3)Other income, net 2,228 1.1 672 0.3691 0.4 231.5 (2.7)Income before income taxes 8,645 4.1 797 0.48,238 4.2 984.7 (90.3)Income tax provision (benefit) 2,057 1.0 (954) (0.5)2,433 1.2 315.6 (139.2)Net income $6,588 3.1% $1,751 0.9 %$5,805 3.0% 276.2 % (69.8)%REVENUEOverviewTotal revenue was $212.9 million in fiscal 2015 compared to $192.7 million in fiscal 2014, an increase of $20.2 million or 10.5%. Product revenue increasedby $22.7 million, or 13.1%, partially offset by a decline in service revenue of $2.5 million, or 12.6%. Total revenue was $192.7 million in fiscal 2014compared to $195.4 million in fiscal 2013, a decrease of $2.7 million or 1.4%. Product revenue decreased by $0.3 million, or 0.1%, and service revenuedecreased by $2.4 million, or 11.0%. We did not experience a material change in revenue due to pricing during fiscal 2015, 2014 or 2013.In fiscal 2015, foreign currency rates compared to the prior year's rates had an unfavorable impact on revenue of $3.4 million. Fluctuation in foreign currencyrates compared to the prior year’s rates had a favorable impact on revenue of $0.8 million in fiscal 2014 and an unfavorable impact on revenue of $0.1million in fiscal 2013.Hardware ProductsIn an effort to provide further transparency of our financial information we have expanded our hardware product categories for revenue reporting. Beginningwith the first quarter of fiscal 2016, we will transition away from reporting revenue in terms of24Table of ContentsITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)growth and mature hardware products and will report four product categories: Cellular routers and gateways, RF, Embedded and Network. We believe this is amore meaningful presentation and reflects how we are monitoring our revenue.Our cellular product category includes our cellular routers and all gateways. Our RF product category includes our XBee® modules as well as other RFSolutions. Our Embedded product category includes Digi Connect® and Rabbit® embedded systems on module and single board computers. Our networkproduct category, which has the highest concentration of mature products, includes console and serial servers and USB connected products.Our growth hardware product offerings include all wireless products as well as the ARM-based embedded module product line with both wired and wirelessconnectivity. Our mature hardware product offerings include generally all wired products, such as our serial servers, Rabbit®-branded modules, chips andUSB hardware offerings along with satellite-related products (which we discontinued in fiscal 2014).The following summarizes our product revenue by product categories: Product Revenue % of Product Revenue($ in millions) 2015 2014 2013 2015 2014 2013Cellular routers and gateways $58.7 $39.2 $33.2 30.0% 22.7% 19.1%RF 34.4 29.1 29.2 17.6% 16.8% 16.9%Embedded 51.0 49.6 57.6 26.1% 28.7% 33.3%Network 51.4 54.9 53.1 26.3% 31.8% 30.7%Total product revenue $195.5 $172.8 $173.1 100.0% 100.0% 100.0% Growth hardware products $116.2 $89.9 $88.1 59.4% 52.0% 50.9%Mature hardware products 79.3 82.9 85.0 40.6% 48.0% 49.1%Total product revenue $195.5 $172.8 $173.1 100.0% 100.0% 100.0%2015 Compared to 2014Cellular routers and gateway product revenue increased $19.5 million, or 49.6%, in fiscal 2015 as compared to fiscal 2014. These increases primarily weredue to a growing market performance and expanding market share with large sales to certain customers of our cellular routers and gateway products. Webelieve sales of these products in fiscal 2015 significantly outpaced the industry growth rate. While we remain optimistic about the sales performance ofthese products in fiscal 2016, growth rates could differ materially from fiscal 2015. All of our cellular products are included in the growth product category.RF product revenue increased $5.3 million, or 18.1%, in fiscal 2015 as compared to fiscal 2014 primarily due to larger sales to certain customers of modulesand wireless communication adapters. All of our RF products are included in the growth product category.Embedded product revenue increased by $1.4 million, or 2.8%, in fiscal 2015 as compared to fiscal 2014 primarily related to our embedded modules andchips, partially offset by a decrease in the sales of Rabbit®-branded modules, which are in the mature portion of their product life cycle.Network product revenue decreased $3.5 million, or 6.3%, in fiscal 2015 as compared to fiscal 2014. The decrease was mostly due to a decrease in sales ofserial cards which are in the mature portion of their product life cycle. There was also a decrease in USB connected products, device servers and satelliteproducts (which have been discontinued), partially offset by an increase in revenue from terminal servers. All of our network products are included in themature product category. We expect that revenue from these products will continue to decrease in the future.2014 Compared to 2013Cellular routers and gateway product revenue increased $6.0 million, or 18.0%, in fiscal 2014 as compared to fiscal 2013. This increase primarily was due tolarge sales to certain customers of our cellular routers and gateway products. All of our cellular products are included in the growth product category.25Table of ContentsITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)RF product revenue was flat in fiscal 2014 as compared to the prior fiscal year. All of our RF products are included in the growth product category.Embedded product revenue decreased $7.9 million, or 13.7%, in fiscal 2014 as compared to fiscal 2013 related to modules as certain customers delayedpurchases. Embedded products also declined since Rabbit®-branded modules and chips are in the mature portion of their product life cycles.Network product revenue increased $1.7 million, or 3.3%, in fiscal 2014 as compared to fiscal 2013 primarily related to the increase in satellite productrevenue resulting from the announcement of the discontinuation of these satellite products early in fiscal 2014 which prompted final purchases fromcustomers. All of our network products are included in the mature product category.Service2015 Compared to 2014Our service offerings in fiscal 2015 include wireless design services, Etherios CRM services, revenue generated from the Digi Device Cloud platform and ourenterprise support services. The significant majority of our service revenue was generated from our Etherios CRM services and our wireless design services.We completed the sale of our Etherios business in the first quarter of fiscal 2016.Service revenue for fiscal 2015 was $17.4 million compared to $19.9 million in the prior fiscal year, a decrease of $2.5 million, or 12.6%. The decrease wasprimarily due to declines of $2.0 million in fiscal 2015 of our wireless design services.2014 Compared to 2013Service revenue for fiscal 2014 was $19.9 million compared to $22.3 in the prior fiscal year, a decrease of $2.4 million, or 11.0%. The decrease is primarilydue to a decline in revenue in fiscal 2014 of $1.4 million for our Etherios CRM services and $0.9 million for our wireless design services as certain customerscancelled or deferred projects that were not replaced.Revenue by Geographic LocationOur revenue by geographic location of our customers was as follows: Revenue % of Revenue($ in millions) 2015 2014 2013 2015 2014 2013North America, primarily United States $136.6 $116.4 $116.6 64.2% 60.4% 59.7%Europe, Middle East & Africa 47.6 47.7 48.8 22.3% 24.8% 25.0%Asia 22.9 22.8 24.5 10.8% 11.8% 12.5%Latin America 5.8 5.8 5.5 2.7% 3.0% 2.8%Total revenue $212.9 $192.7 $195.4 100.0% 100.0% 100.0%2015 Compared to 2014North America revenue in fiscal 2015 increased $20.2 million, or 17.3%, compared to fiscal 2014, as certain customers made large purchases of our cellularproducts. There was also an increase in revenue from our RF and embedded modules and serial servers, partially offset by a decline of $2.5 million in servicerevenue.EMEA revenue decreased $0.1 million, or 0.4%, in fiscal 2015 as compared to fiscal 2014. The decrease primarily was due to fluctuations of foreign currencyrates, which had an unfavorable impact on total revenue of $3.2 million for fiscal 2015 as compared to fiscal 2014 due to the weakening of the Euro andBritish Pound compared to the U.S. Dollar. This was offset partially by increased revenue from cellular products and embedded products compared to theprior fiscal year.Asian countries revenue increased $0.1 million, or 0.6%, in fiscal 2015 as compared to fiscal 2014.Latin America revenue remained flat in fiscal 2015 as compared to fiscal 2014.26Table of ContentsITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)2014 Compared to 2013North America revenue in fiscal 2014 decreased $0.2 million, or 0.1%, compared to fiscal 2013. This was primarily due to a $2.4 million decrease in servicerevenue as certain customers cancelled or deferred projects that were not replaced and a reduction in embedded modules revenue that resulted from delays inpurchases by certain OEM customers. This was offset partially by an increase in cellular products lines.EMEA revenue decreased $1.1 million, or 2.2%, in fiscal 2014 from fiscal 2013. This primarily was due to lower project-based customer purchases,particularly in the cellular product lines. It was offset partially by a favorable impact from fluctuations in foreign currency rates due to the strengthening ofthe British Pound and Euro compared to the U.S. Dollar.Revenue in Asian countries decreased by $1.7 million, or 7.1%, in fiscal 2014 compared to fiscal 2013 mostly related to lower revenue from chips, serialservers and USB connected products as they are all mature products. We also experienced a decrease in our embedded modules and cellular-related products.This was offset partially by an increase in satellite-related products as we experienced increased demand when we announced in early fiscal 2014 that theseproducts would be discontinued.Latin America revenue increased by $0.3 million, or 4.9%, in fiscal 2014 from fiscal 2013. This primarily was due to an increase in revenue from cellularproducts and embedded modules.Revenue by Distribution ChannelThe following table presents our revenue by distribution channel: Revenue % of Revenue($ in millions) 2015 2014 2013 2015 2014 2013Direct/OEM channel $87.0 $77.2 $80.0 40.9% 40.1% 40.9%Distributors channel 125.9 115.5 115.4 59.1% 59.9% 59.1%Total revenue $212.9 $192.7 $195.4 100.0% 100.0% 100.0%2015 Compared to 2014During fiscal 2015, revenue in our Direct/OEM channel increased $9.8 million, or 12.6%, compared to revenue in fiscal 2014 due to large sales to certaincustomers. Revenue in fiscal 2015 for our distributors increased by $10.4 million, or 9.0%, compared to revenue in fiscal 2014. We have been taking steps toexpand our relationship with certain distributors who have a global reach.2014 Compared to 2013Revenue in fiscal 2014 in our Direct/OEM channel decreased by $2.8 million, or 3.5%, compared to the prior fiscal year mostly due to a decrease in revenuefrom our service offerings, which are typically sold through direct channels. During fiscal 2014, revenue by our distributors increased by $0.1 million, or0.1%, compared to revenue in fiscal 2013.GROSS PROFIT2015 Compared to 2014Gross profit was $98.0 million and $90.5 million in fiscal 2015 and 2014, respectively, an increase of $7.5 million, or 8.3%. The gross margin for fiscal 2015was 46.1% compared to 47.0% in fiscal 2014, a decrease of 0.9 percentage points.Hardware product gross profit was $94.3 million and $87.1 million in fiscal 2015 and 2014, respectively, an increase of $7.2 million, or 8.3%. The hardwareproduct gross margin for fiscal 2015 was 48.3% compared to 50.4% in fiscal 2014, a decrease of 2.1 percentage points, primarily due to the mix of ourhardware products since we sold proportionately more growth hardware products in fiscal 2015 that generally have a lower gross margin compared to maturehardware products. In the future we expect to focus more on securing larger and longer-term opportunities that may impact our gross margins negatively.Additionally, for fiscal 2015, we incurred additional manufacturing expenses to recover from the impact of the Thailand fire that also reduced gross margin.27Table of ContentsITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)Service gross profit was $3.7 million and $3.4 million in fiscal 2015 and 2014, respectively, an increase of $0.3 million, or 9.3%. The service gross margin forfiscal 2015 was 21.2% compared to 17.0% in fiscal 2014, an increase of 4.2 percentage points. The increase is a direct result of improved utilization ofconsulting labor in connection with our restructuring (see Note 9 to our Consolidated Financial Statements). We expect our service gross margin to vary fromquarter to quarter for the foreseeable future as our wireless product design and development services margins are dependent on the utilization rates of ourpersonnel.2014 Compared to 2013Gross profit was $90.5 million and $100.1 million in fiscal 2014 and 2013, respectively, a decrease of $9.6 million, or 9.6%. The gross margin for fiscal 2014was 47.0% compared to 51.2% in fiscal 2013, a decrease of 4.2 percentage points.Hardware product gross profit was $87.1 million and $90.8 million in fiscal 2014 and 2013, respectively, a decrease of $3.7 million, or 4.1%. The hardwareproduct gross margin for fiscal 2014 was 50.4% compared to 52.5% in fiscal 2013, a decrease of 2.1 percentage points. The decrease primarily resulted from achange in hardware product mix and customer mix as we sold more products that have a lower gross margin than our more mature products which have ahigher gross margin.Service gross profit was $3.4 million and $9.3 million in fiscal 2014 and 2013, respectively, a decrease of $5.9 million, or 63.8%. The service gross marginfor fiscal 2014 was 17.0% compared to 41.8% in fiscal 2013, a decrease of 24.8 percentage points, mostly related to the underutilization of consulting laborthat had been retained for the expected demand of our service offerings.OPERATING EXPENSES2015 Compared to 2014Operating expenses were $91.6 million in fiscal 2015, an increase of $1.2 million, or 1.4%, compared to $90.4 million in fiscal 2014. Below is a summary ofour operating expenses by function:Sales and marketing expenses were $39.6 million and $40.6 million in fiscal 2015 and 2014, respectively, a decrease of $1.0 million or 2.5%. The decreasewas primarily due to a reduction in travel, facility and compensation-related expenses of $1.5 million, partially offset by an increase in commissions of $0.5million.Research and development expenses were $32.0 million and $29.8 million in fiscal 2015 and 2014, respectively, an increase of $2.2 million or 7.6%.Compensation and employee-related expenses increased by $3.1 million primarily due to underutilization of billable research and development and usingthose employees resources for completing internal products. In addition, incentive compensation expenses increased due to improved company performancein fiscal 2015. This was partially offset by a decrease $0.9 million in other miscellaneous research and development costs and professional services.General and administrative expenses were $19.5 million and $19.9 million in fiscal 2015 and 2014, respectively, a decrease of $0.4 million or 2.0%. This wasprimarily due a decrease of $0.7 million related to CEO transition expenses in the fiscal 2014 partially offset by CFO transition expenses in fiscal 2015.General and administrative expenses also decreased $1.0 million in fiscal 2015 compared to the prior fiscal year due to occupancy expenses, miscellaneousgeneral and administrative expenses, depreciation and amortization as certain intangibles were fully amortized. This was partially offset by an increase inprofessional fees of $0.5 million and compensation and employee-related expenses of $0.8 million mostly related to increased incentive compensationexpenses due to improved company performance in fiscal 2015.Restructuring expenses were $0.5 million and $0.1 million in fiscal 2015 and fiscal 2014, respectively, an increase of $0.4 million. During fiscal 2015, werecorded $0.5 million related to the restructuring of our India and Etherios locations. During fiscal 2014, we recorded a restructuring charge in India of $0.2million related to actions that were announced October 31, 2013, partially offset by a $0.1 million reversal of our 2013 restructuring of our U.S. operations.For further information on restructuring, see Note 9 to our Consolidated Financial Statements.2014 Compared to 2013Operating expenses were $90.4 million in fiscal 2014, a decrease of $2.2 million, or 2.4%, compared to $92.6 million in fiscal 2013. Below is a summary ofour operating expenses by function:28Table of ContentsITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)Sales and marketing expenses were $40.6 million and $40.5 million in fiscal 2014 and 2013, respectively, an increase of $0.1 million or 0.2%. Commissions,travel and professional services increased by $0.7 million, partially offset by a $0.6 million decrease in trade show expenses.Research and development expenses were $29.8 million and $30.3 million in fiscal 2014 and 2013, respectively, a decrease of $0.5 million or 1.8%.Compensation and employee-related expenses decreased by $0.7 million resulting primarily from lower headcount compared to the prior fiscal year. This waspartially offset by $0.2 million in other miscellaneous research and development costs.General and administrative expenses were $19.9 million and $21.4 million in fiscal 2014 and 2013, respectively, a decrease of $1.5 million or 7.0%. In fiscal2013 we recorded a charge of $1.5 million due to a settlement on the U.S. Ethernet Innovations lawsuit and an asset impairment charge on identifiableintangible assets of $0.4 million. General and administrative expenses decreased $2.1 million in fiscal 2014 compared to the prior fiscal year due to outsideservices, occupancy expenses, and amortization as certain intangibles were fully amortized. This was partially offset by an increase in compensation andemployee-related expenses of $1.4 million. We also incurred expenses in fiscal 2014 $1.0 million related to a transition agreement with our former ChiefExecutive Officer pertaining to his retirement which took place at the end of calendar 2014.Restructuring expenses were $0.1 million in fiscal 2014 and $0.3 million in fiscal 2013. For further information on restructuring, see Note 9 to ourConsolidated Financial Statements.OTHER INCOME (EXPENSE), NET2015 Compared to 2014Other income, net was $2.2 million in fiscal 2015 compared to $0.7 million in fiscal 2014. In fiscal 2015, we recorded $1.4 million of gain from thesettlement of a property and casualty insurance claim related to the replacement of our capital equipment destroyed in the fire at our subcontractmanufacturer's location. We also recorded $0.6 million of foreign currency net transaction gains in fiscal 2015 as compared to $0.4 million of foreigncurrency net transaction gains in fiscal 2014. Our interest income remained mostly the same. Our average investment balance was $74.0 million in fiscal 2015and $74.1 million in fiscal 2014. We earned an average interest rate of 0.3% in both fiscal 2015 and fiscal 2014.2014 Compared to 2013Total other income, net was $0.7 million in both fiscal 2014 and fiscal 2013. In fiscal 2014, we recorded $0.5 million of foreign currency net transactiongains compared to fiscal 2013 in which we recorded $0.4 million of foreign currency net transaction gains and $0.1 million gain on the sale of an investment.Our interest income on marketable securities and cash and cash equivalents declined slightly from fiscal 2013 to fiscal 2014 as our average investmentbalance decreased from $80.2 million in fiscal 2013 to $74.1 million in fiscal 2014. We earned an average interest rate of 0.3% in both fiscal 2014 and fiscal2013.INCOME TAXESOur effective income tax rate was 23.8%, (119.7)% and 29.5% for fiscal years 2015, 2014 and 2013, respectively. Our effective tax rate will vary based on avariety of factors, including overall profitability, the geographical mix of income before taxes and related statutory tax rate in each jurisdiction, and discreteevents, such as settlements of audits (see Note 10 to our Consolidated Financial Statements).During fiscal 2015, we recorded net tax benefits of $0.9 million resulting from the reinstatement of the research and development tax credit for calendar year2014, reversal of tax reserves due to the expiration of statute of limitations from U.S. and foreign tax jurisdictions and reversal of tax reserves due to theresolution of tax audits.During fiscal 2014, we recorded net tax benefits of $1.4 million, related to the re-measurement and reversal of certain income tax reserves as a result of afederal income tax audit of fiscal 2012, the reassessment of state research and development tax credits and the release of income tax reserves due to theexpiration of statute of limitations from U.S. and foreign tax jurisdictions.29Table of ContentsITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)During fiscal 2013, we recorded net tax benefits of $0.8 million related to the January 2, 2013 enactment of the American Taxpayers Relief Act of 2012extending the research and development tax credit for the last three quarters of fiscal 2012 and the release of income tax reserves due to the expiration of thestatute of limitations from various U.S. and foreign tax jurisdictions.INFLATIONManagement believes that during fiscal years 2015, 2014 and 2013, inflation has not had a material effect on our consolidated statement of operations orfinancial position.LIQUIDITY AND CAPITAL RESOURCESWe have financed our operations principally with funds generated from operations. We held cash, cash equivalents and short-term marketable securities of$92.2 million, $80.4 million and $88.3 million at September 30, 2015, 2014 and 2013, respectively. Our working capital was $137.0 million, $125.9 millionand $127.7 million at September 30, 2015, 2014 and 2013, respectively. The increase of cash, cash equivalents and short-term marketable securities andworking capital during fiscal 2015 was attributable primarily to increases related to net income and less repurchases of our common stock than in fiscal 2014,partially offset by additional purchases of marketable securities.Consolidated Statements of Cash Flows Highlights: Year ended September 30,($ in thousands) 2015 2014 2013Operating activities $14,074 $1,809 $11,748Investing activities (19,454) 16,579 (19,739)Financing activities 5,145 (10,960) (10,790)Effect of exchange rate changes on cash and cash equivalents (2,237) (1,258) (145)Net (decrease) increase in cash and cash equivalents $(2,472) $6,170 $(18,926)2015 Compared to 2014Net cash provided by operating activities was $14.1 million during fiscal 2015 compared to $1.8 million in fiscal 2014, a net increase of $12.3 million. Thisnet increase was primarily due to increases in net income of $4.8 million, deferred income tax benefit of $4.2 million and a net increase in cash flows relatedto working capital of $4.6 million, partially offset by a decrease of $1.4 million for the non-cash adjustment related to the gain from insurance recovery. Thenet increase in cash flows related to working capital of $4.6 million was primarily due to a $4.8 million increase in accrued liabilities resulting from largerincentive compensation accruals on improved company performance in fiscal 2015. We also had an increase in cash flows as we spent $4.0 million less oninventory in fiscal 2015 compared to fiscal 2014. In addition, we had a $0.9 million increase in cash flows as our accounts receivable increased by a smalleramount in fiscal 2015 compared to fiscal 2014. This was partially offset by a $4.7 million decrease in cash flows related to accounts payable and a $0.4million decrease related to income taxes payable.Net cash used in investing activities was $19.5 million in fiscal 2015 compared to net cash provided of $16.6 million in fiscal 2014, a decrease of $36.1million. There were net purchases of marketable securities in fiscal 2015 compared to net maturities of marketable securities in fiscal 2014 which accountedfor $36.4 million of the decrease along with $1.1 million of additional purchases of capital expenditures. This was partially offset by an increase of $1.4million related to the gain from insurance recovery.Net cash provided by financing activities was $5.1 million in fiscal 2015 compared to net cash used by financing activities of $11.0 million in fiscal 2014.We had $13.4 million fewer repurchases of common stock in fiscal 2015 compared to fiscal 2014. We also had $2.7 million of additional proceeds fromexercises of stock options and employee stock purchase plan transactions in fiscal 2015 compared to fiscal 2014.2014 Compared to 2013Net cash provided by operating activities was $1.8 million during fiscal 2014 compared to $11.7 million during fiscal 2013, a net decrease of $9.9 million.This net decrease is due to a decrease in net income of $4.1 million, net decreases in non-cash items of $2.5 million and a decrease in net working capital of$3.3 million. The decrease in cash flows related to working30Table of ContentsITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)capital is primarily due to an increase in inventory of $3.0 million due to large purchases of components that were being discontinued by the suppliers anddelays in purchases by certain customers.Net cash provided by investing activities was $16.6 million in fiscal 2014 compared to net cash used by investing activities of $19.7 million in fiscal 2013,an increase of $36.3 million. Marketable securities accounted for $24.0 million of the increase as we received net proceeds from maturities in fiscal 2014compared to net purchases of marketable securities in fiscal 2013. We acquired Etherios in fiscal 2013 for $12.9 million, net of cash acquired. Our purchasesof capital expenditures increased by $0.5 million in fiscal 2014 compared to the prior fiscal year. We received $0.1 million related to proceeds from aninvestment in fiscal 2013.Net cash used in by financing activities was $11.0 million in fiscal 2014 compared to $10.8 million in fiscal 2013. We used $15.7 million of cash torepurchase our common stock in fiscal 2014, partially offset by $4.7 million of proceeds related to exercises of stock options and employee stock purchaseplan transactions.We expect positive cash flows from operations and believe that our current cash, cash equivalents and marketable securities balances, cash generated fromoperations and our ability to secure debt and/or equity financing will be sufficient to fund our business operations and capital expenditures for the nexttwelve months and beyond.At September 30, 2015, our total cash and cash equivalents and marketable securities balance, including long-term marketable securities was $105.8 million.At September 30, 2015, we had $28.2 million of accumulated undistributed foreign earnings that are indefinitely reinvested in non-U.S. subsidiaries,resulting in slightly more than half of our cash and cash equivalents being held by non-U.S. subsidiaries. Approximately $28.3 million of cash and cashequivalents was being held by our controlled foreign subsidiaries at September 30, 2015. Although we have no current need or intention to repatriatehistorical earnings in the form of cash in the United States, if we change our assertion from indefinitely reinvesting undistributed foreign earnings, we wouldhave to accrue applicable taxes. The amount of any taxes and the application of any tax credits would be determined based on the income tax laws at the timeof such repatriation. Under current tax laws, we estimate the unrecognized deferred tax liability to be up to $0.8 million.The following summarizes our contractual obligations at September 30, 2015: Payments due by fiscal period($ in thousands) Total Less than 1 year 1-3 years 3-5 years ThereafterOperating leases $4,252 $1,993 $1,775 $484 $—The operating lease agreements included above primarily relate to office space. The table above does not include possible payments for uncertain taxpositions. Our reserve for uncertain tax positions, including accrued interest and penalties, was $2.0 million as of September 30, 2015. Due to the nature ofthe underlying liabilities and the extended time often needed to resolve income tax uncertainties, we cannot make reliable estimates of the amount or timingof future cash payments that may be required to settle these liabilities.The above table also does not include those obligations for royalties under license agreements as these royalties are calculated based on future sales oflicensed products and we cannot make reliable estimates of the amount of cash payments.FOREIGN CURRENCYWe are exposed to foreign currency transaction risk associated with certain sales being denominated in Euros, British Pounds, and Japanese Yen and foreigncurrency translation risk as the financial position and operating results of our foreign subsidiaries are translated into U.S. Dollars for consolidation. Wemanage our net asset or net liability position for U.S. dollar accounts in our foreign locations to reduce our foreign currency risk. We have not implemented aformal hedging strategy to reduce foreign currency risk.During 2015, we had approximately $76.3 million of revenue related to foreign customers including export sales, of which $21.3 million was denominated inforeign currency, predominantly the Euro and British Pound. During 2014 and 2013, we had approximately $76.3 million and $78.8 million, respectively, ofrevenue to foreign customers including export sales, of which $23.3 million and $24.3 million, respectively, were denominated in foreign currency,predominantly the Euro and British Pound. In future periods, we expect a significant portion of sales will continue to be made in Euros and British Pounds.31Table of ContentsITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)RECENT ACCOUNTING DEVELOPMENTSAdoptedIn July 2013, the Financial Accounting Standards Board (“FASB”) issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a NetOperating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” This guidance relates to the presentation of an unrecognized taxbenefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The standard update provides that a liability related to anunrecognized tax benefit should be offset against same jurisdiction deferred tax assets for a net operating loss carryforward, a similar tax loss, or a tax creditcarryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. This guidance was effective prospectively forfiscal years (and interim reporting periods within those years) beginning after December 15, 2013. We adopted this guidance during the fiscal quarter endedDecember 31, 2014, resulting in a reclassification of $0.4 million of unrecognized tax benefits to noncurrent deferred tax assets.In March 2013, FASB issued ASU 2013-05, “Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment uponDerecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” This guidance applies to therelease of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holdsa controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. ASU 2013-05 was effective prospectively for fiscalyears (and interim reporting periods within those years) beginning after December 15, 2013. We adopted this guidance during the fiscal quarter endedDecember 31, 2014. There was no impact on our condensed consolidated financial statements as we have not sold any foreign entities for which we hold acontrolling financial interest.Not Yet AdoptedIn September 2015, FASB issued ASU 2015-16, "Simplifying the Accounting for Measurement-Period Adjustments." To simplify the accounting foradjustments made to provisional amounts recognized in a business combination, the amendments in this update eliminate the requirement to retrospectivelyaccount for those adjustments. The amendments in this update are effective for fiscal years beginning after December 15, 2015, including interim periodswithin those years, which for us will be the first fiscal quarter ending December 31, 2016. Earlier application is permitted for financial statements that havenot been issued. We are currently evaluating the impact of the adoption of ASU 2015-16.In July 2015, FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory." This provision would require inventory that was previously recordedusing first-in, first-out (FIFO) to lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business,less reasonably predictable costs of completion, disposal, and transportation. This guidance is effective for fiscal years beginning after December 15, 2016and interim periods within those years, which for us will be the first fiscal quarter ending December 31, 2017. The amendments in this guidance should beapplied prospectively with earlier application permitted as of the beginning of an interim or annual period. We are currently evaluating the impact of theadoption of ASU 2015-11 and whether it would have a material impact on our consolidated financial statements.In April 2015, FASB issued ASU 2015-05, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Fees Paidin a Cloud Computing Arrangement. The new standard provides guidance to customers about whether a cloud computing arrangement includes a softwarelicense. If the arrangement does include a software license, the software license element of the arrangement should be accounted for in the same manner as theacquisition of other software licenses. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015,with early adoption permitted. We expect to adopt this guidance beginning with our fiscal quarter ending December 31, 2016. We do not expect thisguidance to have a material impact on our consolidated financial statements.In August 2014, FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern.” This guidance requires management to evaluatewhether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. These amendmentsare effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter, which for us, will be the fourth fiscalquarter ended September 30, 2017. Early adoption is permitted. While we are evaluating the impact of the adoption of ASU 2014-15, we do not expect it tohave an impact on our consolidated financial statements.In May 2014, FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” This guidance provides a five-step analysis in determining when andhow revenue is recognized so that an entity will recognize revenue when it transfers promised32Table of ContentsITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)goods or services to customers in an amount that reflects what it expects in exchange for the goods and services. It also requires more detailed disclosures toenable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts withcustomers. In August 2015, the FASB issued ASU 2015-14 "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date" whichapproved a one-year deferral of the effective date of ASU 2014-09. As a result of this deferral, ASU 2014-09 is effective for our fiscal 2019, including interimperiods within that reporting period. The FASB also agreed to allow us to choose to adopt the standard effective for our fiscal 2018. We are assessing theadoption date and potential impact of adopting this ASU on our consolidated financial statements and related disclosures.CRITICAL ACCOUNTING POLICIES AND ESTIMATESOur discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financialstatements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, the disclosure ofcontingent assets and liabilities and the values of purchased assets and assumed liabilities in acquisitions. We base our estimates on historical experience andvarious other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about thecarrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.We believe the following critical accounting policies impact our more significant judgments and estimates used in the preparation of our consolidatedfinancial statements.REVENUE RECOGNITIONOur revenue is derived primarily from the sale of wired and wireless hardware products to our distributors and Direct/OEM customers. We recognize hardwareproduct revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, collectability isreasonably assured and there are no post-delivery obligations, other than warranty. Under these criteria, product revenue generally is recognized uponshipment of product to customers. Sales to authorized domestic distributors and Direct / OEMs are made with certain rights of return and price adjustmentprovisions. Estimated reserves for future returns and pricing adjustments are established by us based on an analysis of historical patterns of returns and priceadjustments as well as an analysis of authorized returns compared to received returns and distribution sales for the current period. Estimated reserves forfuture returns and price adjustments are charged against revenue in the same period as the corresponding sales are recorded. Material differences between thehistorical trends used to determine estimated reserves and actual returns and pricing adjustments could result in a material change to our consolidated resultsof operations or financial position. We have applied consistent methodologies for estimating reserves for future returns and pricing adjustments for all yearspresented. The reserve for future returns and pricing adjustments was $1.8 million at September 30, 2015 and $1.7 million at September 30, 2014.Revenue recognized for service revenue as a percentage of total revenue represented 8.2%, 10.3% and 11.4% in fiscal 2015, 2014 and 2013, respectively. Ourservice revenue is derived primarily from professional and engineering services performed by our Etherios® CRM and wireless design teams. We also havesome service revenue that is derived from our Digi Device Cloud, which is a platform-as-a-service (PaaS) offering in which customers pay for servicesconsumed in terms of devices being managed and monitored, or as a monthly service fee for access to information. We recognize service revenue from ourEtherios® CRM services, wireless design services, and Digi Device Cloud based upon performance, including, but not limited to, final product delivery andcustomer acceptance. In addition, we recognize small amounts of revenue from enterprise support services which are recognized over the life of the contract,and training as the services are performed.MARKETABLE SECURITIESWe regularly monitor and evaluate the realizable value of our marketable securities. When assessing marketable securities for other-than-temporary declinesin value, we consider several factors. These factors include: how significant the decline in value is as a percentage of the original cost, how long the marketvalue of the investment has been less than its original cost, the underlying factors contributing to a decline in the prices of securities in a single asset class,the performance of the issuer’s stock price in relation to the stock price of its competitors within the industry, expected market volatility, analystrecommendations, the views of external investment managers, any news or financial information that has been released specific to the investee and theoutlook for the overall industry in which the issuer operates. If events and circumstances indicate that a33Table of ContentsITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)decline in the value of these securities has occurred and is other-than-temporary, we would record a charge to other income (expense).ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTSWe maintain an allowance for doubtful accounts, which reflects the estimate of losses that may result from the inability of some of our customers to makerequired payments. The estimate for the allowance for doubtful accounts is based on known circumstances regarding collectability of customer accounts andhistorical collections experience. If the financial condition of one or more of our customers were to deteriorate, resulting in an inability to make payments,additional allowances may be required. Material differences between the historical trends used to estimate the allowance for doubtful accounts and actualcollection experience could result in a material change to our consolidated results of operations or financial position. The allowance for doubtful accountswas $0.5 million at September 30, 2015 and $0.4 million at September 30, 2014.INVENTORIESInventories are stated at the lower of cost or fair market value, with cost determined using the first-in, first-out method. We reduce the carrying value of ourinventories for estimated excess and obsolete inventories equal to the difference between the cost of inventory and its estimated realizable value based uponassumptions about future product demand and market conditions. Once the new cost basis is established, the value is not increased with any changes incircumstances that would indicate an increase in value after the remeasurement. If actual product demand or market conditions are less favorable than thoseprojected by management, additional inventory write-downs may be required that could result in a material change to our consolidated results of operationsor financial position. We have applied consistent methodologies for the net realizable value of inventories.GOODWILLGoodwill represents the excess of cost over the fair value of identifiable assets acquired. Goodwill is tested for impairment on an annual basis as of June 30,or more frequently if events or circumstances occur which could indicate impairment. At June 30, 2015, our market capitalization was $238.6 millioncompared to our carrying value of $270.6 million. Our market capitalization plus our estimated control premium of 35% resulted in a fair value in excess ofour carrying value by a margin of 19%. As a result, no impairment was indicated and we were not required to complete the second step of the goodwillimpairment analysis. No goodwill impairment charges were recorded. The control premium used in our annual goodwill assessment at June 30, 2015 wasbased on a control premium study as of June 2014, resulting in a range of control premium of 30% to 40%. We re-evaluated the data and concluded that a35% control premium continues to best represent the amount an investor would likely pay, over and above market capitalization, in order to obtain acontrolling interest given the economic conditions at June 30, 2015.During the fourth quarter of fiscal 2015, we assessed various qualitative factors to determine whether or not an additional goodwill impairment assessmentwas required as of September 30, 2015. We concluded that no additional goodwill impairment assessment was required. We continue to monitor our stockprice on a daily basis. If the stock price remained below certain thresholds for a significant period of time, we would complete an interim impairmentassessment. We also monitor other events or circumstances that could have a significant impact on our operations. If one of these events or circumstanceswere to occur, we would evaluate whether an interim goodwill impairment assessment should be completed.INCOME TAXESWe operate in multiple tax jurisdictions both in the U.S. and outside of the U.S. Accordingly, we must determine the appropriate allocation of income to eachof these jurisdictions. This determination requires us to make several estimates and assumptions. Tax audits associated with the allocation of this income, andother complex issues, may require an extended period of time to resolve and could result in adjustments to our income tax balances that are material to ourconsolidated financial position and results of operations and could result in potential cash outflows.We have unrecognized tax benefits of $2.0 million. We expect that it is reasonably possible that the total amounts of unrecognized tax benefits will decreaseapproximately $0.2 million over the next 12 months due to the expiration of various statutes of limitations. The total amount of unrecognized tax benefitsthat if recognized would affect our effective tax rate is $1.6 million. We recognize interest and penalties related to income tax matters in income tax expense.34Table of ContentsITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)WARRANTIESIn general, we warrant our products to be free from defects in material and workmanship under normal use and service. The warranty periods generally rangefrom one to five years. We typically have the option to repair or replace products we deem defective due to material or workmanship. Estimated warrantycosts are accrued in the period that the related revenue is recognized based upon an estimated average per unit repair or replacement cost applied to theestimated number of units under warranty. These estimates are based upon historical warranty incidents and are evaluated on an ongoing basis to ensure theadequacy of the warranty accrual. The product warranty accrual was $1.0 million and $0.9 million at September 30, 2015 and September 30, 2014,respectively.