What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-11-09 compared with 2022-08-09 · 141 added, 167 removed, 449 unchanged (41% of the section changed)

2 unchanged sentences

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

For the Three Months Ended For the Nine Months Ended

September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021

(in thousands, except per share amounts)

19 unchanged sentences

Loss before income taxes ( 7,332 ) ( 5,263 ) ( 34,479 ) ( 37,638 )

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

(Provision for)/benefit from income taxes ( 8 ) 41 ( 133 ) ( 6 )

Net loss $ ( 7,340 ) $ ( 5,222 ) $ ( 34,612 ) $ ( 37,644 )

6 unchanged sentences

See accompanying notes to unaudited consolidated financial statements.

Tab l e of Contents

Telos Corporation

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

For the Three Months Ended For the Nine Months Ended

September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021

(in thousands)

Net loss $ ( 7,340 ) $ ( 5,222 ) $ ( 34,612 ) $ ( 37,644 )

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

Other comprehensive loss, net of tax:

Foreign currency translation adjustments ( 21 ) ( 13 ) ( 3 ) ( 40 )

1 unchanged sentence

See accompanying notes to unaudited consolidated financial statements.

Tab l e of Contents

Telos Corporation

Consolidated Balance Sheets

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

(in thousands, except per share and share data)

27 unchanged sentences

Stockholders’ equity

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

Common stock, $ 0.001 par value, 250,000,000 shares authorized, 67,300,099 shares and 66,767,450 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively

Additional paid-in capital 398,546 367,153

4 unchanged sentences

See accompanying notes to unaudited consolidated financial statements.

Tab l e of Contents

Telos Corporation

Consolidated Statements of Cash Flows

For the Six Months Ended

June 30, 2022 June 30, 2021

For the Nine Months Ended

September 30, 2022 September 30, 2021

(in thousands)

1 unchanged sentence

Net loss $ ( 34,612 ) $ ( 37,644 )

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

Adjustments to reconcile net loss to cash flows provided by operating activities:

Stock-based compensation 44,225 47,378

4 unchanged sentences

Provision for doubtful accounts 97 7

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

Recovery from inventory obsolescence ( 108 ) ( 2 )

Changes in other operating assets and liabilities

6 unchanged sentences

Other current liabilities and other liabilities ( 507 ) ( 348 )

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

Net cash provided by operating activities 20,118 9,637

Cash flows from investing activities:

1 unchanged sentence

Purchases of property and equipment ( 815 ) ( 1,645 )

Cash paid for acquisition — ( 5,925 )

Net cash used in investing activities ( 9,395 ) ( 14,242 )

11 unchanged sentences

See accompanying notes to unaudited consolidated financial statements.

Tab l e of Contents

Telos Corporation

5 unchanged sentences

(in thousands)

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

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

Net loss — — — — ( 7,340 ) ( 7,340 )

3 unchanged sentences

RSUs vested, net of shares withheld to cover tax withholding 205 — ( 249 ) — — ( 249 )

Balance at September 30, 2022 67,300 $ 106 $ 398,546 $ ( 30 ) $ ( 221,589 ) $ 177,033

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

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

Net loss — — — — ( 5,222 ) ( 5,222 )

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

Foreign currency translation gain — — — 5 — 5

Foreign currency translation loss — — — ( 13 ) — ( 13 )

Stock-based compensation expense — — 12,372 — — 12,372

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

Balance at September 30, 2021 66,635 $ 105 $ 354,300 $ 4 $ ( 181,487 ) $ 172,922

Common Stock Additional Paid-in

5 unchanged sentences

Net loss — — — — ( 34,612 ) ( 34,612 )

Foreign currency translation gain — — — 18 — 18

Foreign currency translation loss — — — ( 3 ) — ( 3 )

Stock-based compensation expense, excluding accrued compensation — — 42,212 — — 42,212

1 unchanged sentence

RSUs vested, net of shares withheld to cover tax withholding 1,392 1 ( 3,136 ) — — ( 3,135 )

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

Balance at September 30, 2022 67,300 $ 106 $ 398,546 $ ( 30 ) $ ( 221,589 ) $ 177,033

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

5 unchanged sentences

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

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

Balance at September 30, 2021 66,635 $ 105 $ 354,300 $ 4 $ ( 181,487 ) $ 172,922

See accompanying notes to unaudited consolidated financial statements.

Tab l e of Contents

Telos Corporation

1 unchanged sentence

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.

We also own all of the issued and outstanding share capital of Ubiquity.com, Inc., a holding company for Xacta Corporation.

We also have a 100 % ownership interest in Telos Identity Management Solutions, LLC (“Telos ID”), Teloworks, Inc.

(“Teloworks”) and Telos APAC Pte.

(“Telos APAC”).

On November 12, 2020, we amended our charter to effect an approximate 0.794 -for-1 reverse stock split with respect to our common stock.

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

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.

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 Solutions ("EnCap").

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

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

We own the issued and outstanding share capital of Ubiquity.com, Inc., a holding company for Xacta Corporation.

We also have a 100% ownership interest in Telos Identity Management Solutions, LLC ("Telos ID"), Teloworks, Inc., and Telos APAC Pte.

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.

The accompanying unaudited consolidated financial statements include the accounts of Telos Corporation and its subsidiaries (see Note 1 – Organ ization ), 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.

2 unchanged sentences

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.

We believe that the unaudited interim financial statements include all adjustments (which are normal and recurring) 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.

Tab l e of Contents

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

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.

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.

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

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

8 unchanged sentences

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.

Further information regarding the misstatements and related revisions are included in Note 18 – Revision 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.

Preparing 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.

(f) Recent Accounting Pronouncements

(f) Software Development Cost (Cloud-computing implementation costs)

ASC 350-40 requires hosting arrangements that are service contracts to follow the guidance for internal-use software to determine which implementation costs can be capitalized.

As of September 30, 2022, the capitalized implementation costs related to hosting arrangements that were incurred during the application development stage aggregated to $ 0.3 million.

These costs are related primarily to the implementation of a new enterprise resource planning system.

The capitalized implementation costs will be amortized over the expected term of the arrangement on a straight-line basis.

Amortization begins when the component of the hosting arrangement is ready for its intended use after all substantial testing is complete and classified in the same line item on our consolidated statement of operations as the expense for fees for the associated hosting arrangement.

(g) Reclassifications

Certain reclassifications have been made to prior years' consolidated financial statements to conform to the current year's presentation.

The reclassification had no impact on our total assets or liabilities nor on our net loss or stockholders' equity.

(h) Recent Accounting Pronouncements

Changes to U.S.

15 unchanged sentences

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.

Tab l e of Contents

In September 2022, the FASB issued ASU No.

2022-04, "Liabilities - Supplier Finance Programs (Subtopic 405-50):

Disclosure of Supplier Finance Program Obligations," which requires a company that uses a supplier finance program in connection with the purchase of goods or services to disclose sufficient information about the program to allow a user of the financial statements to understand the program's nature, activity during the period, changes from period to period, and potential magnitude.

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

REVENUE RECOGNITION

1 unchanged sentence

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 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 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.

Revenue transferred to customer over time accounted for 87 % and 91 % of our revenue for the three and nine months ended September 30, 2022, respectively, and 91 % and 92 % of our revenue for the three and nine months ended September 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.

We also recognize revenue at a point in time on certain contracts, when our customer obtains control of the transferred product, generally upon delivery, and the revenue is classified as product revenue.

Revenue transferred to customers at a point in time accounted for 13 % and 9 % of our revenue for the three and nine months ended September 30, 2022, respectively, and 9 % and 8 % of our revenue for the three and nine months ended September 30, 2021, respectively.

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.

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.

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

Disaggregated Revenues

We have identified two reportable segments.

In addition to our segment reporting, as further discussed in Note 17 – Segment Information , we disaggregate our revenue by customer and contract types.

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 United States, regardless of where the services are performed.

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

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

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

Products — — — —

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

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

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

For the Three Months Ended For the Nine Months Ended

September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021

Amount % Amount % Amount % Amount %

(in thousands)

Security Solutions:

Federal $ 60,294 95 % $ 66,612 97 % $ 160,351 95 % $ 171,091 96 %

State & local, and commercial 3,299 5 % 2,369 3 % 9,193 5 % 7,292 4 %

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

Secure Networks:

Federal 24,962 21,302 48,203 54,198

State & local, and commercial 10 106 10 138

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

Total revenue $ 63,593 $ 68,981 $ 169,544 $ 178,383

Tab l e of Contents

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

For the Three Months Ended For the Nine Months Ended

September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021

Amount % Amount % Amount % Amount %

(in thousands)

Security Solutions:

Firm fixed-price $ 54,055 85 % $ 60,349 87 % $ 140,636 83 % $ 155,832 87 %

1 unchanged sentence

Cost plus fixed fee 6,081 10 % 5,478 8 % 19,804 12 % 13,308 8 %

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

Secure Networks:

Firm fixed-price 19,030 18,885 37,839 50,014

Time-and-materials — — — 29

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

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

Total revenue $ 63,593 $ 68,981 $ 169,544 $ 178,383

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

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 95 % of our billed accounts receivable as of June 30, 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 September 30, 2022, were directly with U.S.

government customers.

We perform ongoing credit evaluations of all 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 guarantees from our customers.

We maintain allowances for potential losses.

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

For the Three Months Ended For the Nine Months Ended

September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021

Department of Defense ("DoD") 77 % 74 % 74 % 75 %

Civilian 22 % 28 % 23 % 20 %

Civilian federal agencies 18 % 23 % 21 % 21 %

Contract Balances

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

(in thousands)

1 unchanged sentence

Contract liabilities 6,952 6,381

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 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.

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

Revenue recognized for the three and nine months ended September 30, 2022, that was included in the contract liabilities balance at the beginning of each reporting period, was $ 0.9 million and $ 5.0 million, respectively.

Revenue recognized for the three and nine months ended September 30, 2021, that was included in the contract liabilities balance at the beginning of each reporting period, was $ 0.8 million and $ 4.1 million, respectively.

As of September 30, 2022, we had $ 111.4 million of remaining performance obligations, which we also refer to as funded backlog.

We expect to recognize approximately 85 % of our remaining performance obligations over the next 12 months and the balance thereafter.

ACCOUNTS RECEIVABLE, NET

Details of Accounts Receivable, Net

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

(in thousands)

3 unchanged sentences

Accounts receivable, net $ 50,983 $ 59,844

Tab l e of Contents

INVENTORIES, NET

Details of Inventories, Net

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

(in thousands)

4 unchanged sentences

Details of Property and Equipment, Net

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

(in thousands)

4 unchanged sentences

Property and equipment, net $ 5,128 $ 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.

Depreciation expense was $ 0.6 million and $ 1.8 million for the three and nine months ended September 30, 2022, respectively, compared to $ 0.6 million and $ 1.5 million for the three and nine months ended September 30, 2021, respectively.

The goodwill balance was $ 17.9 million as of September 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.

No impairment charges were taken for the three and nine months ended that September 30, 2022, and 2021.

INTANGIBLE ASSETS, NET

Details of Intangible Assets, Net

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Gross Accumulated Amortization Net Gross Accumulated Amortization Net

4 unchanged sentences

$ 34,869 $ ( 8,011 ) $ 26,858 $ 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.

Amortization expense was $ 0.5 million and $ 1.3 million for the three and nine months ended September 30, 2022, respectively, and $ 0.4 million and $ 1.3 million for the three and nine months ended September 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.

6 unchanged sentences

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

Tab l e of Contents

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.

Goodwill is primarily attributable to an excess of the purchase price over the acquired identifiable net tangible and intangible assets.

The acquired intangible assets will be amortized on a straight-line basis over 3 - 8 years.

