TELOS CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the Company’s actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth in the risk factors section included in the Company’s Form 10-K for the year ended December 31, 2021, as filed with the SEC. General and Business Overview We offer technologically advanced, software-based security solutions that empower and protect the world’s most security-conscious organizations against rapidly evolving, sophisticated and pervasive threats. Our portfolio of security products, services and expertise empower our customers with capabilities to reach new markets, serve their stakeholders more effectively, and successfully defend the nation or their enterprise. We protect our customers’ people, information, and digital assets so they can pursue their corporate goals and conduct their global missions with confidence in their security and privacy. Our mission is to protect our customers’ people, systems, and vital information assets with offerings for cybersecurity, cloud security, and enterprise security. In the current global environment, our mission is more critical than ever. The emergence of each new information and communications technology introduces new vulnerabilities, as security is still too often overlooked in solution development. Networks and applications meant to enhance productivity and profitability often jeopardize an organization due to poor planning, misconfiguration, or an unknown gap in security. Ransomware, insider threats, cybercrime, and advanced persistent threats continue to menace public and private enterprises across all industries. Cybersecurity, cloud security, and enterprise security of the modern organization share much in common, yet also call for a diverse range of skills, capabilities, and experience in order to meet the requirements of security-conscious customers. Decades of experience in developing, orchestrating, and delivering solutions across these three domains give us the vision and the confidence to provide solutions that empower and protect the enterprise at an integrated, holistic level. Our experience in addressing challenges in one area of an enterprise helps us meet requirements in others. We understand that a range of complementary capabilities may be needed to solve a single challenge, and we also recognize when a single solution might address multiple challenges. Our security solutions span across the following domains: cybersecurity, cloud security and enterprise security. We refer to our cyber and cloud applications as Security Solutions, which includes Information Assurance / Xacta®, Secure Communications, and Telos ID. We refer to our offerings for enterprise security as Secure Networks. Security Solutions • Information Assurance / Xacta : a premier platform for enterprise cyber risk management and security compliance automation, delivering security awareness for systems in the cloud, on-premises, and in hybrid and multi-cloud environments. Xacta delivers automated cyber risk and compliance management solutions to large commercial and government enterprises. Across the U.S. federal government, Xacta is the de facto commercial cyber risk and compliance management solution. • Secure Communications: ◦ Telos Ghost: a virtual obfuscation network-as-a-service with encryption and managed attribution capabilities to ensure the safety and privacy of people, information, and resources on the network. Telos Ghost seeks to eliminate cyberattack surfaces by obfuscating and encrypting data, masking user identity and location, and hiding network resources. It provides the additional layers of security and privacy needed for intelligence gathering, cyber threat protection, securing critical infrastructure, and protecting communications and applications when operations, property, and even lives can be jeopardized by a single error in security. ◦ Telos Automated Message Handling System (“AMHS”): web-based organizational message distribution and management for mission-critical communications; the recognized gold standard for organizational messaging in the U.S. government. Telos AMHS is used by military field operatives for critical communications on the battlefield and is the only web-based solution for assured messaging and directory services using the Defense Information System Agency's Organizational Messaging Service and its specialized communications protocols. 