DIGI INTERNATIONAL INC 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our management's discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended September 30, 2020, as well as our subsequent reports on Form 10-Q and Form 8-K and any amendments to these reports. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Form 10-Q contains certain statements that are "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act 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, as amended. Forward-Looking Statements The words such as "assume," "believe," "anticipate," "intend," "estimate," "target," "may," "will," "expect," "plan," "potential," "project," "should," or "continue" or the negative thereof or other expressions, which are predictions of or indicate future events and trends and which do not relate to historical matters, identify forward-looking statements. Among other items, these statements relate to expectations of the business environment in which Digi operates, projections of future performance, perceived marketplace opportunities and statements regarding our mission and vision. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions. Among others, these include risks related to the ongoing COVID-19 pandemic and efforts to mitigate the same, risks related to the global economic downturn that commenced during the COVID-19 pandemic and the ability of companies like us to operate a global business in such conditions, the highly competitive market in which our company operates, rapid changes in technologies that may displace products sold by us, declining prices of networking products, our reliance on distributors and other third parties to sell our products, the potential for significant purchase orders to be canceled or changed, delays in product development efforts, uncertainty in user acceptance of our products, the ability to integrate our products and services with those of other parties in a commercially accepted manner, potential liabilities that can arise if any of our products have design or manufacturing defects, our ability to defend or settle satisfactorily any litigation, uncertainty in global economic conditions and economic conditions within particular regions of the world which could negatively affect product demand and the financial solvency of customers and suppliers, the impact of natural disasters and other events beyond our control that could negatively impact our supply chain and customers, potential unintended consequences associated with restructuring, reorganizations or other similar business initiatives that may impact our ability to retain important employees or otherwise impact our operations in unintended and adverse ways, the ability to achieve the anticipated benefits and synergies associated with acquisitions or divestitures 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, our Annual Report on Form 10-K for the year ended September 30, 2020, this filing on Form 10-Q and other filings, could cause our actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. Many of such factors are 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 or obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, the disclosure of contingent assets and liabilities and the values of purchased assets and assumed liabilities in acquisitions. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. A description of our critical accounting policies and estimates was provided in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the fiscal year ended September 30, 2020. 20 Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) OVERVIEW We are a leading global provider of business and mission-critical Internet-of-Things ("IoT") connectivity products, services and solutions comprised of two reporting segments: IoT Products & Services and IoT Solutions. Our IoT Products & Services segment offers products and services that help original equipment manufacturers ("OEMs"), enterprise and government customers create and deploy, secure IoT connectivity solutions. From embedded and wireless modules to console servers, enterprise and industrial routers, we provide customers with a wide variety of communication sub-assemblies and finished products to meet their IoT communication requirements. In addition, the IoT Products & Services segment provides our customers with a device management platform and other professional services to enable customers to capture and manage data from devices they connect to networks. Our IoT Solutions segment offers wireless temperature and other condition-based monitoring services as well as task management services. These solutions are focused on the following vertical markets: food service, retail, healthcare (primarily pharmacies), transportation/logistics and education. These solutions are marketed as SmartSense by Digi ® . We