Cambium Networks Corp

Previous wording

The following discussion and analysis of financial condition and results of operation should be read in conjunction with the consolidated financial statements and related notes thereto of Cambium Networks Corporation (“Cambium”, “we”, “our”, or “us”) included elsewhere in this Quarterly Report on Form 10-Q and with the financial statements and related notes and Management’s Discussion and Analysis in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed March 15, 2024. Results for the three-month period ended March 31, 2024 are not necessarily indicative of the results that may be expected for any period in the future.

Current wording

The following discussion and analysis of financial condition and results of operation should be read in conjunction with the consolidated financial statements and related notes thereto of Cambium Networks Corporation (“Cambium”, “we”, “our”, or “us”) included elsewhere in this Quarterly Report on Form 10-Q and with the financial statements and related notes and Management’s Discussion and Analysis in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed March 15, 2024. Results for the three-month and six-month periods ended June 30, 2024 are not necessarily indicative of the results that may be expected for any period in the future.

Previous wording

Cambium Networks is a global technology company that designs, develops, and manufactures fixed wireless and fiber broadband, enterprise Wi-Fi access and local area networking (LAN) infrastructure solutions for a wide range of applications, including broadband access, wireless backhaul, Internet of Things (IoT), public safety communications, and Wi-Fi access for commercial use cases. Our products enable service providers, enterprises, industrial organizations, and governments to deliver exceptional digital experiences and device connectivity, with compelling economics. Our ONE network platform simplifies the management of Cambium Networks' wired and wireless broadband and network edge technologies. Our product lines fall into three broad, interrelated categories: Fixed Wireless & fiber Broadband (FWB), Enterprise networking, and Subscription and Services. The FWB portfolio spans point-to-point (PTP) and point-to-multi-point (PMP) architectures over multiple standards, including IEEE 802.11 and 3GPP (Third Generation Partnership Program) and frequency bands, including licensed, unlicensed, and lightly licensed spectrum, and fiber products. In the third quarter of 2023, we introduced and had our first commercial shipments of a passive optical networking (PON) solution, supporting Gigabit PON (GPON) and XGS-PON (also known as 10G-PON or G987). The Enterprise portfolio includes a complete range of indoor and outdoor Wi-Fi access points, indoor and hardened copper and optical based ethernet switches, and integrated security gateway and software-defined wide area network (SD-WAN) devices.

Current wording

Cambium Networks is a global technology company that designs, develops, and manufactures fixed wireless and fiber broadband, enterprise Wi-Fi access and local area networking (LAN) infrastructure solutions for a wide range of applications, including broadband access, wireless backhaul, Internet of Things (IoT), public safety communications, and Wi-Fi access for commercial use cases. Our products enable service providers, enterprises, industrial organizations, and governments to deliver exceptional digital experiences and device connectivity, with compelling economics. Our ONE network platform simplifies the management of Cambium Networks' wired and wireless broadband and network edge technologies. Our product lines fall into three broad, interrelated categories: Fixed Wireless & fiber Broadband (FWB), Enterprise networking, and Subscription and Services. The FWB portfolio spans point-to-point (PTP) and point-to-multi-point (PMP) architectures over multiple standards, including IEEE 802.11 and 3GPP (Third Generation Partnership Program) and frequency bands, including licensed, unlicensed, and lightly licensed spectrum, and fiber products. In the second quarter of 2024, both our ePMP4600 and PMP 450v platforms received FCC approval to operate in the recently released 6 GHz band in conjunction with our approved Automated Frequency Coordination (AFC) service.

Previous wording

The Subscription and Services portfolio includes network planning and design as well as cloud or on-premises network management and control solutions. The latter capability, delivered through subscription to cnMaestro™ X, forms the foundation of our ONE Network, a cloud-based network management architecture that allows users to remotely configure, monitor, and manage their wired and wireless network. It provides a single, centralized view of all Cambium Network devices, as well as real-time performance and usage data, allowing users to control and optimize the network configuration and settings. Advanced services offered in conjunction with this platform include application visibility and control, which is used to optimize end-user experiences; and "Assists" which provide network administrators suggestions on trouble shooting or optimizing network settings. The integrated security gateway and SD-WAN for small and medium businesses is also associated with a subscription for network security services.

Current wording

The Subscription and Services portfolio includes network planning and design, and cloud or on-premises network management and control solutions. The latter capability, delivered through subscription to cnMaestro™ X, forms the foundation of our ONE Network, a cloud-based network management architecture that allows users to remotely configure, monitor, and manage their wired and wireless network. It provides a single, centralized view of all Cambium Network devices, and real-time performance and usage data, allowing users to control and optimize network configuration and settings. Advanced services offered in conjunction with this platform include application visibility and control, which is used to optimize end-user experiences; and "Assurance" which allows network administrators the ability to rapidly troubleshoot network issues using AI-powered root cause analysis with proactive resolution, ensuring service level agreements are met and preventing client impact. The integrated security gateway and SD-WAN for small and medium businesses is also associated with a subscription for network security services.