25 Table of Contents • Telos ID: offering identity trust and digital services through IDTrust360 ® – an enterprise-class digital identity risk platform for extending flexible hybrid cloud identity services enabled for mobile and enterprise environments and custom digital identity services that mitigate threats through the integration of advanced technologies that fuse biometrics, credentials, and other identity-centric data used to continuously monitor trust. In April 2021, we announced the acquisition of the assets of DFT, whose ONYX ® touchless mobile fingerprint software is being integrated with the IDTrust 360 platform. We maintain government certifications and designations that distinguish Telos ID, including TSA PreCheck ® enrollment provider, Designated Aviation Channeling provider, FBI-approved Channeler, and Financial Industry Regulatory Authority Electronic Fingerprint Submission provider. Secure Networks • Secure Mobility: solutions for business and government that enable remote work and minimize operational and security concerns across and beyond the enterprise. Our secure mobility team brings credentials to every engagement, supplying deep expertise and experience as well as highly desirable clearances and industry-recognized certifications for network engineering, mobility, and security. • Network Management and Defense: services for operating, administrating, and defending complex enterprise networks and defensive cyber operations. Our diverse portfolio of capabilities addresses common and uncommon requirements in many industries and disciplines, ranging from the military and government agencies to Fortune 500 companies. Business Environment Our business performance continues to be heavily affected by the overall level of U.S. government spending and the alignment of our solutions with the priorities of the U.S. government. U.S. government spending and contracts continue to be affected by the federal budget and appropriations process and related legislation. Congress reached an agreement in March 2022 on fiscal year ("FY") 2022 appropriations legislation, which allows our federal customers to finally operate under more normal conditions and with updated funding levels through the remainder of FY 2022. Of note, the final FY 2022 appropriations bill provided $728.5 billion for the DoD and related activities. This amount is $32.5 billion more than the FY 2021 enacted level, and is an increase above the level proposed last spring by President Biden for FY 2022. This delay in enacting final FY 2022 appropriations legislation postponed submission to Congress of the President’s FY 2023 budget request, and could ultimately delay the congressional budget and appropriations process for the next fiscal year. These delays could, in turn, impact future planning by Telos and its government customers. The President’s FY 2023 budget request, which was released on March 25, 2022, calls for approximately 4% more in defense spending than was ultimately provided for FY 2022. However, this FY 2023 budget was developed prior to Russia’s invasion of Ukraine and did not include expenditures related to that ongoing event. The proposed FY 2023 budget also assumes an inflation rate for DoD of 2.2%, which Pentagon officials have subsequently admitted will need to be adjusted higher. As such, there will be significant pressure in Congress to boost defense spending further to account for these factors and other needs. The proposed FY 2023 budget also calls for an increase in federal civilian agency (non-defense) cybersecurity funding of nearly 10.7%. The Biden Administration says it is seeking to increase investments across the various civilian federal agencies to help align them to the cybersecurity practices and priorities outlined in the President’s Executive Order 14028, “Improving the Nation’s Cybersecurity.” The proposed budget says this specifically includes providing funding to facilitate the ongoing transition to a “zero trust” approach to cybersecurity, per the direction of President Biden's May 12, 2021 Executive Order on "Improving the Nation's Cybersecurity." Also in accordance with that order, various federal departments and agencies have been taking steps to enhance public sector and critical infrastructure cybersecurity and to accelerate adoption of zero trust architecture throughout government, and the proposed budget would further support those efforts. Cybersecurity Landscape Over the past few years, continued and increasingly damaging ransomware and other cyberattacks against federal, state and local governments, the K-12 and higher education sectors, and private sector enterprises have resulted in intensified efforts to better defend against such attacks. The growing demand for these solutions continues to provide Telos with the privilege of offering our expertise to protect these vitally important organizations. 