have formed, expanded and enhanced the IoT Solutions segment through four acquisitions. We compete for customers on the basis of existing and planned product features, service and software application capabilities, company reputation, brand recognition, technical support, alliance relationships, quality and reliability, product development capabilities, price and availability. On October 7, 2020, our Board of Directors approved a reorganization of our IoT Products & Services business segment. The restructuring plan aligned the business segment's organization around product lines, each with a segment manager. Under this plan, we recorded a charge of $0.7 million for employee termination charges and eliminated 19 employment positions primarily in the U.S. during the first quarter of fiscal 2021. We have grouped our products under the following categories: Cellular Routers, Console Servers, OEM Solutions and Infrastructure Management. Consequently, the measure of segment operating income (loss) used by our chief operating decision maker ("CODM") changed. As a result, our disclosed measure of segment operating income (loss) has been updated. For further detail on segment performance, see the Revenue by Segment, Cost of Goods Sold and Gross Profit by Segment and Operating Income (Loss) sections of this Item 2. In fiscal 2021, our key operating objectives include: • continued growth of our SmartSense by Digi ® business that is the base of our IoT Solutions segment; • delivering growth within our IoT Products & Services segment through new product introductions; • identification of strategic growth initiatives through acquisition; and • optimizing our reduced fixed cost footprint with third-party manufacturing. We utilize many financial, operational, and other metrics to evaluate our financial condition and financial performance. Below we highlight the metrics for the first quarter of fiscal 2021 that we feel are most important in these evaluations: • Consolidated revenue increased $10.8 million, or 17.4% in the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020. Product revenue increased by $8.4 million, or 15.4%, in the first quarter of fiscal 2021 compared to the same period a year ago. Services revenue increased by $2.4 million, or 30.6%, in the first quarter of fiscal 2021 compared to the same period a year ago. • Gross margin increased as a percentage of revenue to 56.1% in the first quarter of fiscal 2021 as compared to 48.9% in the first quarter of fiscal 2020. • Net loss for the first fiscal quarter of 2021 was $0.3 million, or $0.01 loss per diluted share. Net income for the first fiscal quarter of 2020 was $0.2 million, or $0.01 per diluted share. Adjusted net income and adjusted net income per share was $9.9 million, or $0.32 per diluted share. In the first fiscal quarter of fiscal 2020, adjusted net income and adjusted net income per share was $4.5 million, or $0.15 per diluted share. • Adjusted EBITDA for the first fiscal quarter of 2021 was $13.0 million, or 17.7% of total revenue. In the first fiscal quarter of fiscal 2020, Adjusted EBITDA was $6.7 million, or 10.7% of total revenue. 21 Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Potential Impacts of COVID-19 on Our Business and Operations As is the case with many businesses, the ongoing pandemic and related global economic downturn creates significant uncertainty regarding the nearer term outlook for the markets where we provide products and services. The pandemic and the economic downturn it triggered represents a fluid situation that presents a wide range of potential impacts on our own business and those of our customers, vendors and other business partners. As our products and services serve companies across a broad range of industries, in some instances we have seen demand increase while in others we have observed declines as a result of the societal impacts of the pandemic. At present, the duration and severity of the pandemic and the resulting economic downturn remain unclear. Present State of Our Operations During fiscal 2020, we took steps to lower our operating expenses as a result of the pandemic. We continue to monitor the impacts of COVID-19 on our operations closely and could increase or take further steps to decrease expenses as we believe circumstances warrant. Since the start of the pandemic there have not been any material changes to our assets on our balance sheet and, at present, we do not expect there to be material changes. During the first fiscal quarter of 2021, we reviewed the potential impacts of the COVID-19 pandemic on goodwill and intangible assets and determined there to be no material impact at that time. We also reviewed the potential impacts on future risks to the business as it relates to collections, returns and other business related items. No significant changes