What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-09 compared with 2023-05-10 · 105 added, 75 removed, 154 unchanged (54% of the section changed)

5 unchanged sentences

Several important factors 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, 2022, as filed with the Securities and Exchange Commission on March 16, 2023.

General and Business Overview

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Information regarding our two reportable segments – Security Solutions and Secure Networks – is presented in Note 17 - Segment Information to the unaudited consolidated financial statements at Item 1 of this Form 10-Q.

Fiscal year 2023 will be a transition year for Telos focusing on streamlining our operations and rebuilding and growing the revenue base by generating new business wins.

Fiscal year 2023 will continue to be a transition year for Telos, focusing on streamlining our operations and rebuilding and growing the revenue base by generating new business wins.

Our 2023 business development priorities are to:

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Business Environment

The final fiscal year ("FY") 2023 omnibus appropriations legislation approved in December 2022 provided an increase in total defense spending of $44 billion above the budget proposed last spring by the White House, and represented a $76 billion increase above the previous year's funding level.

It also included significant increases in federal civilian agency (non-defense) cybersecurity funding, including a 15% increase from last year for the Cybersecurity and Infrastructure Security Agency ("CISA") for various program enhancements and new initiatives.

In March 2023, the White House released its proposed FY2024 budget, which calls for a further $26 billion increase for the DoD next year, roughly 3% above the FY2023 enacted level.

Congress may seek to boost this increase to offset current and expected inflationary trends and the threats posed by foreign adversaries.

The President's budget also proposes increased investments for cybersecurity within numerous federal civilian departments and agencies, including $3.1 billion in funding for CISA, a 5% increase, of which $98 million is intended to implement the Cyber Incident Reporting for Critical Infrastructure Act.

In March 2023, the White House released its proposed FY2024 budget, which called for a $26 billion increase for the Department of Defense ("DOD") next year, a little more than 3% above the FY2023 enacted level.

The debt ceiling legislation (the "Fiscal Responsibility Act") subsequently approved by Congress contains spending caps, which reflect that level of defense spending, as do the defense authorization and appropriations bills currently under consideration in the House and Senate.

There are also many in Congress who want to boost this increase further via a subsequent supplemental appropriations bill to offset current and expected inflationary trends and the threats posed by foreign adversaries.

Final decisions on defense spending will not be made until this fall, at the earliest.

The President's FY2024 budget also proposed increased investments for cybersecurity within numerous federal civilian departments and agencies, including $3.1 billion in funding for the Cybersecurity and Infrastructure Security Agency, a 5% increase, of which $98 million is intended to implement the Cyber Incident Reporting for Critical Infrastructure Act.

In general, the President's budget also reflects the prioritization of accelerated cloud adoption, IT modernization, further private sector collaboration for sector risk management responsibilities, ensuring adequate cyber threat information sharing, and supply chain risk management.

These priorities align with the solutions Telos has been developing and bringing to market for the past several years.

However, for both defense and non-defense spending, it remains to be seen how a divided Congress and the White House can reconcile their differences over fiscal policy before the start of FY2024 on October 1, 2023.

Failing to do so could mean the federal government will begin another fiscal year under the constraints of a continuing resolution, with funding frozen at FY2023 levels and restrictions likely on new contracts and acceleration of current programs.

However, such increased spending by civilian agencies on cybersecurity could be difficult to achieve, given the cap on non-defense discretionary spending included in the Fiscal Responsibility Act and subsequent efforts by the House majority to seek even further reductions in all non-defense discretionary spending.

This would impact future cybersecurity investments by potential civilian federal customers.

For both defense and non-defense spending, it is also doubtful that a divided Congress and the White House can reconcile their differences over fiscal policy before the start of FY2024 on October 1, 2023.

Failing to do so would mean the federal government could face a shutdown this fall or, at best, will begin another fiscal year under the constraints of a continuing resolution, with funding frozen at FY2023 levels and restrictions likely on new contracts and acceleration of current programs.

Finally, under the terms of the Fiscal Responsibility Act, if all appropriations legislation is not enacted by January 1, appropriations government-wide will revert to the FY2023 level minus an additional one percent.

This uncertainty could also impact federal customers' ability to move forward on their planned expenditures in FY2024.