Previous wording

During 2023, although we experienced an overall improvement in the supply chain constraints that had persisted industry-wide for multiple periods prior to 2023, we identified an increase in channel inventories, particularly of our Enterprise products and point-to-multi-point products, as channel partners had increased purchases in prior periods in reaction to the supply constraints. As a result, we experienced a reduction in distributor purchases and an increase in stock rotations in 2023 in the first quarter of 2024 as distributors endeavored to right-size their inventories. The level of inventory at distributors has improved and is now reaching historic levels. However, there is a risk distributors may choose to maintain lower levels of inventory than historically has been the case which could delay our revenue recovery. The high level of inventory across the industry along with macroeconomic factors such as higher interest rates which impact private sector capital investment, and concerns about a global economic slow-down have resulted in softened demand. This has continued to negatively impact net revenues in the first quarter of 2024 and is also expected to negatively impact revenues in the second quarter of 2024. To reduce excess channel inventories, we have provided and may continue to provide additional discounts and other incentives to our customers. Further, in addition to the amounts recorded in the fourth quarter of 2023, in the first quarter of 2024, we recorded $6.2 million provision for inventory excess and obsolescence and $0.8 million loss on supplier commitments expense due to a decrease in demand and to offset the risk that technology shifts could result in this increased inventory becoming obsolete before it is deployed.

Current wording

In the first and second quarters of 2024 distributors endeavored to right-size their inventories. Inventory levels at our distributors and other channel partners have improved globally. However, distributors may maintain lower levels of inventory than historically has been the case which could delay purchases and accordingly, delay our revenue recovery. The level of inventory across the industry along with macroeconomic factors such as higher interest rates, which impact private sector capital investment, and concerns about a global economic slowdown have resulted in softened demand for our products and services. We continue to see a high level of competition in our industry due to slower demand and aggressive pricing. We believe that this will continue to negatively impact revenues in the second half of 2024. We may continue to have ongoing risks of technology shifts that could result in any increased inventory becoming obsolete before it is deployed.

Previous wording

We have taken and continue to take actions to address these issues, including actions to reduce inventory of our Enterprise products as well as to reduce our operating costs to improve profitability and cash flow. We also continue to work closely with our contract manufacturers and supply chain partners to balance production to market demand.

Current wording

We continue to take action to manage our operating costs to improve profitability and cash flow. We also continue to work closely with our contract manufacturers and supply chain partners to balance production to market demand.

Previous wording

We continue to monitor the impact of macroeconomic factors, including a potential global recession, inflationary pressures, and growing political tensions as a result of regional conflicts. We also believe that our customers continue to grapple with the impact of these macroeconomic factors on their businesses and future investment plans, resulting in business uncertainty and a more constrained approach to forecasts and orders. Any prolonged economic disruptions, further deterioration in the global economy or outbreaks of international hostilities could have a negative impact on demand from our customers in future periods.

Current wording

We continue to monitor the impact of macroeconomic factors, including a potential global recession, inflationary pressures, and growing political tensions because of regional conflicts. We also believe that our customers continue to grapple with the impact of these macroeconomic factors on their businesses and future investment plans, resulting in business uncertainty and a more constrained approach to forecasts and orders. Any prolonged economic disruptions, further deterioration in the global economy or outbreaks of international hostilities could have a negative impact on demand from our customers in future periods.

Previous wording

Total revenue was $42.3 million, a decrease of 45% year-over-year

Current wording

Total revenue was $45.9 million, a decrease of 23% year-over-year

Previous wording

Total costs of revenues and operating expenses were $63.3 million

Current wording

Total costs of revenues and operating expenses were $58.0 million

Previous wording

Our revenues are generated primarily from the sale of our products, which consist of hardware with essential embedded software. Our revenues also include amounts for software products, extended warranty on hardware products and subscription services. We generally recognize product revenues at the time of shipment, provided that all other revenue recognition criteria have been met. Revenues are recognized net of estimated stock returns, volume-based rebates and cooperative marketing allowances that we provide to distributors. We recognize subscription services revenue ratably over the term in which services are provided and our performance obligation is satisfied. We provide a standard warranty on our hardware products, with the term depending on the product, and record a liability for the estimated future costs associated with potential warranty claims. In addition, we also offer extended warranties for purchase and represents a future performance obligation for us. The extended warranty is included in deferred revenues and is recognized on a straight-line basis over the term of the extended warranty.

