ITERIS, INC. Forward-Looking Statements
This report, including the following discussion and analysis, contains forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) that are based on our current expectations, estimates and projections about our business and our industry, and reflect management's beliefs and certain assumptions made by us based upon information available to us as of the date of this report. When used in this report and the information incorporated herein by reference, the words "expect(s)," "feel(s)," "believe(s)," "intend(s)," "plan(s)," "should," "will," "may," "might," "anticipate(s)," "estimate(s)," "could," "should," and similar expressions or variations of these words are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements regarding our anticipated growth, sales, revenue, expenses, profitability, capital needs, backlog, manufacturing capabilities, the market acceptance of our products and services, competition, statements concerning any potential future impact of the COVID-19 pandemic on our business, the impact of any current or future litigation, the impact of recent accounting pronouncements, the impact of current supply chain constraints, the applications for and acceptance of our products and services, the status of our facilities and product development. These statements are not guarantees of future performance and are subject to certain risks and uncertainties that could cause our actual results to differ materially from those projected. You should not place undue reliance on these forward-looking statements that speak only as of the date hereof. We encourage you to carefully review and consider the various disclosures made by us which describe certain factors which could affect our business, including in "Risk Factors" set forth in Part II. Item 1A of this report, before deciding to invest in our company or to maintain or increase your investment. We undertake no obligation to revise or update publicly any forward-looking statement for any reason, including to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Overview
General
We are a provider of smart mobility infrastructure management solutions. Our cloud-enabled solutions help public transportation agencies, municipalities, commercial entities and other transportation infrastructure providers monitor, visualize, and optimize mobility infrastructure to make mobility safe, efficient, and sustainable for everyone.
Recent Developments
Impact of COVID-19 on Our Business
The COVID-19 pandemic (the "Pandemic") has materially adversely impacted global economic conditions. More than 27 months into the Pandemic, COVID-19 continues to have an unpredictable and unprecedented impact on the global economy. Despite increasing availability of COVID-19 vaccines, as well as an easing of restrictions on social, business, travel and government activities and functions, infection rates continue to fluctuate and federal, state and local government requirements are likely to remain fluid. The uncertainties caused by the Pandemic include, but are not limited to, supply chain disruptions, workplace dislocations, economic contraction, and downward pressure on some customer budgets and customer sentiment in general. Due to the Pandemic, we have experienced supply chain and work delays on certain projects. Should such conditions continue or worsen or should longer-term budgets or priorities of our clients be impacted, the Pandemic could further negatively affect our business, results of operations and financial condition. The extent of the impact of the Pandemic on our business and financial results, and the volatility of our stock price will depend largely on future developments, including the duration of the Pandemic, new and potentially more contagious variants, such as the Delta and Omicron variants, the impact on capital and financial markets, the distribution, rate of adoption and efficacy of vaccines, and the related impact on the budgets and financial circumstances of our customers and suppliers, all of which are highly uncertain and cannot be reasonably estimated as of the date of this report. Given the uncertainties surrounding the impacts of the Pandemic on the Company's future financial condition and results of operations, we have taken certain actions to preserve our liquidity, manage cash flow and strengthen our financial flexibility. Such actions include, but are not limited to, reducing discretionary spending, reducing capital expenditures, and implementing restructuring activities. Refer to Note 3, Restructuring Activities, for more information.