Cybersecurity Landscape

In recent years, we saw cybersecurity threats become more complex, leveraging a wide variety of tactics to exploit their victims.

The continuing and increasingly damaging ransomware and other cyberattacks against federal, state and local governments, education, and private sector enterprises have resulted in intensified efforts to better defend against such attacks.

With this growing threat, below are trends to consider when looking at the cybersecurity landscape:

In recent years, we have seen cybersecurity threats become more complex, with threat actors leveraging a wide variety of tactics to exploit their victims.

With this growing threat, below are some trends to consider when looking at the cybersecurity landscape:

Rising Threats, Rising Liability :

Ransomware remains arguably the most severe cyber threat to enterprises in the commercial, state, and local government and education sectors.

One reason for the rise of ransomware attacks is that it is exceedingly profitable for cybercriminals, and ransomware victims generally settle the ransom than restoring the system from backups or dealing with the fallout from a data breach.

Aside from the financial costs of paying the ransom and restoring the system, the consequence of a successful ransomware attack can include damage to the organization's reputation, stolen sensitive data being used for malicious purposes, and loss of business.

The Nation's Critical Systems Are Still at Risk :

Critical infrastructure and industrial IoT are among the categories at greatest risk of cyberattacks.

Critical infrastructure and industrial Internet of Things ("IoT") are among the categories at greatest risk of cyberattacks.

The Challenging Complexity of Regulatory Compliance :

Government mandates stronger security in highly regulated industries.

These government initiatives and audit fatigue continue 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.

These government initiatives and audit fatigue continue to burden highly regulated organizations, with automation solutions being recognized as the most effective remedy for the many repetitive and redundant tasks that security compliance requires.

Additionally, the Securities and Exchange Commission ("SEC") has finalized and adopted new cybersecurity rules for publicly traded companies, which will require registrants to disclose additional cyber-related information in their regulatory filings.

Specifically, they will have to:

(1) regularly disclose their governance methods, risk analysis and management processes;

(2) meet specific disclosure requirements and deadlines for cybersecurity reporting and describing material cyber incidents;

and (3) describe the board's oversight of risks from cybersecurity threats, and management's expertise and role in assessing and managing material risks from cybersecurity threats.

The required reporting of this information will lead many companies to proactively establish policies that will improve their cyber risk management posture and enable them to better withstand heightened public and regulatory scrutiny.

Identity Assurance and Privacy Protection are Essential for Today's Enterprises :

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Trusted identities are essential to confidence in IT and physical security strategies and to the success of Zero Trust security models and architectures.

Artificial Intelligence :

Cybercriminals are using Artificial Intelligence ("AI") to launch more sophisticated attacks that can quickly adapt to changing environments, making detection harder.

To protect against AI-powered cyberattacks, organizations must stay vigilant and adopt advanced cybersecurity tools and techniques that can detect and respond to these threats timely before they can cause damage.

Global Networks and Worldwide Communications Need Baked-in Security :

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Financial Overview

A number of factors have contributed to our first quarter results of operations, the most significant of which are described below.

A number of factors have contributed to the results of our second quarter of fiscal year 2023, the most noteworthy or significant of which are described below.

More details on these changes are presented below within our "Results of Operations" section.

• The winding down of certain projects, completion of several large programs, and new business wins below expectations in 2022, resulted in a decline in current year revenue.

• Gross margin expansion due to a shift in mix across the portfolio driven by the wind-down of lower margin programs.

• The restructuring plan committed in the fourth quarter of 2022 is continuously being implemented in fiscal year 2023, with the majority of the affected employees separating from the business in early 2023.

The restructuring expenses include severance-related benefit costs (including outplacement services and continuing health insurance coverage), and external consulting and advisory fees related to implementing the restructuring plan.

• Reported a $1.4 million gain on early extinguishment of other financing obligations.

• The winding down of certain projects and lower revenue on existing major programs resulted in a decline in the current quarter's revenue.

• Actions to cushion the impact of lower revenue on profitability, maintain gross margin level, and improve net loss position.

• Lower operating costs through a combination of lower stock-based compensation, aggressive cost management and the results of the restructuring plan.

Results of Operations

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Consolidated Results of Operations

For the Three Months Ended

March 31, 2023 March 31, 2022

For the Three Months Ended For the Six Months Ended

June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022

(dollars in thousands)

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Our business segments have different factors driving revenue fluctuations and profitability.

