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, 2022, 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, risks related to ongoing inflationary pressures around the world and the monetary policies of governments globally as well as present concerns about a potential recession and the ability of companies like us to operate a global business in such conditions as well as negative effects on product demand and the financial solvency of customers and suppliers 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, our ability to defend or settle satisfactorily any litigation, 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, 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 set forth in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended September 30, 2022, subsequent filings, as well as 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 ESTIMATES Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue 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 we 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. 18 Table of Contents A description of our critical accounting 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, 2022. 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. Our IoT Solutions segment primarily consists of our Managed Network-as-a-Service (“MNaaS”) business acquired last year via our acquisition of Ventus Wireless, LLC and affiliated entities (“Ventus”) and our SmartSense by Digi® business. Ventus is a leader in the provision of MNaaS solutions that simplify the complexity of enterprise wide area network (“WAN”) connectivity for customers. The Ventus portfolio includes cellular wireless and fixed line WAN solutions for an array of connectivity applications in banking, healthcare, retail, gaming, hospitality and other sectors. 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 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. In fiscal 2023, our key operating objectives include: • continuing to transition to complete solutions with software and service offerings included with our products, as this drives Annualized Recurring Revenue ("ARR"), which provides more predictable and higher margin revenues; and • delivering a higher level of customer service across our businesses. 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 2023 that we feel are most important in these evaluations, with comparisons to the third quarter of fiscal 2022: • Consolidated revenue was $112 million, an increase of 8%. • Gross profit margin was 56.9%, an increase of 140 basis points. Gross profit margin excluding amortization was 57.7%, an increase of 100 basis points. • Net income per diluted share was $0.18, compared to $0.12, an increase of 50%. • Adjusted net income and adjusted net income per share was $18.5 million, or $0.50 per diluted share, compared to $15.9 million, or $0.45 per diluted share, an increase of 11%. • Adjusted EBITDA was $24 million, an increase of 16%. • ARR was $104 million at quarter end, an increase of 13%. 19 Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) CONSOLIDATED RESULTS OF OPERATIONS The following table sets forth selected information derived from our interim condensed consolidated statements of operations: Three months ended June 30, % incr. Nine months ended June 30, % incr. ($ in thousands) 2023 2022 (decr.) 2023 2022 (decr.) Revenue $ 112,236 100.0 % $ 103,517 100.0 % 8.4 % $ 332,686 100.0 % $ 282,487 100.0 % 17.8 % Cost of sales 48,417 43.1 46,091 44.5 5.0 144,474 43.4 125,196 44.3 15.4 Gross profit 63,819 56.9 57,426 55.5 11.1 188,212 56.6 157,291 55.7 19.7 Operating expenses 51,343 45.7 47,452 45.8 8.2 151,598 45.6 135,954 48.1 11.5 Operating income 12,476 11.1 9,974 9.6 25.1 36,614 11.0 21,337 7.6 71.6 Other expense, net (6,588) (5.9) (5,392) (5.2) 22.2 (18,888) (5.7) (14,716) (5.2) 28.4 Income before income taxes 5,888 5.2 4,582 4.4 28.5 17,726 5.3 6,621 2.3 167.7 Income tax (benefit) expense (839) (0.7) 456 0.4 NM (679) (0.2) (1,539) (0.5) NM Net income $ 6,727 6.0 % $ 4,126 4.0 % 63.0 % $ 18,405 5.5 % $ 8,160 2.9 % 125.6 % NM means not meaningful REVENUE BY SEGMENT Three months ended June 30, % incr. Nine months ended June 30, % incr. ($ in thousands) 2023 2022 (decr.) 2023 2022 (decr.) Revenue IoT Products & Services $ 87,358 77.8 % $ 79,758 77.0 % 9.5 % $ 257,593 77.4 % $ 216,872 76.8 % 18.8 % IoT Solutions 24,878 22.2 23,759 23.0 4.7 75,093 22.6 65,615 23.2 14.4 Total revenue $ 112,236 100.0 % $ 103,517 100.0 % 8.4 % $ 332,686 100.0 % $ 282,487 100.0 % 17.8 % IoT Products & Services IoT Products & Services revenue increased 9.5% for the three months ended June 30, 2023, as compared to the same period in the prior fiscal year. This increase is attributable to growth in our OEM & IM product lines. IoT Products & Services revenue increased 18.8% for the nine months ended June 30, 2023, as compared to the same period in the prior fiscal year. This increase is attributable to growth in each of our product lines. IoT Solutions IoT Solutions revenue increased 4.7% for the three months ended June 30, 2023, as compared to the same period in the prior fiscal year. This increase is primarily attributable to growth in SmartSense. IoT Solutions revenue increased 14.4% for the nine months ended June 30, 2023, as compared to the same period in the prior fiscal year. This increase is attributable to growth in each of our SmartSense and Ventus offerings, as well as fiscal 2022 results excluding October 2021 Ventus revenues that preceded the acquisition. ARR ARR was $104 million as of June 30, 2023, compared to $92 million as of June 30, 2022. IoT Products & Services ARR was $22 million as of June 30, 2023, compared to $15 million as of June 30, 2022. IoT Solutions ARR was over $82 million as of June 30, 2023, compared to $77 million as of June 30, 2022. 20 Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) COST OF GOODS SOLD AND GROSS PROFIT BY SEGMENT Below are our segments' cost of goods sold and gross profit as a percentage of their respective total revenue: Three months ended June 30, Basis point Nine months ended June 30, Basis point ($ in thousands) 2023 2022 inc. (decr.) 2023 2022 inc. (decr.) Cost of Goods Sold IoT Products & Services $ 40,129 45.9 % $ 37,115 46.5 % (60) $ 117,226 45.5 % $ 100,093 46.2 % (70) IoT Solutions 8,288 33.3 % 8,976 37.8 % (450) 27,248 36.3 % 25,103 38.3 % (200) Total cost of goods sold $ 48,417 43.1 % $ 46,091 44.5 % (140) $ 144,474 43.4 % $ 125,196 44.3 % (90) Three months ended June 30, Basis point Nine months ended June 30, Basis point ($ in thousands) 2023 2022 inc. (decr.) 2023 2022 inc. (decr.) Gross Profit IoT Products & Services $ 47,229 54.1 % $ 42,643 53.5 % 60 $ 140,367 54.5 % $ 116,779 53.8 % 70 IoT Solutions 16,590 66.7 % 14,783 62.2 % 450 47,845 63.7 % 40,512 61.7 % 200 Total gross profit $ 63,819 56.9 % $ 57,426 55.5 % 140 $ 188,212 56.6 % $ 157,291 55.7 % 90 IoT Product & Services IoT Products & Services gross profit margin increased 60 basis points for the three months ended June 30, 2023 as compared to the same period in the prior fiscal year. IoT Products & Services gross profit margin increased 70 basis points for the nine months ended June 30, 2023 as compared to the same period in the prior fiscal year. These increases were primarily a result of changes in product and customer mix. IoT Solutions The IoT Solutions gross profit margin increased 450 basis points for the three months ended June 30, 2023 as compared to the same period in the prior fiscal year. This increase primarily was a result of changes in product and customer mix. The IoT Solutions gross profit margin increased 200 basis points for the nine months ended June 30, 2023 as compared to the same period in the prior fiscal year. This increase primarily was a result of changes in product and customer mix partially offset by increased expenses for inventory reserves. OPERATING EXPENSES Below are our operating expenses and operating expenses as a percentage of total revenue: Three months ended June 30, $ % Nine months ended June 30, $ % ($ in thousands) 2023 2022 incr. (decr.) incr. (decr.) 2023 2022 incr. (decr.) incr. (decr.) Operating Expenses Sales and marketing $ 20,974 18.7 % $ 18,230 17.6 % $ 2,744 15.1 $ 60,421 18.2 % $ 51,325 18.2 % $ 9,096 17.7 % Research and development 14,945 13.3 13,968 13.5 977 7.0 44,194 13.3 41,199 14.6 2,995 7.3 General and administrative 15,424 13.7 15,254 14.7 170 1.1 46,983 14.1 43,430 15.4 3,553 8.2 Total operating expenses $ 51,343 45.7 % $ 47,452 45.8 % $ 3,891 8.2 $ 151,598 45.6 % $ 135,954 48.1 % $ 15,644 11.5 % The $3.9 million increase in operating expenses in the third quarter of fiscal 2023 from the third quarter of fiscal 2022 was the result of incremental operating expenses, primarily from investments in Opengear and SmartSense, an increase in stock-based compensation and costs associated with ongoing litigation. The $15.6 million increase in operating expenses in the nine months ended June 30, 2023 from the nine months ended June 30, 2022 was the result of incremental operating expenses, primarily from the acquisition of Ventus, investments in Opengear and SmartSense and an increase in stock-based compensation. 