Our products require specialized parts which have become more difficult to source. In some cases, we have had to purchase such parts from third-party brokers at substantially higher prices. Additionally, to mitigate for component shortages, we have increased inventory levels. In the event demand doesn't materialize, we would need to hold excess inventory for several quarters. Alternatively, we may be unable to source sufficient components, even from third-party brokers, at any price,
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to meet customer demand, resulting in high levels of unshippable backlog. We have placed non-cancellable inventory orders for certain products in advance of our normal lead times to secure normal and incremental future supply and capacity and may need to continue to do so in the future. The Company increased inventory by approximately$4.9 million during the six months endedSeptember 30, 2022 which was a planned increase in inventory as part of the Company's supply chain strategy. During the three months endedSeptember 30, 2022 , inventory decreased fromJune 30, 2022 by a net$0.5 million and we had working capital of approximately$26.0 million as ofSeptember 30, 2022 . The cash flow used in operating activities of our continuing operations was approximately$13.6 million which was primarily driven by the planned increase in inventory and the continued re-design of certain circuit boards as part of the Company's supply chain strategy to help assure the Company has product and raw materials to satisfy customer demand, and the net operating loss as a result of higher inventory component costs related to the global supply chain constraints. The Company's tactics to mitigate the current global supply chain issues included re-designing certain circuit boards to accommodate computer chips that are more readily available in the market at more reasonable prices, and by accumulating inventory in the first two quarters of fiscal year 2023. The increase in inventory purchases and in particular components purchased in the secondary markets will be curtailed and the Company does not expect to continue to accumulate inventory in the future, in the same magnitude, in future periods. However, we may remain supply-constrained beyond the fiscal quarter endedSeptember 30, 2022 . If such efforts are not successful for the foreseeable future, the company may need to further adjust its operations to have sufficient liquidity. OnMarch 27, 2020 , the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law inthe United States . The CARES Act provides relief toU.S. corporations through financial assistance programs and modifications to certain income tax provisions. The Company is applying certain beneficial provisions of the CARES Act, including the payroll tax deferral and the alternative minimum tax acceleration. Refer to Note 5, Income Taxes, for more information. The Pandemic has had an impact on the Company's human capital. While our Santa Ana product and commercial operations facility has remained open throughout the Pandemic, easing of Pandemic restrictions imposed by local and state authorities has allowed a larger portion of our workforce to return to our various facilities while others continue to work remotely. The Company's information technology infrastructure has proven sufficiently flexible to minimize disruptions in required duties and responsibilities. Additionally, we have been able to timely file financial reports. We believe we have the infrastructure to efficiently work remotely during the Pandemic. We do not expect to incur significant costs to safely reopen our facilities to all our employees. The Company assessed the impacts of the Pandemic on the estimates and assumptions used in preparing our unaudited condensed financial statements. The estimates and assumptions used in our assessments were based on management's judgment and may be subject to change as new events occur and additional information is obtained. In particular, there is significant uncertainty about the duration and extent of the impact of the Pandemic and its resulting impact on global economic conditions. If economic conditions caused by the Pandemic do not recover as currently estimated by management, the Company's financial condition, cash flows and results of operations may be materially impacted. The Company will continue to assess the effect on its operations by monitoring the spread of the Pandemic and the actions implemented to combat the virus throughout the world. As a result, our assessment of the impact of the Pandemic may change. Climate Change We take climate change and the risks associated with climate change seriously. Increased frequency of severe and extreme weather events associated with climate change could adversely impact our facilities, interfere with intersection construction projects, and have a material impact on our financial condition, cash flows and results of operations. More extreme and volatile temperatures, increased storm intensity and flooding, and more volatile precipitation are among the weather events that are most likely to impact our business. We are unable to predict the timing or magnitude of these events. However, we perform ongoing assessments of physical risk, including physical climate risk, to our business and efforts to mitigate these physical risks continue to be implemented on an ongoing basis. As a global leader in smart mobility infrastructure management, our core business also aims to reduce climate impact through our work with public and private-sector partners to increase the efficiency of mobility, which has the benefit of reducing carbon emissions, all as part of our commitment to a cleaner, healthier and more sustainable future. By reducing delays and stops as part of traffic signal timing projects, improving the efficiency of public transit via signal priority programs, reducing time spent roadside for heavy-emitting commercial freight vehicles during inspection, to name just a few examples, our industry-leading portfolio of smart mobility infrastructure management solutions is currently helping cities and states to reduce their carbon footprint. Additionally, we continue to enhance the design of our sensors to withstand increasingly extreme weather conditions.
Non-GAAP Financial Measures
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Adjusted income (loss) from continuing operations before interest, taxes,
depreciation, amortization, stock-based compensation expense, restructuring
charges, and project loss reserves ("Adjusted EBITDA") was approximately $(5.2)
million and $(7.6) million for the three and six months ended September 30, 2022
as compared to approximately $2.3 million and $5.4 million for the three and six
months ended September 30, 2021 , respectively.
When viewed with our financial results prepared in accordance with accounting
principles generally accepted in the U.S. ("GAAP") and accompanying
reconciliations, we believe Adjusted EBITDA provides additional useful
information to clarify and enhance the understanding of the factors and trends
affecting our past performance and future prospects. We define these measures,
explain how they are calculated and provide reconciliations of these measures to
the most comparable GAAP measure in the table below. Adjusted EBITDA and the
related financial ratios, as presented in this Quarterly Report on Form 10-Q
("Form 10-Q"), are supplemental measures of our performance that are not
required by or presented in accordance with GAAP. They are not a measurement of
our financial performance under GAAP and should not be considered as
alternatives to net income or any other performance measures derived in
accordance with GAAP, or as an alternative to net cash provided by operating
activities as measures of our liquidity. The presentation of these measures
should not be interpreted to mean that our future results will be unaffected by
unusual or nonrecurring items.
We use Adjusted EBITDA non-GAAP operating performance measures internally as
complementary financial measures to evaluate the performance and trends of our
businesses. We present Adjusted EBITDA and the related financial ratios, as
applicable, because we believe that measures such as these provide useful
information with respect to our ability to meet our operating commitments.
Adjusted EBITDA and the related financial ratios have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations include:
•They do not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments;
•They do not reflect changes in, or cash requirements for, our working capital needs;
•Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;
•They are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows;
•They do not reflect the impact on earnings of charges resulting from matters unrelated to our ongoing operations; and
•Other companies in our industry may calculate Adjusted EBITDA differently than we do, whereby limiting its usefulness as comparative measures.
Because of these limitations, Adjusted EBITDA and the related financial ratios should not be considered as measures of discretionary cash available to us to invest in the growth of our business or as a measure of cash that will be available to us to meet our obligations. You should compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only as supplemental information. See our unaudited condensed financial statements contained in this Form 10-Q. However, in spite of the above limitations, we believe that Adjusted EBITDA and the related financial ratios are useful to an investor in evaluating our results of operations because these measures: •Are widely used by investors to measure a company's operating performance without regard to items excluded from the calculation of such terms, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired, among other factors;
•Help investors to evaluate and compare the results of our operations from period to period by removing the effect of our capital structure from our operating performance; and
•Are used by our management team for various other purposes in presentations to our Board of Directors as a basis for strategic planning and forecasting.
The following financial items have been added back to or subtracted from our net income when calculating Adjusted EBITDA:
•Interest expense.Iteris excludes interest expense because it does not believe this item is reflective of ongoing business and operating results. This amount may be useful to investors for determining current cash flow. For the three and six months endedSeptember 30, 2022 , interest expense includes amortization of the remaining capitalized deferred financing costs due to the termination of the Credit Agreement (see Note 11). 24
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•Income tax. This amount may be useful to investors because it represents the taxes that might be payable for the period and the change in deferred taxes during the period, and therefore could reduce cash flow available for use in our business. •Depreciation expense.Iteris excludes depreciation expense primarily because it is a non-cash expense. These amounts may be useful to investors because it generally represents the wear and tear on our property and equipment used in our operations. •Amortization.Iteris incurs amortization of intangible assets in connection with acquisitions.Iteris also incurs amortization related to capitalized software development costs.Iteris excludes these items because it does not believe that these expenses are reflective of ongoing operating results in the period incurred. These amounts may be useful to investors because it represents the estimated attrition of our acquired customer base and the diminishing value of product rights. •Stock-based compensation. These expenses consist primarily of expenses from employee and director equity based compensation plans.Iteris excludes stock-based compensation primarily because they are non-cash expenses andIteris believes that it is useful to investors to understand the impact of stock-based compensation to its results of operations and current cash flow. •Restructuring charges. These expenses consist primarily of employee separation expenses, facility termination costs, and other expenses associated with Company restructuring activities.Iteris excludes these expenses as it does not believe that these expenses are reflective of ongoing operating results in the period incurred. These amounts may be useful to our investors in evaluating our core operating performance. •Project loss reserves. These expenses consist primarily of expenses incurred to complete a software development contract that will not be recoverable and largely related to previously incurred and capitalized costs for non-recurring engineering activity.Iteris excludes these expenses as it does not believe that these expenses are reflective of ongoing operating results in the period incurred. These amounts may be useful to our investors in evaluating our core operating performance. Reconciliations of net loss from continuing operations to Adjusted EBITDA and the presentation of Adjusted EBITDA as a percentage of total revenues were as follows: Three Months Ended Six Months Ended September 30, September 30, 2022 2021 2022 2021 (In Thousands) (In Thousands)
Net loss from continuing operations
289 (249) 122 (174)
Depreciation expense 149 194 308 426
Amortization expense 804 815 1,626 1,618
Interest expense 300 - 332 -
Stock-based compensation 696 834 1,544 1,628
Other adjustments:
Restructuring charges - - 707 -
Project loss - 2,805 $ - $ 3,394
Adjusted EBITDA $ (5,159) $ 2,310 $ (7,623) $ 5,432
Percentage of total revenues (13.1) % 6.9 % (10.5) % 8.1 %
Critical Accounting Policies and Estimates
"Management's Discussion and Analysis of Financial Condition and Results of Operations" is based on our unaudited condensed financial statements included herein, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our significant accounting policies are summarized in Note 1 to the Financial Statements. In preparing our financial statements in accordance with GAAP and pursuant to the rules and regulations of theSEC , we make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. We base our estimates, assumptions and judgments on historical experience and other factors that we believe are reasonable. We evaluate our estimates, assumptions and judgments on a regular basis and apply our accounting policies on a consistent basis. We believe that the estimates, 25
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assumptions and judgments involved in the accounting for revenue recognition, goodwill, and income taxes have the most potential impact on our financial statements. Historically, our estimates, assumptions and judgments relative to our critical accounting policies have not differed materially from actual results.
