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, 2021, 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 This discussion contains forward-looking statements that are based on management's current expectations and assumptions. These statements often can be identified by the use of forward-looking terminology such as "assume," "believe," "anticipate," "intend," "estimate," "target," "may," "will," "expect," "plan," "potential," "project," "should," or "continue," or the negative thereof or other variations thereon or similar terminology. 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 supply chain and transportation challenges impacting businesses globally, the ongoing COVID-19 pandemic and efforts to mitigate the same, risks related to ongoing inflationary pressures as well as present concerns about a potential recession and the ability of companies like us to operate a global business in such conditions, risks arising from the present war in Ukraine, 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 integrate and realize the expected benefits of acquisitions such as our recently completed acquisition of Ventus, 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, 2021, 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. 21 Table of Contents 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, 2021. GOODWILL Results of our Fiscal 2022 Annual Impairment Test Our goodwill impairment test as of June 30, 2022 indicated no impairment. SmartSense and Ventus fair values exceeded carrying values by less than 10%. We will continue to monitor potential impacts that could potentially affect our cash flows and market capitalization. Assumptions and estimates to determine fair values under the income and market approaches are complex and often subjective. They can be affected by a variety of factors. These include external factors such as industry and economic trends. They also include internal factors such as changes in our business strategy and our internal forecasts. Changes in circumstances or a potential event could negatively affect the estimated fair values. If our future operating results do not meet current forecasts or if we experience a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of one or more of our reporting units, we may be required to record future impairment charges for goodwill. OVERVIEW We are a leading global provider of business and mission-critical IoT connectivity products, services and solutions. Our business is comprised of two reporting segments: IoT Products & Services and IoT Solutions. Our IoT Products & Services segment offers products and services that help OEMs, enterprise and government customers create and deploy, secure IoT connectivity solutions. From embedded and wireless modules to console servers as well as enterprise and industrial routers, we provide a wide variety of communication sub-assemblies and finished products to meet our customers' IoT communication requirements. In addition, this segment provides our customers with a device management platform and other professional services to enable customers to capture and manage data from devices connected to networks. In the past this segment has benefited from significant one-time project based deployments. During the pandemic we saw a decrease in proposals for such projects. Recently we have seen some resumption of opportunities to make these project based sales, most notably in the areas mass transit and smart cities. While there is no assurance we will be chosen for any such deployments, we view this renewed activity as a positive development for this segment. Demand generally has been strong for many products in this segment during fiscal 2022 and has driven record sales bookings and backlogs that we are constrained to meet at present because of supply chain challenges. 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 charges of $1.0 million for employee termination charges and eliminated 19 employment positions primarily in the U.S. during the first half 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 profit used by our chief operating decision maker ("CODM") changed. As a result, our disclosed measure of segment operating income 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 sections of this Item 2. Our IoT Solutions segment primarily consists of our SmartSense by Digi® and Ventus operating segments. SmartSense offers wireless temperature and other condition-based monitoring services as well as employee task management services. These solutions are focused on the following vertical markets: food service, healthcare (primarily pharmacies and hospitals) and supply chain. We initially formed, expanded and enhanced our SmartSense by Digi business through four acquisitions. Our recent acquisition of Ventus makes us a leader in the provision of MNaaS solutions that simplify the complexity of enterprise wide area network WAN connectivity for our customers and provides us with a significant base of high margin subscription based recurring revenue. Ventus’s portfolio includes cellular wireless and fixed line WAN solutions for an array of connectivity applications in banking, healthcare, retail, gaming, hospitality and other sectors. Given our belief in the potential of this segment, we are making targeted investments in this segment designed to enhance its performance over time. 