21 Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) OPERATING INCOME Three months ended June 30, Nine months ended June 30, ($ in thousands) 2023 2022 incr. (decr.) 2023 2022 incr. (decr.) Operating Income (Loss) IoT Products & Services $ 12,096 $ 10,881 $ 1,215 11.2 $ 37,744 $ 24,046 $ 13,698 57.0 IoT Solutions 380 (907) $ 1,287 NM (1,130) (2,709) $ 1,579 NM Total gross profit $ 12,476 $ 9,974 $ 2,502 25.1 $ 36,614 $ 21,337 $ 15,277 71.6 NM means not meaningful Drivers for the changes in operating income for the periods presented are described above in the revenue, gross profit and operating expenses details. OTHER EXPENSE, NET Below are our other expenses, net and other expenses, net as a percentage of total revenue: Three months ended June 30, $ % Nine months ended June 30, $ % ($ in thousands) 2023 2022 incr. (decr.) incr. (decr.) 2023 2022 incr. (decr.) incr. (decr.) Other expense, net Interest expense, net (6,603) (5.9) % (5,296) (5.1) % (1,307) 24.7 (18,967) (5.7) % (14,657) (5.2) % (4,310) 29.4 Other expense, net 15 — % (96) (0.1) % 111 NM 79 — % (59) — % 138 NM Total other expense, net $ (6,588) (5.9) % $ (5,392) (5.2) % $ (1,196) 22.2 $ (18,888) (5.7) % $ (14,716) (5.2) % $ (4,172) 28.4 NM means not meaningful Other expense, net, increased $1.2 million for the three months ended June 30, 2023, as compared to the same period in the prior fiscal year. Other expense, net, increased $4.2 million for the nine months ended June 30, 2023, as compared to the same period in the prior fiscal year. The increases were primarily a result of an increase in our interest expense due to an increase in our effective interest rate (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. KEY BUSINESS METRIC ARR represents the annualized monthly value of all billable subscription contracts, measured at the end of any fiscal period. ARR should be viewed independently of revenue and deferred revenue and is not intended to replace or forecast either of these items. Digi management uses ARR to manage and assess the growth of our subscription revenue business. We believe ARR is an indicator of the scale of our subscription business. 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 actually were 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. 22 Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 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, 2023 2022 2023 2022 % of total revenue % of total revenue % of total revenue % of total revenue Total revenue $ 112,236 100.0 % $ 103,517 100.0 % $ 332,686 100.0 % $ 282,487 100.0 % Net income $ 6,727 $ 4,126 $ 18,405 $ 8,160 Interest expense, net 6,603 5,296 18,967 14,657 Income tax expense (benefit) (839) 456 (679) (1,539) Depreciation and amortization 8,005 8,747 23,963 25,393 Stock-based compensation 3,519 2,143 9,852 6,402 Restructuring charge 95 105 141 214 Acquisition expense 222 175 910 4,256 Adjusted EBITDA $ 24,332 21.7 % $ 21,048 20.3 % $ 71,559 21.5 % $ 57,543 20.4 % 23 Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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, 2023 2022 2023 2022 Net income and net income per diluted share $ 6,727 $ 0.18 $ 4,126 $ 0.12 $ 18,405 $ 0.50 $ 8,160 $ 0.23 Amortization 6,252 0.17 7,046 0.20 18,966 0.51 20,400 0.57 Stock-based compensation 3,519 0.10 2,143 0.06 9,852 0.27 6,402 0.18 Other non-operating income (15) — 96 — (79) — 59 — Acquisition expense 222 0.01 175 — 910 0.02 4,256 0.12 Restructuring charge 95 — 105 — 141 — 214 0.01 Interest expense, net 6,603 0.18 5,296 0.15 18,967 0.51 14,657 0.40 Tax effect from the above adjustments (1) (6,025) (0.17) (2,497) (0.07) (15,520) (0.41) (8,263) (0.23) Discrete tax expenses (benefits) (2) 1,125 0.03 (556) (0.02) 2,874 0.08 (2,746) (0.07) Adjusted net income and adjusted net income per diluted share (3) $ 18,503 $ 0.50 $ 15,934 $ 0.45 $ 54,516 $ 1.48 $ 43,139 $ 1.21 Diluted weighted average common shares 36,817 35,740 36,838 35,740 (1) The tax effect from the above adjustments assumes an estimated effective tax rate of 18.0% for fiscal 2023 and fiscal 2022 based on adjusted net income. (2) For the three and nine months ended June 30, 2023 and 2022, discrete tax expenses (benefits) primarily are a result of changes in excess tax benefits recognized on stock compensation. (3) Adjusted net income per diluted share may not add due to the use of rounded numbers. LIQUIDITY AND CAPITAL RESOURCES Historically we have financed our operations and capital expenditures principally with funds generated from operations. In fiscal 2022 we issued debt to fund our acquisition of Ventus. 