Recent Accounting Pronouncements
Refer to Note 1, Description of Business and Summary of Significant Accounting Policies, to our Unaudited Condensed Financial Statements, included in Part I, Item 1 of this report for a discussion of applicable recent accounting pronouncements.
Analysis of Quarterly Results from Continuing Operations
The following table presents our total revenues for the three and six months
ended
Three Months Ended September 30,
$
Increase %
2022 2021 (decrease) Change
(In thousands, except percentages)
Product revenues $ 20,788 $ 17,736 $ 3,052 17.2 %
Service revenues 18,471 15,511 2,960 19.1 %
Total revenues $ 39,259 $ 33,247 $ 6,012 18.1 %
Six Months Ended September 30,
$
Increase %
2022 2021 (decrease) Change
(In thousands, except percentages)
Product revenues $ 37,169 $ 35,762 $ 1,407 3.9 %
Service revenues 35,757 31,570 4,187 13.3 %
Total revenues $ 72,926 $ 67,332 $ 5,594 8.3 %
Product revenues primarily consist of product sales, but also includes OEM
products for the traffic signal markets, as well as third-party product sales
for installation under certain construction-type contracts. Product revenues for
the three months ended September 30, 2022 increased 17.2% to $20.8 million , as
compared to $17.7 million in the corresponding period in the prior year,
primarily due to continued strong demand for our hardware solutions.
Service revenues consist of software, managed services, systems integration, and
consulting services revenues. In certain instances, the lack of product
availability can impact the timing of systems integration projects and
associated revenue recognition. Service revenues for the three months ended
September 30, 2022 increased 19.1% to $18.5 million , compared to $15.5 million
in the corresponding period in the prior year. This increase was due to
continued adoption of Iteris' ClearMobility Platform and increased software and
managed services revenue. Total annual recurring revenue, which we define as all
software and managed services revenue was 25% of total revenue for the three
months ended September 30, 2022 and 26% of total revenue for the three months
ended September 30, 2021 .
Total revenues for the three months ended
Product revenues for the six months endedSeptember 30, 2022 increased 3.9% to$37.2 million , as compared to$35.8 million in the corresponding period in the prior year, primarily due to continued strong demand for our hardware solutions, but offset by global supply chain restraints that particularly constrained product shipments in our fiscal 2023 first quarter. Service revenues for the six months endedSeptember 30, 2022 increased 13.3% to$35.8 million , compared to$31.6 million in the corresponding period in the prior year. This increase was due to continued adoption ofIteris' ClearMobility Platform and increased software and managed services revenue. Total annual recurring revenue, which we define as all software and managed services revenue was 27% of total revenue for the six months endedSeptember 30, 2022 and 25% of total revenue for the six months endedSeptember 30, 2021 .