The acquired intangible assets will be amortized on a straight-line basis over three to eight years .

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

8 unchanged sentences

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.

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

The net impact to APIC associated with acquiring 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.

1 unchanged sentence

Details of Accounts Payable and Other Accrued Liabilities

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

(in thousands)

7 unchanged sentences

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 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.

The stock-based compensation expense includes an immaterial adjustment of $ 1.3 million for the nine months ended September 30, 2022, related to the prior year.

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

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

For the Three Months Ended For the Nine Months Ended

September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021

(in thousands)

5 unchanged sentences

Total stock-based compensation expense $ 14,721 $ 12,372 $ 44,225 $ 47,378

Tab l e of Contents

Service-Based RSU and Performance-Based RSU Award Activity

5 unchanged sentences

Forfeited ( 360,762 ) ( 155,942 ) ( 516,704 ) 33.22

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.

Unvested outstanding units as of September 30, 2022

4,914,324 336,785 5,251,109 $ 17.23

As of September 30, 2022, the intrinsic value of the RSUs and PRSUs outstanding, exercisable, and vested or expected to vest was $ 46.5 million.

There was $ 42.7 million of total compensation costs related to stock-based awards not yet recognized as of September 30, 2022, which is expected to be recognized on a straight-line basis over a weighted-average remaining vesting period of approximately one year .

SHARE REPURCHASES

2 unchanged sentences

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.

As of September 30, 2022, there was $ 42.3 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

For the Three Months Ended For the Nine Months Ended

September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021

(in thousands, except per share and share data)

5 unchanged sentences

(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.

As of November 4, 2022, the Company has repurchased an additional 106,623 shares of its common stock for $ 1.0 million since September 30, 2022.

ACCUMULATED OTHER COMPREHENSIVE LOSS

5 unchanged sentences

Details of Accumulated Other Comprehensive Loss

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

(in thousands)

7 unchanged sentences

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.

Tab l e of Contents

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

For the Three Months Ended For the Nine Months Ended

September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021

(in thousands)

5 unchanged sentences

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.

The amounts paid to this individual as compensation were $ 91,000 and $ 696,000 for the three and nine months ended September 30, 2022, respectively, and $ 88,000 and $ 389,000 for the three and nine months ended September 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.

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

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

1 unchanged sentence

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.

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.

No cash payments were made for the three months ended September 30, 2022.

The amounts paid for his consulting services were $ 25,000 for the nine months ended September 30, 2022, and $ 71,000 and $ 212,000 for the three and nine months ended September 30, 2021, respectively.

SEGMENT INFORMATION

1 unchanged sentence

Security Solutions and Secure Networks.

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.

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

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

2 unchanged sentences

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.

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

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

Software sales have immaterial operation costs associated with them, thus yielding higher margins.

3 unchanged sentences

Contract costs include labor, material, and overhead costs.

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

Tab l e of Contents

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

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

For the Three Months Ended For the Nine Months Ended

September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021

(in thousands)

11 unchanged sentences

Loss before income taxes ( 7,332 ) ( 5,263 ) ( 34,479 ) ( 37,638 )

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

(Provision for)/benefit from income taxes ( 8 ) 41 ( 133 ) ( 6 )

Net loss $ ( 7,340 ) $ ( 5,222 ) $ ( 34,612 ) $ ( 37,644 )

2 unchanged sentences

Interest income, interest expense, other income and expense items, and income taxes, as reported in the consolidated financial statements, are not part of the segment profitability measure and are primarily recorded at the corporate level.

government Cost Accounting Standards, indirect costs including depreciation and amortization expense, are collected in numerous indirect cost pools, which are then collectively allocated out to the Company’s reportable segments based on a representative causal or beneficial relationship of the costs in the pool to the costs in the base.

While depreciation and amortization expense is a component of the allocated costs, the allocation process precludes depreciation and amortization expense from being specifically identified by the Company’s individual reportable and operating segments.

For this reason, the non-cash items by a reportable and operating segment have not been reported above.

Management does not utilize total assets by segment to evaluate segment performance or allocate resources.

1 unchanged sentence

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.

(a) Expense Classification

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 the 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 addition, 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 the cost of sales was $ 0.7 million, which the Company corrected during the third quarter of 2021.

(b) Revenue Recognition

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.

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 and $ 0.4 million of products revenue for the third quarter of 2021 that should be classified in the condensed consolidated statements of operations as services revenue.

In the third quarter of 2021, the Company erroneously recorded a $ 0.5 million expense related to a software project whose development milestones were achieved, and therefore, costs associated with the software should have been capitalized.

(d) Recording of Expense

In the third quarter of 2021, the Company erroneously recorded a $ 0.9 million expense related to a contract that had not yet begun.

In the fourth quarter of 2021, the Company reversed the expense previously recorded and does not plan to record the expense until the start of the period of performance.

In the fourth quarter of 2021, the Company identified that a third-quarter RSU was awarded to an individual, but that award was erroneously excluded from its calculation of compensation expense, causing compensation expense to be understated by $ 0.2 million in the third quarter of 2021.

(e) Cash Flow

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.

Tab l e of Contents

(f) Valuation of Acquired Assets

In the fourth quarter of fiscal year 2021, the Company identified a necessary update to a previously established assumption related to the valuation of its 2021 acquisition.

The change in assumption resulted in additional goodwill of $ 1.3 million and a reduction of the intangible asset for the same amount that should have been reported during the third quarter of 2021.

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

For the Three Months Ended September 30, 2021 For the Nine Months Ended September 30, 2021

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

5 unchanged sentences

Costs and expenses 43,998 106 44,104 117,400 ( 898 ) 116,502

Research and development 5,396 ( 533 ) 4,863 14,783 ( 533 ) 14,250

General and administrative 20,562 ( 823 ) 19,739 69,271 181 69,452

8 unchanged sentences

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

For the Three Months Ended September 30, 2021 For the Nine Months Ended September 30, 2021

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

3 unchanged sentences

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

For the Six Months Ended June 30, 2021

For the Nine Months Ended September 30, 2021

Previously Reported Error Correction As Adjusted

1 unchanged sentence

Net loss $ ( 38,894 ) $ 1,250 ( 37,644 )

Stock-based compensation 47,197 181 47,378

Changes in other operating assets and liabilities ( 5,900 ) 1,538 ( 4,362 )

Cash used in operating activities 6,668 2,969 9,637

Capitalized software development costs ( 6,139 ) ( 533 ) ( 6,672 )

Cash used in investing activities ( 13,709 ) ( 533 ) ( 14,242 )

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

2 unchanged sentences

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

For the Three Months Ended September 30, 2021 For the Nine Months Ended September 30, 2021

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

1 unchanged sentence

Net loss $ ( 5,387 ) $ 165 $ ( 5,222 ) $ ( 38,894 ) $ 1,250 $ ( 37,644 )

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

Additional paid-in capital 354,119 181 354,300 354,119 181 354,300

Accumulated deficit - beginning balance ( 177,350 ) 1,085 ( 176,265 ) ( 143,843 ) — ( 143,843 )

Accumulated deficit - ending balance ( 182,737 ) 1,250 ( 181,487 ) ( 182,737 ) 1,250 ( 181,487 )

Total Stockholders' equity 171,491 1,431 172,922 171,491 1,431 172,922

Tab l e of Contents

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.

As previously reported in Note 19 of the Form 10-Q for the quarter ended June 30, 2022, filed on August 9, 2022, 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 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.

1 unchanged sentence

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.

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

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

13 unchanged sentences

Details of Cash, Cash Equivalent, and Restricted Cash

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

(in thousands)

4 unchanged sentences

Supplemental Cash Flow Information

For the Six Months Ended

June 30, 2022 June 30, 2021

For the Nine Months Ended

September 30, 2022 September 30, 2021

(in thousands)

6 unchanged sentences

Common stock repurchase under SRP 80 —

Tab l e of Contents

Acquisition holdback — 506

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