Current wording

Our revenues are generated primarily from the sale of our products, which consist of hardware with essential embedded software. Our revenues also include amounts for software products, extended warranty on hardware products and subscription services. We generally recognize product revenues at the time of shipment, provided that all other revenue recognition criteria have been met. Revenues are recognized net of estimated stock returns, rebates, incentives and cooperative marketing allowances that we provide to distributors. We recognize subscription services revenue ratably over the term in which services are provided and our performance obligation is satisfied. We provide a standard warranty on our hardware products, with the term depending on the product, and record a liability for the estimated future costs associated with potential warranty claims. In addition, we also offer extended warranties for purchase and represents a future performance obligation for us. The extended warranty is included in deferred revenues and is recognized on a straight-line basis over the term of the extended warranty.

Previous wording

Our cost of revenues is comprised primarily of the costs of procuring finished goods from our third-party manufacturers, third-party logistics and warehousing provider costs, freight costs and warranty costs. We outsource our manufacturing to third-party manufacturers located primarily in Mexico, China, Israel and Taiwan. Cost of revenues also includes costs associated with supply operations, including personnel related costs and allocated overhead costs, provision for excess and obsolete inventory, third-party license costs and third-party costs related to services we provide. Cost of revenues also includes amortization of capitalized software development costs associated with products marketed to be sold.

Current wording

Our cost of revenues is comprised primarily of the costs of procuring finished goods from our third-party manufacturers, third-party logistics and warehousing provider costs, freight costs and warranty costs. We outsource our manufacturing to third-party manufacturers located primarily in Mexico, China, Israel and Taiwan. Cost of revenues also includes costs associated with supply operations, including personnel related costs and allocated overhead costs, provision for excess and obsolete inventory and loss on supplier commitment expense, third-party license costs and third-party costs related to services we provide. Cost of revenues also includes amortization of capitalized software development costs associated with products marketed to be sold.

Previous wording

Gross profit has been and will continue to be affected by various factors, including changes in product mix. The margin profile of products within each of our core product categories can vary significantly depending on the operating performance, features and manufacturer of the product. Gross margin will also vary as a function of changes in pricing due to competitive pressure, our third-party manufacturing and other production costs, cost of shipping and logistics, provision for excess and obsolete inventory and other factors. We expect our gross margins will fluctuate from period to period depending on the interplay of these various factors.

Current wording

Gross profit has been and will continue to be affected by various factors, including changes in product mix. The margin profile of products within each of our core product categories can vary significantly depending on the operating performance, features and manufacturer of the product. Gross margin will also vary as a function of changes in pricing due to competitive pressure, our third-party manufacturing and other production costs, cost of shipping and logistics, provision for excess and obsolete inventory and loss on supplier commitment expense and other factors. We expect our gross margins will fluctuate from period to period depending on the interplay of these various factors.

Previous wording

PTP revenues decreased $3.6 million, or 20.0%, from the three-month period ended March 31, 2023 to 2024 mostly driven by lower demand for backhaul and unlicensed spectrum products in North America and decreased demand for defense products in Europe, Middle East, Africa.

Current wording

PTP revenues decreased $11.4 million, or 45.5%, from the three-month period ended June 30, 2023 to 2024 mostly driven by lower demand for defense products in North America partially offset by increased demand for defense products in Europe, Middle East, Africa.

Previous wording

Gross margin decreased to 20.5% for the three-month period ended March 31, 2024 from 51.2% for the three-month period ended March 31, 2023. The decrease primarily reflects the impact from an increase in our excess and obsolescence reserve, increased incentives and lower revenues from higher margin products.

Current wording

Gross margin decreased to 31.4% for the three-month period ended June 30, 2024 from 49.1% for the three-month period ended June 30, 2023. The decrease primarily reflects the impact from an increase in our excess and obsolescence reserve and loss on supplier commitment expense.

Previous wording

Sales and marketing expense decreased $1.9 million, or 16.7%, to $9.7 million for the three-month period ended March 31, 2024 from $11.7 million for the three-month period ended March 31, 2023. As a percentage of revenues, sales and marketing expense increased to 23.0% in 2024 from 15.1% in 2023 over the same period. The decrease in sales and marketing expense was primarily due to $1.0 million lower staff-related costs, mostly due to a reduction in headcount from restructuring activities, $0.4 million lower marketing-related spend, mostly due to lower spend on trade shows, $0.3 million lower corporate bonus expense as we failed to meet bonus targets, and $0.3 million lower outside contractor spend.

Current wording

Sales and marketing expense decreased $1.8 million, or 15.8%, to $9.7 million for the three-month period ended June 30, 2024 from $11.5 million for the three-month period ended June 30, 2023. The decrease in sales and marketing expense was primarily due to $0.7 million lower staff-related costs, mostly due to a reduction in headcount from restructuring activities in 2023 offset by new hires in 2024, $0.3 million lower marketing-related spend, mostly due to lower spend on trade shows, $0.3 million lower travel-related costs, $0.2 million lower variable compensation expense and $0.2 million lower share-based compensation expense.

