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Item 1. Financial Statements

2022-08-09 compared with 2022-05-10 · 400 added, 465 removed, 216 unchanged (80% of the section changed)

1 unchanged sentence

Telos Corporation

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except per share data)

Three Months Ended March 31,

Services $ 48,108 $ 52,058

Products 2,052 3,699

Consolidated Statements of Operations

For the Three Months Ended For the Six Months Ended

June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

(in thousands, except per share amounts)

Revenue – services

$ 50,270 $ 49,003 $ 98,378 $ 101,061

Costs and expenses

Revenue – products

5,521 4,641 7,573 8,341

Total revenue 55,791 53,644 105,951 109,402

Cost of sales – services

31,436 28,609 61,167 68,099

Cost of sales – products

3,426 2,501 4,984 4,299

Total cost of sales 34,862 31,110 66,151 72,398

Gross profit 20,929 22,534 39,800 37,004

Selling, general and administrative expenses:

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General and administrative 23,865 29,635 46,788 49,712

33,605 27,963

Total selling, general and administrative expenses 33,095 40,005 66,700 67,969

Operating loss ( 12,166 ) ( 17,471 ) ( 26,900 ) ( 30,965 )

Other income/(expense) 118 32 130 ( 1,022 )

Other income (expense) 12 ( 1,054 )

Interest expense ( 187 ) ( 192 ) ( 377 ) ( 388 )

2 unchanged sentences

Net loss $ ( 12,289 ) $ ( 17,644 ) $ ( 27,272 ) $ ( 32,422 )

Net loss per share, basic $ ( 0.22 ) $ ( 0.23 )

Net loss per share, diluted $ ( 0.22 ) $ ( 0.23 )

Weighted-average number of common shares outstanding, basic 67,559 64,625

Weighted-average number of common shares outstanding, diluted 67,559 64,625

The accompanying notes are an integral part of these condensed consolidated financial statements.

Net loss per share:

Basic $ ( 0.18 ) $ ( 0.26 ) $ ( 0.40 ) $ ( 0.49 )

Diluted $ ( 0.18 ) $ ( 0.26 ) $ ( 0.40 ) $ ( 0.49 )

Weighted average shares outstanding:

Basic 67,876 66,616 67,717 65,621

Diluted 67,876 66,616 67,717 65,621

See accompanying notes to unaudited consolidated financial statements.

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Telos Corporation

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(amounts in thousands)

Three Months Ended March 31,

Consolidated Statements of Comprehensive Loss

For the Three Months Ended For the Six Months Ended

June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

(in thousands)

Net loss $ ( 12,289 ) $ ( 17,644 ) $ ( 27,272 ) $ ( 32,422 )

Other comprehensive income (loss), net of tax:

Other comprehensive (loss)/income, net of tax:

Foreign currency translation adjustments ( 11 ) 5 18 ( 27 )

Comprehensive loss $ ( 12,300 ) $ ( 17,639 ) $ ( 27,254 ) $ ( 32,449 )

The accompanying notes are an integral part of these condensed consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

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Telos Corporation

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except shares and par value data)

March 31, 2022 December 31, 2021

Current assets

Consolidated Balance Sheets

June 30, 2022 December 31, 2021

(in thousands, except per share and share data)

Cash and cash equivalents $ 122,588 $ 126,562

Accounts receivable, net of reserve of $ 211 and $ 116 , respectively

57,734 59,844

Inventories, net of obsolescence reserve of $ 773 and $ 861 , respectively

Accounts receivable, net 50,676 59,844

Inventories, net 3,630 1,247

Prepaid expenses 6,778 3,329

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Total current assets 184,619 191,714

Property and equipment, net of accumulated depreciation and amortization of $ 34,826 and $ 34,057 , respectively

14,823 15,141

Property and equipment, net 5,571 6,088

Finance lease right-of-use assets, net 8,442 9,053

Operating lease right-of-use assets 569 852

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Liabilities and Stockholders' Equity:

Current liabilities

Accounts payable and other accrued liabilities $ 35,412 $ 34,548

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Contract liabilities 4,799 6,381

Finance lease obligations – short-term 1,493 1,461

Operating lease obligations – short-term 517 564

Finance lease obligations, current portion 1,525 1,461

Operating lease obligations, current portion 450 564

Other current liabilities 2,734 1,430

Total current liabilities 54,200 50,941

Finance lease obligations – long-term 12,457 12,840

Operating lease liabilities – long-term 275 388

Finance lease obligations, non-current portion 12,066 12,840

Operating lease liabilities, non-current portion 192 388

Deferred income taxes 748 723

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Stockholders’ equity

Common stock, $ 0.001 par value, 250,000,000 shares authorized, 67,867,500 shares and 66,767,450 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively

Common stock, $ 0.001 par value, 250,000,000 shares authorized, 67,594,301 shares and 66,767,450 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively

Additional paid-in capital 388,464 367,153

Accumulated other comprehensive income (loss) 2 ( 27 )

Accumulated other comprehensive loss ( 9 ) ( 27 )

Accumulated deficit ( 214,249 ) ( 186,977 )

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Total liabilities and stockholders’ equity $ 241,958 $ 246,081

The accompanying notes are an integral part of these condensed consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

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Telos Corporation

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

Three Months Ended March 31,

Operating activities:

Consolidated Statements of Cash Flows

For the Six Months Ended

June 30, 2022 June 30, 2021

(in thousands)

Cash flows from operating activities:

Net loss $ ( 27,272 ) $ ( 32,422 )

Adjustments to reconcile net loss to cash provided by (used in) operating activities:

Adjustments to reconcile net loss to cash flows provided by/(used in) operating activities:

Stock-based compensation 29,504 35,006

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Accretion of discount on acquisition holdback 23 —

Other noncash items 7 5

Loss on disposal of fixed assets 1 5

Provision for doubtful accounts 66 11

(Recovery from)/provision for inventory obsolescence ( 108 ) 14

Changes in other operating assets and liabilities

Cash provided by (used in) operating activities 249 ( 6,882 )

Investing activities:

Accounts receivable 9,102 ( 9,595 )

Inventories ( 2,275 ) 1,513

Prepaid expenses, other current assets, and other assets ( 3,324 ) ( 2,417 )

Accounts payable and other accrued payables 567 1,278

Accrued compensation and benefits 419 632

Contract liabilities ( 1,582 ) 271

Other current liabilities and other liabilities 76 ( 432 )

Net cash provided by/(used in) operating activities 8,132 ( 3,354 )

Cash flows from investing activities:

Capitalized software development costs ( 5,134 ) ( 3,663 )

Purchases of property and equipment ( 641 ) ( 1,070 )

Cash used in investing activities ( 3,341 ) ( 2,645 )

Financing activities:

Net cash used in investing activities ( 5,775 ) ( 4,733 )

Cash flows from financing activities:

Payments under finance lease obligations ( 710 ) ( 650 )

Payment of tax withholding related to net share settlement of equity awards ( 2,886 ) —

Distribution to Telos ID Class B member - non-controlling interest — ( 2,436 )

Cash used in financing activities ( 3,237 ) ( 2,757 )

Decrease in cash and cash equivalents ( 6,329 ) ( 12,284 )

Cash and cash equivalents, beginning of period 126,562 106,045

Cash and cash equivalents, end of period $ 120,233 $ 93,761

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Interest $ 179 $ 196

Supplemental disclosures of non-cash investing activity:

Operating lease ROU assets obtained in exchange for operating lease liabilities $ 147 $ 160

The accompanying notes are an integral part of these condensed consolidated financial statements.

Repurchase of common stock ( 2,603 ) ( 1,251 )

Proceeds from issuance of common stock, net of issuance costs — 64,269

Repurchase of outstanding warrants — ( 26,894 )

Distributions to Telos ID Class B member – non-controlling interest

Net cash (used in)/provided by financing activities ( 6,199 ) 33,038

Net change in cash, cash equivalents, and restricted cash ( 3,842 ) 24,951

Cash, cash equivalents and restricted cash, beginning of period 126,562 106,045

Cash, cash equivalents and restricted cash, end of period $ 122,720 $ 130,996

See accompanying notes to unaudited consolidated financial statements.

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Telos Corporation

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(amounts in thousands)

Consolidated Statements of Changes in Stockholders' Equity

Common Stock Additional Paid-in

Capital Accumulated

Other Comprehensive Income Accumulated Deficit Total Stockholders’

Other Comprehensive Income/(Loss) Accumulated Deficit Total Stockholders’

Shares Amount

For the Three Months Ended March 31, 2022

Beginning balance 66,767 $ 105 $ 367,153 $ ( 27 ) $ ( 186,977 ) $ 180,254

(in thousands)

Balance at March 31, 2022 67,867 $ 106 $ 376,913 $ 2 $ ( 201,960 ) $ 175,061

Net loss — — — — ( 12,289 ) ( 12,289 )

Foreign currency translation loss — — — ( 11 ) — ( 11 )

Stock-based compensation expense, excluding accrued compensation — — 14,553 — — 14,553

Repurchase of common stock ( 360 ) — ( 3,002 ) — — ( 3,002 )

RSUs vested, net of shares withheld to cover tax withholding 87 — — — — —

Balance at June 30, 2022 67,594 $ 106 $ 388,464 $ ( 9 ) $ ( 214,249 ) $ 174,312

Balance at March 31, 2021 64,625 $ 103 $ 284,470 $ 12 $ ( 158,621 ) $ 125,964

Net loss — — — — ( 17,644 ) ( 17,644 )

Issuance of common stock 2,050 2 64,267 — — 64,269

Foreign currency translation gain — — — 5 — 5

Vesting of restricted stock unit awards, net of shares withheld to cover tax withholding 1,100 1 ( 2,887 ) — — ( 2,886 )

Stock-based compensation, net of forfeitures and accrued compensation — 12,647 — — 12,647

Ending balance 67,867 $ 106 $ 376,913 $ 2 $ ( 201,960 ) $ 175,061

For the Three Months Ended March 31, 2021

Beginning balance 64,625 $ 103 $ 270,800 $ 44 $ ( 143,843 ) $ 127,104

Stock-based compensation expense — — 21,336 — — 21,336

Repurchase of outstanding warrants — — ( 26,894 ) — — ( 26,894 )

Repurchase of common stock ( 40 ) — ( 1,251 ) — — ( 1,251 )

Balance at June 30, 2021 66,635 $ 105 $ 341,928 $ 17 $ ( 176,265 ) $ 165,785

Common Stock Additional Paid-in

Capital Accumulated

Other Comprehensive Income/(Loss) Accumulated Deficit Total Stockholders’

Shares Amount

(in thousands)

Balance at December 31, 2021 66,767 $ 105 $ 367,153 $ ( 27 ) $ ( 186,977 ) $ 180,254

Net loss — — — — ( 27,272 ) ( 27,272 )

Foreign currency translation gain — — — 18 — 18

Stock-based compensation expense, excluding accrued compensation — — 27,200 — — 27,200

Repurchase of common stock ( 360 ) — ( 3,002 ) — — ( 3,002 )

RSUs vested, net of shares withheld to cover tax withholding 1,187 1 ( 2,887 ) — — ( 2,886 )

Balance at June 30, 2022 67,594 $ 106 $ 388,464 $ ( 9 ) $ ( 214,249 ) $ 174,312

Balance at December 31, 2020 64,625 $ 103 $ 270,800 $ 44 $ ( 143,843 ) $ 127,104

Net loss — — — — ( 32,422 ) ( 32,422 )

Issuance of common stock 2,050 2 64,267 — — 64,269

Foreign currency translation loss — — — ( 27 ) — ( 27 )

Stock-based compensation, net of forfeitures — — 13,670 — — 13,670

Ending balance 64,625 $ 103 $ 284,470 $ 12 $ ( 158,621 ) $ 125,964

The accompanying notes are an integral part of these condensed consolidated financial statements.

Stock-based compensation expense — — 35,006 — — 35,006

Repurchase of outstanding warrants — — ( 26,894 ) — — ( 26,894 )

Repurchase of common stock ( 40 ) — ( 1,251 ) — — ( 1,251 )

Balance at June 30, 2021 66,635 $ 105 $ 341,928 $ 17 $ ( 176,265 ) $ 165,785

See accompanying notes to unaudited consolidated financial statements.

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Telos Corporation

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Basis of Presentation and Summary of Significant Accounting Policies

Nature of Business

Telos Corporation, together with its subsidiaries (the “Company” or “Telos” or “We”), a Maryland corporation, is a leading provider of cyber, cloud and enterprise solutions for the world's most security-conscious organizations.

Notes to the Unaudited Consolidated Financial Statements

Telos Corporation, together with its subsidiaries (collectively, the "Company," "we," "our" or "Telos"), a Maryland corporation, is a leading provider of cyber, cloud and enterprise security solutions for the world's most security-conscious organizations.

We own all of the issued and outstanding share capital of Xacta Corporation, a subsidiary that develops, markets and sells government-validated secure enterprise solutions to government and commercial customers.

5 unchanged sentences

The par value and the authorized shares of the common stock were not adjusted as a result of the reverse stock split.

The accompanying condensed consolidated financial statements and notes to the condensed consolidated financial statements give retroactive effect to the reverse stock split for all periods presented.

Public Offering of Common Stock

On November 19, 2020, we completed our initial public offering of shares of our common stock.

The accompanying consolidated financial statements and notes to the consolidated financial statements give retroactive effect to the reverse stock split for all periods presented.

On November 19, 2020, we completed our initial public offering ("IPO") of shares of our common stock.

We issued 17.2 million shares of our common stock at a price of $ 17.00 per share, generating net proceeds of approximately $ 272.8 million.

We used approximately $ 108.9 million of the net proceeds in connection with the conversion of our outstanding shares of Exchangeable Redeemable Preferred Stock into the right to receive cash and shares of our common stock, $ 30.0 million to fund our acquisition of the outstanding Class B Units of Telos ID, and $ 21.0 million to repay our outstanding senior term loan and subordinated debt.

On April 6, 2021, we completed our follow-on offering of 9.1 million shares of our common stock at a price of $ 33.00 per share, including 7.0 million shares of common stock by certain existing stockholders of Telos.

We intend to use the remaining net proceeds for general corporate purposes.

On April 6, 2021, we completed our follow-on offering of 9.1 million shares of our common stock at a price of $ 33.00 per share, including 7.0 million shares of common stock held by certain existing stockholders of Telos.

The offering generated approximately $ 64.3 million of net proceeds to Telos.

We did not receive any proceeds from the shares of common stock sold by the selling stockholders.

On April 19, 2021, we used approximately $ 1.3 million of the net proceeds to repurchase 39,682 shares of our common stock and $ 26.9 million to repurchase the warrants to purchase 900,970 shares of our common stock owned by certain affiliates of Enlightenment Capital Solution ("EnCap").

We used the remaining net proceeds for general corporate purposes.

Principles of Consolidation and Reporting

The accompanying condensed consolidated financial statements include the accounts of Telos and its subsidiaries, including Ubiquity.com, Inc., Xacta Corporation, Telos ID, Teloworks, and Telos APAC, all of whose issued and outstanding share capital is wholly-owned directly and indirectly by Telos Corporation.

We intend to use the remaining net proceeds for general corporate purposes.

SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Telos and its subsidiaries, including Ubiquity.com, Inc., Xacta Corporation, Telos ID, Teloworks, and Telos APAC, all of whose issued and outstanding share capital is wholly-owned directly and indirectly by Telos Corporation.

All intercompany transactions have been eliminated in consolidation.

The accompanying condensed consolidated financial statements reflect all adjustments (which include normal recurring adjustments) and reclassifications necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“U.S.

GAAP”) and pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”).

The presented interim results are not necessarily indicative of fiscal year performance for a variety of reasons, including, but not limited to, the impact of seasonal and short-term variations.

We have continued to follow the accounting policies (including the critical accounting policies) set forth in the consolidated financial statements included in our 2021 Annual Report on Form 10-K filed with the SEC.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

In preparing these condensed consolidated financial statements, we have evaluated subsequent events through the date that these condensed consolidated financial statements were issued.

Segment Reporting

(b) Basis of Presentation for Interim Periods

Certain information and footnote disclosures normally included for the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S.

GAAP") have been condensed or omitted for the interim periods presented.

We believe that the unaudited interim financial statements include all adjustments (which are normal and recurring in nature) necessary to state fairly our financial position and the results of operations and cash flows for the periods presented.

The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for the year or future periods.

The financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto for the year ended December 31, 2021, included in our Annual Report on Form 10-K for the fiscal year then ended (the "2021 10-K").

We have continued to follow the accounting policies set forth in those financial statements.

Operating segments are defined as components of an enterprise for which separate discrete financial information is available and evaluated regularly by the chief operating decision maker (“CODM”), or decision-making group, in deciding how to allocate resources and assess performance.

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During the fourth quarter of 2021, we reorganized our internal management reporting structure and the financial results evaluated by our CODM;

2 unchanged sentences

Security Solutions and Secure Networks.

Our Security Solutions segment focuses on the Company's cybersecurity, cloud and identity solutions.

Our Secure Networks segment provides offerings for enterprise security.

The segments enable the alignment of our strategies and objectives and provide a framework for timely and rational allocation of resources within the lines of business.

We eliminate any inter-segment revenues and expenses upon consolidation.

Prior period segment information has been recast to reflect the change.

The segment reorganization had no impact on previously reported condensed consolidated financial results.

Basis of Comparison

Revision of Prior Year Interim Financial Statements

The segment reorganization had no impact on previously reported unaudited consolidated financial results.

(d) Basis of Comparison – Revision of Previously Issued Interim Financial Statements

The Company recorded certain revisions related to the previously issued unaudited condensed consolidated financial statements.

2 unchanged sentences

Nonetheless, the Company corrected these errors when identified in 2021.

During the third quarter of 2021, the Company identified that stock compensation for a single individual was incorrectly charged to cost of sales - services instead of general and administrative expense, of which $ 0.1 million was related to the first quarter of 2021.

The Company erroneously presented the $ 2.4 million final payment to fully acquire all membership interest of Telos ID as an operating activity on the condensed consolidated statements of cash flows.

The Company corrected the presentation to properly reflect the final payment within financing activities on the consolidated statements of cash flows in the fourth quarter of 2021.

The following table reflects the impact of the correction on all affected line items of the Company's previously reported condensed consolidated financial statements for the period ended March 31, 2021 (in thousands):

Three Months Ended March 31, 2021

Previously Reported Error Correction As Adjusted

Condensed Consolidated Statement of Operations

Cost of sales - Services $ 39,602 $ ( 112 ) $ 39,490

Costs and expenses 41,400 ( 112 ) 41,288

General and administrative 19,964 112 20,076

Selling, general and administrative expenses 27,851 112 27,963

Three Months Ended March 31, 2021

Previously Reported Error Correction As Adjusted

Condensed Consolidated Statement of Cash Flows

Changes in other operating assets and liabilities $ ( 9,584 ) $ 2,436 $ ( 7,148 )

Cash used in operating activities ( 9,318 ) 2,436 ( 6,882 )

Distribution to Telos ID Class B member - non-controlling interest — ( 2,436 ) ( 2,436 )

Cash used in financing activities ( 321 ) ( 2,436 ) ( 2,757 )

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S.

During the third quarter of 2021, the Company identified out-of-period adjustments on certain revenue and expense classification.

Further, we corrected the cash flow presentation to properly reflect the final payment to fully acquire all of the membership interest of Telos ID as financing activities.

Further information regarding the misstatements and related revisions are included in Note 1 8 – R evision of Prior Year Interim Financial Statements to the condensed consolidated financial statements.

(e) Use of Estimates

The preparation of unaudited consolidated financial statements in conformity with U.S.

GAAP requires management to make estimates and assumptions that affect the reported amounts of revenue, expenses, assets and liabilities and disclosure of contingent assets and liabilities.

4 unchanged sentences

The impact of changes in estimates is recorded in the period in which they become known.

Summary of Significant Accounting Policies

Accounts Receivable

Accounts receivable are stated at the invoiced amount, less an allowance for credit losses.

The allowance for credit losses is management's best estimate of current expected credit losses over the contractual life of the accounts receivable.

Accounts receivable balances are written off against the allowance for credit losses when management deems the balances uncollectible.

Receivables include billed and unbilled receivables.

Unbilled receivables, substantially all of which are expected to be billed and collected within one year, are stated at their estimated realization value and consist of costs and fees billable on contract completion or the occurrence of a specific event, other than the passage of time.

Inventories are stated at the lower of cost or net realizable value, where cost is determined using the weighted-average method.

Substantially all inventories consist of purchased off-the-shelf hardware and software, and component computer parts used in connection with system integration services that we perform.

Provisions have been made to reduce all obsolete, slow-moving or unsaleable inventories to their net realizable values.

This provision is based on our overall obsolescence experience and our assessment of future inventory requirements.

This charge is taken primarily due to the age of the specific inventory and the significant additional costs that would be necessary to upgrade to current standards, as well as the lack of forecasted sales for such inventory in the near future.

Gross inventory was $ 2.9 million and $ 2.1 million as of March 31, 2022 and December 31, 2021, respectively.

As of March 31, 2022, it is management’s judgment that we have fully provided for any potential inventory obsolescence, which was $ 0.8 million and $ 0.9 million as of March 31, 2022 and December 31, 2021, respectively.

Software Development Costs

We account for development costs of software in accordance with Accounting Standards Codification ("ASC") Topic 985-20, “Software – Costs of Software to be Sold, Leased, or Marketed” and ASC Topic 350-40 “Internal Use Software,” depending on the intended use of the software being developed.

Software development costs are capitalized and amortized over the estimated product life on a straight-line basis.

The Company analyzes the net realizable value of capitalized software development costs on at least an annual basis and has determined that there is no indication of impairment of the capitalized software development costs as forecasted future sales are adequate to support the carrying values.

We account for income taxes in accordance with ASC 740, “Income Taxes.” Under ASC 740, deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences and income tax credits.

Deferred tax assets and liabilities are measured by applying enacted statutory tax rates that are applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized for differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities.

Any change in tax rates on deferred tax assets and liabilities is recognized in net income in the period in which the tax rate change is enacted.

We record a valuation allowance that reduces deferred tax assets when it is "more likely than not" that deferred tax assets will not be realized.

We follow the provisions of ASC 740 related to accounting for uncertainty in income taxes.

The accounting estimates related to liabilities for uncertain tax positions require us to make judgments regarding the sustainability of each uncertain tax position based on its technical merits.

If we determine it is more likely than not that a tax position will be sustained based on its technical merits, we record the impact of the position in our condensed consolidated financial statements at the largest amount that is greater than fifty percent likely of being realized upon ultimate settlement.

These estimates are updated at each reporting date based on the facts, circumstances and information available.

We are also required to assess at each reporting date whether it is reasonably possible that any significant increases or decreases to our unrecognized tax benefits will occur during the next 12 months.

The provision for income taxes in interim periods is computed by applying the estimated annual effective tax rate against earnings before income tax expense for the period.

In addition, non-recurring or discrete items are recorded during the period in which they occur.

Goodwill and Intangible Assets

Goodwill is recorded for the difference between the aggregate consideration paid for an acquisition and the fair value of net tangible and intangible assets acquired and liabilities assumed.

Goodwill is not amortized, but rather tested for potential impairment.

We evaluate the impairment of goodwill in accordance with ASC 350, “Intangibles - Goodwill and Other,” which requires goodwill and indefinite-lived intangible assets to be assessed on at least an annual basis, as of December 31 each year, for impairment using a fair value basis.

Between annual evaluations, if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount, then impairment must be evaluated.

Such circumstances could include, but are not limited to:

(1) a significant adverse change in legal factors or business climate, or (2) a loss of key contracts or customers.

The goodwill impairment test is performed at the reporting unit level.

The Company estimates and compares the fair value of each reporting unit to its respective carrying value, including goodwill.

If the fair value is less than the carrying value, the amount of impairment expense is equal to the difference between the reporting unit's fair value and the reporting unit's carrying value.

Goodwill is amortized and deducted over a 15 -year period for tax purposes.

Intangible assets with finite lives are carried at cost, less accumulated amortization.

Amortization is computed using the method that best reflects how their economic benefits are utilized or, if a pattern of economic benefits cannot be reliably determined, on a straight-line basis over their estimated useful lives.

Intangible assets with finite lives are assessed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Stock-Based Compensation

Under our 2016 Omnibus Long-Term Incentive Plan, as amended (the “2016 LTIP”), we have the ability to award restricted stock units with time-based vesting (“Service-Based RSUs”), and restricted stock units with performance-based vesting (“Performance-Based RSUs”) to senior executives, directors, employees and other eligible service providers.

Under the 2016 LTIP, our Board of Directors or, by designation of authority, the Management Development and Compensation Committee of our Board of Directors has the discretion to establish the terms, conditions and criteria of the various awards, including the weighing and vesting schedule of Service-Based RSUs and the performance conditions applicable to the Performance-Based RSUs, including the achievement of certain financial performance criteria or price targets for our common stock.

Upon vesting, Service-Based RSUs and Performance-Based RSUs will be settled in the Company’s common stock.

• Service-Based RSUs granted to eligible recipients as an incentive generally vest in installments over a period of up to three years from the date of grant.

Service-based RSUs granted to senior executives in 2021 and 2022 vest in two to three annual installments from the date of grant.

The grant date fair value per share is equal to the closing stock price on the date of grant.

• Performance-Based RSUs may vest upon the achievement of a defined performance target or at the end of the defined performance period from the date of grant, whichever initially occurs.

The grant date fair value per share of these Performance-Based RSUs is equal to the closing stock price on the date of the grant or the fair value of the award on the grant date as determined through an independent valuation for Performance-Based RSUs with market condition.

Performance-Based RSUs may vest upon the achievement of certain price targets for the Company’s common stock anytime over a three-year period from the date of grant.

In order to reflect the substantive characteristics of these market condition awards, the Company employs a Monte Carlo simulation valuation model to calculate the grant date fair value and corresponding requisite service period of the award.

Monte Carlo approaches are a class of computational algorithms that rely on repeated random sampling to compute their results.

This approach allows the calculation of the value of such awards based on a large number of possible stock price path scenarios.

We recognize these share-based payment transactions when services from the employees are received and recognize a corresponding increase in additional paid-in capital in our condensed consolidated balance sheets, in accordance with ASC 718, "Compensation - Stock Compensation." The measurement objective for these equity awards is the estimated fair value at the date of grant of the equity instruments that we are obligated to issue when employees have rendered the requisite service and satisfied any other conditions necessary to earn the right to benefit from the instruments.

The compensation expense for an award is recognized ratably over the requisite service period for the entire award, which is the period during which an employee is required to provide service in exchange for an award.

Compensation expense for awards with performance conditions is recognized over the requisite service period if it is probable that the performance condition will be satisfied.

If such performance conditions are not or are no longer considered probable, no compensation expense for these awards is recognized, and any previously recognized expense is reversed.

If the performance condition is achieved prior to the completion of the requisite service period, any unrecognized compensation expense will be recognized in the period the performance condition is achieved.

Compensation expense for awards with market conditions is recognized over the derived service period, or sooner, if the market condition is achieved.

Previously recognized expense for awards with market conditions will never be reversed even if the market conditions is never achieved.

We recognize forfeitures of share-based compensation awards as they occur.

Share-based compensation expense is recognized as part of cost of sales and selling, general and administrative expenses in our condensed consolidated statements of operations.

Net Earnings (Loss) per Share

Basic net earnings (loss) per share is computed by dividing the net earnings (loss) by the weighted-average number of common shares outstanding for the period, without consideration for potentially dilutive securities.

Diluted net earnings (loss) per share is computed by dividing the net earnings (loss) by the weighted-average number of shares of common stock and dilutive common stock equivalents outstanding for the period determined using the treasury-stock and if-converted methods.

Dilutive common stock equivalents are comprised of unvested restricted common stock and warrants.

For the period of net loss, potentially dilutive securities are not included in the calculation of diluted net earnings (loss) per share, because to do so would be anti-dilutive.

Potentially dilutive securities are as follows (in common stock equivalent shares, in thousands):

Three Months Ended March 31,

Unvested restricted stock — 3,167

Common stock warrants, exercisable at $ 1.665 /sh.

Total — 4,068

(1) For the three months ended March 31, 2022, the weighted-average unvested restricted stock of approximately 4 million shares were anti-dilutive and were excluded in the computation of the potentially dilutive securities because the hypothetical repurchase of shares exceeds the unvested restricted stocks using the treasury stock method.

Other Comprehensive Income (Loss)

Our functional currency is the U.S.

For one of our wholly-owned subsidiaries, the functional currency is the local currency.

For this subsidiary, the translation of its foreign currency into U.S.

Dollars is performed for assets and liabilities using current foreign currency exchange rates in effect at the balance sheet date and for revenue and expense accounts using average foreign currency exchange rates during the periods presented.

Translation gains and losses are included in stockholders’ equity as a component of accumulated other comprehensive income (loss).

Accumulated other comprehensive income (loss) included within stockholders’ equity consists of the following (in thousands):

March 31, 2022 December 31, 2021

Cumulative foreign currency translation loss $ ( 105 ) $ ( 134 )

Cumulative actuarial gain on pension liability adjustment 107 107

Accumulated other comprehensive income (loss) $ 2 $ ( 27 )

Recent Accounting Pronouncements

(f) Recent Accounting Pronouncements

Changes to U.S.

GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of accounting standards updates ("ASUs") to the FASB's ASC.

GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of Accounting Standards Updates ("ASUs") to the FASB's Accounting Standards Codification ("ASC").

We consider the applicability and impact of all recent ASUs.

ASUs not listed below were assessed and determined to be not applicable.

Accounting Pronouncements Adopted

In March 2020, the FASB issued ASU No.

2020-04, “Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which provides optional expedients and exceptions for a limited period of time to ease the potential burden in accounting for contracts, hedging relationship and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.

This amendment is effective for all entities as of March 12, 2020 through December 31, 2022.

The adoption of this ASU did not have a material impact on our condensed consolidated financial position, results of operations or cash flows.

Accounting Pronouncements Not Adopted

Accounting Pronouncements Not Yet Adopted

In October 2021, the FASB issued ASU No.

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This standard will be effective for reporting periods beginning after December 15, 2022, with early adoption permitted.

While we are currently assessing the impact of the adoption of this ASU, we do not believe the adoption of this ASU will have a material impact on our condensed consolidated financial position, results of operations and cash flows.

While we are currently assessing the impact of the adoption of this ASU, we do not believe the adoption of this ASU will have a material impact on our unaudited consolidated financial position, results of operations and cash flows.

In June 2022, the FASB issued ASU No.

2022-03, "Fair Value Measurement (Topic 820):

Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions," which clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.

This standard will be effective for reporting periods beginning December 15, 2023, with early adoption permitted.

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REVENUE RECOGNITION

We account for revenue in accordance with ASC Topic 606, “Revenue from Contracts with Customers.” The unit of account in ASC 606 is a performance obligation, which is a promise in a contract with a customer to transfer a good or service to the customer.

ASC 606 prescribes a five-step model for recognizing revenue that includes identifying the contract with the customer, determining the performance obligation(s), determining the transaction price, allocating the transaction price to the performance obligation(s), and recognizing revenue as the performance obligations are satisfied.

Timing of the satisfaction of performance obligations varies across our businesses due to our diverse product and service mix, customer base, and contractual terms.

Significant judgment can be required in determining certain performance obligations, and these determinations could change the amount of revenue and profit recorded in a given period.

Our contracts may have a single performance obligation or multiple performance obligations.

When there are multiple performance obligations within a contract, we allocate the transaction price, net of any discounts, to each performance obligation based on the standalone selling price of the product or service underlying each performance obligation.

Our contracts with the U.S.

government are generally subject to Federal Acquisition Regulation ("FAR") and the price is typically based on estimated or actual costs plus a reasonable profit margin.

As such, the standalone selling price of products or services in our contracts with the U.S.

government is typically equal to the selling price stated in the contract.

government contracts with multiple performance obligations, standalone selling price is the observable price of a good or service when Telos sells that good or service separately in similar circumstances and to similar customers.

Contracts are routinely and often modified to account for changes in contract requirements, specifications, quantities, or price.

Depending on the nature of the modification, we determine whether to account for the modification as an adjustment to the existing contract or as a new contract.

Generally, modifications are not distinct from the existing contract due to the significant interrelatedness of the performance obligations and are therefore accounted for as an adjustment to the existing contract, and recognized as a cumulative adjustment to revenue (as either an increase or reduction of revenue) based on the modification’s effect on progress toward completion of a performance obligation.

We recognize revenue in accordance with ASC Topic 606, "Revenue from Contracts with Customers." The unit of account in ASC 606 is a performance obligation, which is a promise in a contract with a customer to transfer a good or service to the customer.

The majority of our revenue is recognized over time, as control is transferred continuously to our customers who receive and consume benefits as we perform, and is classified as services revenue.

Revenue transferred to customers over time accounted for 96 % and 93 % of our revenue for the three months ended March 31, 2022 and 2021, respectively.

Revenue transferred to customers over time accounted for 90 % and 93 % of our revenue for the three and six months ended June 30, 2022, and 91 % and 92 % of our revenue for the three and six months ended June 30, 2021, respectively.

All of our business groups earn services revenue under a variety of contract types, including time and materials, firm-fixed price, firm-fixed price level of effort, and cost-plus fixed fee contract types, which may include variable consideration as discussed further below.

Revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations.

Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer.

Contract costs include labor, material, subcontractor costs and indirect expenses.

This continuous transfer of control to the customer is supported by clauses in our contracts with U.S.

government customers whereby the customer may terminate a contract for convenience and then pay for costs incurred plus a profit, at which time the customer would take control of any work in process.

government contracts where we perform as a subcontractor and our order includes similar FAR provisions as the prime contractor’s order from the U.S.

government, continuous transfer of control is likewise supported by such provisions.

For other non-U.S.

government customers, continuous transfer of control to such customers is also supported due to general terms in our contracts and rights to recover damages which would include, among other potential damages, the right to payment for our work performed to date plus a reasonable profit.

Revenue that is recognized at a point in time is for the sale of software licenses in our Information Assurance / Xacta® and Secure Communications business groups and for the sale of resold products in Telos ID and Secure Networks, and is classified as product revenue.

Revenue transferred to customers at a point in time accounted for 4 % and 7 % of our revenue for the three months ended March 31, 2022 and 2021, respectively.

Revenue transferred to customers at a point in time accounted for 10 % and 7 % of our revenue for the three and six months ended June 30, 2022, and 9 % and 8 % of our revenue for the three and six months ended June 30, 2021, respectively.

Revenue on these contracts is recognized when the customer obtains control of the transferred product or service, which is generally upon delivery of the product to the customer for their use, due to us maintaining control of the product until that point.

Orders for the sale of software licenses may contain multiple performance obligations, such as maintenance, training, or consulting services, which are typically delivered over time, consistent with the transfer of control disclosed above for the provision of services.

When an order contains multiple performance obligations, we allocate the transaction price to the performance obligations based on the standalone selling price of the product or service underlying each performance obligation.

The standalone selling price represents the amount we would sell the product or service to a customer on a standalone basis.

For certain performance obligations where we are not primarily responsible for fulfilling the promise to provide the goods or services to the customer, do not have inventory risk and have limited discretion in establishing the price for the goods or services, we recognize revenue on a net basis.

Contract Estimates

Due to the transfer of control over time, revenue is recognized based on progress towards completion of the performance obligation.

The selection of the method to measure progress towards completion requires judgment and is based on the nature of the performance obligations.

We generally use the cost-to-cost measure of progress on a proportional performance basis for our contracts because it best depicts the transfer of control to the customer, which occurs as we incur costs on our contracts.

Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation.

Revenues are recorded proportionally as costs are incurred.

Due to the nature of the work required to be performed on certain of our performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment.

Contract estimates are based on various assumptions, including labor and subcontractor costs, materials and other direct costs and the complexity of the work to be performed.

A significant change in one or more of these estimates could affect the profitability of our contracts.

We review and update our contract-related estimates regularly and recognize adjustments in estimated profit on contracts on a cumulative catch-up basis, which may result in an adjustment increasing or decreasing revenue to date on a contract in a particular period that the adjustment is identified.

Revenue and profit in future periods of contract performance are recognized using the adjusted estimate.

Our contracts may include various types of variable consideration, such as claims (for instance, indirect rate or other equitable adjustments) or incentive fees.

We include estimated amounts in the transaction price based on all of the information available to us, including historical information and future estimations, and to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when any uncertainty associated with the variable consideration is resolved.

We provide for anticipated losses on contracts during the period when the loss is determined by recording an expense for the total expected costs that exceeds the total estimated revenue for a performance obligation.

No contract losses were recorded during the three months ended March 31, 2022 and 2021.

Historically, most of our contracts do not include award or incentive fees.

For incentive fees, we would include such fees in the transaction price to the extent we could reasonably estimate the amount of the fee.

With limited historical experience, we have not included any revenue related to incentive fees in our estimated transaction prices.

We may include in our contract estimates additional revenue for submitted contract modifications or claims against the customer when we believe we have an enforceable right to the modification or claim, the amount can be estimated reliably and its realization is probable.

We consider the contractual/legal basis for the claim (in particular FAR provisions), the facts and circumstances around any additional costs incurred, the reasonableness of those costs and the objective evidence available to support such claims.

For our contracts that have an original duration of one year or less, we use the practical expedient applicable to such contracts and do not consider the time value of money.

We capitalize on sales commissions related to proprietary software and related services that are directly tied to sales.

We do not elect the practical expedient to expense as incurred the incremental costs of obtaining a contract if the amortization period would have been one year or less.

For the sales commissions that are capitalized, we amortize the asset over the expected customer life, which is based on recent and historical data.

We provide for anticipated losses on contracts during the period when the loss is determined by recording an expense for the total expected costs that exceed the total estimated revenue for a performance obligation.

No contract losses were recorded during the three and six months ended June 30, 2022 and 2021.

Disaggregated Revenues

We have identified two reportable segments.

We treat sales to U.S.

customers as sales within the U.S.

regardless of where the services are performed.

customers as sales within the U.S., regardless of where the services are performed.

Substantially all of our revenues are generated from U.S.

customers, international customers are de minimus, therefore the financial information by geographic location is not presented.

The following tables disclose revenue for our operating segments disaggregated by several categories for the three months ended March 31, 2022 and 2021.

Three Months Ended

Revenue Type 2022 2021

Revenue by Operating Segments

For the Three Months Ended For the Six Months Ended

June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

(in thousands)

Security Solutions:

Services $ 25,298 $ 27,595 $ 50,165 $ 46,725

Product 2,052 3,699

26,919 22,829

Products 5,521 4,641 7,573 8,341

Total Security Solutions revenue 30,819 32,236 57,738 55,066

Secure Networks:

Services 24,972 21,408 48,213 54,336

23,241 32,928

Products — — — —

Total Secure Networks revenue 24,972 21,408 48,213 54,336

Total revenue $ 55,791 $ 53,644 $ 105,951 $ 109,402

Three Months Ended

Customer Type 2022 2021

Revenue by Customer Type

For the Three Months Ended For the Six Months Ended

June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

(in thousands)

Security Solutions:

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State & local, and commercial 3,568 2,406 5,885 4,785

26,919 22,829

Total Security Solutions revenue 30,819 32,236 57,738 55,066

Secure Networks:

1 unchanged sentence

State & local, and commercial 10 106 10 138

23,241 32,928

Total Secure Networks revenue 24,972 21,408 48,213 54,336

Total revenue $ 55,791 $ 53,644 $ 105,951 $ 109,402

Three Months Ended

Contract Type 2022 2021

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Revenue by Contract Type

For the Three Months Ended For the Six Months Ended

June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

(in thousands)

Security Solutions:

2 unchanged sentences

Cost plus fixed fee 1,813 1,720 3,350 3,537

26,919 22,829

Total Security Solutions revenue $ 30,819 $ 32,236 $ 57,738 $ 55,066

Secure Networks:

2 unchanged sentences

Cost plus fixed fee 5,942 2,523 10,374 4,293

23,241 32,928

Total Secure Networks revenue 24,972 21,408 48,213 54,336

Total revenue $ 55,791 $ 53,644 $ 105,951 $ 109,402

Revenue resulting from contracts and subcontracts with the U.S.

government accounted for 95 % and 96 % of our revenue for the three months ended March 31, 2022 and 2021, respectively.

government accounted for 94 % and 95 % of our revenue for the three months ended June 30, 2022 and 2021, respectively, and 94 % and 96 % of our revenue for the six months ended June 30, 2022 and 2021, respectively.

As our primary customer base includes agencies of the U.S.

government, we have a concentration of credit risk associated with our accounts receivable, as 72 % of our billed accounts receivable as of March 31, 2022 were directly with U.S.

government, we have a concentration of credit risk associated with our accounts receivable, as 95 % of our billed accounts receivable as of June 30, 2022, were directly with U.S.

government customers.

While we acknowledge the potentially material and adverse risk of such a significant concentration of credit risk, our past experience of collecting substantially all of such receivables provides us with an informed basis that such risk, if any, is manageable.

We perform ongoing credit evaluations of all of our customers and generally do not require collateral or other guarantee from our customers.

We perform ongoing credit evaluations of all our customers and generally do not require collateral or other guarantee from our customers.

We maintain allowances for potential losses.

The percentage of total revenue for the U.S.

government, its agencies and other customers comprising more than 10% of total revenue is as follows:

Three Months Ended

Revenue Concentrations Greater than 10% of Total Revenue

For the Three Months Ended For the Six Months Ended

June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

Department of Defense ("DoD") 72 % 67 % 71 % 76 %

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Contract Balances

Performance obligations are satisfied either over time or at a point in time and are typically invoiced to the customers as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones.

Generally, revenue recognition occurs before billing, resulting in contract assets.

These contract assets are referred to as unbilled receivables and are reported within accounts receivable, net of reserve on our condensed consolidated balance sheets.

Contract liabilities are payments received in advance and milestone payments from our customers on selected contracts that exceed revenue earned to date, resulting in contract liabilities.

Contract liabilities typically are not considered a significant financing component because they are generally satisfied within one year and are used to meet working capital demands that can be higher in the early stages of a contract.

Contract liabilities are reported on our condensed consolidated balance sheets on a net contract basis at the end of each reporting period.

As of March 31, 2022 and December 31, 2021, the contract liabilities are primarily related to product support services.

Contract balances for the periods presented are as follow (in thousands):

March 31, 2022 December 31, 2021

Contract Balances

June 30, 2022 December 31, 2021

(in thousands)

Contract assets (unbilled receivables) $ 36,216 $ 41,374

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The change in the Company's contract assets and contract liabilities during the period were primarily the result of the timing differences between the Company's performance, invoicing and customer payments.

Revenue recognized for the three months ended March 31, 2022 and 2021, that was included in the contract liabilities balance at the beginning of each reporting period was $ 2.5 million and $ 2.0 million, respectively.

As of March 31, 2022 and December 31, 2021, we had $ 120.0 million and $ 123.5 million of remaining performance obligations, respectively, which we also refer to as funded backlog.

Revenue recognized for the three and six months ended June 30, 2022, that was included in the contract liabilities balance at the beginning of each reporting period was $ 1.6 million and $ 4.1 million, respectively.

Revenue recognized for the three and six months ended June 30, 2021, that was included in the contract liabilities balance at the beginning of each reporting period was $ 1.2 million and $ 3.2 million, respectively.

As of June 30, 2022, we had $ 100.5 million of remaining performance obligations, which we also refer to as funded backlog.

We expect to recognize approximately 76 % of our remaining performance obligations as revenue in 2022, an additional 20 % in 2023, and the balance thereafter.

Accounts Receivable

The following table discloses accounts receivable (in thousands):

March 31, 2022 December 31, 2021

ACCOUNTS RECEIVABLE, NET

Details of Accounts Receivable, Net

June 30, 2022 December 31, 2021

(in thousands)

Billed accounts receivable $ 14,638 $ 18,586

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Accounts receivable, net $ 50,676 $ 59,844

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INVENTORIES, NET

Details of Inventories, Net

June 30, 2022 December 31, 2021

(in thousands)

Gross inventory $ 4,383 $ 2,108

Allowance for inventory obsolescence ( 753 ) ( 861 )

Inventories, net $ 3,630 $ 1,247

PROPERTY AND EQUIPMENT, NET

Details of Property and Equipment, Net

June 30, 2022 December 31, 2021

(in thousands)

Furniture and equipment $ 15,866 $ 15,420

Leasehold improvement 3,009 2,994

Property and equipment, at cost 18,875 18,414

Accumulated depreciation ( 13,304 ) ( 12,326 )

Property and equipment, net $ 5,571 $ 6,088

Depreciation expense was $ 0.5 million and $ 1.2 million for the three and six months ended June 30, 2022, respectively, compared to $ 0.5 million and $ 0.9 million for the three and six months ended June 30, 2021.

The goodwill balance was $ 17.9 million as of June 30, 2022, and December 31, 2021, of which $ 3.0 million is allocated to the Security Solutions segment and $ 14.9 million is allocated to the Secure Networks segment.

Goodwill is subject to annual impairment tests and if triggering events are present in the interim before the annual tests, we will assess impairment.

For the three and six months ended June 30, 2022 and 2021, no impairment charges were taken.

INTANGIBLE ASSETS, NET

Details of Intangible Assets, Net

June 30, 2022 December 31, 2021

Gross Accumulated Amortization Net Gross Accumulated Amortization Net

(in thousands)

Acquired technology $ 3,630 $ ( 416 ) $ 3,214 $ 3,630 $ ( 256 ) $ 3,374

Customer relationships 40 ( 12 ) 28 40 ( 5 ) 35

Software development costs 27,652 ( 7,111 ) 20,541 22,222 ( 6,432 ) 15,790

$ 31,322 $ ( 7,539 ) $ 23,783 $ 25,892 $ ( 6,693 ) $ 19,199

Amortization expense was $ 0.4 million and $ 0.8 million for the three and six months ended June 30, 2022, respectively, and $ 0.5 million and $ 0.9 million for the three and six months ended June 30, 2021, respectively.

On July 30, 2021, the Company acquired the assets of Diamond Fortress Technologies ("DFT") and wholly-owned subsidiaries for a total purchase consideration of $ 6.7 million, inclusive of $ 0.3 million related to a pre-existing contractual arrangement with DFT.

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The addition of contactless biometrics technology will enable the Company to better serve the needs of organizations in existing and new markets.

The acquisition of DFT has been accounted for under U.S.

The acquisition of the assets of DFT has been accounted for under U.S.

GAAP using the acquisition method of accounting.

The total purchase consideration of $ 6.7 million has been allocated among the assets acquired at their fair value at the acquisition date.

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The Company recognized $ 3.7 million of intangible assets and $ 3.0 million of goodwill, which is housed in the Telos ID reporting unit, part of the Security Solutions operating segment.

2 unchanged sentences

The acquisition was considered an asset purchase for tax purposes and the recognized goodwill is deductible for tax purposes.

The goodwill balance was $ 17.9 million as of March 31, 2022 and December 31, 2021, of which $ 3.0 million is allocated to the Security Solutions segment and $ 14.9 million is allocated to the Secure Networks segment.

Goodwill is subject to annual impairment tests and in the interim, if triggering events are present before the annual tests, we will assess impairment.

For the three months ended March 31, 2022 and 2021, no impairment charges were taken.