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 December 2, 2021, we entered into a third amended and restated credit agreement. Digi refinanced the Term Loan Facility and Revolving Loan Facility under its existing credit agreement entered into on November 1, 2021, but did not receive any additional proceeds from nor modify the amounts of any facilities or subfacilities contained within that credit agreement. The credit agreement consists 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, 2023, $35.0 million remained available under the Revolving Loan, which included $10 million available for a letter of credit subfacility and $10 million available under a swingline subfacility, the outstanding amounts of which decrease the available commitment. For additional information regarding the terms of our Credit Facility, including the Revolving Loan and its subfacilities, see Note 7 to our condensed consolidated financial statements. We expect positive cash flows from operations for the foreseeable future. We believe that our current cash and cash equivalents balances, cash generated from operations and our ability to borrow under our credit facility will be sufficient to fund our business operations and capital expenditures for the next 12 months and beyond. 24 Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Our condensed consolidated statements of cash flows for the nine months ended June 30, 2023 and 2022 is summarized as follows: Nine months ended June 30, 2023 2022 ($ in thousands) Restated (1) Operating activities $ 27,804 $ 31,216 Investing activities (3,842) (351,771) Financing activities (28,920) 208,551 Effect of exchange rate changes on cash and cash equivalents (362) 1,087 Net increase (decrease) in cash and cash equivalents $ (5,320) $ (110,917) (1) We have restated the condensed consolidated statement of cash flows for the six months ended March 31, 2022. For additional information, see Note 2 to our condensed consolidated financial statements. Cash flows from operating activities decreased $3.4 million primarily as a result of: • an increase in operating assets and liabilities (net of acquisitions) in the nine months ended June 30, 2023 of $17.3 million compared to an increase of $15.4 million in the nine months ended June 30, 2022, and • decreases in the provisions for deferred income tax, provisions for bad debt and amortization expense. These changes were partially offset by: • increases in net income and stock-based compensation expense. Cash flows used in investing activities decreased $347.9 million primarily as a result of: • no amounts used for the acquisition of businesses in the nine months ended June 30, 2023 compared to $347.6 million used for acquisitions in the nine months ended June 30, 2022, primarily related to our November 2021 acquisition of Ventus, and • a $0.3 million decrease in purchases of property, equipment, improvements and certain other intangible assets. Cash flows from financing activities decreased $237.5 million primarily as a result of: • no proceeds from debt in the nine months ended June 30, 2023 compared to $350.0 million in proceeds from the Term Loan issued in the nine months ended June 30, 2022, and • a $3.5 million decrease in proceeds from stock issuances. These changes were partially offset by: • debt payments of $29.4 million in the nine months ended June 30, 2023 compared to $129.4 million the nine months ended June 30, 2022 (see Note 7 to the condensed consolidated financial statements), • a decrease of $13.4 million in debt issuance cost payments, and • a $2.6 million decrease in taxes paid for net share settlements. 25 Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) CONTRACTUAL OBLIGATIONS The following table summarizes our contractual obligations at June 30, 2023: Payments due by fiscal period ($ in thousands) Total Less than 1 year 1-3 years 3-5 years Thereafter Operating leases $ 21,432 $ 4,136 $ 9,183 $ 5,658 $ 2,455 Term Loan 220,625 17,500 35,000 35,000 133,125 Interest on long-term debt 95,144 22,108 37,991 30,615 4,430 Total $ 337,201 $ 43,744 $ 82,174 $ 71,273 $ 140,010 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, 2023. 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.