Total revenues for the six months ended
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We plan to continue to focus on securing new contracts and extending and/or continuing our existing relationships with both key public-sector and private-sector customers that have projects in their final project phases. While we believe our ability to obtain additional large contracts will contribute to overall revenue growth, the mix of subcontractor revenue and third-party product sales to our public-sector customers will likely affect the related total gross profit from period to period, as total revenues derived from subcontractors and third-party product sales generally have lower gross margins than revenues generated by our professional services. Backlog is an operational measure representing future unearned revenue amounts believed to be firm that are to be earned under our existing agreements and are not included in deferred revenue on our balance sheets. Backlog includes new bookings but does not include announced orders for which definitive contracts have not been executed. In many cases, backlog is less than the sum total contract value of all our customer agreements. We believe backlog is a useful metric for investors, given its relevance to total orders, but there can be no assurances we will recognize revenue from bookings or backlog timely or ever. Total backlog was approximately$111.8 million as ofSeptember 30, 2022 compared to approximately$83.4 million as ofSeptember 30, 2021 .
Gross Profit and Gross Margin
The following tables present details of our gross profit and gross margin for
the three and six months ended
Three Months Ended September 30, $ %
2022 2021 Increase (decrease) Change
(In thousands, except percentages)
Product gross profit $ 762 $ 8,753 $ (7,991) (91.3) %
Service gross profit 5,789 2,377 3,412 143.5 %
Total gross profit $ 6,551 $ 11,130 $ (4,579) (41.1) %
Product gross margin as a % of product
revenues 3.7 % 49.4 %
Service gross margin as a % of service
revenues 31.3 % 15.3 %
Total gross margin as a % of total
revenues 16.7 % 33.5 %
Six Months Ended September 30, $ %
2022 2021 Increase Change
(In thousands, except percentages)
Product gross profit $ 5,486 $ 17,222 $ (11,736) (68.1) %
Service gross profit 11,224 8,001 3,223 40.3 %
Total gross profit $ 16,710 $ 25,223 $ (8,513) (33.8) %
Product gross margin as a % of product
revenues 14.8 % 48.2 %
Service gross margin as a % of service
revenues 31.4 % 25.3 %
Total gross margin as a % of total
revenues 22.9 % 37.5 %
Our product gross margin as a percentage of product revenues for the three and
six months ended September 30, 2022 decreased approximately 4,570 basis points
and 3,340 basis points, respectively, compared to the corresponding periods in
the prior year. The decline was due to global supply chain constraints that
prevented the Company from sourcing certain electronics components (most notably
semiconductors) through traditional channels at normal prices. To maintain
customer loyalty, increase market penetration, and build buffer stock to reduce
future shipping disruptions, the Company sourced various components from
electronics brokers (or aftermarket brokers) at elevated prices. Electronics
brokers typically require buyers to pay upon receipt, whereas traditional
sources offer standard payment terms. While this dynamic impacted working
capital and cash flow in the periods, the Company expects these dynamics to
renormalize upon the release of new circuit board designs that have qualified
components from traditional supplier channels at more reasonable prices. The
Company expects to begin shipments of these new circuit boards in the third
quarter of fiscal 2023 resulting in improvements in product gross margins.
Our service gross margin as a percentage of service revenues for the three and
six months ended September 30, 2022 increased approximately 1,600 basis points
and 610 basis points, respectively, as compared to the corresponding periods in
the prior year primarily due to the prior year periods including a contractual
loss with a customer of $2.8 million and $3.4 million , respectively.
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Our total gross margin as a percentage of total revenues for the three and six months endedSeptember 30, 2022 decreased approximately 1,680 basis points and 1,460 basis points, respectively, as compared to the corresponding prior year periods due to the aforementioned reasons. General and Administrative Expense General and administrative expense for the three months endedSeptember 30, 2022 decreased approximately 18.5% to$5.0 million , compared to$6.1 million for the three months endedSeptember 30, 2021 . General and administrative expense for the six months endedSeptember 30, 2022 decreased approximately 8.7% to$11.4 million , compared to$12.5 million for the six months endedSeptember 30, 2021 . The decrease for the three and six months endedSeptember 30, 2022 as compared to the three and six months endedSeptember 30, 2021 was due to cost savings associated with the prior restructuring activities as well as decreased rent, and outside services expenses.