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKINTEREST RATE RISKOur exposure to interest rate risk relates primarily to our investment portfolio. We do not use derivative financial instruments to hedge against interest raterisk.FOREIGN CURRENCY RISKWe are exposed to foreign currency transaction risk associated with certain sales being denominated in Euros, British Pounds or Japanese Yen and foreigncurrency translation risk as the financial position and operating results of our foreign subsidiaries are translated into U.S. Dollars for consolidation. Wemanage our net asset or net liability position for U.S. dollar accounts in our foreign locations to reduce our foreign currency risk. We have not implemented aformal hedging strategy.The table below compares the average monthly exchange rates of the Euro, British Pound and Japanese Yen: Fiscal year endedSeptember 30, % increase 2015 2014 (decrease)Euro1.1499 1.3575 (15.3)%British Pound1.5462 1.6570 (6.7)%Japanese Yen0.0084 0.0098 (14.3)%A 10.0% change from the 2015 average exchange rate for the Euro, British Pound and Yen to the U.S. Dollar would have resulted in a 2.2% increase ordecrease in fiscal 2015 annual revenue and a 2.0% increase or decrease in stockholders' equity at September 30, 2015. The above analysis does not take intoconsideration any pricing adjustments we may make in response to changes in the exchange rate.CREDIT RISKWe have some exposure to credit risk related to our accounts receivable portfolio. Exposure to credit risk is controlled through regular monitoring ofcustomer financial status, credit limits and collaboration with sales management on customer contacts to facilitate payment.Investments are made in accordance with our investment policy and consist of certificates of deposit, money market funds, corporate bonds and governmentmunicipal bonds. We may have some credit exposure related to the fair value of our securities, which could change based on changes in market conditions. Ifmarket conditions deteriorate or, if these securities experience credit rating downgrades, we may incur impairment charges for securities in our investmentportfolio.35Table of ContentsITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders of Digi International Inc.In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income (loss),stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Digi International Inc. and its subsidiaries at September30, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2015 in conformitywith accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in theindex appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the relatedconsolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting asof September 30, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statementschedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financialreporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinionson these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integratedaudits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement andwhether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining,on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significantestimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting includedobtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating thedesign and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considerednecessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate./s/ PricewaterhouseCoopers LLPMinneapolis, MinnesotaNovember 30, 201536Table of ContentsITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)DIGI INTERNATIONAL INC.CONSOLIDATED STATEMENTS OF OPERATIONS Fiscal years ended September 30, 2015 2014 2013 (in thousands, except per common share data)Revenue: Hardware product$195,497 $172,846 $173,078Service17,361 19,855 22,303Total revenue212,858 192,701 195,381Cost of sales: Cost of hardware product101,155 85,737 82,276Cost of service13,672 16,480 12,982Total cost of sales114,827 102,217 95,258Gross profit98,031 90,484 100,123Operating expenses: Sales and marketing39,544 40,576 40,513Research and development32,047 29,789 30,327General and administrative19,514 19,913 21,423Restructuring charges, net509 81 313Total operating expenses91,614 90,359 92,576Operating income6,417 125 7,547Other income, net: Interest income218 176 210Interest expense(4) (5) (42)Other income, net2,014 501 523Total other income, net2,228 672 691Income before income taxes8,645 797 8,238Income tax provision (benefit)2,057 (954) 2,433Net income$6,588 $1,751 $5,805Net income per common share: Basic$0.27 $0.07 $0.22Diluted$0.26 $0.07 $0.22Weighted average common shares: Basic24,645 25,345 25,956Diluted25,227 25,730 26,237The accompanying notes are an integral part of the consolidated financial statements.37Table of ContentsITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)DIGI INTERNATIONAL INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Fiscal years ended September 30, 2015 2014 2013 (in thousands)Net income$6,588 $1,751 $5,805Other comprehensive loss, net of tax: Foreign currency translation adjustment(4,323) (2,713) (1,826)Change in net unrealized (loss) gain on investments(21) 43 (63)Less income tax benefit (provision)7 (17) 24Reclassification of realized loss on investments included in net income (1)1 — —Other comprehensive loss, net of tax(4,336) (2,687) (1,865)Comprehensive income (loss)$2,252 $(936) $3,940(1)Recorded in Other income, net in our Consolidated Statements of Operations.The accompanying notes are an integral part of the consolidated financial statements.38Table of ContentsITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)DIGI INTERNATIONAL INC.CONSOLIDATED BALANCE SHEETS As of September 30, 2015 2014 (in thousands, except share data)ASSETS Current assets: Cash and cash equivalents$45,018 $47,490Marketable securities47,191 32,898Accounts receivable, net29,205 28,576Inventories31,877 31,247Deferred tax assets3,379 3,221Other3,515 4,249Total current assets160,185 147,681Marketable securities, long-term13,626 11,541Property, equipment and improvements, net14,357 13,231Identifiable intangible assets, net4,179 6,785Goodwill102,097 103,398Deferred tax assets5,666 7,383Other250 440Total assets$300,360 $290,459LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable$6,723 $10,451Income taxes payable828 —Accrued compensation11,502 8,133Other4,136 3,170Total current liabilities23,189 21,754Income taxes payable1,546 2,724Deferred tax liabilities135 272Other noncurrent liabilities552 411Total liabilities25,422 25,161Commitments and Contingencies (see Notes 15 & 16) 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; 31,534,198 and 30,703,895 shares issued315 307Additional paid-in capital227,367 218,689Retained earnings124,404 117,816Accumulated other comprehensive loss(22,613) (18,277)Treasury stock, at cost, 6,487,248 and 6,313,937 shares(54,535) (53,237)Total stockholders’ equity274,938 265,298Total liabilities and stockholders’ equity$300,360 $290,459The accompanying notes are an integral part of the consolidated financial statements.39Table of ContentsITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)DIGI INTERNATIONAL INC.CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal years ended September 30, 2015 2014 2013Operating activities: (in thousands)Net income $6,588 $1,751 $5,805Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property, equipment and improvements 2,949 3,557 3,461Amortization of identifiable intangible assets 2,910 3,589 4,416Stock-based compensation 4,301 4,330 3,773Excess tax benefits from stock-based compensation — (44) (67)Deferred income tax benefit (769) (2,783) (2,055)Gain on insurance settlement related to property and equipment (1,375) — —Bad debt/product return provision 357 98 811Inventory obsolescence 1,284 860 1,258Intangible impairment charge — — 361Restructuring charges, net 509 81 313Other 87 3 (85)Changes in operating assets and liabilities (net of acquisition): Accounts receivable (1,794) (2,730) (2,368)Inventories (1,913) (5,966) (2,972)Other assets 241 210 (212)Income taxes 387 (1,408) (2,634)Accounts payable (3,769) 970 1,413Accrued expenses 4,081 (709) 530Net cash provided by operating activities 14,074 1,809 11,748Investing activities: Purchase of marketable securities (54,427) (27,420) (67,159)Proceeds from maturities of marketable securities 38,028 47,420 63,089Acquisition of businesses, net of cash acquired — — (12,919)Proceeds from insurance settlement related to property and equipment 1,400 — —Proceeds from sale of property and equipment 45 — —Proceeds from sale of investment — — 136Purchase of property, equipment, improvements and certain other intangible assets (4,500) (3,421) (2,886)Net cash (used in) provided by in investing activities (19,454) 16,579 (19,739)Financing activities: Excess tax benefits from stock-based compensation — 44 67Proceeds from stock option plan transactions 6,559 3,689 2,193Proceeds from employee stock purchase plan transactions 925 1,009 1,008Purchase of common stock (2,339) (15,702) (14,058)Net cash provided by (used in) financing activities 5,145 (10,960) (10,790)Effect of exchange rate changes on cash and cash equivalents (2,237) (1,258) (145)Net (decrease) increase in cash and cash equivalents (2,472) 6,170 (18,926)Cash and cash equivalents, beginning of period 47,490 41,320 60,246Cash and cash equivalents, end of period $45,018 $47,490 $41,320 Supplemental disclosures of cash flow information: Interest paid $4 $5 $42Income taxes paid, net $1,296 $3,197 $6,300Supplemental schedule of non-cash investing and financing activities: Accrual for capitalized intangible asset $17 $— $42Issuance of common stock for business acquisition $— $— $6,741Accrual for purchase of common stock $— $100 $—The accompanying notes are an integral part of the consolidated financial statements.40Table of ContentsITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)DIGI INTERNATIONAL INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYFor fiscal years ended September 30, 2015, 2014 and 2013 Accumulated Additional Other Total Common Stock Treasury Stock Paid-In Retained Comprehensive Stockholders’ Shares Par Value Shares Value Capital Earnings Loss EquityBalances, September 30, 2012 29,269 $293 3,356 $(25,489) $199,495 $110,260 $(13,725) $270,834Net income 5,805 5,805Other comprehensive loss (1,865) (1,865)Employee stock purchase issuances (128) 1,030 (22) 1,008Repurchase of common stock 1,481 (14,058) (14,058)Issuance of stock upon exercise of stockoptions 280 3 2,190 2,193Tax impact from equity awards (188) (188)Acquisition of Etherios, Inc. 715 7 6,734 6,741Stock-based compensation expense 3,773 3,773Balances, September 30, 2013 30,264 $303 4,709 $(38,517) $211,982 $116,065 $(15,590) $274,243Net income 1,751 1,751Other comprehensive loss (2,687) (2,687)Employee stock purchase issuances (129) 1,082 (73) 1,009Repurchase of common stock 1,734 (15,802) (15,802)Issuance of stock under stock award plans 440 4 3,685 3,689Tax impact from equity awards (1,235) (1,235)Stock-based compensation expense 4,330 4,330Balances, September 30, 2014 30,704 $307 6,314 $(53,237) $218,689 $117,816 $(18,277) $265,298Net income 6,588 6,588Other comprehensive loss (4,336) (4,336)Employee stock purchase issuances (124) 1,041 (116) 925Repurchase of common stock 297 (2,339) (2,339)Issuance of stock under stock award plans 830 8 6,551 6,559Tax impact from equity awards (2,058) (2,058)Stock-based compensation expense 4,301 4,301Balances, September 30, 2015 31,534 $315 6,487 $(54,535) $227,367 $124,404 $(22,613) $274,938The accompanying notes are an integral part of the consolidated financial statements.41Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBusiness DescriptionWe are a leading provider of Internet of Things (IoT) networking hardware products and solutions that enable the connection, monitoring and control of localor remote physical assets by electronic means. These networking products and solutions can connect communication hardware to a physical asset, conveyinformation about the asset’s status and performance to a computer system and then use that information to improve or automate one or more processes. Theseproducts and solutions are deployed via both wired and, ever increasingly wireless networks. Our solutions are deployed by a wide range of businesses andinstitutions. Any business that utilizes a significant number of devices, whose operation could benefit from remote monitoring or control, may realizebenefits from IoT networking.Principles of ConsolidationThe consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. All intercompany accounts and transactionshave been eliminated in consolidation.Cash EquivalentsCash equivalents consist of money market accounts and other highly liquid investments purchased with an original maturity of three months or less. Thecarrying amounts approximate fair value due to the short maturities of these investments.Marketable SecuritiesMarketable securities consist of certificates of deposit, commercial paper, corporate bonds and government municipal bonds. All marketable securities areaccounted for as available-for-sale and are carried at fair value on our consolidated balance sheets with unrealized gains and losses recorded in accumulatedother comprehensive loss within stockholders’ equity. In order to estimate the fair value for each security in our investment portfolio, we obtain quotedmarket prices and trading activity for each security where available. We obtain relevant information from our investment advisor and, if warranted, also mayreview the financial solvency of certain security issuers.We regularly monitor and evaluate the value of our marketable securities. When assessing marketable securities for other-than-temporary declines in value,we consider several factors. These factors include: how significant the decline in value is as a percentage of the original cost, how long the market value ofthe investment has been less than its original cost, the underlying factors contributing to a decline in the prices of securities in a single asset class, theperformance of the issuer’s stock price in relation to the stock price of its competitors within the industry, expected market volatility, analystrecommendations, the views of external investment managers, any news or financial information that has been released specific to the investee and theoutlook for the overall industry in which the issuer operates. If events and circumstances indicate that a decline in the value of a security has occurred and isother-than-temporary, we would record a charge to other income (expense).Accounts ReceivableAccounts receivable are stated at the amount we expect to collect, which is net of an allowance for doubtful accounts for estimated losses resulting from theinability of our customers to make required payments. The following factors are considered when determining the collectability of specific customeraccounts: customer creditworthiness, past transaction history with the customer, and changes in customer payment terms or practices. In addition, overallhistorical collection experience, current economic industry trends, and a review of the current status of trade accounts receivable are considered whendetermining the required allowance for doubtful accounts. Based on our assessment, we provide for estimated uncollectible amounts through a charge toearnings and a credit to our allowance for doubtful accounts. Balances that remain outstanding after we have used reasonable collection efforts are written offthrough a charge to the allowance for doubtful accounts and a credit to accounts receivable.InventoriesInventories are stated at the lower of cost or fair market value, with cost determined using the first-in, first-out method. Appropriate consideration is given todeterioration, obsolescence and other factors in evaluating fair market value.42Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)Property, Equipment and Improvements, NetProperty, equipment and improvements are carried at cost, net of accumulated depreciation. Depreciation is provided by charges to operations using thestraight-line method over the estimated asset useful lives. Furniture and fixtures and other equipment are depreciated over a period of three to five years.Building improvements and buildings are depreciated over ten and thirty-nine years, respectively.Expenditures for maintenance and repairs are charged to operations as incurred, while major renewals and betterments are capitalized. The assets and relatedaccumulated depreciation accounts are adjusted for asset retirements and disposals with the resulting gain or loss included in operations.Identifiable Intangible AssetsPurchased proven technology, license agreements, covenants not to compete and other identifiable intangible assets are recorded at fair value when acquiredin a business acquisition, or at cost when not purchased in a business acquisition. Purchased in-process research and development costs (IPR&D) related tobusiness combinations are capitalized and amortized once placed in service. All other identifiable intangible assets are amortized on either a straight-linebasis over their estimated useful lives of three to thirteen years or based on the pattern in which the asset is consumed. Useful lives for identifiable intangibleassets are estimated at the time of acquisition based on the periods of time from which we expect to derive benefits from the identifiable intangible assets.Amortization of purchased and core technology is included in cost of product in the Consolidated Statements of Operations. Amortization of all otheracquired identifiable intangible assets is charged to operating expenses as a component of general and administrative expense.Identifiable intangible assets are reviewed for impairment annually or whenever events or circumstances indicate that undiscounted expected future cashflows are not sufficient to recover the carrying value amount. We measure impairment loss by utilizing an undiscounted cash flow valuation technique usingfair values indicated by the income approach. Impairment losses, if any, would be recorded in the period the impairment is identified. During the fourthquarter of fiscal 2013, we recorded an impairment charge of $0.4 million which was included in general and administrative expense on our ConsolidatedStatements of Operations for our single operating and reporting segment (see Note 4 to our Consolidated Financial Statements). There was an immaterialamount of impairments identified in fiscal 2015 and no impairments identified during fiscal 2014.GoodwillGoodwill represents the excess of cost over the fair value of identifiable assets acquired. Goodwill is tested for impairment on an annual basis as of June 30,or more frequently if events or circumstances occur which could indicate impairment. The calculation of goodwill impairment requires us to makeassumptions about the fair value of our one reporting unit, which historically has been approximated by using our market capitalization plus a controlpremium. Control premium assumptions require judgment and actual results may differ from assumed or estimated amounts.Our test for potential goodwill impairment is a two-step approach. We estimate the fair value for our one reporting unit by comparing its fair value (marketcapitalization plus control premium) to our carrying value. If the carrying value of the reporting unit exceeds its estimated fair value, the second step of thegoodwill impairment analysis requires us to measure the amount of the impairment loss. An impairment loss is calculated by comparing the implied fair valueof the goodwill to its carrying amount. To calculate the implied fair value of goodwill, the fair value of the reporting unit's assets and liabilities, excludinggoodwill, is estimated. The excess of the fair value of the reporting unit over the amount assigned to its assets and liabilities, excluding goodwill, is theimplied fair value of the reporting unit's goodwill.In June 2014, we performed a control premium study to determine the appropriate control premium to include in the calculation of fair value. We used a thirdparty valuation firm to assist us in performing the control premium analysis. In order to estimate the range of control premiums appropriate for us, thefollowing three methodologies were used: (1) analysis of individual transactions within our industry; (2) analysis of industry-wide data, and (3) analysis ofglobal transaction data. Individual transactions in the Communication Equipment or Technology Hardware, Storage and Peripherals industries were used tofind transactions of target companies that operated in similar markets and shared similar operating characteristics with us. 43Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)Transaction screening criteria included selection of transactions with the following characteristics:•At