to these reserves have been made. Potential Impacts on Our Supply Chain To date, travel restrictions and border closures have only had minor impacts on our ability to obtain inventory or manufacture or deliver products or services to our customers. The impacts we have experienced have primarily impacted our IoT Solutions segment. We continue to monitor restrictions and border closures closely so we are positioned to mitigate the negative impacts of any future restrictions or closures. It is possible, however, that future restrictions or closures could negatively harm our business. Travel restrictions impacting people so far have not materially restrained our ability to assist our customers with on-site installation activities or product troubleshooting. At present, we do not expect impacts on personal travel to be material to our business operations or financial results. We have taken steps to restrain and monitor our operating expenses and therefore do not expect and such impacts to materially change the relationship between our costs and revenues. Proactive Efforts to Mitigate the Negative Impacts of COVID-19 Like most companies, we have taken a range of actions with respect to how we operate to assure we comply with government restrictions and guidelines as well as best practices to protect the health and well-being of our employees and our ability to continue operating our business effectively. To date, we have been able to operate our business effectively using these measures and to maintain all internal controls as documented and posted. We also have not experienced challenges in maintaining business continuity and do not expect to incur material expenditures to do so. However, the impacts of the pandemic and efforts to mitigate the same have remained unpredictable and it remains possible that challenges may arise in the future. 22 Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) CONSOLIDATED RESULTS OF OPERATIONS The following table sets forth selected information derived from our interim condensed consolidated statements of operations: Three months ended December 31, % incr. ($ in thousands) 2020 2019 (decr.) Revenue $ 73,146 100.0 % $ 62,317 100.0 % 17.4 Cost of sales 32,127 43.9 31,853 51.1 0.9 Gross profit 41,019 56.1 30,464 48.9 34.6 Operating expenses 41,165 56.3 30,947 49.7 33.0 Operating loss (146) (0.2) (483) (0.8) 69.8 Other expense, net (594) (0.8) (437) (0.7) NM Loss before income taxes (740) (1.0) (920) (1.5) 19.6 Income tax benefit (433) (0.6) (1,128) (1.8) NM Net (loss) income $ (307) (0.4) % $ 208 0.3 % (247.6) REVENUE BY SEGMENT Three months ended December 31, % incr. ($ in thousands) 2020 2019 (decr.) Revenue IoT Products & Services $ 61,780 84.5 % $ 54,613 87.6 % 13.1 IoT Solutions 11,366 15.5 7,704 12.4 47.5 Total revenue $ 73,146 100.0 % $ 62,317 100.0 % 17.4 IoT Products & Services IoT Products & Services revenue increased 13.1% for the three months ended December 31, 2020 as compared to the same period in the prior fiscal year. This primarily was a result of: • increased sales of our console servers primarily due to incremental revenue from our acquisition of Opengear in December 2019; and • increased sales of technical services. This increase partially was offset by: • decreased sales of our cellular routers primarily related to large sales to an existing customer for our cellular products in the prior year that was not repeated this year. IoT Solutions IoT Solutions revenue increased 47.5% for the three months ended December 31, 2020 as compared to the same period in the prior fiscal year. This primarily was a result of: • additional new and existing customer deployments and equipment upgrades; and • an increase in recurring revenue from our subscription services as we service over 75,000 sites as of December 31, 2020, compared to nearly 67,000 sites as of December 31, 2019. COST OF GOODS SOLD AND GROSS PROFIT BY SEGMENT Three months ended December 31, Basis point ($ in thousands) 2020 2019 inc. (decr.) Cost of Goods Sold IoT Products & Services $ 26,101 42.2 % $ 27,962 51.2 % (900) IoT Solutions 6,026 53.0 % 3,891 50.5 % 250 Total cost of goods sold $ 32,127 43.9 % $ 31,853 51.1 % (720) 23 Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Three months ended December 31, Basis point ($ in thousands) 2020 2019 inc. (decr.) Gross Profit IoT Products & Services $ 35,679 57.8 % $ 26,651 48.8 % 900 IoT Solutions 5,340 47.0 % 3,813 49.5 % (250) Total gross profit $ 41,019 56.1 % $ 30,464 48.9 % 720 IoT Product & Services IoT Products & Services gross profit margin increased 900 basis points for the three months ended December 31, 2020 as compared to the same period in the prior fiscal year. This increase primarily was a result of: • incremental gross profit from increased sales of our console servers, which have higher gross margins; • a decrease in our cellular products gross profit which typically has lower gross margins; and • increased sales from our technical services, which typically has higher gross margins. IoT Solutions The IoT Solutions gross profit margin decreased 250 basis points for the three months ended December 31, 2020 as compared to the same period in the prior fiscal year. This decrease primarily was a result of: • higher portion of revenue attributed to hardware product sales, which carry a lower gross margin; • increased freight and tariff charges incurred in first quarter of fiscal 2021; and • remediation and warranty claims in the first quarter of fiscal 2021 compared to the same period in the prior fiscal year. This was partially offset by: • increased recurring subscription revenue, which typically has higher gross margins. OPERATING EXPENSES Below is our operating expenses and operating expenses as a percentage of total revenue: Three months ended December 31, $ % ($ in thousands) 2020 2019 incr. (decr.) incr. (decr.) Operating Expenses Sales and marketing $ 14,924 20.4 % $ 12,061 19.4 % $ 2,863 23.7 Research and development 11,093 15.2 % 10,331 16.6 % 762 7.4 General and administrative 14,415 19.7 % 8,555 13.7 % 5,860 68.5 Restructuring charge 733 1.0 % — — % 733 NM Total operating expenses $ 41,165 56.3 % $ 30,947 49.7 % $ 10,218 33.0 NM means not meaningful The $10.2 million increase in operating expenses in the first quarter of fiscal 2021 from the first quarter of fiscal 2020 primarily was the result of: • an increase of $5.5 million in earn-out expenses as a result of revenue from Opengear exceeding our previous estimate; • an increase of $3.6 million in compensation related expenses primarily related to incremental salaries and bonuses from Opengear acquired in December 2019 and additional commission expense due to increased revenue performance of Opengear in the first quarter of fiscal 2021; 24 Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) • an increase in $1.1 million primarily related to incremental amortization due to the acquisition of Opengear acquired in December 2019; • a $0.9 million increase in professional fees; and • a $0.7 million increase related to severance expense from the restructuring that took place during the first quarter of fiscal 2021. This increase partially was offset by: • a decrease of $1.9 in acquisition expenses; and • a decrease of $0.8 million in travel related expenses as events and travel were restricted due to COVID-19. OPERATING INCOME (LOSS) Operating loss was $0.1 million for the first quarter of fiscal 2021, compared to an operating loss of $0.5 million for the first quarter of 2020. IoT Product & Services provided operating income of $1.3 million in the first quarter of fiscal 2021 compared to $4.4 million in the first quarter of fiscal 2020, a decrease of $3.1 million, or 71.1%. Included in the first quarter of fiscal 2021 was an earn-out adjustment of $5.8 million. Other drivers for the decrease in operating income are described above in the revenue, gross profit and operating expenses details. IoT Solutions had an operating loss of $1.4 million in the first quarter of fiscal 2021 compared to an operating loss of $4.9 million in the first quarter of fiscal 2020, an improvement of $3.5 million, or 71.0%. Drivers for the improvement in operating loss are described above in the revenue, gross profit and operating expenses details. OTHER EXPENSE, NET Three months ended December 31, $ % ($ in thousands) 2020 2019 incr. (decr.) incr. (decr.) Other expense, net Interest income $ — — % $ 231 0.4 % $ (231) (100.0) Interest expense (402) (0.5) % (432) (0.7) % 30 (6.9) Other expense, net (192) (0.3) % (236) (0.4) % 44 (18.6) Total other expense, net $ (594) (0.8) % $ (437) (0.7) % $ (157) NM NM means not meaningful The $0.2 million increase in other expense, net in the first quarter of fiscal 2021 from the first quarter of fiscal 2020 primarily was the result of a decrease in interest income of $0.2 million related to the money market fund that was closed in December 2019. INCOME TAXES See Note 10 to the condensed consolidated financial statements for discussion of income taxes. NON-GAAP FINANCIAL INFORMATION This report includes adjusted net income, adjusted net income per diluted share and adjusted earnings before interest, taxes and amortization ("Adjusted EBITDA"), each of which is a non-GAAP financial measure. We understand that there are material limitations on the use of non-GAAP measures. Non-GAAP measures are not substitutes for GAAP measures, such as net income, for the purpose of analyzing financial performance. The disclosure of these measures does not reflect all charges and gains that were actually recognized by Digi. These non-GAAP measures are not in accordance with, or, an alternative for measures prepared in accordance with GAAP and may be different from non-GAAP measures used by other companies or presented by us in prior reports. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. We believe that non-GAAP measures have limitations in that they do not 25 Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) reflect all of the amounts associated with our results of operations as determined in accordance with GAAP. We believe these measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures. Additionally, Adjusted EBITDA does not reflect our cash expenditures, the cash requirements for the replacement of depreciated and amortized assets, or changes in or cash requirements for our working capital needs. We believe that providing historical and adjusted net income and adjusted net income per diluted share, respectively, exclusive of such items as reversals of tax reserves, discrete tax benefits, restructuring charges and reversals, intangible amortization, stock-based compensation, other non-operating income/expense, changes in fair value of contingent consideration, acquisition-related expenses and interest expense related to acquisitions permits investors to compare results with prior periods that did not include these items. Management uses the aforementioned non-GAAP measures to monitor and evaluate ongoing operating results and trends and to gain an understanding of our comparative operating performance. In addition, certain of our stockholders have expressed an interest in seeing financial performance measures exclusive of the impact of these matters, which while important, are not central to the core operations of our business. Management believes that Adjusted EBITDA, defined as EBITDA adjusted for stock-based compensation expense, acquisition-related expenses, restructuring charges and reversals, and changes in fair value of contingent consideration is useful to investors to evaluate the Company's core operating results and financial performance because it excludes items that are significant non-cash or non-recurring items reflected in the Condensed Consolidated Statements of Operations. We believe that the presentation of Adjusted EBITDA as a percentage of revenue is useful because it provides a reliable and consistent approach to measuring our performance from year to year and in assessing our performance against that of other companies. We believe this information helps compare operating results and corporate performance exclusive of the impact of our capital structure and the method by which assets were acquired. Below are reconciliations from GAAP to Non-GAAP information that we feel is important to our business: Reconciliation of Net (Loss) Income to Adjusted EBITDA (In thousands) Three months ended December 31, 2020 2019 % of total revenue % of total revenue Total revenue $ 73,146 100.0 % $ 62,317 100.0 % Net (loss) income $ (307) $ 208 Interest expense, net 402 201 Income tax benefit (433) (1,128) Depreciation and amortization 5,050 3,617 Stock-based compensation 1,745 1,600 Changes in fair value of contingent consideration 5,772 259 Restructuring charge 733 — Acquisition expense 15 1,906 Adjusted EBITDA (1) $ 12,977 17.7 % $ 6,663 10.7 % (1) Beginning in fiscal 2021, Adjusted EBITDA now excludes changes in fair value of contingent consideration. The prior year presentation has been adjusted to conform to the current year presentation. 26 Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Reconciliation of Net (Loss) Income and Net (Loss) Income per Diluted Share to Adjusted Net Income and Adjusted Net Income per Diluted Share (In thousands, except per share amounts) Three months ended December 31, 2020 2019 Net (loss) income and net (loss) income per diluted share $ (307) $ (0.01) $ 208 $ 0.01 Amortization 3,961 0.13 2,448 0.08 Stock-based compensation 1,745 0.06 1,600 0.05 Other non-operating expense 192 0.01 236 0.01 Acquisition expense 15 — 1,906 0.06 Changes in fair value of contingent consideration 5,772 0.19 259 0.01 Restructuring charge 733 0.02 — — Interest expense related to acquisition 402 0.01 416 0.01 Tax effect from the above adjustments (1) (2,355) (0.08) (1,618) (0.05) Discrete tax benefits (2) (252) (0.01) (959) (0.03) Adjusted net income and adjusted net income per diluted share (3) $ 9,906 $ 0.32 $ 4,496 $ 0.15 Diluted weighted average common shares (4) 30,532 29,614 (1) The tax effect from the above adjustments assumes an estimated effective tax rate of 18.0% for fiscal 2021 and 20.2% for fiscal 2020 based on adjusted net income. (2) For the three months ended December 30, 2020, discrete tax benefits primarily are a result of excess tax benefits recognized on stock compensation. For the three months ended December 31, 2019, discrete tax benefits were primarily a result of excess tax benefits on stock compensation and an adjustment of our