Sales and Marketing
Sales and marketing expense for the three months endedSeptember 30, 2022 increased approximately 15.9% to$5.7 million compared to$4.9 million for the three months endedSeptember 30, 2021 . Sales and marketing expense for the six months endedSeptember 30, 2022 increased approximately 14.7% to$10.9 million compared to$9.5 million for the six months endedSeptember 30, 2021 . The increase was primarily due to the addition of sales and sales support representatives, resulting in higher compensation and benefit costs. Research and Development Expense Research and development expense for the three months endedSeptember 30, 2022 increased approximately 18.8% to$2.2 million , compared to$1.8 million for the three months endedSeptember 30, 2021 . Research and development expense for the six months endedSeptember 30, 2022 increased approximately 19.9% to$4.3 million , compared to$3.6 million for the six months endedSeptember 30, 2021 . The overall increase was primarily due to the continued investment in research and development activities largely focused on improving our existing software related offerings and the re-design of certain circuit boards as part of the Company's supply chain mitigation program. We plan to continue to invest in the development of further enhancements and functionality of our Iteris ClearMobility Platform which includes among other things our software portfolio and our Vantage sensors. Certain development costs were capitalized into intangible assets in the unaudited condensed balance sheets in both the current and prior year periods; however, certain costs did not meet the criteria for capitalization under GAAP and are included in research and development expense. Going forward, we expect to continue to invest in our software solutions. This continued investment may result in increases in research and development costs, as well as additional capitalized software in future periods.
Amortization of Intangible Assets
Amortization of intangible assets was approximately
Income Taxes
The effective tax rate used for interim periods is the estimated annual effective tax rate, based on our current estimate of full year results, except that taxes related to specific events, if any, are recorded in the interim period in which they occur.
Income tax expense for the three and six months endedSeptember 30, 2022 was approximately$0.3 million and$0.1 million , or (3.9)% and (1.0)%, respectively, of pre-tax loss, as compared with a benefit of approximately$0.2 million and$0.2 million , or 11.2% and 11.4%, respectively, of pre-tax loss for the three and six months endedSeptember 30, 2021 . In assessing the realizability of our deferred tax assets, we review all available positive and negative evidence, including reversal of deferred tax liabilities, potential carrybacks, projected future taxable income, tax planning strategies and recent financial performance. As we have experienced a cumulative pre-tax loss over the trailing three years, we continue to maintain a valuation allowance against our deferred tax assets. We intend to continue maintaining a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. 28
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Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that we are able to actually achieve.
OnMarch 27, 2020 , the CARES Act was enacted in response to the Pandemic. The CARES Act contains numerous income tax provisions, such as relaxing limitations on the deductibility of interest and the use of net operating losses arising in taxable years beginning afterDecember 31, 2017 . The income tax provisions of the CARES Act had an immaterial impact on our current taxes, deferred taxes, and uncertain tax positions of the Company in the year endedMarch 31, 2022 . The CARES Act also allows for the deferral of payroll taxes, as well as the immediate refund of federal Alternative Minimum Tax credits, which had previously been made refundable over a period of four years by the Tax Cuts and Jobs Act of 2017. The Company is utilizing the provision of the CARES Act allowing for the deferral of payroll taxes as ofSeptember 30, 2022 .
Liquidity and Capital Resources
Liquidity Outlook
We believe we will have adequate liquidity over the next 12 months to operate our business and to meet our cash requirements. As ofSeptember 30, 2022 , we had cash and cash equivalents totaling approximately$8.0 million . Additionally, the Company had working capital of approximately$26.0 million as ofSeptember 30, 2022 . As a result of the Pandemic, we have taken and will continue to take action to reduce costs, preserve liquidity and manage our cash flow. Such actions include, but are not limited to reducing our discretionary spending, reducing capital expenditures, and reducing payroll costs, including employee furloughs, pay freezes and pay cuts as needed. While the impact and duration of the Pandemic on our business is currently uncertain, the situation is expected to be temporary. The Company increased inventory by approximately$4.9 million during the six months endedSeptember 30, 2022 , which was a planned increase in inventory as part of the Company's supply chain mitigation program. During the three months endedSeptember 30, 2022 , inventory decreased fromJune 30, 2022 , by a net$0.5 million though the Company did replenish certain electronics components in theSeptember 30, 2022 period to maintain buffer stock targets consistent with our supply chain mitigation program. The cash flow used in operating activities of our continuing operations was approximately$13.6 million which was primarily driven by the planned increase in inventory and the re-design of certain circuit boards as part of the Company's supply chain mitigation program to help assure the Company has product and raw materials to satisfy customer demand, and the net operating loss is a result of higher inventory component costs for product we shipped in the periods. The Company's tactics to mitigate the current global supply chain issues included accumulating inventory in the first two quarters of fiscal year 2023 to reduce the risk of customer disruptions while our engineering teams re-design certain circuit boards to accommodate electronic components (primarily semiconductors) that are more readily available through traditional sources at more normal prices. In future periods, the increase in inventory purchases and in particular components purchased in the secondary markets will be curtailed, meaning the Company does not expect to continue to accumulate inventory in the future and in the same magnitude. However, we may remain supply-constrained beyond the fiscal quarter endedSeptember 30, 2022 . If such efforts are not successful for the foreseeable future, the Company may need to further adjust its operations to have sufficient liquidity.