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. 22 Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) In fiscal 2022, our key operating objectives include: • continued growth of our SmartSense by Digi ® and Ventus businesses that are the base of our IoT Solutions segment; • delivering growth within our IoT Products & Services segment through new product introductions; and • integration of our recently acquired Ventus business. We utilize many financial, operational, and other metrics to evaluate our financial condition and financial performance. Below we highlight the metrics for the third quarter of fiscal 2022 that we feel are most important in these evaluations, with comparisons to the third quarter of fiscal 2021: • Consolidated revenue was $104 million, an increase of 31%. • Consolidated gross profit was $57.4 million, an increase of 35%. • Consolidated operating income was $10.0 million, an increase of 148%. • Gross profit margin was 55.5% versus 53.8%. Gross profit margin excluding amortization was 56.7% compared to 55.2%. • Net income was $4.1 million, an increase of 31%. • Diluted earnings per share was $0.12, compared to $0.09, an increase of 33%. • Adjusted EBITDA was $21 million, an increase of 82%. • Adjusted net income and adjusted net income per share was $15.9 million, or $0.45 per diluted share, compared to $8.7 million, or $0.25 per diluted share, an increase of 80%. Recent Events Impacting Third Quarter Results Acquisition of Ventus On November 1, 2021, we acquired Ventus for approximately $350 million in cash. The acquisition was funded through a combination of cash on hand and debt financing under an amended and restated credit facility committed by BMO Harris Bank N.A. (see Note 7 ). In the first quarter of fiscal 2022, the preliminary purchase price allocation was recorded, including related determinations of fair value and income tax implications. In the third quarter of fiscal 2022, we recorded a purchase price allocation adjustment to adjust for new information. As a result, we have $118 million of goodwill and $211 million of other intangibles on our condensed consolidated balance sheets at June 30, 2022. The results of operations following the acquisition date are now included in our 2022 results within our IoT Solutions segment. CONSOLIDATED RESULTS OF OPERATIONS The following table sets forth selected information derived from our interim condensed consolidated statements of operations: Three months ended June 30, % incr. Nine months ended June 30, % incr. ($ in thousands) 2022 2021 (decr.) 2022 2021 (decr.) Revenue $ 103,517 100.0 % $ 79,079 100.0 % 30.9 % $ 282,487 100.0 % $ 229,526 100.0 % 23.1 % Cost of sales 46,091 44.5 36,523 46.2 26.2 125,196 44.3 105,495 46.0 18.7 Gross profit 57,426 55.5 42,556 53.8 34.9 157,291 55.7 124,031 54.0 26.8 Operating expenses 47,452 45.8 38,538 48.7 23.1 135,954 48.1 116,789 50.9 16.4 Operating income 9,974 9.6 4,018 5.1 148.2 21,337 7.6 7,242 3.2 194.6 Other expense, net (5,392) (5.2) (482) (0.6) NM (14,716) (5.2) (1,244) (0.5) NM Income before income taxes 4,582 4.4 3,536 4.5 29.6 6,621 2.3 5,998 2.6 10.4 Income tax expense (benefit) 456 0.4 379 0.5 20.3 (1,539) (0.5) 220 0.1 NM Net income $ 4,126 4.0 % $ 3,157 4.0 % 30.7 $ 8,160 2.9 % $ 5,778 2.5 % 41.2 NM means not meaningful 23 Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) REVENUE BY SEGMENT Three months ended June 30, % incr. Nine months ended June 30, % incr. ($ in thousands) 2022 2021 (decr.) 2022 2021 (decr.) Revenue IoT Products & Services $ 79,758 77.0 % $ 66,812 84.5 % 19.4 % $ 216,872 76.8 % $ 194,224 84.6 % 11.7 IoT Solutions 23,759 23.0 12,267 15.5 93.7 65,615 23.2 35,302 15.4 85.9 Total revenue $ 103,517 100.0 % $ 79,079 100.0 % 30.9 % $ 282,487 100.0 % $ 229,526 100.0 % 23.1 IoT Products & Services IoT Products & Services revenue increased 19.4% and 11.7% for the three and nine months ended June 30, 2022, respectively, as compared to the same periods in the prior fiscal year. This primarily was a result of: • increased sales of console server and cellular products in both periods driven by demand for data