The discussion of the changes in our revenue and profitability are covered in greater detail under the section that follows "Segment Results." We generate revenue from the delivery of products and services to our customers.

The discussion of the changes in our revenue and profitability is covered in greater detail under the section that follows "Segment Results." We generate revenue from the delivery of products and services to our customers.

Cost of sales, for both products and services, consists of labor, materials, subcontracting costs and an allocation of indirect costs.

Selling, general, and administrative expenses decreased by $8.8 million, or 24.9% , in the first quarter of 2023 compared to the same period in 2022.

This is primarily due to reduced stock-based compensation costs of $5.8 million, and decreased labor costs of $3.8 million, partially offset by $1.2 million in restructuring charges.

Other income increased by $2.5 million due to increases in dividend income from money market placements of $1.1 million, and gain on early extinguishment of other financing obligations of $1.4 million in the first quarter of 2023 without similar gain in the same period in 2022.

Selling, general, and administrative expenses (SG&A).

SG&A decreased by $13.1 million, or 37.6%, for the three months ended June 30, 2023, compared to the same period in 2022.

This decrease is primarily due to lower stock-based compensation costs of $8.7 million, reduced labor costs of $2.6 million as a result of a decrease in personnel, and change in capitalized research and development costs of $2.1 million driven by the timing in software projects.

SG&A decreased by $21.9 million, or 31.2%, for the six months ended June 30, 2023, as compared to the same period in the prior year primarily due to lower stock-based compensation costs of $14.4 million, reduced labor costs of $5.3 million as a result of a decrease in personnel, and change in capitalized research and development costs of $3.2 million driven by the timing in software projects, partially offset by $1.2 million in restructuring charges.

Other income.

Other income increased by $1.5 million for the three months ended June 30, 2023, due to increases in dividend income from money market placements as a result of increasing interest rates, compared to the same period in 2022.

Other income increased by $4.0 million for the six months ended June 30, 2023, as compared to the same period in the prior year primarily due to an increase in dividend income from money market placement of $2.7 million, and a gain on early extinguishment of other financing obligations of $1.4 million in 2023 without a similar gain in the same period in 2022.

Interest expenses .

There was no significant change in interest expense between comparable periods.

The change in the income tax provision for the first quarter of 2023 compared to the same period in 2022 is based on the estimated annual effective tax rate applied to the pretax loss incurred for the quarter plus discrete tax items, based on our expectation of pretax loss for the fiscal year.

Provision for income taxes .

The change in the income tax provision for the three and six months ended June 30, 2023, compared to the same period in 2022, is based on the estimated annual effective tax rate applied to the pretax loss incurred for the quarter plus discrete tax items, based on our expectation of pretax loss for the fiscal year.

Segment Results

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Security Solutions Segment - Financial Results

For the Three Months Ended

March 31, 2023 March 31, 2022

For the Three Months Ended For the Six Months Ended

June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022

(dollars in thousands)

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Gross margin 55.5 % 53.3 % 53.6 % 54.5 %

For the three months ended March 31, 2023, Security Solutions segment revenue decreased by $7.1 million, or 26.5%, compared to the same period in 2022, primarily due to the loss of a program and lower volume on two other programs.

Gross profit for Security Solutions decreased by $4.8 million, or 31.7%, for the first quarter of 2023 compared with the same period in 2022, primarily due to the decrease in revenue.

Further, the segment gross margin decreased to 52.0% for the first quarter of 2023 from 55.9% for the same period in 2022.

The gross margin contraction in the first quarter of 2023 was the result of changes in the mix of programs within the portfolio and lower margin on certain projects within the segment.

For the three months ended June 30, 2023, Security Solutions segment revenue decreased by $13.6 million, or 44.2%, compared to the same period in 2022, primarily due to lower volume on certain major programs.

Security Solutions segment revenue for the six months ended June 30, 2023, decreased by $20.8 million, or 36.0%, compared to the same period in 2022, primarily due to lower revenues on major programs.

Gross profit for Security Solutions decreased by $6.9 million, or 41.9%, for the second quarter of 2023 compared with the same period in 2022, primarily due to the decrease in revenue, partially offset by lower indirect expenses due to restructuring and other cost actions.