Cash Flows
We have historically financed our operations with a combination of cash flows from operations and the sale of equity securities. We expect to continue to rely on cash flows from operations and our cash reserves to fund our operations, which we believe to be sufficient to fund our operations for at least the next twelve months. However, we may need or choose to raise additional capital to fund potential future acquisitions and our future growth. We may raise such funds by selling equity or debt securities to the public or to selected investors or by borrowing money from financial institutions. If we raise additional funds by issuing equity or convertible debt securities, our existing stockholders may experience significant dilution, and any equity securities that may be issued may have rights senior to our existing stockholders. There is no assurance that we will be able to secure additional funding on a timely basis, on terms acceptable to us, or at all. AtSeptember 30, 2022 , we had$26.0 million in working capital, excluding current assets and liabilities of discontinued operations, which included$8.0 million in cash and cash equivalents. This compares to working capital of$36.8 million atMarch 31, 2022 , excluding current assets and liabilities of discontinued operations, which included$23.8 million in cash and cash equivalents. 29
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Operating Activities. Net cash used in operating activities of our continuing operations for the six months endedSeptember 30, 2022 of approximately$13.6 million was primarily the result of approximately$5.6 million from non-cash items, primarily for noncash lease expense, deferred income taxes, depreciation, stock-based compensation, and amortization. This was offset by our net loss from continuing operations of approximately$12.3 million coupled with approximately$7.0 million of outflows due to changes in working capital which was primarily driven by the planned increase in inventory as part of the Company's supply chain mitigation program. The Company does not expect such a large increase in inventory in future periods. The efforts to redesign circuit boards around more readily available parts at lower prices has resulted in new circuit boards that are expected to commence production during the third quarter of fiscal 2023 with the aim of reducing purchases in the broker market at elevated prices and reducing cash outflows related to inventory purchases in future periods. However, if such efforts are not successful for the foreseeable future, the Company may need to further adjust its operations to maintain sufficient liquidity. Net cash used in operating activities from discontinued operations was de minimis. Net cash used in operating activities of our continuing operations for the six months endedSeptember 30, 2021 of approximately$1.4 million was primarily the result of our net income of approximately$8.0 million in non-cash items, primarily for noncash lease expense, deferred income taxes, depreciation, stock-based compensation, and amortization. This was offset by our net loss from continuing operations of approximately$1.5 million . Net cash used in operating activities from discontinued operations was de minimis. Investing Activities. Net cash used in investing activities of our continuing operations during the six months endedSeptember 30, 2022 of approximately$1.0 million was primarily the result of approximately$0.4 million of property and equipment purchases, and approximately$0.7 million of capitalized software development costs. Net cash provided by investing activities from discontinued operations was de minimis. Net cash provided by investing activities of our continuing operations during the six months endedSeptember 30, 2021 was primarily the result of approximately$3.1 million in proceeds from the sale and maturity of short-term investments offset by approximately$0.3 million of property and equipment purchases, and approximately$1.3 million of capitalized software development costs. Net cash provided by investing activities from discontinued operations was approximately$1.5 million .
Financing Activities. Net cash used in financing activities of our continuing
operations during the six months ended
Net cash provided by financing activities of our continuing operations during the six months endedSeptember 30, 2021 was the result of approximately$1.4 million and$0.2 million of cash proceeds from the exercises of stock options and purchase of ESPP shares, respectively.
Off Balance Sheet Arrangements
We did not have any material off balance sheet arrangements at
Seasonality We have historically experienced seasonality, which adversely affects product sales in our third and fourth fiscal quarters due to a reduction in intersection construction and repairs during the winter months due to inclement weather conditions, with the third fiscal quarter generally affected the most by inclement weather. We have also experienced seasonality, particularly with respect to our service revenues, especially in the third fiscal quarter due to the increased number of holidays, causing a reduction in available billable hours.
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