center and edge based deployments and increased OEM sales in the third quarter. This increase was partially offset by: • decreased sales of infrastructure management products, driven by supply chain challenges. IoT Solutions IoT Solutions revenue increased 93.7% and 85.9% for the three and nine months ended June 30, 2022, respectively, as compared to the same periods in the prior fiscal year. This primarily was a result of: • increased recurring revenue from our November 2021 acquisition of Ventus. These increases were partially offset by: • decreased one-time customer implementation sales, due to significant activity from a few large customers in 2021 that did not recur in 2022. COST OF GOODS SOLD AND GROSS PROFIT BY SEGMENT Three months ended June 30, Basis point Nine months ended June 30, Basis point ($ in thousands) 2022 2021 inc. (decr.) 2022 2021 inc. (decr.) Cost of Goods Sold IoT Products & Services $ 37,115 46.5 % $ 30,006 44.9 % 160 $ 100,093 46.2 % $ 87,282 44.9 % 130 IoT Solutions 8,976 37.8 % 6,517 53.1 % (1,530) 25,103 38.3 % 18,213 51.6 % (1,330) Total cost of goods sold $ 46,091 44.5 % $ 36,523 46.2 % (170) $ 125,196 44.3 % $ 105,495 46.0 % (170) Three months ended June 30, Basis point Nine months ended June 30, Basis point ($ in thousands) 2022 2021 inc. (decr.) 2022 2021 inc. (decr.) Gross Profit IoT Products & Services $ 42,643 53.5 % $ 36,806 55.1 % (160) $ 116,779 53.8 % $ 106,942 55.1 % (130) IoT Solutions 14,783 62.2 % 5,750 46.9 % 1,530 40,512 61.7 % 17,089 48.4 % 1,330 Total gross profit $ 57,426 55.5 % $ 42,556 53.8 % 170 $ 157,291 55.7 % $ 124,031 54.0 % 170 IoT Product & Services IoT Products & Services gross profit margin decreased 160 basis points for the three months ended June 30, 2022 as compared to the same period in the prior fiscal year. This decrease primarily was a result of: • increased production and distribution costs due to the continuing supply chain challenges, as well as changes in product and customer mix. 24 Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) IoT Products & Services gross profit margin decreased 130 basis points for the nine months ended June 30, 2022 as compared to the same period in the prior fiscal year. This decrease primarily was a result of: • increased production and distribution costs due to the continuing supply chain challenges, as well as changes in product and customer mix. IoT Solutions The IoT Solutions gross profit margin increased 1,530 basis points for the three months ended June 30, 2022 as compared to the same periods in the prior fiscal year. This increase primarily was a result of: • increased recurring subscription revenue, from the acquisition of Ventus, which typically has a high gross profit margin. The IoT Solutions gross profit margin increased 1,330 basis points for the nine months ended June 30, 2022 as compared to the same periods in the prior fiscal year. This increase primarily was a result of: • increased recurring subscription revenue, from the acquisition of Ventus, which typically has a high gross profit margin. OPERATING EXPENSES Below is our operating expenses and operating expenses as a percentage of total revenue: Three months ended June 30, $ % Nine months ended June 30, $ % ($ in thousands) 2022 2021 incr. (decr.) incr. (decr.) 2022 2021 incr. (decr.) incr. (decr.) Operating Expenses Sales and marketing $ 18,230 17.6 % $ 15,910 20.1 % $ 2,320 14.6 $ 51,325 18.2 % $ 46,271 20.2 % $ 5,054 10.9 % Research and development 13,968 13.5 12,374 15.6 1,594 12.9 41,199 14.6 34,822 15.2 6,377 18.3 General and administrative 15,149 14.6 10,153 12.8 4,996 49.2 43,216 15.3 34,701 15.1 8,515 24.5 Restructuring charge 105 0.1 101 0.1 4 4.0 214 0.1 995 0.4 (781) (78.5) Total operating expenses $ 47,452 45.8 % $ 38,538 48.7 % $ 8,914 23.1 $ 135,954 48.1 % $ 116,789 50.9 % $ 19,165 16.4 % The $8.9 million increase in operating expenses in the third quarter of fiscal 2022 from the third quarter of fiscal 2021 primarily was the result of: • incremental operating expenses, primarily from the acquisition of Ventus. The $19.2 million increase in operating expenses in the first three quarters of fiscal 2022 from the first three quarters of fiscal 2021 primarily was the result of: • incremental operating expenses from our acquisitions of Haxiot, Ctek and Ventus. This increase was partially offset by: • $5.8 million in contingent consideration expenses in prior year and a decrease in restructuring charges. OPERATING INCOME Operating income was $10.0 million for the three months ended June 30, 2022, compared to $4.0 million for the three months ended June 30, 2021. Operating income was $21.3 million for the nine months ended June 30, 2022, compared to $7.2 million for the nine months ended June 30, 2021. IoT Product & Services provided operating income of $10.9 million for the three months ended June 30, 2022 compared to $6.1 million for the three months ended June 30, 2021, an increase of $4.8 million, or 78.3%. IoT Product & Services provided operating income of $24.0 million for the nine months ended June 30, 2022 compared to $12.0 million for the nine months ended June 30, 2021, an increase of $12.1 million, or 101.2%. Drivers for the changes in operating income for the both the quarter and year-to-date periods are described above in the revenue, gross profit and operating expenses details. 