26 Table of Contents Ransomware remains arguably the most severe cyber threat to enterprises in the commercial and state, local government and education sectors. Our Xacta offering empowers these organizations and institutions to maintain a strong cyber risk posture to minimize the risk of ransomware gaining a foothold in their IT environment. Should ransomware get loose in the enterprise network, Telos Ghost, our virtual obfuscation network offering, can hide vital resources from view to prevent the payload from reaching them. Critical infrastructure and industrial internet of things ("IoT") are among the categories at greatest risk of cyberattacks. Energy, utilities, transportation, and food supply were among the critical infrastructure sectors that experienced high-profile breaches or ransomware attacks over the past year. Telos Ghost can hide critical IoT and industrial control systems from the public internet to keep them from being compromised. Telos Ghost can also cordon off financial data, medical records, intellectual property, and other crown-jewel assets from visibility or accessibility by adversaries. Telos Ghost complements zero trust security, creating an additional layer of defense against intruders by hiding critical resources and users in an anonymous undiscoverable network. As noted above, it protects the crown-jewel assets of critical infrastructure from unauthorized access. Xacta streamlines and automates the critical processes of the leading cybersecurity standards and frameworks, particularly Federal Risk and Authorization Management Program ("FedRAMP"), allowing all process participants to collaborate within the same Xacta application to attain a FedRAMP Authority to Operate. Xacta is also a trailblazer in adopting the Open Security Controls Assessment Language, a multi-format framework adopted by FedRAMP to allow security professionals to automate security assessment, auditing, and continuous monitoring processes. The Cyber Incident Reporting for Critical Infrastructure Act of 2022, which was signed into law on March 15, 2022 will require critical infrastructure owners and operators as well as federal agencies to report to Cybersecurity & Infrastructure Security Agency significant cyber incidents within 72 hours and any ransomware payments made within 24 hours. Telos believes that having to make such disclosures will make organizations even more sensitive to boosting their cybersecurity posture, and that our Xacta solution will help illuminate their risk profile so that they can better understand the issues and address those issues proactively. Government mandates and initiatives to assure stronger security in highly regulated industries, as noted above, also lead to opportunities for Xacta. An update to the research study Telos conducted last year reveals that audit fatigue continues to burden these organizations, with automation solutions being recognized as the most effective remedy for the many repetitive and redundant tasks that security compliance requires. Xacta streamlines, harmonizes, and automates the security controls and processes that comprise the leading cybersecurity standards and frameworks, in on-premises, cloud, hybrid, and multi-cloud environments. The Securities and Exchange Commission has also recently proposed new, mandatory cyber risk management and cybersecurity incident reporting requirements for publicly traded companies. Telos believes this will ensure companies have a sound cyber risk management strategy based on recognized best practices, such as the National Institute of Standards and Technology Cybersecurity Framework, and Telos solutions will support this. Finally, as a whole, the COVID-19 pandemic has resulted in the acceleration of digital transformation and cloud adoption within the government and beyond, which could increase demand for Xacta and Telos Ghost. Xacta is engineered to manage risk and compliance of complex cloud and multi-cloud environments, a key capability for federal agencies and regulated industries that need to gain and maintain compliance with cloud-specific security regulations. Telos Ghost is a cloud-native, as-as-service offering that delivers network obfuscation and managed attribution capabilities on a global scale to support the cloud-enabled enterprise. COVID-19 Pandemic Despite the pandemic’s resultant massive shift to teleworking by federal employees and contractors, the government successfully maintained the continuity of services, as did Telos. As the government has developed and implemented its reopening process, and made adjustments based on changing circumstances, officials have said they will seek to continue to maximize the use of teleworking by federal employees. This stance continued during the most recent, renewed surge of COVID-19 variant transmission. As such, with much of the business of government still being conducted by federal employees working remotely through the use of information technology systems, we believe there will continue to be a need on the part of the government for the types of solutions and services provided by Telos. 