Intangible Assets

Intangible assets with finite lives are amortized over the following estimated useful lives:

Estimated Useful Life

Acquired technology 8 years

Customer relationship 3 years

Software development costs 2 years

Intangible assets, all of which are finite-lived, consists of the following (in thousands):

March 31, 2022

December 31, 2021

Gross Carrying Amount Accumulated Amortization Net Carrying Value Gross Carrying Amount Accumulated Amortization Net Carrying Value

Acquired technology $ 3,630 $ ( 302 ) $ 3,328 $ 3,630 $ ( 256 ) $ 3,374

Customer relationships 40 ( 9 ) 31 40 ( 5 ) 35

Software development costs 25,017 ( 6,763 ) 18,254 22,222 ( 6,432 ) 15,790

$ 28,687 $ ( 7,074 ) $ 21,613 $ 25,892 $ ( 6,693 ) $ 19,199

Amortization expense was $ 0.4 million and $ 0.5 million for the three months ended March 31, 2022 and 2021, respectively.

PURCHASE OF TELOS ID NON-CONTROLLING INTERESTS

6 unchanged sentences

the total consideration transferred to Hoya was $ 178.4 million.

As part of the common stock issuance, the Company recognized a credit to additional paid-in capital (“APIC”) of $ 148.4 million.

The Company further recognized a debit to APIC of $ 173.9 million as part of the elimination of Hoya’s non-controlling interest in Telos ID.

The net impact to APIC associated with the acquisition of the additional 50 % interest in Telos ID was a debit of $ 25.5 million.

Hoya received the final distribution of $ 2.4 million in January 2021.

Fair Value Measurements

The accounting standard for fair value measurements provides a framework for measuring fair value and expands disclosures about fair value measurements.

The framework requires the valuation of financial instruments using a three-tiered approach.

The statement requires fair value measurement to be classified and disclosed in one of the following categories:

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets and liabilities;

Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e.

supported by little or no market activity).

As of March 31, 2022 and December 31, 2021, we did not have any financial instruments with significant Level 3 inputs and we did not have any financial instruments that are measured at fair value on a recurring basis.

For certain of our non-derivative financial instruments, including receivables, accounts payable and other accrued liabilities, the carrying amount approximates fair value due to the short-term maturities of these instruments.

We established a valuation allowance for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The realization of deferred tax assets is dependent upon the generation of future taxable income.

We considered projected future taxable income, tax planning strategies, and reversal of taxable temporary differences in making this assessment.

Based on available evidence, we have determined that a full valuation allowance is required as of March 31, 2022 and December 31, 2021.

As of March 31, 2022 and December 31, 2021, we have recorded a net deferred tax liability of approximately $ 735,000 and $ 723,000 , respectively.

We review and update our estimated annual effective tax rate each quarter.

For the three months ended March 31, 2022 and 2021, we recorded an income tax provision of $ 71,000 and $ 34,000 , respectively.

For the three months ended March 31, 2022 and 2021, our estimated annual effective tax rate was primarily impacted by the overall valuation allowance position which reduced the net tax impact from taxable income or loss for both periods.

Under the provisions of ASC 740, we determined that there were approximately $ 1,149,000 and $ 1,056,000 of gross unrecognized tax benefits as of March 31, 2022 and December 31, 2021, respectively.

Included in the balance of unrecognized tax benefits as of March 31, 2022 and December 31, 2021 were $ 174,000 of tax benefits that, if recognized, would impact the effective tax rate.

Also included in the balance of unrecognized tax benefits as of March 31, 2022 and December 31, 2021 were $ 975,000 and $ 882,000 , respectively, of tax benefits that, if recognized, would not impact the effective tax rate due to the Company’s valuation allowance.

The Company had accrued interest and penalties related to the unrecognized tax benefits of $ 174,000 and $ 170,000 , which were recorded in other liabilities as of March 31, 2022 and December 31, 2021, respectively.

We believe that the total amounts of unrecognized tax benefits will not significantly increase or decrease within the next 12 months.

Related Party Transactions

Wood, the brother of our Chairman and CEO, has been an employee of the Company since 1996.

The amounts paid to this individual as compensation were $ 512,000 and $ 218,000 for the three months ended March 31, 2022 and 2021, respectively.

Additionally, Mr.

Wood owned 94,547 and 73,562 shares of the Company’s common stock as of March 31, 2022 and December 31, 2021, respectively.

One of the Company’s directors serves as a consultant to the Company.

The amounts paid for his consultancy services were $ 25,000 and $ 71,000 for the three months ended March 31, 2022 and 2021, respectively.

In February 2022, the director and the Company amended the consulting agreement to provide that the Company would pay the remainder of the director’s consultancy fees for 2022 in a fixed price amount in the form of restricted stock units.

The Company granted the director 26,091 restricted stock units on February 1, 2022, which vest quarterly in four equal amounts through the end of the year, subject to the director’s continued performance under the consulting agreement.

We lease office space and equipment under non-cancelable operating and finance leases with various expiration dates, some of which contain renewal options.

The components of lease expense were as follows (in thousands):

Three Months Ended March 31,

Operating lease cost $ 159 $ 182

Short-term lease cost (1) 9 4

Finance lease cost

Amortization of right-of-use assets 305 305

Interest on lease liabilities 179 196

Total finance lease cost 484 501

Total lease costs $ 652 $ 687

(1) Leases that have terms of 12 months or less

The weighted-average remaining lease terms and discount rates were as follows:

Three Months Ended March 31,

Weighted-average remaining lease term (in years):

Finance leases 7.1 years 8.1 years

Operating leases 1.6 years 2.3 years

Weighted-average discount rate:

Finance leases 5.04 % 5.04 %

Operating leases 5.75 % 5.75 %

Future minimum lease commitments at March 31, 2022 were as follows (in thousands):

Year Ending December 31, Operating Leases Finance Leases

2022 (excluding the three months ended March 31, 2022) $ 429 $ 1,619

2023 373 2,202

2024 28 2,258

After 2026 — 5,972

Total lease payments 830 16,737

Less imputed interest ( 38 ) ( 2,787 )

Total $ 792 $ 13,950

Supplemental cash flow information related to leases was as follows (in thousands):

Three Months Ended March 31,

Cash paid for amounts included in the measurement of lease liabilities:

Cash flows from operating activities - operating leases $ 173 $ 194

Cash flows from operating activities - finance leases 179 196

Cash flows from financing activities - finance leases 351 321

Note 12 – Stock-Based Compensation

Our 2016 LTIP provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock and dividend equivalent rights to our senior executives, directors, employees, and other service providers.

As part of the common stock issuance, the Company recognized an increase to additional paid-in capital (“APIC”) of $ 148.4 million.

The Company further recognized a reduction to APIC of $ 173.9 million as part of the elimination of Hoya’s non-controlling interest in Telos ID.

The net impact to APIC associated with the acquisition of the additional 50 % interest in Telos ID was a reduction of $ 25.5 million.

Hoya received a final distribution of $ 2.4 million in January 2021 .

ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES

Details of Accounts Payable and Other Accrued Liabilities

June 30, 2022 December 31, 2021

(in thousands)

Accounts payable - trade $ 15,929 $ 7,869

Accrued liabilities 18,109 25,300

Others 1,374 1,379

Accounts payable and other accrued liabilities $ 35,412 $ 34,548

STOCK-BASED COMPENSATION

Our 2016 Omnibus Long-Term Incentive Plan (the "2016 LTIP") provides for the grant of restricted stock units with time-based vesting ("Service-Based RSU" or "RSU") and restricted stock units with performance-based vesting (Performance-Based RSU" or "PRSU") to our senior executives, directors, employees, and other service providers.

Awards granted under the 2016 LTIP vest over the periods determined by the Board of Directors or the Compensation Committee of the Board of Directors, generally one to three years .

The stock options granted under the 2016 LTIP expire no more than ten years after the date of grant.

No stock options granted under the 2016 LTIP are outstanding as of March 31, 2022.

Approximately 0.5 million shares of our common stock were reserved for future grants as of March 31, 2022 under the 2016 LTIP.

The Company records stock-based compensation related to accrued compensation in which it intends to settle in shares of the Company’s common stock.

However, it is the Company’s discretion on whether this compensation will ultimately be paid in stock or cash as it has the right to dictate the form of these payments up until the date at which they are paid.

Accounting for stock-based compensation requires that the cost resulting from all stock-based payments be recognized in the financial statements based on the grant date fair value of the award.

The following are the stock-based compensation expense incurred for the Service-Based and Performance-Based RSUs, net of forfeitures, and accrued compensation (in thousands).

However, it is the Company’s discretion whether this compensation will ultimately be paid in stock or cash, as it has the right to dictate the form of these payments up until the date at which they are paid.

The stock-based compensation expense includes an immaterial adjustment of $ 0.7 million and $ 1.3 million for the three and six months ended June 30, 2022 related to the prior year.

There were no income tax benefits recognized on the share-based compensation expense for both periods.

Three Months Ended March 31,

Details of Stock Compensation Expense by Department

For the Three Months Ended For the Six Months Ended

June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

(in thousands)

Cost of sales – services

$ 862 $ 631 $ 1,869 $ 1,256

Sales and marketing 1,420 2,233 3,088 3,780

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Total stock-based compensation expense $ 15,206 $ 21,336 $ 29,504 $ 35,006

Restricted Stock Awards and Restricted Stock Unit (collectively “RSU”) Activity

The Company grants RSUs to our senior executives, directors, employees and service providers.

Our stock-based compensation primarily consists of service-based RSUs and performance-based RSUs.

Service-Based RSU Awards

A summary of the awards of Service-Based RSUs that vest upon the completion of a service requirement is presented below:

Shares Weighted-

Average Grant

(per share) Weighted-

Life (years) Aggregate

(in thousands)

For the Three Months Ended March 31, 2022

Beginning balance - unvested 3,030,608 $ 34.94 1.3 $ 46,700

Granted 3,438,602 10.19 — —

Vested ( 1,328,876 ) 33.38 — —

Forfeited ( 81,259 ) 35.83 — —

Ending balance - unvested 5,059,075 $ 18.38 1.1 $ 50,043

For the Three Months Ended March 31, 2021

Beginning balance - unvested 59,521 $ 0.18 2.4 $ 2,000

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Service-Based RSU and Performance-Based RSU Award Activity

Service-Based RSU Performance-Based RSU Total Weighted-Average Grant Date Fair Value

Unvested outstanding units as of December 31, 2021

3,030,608 492,727 3,523,335 $ 34.24

Granted 3,759,037 — 3,759,037 10.01

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Forfeited ( 260,588 ) ( 113,566 ) ( 374,154 ) 33.15

Ending balance - unvested 2,728,484 $ 35.76 1.9 $ 103,500

As of March 31, 2022, there was approximately $ 79.6 million of unrecognized stock-based compensation expense related to Service-Based RSUs, and this unrecognized expense is expected to be recognized over a weighted-average period of 1.5 years on a straight-line basis.

Performance-Based RSU Awards

A summary of the awards of Performance-Based RSUs that vest upon the attainment of certain price targets of the Company’s common stock is presented below:

Shares Weighted-

Average Grant

(per share) Weighted-

Life (years) Aggregate

Unvested outstanding units as of June 30, 2022 5,112,941 379,161 5,492,102 $ 18.04

As of June 30, 2022, the intrinsic value of the RSUs and PRSUs outstanding, exercisable, and vested or expected to vest was $ 44.2 million.

There was $ 61.0 million of total compensation costs related to stock-based awards not yet recognized as of June 30, 2022, which is expected to be recognized on a straight-line basis over a weighted-average remaining vesting period of approximately 1.3 years.

SHARE REPURCHASES

On May 24, 2022, the Company announced that the Board of Directors approved a new share repurchase program ("SRP") authorizing the Company to repurchase up to $ 50.0 million of its common stock.

Pursuant to this authorization, the Company may repurchase shares of its common stock on a discretionary basis from time to time through open market purchases.

The repurchase program has no expiration date and may be modified, suspended, or terminated at any time.

As of June 30, 2022, there was $ 47.0 million of the remaining authorization for future common stock repurchases under the SRP.

Shares Repurchase Activity

For the Three Months Ended For the Six Months Ended

June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

(in thousands, except per share and share data)

Amount paid for shares repurchased (1)

$ 3,002 $ — $ 3,002 $ —

Number of shares repurchased 360,439 — 360,439 —

Average per share price paid (1)

$ 8.33 $ — $ 8.33 $ —

(1) Includes commissions paid for repurchases on the open market.

As of August 5, 2022, the Company repurchased an additional 142,536 shares of its common stock, for $ 1.1 million since June 30, 2022.

ACCUMULATED OTHER COMPREHENSIVE LOSS

Our functional currency is the U.S.

For one of our wholly-owned subsidiaries, the functional currency is the local currency.

For this subsidiary, the translation of its foreign currency into U.S.

Translation gains and losses are included in stockholders’ equity as a component of accumulated other comprehensive loss.

Details of Accumulated Other Comprehensive Loss

June 30, 2022 December 31, 2021

(in thousands)

For the Three Months Ended March 31, 2022

Beginning balance - unvested 492,727 $ 30.07 2.2 $ 7,600

Granted — — — —

Vested — — — —

Forfeited ( 52,941 ) 30.84 — —

Ending balance 439,786 $ 29.97 1.8 $ 4,385

For the Three Months Ended March 31, 2021

Beginning balance — $ — — —

Granted 438,403 30.84 — —

Vested — — — —

Forfeited — — — —

Ending balance - unvested 438,403 $ 30.84 0.2 $ 16,600

In 2021 the Company granted certain senior executives awards of Performance-Based RSUs that could settle into 458,903 shares of our common stock.

The awards will vest only if, during the three-year period from the date of grant, (a) the Company’s common stock, as listed on the Nasdaq Global Market, trades at or above $ 42.50 per share (the “Target Price”) for 20 of 30 consecutive trading days or (b) the weighted-average of the per-share price of the Company’s common stock over any 30 days consecutive trading days is at least equal to the Target Price.

Further, the Company granted 50,000 shares of Performance-Based RSUs to certain employees that will fully vest upon achieving certain operational milestones during a three-year period from the grant date.

For the Performance-Based RSUs containing market conditions, the conditions are required to be considered when calculating the grant date fair value.

In order to reflect the substantive characteristics of these awards, a Monte Carlo simulation valuation model was used to calculate the grant date fair value of such awards.

Monte Carlo approaches are a class of computational algorithms that rely on repeated random sampling to compute their results.

This approach allows the calculation of the value of such Performance-Based RSUs based on a large number of possible stock price path scenarios.

As the Company recently completed its IPO in November 2020, expected volatility was based on the average historical stock price volatility of comparable publicly-traded companies over the performance period.

The risk-free rate is based on the U.S.

Treasury zero-coupon issues in effect at the time of grant over the performance period.

The expense for these awards is recognized over the derived service period as determined through the Monte Carlo simulation model.

Our key assumptions include a performance period ranging from 2.45 to 2.92 years, expected volatility between 57.4 % - 58.8 %, and a risk-free rate of 0.18 % - 0.29 %.

The fair value at the grant date and derived service periods calculated for these market condition Performance-Based RSUs were $ 19.12 - $ 30.84 and between 0.38 - 0.76 years, respectively.

As of March 31, 2022, there was approximately $ 1.1 million of unrecognized stock-based compensation expense related to these Performance-Based RSUs, and this unrecognized expense is expected to be recognized over a weighted-average period of 1.7 years on a straight-line basis.

Cumulative foreign currency translation loss $ ( 116 ) $ ( 134 )

Cumulative actuarial gain on pension liability adjustment 107 107

Accumulated other comprehensive loss $ ( 9 ) $ ( 27 )

LOSS PER SHARE

Dilutive common stock equivalents are comprised of unvested restricted common stock and warrants.

For the period of net loss, potentially dilutive securities are not included in the calculation of diluted net earnings (loss) per share, because to do so would be anti-dilutive.

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Potentially Dilutive Securities

For the Three Months Ended For the Six Months Ended

June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

(in thousands)

Unvested restricted stock and restricted stock units 57 1,030 211 239

Common stock warrants, exercisable at $ 1.665 per share

Total 57 1,886 211 1,096

Unvested antidilutive stock units excluded from the dilutive effect (stock units) 3,056 — 1,348 —

RELATED PARTY TRANSACTIONS

Wood, the brother of our Chairman and CEO, has been an employee of the Company since 1996.

The amounts paid to this individual as compensation were $ 93,000 and $ 605,000 for the three and six months ended June 30, 2022, respectively, and $ 83,000 and $ 301,000 for the three and six months ended June 30, 2021, respectively.

Additionally, Mr.

Wood owned 94,547 and 73,562 shares of the Company’s common stock as of June 30, 2022, and December 31, 2021.

One of the Company’s directors serves as a consultant to the Company.

In February 2022, the director and the Company amended the consulting agreement to provide that the Company would pay the remainder of the director’s consulting fees for 2022 in a fixed price amount in the form of restricted stock units.

The amounts paid for his consulting services were $ 25,000 for the three and six months ended June 30, 2022, and $ 70,500 and $ 141,000 for the three and six months ended June 30, 2021, respectively.

SEGMENT INFORMATION

During the fourth quarter of 2021, as a result of the segment reorganization, our CODM began evaluating, overseeing and managing the financial performance of our operations through two operating segments:

As noted in Note 2 - Significant Accounting Policies , during the fourth quarter of 2021, as a result of the segment reorganization, our CODM began evaluating, overseeing and managing the financial performance of our operations through two operating segments:

Security Solutions and Secure Networks.

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We eliminate any inter-segment revenues and expenses upon consolidation.

The Security Solutions segment is primarily focused on cybersecurity, cloud and identity solutions through Xacta, Telos Ghost, AMHS and Telos ID offerings.

We recognize revenue on contracts from providing various system platforms in the cloud, on-premises and/or in hybrid cloud environment, as well as software sales or software-as-a-service.

Revenue associated with the segment's custom solutions is recognized as work progresses or upon delivery of services.

Fluctuation in revenue from period to period is the result of the volume of software sales, and progress or completion of cloud and/or cyber security solutions during the period.

The Security Solutions segment is primarily focused on cybersecurity, cloud and identity solutions, and secure messaging through Xacta ® , Telos Ghost ® , Telos ® Advanced Cyber Analytics, Telos ® AMHS and Telos ® ID offerings.

We recognize revenue on contracts from providing various system platforms in the cloud, on-premises and in hybrid cloud environments, as well as software sales or software-as-a-service.

Revenue associated with the segment's custom solutions is recognized as work progresses or upon delivery of services and products.

Fluctuation in revenue from period to period is the result of the volume of software sales, and progress or completion of cloud and/or cybersecurity solutions during the period.

The majority of the operating costs relates to labor, material, and overhead costs.

5 unchanged sentences

Variances in costs recognized from period to period primarily reflect increases and decreases in activity level on individual contracts.

The following table summarizes business segment information for the periods presented, and a reconciliation of those results to the statement of operations for the relevant periods.

Prior period segment information was recast to conform to the current year's presentation.

Three Months Ended March 31,

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Results of Operations by Business Segment

For the Three Months Ended For the Six Months Ended

June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

(in thousands)

1 unchanged sentence

Secure Networks 24,972 21,408 48,213 54,336

Consolidated revenue $ 50,160 $ 55,757

Total revenue 55,791 53,644 105,951 109,402

Gross profit:

Security Solutions 16,433 17,188 31,485 26,515

1 unchanged sentence

Total gross profit 20,929 22,534 39,800 37,004

Selling, general and administrative expenses 33,095 40,005 66,700 67,969

Operating loss ( 12,166 ) ( 17,471 ) ( 26,900 ) ( 30,965 )

Other income/(expense) 118 32 130 ( 1,022 )

Interest expense ( 187 ) ( 192 ) ( 377 ) ( 388 )

Loss before income taxes ( 12,235 ) ( 17,631 ) ( 27,147 ) ( 32,375 )

Provision for income taxes ( 54 ) ( 13 ) ( 125 ) ( 47 )

Net loss $ ( 12,289 ) $ ( 17,644 ) $ ( 27,272 ) $ ( 32,422 )

We measure each segment's profitability based on gross profit.

6 unchanged sentences

As a result, assets are not tracked by segment and therefore, total assets by segment are not disclosed.

Commitments and Contingencies

REVISION OF PRIOR YEAR INTERIM FINANCIAL STATEMENTS

During the third quarter of 2021, the Company identified that stock compensation for a single individual was incorrectly charged to "cost of sales - services" instead of "general and administrative expense." The total amount of stock compensation incorrectly charged to cost of sales was $ 0.3 million, of which $ 0.1 million was related to the first quarter of 2021, and $ 0.2 million related to the second quarter of 2021.

The Company corrected the error during the third quarter of 2021.

During the third quarter of 2021, the Company identified that the allocation of stock compensation for two of the Company's overhead cost pools was incorrectly charged to "cost of sales" instead of "general and administrative expense" during the second quarter of 2021.

The total amount of the allocated stock compensation incorrectly charged to cost of sales was $ 0.7 million, which the Company corrected during the third quarter of 2021.

In the third quarter of 2021, the Company identified $ 1.1 million in revenue related to the stub period of a newly awarded contract that should have been recognized as income during the second quarter of 2021.

The Company initially corrected the error during the third quarter of 2021.

Additionally, and related to this contract, in the fourth quarter of 2021 the Company identified $ 0.3 million of products revenue for the second quarter of 2021 that should be classified in the condensed consolidated statements of operations as services revenue.

The Company erroneously presented the $ 2.4 million final payment to fully acquire all membership interest of Telos ID as an operating activity on the condensed consolidated statements of cash flows.

The Company corrected the presentation to properly reflect the final payment within financing activities on the consolidated statements of cash flows in the fourth quarter of 2021.

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Impact of the Correction to the Condensed Consolidated Statement of Operations

For the Three Months Ended June 30, 2021 For the Six Months Ended June 30, 2021

Previously Reported Error Correction As Adjusted Previously Reported Error Correction As Adjusted

(in thousands, except per share amounts)

Revenue - services $ 47,618 $ 1,385 $ 49,003 $ 99,676 $ 1,385 $ 101,061

Revenue - products 4,941 ( 300 ) 4,641 8,641 ( 300 ) 8,341

Revenue 52,559 1,085 53,644 108,317 1,085 109,402

Cost of sales - services 29,501 ( 892 ) 28,609 69,103 ( 1,004 ) 68,099

Costs and expenses 32,002 ( 892 ) 31,110 73,402 ( 1,004 ) 72,398

General and administrative 28,743 892 29,635 48,708 1,004 49,712

Selling, general and administrative expenses 39,113 892 40,005 66,965 1,004 67,969

Operating loss ( 18,556 ) 1,085 ( 17,471 ) ( 32,050 ) 1,085 ( 30,965 )

Loss before income taxes ( 18,716 ) 1,085 ( 17,631 ) ( 33,460 ) 1,085 ( 32,375 )

Net loss ( 18,729 ) 1,085 ( 17,644 ) ( 33,507 ) 1,085 ( 32,422 )

Net loss attributable to Telos Corporation ( 18,729 ) 1,085 ( 17,644 ) ( 33,507 ) 1,085 ( 32,422 )

Net loss per share attributable to Telos Corporation

Basic $ ( 0.28 ) $ 0.02 $ ( 0.26 ) $ ( 0.51 ) $ 0.02 $ ( 0.49 )

Diluted $ ( 0.28 ) $ 0.02 $ ( 0.26 ) $ ( 0.51 ) $ 0.02 $ ( 0.49 )

Impact of the Correction to the Condensed Consolidated Statement of Comprehensive Loss

For the Three Months Ended June 30, 2021 For the Six Months Ended June 30, 2021

Previously Reported Error Correction As Adjusted Previously Reported Error Correction As Adjusted

(in thousands)

Net loss $ ( 18,729 ) $ 1,085 $ ( 17,644 ) $ ( 33,507 ) $ 1,085 $ ( 32,422 )

Comprehensive loss attributable to Telos Corporation ( 18,724 ) 1,085 ( 17,639 ) ( 33,534 ) 1,085 ( 32,449 )

Impact of the Correction to the Condensed Consolidated Statement of Cash Flows

For the Six Months Ended June 30, 2021

Previously Reported Error Correction As Adjusted

(in thousands)

Net loss $ ( 33,507 ) $ 1,085 ( 32,422 )

Changes in other operating assets and liabilities ( 10,074 ) 1,351 ( 8,723 )

Cash used in operating activities ( 5,790 ) 2,436 ( 3,354 )

Distribution to Telos ID Class B member – non-controlling interest

— ( 2,436 ) ( 2,436 )

Cash provided by financing activities 35,474 ( 2,436 ) 33,038

Impact of the Correction to the Condensed Consolidated Statement of Changes in Stockholders' Equity

For the Three Months Ended June 30, 2021 For the Six Months Ended June 30, 2021

Previously Reported Error Correction As Adjusted Previously Reported Error Correction As Adjusted

(in thousands)

Net loss $ ( 18,729 ) $ 1,085 $ ( 17,644 ) $ ( 33,507 ) $ 1,085 $ ( 32,422 )

Accumulated deficit ( 177,350 ) 1,085 ( 176,265 ) ( 177,350 ) 1,085 ( 176,265 )

Total Stockholders' equity 164,700 1,085 165,785 164,700 1,085 165,785

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COMMITMENT AND CONTINGENCIES

Legal Proceedings

On February 7, 2022, Telos and certain of its current and former officers were named as defendants in a lawsuit filed in the United States District Court for the Eastern District of Virginia.

In the complaint, the plaintiffs, who purport to represent a class of purchasers of Telos common stock between November 19, 2020 and November 12, 2021, allege that the defendants violated securities laws by failing to disclose delays relating to the launch of certain contracts between Telos and the Transportation Security Administration ("TSA") and the Centers for Medicare and Medicaid Services and to take into account those delays when providing a financial outlook of the Company’s 2021 performance.

The complaint seeks monetary damages in an unspecified amount.

We dispute the claims described in the complaint and intend to defend the lawsuit vigorously.

In the complaint, the plaintiffs, who purport to represent a class of purchasers of Telos common stock between November 19, 2020, and March 16, 2022, allege that the defendants violated securities laws by failing to disclose delays relating to the launch of certain contracts between Telos and the Transportation Security Administration ("TSA") and the Centers for Medicare and Medicaid Services and to take into account those delays when providing a financial forecast for the Company’s 2021 performance.

On June 15, 2022, the Plaintiffs filed a consolidated complaint which added claims (i) concerning Telos' disclosure of revenue projections for these contracts, (ii) against the directors of Telos at the time of its initial public offering, and (iii) pursuant to Sections 11 and 15 of the Securities Act of 1933.

The Company is vigorously defending the case, but given the early stage, although a loss may reasonably be possible, the Company is unable to predict the likelihood of success of plaintiffs' claims or estimate a loss or range of loss.

As a result, no material liability has been recorded as of June 30, 2022 and December, 31, 2021, respectively.

In addition, the Company is a party to litigation arising in the ordinary course of business.

In the opinion of management, while the results of such litigation cannot be predicted with any reasonable degree of certainty, the final outcome of such known matters will not, based upon all available information, have a material adverse effect on the Company's condensed consolidated financial position, results of operations or cash flows.

In the opinion of management, while the results of such litigation cannot be predicted with any reasonable degree of certainty, the final outcome of such known matters will not, based upon all available information, have a material adverse effect on the Company's unaudited consolidated financial position, results of operations or cash flows.

Other - Government Contracts

9 unchanged sentences

government regulations also may be audited or investigated.

SUPPLEMENTAL CASH FLOW INFORMATION

Details of Cash, Cash Equivalent, and Restricted Cash

June 30, 2022 December 31, 2021

(in thousands)

Cash and cash equivalents $ 122,588 $ 126,562

Restricted cash (1)

Cash, cash equivalents, and restricted cash $ 122,720 $ 126,562

(1) Restricted cash consists of a commercial money market account held as a deposit on the Ashburn lease and is recorded under "Other assets" on the Consolidated Balance Sheets

Supplemental Cash Flow Information

For the Six Months Ended

June 30, 2022 June 30, 2021

(in thousands)

Cash paid during the period for:

Interest $ 353 $ 388

Income taxes 188 54

Non-cash investing and financing activities:

Operating lease ROU assets obtained in exchange for operating lease liabilities 282 322

Capital expenditure activity in accounts payable and other accrued liabilities 296 —

Common stock repurchase under SRP 400 —

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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 1. Financial Statements