25 Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) IoT Solutions had an operating loss of $0.9 million for the three months ended June 30, 2022 compared to an operating loss of $2.1 million for the three months ended June 30, 2021, a decrease of $1.2 million, or 56.5%. IoT Solutions incurred an operating loss of $2.7 million for the nine months ended June 30, 2022 compared to $4.7 million for the nine months ended June 30, 2021, a decrease of $2.0 million, or 42.5%. Drivers for the changes in operating loss for the both the quarter and year-to-date periods are described above in the revenue, gross profit and operating expenses details. OTHER EXPENSE, NET Three months ended June 30, $ % Nine months ended June 30, $ % ($ in thousands) 2022 2021 incr. (decr.) incr. (decr.) 2022 2021 incr. (decr.) incr. (decr.) Other expense, net Interest income $ 1 — % $ 3 — % $ (2) NM $ 8 — % $ 4 — % $ 4 NM Interest expense (5,297) (5.1) % (371) (0.5) % (4,926) NM (14,665) (5.2) % (1,019) (0.4) % (13,646) NM Other expense, net (96) (0.1) % (114) (0.1) % 18 NM (59) — % (229) (0.1) % 170 NM Total other expense, net $ (5,392) (5.2) % $ (482) (0.6) % $ (4,910) NM $ (14,716) (5.2) % $ (1,244) (0.5) % $ (13,472) NM NM means not meaningful Other expense, net, increased $4.9 million and $13.5 million for the three and nine months ended June 30, 2022, respectively, as compared to the same period in the prior fiscal year. The increase was primarily a result of an increase to our interest expense as we refinanced our revolving loan with a new credit facility in November 2021 and wrote off a portion of the deferred financing fees associated with our prior credit facility to fund the acquisition of Ventus. (see Note 7 to the condensed consolidated financial statements). 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. Non-GAAP measures are not substitutes for GAAP measures 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 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, adjustments to estimates of contingent consideration, acquisition-related expenses and interest expense related to acquisition 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 our core operating results and financial performance because it excludes items that are significant non-cash or non-recurring expenses reflected in the 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 26 Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 Income to Adjusted EBITDA (In thousands) Three months ended June 30, Nine months ended June 30, 2022 2021 2022 2021 % of total revenue % of total revenue % of total revenue % of total revenue Total revenue $ 103,517 100.0 % $ 79,079 100.0 % $ 282,487 100.0 % $ 229,526 100.0 % Net income $ 4,126 $ 3,157 $ 8,160 $ 5,778 Interest expense, net 5,296 368 14,657 1,015 Income tax expense (benefit) 456 379 (1,539) 220 Depreciation and amortization 8,747 5,148 25,393 15,200 Stock-based compensation 2,143 2,110 6,402 6,331 Changes in fair value of contingent consideration — — — 5,772 Restructuring charge 105 101 214 995 Acquisition expense 175 313 4,256 937 Adjusted EBITDA $ 21,048 20.3 % $ 11,576 14.6 % $ 57,543 20.4 % $ 36,248 15.8 % Reconciliation of Net Income and Net Income per Diluted Share to Adjusted Net Income and Adjusted Net Income per Diluted Share (In thousands, except per share amounts) Three months ended June 30, Nine months ended June 30, 2022 2021 2022 2021 Net income and net income per diluted share $ 4,126 $ 0.12 $ 3,157 $ 0.09 $ 8,160 $ 0.23 $ 5,778 $ 0.18 Amortization 7,046 0.20 4,101 0.12 20,400 0.57 11,989 0.37 Stock-based compensation 2,143 0.06 2,110 0.06 6,402 0.18 6,331 0.19 Other non-operating income 96 — 114 — 59 — 229 0.01 Acquisition expense 175 — 313 0.01 4,256 0.12 937 0.03 Changes in fair value of contingent consideration — — — — — — 5,772 0.18 Restructuring charge 105 — 101 — 214 0.01 995 0.03 Interest expense, net 5,296 0.15 378 0.01 14,657 0.40 1,028 0.03 Tax effect from the above adjustments (1) (2,497) (0.07) (1,026) (0.03) (8,263) (0.23) (4,494) (0.14) Discrete tax benefits (2) (556) (0.02) (512) (0.01) (2,746) (0.07) (764) (0.02) Adjusted net income and adjusted net income per diluted share (3) $ 15,934 $ 0.45 $ 8,736 $ 0.25 $ 43,139 $ 1.21 $ 27,801 $ 0.85 Diluted weighted average common shares 35,740 35,148 35,740 32,706 (1) The tax effect from the above adjustments assumes an estimated effective tax rate of 18.0% for fiscal 2022 and fiscal 2021 based on adjusted net income. (2) For the three and nine months ended June 30, 2022 and June 30, 2021, discrete tax benefits primarily are a result of excess tax benefits recognized on stock compensation. (3) Adjusted net income per diluted share may not add due to the use of rounded numbers. 27 Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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. On November 1, 2021, we entered into a second amended and restated credit agreement consisting of a $350 million term loan B secured loan and a $35 million revolving credit facility. The $35 million revolving credit facility, which presently has no outstanding balance, includes a $10 million letter of credit subfacility and $10 million swingline subfacility. During the first quarter of fiscal 2022, we repaid all outstanding balances under the credit facility entered into on March 21, 2021. As of June 30, 2022, $35.0 million remained available under the Revolving Loan, which included $10 million available for a letter of credit subfacility and $10 million available under a swingline subfacility, the outstanding amounts of which decrease the available commitment. For additional information regarding the terms of our Credit Facility, including the Revolving Loan and its subfacilities, see Note 7 to our condensed consolidated financial statements. We expect positive cash flows from operations for the foreseeable future. Our third fiscal quarter operating cash flows were negatively impacted by changes in operating assets and liabilities (net of acquisitions) that we do not anticipate in future periods. We believe that our current cash and cash equivalents balances, cash generated from operations and our ability to borrow under our credit facility will be sufficient to fund our business operations and capital expenditures for the next twelve months and beyond. As follows, our condensed consolidated statements of cash flows for the nine months ended June 30, 2022 and 2021 is summarized: Nine months ended June 30, ($ in thousands) 2022 2021 Operating activities $ 15,454 $ 42,084 Investing activities (351,771) (7,957) Financing activities 224,313 60,579 Effect of exchange rate changes on cash and cash equivalents 1,087 (1,893) Net increase (decrease) in cash and cash equivalents $ (110,917) $ 92,813 Cash flows from operating activities decreased $26.6 million primarily as a result of: • an increase in operating assets and liabilities (net of acquisitions) during the period of $34.6 million compared to a decrease of $3.1 million in the nine months ended June 30, 2021, and • a reduction of $5.8 million in contingent consideration fair value changes from the nine months ended June 30,2021. These increases were partially offset by: • increases in depreciation and amortization expenses, the provision for inventory obsolescence and net income. Cash flows used in investing activities increased $343.8 million almost entirely as a result of: • an increase of $341.2 million used for acquisitions, primarily related to our November 2021 acquisition of Ventus (see Note 2 to the condensed consolidated financial statements). Cash flows from financing activities increased $163.7 million primarily as a result of: • an increase of $350.0 million in proceeds from the Term Loan issued in November 2021. This increase was partially offset by: • $73.8 million in proceeds from stock issuance in Q2 2021, • payments of $45.8 million upon the closing of the Term Loan issued in November 2021 to retire the previous credit facility, and 28 Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) • early payments of $81.3 million on the new Term Loan issued in November 2021 compared to $15.6 million in debt payments in fiscal 2021 on the previous credit facility (see Note 7 to the condensed consolidated financial statements). CONTRACTUAL OBLIGATIONS The following table summarizes our contractual obligations at June 30, 2022: Payments due by fiscal period ($ in thousands) Total Less than 1 year 1-3 years 3-5 years Thereafter Operating leases $ 22,220 $ 3,802 $ 7,646 $ 4,153 $ 6,619 Contingent consideration 6,200 6,100 100 — — Term Loan 268,748 17,500 35,000 35,000 181,248 Interest on long-term debt 93,503 18,012 32,640 27,293 15,558 Total $ 390,671 $ 45,414 $ 75,386 $ 66,446 $ 203,425 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 $2.8 million as of June 30, 2022. 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. 29 Table of Contents