Previous wording

Interest expense increased $0.3 million, or 47.6%, to $0.9 million for the three-month period ended March 31, 2024 from $0.6 million for the three-month period ended March 31, 2023. The increase was primarily due to an increase in the interest rate on the term loan and the addition of interest on the revolving credit facility in the first quarter of 2024.

Current wording

Interest expense increased $0.7 million, or 125.2%, to $1.3 million for the three-month period ended June 30, 2024 from $0.6 million for the three-month period ended June 30, 2023. The increase was primarily due to an increase in the interest rate on the term loan and the addition of interest on the revolving credit facility.

Previous wording

Other expense, net decreased from expense of $0.2 million for the three-month period ended March 31, 2023 to $0.1 million for the three-month period ended March 31, 2024, primarily due to foreign currency fluctuations.

Current wording

Other expense, net decreased from expense of $0.1 million for the three-month period ended June 30, 2023 to $0.0 million for the three-month period ended June 30, 2024, primarily due to foreign currency fluctuations.

Previous wording

Revenues decreased $35.1 million, or 45.3%, to $42.3 million for the three-month period ended March 31, 2024, from $77.4 million for the three-month period ended March 31, 2023, with the largest decrease in our enterprise product category driven by lower order volumes from distributors as channel inventory levels start to recover, but still remain high. Revenues also decreased in our point-to-multi-point product category ahead of a product transition to 6 GHz technology and our point-to-point product category driven by decreased demand for backhaul and unlicensed products.

Current wording

Revenues decreased $48.7 million, or 35.5%, to $88.3 million for the six-month period ended June 30, 2024, from $136.9 million for the six-month period ended June 30, 2023, with the largest decrease in our enterprise product category driven by lower order volumes from distributors. Revenues also decreased in our point-to-point product category driven by decreased defense orders due to timing of funding in North America and our point-to-multi-point product category as service providers transition to 6 GHz technology.

Previous wording

Our PMP revenues decreased $2.9 million, or 12.9%, from the three-month period ended March 31, 2023 to 2024. Our decrease in point-to-multi-point revenues were driven by lower demand from service providers in North America as they await the approval of our 6 GHz products, but benefited from increased demand for our ePMP and 60GHz products in Europe, Middle East, Africa.

Current wording

Our PMP revenues decreased $10.0 million, or 20.3%, from the six-month period ended June 30, 2023 to 2024. Our decrease in point-to-multi-point revenues were driven by lower demand from service providers in North America as they start to transition to our 6 GHz products.

Previous wording

Enterprise revenues decreased $28.5 million, or 79.9%, from the three-month period ended March 31, 2023 to 2024. Enterprise revenues decreased in all regions except Caribbean and Latin America, with the largest decrease in North America and Europe, Middle East, Africa, driven mostly by lower order volumes from distributors. Enterprise product revenues are starting to improve, but are still impacted by the recovery of the product supply chain during 2023 which reduced our prior advantage in supply and order fulfillment and therefore, increased competition, coupled with aggressive pricing by our competitors, as well as higher inventory levels still in the channel.

Current wording

Enterprise revenues decreased $23.6 million, or 56.1%, from the six-month period ended June 30, 2023 to 2024. Enterprise revenues decreased in all regions except Caribbean and Latin America, with the largest decrease in North America and Europe, Middle East, Africa, driven mostly by lower order volumes from distributors. Enterprise product revenues are improving, but remain impacted by the recovery of the product supply chain during 2023 which reduced our prior advantage in supply and order fulfillment and therefore, increased competition and aggressive pricing by our competitors.

Previous wording

Revenues decreased in all regions except Caribbean and Latin America from the three-month period ended March 31, 2023 to March 31, 2024. North America revenues decreased $22.5 million, or 47.4%, with the largest decrease in enterprise product revenues due to decreased demand from high levels of channel inventory, along with lower PMP and PTP revenues due to decreased demand. Europe, Middle East, Africa revenues decreased by $11.3 million, or 57.3%, mostly driven by lower enterprise product revenues due to decreased demand as a result of high channel inventory and lower PTP revenues due to lower demand from defense, partially offset by higher PMP revenues due to increased demand. Caribbean and Latin America revenues increased $1.2 million, or 32.8%, mostly driven by higher PMP and enterprise product revenues partially offset by lower PTP revenues. Asia Pacific revenues decreased $2.4 million, or 37.9%, mostly driven by lower enterprise product revenues and lower PTP revenues both due to decreased demand.

Current wording

Revenues decreased in all regions except Caribbean and Latin America from the six-month period ended June 30, 2024 to June 30, 2024. North America revenues decreased $41.4 million, or 47.5%, with the largest decrease in PTP product revenues due to lower demand for defense and licensed microwave products, lower enterprise product revenues due to decreased demand for Wi-Fi 6 products and lower PMP revenues due to decreased demand from service providers. Europe, Middle East, Africa revenues decreased by $3.1 million, or 11.6%, mostly driven by lower enterprise product revenues due to decreased Wi-Fi 6 demand and high channel inventory, partially offset by higher PTP revenues due to increased demand from defense. Caribbean and Latin America revenues increased $0.5 million, or 5.1%, mostly driven by higher PMP. Asia Pacific revenues decreased $4.7 million, or 34.2%, mostly driven by lower enterprise product revenues and lower PTP revenues, both due to decreased demand.

Previous wording

Cost of revenues decreased $4.1 million, or 10.8%, to $33.7 million for the three-month period ended March 31, 2024 from $37.7 million for the three-month period ended March 31, 2023. The decrease in cost of revenues was primarily due to decreased revenues but was partially offset by $6.2 million provision for excess and obsolescence recorded in the three-months ended March 31, 2024, a $4.8 million increase from the three-month period ended March 31, 2023, and higher material fixed costs. The increase in the excess and obsolescence reserve was mostly due to a drop in lifetime demand.

Current wording

Cost of revenues decreased $2.8 million, or 4.2% to $65.2 million for the six-month period ended June 30, 2024 from $68.0 million for the six-month period ended June 30, 2023. The decrease in cost of revenues was primarily due to decreased revenues but was mostly offset by $8.6 million provision for excess and obsolescence recorded in the six-month period ended June 30, 2024, a $7.1 million increase from the six-month period ended June 30, 2023 and $5.3 million loss on supplier commitment recorded in the six-months ended June 30, 2024, a $4.5 million increase from the six-month period ended June 30, 2023, and higher amortization of capitalized software costs. The increase in the excess and obsolescence reserve was mostly due to a decrease in lifetime demand and increase in the loss on supplier commitment expense was mostly due to decreased demand for fiber and switching components.

Previous wording

Research and development expense decreased $3.5 million, or 24.3%, to $10.8 million for the three-month period ended March 31, 2024 from $14.3 million for the three-month period ended March 31, 2023. As a percentage of revenues, research and development expenses increased to 25.5% in 2024 from 18.4% in 2023 over the same period. The decrease in research and development expense was primarily due to $1.7 million lower staff-related costs, mostly due to a reduction in headcount from restructuring activities, $1.0 million lower corporate bonus expense as we failed to meet bonus targets, $0.5 million lower outside contractor spend due to the restructuring actions implemented in 2023, $0.3 million lower share-based compensation due to lower headcount and $0.2 million lower homologation and regulatory fees due to the timing of projects. These reductions were offset by a $0.3 million increase in restructuring expenses related to additional headcount reductions completed in the first quarter of 2024.

Current wording

Research and development expense decreased $7.3 million, or 26.9% to $20.0 million for the six-month period ended June 30, 2024 from $27.3 million for the six-month period ended June 30, 2023. The decrease in research and development expense was primarily due to $3.4 million lower staff-related costs, mostly due to a reduction in headcount from restructuring activities completed in 2023, $1.4 million lower outside contractor spend due to the restructuring actions implemented in 2023 and streamlining projects, $0.8 million lower share-based compensation expense due to headcount reductions, $0.4 million lower engineering project materials spend, $0.4 million lower corporate bonus expense as we failed to meet bonus targets, $0.3 million lower homologation and regulatory fees due to the timing of projects, $0.2 million lower travel-related spend and $0.2 million lower equipment repairs and maintenance expense.

Previous wording

General and administrative expense increased $0.8 million, or 12.6%, to $7.5 million for the three-month period ended March 31, 2024 from $6.7 million for the three-month period ended March 31, 2023. As a percentage of revenues, general and administrative expense increased to 17.7% in 2024 from 8.6% in 2023 over the same period. The increase in general and administrative expense was primarily due to $0.6 million increase in bad debt expense recorded in the first quarter of 2024, $0.3 million expense incurred as part of the Chief Financial Officer transition, $0.3 million higher share-based compensation expense, mostly due to new grants awarded in 2023, $0.1 million of nonrecurring expenses and $0.1 million higher legal expense, partially offset by $0.5 million lower corporate bonus expense as we failed to meet bonus targets.

Current wording

General and administrative expense increased $1.0 million, or 8.0%, to $13.5 million for the six-month period ended June 30, 2024 from $12.5 million for the six-month period ended June 30, 2023. The increase in general and administrative expense was primarily due to $0.5 million increase in share-based compensation expense, mostly due to new grants awarded in 2023 and 2024, $0.3 million increase in bad debt expense and $0.2 million higher legal expense.