state deferred tax rate due to the Opengear acquisition. (3) Adjusted net income per diluted share may not add due to the use of rounded numbers. (4) Diluted weighted average common shares for the three months ended December 31, 2020 include 1,157,727 common stock options and restricted stock units due to the adjusted net income position. LIQUIDITY AND CAPITAL RESOURCES Historically we have financed our operations and capital expenditures principally with funds generated from operations. Our liquidity requirements arise from our working capital needs, and to a lesser extent, our need to fund capital expenditures to support our current operations and facilitate growth and expansion. In the first quarter of fiscal 2020, we incurred debt of $110 million associated with our acquisition of Opengear. As of December 31, 2020, $100 million remained available under the Revolving Loan, which included $10 million available for a letter of credit subfacility and $10 million available under a swingline subfacility, the outstanding amounts of which decrease the available commitment. During the first quarter of fiscal 2021, we repaid the final $15 million of the Revolving Loan. For additional information regarding the terms of our Credit Facility, including the Revolving Loan and its subfacilities, see Note 7 to our condensed consolidated financial statements. We expect positive cash flows from operations for the foreseeable future. We believe that our current cash and cash equivalents balances, cash generated from operations and our ability to borrow under our credit facility will be sufficient to fund our business operations and capital expenditures for the next twelve months and beyond. As follows, our condensed consolidated statement of cash flows for the three months ended December 31, 2020 and 2019 is summarized: Three months ended December 31, ($ in thousands) 2020 2019 Operating activities $ 8,312 $ (22,067) Investing activities (777) (136,294) Financing activities (12,793) 112,869 Effect of exchange rate changes on cash and cash equivalents 392 1,772 Net decrease in cash and cash equivalents $ (4,866) $ (43,720) 27 Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Cash flows from operating activities increased $30.4 million primarily as a result of: • increased changes in operating assets and liabilities (net of acquisitions) of $23.0 million. This primarily was due to a decrease in accounts receivable due to ramped up collections in the current fiscal year in addition to increased accounts receivable in the prior fiscal year. There was also an increase in accrued liabilities, partially offset by a decrease in accounts payable in the current fiscal year; and • a decrease in net income of $0.5 million, partially offset by non-cash adjustments of $7.9 million. These non-cash adjustments include an accrual for additional earn-out provision. Cash flows from investing activities increased $135.5 million primarily as a result of: • an increase of $136.1 million related to the purchase of Opengear in the prior fiscal year; • a partial offset to these decreases was $0.6 million related to additional purchases of property, equipment, and facilities improvements in the prior fiscal year. Cash flows from financing activities decreased $125.6 million primarily as a result of: • a decrease of $110.0 related to proceeds of long-term debt from the Revolving Loan and Term Loan in the prior fiscal year (see Note 7 to the condensed consolidated financial statements); and • a decrease of $15.6 million related to payments on long-term debt. CONTRACTUAL OBLIGATIONS The following table summarizes our contractual obligations at December 31, 2020: Payments due by fiscal period ($ in thousands) Total Less than 1 year 1-3 years 3-5 years Thereafter Operating leases $ 27,066 $ 3,717 $ 6,483 $ 5,762 $ 11,104 Contingent consideration $ 10,000 $ 10,000 $ — $ — $ — Term loan $ 47,500 $ 2,500 $ 7,500 $ 37,500 $ — Interest on long-term debt $ 3,076 $ 639 $ 1,590 $ 847 $ — Total $ 87,642 $ 16,856 $ 15,573 $ 44,109 $ 11,104 The operating lease agreements included above primarily relate to office space. The table above does not include possible payments for uncertain tax positions. Our reserve for uncertain tax positions, including accrued interest and penalties, was $2.6 million as of December 31, 2020. Due to the nature of the underlying liabilities and the extended time often needed to resolve income tax uncertainties, we cannot make reliable estimates of the amount or timing of 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 of licensed products and we cannot make reliable estimates of the amount of cash payments. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS For information on new accounting pronouncements, see Note 1 to our condensed consolidated financial statements. 28 Table of Contents