Segment gross margin increased to 55.5% for the second quarter of 2023 from 53.3% for the same period in 2022, primarily due to revenue mix.

For the six months ended June 30, 2023, Security Solutions segment gross profit decreased by $11.7 million, or 37.0%, compared to the same period in 2022, primarily due to the decrease in revenue but partially offset by significantly lower indirect expenses.

Segment gross margin decreased from 54.5% to 53.6% as a result of a lower revenue base for indirect expenses.

Table MD&A 3:

Secure Networks Segment - Financial Results

For the Three Months Ended

March 31, 2023 March 31, 2022

For the Three Months Ended For the Six Months Ended

June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022

(dollars in thousands)

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Gross margin 17.9 % 18.0 % 19.3 % 17.2 %

Secure Networks segment revenue for the three months ended March 31, 2023 decreased by $7.8 million, or 33.5%, compared to the same period in 2022, due to the successful wind-down of large programs in the second half of 2022 and 2023 as expected.

Gross profit for Secure Networks decreased by $0.6 million, or 16.0%, for the first quarter of 2023 compared with the same period in 2022 due to the lower revenue, offset by improved margin across the portfolio.

Segment gross margin increased to 20.8% for the first quarter of 2023 from 16.4% for the same period in 2022 due to improved margin performance on several programs and a shift in mix across the portfolio driven by the wind-down of lower margin programs.

Secure Networks segment revenue for the three months ended June 30, 2023, decreased by $9.3 million, or 37.1%, compared to the same period in 2022, primarily due to the successful wind-down of large programs as expected.

For the six months ended June 30, 2023, Secure Networks segment revenue decreased by $17.0 million, or 35.4%, compared to the same period in 2022, primarily due to the successful wind-down of large programs as expected.

Gross profit for Secure Networks decreased by $1.7 million, or 37.5%, for the second quarter of 2023, compared with the same period in 2022, primarily due to lower revenue, partially offset by lower indirect expenses.

Segment gross margin slightly decreased to 17.9% for the second quarter of 2023 from 18.0% for the same period in 2022.

For the six months ended June 30, 2023, Secure Networks segment gross profit decreased by $2.3 million, or 27.6% compared to the same period in 2022, primarily due to lower revenue, partially offset by lower indirect expenses.

Segment gross margin increased from 17.2% in 2022 to 19.3% in 2023 due to improved performance on several programs and a shift in the mix across the portfolio driven by the wind-down of lower-margin programs.

Non-GAAP Financial Measures

In addition to our results determined in accordance with U.S.

GAAP, we believe the non-GAAP financial measures of EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income/(Loss), Adjusted Earnings Per Share ("EPS") and Free Cash Flow are useful in evaluating our operating performance.

GAAP, we believe the non-GAAP financial measures of EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin, 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.

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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.

EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin

EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin 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.

EBITDA, Adjusted EBITDA, EBITDA Margin and Adjusted EBITDA Margin

EBITDA, Adjusted EBITDA, EBITDA Margin and Adjusted EBITDA Margin 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 EBITDA as net (loss)/income, adjusted for non-operating (income)/expense, interest expense, (benefit from)/provision for income taxes, and depreciation and amortization.

We define Adjusted EBITDA as EBITDA, adjusted for stock-based compensation expense and restructuring expenses/(adjustments).

We define EBITDA Margin as EBITDA as a percentage of total revenue.

We define Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of total revenue.

Table MD&A 4:

Reconciliation of Net Loss to EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin

For the Three Months Ended

March 31, 2023 March 31, 2022

Amount Margin Amount Margin

Reconciliation of Net Loss to EBITDA, Adjusted EBITDA, EBITDA Margin and Adjusted EBITDA Margin

For the Three Months Ended For the Six Months Ended

June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022

Amount Margin Amount Margin Amount Margin Amount Margin

(dollars in thousands)

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Depreciation and amortization 1,696 5.2 % 1,505 2.7 % 3,121 4.5 % 2,910 2.7 %

EBITDA (11,545) (32.8 %) (14,962) (29.8 %)

EBITDA (Non-GAAP) (7,771) (23.6 %) (12,531) (22.5 %) (19,316) (28.4) % (27,493) (25.9) %

Stock-based compensation expense (1)

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(3) — % — — % 1,197 1.8 % — — %

Adjusted EBITDA $ (846) (2.4 %) $ 969 1.9 %

(1) The Stock-based Compensation adjustment to EBITDA as of March 31, 2023 and 2022 is made up of $7.9 million and $14.3 million, respectively, of stock-based compensation expense for the awarded RSUs and PSUs, and $1.6 million and $1.7 million, respectively, of other sources of stock-based compensation expense.