Previous wording

Our provision for income taxes at March 31, 2023 was based upon the estimated annual tax rate for the year, applied to federal, state and foreign income. Due to forecasting uncertainty for 2024, our provision for income taxes at March 31, 2024 is based on 3-month year-to-date actual results. Our provision for income taxes was $4.5 million for the three-month period ended March 31, 2024 versus a provision for income taxes of $0.5 million for the three-month period ended March 31, 2023. The effective income tax rates were (20.7)% and 11.2% over the same periods, respectively. In the three-month period ended March 31, 2023, the effective tax rate of 11.2% was different from the statutory rate of 21.0%, primarily due to Foreign Derived Intangible Income and tax benefits arising on Research and Development tax credits. For the three-month period ended March 31, 2024, our effective tax rate of (20.7)% was different from the statutory rate of 21.0%, primarily due to an increase in the valuation allowance on the net deferred tax assets of the UK and U.S. companies, the tax benefit on Foreign Derived Intangible Income, and tax benefits arising on U.S. Research and Development tax credits. We increased the valuation allowance based on the analysis of cumulative income and loss positions, future income projection, and operating plans. The UK net deferred tax assets at December 31, 2023 were comprised primarily of NOL carryforwards, corporate interest restriction carryforwards and acquired intangibles and amounting to $23.6 million. The increase in the UK valuation allowance during the three-month period ended March 31, 2024 amounted to $5.9 million, for a total valuation allowance at March 31, 2024 of $29.5 million. The U.S. net deferred tax assets at December 31, 2023 were comprised primarily of capitalized research costs and share-based compensation, amounting to $15.8 million. The U.S. net deferred tax assets increased by $1.2 million during the three-month period ended March 31, 2024, to total U.S. net deferred tax assets at March 31, 2024 of $17.0 million. The U.S. valuation allowance at December 31, 2023 was $12.1 million. The increase in the U.S. valuation allowance during the three-month period ended March 31, 2024 amounted to $4.9 million, for a total valuation allowance at March 31, 2024 of $17.0 million.

Current wording

Our provision for income taxes at June 30, 2023 was based upon the estimated annual tax rate for the year, applied to federal, state and foreign income. Due to forecasting uncertainty for 2024, our provision for income taxes at June 30, 2024 is based on 6-month year-to-date actual results. Our provision for income taxes was $0.3 million for the six-month period ended June 30, 2024 versus a benefit for income taxes of $0.2 million for the six-month period ended June 30, 2023. The effective income tax rates were (0.7)% and (11.3)% over the same periods, respectively. In the six-month period ended June 30, 2023, the effective tax rate of (11.3)% was different from the statutory rate of 21.0%, primarily due to Foreign Derived Intangible Income, tax benefits arising on Research and Development tax credits, and revaluing of UK deferred tax assets at a higher future tax rate. For the six-month period ended June 30, 2024, our effective tax rate of (0.7)% was different from the statutory rate of 21.0%, primarily due to the implementation of a tax method change in the U.S. related to the tax capitalization of our research and development expenditures, resulting in a provision-to-return impact, and a reduction in the U.S. valuation allowance, while also including in the period an increase in the valuation allowance on the net deferred tax assets of the UK company, maintaining a full valuation allowance on the net UK deferred tax assets.

Previous wording

As of March 31, 2024, we had a cash balance of $38.7 million, an increase of $20.0 million from December 31, 2023. We drew $40.0 million on our revolving credit facility in the first quarter of 2024 to help manage our working capital needs for the near future, mainly to: (i) fund normal operating expenses; (ii) meet interest and principal requirements of our outstanding indebtedness; and (iii) fund capital expenditures. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of spending to support development efforts, the timing of new product introductions, market acceptance of our products and overall economic conditions. We continue to focus on cost management, operating efficiency and efficient discretionary spending. We expect to regularly assess our liquidity needs and market conditions and may raise additional equity or incur additional debt if and when our board of directors determines that doing so is in our best interest. For the first quarter of 2024, all quarterly principal and interest payments have been made in accordance with the terms of our credit facility with Bank of America. As of March 31, 2024, we were in compliance with all affirmative and negative covenants.

Current wording

As of June 30, 2024, we had a cash balance of $42.6 million, an increase of $23.9 million from December 31, 2023. We drew $40.0 million on our revolving credit facility in the first quarter of 2024 and an additional $5.0 million in the second quarter of 2024 to help manage our working capital needs for the near future, mainly to: (i) fund normal operating expenses; (ii) meet interest and principal requirements of our outstanding indebtedness; and (iii) fund capital expenditures. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of spending to support development efforts, the timing of new product introductions, market acceptance of our products and overall economic conditions. We continue to focus on cost management, operating efficiency and efficient discretionary spending. We expect to regularly assess our liquidity needs and market conditions and may raise additional equity or incur additional debt if and when our board of directors determines that doing so is in our best interest. For the second quarter of 2024, all quarterly principal and interest payments have been made in accordance with the terms of our credit facility with Bank of America. As of June 30, 2024, we were in compliance with all affirmative and negative covenants under this credit agreement.

Previous wording

Net cash used in operating activities for the three-month period ended March 31, 2023 of $6.0 million consisted of net income of $4.3 million, share-based compensation expense of $2.9 million and adjustments for depreciation and amortization and other non-cash impacts of $3.3 million, an increase in deferred tax assets of $1.5 million and changes in operating assets and liabilities that resulted in net cash outflows of $14.9 million. The changes in operating assets and liabilities consisted primarily of a $12.6 million increase in inventories due to management's plan to build inventory in response to higher revenue expectations, a $9.0 million increase in account receivable reflecting the impact of higher sales and the timing of collections and $1.5 million decrease in accounts payable due to timing of invoices and payments. The uses of cash were partially offset by $7.7 million increase in cash provided by all other assets and liabilities, mostly driven by the increase in inventory related accruals, accrued sales returns and accrued income taxes along with $1.1 million reduction in prepaid expenses, mostly due to lower vendor prepayments.

Current wording

Net cash used in operating activities for the six-month period ended June 30, 2023 of $10.5 million consisted of net income of $1.6 million, share-based compensation expense of $5.9 million and adjustments for depreciation and amortization and other non-cash impacts of $5.4 million, an increase in deferred tax assets of $3.3 million and changes in operating assets and liabilities that resulted in net cash outflows of $20.1 million. The changes in operating assets and liabilities consisted primarily of a $26.3 million increase in inventories due to lower sales along with management's plan to build inventory to manage component shortages, a $1.5 million decrease in accrued employee compensation due to lower corporate bonus accrual and $1.3 million decrease in accounts payable due to timing of invoices and payments. The uses of cash were partially offset by $4.5 million increase in cash provided by all other assets and liabilities, mostly driven by the increase in accrued sales returns along with collection of the UK RDEC tax credit, $3.8 million reduction in prepaid expenses, mostly due to lower vendor prepayments, $0.6 million higher accrued liabilities primarily related to inventory in transit and $0.2 million decrease in accounts receivable reflecting the impact of lower sales and the timing of collections.

Previous wording

Net cash used in operating activities for the three-month period ended March 31, 2024 of $15.6 million consisted primarily of net loss of $26.4 million, inventory excess and obsolescence expense of $6.2 million, share-based compensation expense of $2.6 million and adjustments for depreciation and amortization and other non-cash impacts of $3.3 million, an increase in deferred tax assets of $3.7 million and changes in operating assets and liabilities that resulted in net cash outflows of $5.0 million. The changes in operating assets and liabilities consisted primarily of $6.2 million higher prepaid expenses, mostly as a result of an increase in supplier prepayments and $3.6 million lower accounts payable due to decreased purchases and timing of payments partially offset by $5.1 million lower inventory as channel inventories are starting to decrease.

Current wording

Net cash used in operating activities for the six-month period ended June 30, 2024 of $13.2 million consisted primarily of net loss of $35.6 million, offset by an increase in our provision for inventory excess and obsolescence of $8.6 million, share-based compensation expense of $5.1 million and adjustments for depreciation and amortization and other non-cash impacts of $5.7 million, a decrease in deferred tax assets of $3.7 million and changes in operating assets and liabilities that resulted in net cash outflows of $0.8 million. The changes in operating assets and liabilities consisted primarily of a $4.4 million net increase in income taxes receivable, mostly as a result of an expected income tax refund of $3.6 million, $5.5 million higher prepaid expenses, mostly as a result of an increase in supplier prepayments, $2.7 million lower accounts payable due to decreased purchases and $0.6 million lower accrued employee compensation, partially offset by $8.4 million lower inventory and $4.1 million lower accounts receivable due to improved cash collections.

Previous wording

Our investing activities for all periods presented consisted of capital expenditures for property, equipment and software and capitalized labor costs for software to be marketed for sale in support of the growth of our business.

Current wording

Our investing activities for all periods presented consisted of capital expenditures for property, equipment, internal use software and capitalized labor costs for software to be marketed for sale in support of the growth of our business. The increase in cash used in investing activities for the six-month period ended June 30, 2023 to the six-month period ended June 30, 2024 is mostly due to leasehold improvements completed on the new Hoffman Estates headquarters.

Previous wording

During the three-month period ended March 31, 2023, net cash used in financing activities of $0.4 million was primarily due to $0.7 million repayment of principal due under the term loan facility with Bank of America and $0.1 million for taxes paid from shares withheld in net settlement of taxes due on vesting of restricted shares issued to our employees.

Current wording

During the six-month period ended June 30, 2023, net cash used in financing activities of $0.2 million was primarily due to $1.3 million repayment of principal due under the term loan facility with Bank of America and $0.4 million for taxes paid from shares withheld in net settlement of taxes due on vesting of restricted shares issued to our employees partially offset by proceeds received of $1.1 million from the issuance of ordinary shares under our ESPP and $0.4 million from the exercise of share options.

Previous wording

During the three-month period ended March 31, 2024, net cash provided by financing activities of $38.7 million was primarily due to $40.0 million drawn down on the revolver offset by $1.3 million repayment of principal due under the term loan facility with Bank of America.

Current wording

During the six-month period ended June 30, 2024, net cash provided by financing activities of $44.3 million was primarily due to $45.0 million drawn down on the revolving credit facility and proceeds received of $0.7 million from the issuance of ordinary shares under our ESPP partially offset by $1.3 million repayment of principal due under the term loan facility with Bank of America.

Previous wording

As of March 31, 2024, we had $24.1 million outstanding on our term loan facility and $40.0 million outstanding on our revolving credit facility with Bank of America. The effective interest rate on the term credit facility at March 31, 2024 was 9.15% and the weighted-average interest rate on our revolving credit facility was 8.67%. The Company is required to make quarterly principal payments of $0.7 million under the term credit facility and quarterly interest payments under both the term loan facility and the revolving credit facility. Our term loan facility and revolving credit facility matures on November 17, 2026, at which time the outstanding principal will be due. Refer to Note 6 – Debt, to our unaudited condensed consolidated financial statements in Part I of this Form 10-Q for additional information.

Current wording

As of June 30, 2024, we had $24.1 million outstanding on our term loan facility and $45.0 million outstanding on our revolving credit facility with Bank of America. The effective interest rate on the term credit facility at June 30, 2024 was 9.17% and the weighted-average interest rate on our revolving credit facility was 8.67%. The Company is required to make quarterly principal payments of $0.7 million under the term credit facility and quarterly interest payments under both the term loan facility and the revolving credit facility. Our term loan facility and revolving credit facility matures on November 17, 2026, at which time the outstanding principal will be due. Refer to Note 6 – Debt, to our unaudited condensed consolidated financial statements in Part I of this Form 10-Q for additional information.

Previous wording

For the three-month period ended March 31, 2024, the only material change to the contractual obligations and commercial commitments from what was disclosed in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 is the addition of $40.0 million in long-term debt related to the drawdown of funds against our revolving credit facility in the first quarter of 2024. The $40.0 million was drawn down in two draws, the first draw of $10.0 million in February 2024 and the second draw of $30.0 million in March 2024. As of March 31, 2024, the weighted average interest rate on the revolving credit facility is 8.67%. Interest is due and payable quarterly. The revolving credit facility matures on November 17, 2026, at which time the outstanding principal will be due. Based on the interest rate at the time of the draw and assuming no repayment of principal until maturity, this increases our obligations by $2.8 million for interest in 2024, $3.5 million for interest in 2025 and $40.0 million for principal and $3.1 million for interest in 2026.

Current wording

For the six-month period ended June 30, 2024, the only material change to the contractual obligations and commercial commitments from what was disclosed in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 is the addition of $45.0 million in long-term debt related to the drawdown of funds against our revolving credit facility. This amount increased from the $40.0 million disclosed for this item in the Form 10-Q for the three-month period ended March 31, 2024 as a result of an additional drawdown of $5.0 million in April 2024. The $45.0 million was drawn down in three draws, the first draw of $10.0 million in February 2024, the second draw of $30.0 million in March 2024 and the third draw of $5.0 million in April 2024. As of June 30, 2024, the weighted average interest rate on the revolving credit facility is 8.67%. Interest is due and payable quarterly. The revolving credit facility matures on November 17, 2026, at which time the outstanding principal will be due. Based on the interest rate at the time of the draw and assuming no repayment of principal until maturity, this increases our obligations by $3.1 million for interest in 2024, $4.0 million for interest in 2025 and $45.0 million for principal and $3.5 million for interest in 2026.

Previous wording

During the three-month period ended March 31, 2024, there were no significant changes to our critical accounting policies and estimates. During the three months ended March 31, 2024, our share price experienced declines and in the month subsequent to quarter end, decreased to a historic low. As indicated in Note 5 of the condensed consolidated financial statements, we evaluated whether there were goodwill triggering events that occurred as of March 31, 2024, and determined there were not. The Company will continue to assess potential goodwill impairment triggering events, including continued impact of slower demand, higher channel inventory and sustained decreases in our share price. If triggering events occur, we will perform a goodwill impairment assessment that may indicate impairment in a future period. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended December 31, 2023, filed on March 15, 2024, for a more complete discussion of our critical accounting policies and estimates.

Current wording

During the three-month period ended June 30, 2024, there were no significant changes to our critical accounting policies and estimates. During the three-month period ended June 30, 2024, our share price experienced additional declines and in the month subsequent to quarter end, decreased to a historic low. As indicated in Note 5 of the condensed consolidated financial statements, we evaluated whether there were goodwill triggering events that occurred as of June 30, 2024, and determined there were not. The Company will continue to assess potential goodwill impairment triggering events, including continued impact of slower demand and sustained decreases in our share price. If triggering events occur, we will perform a goodwill impairment assessment that may indicate impairment in a future period. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended December 31, 2023, filed on March 15, 2024, for a more complete discussion of our critical accounting policies and estimates.