27 Table of Contents Reportable Segment During the fourth quarter of 2021, we revised our reportable segments to reflect changes to our organization and leadership structure. As a result, we established and operate in two reportable segments - Security Solutions and Secure Networks. Prior to the fourth quarter of 2021, the Company had one operating and reportable segment. We updated the results for the prior period to conform to the current period presentation. • Security Solutions focuses on cybersecurity, cloud and identity solutions. Cybersecurity solutions help our customers ensure the ongoing security, integrity, and compliance of their on-premises and related cloud-based systems by reducing threats and vulnerabilities to foil cyber adversaries before they can attack. Our security engineers and subject matter experts assess our customers’ cybersecurity environments and design, engineer, and operate systems needed to strengthen their cybersecurity posture. Our cloud solutions leverage the specialized skills and experience needed to help our customers plan, engineer, execute and accelerate secure cloud migrations while assuring ongoing management and security of enterprise cloud technology environments. Our identity solutions deliver digital identity, biometric, and nationwide enrollment services and address Know Your Customer ("KYC") and identity management challenges for enterprises working within regulated and critical infrastructure environments. • Secure Networks provides secure networking architectures and solutions to the DoD, IC and other federal government agencies. Our net-centric solutions enable collaboration and connectivity in order to increase efficiency, reduce costs, and improve mission outcomes. We provide an extensive range of wired and wireless, fixed and deployable, classified and unclassified voice, data, and video secure network solutions and services to support defense and civilian missions. Capabilities include network design, operations and sustainment; system integration and engineering; network security and compliance; deployable comms; innovation and digital transformation; service desk; defensive cyber operations; and program management. Backlog We develop our annual budgeted revenue by estimating for the upcoming year our continuing business from existing customers and active contracts. We consider backlog, both funded and unfunded (as explained below), other expected annual renewals, and expansion planned by our current customers. Total backlog consists of the aggregate contract revenues remaining to be earned by us at a given time over the life of our contracts, whether funded or unfunded. Funded backlog consists of the aggregate contract revenues remaining to be earned at a given time, which, in the case of U.S. government contracts, means that they have been funded by the procuring agency. Unfunded backlog is the difference between total backlog and funded backlog and includes potential revenues that may be earned if customers exercise delivery orders and/or renewal options to continue these contracts. Based on historical experience, we generally assume option year renewals to be exercised. Most of our customers fund contracts on a basis of one year or less and, as a result, funded backlog is generally expected to be earned within one year from any point in time, whereas unfunded backlog is expected to be earned over a longer period. Consolidated Results of Operations (Unaudited) The following table summarizes our result of operations as a percentage of revenue for the periods presented: Three Months Ended March 31, 2022 2021 (unaudited) Revenue 100.0 % 100.0 % Cost of sales 62.4 % 74.0 % Selling, general and administrative expenses 67.0 % 50.2 % Operating loss (29.4) % (24.2) % Other expense — % (1.9) % Interest expense (0.4) % (0.4) % Loss before income taxes (29.8) % (26.5) % Provision for income taxes (0.1) % — % Net loss (29.9) % (26.5) % 28 Table of Contents We generate revenue from the delivery of products and services to our customers. Revenue decreased by 10.0% to $50.2 million for the quarter ended March 31, 2022, from $55.8 million for the same period in 2021. The decrease in revenue was attributable to the impact of certain projects winding down near its completion within Secure Networks. Due to the various solutions offerings within the business groups, sales may vary from period to period according to the solution mix and timing of deliverables for a particular period. Cost of sales consists of materials, labor, subcontracting costs and an allocation of indirect costs. Cost of sales decreased by 24.2% to $31.3 million for the quarter ended March 31, 2022, from $41.3 million for the same period in 2021. The change in the cost of sales is directly driven by the change in mix and nature of the programs. For the quarter ended March 31, 2022, there was a decrease in cost of sales resulting from the winding down of low-margin projects. Gross profit increased by 30.4% to $18.9 million for the quarter ended March 31, 2022, from $14.5 million for the same period in 2021. Gross margin increased to 37.6% for the first quarter of 2022 from 26.0% for the same period in 2021. The change in gross margin is due to a change in the mix of contracts within each of Security Solutions and Secure Networks, as well as the relative weighting of revenue between Security Solutions and Secure Networks. Selling, general, and administrative expense increased by 20.2% to $33.6 million for the first quarter of 2022, from $28.0 million for the same period in 2021, primarily attributable to increases in labor costs by $5.0 million, outside services by $0.7 million, offset by the capitalization of software development costs of $0.5 million. Operating loss was $14.7 million for the quarter ended March 31, 2022, compared with $13.5 million for the same period in 2021, due primarily to the increase in operating cost for the first quarter of 2022 compared with same period in prior year. Other expense of $1.1 million for the first quarter of 2021 was attributable to an accrual for a litigation settlement agreement, with no similar cost in 2022. There was no significant change in interest expense year over year. Income tax provision was $71,000 for the first quarter of 2022, compared to $34,000 for the same period in 2021, which is based on the estimated annual effective tax rate applied to the pretax loss incurred for the quarter plus discreet tax items, based on our expectation of pretax loss for the fiscal year. Net loss was $15.0 million for the quarter ended March 31, 2022, compared to $14.8 million for the same period in 2021, primarily attributable to the changes in the gross profit and increase in certain selling, general and administrative expenses as mentioned above. Segment Results The accounting policies of each business segment are the same as those followed by the Company as a whole. Management evaluates business segment performance based on gross profit. Security Solutions Segment: Three Months Ended March 31, 2022 2021 (unaudited) Revenue $ 26,919 $ 22,829 Gross profit $ 15,051 $ 9,326 Gross margin 55.9 % 40.9 % Security Solutions' revenue increased by $4.1 million year over year, or approximately 17.9%. This is primarily due to an increase in sales offerings. Gross profit for Security Solutions increased by $5.7 million primarily due to the significant increase in revenue coupled by the various changes in the sales mix on various programs. Gross margin for Security Solutions increased to 55.9% for the first quarter of 2022 from 40.9% for the same period in 2021. The increase in profitability in the first quarter of 2022 was due to growth in high margin projects. 29 Table of Contents Secure Networks Segment: Three Months Ended March 31, 2022 2021 (unaudited) Revenue $ 23,241 $ 32,928 Gross profit $ 3,820 $ 5,143 Gross margin 16.4 % 15.6 % Secure Networks' revenue decreased by $9.7 million year over year, or approximately 29.4%. This is primarily due to the ramping down of certain projects under Secure Networks offerings. Gross profit for Secure Networks decreased by $1.3 million as a result of lower revenue volume. Gross margin for Secure Networks increased to 16.4% for the first quarter of 2022 from 15.6% for the same period in 2021. The increase in gross margin is due to lower margin projects winding down in the first quarter of 2022. Non-GAAP Financial Measures In addition to our results determined in accordance with U.S. GAAP, we believe the non-GAAP financial measures of Enterprise EBITDA, Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Earnings Per Share ("EPS") and Free Cash Flow are useful in evaluating our operating performance. We believe that this non-GAAP financial information, when taken collectively with our GAAP results, may be helpful to readers of our financial statements because it provides consistency and comparability with past financial performance and assists in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their GAAP results. The non-GAAP financial information is presented for supplemental informational purposes only, should not be considered a substitute for financial information presented in accordance with GAAP, and may be different from similarly-titled non-GAAP measures used by other companies. A reconciliation is provided below for each of these non-GAAP financial measures to the most directly comparable financial measure stated in accordance with GAAP. We use the following non-GAAP financial measures to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget, to develop short-term and long-term operating plans, and to evaluate the performance of certain management personnel when determining incentive compensation. We believe these non-GAAP financial measures facilitate comparison of our operating performance on a consistent basis between periods by excluding certain items that may, or could, have a disproportionately positive or negative impact on our results of operations in any particular period. When viewed in combination with our results prepared in accordance with GAAP, these non-GAAP financial measures help provide a broader picture of factors and trends affecting our results of operations. Enterprise EBITDA and Adjusted EBITDA Both Enterprise EBITDA and Adjusted EBITDA are supplemental measures of operating performance that are not made under GAAP and do not represent, and should not be considered as, an alternative to net loss as determined by GAAP. We define Enterprise EBITDA as net (loss) income, adjusted for non-operating (income) expense, interest expense, provision for (benefit from) income taxes, and depreciation and amortization. We define Adjusted EBITDA as Enterprise EBITDA, adjusted for stock-based compensation expense. 30 Table of Contents A reconciliation of net loss to Enterprise EBITDA and Adjusted EBITDA, the most directly comparable GAAP measure, is as follows (in thousands): Three Months Ended March 31, 2022 2021 Net loss $ (14,983) $ (14,778) Adjustments: Non-operating (income) expense (12) 1,054 Interest expense 190 196 Provision for income taxes 71 34 Depreciation and amortization 1,405 1,360 Enterprise EBITDA (13,329) (12,134) Stock-based compensation expense (1) $ 14,298 $ 13,670 Adjusted EBITDA $ 969 $ 1,536 (1) The Stock-based Compensation adjustment to EBITDA as of March 31, 2022 is made up of $12.6 million stock-based compensation expense for the awarded RSUs and PSUs, and $1.7 million of other sources of stock-based compensation expense. The other sources of stock-based compensation consists of accrued compensation, which the Company intends to settle in shares of the Company's common stock. However, it is the Company’s discretion as to whether this compensation will ultimately be paid in stock or cash. The Company has the right to dictate the form of these payments up until the date at which they are paid. Any change to the expected payment form would result in out of quarter adjustments to this add back to Adjusted EBITDA. Adjusted Net Income (Loss) and Adjusted EPS Adjusted Net Income (Loss) and Adjusted EPS are supplemental measures of operating performance that are not made under GAAP and do not represent, and should not be considered as, alternatives to net income (loss) as determined by GAAP. We define Adjusted Net Income (Loss) as net income (loss), adjusted for non-operating expense (income), stock-based compensation expense. We define Adjusted EPS as Adjusted Net Income (Loss) divided by the weighted-average number of common shares outstanding for the period. A reconciliation of net (loss) income attributable to Telos Corporation to Adjusted Net Income (Loss) and Adjusted EPS, the most directly comparable GAAP measure, is as follows: Three Months Ended March 31, 2022 Three Months Ended March 31, 2021 Net Loss Diluted Earnings Per Share Net Loss Diluted Earnings Per Share (in thousands) (in thousands) Reported GAAP measure $ (14,983) $ (0.22) $ (14,778) $ (0.23) Adjustments: Non-operating (income) expense (12) — 1,054 0.02 Stock-based compensation expense (2) 14,298 0.21 13,670 0.21 Adjusted non-GAAP measure $ (697) $ (0.01) $ (54) $ — Weighted-average shares of common stock outstanding 67,559 64,625 (2) The Stock-based Compensation adjustment to Net Loss as of March 31, 2022 is made up of $12.6 million stock-based compensation expense for the awarded RSUs and PSUs, and $1.7 million of other sources of stock-based compensation expense. The other sources of stock-based compensation consist of accrued compensation, which the Company intends to settle in shares of the Company’s common stock. However, it is the Company's discretion as to whether this compensation will ultimately be paid in stock or cash. The Company has the right to dictate the form of these payments up until the date at which they are paid. Any change to the expected form of payment would result in out of quarter adjustments to this add back to Adjusted Net Loss. 31 Table of Contents Free Cash Flow Free cash flow, as reconciled in the table below, is a non-GAAP financial measure defined as net cash provided by or used in operating activities, less purchases of property and equipment and capitalized software development costs. This non-GAAP financial measure may be a useful measure for investors and other users of our financial statements as a supplemental measure of our cash performance and to assess the quality of our earnings as a key performance measure in evaluating management. Three Months Ended March 31, 2022 2021 (in thousands) Net cash flows provided by (used in) operating activities $ 249 $ (6,882) Adjustments: Purchases of property and equipment (546) (480) Capitalized software development costs (2,795) (2,165) Free cash flow $ (3,092) $ (9,527) Each of Enterprise EBITDA, Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted EPS and Free Cash Flow has limitations as an analytical tool, and you should not consider any of them in isolation, or as a substitute for analysis of our results as reported under GAAP. Among other limitations, each of Enterprise EBITDA, Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted EPS and Free Cash Flow does not reflect our future