Adjusted EBITDA (Non-GAAP) $ (29) (0.1 %) $ 4,545 8.1 % $ (875) (1.3 %) $ 5,514 5.2 %

(1) The stock-based compensation adjustment to EBITDA is made up of stock-based compensation expense for the awarded RSUs, PSUs and stock options, and of other sources.

Stock-based compensation expense for the awarded RSUs, PSUs and stock options was $5.7 million and $13.6 million for the three and six months ended June 30, 2023, respectively, and $16.4 million and $30.7 million for the three and six months ended June 30, 2022, respectively.

Stock-based compensation from other sources was $2.1 million and $3.7 million for the three and six months ended June 30, 2023, respectively, and $0.7 million and $2.3 million for the three and six months ended June 30, 2022, respectively.

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.

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(2) The restructuring expenses/(adjustments) to EBITDA include severance and other related benefit costs (including outplacement services and continuing health insurance coverage), external consulting and advisory fees related to implementing the restructuring plan.

Adjusted Net Loss and Adjusted EPS

Adjusted Net 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 Loss as net loss, adjusted for non-operating (income)/expense, stock-based compensation expense and restructuring expense/(adjustments).

Adjusted Net (Loss)/Income and Adjusted EPS

Adjusted Net (Loss)/Income 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 (Loss)/Income as net loss, adjusted for non-operating (income)/expense, stock-based compensation expense and restructuring expense/(adjustments).

We define Adjusted EPS as Adjusted Net Loss divided by the weighted-average number of common shares outstanding for the period.

Table MD&A 5:

Reconciliation of Net Loss to Non-GAAP Adjusted Net Loss and Adjusted EPS

For the Three Months Ended

March 31, 2023 March 31, 2022

Net Loss Adjusted Earnings Per Share Adjusted

Net Loss Adjusted Earnings Per Share

Reconciliation of Net Loss to Non-GAAP Adjusted Net (Loss)/Income and Adjusted EPS

For the Three Months Ended For the Six Months Ended

June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022

Net (Loss)/Income Adjusted Earnings Per Share Adjusted

Net (Loss)/Income Adjusted Earnings Per Share

(in thousands, except per share data)

Net loss - GAAP measure $ (10,746) $ (0.16) $ (16,616) $ (0.25)

Net loss $ (8,024) $ (0.12) $ (14,159) $ (0.21) $ (18,770) $ (0.27) $ (30,775) $ (0.45)

Other income (1,649) (0.02) (118) — (4,145) (0.06) (130) —

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(3) — — — 1,197 0.01 — —

Adjusted net loss - non-GAAP measure $ (2,543) $ (0.04) $ (697) $ (0.01)

Adjusted net (loss)/income (Non-GAAP) $ (1,931) $ (0.03) $ 2,799 $ 0.04 $ (4,474) $ (0.07) $ 2,102 $ 0.03

Weighted-average shares of common stock outstanding, basic 69,424 67,876 68,804 67,717

(1) The Stock-based Compensation adjustment to Net Loss as of March 31, 2023 and 2022 is made up of $7.9 million and $14.3 million, respectively, of stock-based compensation expense for the awarded RSUs and PSUs, and $1.6 million and $1.7 million, respectively, of other sources of stock-based compensation expense.

(1) The stock-based compensation adjustment to Net (Loss)/Income is made up of stock-based compensation expense for the awarded RSUs, PSUs and stock options, and of other sources.

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.

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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 Net Loss.

Any change to the expected payment form would result in out-of-quarter adjustments to this add back to Adjusted Net (Loss)/Income.

(2) The restructuring expenses/(adjustments) to net loss include severance and other related benefit costs (including outplacement services and continuing health insurance coverage), external consulting and advisory fees related to implementing the restructuring plan.