least 50 percent of a target company’s equity sought by an acquirer,•Target company considered operating (not in bankruptcy),•Target company had publicly traded stock outstanding at the transaction date, and•Transactions announced between June 30, 2009 and the valuation date.In analyzing industry-wide data, transactions in the following three industries were identified that encompassed the products offered by us: Office Equipmentand Computer Hardware, Communications, and Computer, Supplies and Services. Finally, control premiums were considered for both domestic andinternational transactions. The control premium analysis resulted in a range of control premium of 30% to 40%. We re-evaluated the data and concluded thata 35% control premium continues to best represent the amount an investor would likely pay, over and above market capitalization, in order to obtain acontrolling interest given the economic conditions at June 30, 2015.Based on our industry knowledge, including recent industry merger and acquisition activity, we concluded that a 35% control premium continues to beappropriate to use for our June 30, 2015 goodwill impairment assessment.At June 30, 2015, our market capitalization was $238.6 million compared to our carrying value of $270.6 million. Our market capitalization plus ourestimated control premium of 35% resulted in a fair value in excess of our carrying value by a margin of 19%. As a result, no goodwill impairment wasindicated and we were not required to complete the second step of the goodwill impairment analysis. No goodwill impairment charges were recorded. Duringthe fourth quarter of fiscal 2015, we assessed various qualitative factors to determine whether or not an additional goodwill impairment assessment wasrequired as of September 30, 2015, and we concluded that no additional impairment assessment was required.As of June 30, 2014, our market capitalization was $235.8 million compared to our carrying value of $273.0 million. Our market capitalization plus ourestimated control premium of 35% resulted in a fair value in excess of our carrying value by a margin of 17% and therefore no impairment was indicated.We continue to monitor our stock price on a daily basis. If the stock price remained below certain thresholds for a significant period of time, we wouldcomplete an interim impairment assessment. We also monitor other events or circumstances that could have a significant impact on our operations. If one ofthese events or circumstances were to occur, we would evaluate whether an interim goodwill impairment assessment should be completed.If our stock price or control premium declines, the first step of our goodwill impairment analysis may fail. We have identified factors that could result inadditional interim goodwill impairment testing; for example, we would perform the second step of the impairment testing if our stock price fell below certainthresholds for a significant period of time, or if our control premium significantly decreased. Events or circumstances may occur that could negatively impactour stock price, including changes in our anticipated revenue and profits and our ability to execute on our strategies. In addition, our control premium coulddecline due to changes in economic conditions, in the technology industry, in the financial markets or more generally. An impairment could have a materialeffect on our consolidated balance sheet and results of operations. We have had no goodwill impairment losses since the adoption of Accounting StandardsCodification (ASC) 350, Intangibles-Goodwill and Others, in fiscal 2003.WarrantiesIn general, we warrant our hardware products to be free from defects in material and workmanship under normal use and service. The warranty periodsgenerally range from one to five years. We typically have the option to either repair or replace hardware products we deem defective with regard to material orworkmanship. Estimated warranty costs are accrued in the period that the related revenue is recognized based upon an estimated average per unit repair orreplacement cost applied to the estimated number of units under warranty. These estimates are based upon historical warranty incidents and are evaluated onan ongoing basis to ensure the adequacy of the warranty accrual.44Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)Revenue RecognitionWe recognize revenue in accordance with authoritative guidance issued by FASB related to revenue recognition.Hardware product revenue as a percentage of total revenue was 91.8%, 89.7% and 88.6% in fiscal 2015, 2014 and 2013, respectively. We recognize hardwareproduct revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, collectability isreasonably assured and there are no post-delivery obligations, other than warranty. Under these criteria, product revenue generally is recognized uponshipment of product to customers.Sales to authorized domestic and foreign distributors and Direct / OEMs are made with certain rights of return and price adjustment provisions. Estimatedreserves for future returns and pricing adjustments are established by us based on an analysis of historical patterns of returns and price adjustments as well asan analysis of authorized returns compared to received returns and distribution sales for the current period. Estimated reserves for future returns and priceadjustments are charged against revenue in the same period as the corresponding revenue is recorded.Service revenue as a percentage of total revenue represented 8.2%, 10.3% and 11.4% in fiscal 2015, 2014 and 2013, respectively. Our service revenue isderived primarily from professional and engineering services performed by our Etherios customer relationship management (CRM) services and our wirelessdesign services. We also have some service revenue that is derived from our Digi Device Cloud, which is a platform-as-a-service (PaaS) offering in whichcustomers pay for services consumed in terms of devices being managed and monitored, or as a monthly service fee for access to information. In addition, wehave small amounts of revenue from our enterprise support services. We recognize service revenue from our Etherios CRM services, wireless design services,and Device Cloud based upon performance, including final product delivery and customer acceptance. In addition, we recognize small amounts of revenuefrom and enterprise support services which is recognized over the life of the contract, and training as the services are performed.Research and DevelopmentResearch and development costs are expensed when incurred. Research and development costs include compensation, allocation of corporate costs,depreciation, utilities, professional services and prototypes. Software development costs are expensed as incurred until the point that technologicalfeasibility and proven marketability of the product are established. To date, the time period between the establishment of technological feasibility andcompletion of software development has been short, and no significant development costs have been incurred during that period. Accordingly, we have notcapitalized any software development costs to date.Income TaxesDeferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financialreporting amounts at each year end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affecttaxable income. Income tax expense is equal to the tax payable for the period and the change during the period in deferred tax assets and liabilities and alsochanges in income tax reserves.Stock-Based CompensationStock-based compensation expense represents the cost of employee services received in exchange for an award of equity instruments based on the grant datefair value of the award. This cost must be recognized over the period during which an employee is required to provide the service (usually the vesting period).Foreign Currency TranslationFinancial position and results of operations of our international subsidiaries are measured using local currencies as the functional currency, except for ourSingapore location which uses the U.S. Dollar as its local currency. Assets and liabilities of these operations are translated at the exchange rates in effect atthe end of each reporting period. For our larger international subsidiaries, statements of operations accounts are translated at the daily rate. For all otherinternational subsidiaries, our statements of operations accounts are translated at the weighted average rates of exchange prevailing during each reportingperiod. Translation adjustments arising from the use of differing currency exchange rates from period to period are included in accumulated othercomprehensive loss in stockholders’ equity. Gains and losses on foreign currency exchange transactions, as well as translation gains or losses on transactionsdenominated in currencies other than an entity’s functional currency, are reflected in the statement of operations. During fiscal 2015, 2014 and 2013, therewere net transaction gains of $0.6 million,45Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)$0.5 million and $0.4 million, respectively, that were recorded in other income (expense). We manage our net asset or net liability position for U.S. dollaraccounts in our foreign locations to reduce our foreign currency risk. We have not implemented a formal hedging strategy.Net Income Per Common ShareBasic net income per common share is calculated based on the weighted average number of common shares outstanding during the period. Diluted netincome per common share is computed by dividing net income by the weighted average number of common and potentially dilutive common sharesoutstanding during the period. Potentially dilutive common shares of our stock result from dilutive common stock options and restricted stock units. We usethe treasury stock method to calculate the weighted-average shares used in the diluted earnings per share computation. Under the treasury stock method, theproceeds from exercise of an option, the amount of compensation cost, if any, for future service that we have not yet recognized, and the amount of estimatedtax benefits that would be recorded in paid-in capital, if any, when the option is exercised are assumed to be used to repurchase shares in the current period.The following table is a reconciliation of the numerators and denominators in the net income per common share calculations (in thousands, except percommon share data): Fiscal years ended September 30, 2015 2014 2013Numerator: Net income$6,588 $1,751 $5,805Denominator: Denominator for basic net income per common share — weighted average shares outstanding24,645 25,345 25,956Effect of dilutive securities: Stock options and restricted stock units582 385 281Denominator for diluted net income per common share — adjusted weighted average shares25,227 25,730 26,237Net income per common share, basic$0.27 $0.07 $0.22Net income per common share, diluted$0.26 $0.07 $0.22Because their effect would be anti-dilutive at period end, certain potentially dilutive shares related to stock options to purchase common shares wereexcluded in the above computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of ourcommon shares. At September 30, 2015, 2014 and 2013, such excluded stock options were 3,016,911, 3,284,993 and 3,939,541, respectively.Use of Estimates and Risks and UncertaintiesThe preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States requires managementto make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amount of revenue and expenses during the reporting period. Actual results could differ from those estimates.Estimates that could significantly affect our results of operations or financial condition involve the assignment of fair values upon acquisition of goodwilland other intangible assets and testing for impairment; the determination of our allowance for doubtful accounts and reserve for future returns and pricingadjustments; the estimation of our inventory obsolescence, warranty reserve, income tax reserves and other contingencies.Comprehensive Income (Loss)Our comprehensive income (loss) is comprised of net income, foreign currency translation adjustments and unrealized gains and losses on available-for-salemarketable securities, which are charged or credited to the accumulated other comprehensive loss account in stockholders’ equity.46Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)Recent Accounting DevelopmentsAdoptedIn July 2013, the Financial Accounting Standards Board (“FASB”) issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a NetOperating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” This guidance relates to the presentation of an unrecognized taxbenefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The standard update provides that a liability related to anunrecognized tax benefit should be offset against same jurisdiction deferred tax assets for a net operating loss carryforward, a similar tax loss, or a tax creditcarryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. This guidance was effective prospectively forfiscal years (and interim reporting periods within those years) beginning after December 15, 2013. We adopted this guidance during the fiscal quarter endedDecember 31, 2014, resulting in a reclassification of $0.4 million of unrecognized tax benefits to noncurrent deferred tax assets.In March 2013, FASB issued ASU 2013-05, “Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment uponDerecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” This guidance applies to therelease of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holdsa controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. ASU 2013-05 was effective prospectively for fiscalyears (and interim reporting periods within those years) beginning after December 15, 2013. We adopted this guidance during the fiscal quarter endedDecember 31, 2014. There was no impact on our condensed consolidated financial statements as we have not sold any foreign entities for which we hold acontrolling financial interest.Not Yet AdoptedIn September 2015, FASB issued ASU 2015-16, "Simplifying the Accounting for Measurement-Period Adjustments." To simplify the accounting foradjustments made to provisional amounts recognized in a business combination, the amendments in this update eliminate the requirement to retrospectivelyaccount for those adjustments. The amendments in this update are effective for fiscal years beginning after December 15, 2015, including interim periodswithin those years, which for us will be the first fiscal quarter ending December 31, 2016. Earlier application is permitted for financial statements that havenot been issued. We are currently evaluating the impact of the adoption of ASU 2015-16.In July 2015, FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory." This provision would require inventory that was previously recordedusing first-in, first-out (FIFO) to lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business,less reasonably predictable costs of completion, disposal, and transportation. This guidance is effective for fiscal years beginning after December 15, 2016and interim periods within those years, which for us will be the first fiscal quarter ending December 31, 2017. The amendments in this guidance should beapplied prospectively with earlier application permitted as of the beginning of an interim or annual period. We are currently evaluating the impact of theadoption of ASU 2015-11 and whether it would have a material impact on our consolidated financial statements.In April 2015, FASB issued ASU 2015-05, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Fees Paidin a Cloud Computing Arrangement. The new standard provides guidance to customers about whether a cloud computing arrangement includes a softwarelicense. If the arrangement does include a software license, the software license element of the arrangement should be accounted for in the same manner as theacquisition of other software licenses. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015,with early adoption permitted. We expect to adopt this guidance beginning with our fiscal quarter ending December 31, 2016. We do not expect thisguidance to have a material impact on our consolidated financial statements.In August 2014, FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern.” This guidance requires management to evaluatewhether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. These amendmentsare effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter, which for us, will be the fourth fiscalquarter ended September 30, 2017. Early adoption is permitted. While we are evaluating the impact of the adoption of ASU 2014-15, we do not expect it tohave an impact on our consolidated financial statements.47Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)In May 2014, FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” This guidance provides a five-step analysis in determining when andhow revenue is recognized so that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects whatit expects in exchange for the goods and services. It also requires more detailed disclosures to enable users of financial statements to understand the nature,amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued ASU 2015-14 "Revenuefrom Contracts with Customers (Topic 606): Deferral of the Effective Date" which approved a one-year deferral of the effective date of ASU 2014-09. As aresult of this deferral, ASU 2014-09 is effective for our fiscal 2019, including interim periods within that reporting period. The FASB also agreed to allow usto choose to adopt the standard effective for our fiscal 2018. We are assessing the adoption date and potential impact of adopting this ASU on ourconsolidated financial statements and related disclosures.2. ACQUISITIONEtherios, Inc.On October 31, 2012, we acquired Etherios, Inc. ("Etherios"). The total purchase price of $20.4 million included $13.7 million in cash (excluding cashacquired of $0.8 million) and $6.7 million represented by 715,571 shares of our common stock. The common stock issued was valued at $9.42 per commonshare.Cash in the amount of $2.35 million was deposited to an escrow fund with a third party agent. Of the $2.35 million escrow, $0.3 million related to a holdbackamount pending final determination of the unpaid debt and working capital as shown on the closing balance sheet. This holdback amount was released to thesellers in February 2013 as there were no changes to the closing balance sheet. An additional $2.05 million was held in escrow in accordance with the termsof the stock purchase agreement until eighteen months after closing. These amounts were held in escrow to satisfy any claims that representations andwarranties in the stock purchase agreement were not true. Ultimately, no claims were made and the escrow agent released these funds on April 30, 2014. Theescrowed amounts were included in the determination of the purchase consideration on the date of acquisition as management expected that therepresentation and warranty matters were determinable beyond a reasonable doubt.The purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed. During the fourth quarter of fiscal 2013, we recordedfinal purchase accounting entries that reduced the value of the common stock issued by $0.1 million to reflect the closing price on the date of the acquisitionand we reduced the fair value of the net tangible assets acquired by $0.3 million. These adjustments resulted in an increase of $0.2 million in goodwill. Thefinal purchase price allocation resulted in the recognition of $17.3 million of goodwill. The acquisition resulted in the recognition of goodwill primarilybecause Etherios is a salesforce.com Platinum Partner and experienced in end user implementation of the Salesforce Service Cloud. Although the relationshipwith salesforce.com was important to us, it was not an exclusive relationship and required Etherios to compete with others for business opportunities. Accordingly, we determined that this relationship could not be valued as a separate intangible asset of Etherios and as a result was a component of goodwill.As salesforce.com has signaled its intent for the Service Cloud to be used as a means to monitor machines, we determined the acquisition of Etherios likelywould further enhance our solutions offerings and provide another channel for revenue of our networking products.Costs related to the acquisition, which included legal, accounting and valuation fees, in the amount of $0.2 million were charged directly to operations andwere included in general and administrative expense in our Consolidated Statements of Operations for fiscal 2013.Etherios’ operating results were included in our Consolidated Results of Operations from the day following the acquisition on October 31, 2012. Because theEtherios acquisition was not material to our consolidated results of operations or financial position, pro forma financial information was not presented. OnOctober 23, 2015, we entered into a stock purchase agreement with West Monroe Partners, LLC, in which they acquired all of the outstanding capital stock ofour wholly owned subsidiary, Etherios, Inc. (see Note 18 to our Consolidated Financial Statements).48Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS3. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NETIdentifiable Intangible Assets, NetAmortizable identifiable intangible assets, net as of September 30, 2015 and 2014 are comprised of the following (in thousands): September 30, 2015 September 30, 2014 Grosscarryingamount Accum.amort. Net Grosscarryingamount Accum.amort. NetPurchased and core technology$45,449 $(45,424) $25 $45,952 $(45,162) $790License agreements18 (4) 14 2,440 (2,440) —Patents and trademarks11,817 (10,568) 1,249 11,667 (9,799) 1,868Customer relationships18,490 (16,057) 2,433 18,894 (15,445) 3,449Non-compete agreements1,100 (642) 458 1,100 (422) 678Order backlog— — — 360 (360) —Total$76,874 $(72,695) $4,179 $80,413 $(73,628) $6,785During the fourth quarter of fiscal 2013, we recorded an impairment charge of $0.4 million in general and administrative expense on our ConsolidatedStatements of Operations for our single operating and reporting segment. Management determined to end-of-life certain product lines acquired in connectionwith the MobiApps acquisition due to various factors impacting the viability of these product lines. These products lines utilized certain identifiableintangible technology assets which were part of the assets purchased at the time of acquisition. The impairment charge consisted of $0.2 million for patentedsatellite technology and $0.1 million relating to an associated license agreement as the net carrying values of these intangible assets were not recoverableand the undiscounted future cash flows did not exceed the net carrying value of the assets. We also wrote off $0.1 million of various patents that wereabandoned.Amortization expense for fiscal years 2015, 2014 and 2013 is as follows (in thousands):Fiscal yearTotal2015$2,9102014$3,5892013$4,416Estimated amortization expense for the next five years is as follows (in thousands):Fiscal yearTotal2016$1,9442017$1,0612018$4872019$4512020$168GoodwillThe changes in the carrying amount of goodwill were (in thousands): Fiscal years ended September 30, 2015 2014Beginning balance, October 1$103,398 $103,569Foreign currency translation adjustment(1,301) (171)Ending balance, September 30$102,097 $103,39849Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS4. SEGMENT INFORMATION AND MAJOR CUSTOMERSWe operate under a single operating and reporting segment. Our revenue consists of hardware product revenue and service revenue. In an effort to providefurther transparency of our financial information, we have expanded our hardware product categories for revenue reporting. Beginning with the first quarter offiscal 2016, we will transition away from reporting revenue in terms of growth and mature hardware products and will report four product categories: Cellularrouters and gateways, Radio Frequency (RF), Embedded and Network. We believe this is a more meaningful presentation and reflects how we are monitoringour revenue.Our cellular product category includes cellular routers and all gateways, and the RF product category includes XBee® modules as well as other RF solutions.The embedded product category includes Digi Connect® and Rabbit® embedded systems on module and single board computers. The network productcategory, which has the highest concentration of mature products, includes console and serial servers and USB connected devices.Our service offerings include wireless product design and development services, CRM consulting services, application development services, our PaaSrecurring revenue generated from Device Cloud platform, post-contract customer support and fees associated with enterprise support services.The following table presents our revenue by our new product categories (in thousands): Fiscal years ended September 30, 2015 2014 2013Cellular routers and gateways$58,666 $39,215 $33,227RF34,373 29,094 29,157Embedded51,063 49,681 57,597Network51,395 54,856 53,097Total product revenue195,497 172,846 173,078Service17,361 19,855 22,303Total revenue$212,858 $192,701 $195,381The following table presents revenue for our growth and mature categories (in thousands): Fiscal years ended September 30, 2014 2013 2012Growth hardware products and all services$133,572 $109,763 $110,350Mature hardware products79,286 82,938 85,031Total revenue$212,858 $192,701 $195,381The information in the following table provides revenue by the geographic location of the customer for the fiscal years ended September 30, 2015, 2014 and2013 (in thousands): Fiscal years ended September 30, 2015 2014 2013North America, primarily United States$136,603 $116,421 $116,541Europe, Middle East & Africa47,523 47,729 48,815Asia22,907 22,762 24,507Latin America5,825 5,789 5,518Total revenue$212,858 $192,701 $195,38150Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS4. SEGMENT INFORMATION AND MAJOR CUSTOMERS (CONTINUED)Net property, equipment and improvements by geographic location are as follows (in thousands): Fiscal years ended September 30, 2015 2014 2013United States$14,103 $12,813 $13,321International, primarily Europe254 418 589Total net property, equipment and improvements$14,357 $13,231 $13,910Our U.S. export sales comprised 37.7% , 41.2% and 41.7% of revenue for the fiscal years ended September 30, 2015, 2014 and 2013. No single customerexceeded 10% of revenue for any of the periods presented. At September 30, 2015, we had two customers, whose accounts receivable balance comprised10.2% and 11.0% of total accounts receivable. No single customer exceeded 10% of total accounts receivable at September 30, 2014.5. SELECTED BALANCE SHEET DATA(in thousands) As of September 30, 2015 2014Accounts receivable, net: Accounts receivable$29,688 $28,943Less allowance for doubtful accounts483 367Total accounts receivable, net$29,205 $28,576 Inventories: Raw materials$26,037 $26,402Work in process598 315Finished goods5,242 4,530Total inventories$31,877 $31,247 Property, equipment and improvements, net: Land$1,800 $1,800Buildings10,522 10,522Improvements3,328 3,420Equipment15,691 13,646Purchased software3,458 3,559Furniture and fixtures2,742 2,477Total property, equipment and improvements, gross37,541 35,424Less accumulated depreciation and amortization23,184 22,193Total property, equipment and improvements, net$14,357 $13,2316. MARKETABLE SECURITIESOur marketable securities consist of certificates of deposit, commercial paper, corporate bonds and government municipal bonds. We analyze our available-for-sale marketable securities for impairment on an ongoing basis. When we perform this analysis, we consider factors such as the length of time and extent towhich the securities have been in an unrealized loss position and the trend of any unrealized losses. We also consider whether an unrealized loss is atemporary loss or an other-than-temporary loss such as: (a) whether we have the intent to sell the security, or (b) whether it is more likely than not that we willbe required to sell the security before its anticipated recovery, or (c) permanent impairment due to bankruptcy or insolvency.In order to estimate the fair value for each security in our investment portfolio, we obtain quoted market prices and trading activity for each security whereavailable. We obtain relevant information from our investment advisor and, if warranted, also51Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS6. MARKETABLE SECURITIES (CONTINUED)may review the financial solvency of certain security issuers. As of September 30, 2015, 44 of our 81 securities that we held were trading below our amortizedcost basis. We determined each decline in value to be temporary based upon the above described factors. We expect to realize the fair value of thesesecurities, plus accrued interest, either at the time of maturity or when the security is sold. All of our current holdings are classified as available-for-salemarketable securities and are recorded at fair value on our consolidated balance sheet with the unrealized gains and losses recorded in accumulated othercomprehensive loss. All of our current marketable securities will mature in less than one year and our non-current marketable securities will mature in lessthan 3 years. We received proceeds from the sale of our available-for-sale marketable securities of $38.0 million, $47.4 million and $63.1 million for fiscal2015, 2014 and 2013, respectively.At September 30, 2015 our marketable securities were (in thousands): AmortizedCost (1) UnrealizedGains UnrealizedLosses Fair Value (1)Current marketable securities: Corporate bonds$31,753 $— $(39) $31,714Commercial paper7,986 — (1) 7,985Certificates of deposit6,253 8 — 6,261Government municipal bonds1,232 — — 1,232Current marketable securities47,224 8 (40) 47,192Non-current marketable securities: Corporate bonds4,138 — (13) 4,125Certificates of deposit7,511 3 (7) 7,507Government municipal bonds1,996 — (3) 1,993Non-current marketable securities13,645 3 (23) 13,625Total marketable securities$60,869 $11 $(63) $60,817(1)Included in amortized cost and fair value is purchased and accrued interest of $252.At September 30, 2014 our marketable securities were (in thousands): AmortizedCost (1) UnrealizedGains UnrealizedLosses Fair Value (1)Current marketable securities: Corporate bonds$24,668 $1 $(22) $24,647Commercial paper3,998 — (1) 3,997Certificates of deposit4,252 2 — 4,254Current marketable securities32,918 3 (23) 32,898Non-current marketable securities: Corporate bonds2,051 — (4) 2,047Certificates of deposit9,502 14 (22) 9,494Non-current marketable securities11,553 14 (26) 11,541Total marketable securities$44,471 $17 $(49) $44,439(1)Included in amortized cost and fair value is purchased and accrued interest of $629.52Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS6. MARKETABLE SECURITIES (CONTINUED)The following tables show the fair values and gross unrealized losses of our available-for-sale securities that have been in a continuous unrealized lossposition deemed to be temporary, aggregated by investment category (in thousands): September 30, 2015 Less than 12 Months More than 12 Months Fair Value Unrealized Losses Fair Value Unrealized LossesCorporate bonds$33,664 $(52) $— $—Commercial paper5,987 (1) — —Certificates of deposit4,244 (6) 499 (1)Government municipal bonds3,159 (3) — —Total$47,054 $(62) $499 $(1) September 30, 2014 Less than 12 Months More than 12 Months Fair Value Unrealized Losses Fair Value Unrealized LossesCorporate bonds$23,475 $(26) $— $—Commercial paper3,998 (1) — —Certificates of deposit2,980 (20) 748 (2)Total$30,453 $(47) $748 $(2)7. FAIR VALUE MEASUREMENTSFair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participantsas of the measurement date. This standard also establishes a hierarchy for inputs used in measuring fair value. This standard maximizes the use of observableinputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputsmarket participants would use in valuing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs thatreflect our assumptions about the factors market participants would use in valuing the asset or liability based upon the best information available in thecircumstances. The categorization of financial assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant tothe fair value measurement.The hierarchy is broken down into the following three levels:•Level 1 — Inputs are quoted prices in active markets for identical assets or liabilities.•Level 2 — Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities inmarkets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly.•Level 3 — Inputs are unobservable for the asset or liability and their fair values are determined using pricing models, discounted cash flowmethodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 may also include certaininvestment securities for which there is limited market activity or a decrease in the observability of market pricing for the investments, such that thedetermination of fair value requires significant judgment or estimation.53Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS7. FAIR VALUE MEASUREMENTS (CONTINUED)Fair value is applied to financial assets such as our marketable securities, which are classified and accounted for as available-for-sale. These items are stated atfair value at each reporting period using the above guidance. The following tables provide information by level for financial assets that are measured at fairvalue on a recurring basis (in thousands): Fair Value Measurements at September 30, 2015 using: Total carryingvalue atSeptember 30, 2015 Quoted price inactive markets(Level 1) Significant otherobservable inputs(Level 2) Significantunobservable inputs(Level 3)Cash equivalents: Money market$14,436 $14,436 $— $—Available-for-sale marketable securities: Corporate bonds35,839 — 35,839 —Commercial paper7,985 — 7,985 —Certificates of deposit13,768 — 13,768 —Government municipal bonds3,225 — 3,225 —Total cash equivalents and marketablesecurities measured at fair value$75,253 $14,436 $60,817 $— Fair Value Measurements at September 30, 2014 using: Total carryingvalue atSeptember 30, 2014 Quoted price inactive markets(Level 1) Significant otherobservable inputs(Level 2) Significantunobservable inputs(Level 3)Cash equivalents: Money market$19,630 $19,630 $— $—Available-for-sale marketable securities: Corporate bonds26,694 — 26,694 —Commercial paper3,997 — 3,997 —Certificates of deposit13,748 — 13,748 —Total cash equivalents and marketablesecurities measured at fair value$64,069 $19,630 $44,439 $—Cash equivalents are measured at fair value using quoted market prices in active markets for identical assets and are therefore classified as Level 1 assets. Wevalue our Level 2 assets using inputs that are based on market indices of similar assets within an active market. There were no transfers into or out of ourLevel 2 financial assets during the twelve months ended September 30, 2015.We had no financial assets valued with Level 3 inputs as of September 30, 2015 nor did we purchase or sell any Level 3 financial assets during the twelvemonths ended September 30, 2015.The use of different assumptions, applying different judgment to matters that are inherently subjective and changes in future market conditions could resultin different estimates of fair value of our securities, currently and in the future. If market conditions deteriorate, we may incur impairment charges forsecurities in our investment portfolio.54Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS8. PRODUCT WARRANTY OBLIGATIONThe following table summarizes the activity associated with the product warranty accrual (in thousands) and is listed on our Consolidated Balance Sheetsunder Current Liabilities: Balance at Warranties Settlements Balance atFiscal yearOctober 1 issued made September 302015$862 $967 $(815) $1,0142014$1,063 $627 $(828) $8622013$1,021 $669 $(627) $1,063We are not responsible for, and do not warrant that, custom software versions, created by original equipment manufacturer (OEM) customers based upon oursoftware source code, will function in a particular way, will conform to any specifications or are fit for any particular purpose. Further, we do not indemnifythese customers from any third-party liability as it relates to or arises from any customization or modifications made by the OEM customer.9. RESTRUCTURINGBelow is a summary of the restructuring charges and other activity within the restructuring accrual (in thousands): 2015Restructuring 2014Restructuring 2013Restructuring 2012Restructuring EmployeeTerminationCosts EmployeeTerminationCosts EmployeeTerminationCosts EmployeeTerminationCosts Other TotalBalance at September 30, 2012$— $— $— $13 108 $121Restructuring charge— — 350 — — 350Payments— — — — (84) (84)Reversals— — — (13) (24) (37)Balance at September 30, 2013— — 350 — — 350Restructuring charge— 152 — — — 152Payments— (152) (279) — — (431)Reversals— — (71) — — (71)Balance at September 30, 2014— — — — — —Restructuring charge518 — — — — 518Payments(509) — — — — (509)Reversals(9) — — — — (9)Balance at September 30, 2015$— $— $— $— $— $—2015 RestructuringOn February 20, 2015, we announced a restructuring plan related to our Etherios operations in order to refocus the business on CRM and service cloudimplementations. We recorded a restructuring charge of $0.3 million related to severance during the second quarter of fiscal 2015. We scaled the business toexpected revenue levels resulting in an elimination of approximately 21 positions. The payments associated with these charges were completed during thefourth quarter of fiscal 2015.On January 22, 2015, we announced the closure of our India location. The March closure resulted in the elimination of approximately 38 employees fromengineering, sales and administration. We recorded a restructuring charge of $0.2 million related to severance during the second quarter of fiscal 2015. Thepayments associated with this charge were completed during the third quarter of fiscal 2015.55Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS9. RESTRUCTURING (CONTINUED)2014 RestructuringOn October 31, 2013, we announced our intention to restructure certain of our operations in India. The restructuring was primarily associated with costreduction initiatives resulting in the elimination of approximately 40 engineering and sales positions in our work force. We recorded a restructuring charge of0.2 million related to severance during the first quarter of fiscal 2014. The payments associated with these charges and all the actions associated with therestructuring were completed during the third quarter of fiscal 2014.2013 RestructuringOn September 27, 2013, we announced our intention to restructure certain of our operations in the U.S. The restructuring was primarily associated with costreduction initiatives and resulted in the elimination of 15 positions in our work force. We recorded a restructuring charge of 0.4 million for severance duringthe fourth quarter of fiscal 2013. The payments associated with these charges and all the actions associated with the restructuring were completed during thefirst quarter of fiscal 2014.2012 RestructuringOn April 26, 2012, we announced our intention to restructure certain of our operations. We recorded a $1.0 million restructuring charge. The restructuringrelated primarily to changes being implemented to focus on a shift in our business to more aggressively sell end-to-end IoT solutions. As a result of thisrestructuring, we eliminated employment positions in our work force of 30 employees at a cost of $0.6 million for severance. We also incurred expenses fromvacating facilities in Davis, California and Huntington Beach, California at a cost of approximately $0.4 million. The payments associated with these chargesand all the actions associated with the restructuring were completed by the second quarter of fiscal 2013.10. INCOME TAXESThe components of income before income taxes are as follows (in thousands): Fiscal years ended September 30, 2015 2014 2013United States$2,462 $(5,097) $(395)International6,183 5,894 8,633Income before income taxes$8,645 $797 $8,238The components of the income tax provision (benefit) are as follows (in thousands): Fiscal years ended September 30, 2015 2014 2013Current: Federal$240 $(309) $1,418State308 (58) 263Foreign2,278 2,196 3,148Deferred: U.S.(566) (2,623) (2,270)Foreign(203) (160) (126)Income tax provision (benefit)$2,057 $(954) $2,43356Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS10. INCOME TAXES (CONTINUED)The net deferred tax asset consists of the following (in thousands): As of September 30, 2015 2014Current deferred tax asset$3,379 $3,221Non-current deferred tax asset5,666 7,383Current deferred tax liability(36) —Non-current deferred tax liability(135) (272)Net deferred tax asset$8,874 $10,332 Uncollectible accounts and other reserves$1,075 $1,023Depreciation and amortization190 276Inventories999 1,297Compensation costs7,148 8,606Tax carryforwards1,185 1,347Valuation allowance(862) (572)Identifiable intangible assets(861) (1,645)Net deferred tax asset$8,874 $10,332As of September 30, 2015, we have estimated carryforwards for tax purposes as follows: We have $0.7 million of carryforwards mostly related to state researchand development credits of tax credits and $0.5 million related to non-U.S. net operating losses. The majority of the state research and development taxcredits and non-U.S. net operating losses have an unlimited carryforward period. The majority of our non-U.S. tax credit carryforwards will expire in 2027.Our valuation allowance for certain U.S. and foreign locations increased to $0.9 million at September 30, 2015 from $0.6 million at September 30, 2014, dueto foreign losses and limitations on current year state research and development credits. The amount of the deferred tax assets realized could vary if there aredifferences in the timing or amount of future reversals of existing deferred tax liabilities or changes in the amounts of future taxable income. If our futuretaxable income projections are not realized, an additional valuation allowance may be required, and would be reflected as income tax expense at the timethat any such change in future taxable income is determined.The reconciliation of the statutory federal income tax amount to our income tax provision (benefit) is as follows (in thousands): Fiscal years ended September 30, 2015 2014 2013Statutory income tax amount$2,939 $271 $2,801Increase (decrease) resulting from: State taxes, net of federal benefits(222) (281) (32)Utilization of tax credits(250) (76) (601)Manufacturing deduction(285) (92) (65)Discrete tax benefits(845) (1,470) (863)Foreign operations181 316 166Valuation reserve297 11 65Adjustment of tax contingency reserves71 168 800Meals and entertainment93 99 80Employee stock purchase plan76 85 77Other, net2 15 5Income tax provision (benefit)$2,057 $(954) $2,43357Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS10. INCOME TAXES (CONTINUED)During fiscal 2015, we recorded net tax benefits of $0.9 million resulting from the reinstatement of the research and development tax credit for calendar year2014, reversal of tax reserves due to the expiration of statute of limitations from U.S. and foreign tax jurisdictions and reversal of tax reserves due to theresolution of tax audits. These benefits are included within the discrete tax benefits in the above table.During fiscal 2014, we recorded net tax benefits of $1.4 million, related to the re-measurement and reversal of certain income tax reserves as a result of afederal income tax audit of fiscal 2012, the reassessment of state research and development tax credits and the release of income tax reserves due to theexpiration of statute of limitations from U.S. and foreign tax jurisdictions. These benefits are included within the discrete tax benefits in the above table.During fiscal 2013, we recorded net tax benefits of $0.8 million related to the January 2, 2013 enactment of the American Taxpayers Relief Act of 2012extending the research and development tax credit for the last three quarters of fiscal 2012 and the release of income tax reserves due to the expiration of thestatute of limitations from various U.S. and foreign tax jurisdictions. These benefits are included within the discrete tax benefits in the above table.A reconciliation of the beginning and ending amount of unrecognized tax benefits is (in thousands): Fiscal years ended September 30, 2015 2014 2013Unrecognized tax benefits at beginning of fiscal year$2,301 $3,332 $2,720Increases related to: Prior year income tax positions110 181 162Current year income tax positions144 148 733Decreases related to: Prior year income tax positions(255) (1,105) —Settlements(74) (95) —Expiration of statute of limitations(608) (160) (283)Unrecognized tax benefits at end of fiscal year$1,618 $2,301 $3,332The total amount of unrecognized tax benefits at September 30, 2015 that, if recognized, would affect our effective tax rate is $1.6 million. We expect that itis reasonably possible that the total amounts of unrecognized tax benefits will decrease approximately $0.2 million over the next 12 months due to theexpiration of various statutes of limitations.Of the $1.6 million of unrecognized tax benefits, $1.2 million is included in non-current income taxes payable and $0.4 million is included with non-currentdeferred tax assets on the consolidated balance sheet at September, 20, 2015.We recognize interest and penalties related to income tax matters in income tax expense. During the fiscal years ended 2015 and 2014, there were $0.1million and $0.2 million, respectively, of benefits for interest and penalties related to income tax matters in income tax expense. We had accrued interest andpenalties related to unrecognized tax benefits of $0.3 million at September 30, 2015 and $0.4 million at September 30, 2014. Our long-term income taxespayable on our consolidated balance sheets includes these accrued interest and penalties in addition to the unrecognized tax benefits in the table above.We operate in multiple tax jurisdictions both in the U.S. and outside of the U.S and face audits from various tax authorities regarding transfer pricing, taxcredits, and other matters. Accordingly, we must determine the appropriate allocation of income to each of these jurisdictions. This determination requires usto make several estimates and assumptions. Tax audits associated with the allocation of this income, and other complex issues, may require an extendedperiod of time to resolve and may result in adjustments to our income tax balances in those years that are material to our consolidated balance sheet andresults of operations. With a few exceptions, we are no longer subject to income tax examination for tax years prior to fiscal 2013. For state taxing authorities,most notably in California and Texas, we are no longer subject to income tax examination for tax years generally before fiscal 2011, and for Minnesota fortax years prior to fiscal 2013. We do not anticipate significant changes to our unrecognized tax benefits as a result of these examinations.At September 30, 2015, we had approximately $28.2 million of accumulated undistributed foreign earnings, for which we have not accrued additional U.S.tax. Our policy is to reinvest earnings of our foreign subsidiaries indefinitely to fund current58Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS10. INCOME TAXES (CONTINUED)operations and provide for future international expansion opportunities, and only repatriate earnings to the extent that U.S. taxes have already been recorded.Although we have no current need or intention to repatriate historical earnings in the form of cash in the United States, if we change our assertion fromindefinitely reinvesting undistributed foreign earnings, we would have to accrue applicable taxes. The amount of any taxes and the application of any taxcredits would be determined based on the income tax laws at the time of such repatriation. Under current tax laws, we estimate the unrecognized deferred taxliability to be up to $0.8 million.11. STOCK-BASED COMPENSATIONDuring fiscal 2015, stock-based awards were granted under the terms of the 2014 Omnibus Incentive Plan (the 2014 Plan). The authority to grant optionsunder the 2014 Plan and set other terms and conditions rests with the Compensation Committee of the Board of Directors. We also have outstanding sharesrelated to stock-based awards for plans in which we can no longer grant shares. These plans include the 2013 Omnibus Incentive Plan (the 2013 Plan), whichexpired during the second quarter of fiscal 2014, the 2000 Omnibus Stock Plan as amended and restated as of December 4, 2009 (the Omnibus Plan), whichexpired during the second quarter of fiscal 2013 and the Stock Option Plan as amended and restated as of November 27, 2006 (the Stock Option Plan) andNon-Officer Stock Option Plan as amended and restated as of November 27, 2006 (the Non-Officer Plan), both of which expired during the first quarter offiscal 2007 (the Plans).The 2014 Plan authorizes the issuance of up to 2,250,000 common shares in connection with awards of stock options, stock appreciation rights, restrictedstock, restricted stock units, performance-based full value awards or other stock-based awards. Eligible participants include our employees, our affiliates, non-employee directors of our Company and any consultant or advisor who is a natural person and provides services to us or our affiliates. Options granted underthis plan generally vest over a four year service period and will expire if unexercised after eight years from the date of grant. Restricted stock awards (RSU's)that were granted to Directors typically vest in one year. RSU's that were granted to executives and employees typically vest in November over a four-yearperiod. Awards may be granted under the 2014 Plan until January 27, 2024 as the 2014 Plan was ratified on January 27, 2014 at the Annual Meeting ofStockholders. Options under the 2014 Plan can be granted as either incentive stock options (ISOs) or non-statutory stock options (NSOs). The exercise priceof options and the grant date price of restricted stock shall be determined by our Compensation Committee but shall not be less than the fair market value ofour common stock based on the closing price on the date of grant. As of September 30, 2015, there were approximately 1,369,684 shares available for futuregrants under the 2014 Plan.The 2013 Plan authorized the issuance of up to 1,750,000 common shares in connection with awards of stock options, stock appreciation rights, restrictedstock, restricted stock units, performance-based full value awards or stock awards. Eligible participants included our employees, non-employee directors,consultants and advisors. Options granted under this plan generally vested over a four year service period and will expire if unexercised after eight years fromthe date of grant. RSU's that were granted to Directors typically vested in one year. Awards may no longer be granted under the Incentive Plan as the plan wasterminated effective January 27, 2014 at the Annual Meeting of Stockholders. Options under the 2013 Plan were granted as either ISOs or NSOs. The exerciseprice was determined by our Compensation Committee but could not be less than the fair market value of our common stock based on the closing price onthe date of grant.The Omnibus Plan authorized the issuance of up to 5,750,000 common shares in connection with awards of stock options, stock appreciation rights, restrictedstock, performance units or stock awards. Eligible participants included our employees, non-employee directors, consultants and advisors. An authorizationto issue an additional 2,500,000 common shares was ratified on January 25, 2010 at the Annual Meeting of Stockholders. Awards may no longer be grantedunder the Omnibus Plan as the plan was terminated as to future awards on January 28, 2013 at the Annual Meeting of Stockholders. Options under theOmnibus Plan were granted as either ISOs or non-statutory stock options NSOs. The exercise price was determined by our Compensation Committee butcould not be less than the fair market value of our common stock based on the closing price on the date of grant.Awards outstanding under the Stock Option Plan and the Non-Officer Plan included NSOs. In addition, the Stock Option Plan also included ISOs toemployees and others who provided services to us, including consultants, advisers and directors. Options granted under these plans generally vested over afour year service period and will expire if unexercised after ten years from the date of grant. The exercise price for ISOs and non-employee director optionsgranted under the Stock Option Plan was set at the fair market value of our common stock based on the closing price on the date of grant. The exercise pricefor NSOs granted under the Stock Option Plan or the Non-Officer Plan was set by the Compensation Committee of the Board of Directors and was set to theexercise price based on the closing price on the date of grant.59Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS11. STOCK-BASED COMPENSATION (CONTINUED)We recorded cash received from the exercise of stock options of $6.6 million, $3.7 million and $2.2 million during fiscal years 2015, 2014 and 2013,respectively. During fiscal 2015, there were no excess tax benefits from stock-based compensation. The excess tax benefits from stock-based compensationwere minimal during fiscal 2014 and $0.1 million during fiscal year 2013. Upon exercise, we issue new shares of stock. Our award plans have provisionsallowing employees to elect to pay their withholding obligation through share reduction (see Note 12).We sponsor an Employee Stock Purchase Plan as amended and restated as of October 29, 2013, December 4, 2009 and November 27, 2006 (the PurchasePlan), covering all domestic employees with at least 90 days of continuous service and who are customarily employed at least 20 hours per week. ThePurchase Plan allows eligible participants the right to purchase common stock on a quarterly basis at the lower of 85% of the market price at the beginning orend of each three-month offering period. The Purchase Plan was ratified on January 27, 2014 at the Annual Meeting of Stockholders to increase the number ofshares reserved for future purchases by 800,000 shares bringing the total number of shares to 2,800,000 shares of our Common Stock that may be purchasedunder the plan. Employee contributions to the Purchase Plan were $0.9 million in fiscal 2015, and $1.0 million in both fiscal 2014 and 2013. Pursuant to thePurchase Plan, 123,847, 129,449, and 128,853 common shares were issued to employees during the fiscal years ended 2015, 2014 and 2013, respectively.Shares are issued under the Purchase Plan from treasury stock. As of September 30, 2015, 617,531 common shares were available for future issuances underthe Purchase Plan.Stock-based compensation cost capitalized as part of inventory was immaterial as of September 30, 2015, 2014 and 2013.Stock-based compensation expense is included in the consolidated results of operations as follows (in thousands): Fiscal years ended September 30, 2015 2014 2013Cost of sales$356 $345 $183Sales and marketing1,197 1,179 1,261Research and development785 735 772General and administrative1,963 2,071 1,556Stock-based compensation before income taxes4,301 4,330 3,772Income tax benefit(1,493) (1,491) (1,192)Stock-based compensation after income taxes$2,808 $2,839 $2,580The following table summarizes our stock option activity (in thousands, except per common share amounts): OptionsOutstanding Weighted AverageExercised Price Weighted AverageContractual Term (inyears) AggregateIntrinsic Value(1)Balance at September 30, 2014 6,029 $10.61 Granted 810 8.12 Exercised (739) 8.87 Forfeited / Canceled (1,300) 11.55 Balance at September 30, 2015 4,800 $10.21 4.8 $9,163 Exercisable at September 30, 2015 3,540 $10.66 4.1 $5,575(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $11.79 as of September 30, 2015, whichwould have been received by the option holders had all option holders exercised their options as of that date.The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price. The total intrinsic value of alloptions exercised during each of the twelve months ended September 30, 2015, 2014 and 2013 was $0.9 million, $0.5 million and $0.5 million, respectively.60Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS11. STOCK-BASED COMPENSATION (CONTINUED)The table below shows the weighted average fair value, which was determined based upon the fair value of each option on the grant date utilizing the Black-Scholes option-pricing model and the related assumptions: Fiscal years ended September 30, 2015 2014 2013Weighted average per option grant date fair value$2.98 $4.35 $3.77Assumptions used for option grants: Risk free interest rate1.57% - 1.85% 1.76% - 2.02% 0.88% - 1.78%Expected term6.00 years 6.00 years 6.25 yearsExpected volatility32% - 36% 38% - 40% 40%Weighted average volatility35% 40% 40%Expected dividend yield0 0 0The fair value of each option award granted during the periods presented was estimated using the Black-Scholes option valuation model that uses theassumptions noted in the table above. Expected volatilities are based on the historical volatility of our stock. We use historical data to estimate optionexercise and employee termination information within the valuation model; separate groups of grantees that have similar historical exercise behaviors areconsidered separately for valuation purposes. The expected term of options granted is derived from the vesting period and historical information andrepresents the period of time that options granted are expected to be outstanding. The risk-free rate used is the zero-coupon U.S. Treasury bond rate in effectat the time of the grant whose maturity equals the expected term of the option.We use historical data to estimate pre-vesting forfeiture rates. The pre-vesting forfeiture rate used in fiscal 2015 was 6.0%. As of September 30, 2015 the totalunrecognized compensation cost related to non-vested stock-based compensation arrangements, net of expected forfeitures, was $3.6 million and the relatedweighted average period over which it is expected to be recognized is approximately 2.7 years.At September 30, 2015, the weighted average exercise price and remaining life of the stock options are as follows (in thousands, except remaining life andexercise price):Options Outstanding Options ExercisableRange of Exercise Prices Options Outstanding Weighted AverageRemainingContractual Life (InYears) Weighted AverageExercise Price Number of SharesVested Weighted AverageExercise Price$7.40 - $8.03 777 5.32 $7.74 439 $8.01$8.04 - $9.35 1,006 6.10 $8.79 521 $8.98$9.36 - $9.95 751 4.94 $9.69 709 $9.69$9.96 - $10.81 1,119 6.05 $10.66 724 $10.68$10.82 - $13.41 883 2.00 $12.41 883 $12.41$13.42 - $14.75 27 3.22 $14.35 27 $14.35$14.76 - $15.23 237 2.05 $15.23 237 $15.23$7.40 - $15.23 4,800 4.81 $10.21 3,540 $10.66The total grant date fair value of shares vested was $2.9 million in fiscal 2015, $0.8 million in fiscal 2014 and $3.1 million in fiscal 2013.61Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS11. STOCK-BASED COMPENSATION (CONTINUED)A summary of our non-vested restricted stock units as of September 30, 2015 and changes during the twelve months then ended is presented below (inthousands, except per common share amounts): Number of Awards Weighted AverageGrant Date Fair ValueNonvested at September 30, 2014171 $9.35Granted503 $8.27Vested(91) $9.66Canceled(40) $7.77Nonvested at September 30, 2015543 $8.41As of September 30, 2015, the total unrecognized compensation cost related to non-vested restricted stock units was $3.2 million and the related weightedaverage period over which it is expected to be recognized is approximately 1.4 years.12. COMMON STOCK REPURCHASECommon Stock Repurchase ProgramOn October 29, 2013, our Board of Directors authorized a program to repurchase up to $20.0 million of our common stock, primarily to support our employeestock purchase program and to return capital to shareholders. Shares repurchased under this program were permitted either through the open market orprivately negotiated transactions from time to time and in amounts that management deemed appropriate. During the first quarter of fiscal 2015, werepurchased 287,787 shares for $2.2 million under this plan which expired on October 31, 2014.On October 28, 2014, our Board of Directors authorized a program to repurchase up to $15 million of our common stock, primarily to return capital toshareholders and to support our employee stock purchase program. This authorization began on November 1, 2014 and expired on October 31, 2015. Therewere no shares repurchased under this program.Restricted Stock Unit WithholdingsWe issue restricted stock units as part of our equity incentive plans. When the restricted stock units vest and become taxable to our employees, they may electto have us deduct shares on their behalf to pay the appropriate taxing authorities. In our consolidated financial statements, we treat these shares withheld fortax purposes on behalf of our employees as common stock repurchases. These withheld shares are not considered common stock repurchases on ourauthorized common stock repurchase program. During fiscal 2015, we used $0.1 million to repurchase shares to satisfy these withholding obligations. Therewere no purchases of shares to satisfy withholding obligations during fiscal 2014 and 2013.13. SHARE RIGHTS PLANUnder our share rights plan, each right entitles its holder to buy one one-hundredth of a share of a Series A Junior Participating Preferred Stock at an exerciseprice of $60, subject to adjustment. The rights are not exercisable until a specified distribution date as defined in the Share Rights Agreement. The Rightswill expire on June 30, 2018, unless extended or earlier redeemed or exchanged by us as defined in the Share Rights Agreement.14. EMPLOYEE BENEFIT PLANSWe currently have a savings and profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code (the Code), whereby eligible employees maycontribute up to 25% of their pre-tax earnings, not to exceed amounts allowed under the Code.We provide a match of 100% on the first 3% of each employee’s bi-weekly contribution and a 50% match on the next 2% of each employee’s bi-weeklycontribution. In addition, we may make contributions to the plan at the discretion of the Board of Directors. We provided matching contributions of $1.7million for fiscal 2015, $1.6 million for fiscal 2014 and $1.4 million for fiscal 2013.62Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS15. COMMITMENTSWe have entered into various operating lease agreements for office facilities and equipment, the last of which expires in fiscal 2020. The office facility leasesgenerally require us to pay a pro-rata share of the lessor’s operating expenses. Certain operating leases contain escalation clauses and are being amortized ona straight-line basis over the term of the lease.The following schedule reflects future minimum rental commitments under noncancelable operating leases (in thousands):Fiscal year Amount2016 $1,9932017 1,1272018 6482019 4442020 40Thereafter —Total minimum payments required $4,252The following schedule shows the composition of total rental expense for all operating leases for the years ended September 30 (in thousands): Fiscal years ended September 30, 2015 2014 2013Rentals$2,591 $2,967 $3,053Less: sublease rentals(56) (24) (31)Total rental expense$2,535 $2,943 $3,02216. CONTINGENCIESPatent Infringement LawsuitsOn May 29, 2012, U.S. Ethernet Innovations, LLC filed a patent infringement lawsuit against us in federal court in the Eastern District of Texas. The lawsuitincluded allegations against us and one other company pertaining to the infringement of four patents related to Ethernet technology. On April 22, 2013, weannounced the settlement of this patent infringement lawsuit for $1.5 million, which was recorded in general and administrative expense on our ConsolidatedStatements of Operations during the second quarter of fiscal 2013. The settlement was paid during the third quarter of fiscal 2013. The settlement fullyresolved the claims by USEI with no future payment obligations. Net of taxes, the settlement was $1.0 million and therefore reduced earnings per dilutedshare for the second quarter of fiscal 2013 by approximately $0.04.In addition to the matters discussed above, in the normal course of business, we are subject to various claims and litigation, which may include, but are notlimited to, patent infringement and intellectual property claims. While we are unable to predict the outcome of any potential claims or litigation due to theinherent unpredictability of these matters, we believe that it is possible that we could, in the future, incur judgments or enter into settlements of claims thatcould have a material adverse effect on our operations in any particular period.63Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS17. QUARTERLY FINANCIAL DATA (UNAUDITED)(in thousands, except per common share data) Quarter ended Dec. 31 March 31 June 30 Sept. 30Fiscal 2015 Revenue$48,723 $53,151 $54,538 $56,446Gross profit21,922 24,078 25,349 26,682Net (loss) income (1)(2)(3)(339) 1,446 2,496 2,985Net (loss) income per common share - basic(0.01) 0.06 0.10 0.12Net (loss) income per common share - diluted(0.01) 0.06 0.10 0.12 Fiscal 2014 Revenue$47,322 $45,882 $47,885 $51,612Gross profit22,908 21,780 22,149 23,647Net income (loss) (1)688 738 (101) 426Net income per common share - basic0.03 0.03 — 0.02Net income per common share - diluted0.03 0.03 — 0.02(1)During fiscal 2015 and 2014, we recorded net tax benefits of $0.9 million and $1.4 million, respectively. We recorded a benefit of $0.5 million in thefirst quarter of fiscal 2015 resulting from the reinstatement of the research and development tax credit for calendar year 2014, reversal of income taxreserves due to the expiration of the statute of limitations from various U.S. and foreign tax jurisdictions and reversal of tax reserves due to theresolution of tax audits. In the third quarter of fiscal 2015, we recorded a tax benefit of $0.4 million primarily due to the reversal of reserves for stateresearch and development tax credits and transfer pricing, partially offset by an adjustment of the state rate on net deferred tax assets. We recorded nettax benefits of $0.2 million in the first quarter of fiscal 2014 resulting from the release of income tax reserves due to the expiration of the statute oflimitations from various U.S. and foreign tax jurisdictions. During the second quarter of fiscal 2014, we recorded a tax benefit of $1.1 million resultingfrom re-measurement and reversal of certain income tax reserves as a result of the conclusion of a federal income tax audit for fiscal 2012. In the thirdquarter of fiscal 2014, we recorded a tax benefit of $0.1 million primarily for a valuation allowance reversal associated with the reassessment of stateresearch and development tax credits.(2)In the second quarter of fiscal 2015, we recorded a business restructuring accrual of $0.5 million ($0.3 million after tax).(3)During fiscal 2015, we recorded a gain of $1.4 million from the settlement of a property and casualty insurance claim related to the replacement of ourcapital equipment destroyed in the fire at our subcontract manufacturer's location. We recorded $1.0 million ($0.6 million after tax) during the secondquarter of fiscal 2015 and $0.4 million ($0.3 million after tax) during the third quarter of fiscal 2015.64Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS18. SUBSEQUENT EVENTSAcquisition of Bluenica CorporationOn October 5, 2015 we purchased all of the outstanding stock of Bluenica Corporation, a company focused on temperature monitoring of perishable goods inthe food industry by using wireless sensors which are installed in grocery and convenience stores, restaurants, and in products during shipment and storage toensure that quality, freshness and public health requirements are met. We believe that this is a complementary acquisition for us and will provide a source ofrecurring subscription revenue from cloud services in addition to product revenue from sensors and gateways. The terms of the acquisition include an upfront cash payment together with earn-out payments. Cash of $2.9 million was paid at time of closing. The earn-out payments are scheduled to be paid in installments over a four-year period based on revenue achievement of the acquired business. The cumulativeamount of these earn-out payments will not exceed $11.6 million. An additional payment, not to exceed $3.5 million, may also be due depending onrevenue performance. We have determined that the earn-out will be considered as part of the purchase price consideration as there are no continuingemployment requirements associated with the earn-out. A preliminary purchase price allocation and estimated acquisition costs are not available due to thetiming of the acquisition.Disposition of Etherios, Inc.On October 23, 2015, we sold all the outstanding stock of our wholly owned subsidiary, Etherios, Inc. to West Monroe Partners, LLC. We sold our CRMbusiness as part of a strategy to improve our focus on providing highly reliable machine connectivity solutions for business-critical and mission-criticalapplication environments. Beginning in fiscal 2016, we will report Etherios as discontinued operations within our single operating segment.We sold the Etherios business for $9.0 million, subject to certain purchase price adjustments. Of the total purchase price, $4.0 million, less employee relatedliabilities of approximately $1.1 million, was paid at closing. Below is a summary of the proceeds (in thousands):Cash due at closing $4,000Less: Employee related liabilities (1,134) Net cash proceeds at closing 2,866Deferred payment due October 23, 2016 3,000Deferred payment due October 23, 2017 2,000 Total proceeds $7,866RestructuringOn November 19, 2015, we approved a restructuring plan impacting our corporate staff. The plan most principally will close our Dortmund office andrelocate certain employees to our Munich office. We expect to incur charges in the range of $0.4 million to $0.6 million in connection with theserestructuring activities. The charges relate to severance payments to impacted employees. We expect to complete all payments associated with the chargesby the end of fiscal 2016.65Table of ContentsITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.ITEM 9A. CONTROLS AND PROCEDURESThis Annual Report on Form 10-K includes the certifications attached as Exhibits 31.1 and 31.2 of our Chief Executive Officer and Chief Financial Officerrequired by Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This Item 9A includes information concerning thecontrols and control evaluations referred to in those certifications.Evaluation of Disclosure Controls and ProceduresWe maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to providereasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act) is recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management ofthe Company, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.Our management with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls andprocedures. Based on their evaluation as of September 30, 2015, the Chief Executive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were effective and provide reasonable assurance on the reliability of the Company's financial reporting and the preparation of itsfinancial statements for external purposes in accordance with generally accepted accounting principles.Management’s Report on Internal Control Over Financial ReportingManagement is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of our consolidated financial statements for external purposes in accordance with generally accepted accountingprinciples. Management, with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal controlover financial reporting as of September 30, 2015. In making this assessment, management used the framework set forth by the Committee of SponsoringOrganizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Based on this assessment, management concludedthat the Company's internal control over financial reporting was effective as of September 30, 2015 based on Internal Control – Integrated Framework(2013) issued by the COSO.The effectiveness of our internal control over financial reporting as of September 30, 2015 has been audited by PricewaterhouseCoopers LLP, an independentregistered public accounting firm, as stated in their report which appears in Item 8 of this Annual Report on Form 10-K.Remediation of Material Weakness in Internal Control Over Financial ReportingA material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility thata material misstatement of our interim or annual financial statements will not be prevented or detected on a timely basis.As disclosed in the Company's 2014 Annual Report on Form 10-K, management concluded that our internal control over financial reporting was previouslynot effective based on the material weakness in internal control over financial reporting as we did not maintain effective controls over the preparation, reviewand analysis of income tax balances. Specifically, we did not maintain effective controls over the interim and annual reconciliation analysis and review of thecomponents of our consolidated income taxes receivable account to ensure all account components existed and were recorded at their appropriate amounts inthe consolidated financial statements. Management has remediated this material weakness in fiscal 2015. Specifically, during the year ended September 30,2015, we engaged a reputable firm to assist in performing responsibilities in our tax department, which provides us with more tax personnel and expertisethan we previously had internally. We also added new controls to strengthen the reconciliation and review process over income tax accounts. Certaincontrols have also been re-designed to operate at a higher level of precision, resulting from enhanced account-level reviews and pre-closing processes toidentify business events that may impact income taxes.66Table of ContentsITEM 9A. CONTROLS AND PROCEDURES (CONTINUED)Changes in Internal Control Over Financial ReportingThere were no changes in the Company's internal control over financial reporting during the quarterly period ended September 30, 2015 that has materiallyaffected, or is reasonable likely to affect, our internal control over financial reporting.ITEM 9B. OTHER INFORMATIONCosts Associated with Exit or Disposal ActivitiesOn November 19, 2015, we approved a restructuring plan impacting our corporate staff. The plan most principally will close our Dortmund office andrelocate certain employees to our Munich office. We expect to incur charges in the range of $0.4 million to $0.6 million in connection with theserestructuring activities. The charges relate to severance payments to impacted employees. We expect to complete all payments associated with the chargesby the end of fiscal 2016. We began notifying impacted employees on November 24, 2015.67Table of ContentsPART III.ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEIncorporated into this item by reference is the information appearing under the headings “Proposal No. 1 - Election of Directors” and “Security Ownership ofPrincipal Stockholders and Management” in our Proxy Statement for our 2016 Annual Meeting of Stockholders we will file with the SEC (the “ProxyStatement”).Executive Officers of the RegistrantAs of the date of filing this Form 10-K, the following individuals were executive officers of the Registrant:Name Age PositionRonald E. Konezny 47 President and Chief Executive OfficerMichael C. Goergen 48 Senior Vice President, Chief Financial Officer and TreasurerJon A. Nyland 52 Vice President Manufacturing OperationsKevin C. Riley 54 Senior Vice President of Global SalesTracy L. Roberts 53 Vice President of Human Resources and Information TechnologyDavid H. Sampsell 47 Vice President of Corporate Development, General Counsel and Corporate SecretaryJoel K. Young 51 Senior Vice President of Research and Development and Chief Technical OfficerJeffrey F. Liebl 44 Vice President and Chief Marketing OfficerMr. Konezny joined our company in December 2014 as President and Chief Executive Officer and as a member of our Board of Directors. Prior to joining us,he had served as Vice President, Global Transportation and Logistics at Trimble Navigation Limited, a global provider of navigation and range-findingequipment and related solutions, since September 2013. From August 2011 to September 2013, he served as General Manager of Trimble’s GlobalTransportation and Logistics division. From 2007 to September 2013, he served as Chief Executive Officer of PeopleNet, Inc., a provider of telematicssolutions for the transportation industry, which was acquired by Trimble in 2011. Mr. Konezny founded PeopleNet in 1996 and served in various other roles,including Chief Technology Officer, Chief Financial Officer and Chief Operating Officer, before serving as its Chief Executive Officer. Mr. Konezny serveson the board of directors of I.D. Systems, Inc.Michael C. Goergen joined our company as Senior Vice President, Chief Financial Officer and Treasurer in April 2015. He most recently served as SeniorVice President -Finance of the Transport - Logistics division of Trimble Navigation Limited from April, 2013 to March, 2015. From June 2007 to April, 2013,Mr. Goergen served as Chief Financial Officer of PeopleNet Communications. PeopleNet was acquired by Trimble in 2011. Prior to his role as Chief FinancialOfficer of PeopleNet, he served since 1997 in various financial roles at PeopleNet.Mr. Nyland joined our company in 1993 as Manager of Manufacturing and Test Engineering. He served in roles of increasing responsibility until he waspromoted in April 1999 to his current position of Vice President of Manufacturing Operations. Prior to joining us, from 1985 to 1993, Mr. Nyland heldengineering and consulting positions with ITT Corporation, Minnesota Technology, and Turtle Mountain Corporation.Mr. Riley joined our company in January 2013 as Senior Vice President of Global Sales. Prior to joining us, Mr. Riley served as Senior Vice President -Global Markets for Infor Global Solutions, an enterprise software solutions company, where he led four global business units to profitable growth fromJanuary 2010 to November 2011. Prior to his time at Infor, he was Vice President and General Manager at Oracle, an enterprise software company, fromSeptember 2008 to January 2010, and President of Global Knowledge Software from September 2002 to September 2008, when Global Knowledge Softwarewas acquired by Oracle. He also served as President and Chief Operating Officer for Learn2 Corporation from 1999 to 2002.Ms. Roberts has served as our Vice President of Human Resources and Information Technology since March 2005 and has been employed by our companysince June 1999. Prior to joining us, Ms. Roberts served as the Director of Human Resources at Novartis Nutrition Corporation where she served the medicalnutritional business unit. Prior to her time at Novartis, Ms. Roberts had an extensive career with Cray Research (now Silicon Graphics) including various roleswith Human Resources and Marketing.68Table of ContentsITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE (CONTINUED)Mr. Sampsell joined our company in April 2011 as Vice President, General Counsel and Corporate Secretary. Prior to joining us, Mr. Sampsell worked ascorporate counsel at ADC Telecommunications, Inc., a supplier of network infrastructure products and services, from December 1999 until March 2011. ADCTelecommunications, Inc. was acquired by TE Connectivity in December 2010. His most recent role at ADC was as Associate General Counsel overseeingcorporate transactions and securities law compliance. Prior to joining ADC, Mr. Sampsell was an attorney in private practice with Leonard, Street andDeinard, P.A. from 1996 to 1999 and Moore & Van Allen, PLLC from 1993 to 1996.Mr. Young joined our company in July 2000 as Vice President of Engineering and was named Vice President of Research and Development and ChiefTechnical Officer in November 2005. In October 2006, Mr. Young was named Senior Vice President of Research and Development and Chief TechnicalOfficer. Prior to joining us, Mr. Young served as a Vice President for Transcrypt International, a provider of encryption products, in various engineering, salesand marketing positions from February 1996 to June 2000. Before that, he held various engineering and management positions at AT&T and AT&T BellLaboratories from 1986 to 1996.Mr. Liebl joined our company in October 2013 as Vice President and Chief Marketing Officer. Prior to joining us, Mr. Liebl served as Vice President of Salesand Marketing for TST Media from May 2012 to March 2013. Prior to his time at TST Media, he served as Chief Strategy Officer for eBureau from September2006 to April 2012, and Vice President of Global Marketing and Product Management for Ubiquity Software from June 2001 to April 2006.Code of Ethics/Code of ConductWe have in place a “code of ethics” within the meaning of Rule 406 of Regulation S-K, which is applicable to our senior financial management, includingspecifically our principal executive officer, principal financial officer and controller. A copy of this financial code of ethics is available on our website(www.digi.com) under the “Company - Investor Relations - Corporate Governance” caption. We intend to satisfy our disclosure obligations regarding anyamendment to, or a waiver from, a provision of this code of ethics by posting such information on the same website. We also have a “code of conduct” thatapplies to all directors, officers and employees, a copy of which is available through our website (www.digi.com) under the “Company - Investor Relations -Corporate Governance” caption.ITEM 11. EXECUTIVE COMPENSATIONIncorporated into this item by reference is the information appearing under the heading “Compensation of Directors,” “Executive Compensation,” theinformation regarding compensation committee interlocks and insider participation under the heading “Proposal No. 1 - Election of Directors” on our ProxyStatement.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSIncorporated into this item by reference is the information appearing under the headings “Security Ownership of Principal Stockholders and Management”and “Equity Compensation Plan Information” in our Proxy Statement.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEIncorporated into this item by reference is the information regarding director independence under the heading “Proposal No. 1 - Election of Directors” andthe information regarding related person transactions under the heading “Related Person Transaction Approval Policy” on our Proxy Statement.ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESIncorporated into this item by reference is the information under “Proposal No. 4 - Ratification of Independent Registered Public Accounting Firm” in ourProxy Statement.69Table of ContentsPART IV.ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES(a)Consolidated Financial Statement and Schedules of the Company (filed as part of this Annual Report on Form 10-K) 1.Consolidated Statements of Operations for fiscal years ended September 30, 2015, 2014 and 2013 Consolidated Statements of Comprehensive Income (Loss) for fiscal years ended September 30, 2015, 2014 and 2013 Consolidated Balance Sheets as of September 30, 2015 and 2014 Consolidated Statements of Cash Flows for fiscal years ended September 30, 2015, 2014 and 2013 Consolidated Statements of Stockholders’ Equity for fiscal years ended September 30, 2015, 2014 and 2013 Notes to Consolidated Financial Statements 2.Schedule of Valuation and Qualifying Accounts 3.Report of Independent Registered Certified Public Accounting Firm (b)Exhibits Exhibit Number Description 2 Stock Purchase Agreement with West Monroe Partners, LLC dated as of October 23, 2015* (1) 3(a) Restated Certificate of Incorporation of the Company, as amended (2) 3(b) Amended and Restated By-Laws of the Company (3) 4(a) Share Rights Agreement, dated as of April 22, 2008, between the Company and Wells Fargo Bank, N.A., as Rights Agent(4) 4(b) Form of Amended and Restated Certificate of Powers, Designations, Preferences and Rights of Series A Junior ParticipatingPreferred Shares (5) 10(a) Digi International Inc. Stock Option Plan as Amended and Restated as of November 27, 2006** (6) 10(a)(i) Form of Notice of Grant of Stock Options and Option Agreement (for grants under Digi International Inc. Stock OptionPlan)** (7) 10(b) Digi International Inc. Non-Officer Stock Option Plan, as Amended and Restated as of November 27, 2006 (8) 10(c) Digi International Inc. Employee Stock Purchase Plan as amended and restated as of October 29, 2013** (9) 10(d) Digi International Inc. 2000 Omnibus Stock Plan, as amended and restated as of December 4, 2009** (10) 10(d)(i) Form of Notice of Grant of Stock Options and Option Agreement (for grants under Digi International Inc. 2000 OmnibusStock Plan before January 26, 2010)** (11) 10(d)(ii) Form of Notice of Grant of Stock Options and Option Agreement (amended form for grants under Digi International Inc.2000 Omnibus Stock Plan on or after January 26, 2010 provided Addendum 1A applies only to certain grants made on andafter November 22, 2011)** (12) 10(e) Digi International Inc. 2013 Omnibus Incentive Plan** (13) 10(e)(i) Form of Notice of Grant of Stock Options and Option Agreement including Addendums to Option Agreement that mayapply to certain grants (for grants under Digi International Inc. 2013 Omnibus Incentive Plan)** (14) 10(e)(ii) Form of (Director) Restricted Stock Unit Award Agreement (for awards under Digi International Inc. 2013 OmnibusIncentive Plan)** (15)70Table of ContentsITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (CONTINUED) 10(f) Digi International Inc. 2014 Omnibus Incentive Plan** (16) 10(f)(i) Form of Notice of Grant of Stock Options and Option Agreement including Addendums to Option Agreement that mayapply to certain grants (for grants under Digi International Inc. 2014 Omnibus Incentive Plan)** (17) 10(f)(ii) Form of (Director) Restricted Stock Unit Award Agreement (for awards under Digi International Inc. 2014 OmnibusIncentive Plan)** (18) 10(f)(iii) Form of (Executive) Restricted Stock Unit Award Agreement (for awards under Digi International Inc. 2014 OmnibusIncentive Plan)** (19) 10(g) Form of indemnification agreement with directors and officers of the Company** (20) 10(h) Employment Agreement between the Company and Joseph T. Dunsmore dated September 27, 2006** (21) 10(i) Transition Agreement between the Company and Joseph T. Dunsmore dated April 22, 2014** (22) 10(j) Employment Agreement between the Company and Ronald E. Konezny dated November 26, 2014** (23) 10(k) Agreement between the Company and Joel K. Young dated July 30, 2007** (24) 10(l) Offer Letter Agreement, dated as of October 28, 2010 between the Company and Steven E. Snyder** (25) 10(m) Agreement between the Company and Jon A. Nyland dated September 17, 2013** (26) 10(n) Offer Letter Agreement, dated as of April 8, 2011 between the Company and David H. Sampsell** (27) 10(o) Transition Agreement between the Company and Steven E. Snyder dated March 25, 2015** (28) 10(p) Offer letter between the Company and Michael C. Goergen dated March 6, 2015** (29) 21 Subsidiaries of the Company 23 Consent of Independent Registered Public Accounting Firm 24 Powers of Attorney 31(a) Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer 31(b) Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer 32 Section 1350 Certification 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Calculation Linkbase Document 101.DEF XBRL Taxonomy Definition Linkbase Document 101.LAB XBRL Taxonomy Label Linkbase Document 101.PRE XBRL Taxonomy Presentation Linkbase Document____________________________Unless otherwise indicated, all documents incorporated into this Annual Report on Form 10-K by reference to a document filed with the SEC are locatedunder SEC file number 1-34033.**Certain schedules and exhibits have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibitwill be furnished to the Securities and Exchange Commission upon request.*Management compensatory contract or arrangement required to be included as an exhibit to this Annual Report on Form 10-K.71Table of ContentsITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (CONTINUED)(1)Incorporated by refeerence to Exhibit 2.1 to the Company's Form 8-K filed October 29, 2015.(2)Incorporated by reference to Exhibit 3(a) to the Company’s Form 10‑K for the year ended September 30, 1993 (File no. 0‑17972).(3)Incorporated by reference to Exhibit 3 to the Company's Form 8-K dated January 18, 2011 (File no. 1‑34033).(4)Incorporated by reference to Exhibit 4(a) to the Company’s Registration Statement on Form 8-A filed on April 25, 2008 (File no. 1‑34033).(5)Incorporated by reference to Exhibit 4(b) to the Company’s Registration Statement on Form 8-A filed on April 25, 2008 (File no. 1‑34033).(6)Incorporated by reference to Exhibit 10(a) to the Company’s Form 10‑K for the year ended September 30, 2006 (File no. 0‑17972).(7)Incorporated by reference to Exhibit 10(a) to the Company’s Form 8-K dated September 13, 2004 (File no. 0‑17972).(8)Incorporated by reference to Exhibit 10(g) to the Company’s Form 10‑K for the year ended September 30, 2006 (File no. 0‑17972).(9)Incorporated by reference to Exhibit 99 to the Company’s Registration Statement on Form S-8 filed on March 12, 2014 (File no. 333‑194522).(10)Incorporated by reference to Exhibit 10(a) to the Company’s Form 10‑Q for the quarter ended December 31, 2009 (File no. 1‑34033).(11)Incorporated by reference to Exhibit 10(o) to the Company’s Form 10‑K for the year ended September 30, 2008 (File no. 1‑34033).(12)Incorporated by reference to Exhibit 10 (e)ii to the Company’s Form 10‑Q for the year ended September 30, 2011 (File no. 1‑34033).(13)Incorporated by reference to Exhibit 99 to the Company’s Registration Statement on Form S-8 filed on April 16, 2013 (File no. 333-187949).(14)Incorporated by reference to Exhibit 10(a)(i) to the Company’s Form 10-Q for the quarter ended March 31, 2013 (File no. 1-34033).(15)Incorporated by reference to Exhibit 10(a)(ii) to the Company’s Form 10-Q for the quarter ended March 31, 2013 (File no. 1-34033).(16)Incorporated by reference to Exhibit 99 to the Company’s Registration Statement on Form S-8 filed on March 12, 2014 (File no. 333‑194518).(17)Incorporated by reference to Exhibit 10(b)(i) to the Company’s Form 10-Q for the quarter ended March 31, 2014 (File no. 1-34033).(18)Incorporated by reference to Exhibit 10(b)(ii) to the Company’s Form 10-Q for the quarter ended March 31, 2014 (File no. 1-34033).(19)Incorporated by reference to Exhibit 10(a) to the Company’s Form 10-Q for the quarter ended June 30, 2014 (File no. 1-34033).(20)Incorporated by reference to Exhibit 10 to the Company’s Form 10‑Q for the quarter ended June 30, 2010 (File no. 1‑34033).(21)Incorporated by reference to Exhibit 10(d) to the Company’s Form 10‑K for the year ended September 30, 2006 (File no. 0‑17972).(22)Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K dated April 23, 2014 (File no. 1‑34033).(23)Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K dated December 3, 2014 (File no. 1-34033).(24)Incorporated by reference to Exhibit 10(b) to the Company’s Form 10‑Q for the quarter ended June 30, 2007 (File no. 0‑17972).(25)Incorporated by reference to Exhibit 10 to the Company’s Form 10‑Q for the quarter ended December 31, 2010 (File no. 1‑34033).(26)Incorporated by reference to Exhibit 10(l) to the Company's Form 10-K for the year ended September 30, 2013 (File no. 1‑34033).(27)Incorporated by reference to Exhibit 10(m) to the Company's Form 10-K for the year ended September 30, 2013 (File no. 1‑34033).(28)Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed March 26, 2015.(29)Incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed March 26, 2015.72Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, on November 30, 2015. DIGI INTERNATIONAL INC. By: /s/ Ronald E. Konezny Ronald E. KoneznyPresident, Chief Executive Officer and DirectorPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrantand in the capacities indicated on November 30, 2015. By: /s/ Ronald E. Konezny Ronald E. KoneznyPresident, Chief Executive Officer and Director(Principal Executive Officer) By: /s/ Michael C. Goergen Michael C. GoergenSenior Vice President, Chief Financial Officer and Treasurer(Principal Financial Officer and Principal Accounting Officer) By:* Guy C. JacksonDirector By:* Satbir KhanujaDirector By:* Ahmed NawazDirector By:* William N. PriesmeyerDirector By:* Girish RishiDirector By:* Spiro LazarakisDirector*Ronald E. Konezny, by signing his name hereto, does hereby sign this document on behalf of each of the above named directors of the Registrant pursuantto Powers of Attorney duly executed by such persons. By: /s/ Ronald E. Konezny Ronald E. KoneznyAttorney-in-fact73Table of ContentsSCHEDULE II - VALUATION AND QUALIFYING ACCOUNTSDIGI INTERNATIONAL INC.(in thousands)Description Balance atbeginning ofperiod Increase(Decrease) tocosts andexpenses Deductions Balance at endof periodValuation allowance - deferred tax assets September 30, 2015 $572 $316 $26 $862September 30, 2014 $807 $174 $409 $572September 30, 2013 $887 $170 $250 $807 Valuation account - doubtful accounts September 30, 2015 $367 $202 $86(1) $483September 30, 2014 $313 $209 $155(1) $367September 30, 2013 $295 $309 $291(1) $313 Reserve for future returns and pricing adjustments September 30, 2015 $1,662 $7,002 $6,847 $1,817September 30, 2014 $1,770 $6,526 $6,634 $1,662September 30, 2013 $1,362 $6,973 $6,565 $1,770(1)Uncollectible accounts charged against allowance, net of recoveries74Table of ContentsExhibit Number DescriptionMethod of Filing2 Stock Purchase Agreement with West Monroe Partners, LLC dated as of October 23, 2015Incorporation byReference 3(a) Restated Certificate of Incorporation of the Company, as amendedIncorporation byReference 3(b) Amended and Restated By-Laws of the CompanyIncorporation byReference 4(a) Share Rights Agreement, dated as of April 22, 2008, between the Company and Wells Fargo Bank, N.A., asRights AgentIncorporation byReference 4(b) Form of Amended and Restated Certificate of Powers, Designations, Preferences and Rights of Series AJunior Participating Preferred SharesIncorporation byReference 10(a) Digi International Inc. Stock Option Plan as Amended and Restated as of November 27, 2006Incorporation byReference 10(a)(i) Form of Notice of Grant of Stock Options and Option AgreementIncorporation byReference 10(b) Digi International Inc. Non-Officer Stock Option Plan, as Amended and Restated as of November 27, 2006Incorporation byReference 10(c) Digi International Inc. Employee Stock Purchase Plan as amended and restated as of October 29, 2013Incorporation byReference 10(d) Digi International Inc. 2000 Omnibus Stock Plan, as amended and restated as of December 4, 2009Incorporation byReference 10(d)(i) Form of Notice of Grant of Stock Options and Option AgreementIncorporation byReference 10(d)(ii) Form of Notice of Grant of Stock Options and Option AgreementIncorporation byReference 10(e) Digi International Inc. 2013 Omnibus Incentive PlanIncorporation byReference 10(e)(i) Form of Notice of Grant of Stock Options and Option Agreement including Addendums to OptionAgreement that may apply to certain grantsIncorporation byReference 10(e)(ii) Form of (Director) Restricted Stock Unit Award AgreementIncorporation byReference 10(f) Digi International Inc. 2014 Omnibus Incentive PlanIncorporation byReference 10(f)(i) Form of Notice of Grant of Stock Options and Option Agreement including Addendums to OptionAgreement that may apply to certain grants (for grants under Digi International Inc. 2014 OmnibusIncentive Plan)Incorporation byReference 10(f)(ii) Form of (Director) Restricted Stock Unit Award Agreement (for awards under Digi International Inc. 2014Omnibus Incentive Plan)Incorporation byReference 10(f)(iii) Form of (Executive) Restricted Stock Unit Award Agreement (for awards under Digi International Inc. 2014Omnibus Incentive Plan)Incorporation byReference 10(g) Form of indemnification agreement with directors and officers of the CompanyIncorporation byReference 10(h) Employment Agreement between the Company and Joseph T. Dunsmore dated September 27, 2006Incorporation byReference 10(i) Transition Agreement between the Company and Joseph T. Dunsmore dated April 22, 2014Incorporation byReference 10(j) Employment Agreement between the Company and Ronald E. Konezny dated November 26, 2014Incorporation byReference75Table of ContentsExhibit Number DescriptionMethod of Filing 10(k) Agreement between the Company and Joel K. Young dated July 30, 2007Incorporation byReference 10(l) Offer Letter Agreement, dated as of October 28, 2010 between the Company and Steven E. SnyderIncorporation byReference 10(m) Agreement between the Company and Jon A. Nyland dated September 17, 2013Incorporation byReference 10(n) Offer Letter Agreement, dated as of April 8, 2011 between the Company and David H. SampsellIncorporation byReference 10(o) Transition Agreement between the Company and Steven E. Snyder dated March 25 ,2015Incorporation byReference 10(p) Offer Letter between the Company and Michael C. Goergen dated March 6, 2015Incorporation byReference 21 Subsidiaries of the CompanyElectronically 23 Consent of Independent Registered Public Accounting FirmElectronically 24 Powers of AttorneyElectronically 31(a) Rule 13a-14(a)/15d-14(a) Certification of Chief Executive OfficerElectronically 31(b) Rule 13a-14(a)/15d-14(a) Certification of Chief Financial OfficerElectronically 32 Section 1350 CertificationElectronically 101.INS XBRL Instance DocumentElectronically 101.SCH XBRL Taxonomy Extension Schema DocumentElectronically 101.CAL XBRL Taxonomy Calculation Linkbase DocumentElectronically 101.DEF XBRL Taxonomy Definition Linkbase DocumentElectronically 101.LAB XBRL Taxonomy Label Linkbase DocumentElectronically 101.PRE XBRL Taxonomy Presentation Linkbase DocumentElectronically76EXHIBIT 21Subsidiaries of the CompanyName JurisdictionBluenica Corporation Ontario, CanadaDigi International GmbH GermanyDigi International (HK) Ltd. Hong KongDigi International Kabushikikaisha JapanDigi International Limited United KingdomDigi International SARL FranceDigi International Spain S.A. SpainDigi International Wireless Design Services Inc. Minnesota, United StatesDigi m2m Solutions India Pvt. Ltd. IndiaDigi Wireless Singapore Pte. Ltd. SingaporeITK International Inc. Delaware, United StatesEXHIBIT 23CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statements on Form S‑8 (Nos. 333-187949, 333-144872, 333-00099, 333-23857,333-82674, 333-169427, 333-169428, 333-194518, and 333-194522) of Digi International Inc. of our report dated November 30, 2015 relating to thefinancial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10‑K./s/PricewaterhouseCoopers LLPMinneapolis, MinnesotaNovember 30, 2015EXHIBIT 24DIGI INTERNATIONAL INC.Power of AttorneyThe undersigned director of Digi International Inc., a Delaware corporation, does hereby make, constitute and appoint Ronald E. Konezny and MichaelC. Goergen, and either of them, the undersigned’s true and lawful attorney-in-fact and agent, with power of substitution, for the undersigned and in theundersigned’s name, place and stead, to sign and affix the undersigned’s name as such director of said corporation to an Annual Report on Form 10-K or otherapplicable form for the fiscal year ended September 30, 2015, and all amendments thereto, to be filed by said corporation with the U.S. Securities andExchange Commission, Washington, D.C. (the “SEC”), and to file the same with all exhibits thereto and other supporting documents in connection therewithwith the SEC, granting unto said attorneys-in-fact, and either of them, full power and authority to do and perform any and all acts necessary or incidental tothe performance and execution of the powers herein expressly granted.IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned’s hand this 25th day of November, 2015. /s/ Guy C. Jackson Guy C. Jackson DIGI INTERNATIONAL INC.Power of AttorneyThe undersigned director of Digi International Inc., a Delaware corporation, does hereby make, constitute and appoint Ronald E. Konezny and MichaelC. Goergen, and either of them, the undersigned’s true and lawful attorney-in-fact and agent, with power of substitution, for the undersigned and in theundersigned’s name, place and stead, to sign and affix the undersigned’s name as such director of said corporation to an Annual Report on Form 10-K or otherapplicable form for the fiscal year ended September 30, 2015, and all amendments thereto, to be filed by said corporation with the U.S. Securities andExchange Commission, Washington, D.C. (the “SEC”), and to file the same with all exhibits thereto and other supporting documents in connection therewithwith the SEC, granting unto said attorneys-in-fact, and either of them, full power and authority to do and perform any and all acts necessary or incidental tothe performance and execution of the powers herein expressly granted.IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned’s hand this 25th day of November, 2015. /s/ Satbir Khanuja Satbir Khanuja DIGI INTERNATIONAL INC.Power of AttorneyThe undersigned director of Digi International Inc., a Delaware corporation, does hereby make, constitute and appoint Michael C. Goergen and David H.Sampsell, and either of them, the undersigned’s true and lawful attorney-in-fact and agent, with power of substitution, for the undersigned and in theundersigned’s name, place and stead, to sign and affix the undersigned’s name as such director of said corporation to an Annual Report on Form 10-K or otherapplicable form for the fiscal year ended September 30, 2015, and all amendments thereto, to be filed by said corporation with the U.S. Securities andExchange Commission, Washington, D.C. (the “SEC”), and to file the same with all exhibits thereto and other supporting documents in connection therewithwith the SEC, granting unto said attorneys-in-fact, and either of them, full power and authority to do and perform any and all acts necessary or incidental tothe performance and execution of the powers herein expressly granted.IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned’s hand this 25th day of November, 2015. /s/ Ronald E. Konezny Ronald E. Konezny DIGI INTERNATIONAL INC.Power of AttorneyThe undersigned director of Digi International Inc., a Delaware corporation, does hereby make, constitute and appoint Michael C. Goergen and David H.Sampsell, and either of them, the undersigned’s true and lawful attorney-in-fact and agent, with power of substitution, for the undersigned and in theundersigned’s name, place and stead, to sign and affix the undersigned’s name as such director of said corporation to an Annual Report on Form 10-K or otherapplicable form for the fiscal year ended September 30, 2015, and all amendments thereto, to be filed by said corporation with the U.S. Securities andExchange Commission, Washington, D.C. (the “SEC”), and to file the same with all exhibits thereto and other supporting documents in connection therewithwith the SEC, granting unto said attorneys-in-fact, and either of them, full power and authority to do and perform any and all acts necessary or incidental tothe performance and execution of the powers herein expressly granted.IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned’s hand this 25th day of November, 2015. /s/ Spiro C. Lazarakis Spiro C. Lazarakis DIGI INTERNATIONAL INC.Power of AttorneyThe undersigned director of Digi International Inc., a Delaware corporation, does hereby make, constitute and appoint Michael C. Goergen and David H.Sampsell, and either of them, the undersigned’s true and lawful attorney-in-fact and agent, with power of substitution, for the undersigned and in theundersigned’s name, place and stead, to sign and affix the undersigned’s name as such director of said corporation to an Annual Report on Form 10-K or otherapplicable form for the fiscal year ended September 30, 2015, and all amendments thereto, to be filed by said corporation with the U.S. Securities andExchange Commission, Washington, D.C. (the “SEC”), and to file the same with all exhibits thereto and other supporting documents in connection therewithwith the SEC, granting unto said attorneys-in-fact, and either of them, full power and authority to do and perform any and all acts necessary or incidental tothe performance and execution of the powers herein expressly granted.IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned’s hand this 25th day of November, 2015. /s/ Ahmed Nawaz Ahmed Nawaz DIGI INTERNATIONAL INC.Power of AttorneyThe undersigned director of Digi International Inc., a Delaware corporation, does hereby make, constitute and appoint Michael C. Goergen and David H.Sampsell, and either of them, the undersigned’s true and lawful attorney-in-fact and agent, with power of substitution, for the undersigned and in theundersigned’s name, place and stead, to sign and affix the undersigned’s name as such director of said corporation to an Annual Report on Form 10-K or otherapplicable form for the fiscal year ended September 30, 2015, and all amendments thereto, to be filed by said corporation with the U.S. Securities andExchange Commission, Washington, D.C. (the “SEC”), and to file the same with all exhibits thereto and other supporting documents in connection therewithwith the SEC, granting unto said attorneys-in-fact, and either of them, full power and authority to do and perform any and all acts necessary or incidental tothe performance and execution of the powers herein expressly granted.IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned’s hand this 25th day of November, 2015. /s/ William N. Priesmeyer William N. Priesmeyer DIGI INTERNATIONAL INC.Power of AttorneyThe undersigned director of Digi International Inc., a Delaware corporation, does hereby make, constitute and appoint Michael C. Goergen and David H.Sampsell, and either of them, the undersigned’s true and lawful attorney-in-fact and agent, with power of substitution, for the undersigned and in theundersigned’s name, place and stead, to sign and affix the undersigned’s name as such director of said corporation to an Annual Report on Form 10-K or otherapplicable form for the fiscal year ended September 30, 2015, and all amendments thereto, to be filed by said corporation with the U.S. Securities andExchange Commission, Washington, D.C. (the “SEC”), and to file the same with all exhibits thereto and other supporting documents in connection therewithwith the SEC, granting unto said attorneys-in-fact, and either of them, full power and authority to do and perform any and all acts necessary or incidental tothe performance and execution of the powers herein expressly granted.IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned’s hand this 25th day of November, 2015. /s/ Girish Rishi Girish Rishi Exhibit No. 31(a)CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Ronald E. Konezny, certify that:1. I have reviewed this annual report on Form 10-K of Digi International Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theRegistrant and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularlyduring the period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles;(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness ofthe disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscalquarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theRegistrant’s internal control over financial reporting; and5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theRegistrant’s auditors and the audit committee of the Registrant’s Board of Directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the Registrant’s ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control overfinancial reporting. November 30, 2015/s/ Ronald E. Konezny Ronald E. Konezny President, Chief Executive Officer and Director Exhibit No. 31(b)CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Michael C. Goergen, certify that:1. I have reviewed this annual report on Form 10-K of Digi International Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theRegistrant and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularlyduring the period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles;(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness ofthe disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscalquarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theRegistrant’s internal control over financial reporting; and5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theRegistrant’s auditors and the audit committee of the Registrant’s Board of Directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the Registrant’s ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control overfinancial reporting. November 30, 2015/s/ Michael C. Goergen Michael C. Goergen Senior Vice President, Chief Financial Officer and Treasurer Exhibit No. 32CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, each of the undersigned certifies that:(1) The Annual Report on Form 10-K of the Company for the year ended September 30, 2015 (the "Report") fully complies with the requirements of section13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. November 30, 2015 /s/ Ronald E. Konezny Ronald E. Konezny President, Chief Executive Officer and Director November 30, 2015 /s/ Michael C. Goergen Michael C. Goergen Senior Vice President, Chief Financial Officer and Treasurer

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