requirements for capital expenditures or contractual commitments, does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations, and does not reflect income tax expense or benefit. Other companies in our industry may calculate Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted EPS and Free Cash Flow differently than we do, which limits its usefulness as a comparative measure. Because of these limitations, neither Enterprise EBITDA, Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted EPS nor Free Cash Flow should be considered as a replacement for net income (loss), earnings per share or net cash flows provided by operating activities, as determined by GAAP, or as a measure of our profitability. We compensate for these limitations by relying primarily on our GAAP results and using non-GAAP measures only for supplemental purposes. Liquidity and Capital Resources Upon the closing of the IPO in November 2020, we issued 17.2 million shares of our common stock at a price of $17.00 per share, generating net proceeds of approximately $272.8 million. We used approximately $108.9 million of the net proceeds in connection with the exchangeable redeemable preferred stock conversion, $30.0 million to fund our acquisition of the outstanding Class B Units of Telos ID (see Note 7 – Purchase of Telos ID Non - cont rolling Interest ), and $21.0 million to repay our outstanding senior term loan and subordinated debt. On April 6, 2021, we completed our follow-on offering of 9.1 million shares of our common stock at a price of $33.00 per share, including $7.0 million shares of common stock by certain existing stockholders of Telos. The offering generated approximately $64.3 million of net proceeds to Telos. We did not receive any proceeds from the shares of common stock sold by the selling stockholders. On April 19, 2021, we used approximately $1.3 million of the net proceeds to repurchase 39,682 shares of our common stock and $26.9 million to repurchase warrants to purchase 900,970 shares of our common stock owned by EnCap . Further, on July 30, 2021, we used approximately $5.9 million of the net proceeds to acquire the assets of DFT (see Note 4 - Acquisition ). We used the remaining net proceeds of the IPO and the follow-on offering for general corporate purposes. Our overall financial position and liquidity are strong. Our working capital was $132.7 million and $140.8 million as of March 31, 2022 and December 31, 2021, respectively. Although no assurances can be given, we expect that funds generated from operations are sufficient to maintain the liquidity we require to meet our operating, investing and financing needs for the next 12 months. As of March 31, 2022, we had a cash and cash equivalent balance of $120.2 million, compared to $126.6 million at the end of 2021. This balance gives us the flexibility for capital deployment while maintaining our focus on preserving a strong balance sheet to position us for future opportunities. We believe we have adequate funds on hand to execute our financial and operating strategy. 32 Table of Contents The following is a discussion of our major operating, investing and financing activities for the quarter ended March 31, 2022 and 2021. Cash provided by operating activities was $0.2 million for the three months ended March 31, 2022, compared to cash used in operating activities of $6.9 million for the same period in 2021. Cash provided by or used in operating activities is primarily driven by the Company’s operating income, the timing of receipt of customer payments, the timing of its payments to vendors and employees, and the timing of inventory turnover, adjusted for certain non-cash items that do not impact cash flows from operating activities. Cash used in investing activities was $3.3 million and $2.6 million for the three months ended March 31, 2022 and 2021, respectively, due primarily to the investment in software development costs of $2.8 million and $2.2 million for the three months ended March 31, 2022 and 2021, respectively, and the purchase of property and equipment. Cash used in financing activities was $3.2 million and $2.8 million for the three months ended March 31, 2022 and 2021, respectively, primarily attributable to payments under finance leases for both periods, payment of tax withholding related to net share settlement of equity awards of $2.9 million in the first quarter of 2022, and a final distribution of $2.4 million of the Class B Member of Telos ID in the first quarter of 2021. Recent Accounting Pronouncements See Note 1 of the Condensed Consolidated Financial Statements for a discussion of recently issued accounting pronouncements. Critical Accounting Policies During the three months ended March 31, 2022, there were no material changes to our critical accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the SEC on March 28, 2022. Item 3. Quantitative and Qualitative Disclosures about Market Risk None.