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Free Cash Flow

For the Three Months Ended

March 31, 2023 March 31, 2022

For the Three Months Ended For the Six Months Ended

June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022

(in thousands)

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Capitalized software development costs (4,398) (2,339) (8,198) (5,134)

Free cash flow $ (4,123) $ (3,092)

Each of EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, 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 EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income/(Loss), Adjusted EPS and Free Cash Flow does not reflect our cash expenditures, or 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.

Free cash flow (Non-GAAP) $ (8,558) $ 5,449 $ (12,681) $ 2,357

Each of EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin, 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 EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin, Adjusted Net Income/(Loss), Adjusted EPS and Free Cash Flow does not reflect our cash expenditures, or 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 EBITDA Margin, Adjusted Net Income/(Loss), Adjusted EPS and Free Cash Flow differently than we do, which limits their usefulness as comparative measures.

Because of these limitations, neither EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income/(Loss), Adjusted EPS nor Free Cash Flow should be considered as a replacement for net (loss)/income, earnings per share or net cash flows provided by/(used in) operating activities, as determined by GAAP, or as a measure of our profitability.

Because of these limitations, neither EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin, Adjusted Net Income/(Loss), Adjusted EPS nor Free Cash Flow should be considered as a replacement for net (loss)/income, earnings per share or net cash flows provided by/(used in) 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.

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While a variety of factors related to sources and uses of cash, such as timeliness of accounts receivable collections, vendor credit terms, or significant collateral requirements, ultimately impact our liquidity, such factors may or may not have a direct impact on our liquidity.

As of March 31, 2023, we had cash and cash equivalents of $112.5 million and our working capital was $116.5 million.

As of June 30, 2023, we had cash and cash equivalents of $103.4 million and our working capital was $110.8 million.

We place a strong emphasis on liquidity management.

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Net Change in Cash, Cash Equivalents, and Restricted Cash

For the Three Months Ended

March 31, 2023 March 31, 2022

For the Six Months Ended

June 30, 2023 June 30, 2022

(in thousands)

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Net change in cash, cash equivalents, and restricted cash $ (15,857) $ (3,842)

Net cash used in operating activities for the three months ended March 31, 2023, was $0.1 million, a decrease of $0.35 million compared to the same period in 2022.

Net cash used in operating activities for the six months ended June 30, 2023, was $4.2 million, an increase of $12.3 million in cash outflow, compared to the same period in 2022.

The change is primarily driven by the Company's operating losses, the timing of receipts of customer payments, the timing of 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.

Net cash used in investing activities for the three months ended March 31, 2023 increased by $1.2 million compared to the same period of the prior year primarily, due to the investment in software development costs of $3.8 million and $2.8 million for the three months ended March 31, 2023 and 2022, respectively, and payment of the DFT holdback amount of $0.6 million in February 2023.

This is partially offset by the slight decrease in purchases of property and equipment.

Net cash used in financing activities for the three months ended March 31, 2023, decreased by $1.1 million compared to the same period in 2022.

This is primarily attributable to the decrease in payment of tax withholding related to net share settlement of equity awards of $1.5 million in the first quarter of 2023 compared with $2.9 million in the same period of 2022.

Net cash used in investing activities for the six months ended June 30, 2023, increased by $2.7 million compared to the same period of the prior year, primarily due to the higher investment in software development costs of $8.2 million and $5.1 million for the six months ended June 30, 2023 and 2022, respectively, partially offset by the slight decrease in purchases of property and equipment.

Net cash used in financing activities for the six months ended June 30, 2023, decreased by $3.0 million compared to the same period in 2022.

This is primarily attributable to the decrease in payment of tax withholding related to net share settlement of equity awards of $1.6 million for the six months ended June 30, 2023, compared with $2.9 million in the same period of 2022, and the cash outflow on repurchases of common stock of $2.6 million in 2022 compared with $0.1 million in 2023 under the share repurchase program (see Note 13 – Share Repurchases ).

This is partially offset by the payment of the DFT holdback amount of $0.6 million in February 2023.

Critical Accounting Policies and Estimates

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The 2022 Form 10-K, as filed with the SEC on March 16, 2023, includes a summary of critical accounting policies we believe are the most important to aid in understanding our financial results.

There have been no changes to those critical accounting policies that have had a material impact on our reported amounts of assets, liabilities, revenues, or expenses during the three months ended March 31, 2023.

Quantitative and Qualitative Disclosures about Market Risk

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis