What changed in this filing

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Item 1. Financial Statements

2023-08-09 compared with 2023-05-10 · 189 added, 101 removed, 434 unchanged (40% of the section changed)

2 unchanged sentences

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended

March 31, 2023 March 31, 2022

For the Three Months Ended For the Six Months Ended

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

(in thousands, except per share amounts)

26 unchanged sentences

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

For the Three Months Ended

March 31, 2023 March 31, 2022

For the Three Months Ended For the Six Months Ended

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

(in thousands)

6 unchanged sentences

CONSOLIDATED BALANCE SHEETS

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

(in thousands, except per share amount and share data)

29 unchanged sentences

Stockholders’ equity:

Common stock, $ 0.001 par value, 250,000,000 shares authorized, 69,388,256 shares and 67,431,632 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively

Common stock, $ 0.001 par value, 250,000,000 shares authorized, 69,466,777 shares and 67,431,632 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively

Additional paid-in capital 426,656 412,708

6 unchanged sentences

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended

March 31, 2023 March 31, 2022

For the Six Months Ended

June 30, 2023 June 30, 2022

(in thousands)

22 unchanged sentences

Purchases of property and equipment ( 270 ) ( 641 )

Payment of DFT holdback amount ( 564 ) —

Net cash used in investing activities ( 8,468 ) ( 5,775 )

3 unchanged sentences

Repurchase of common stock ( 139 ) ( 2,603 )

Payment of DFT holdback amount ( 564 ) —

Payments for debt issuance costs ( 114 ) —

11 unchanged sentences

(in thousands)

Balance at March 31, 2023 69,388 $ 108 $ 420,980 $ ( 42 ) $ ( 251,151 ) $ 169,895

Net loss — — — — ( 8,024 ) ( 8,024 )

Foreign currency translation gain — — — ( 11 ) — ( 11 )

Restricted stock unit awards vested, net of shares withheld to cover tax withholding 79 — — — — —

Stock-based compensation — 5,676 — — 5,676

Balance at June 30, 2023 69,467 $ 108 $ 426,656 $ ( 53 ) $ ( 259,175 ) $ 167,536

Balance at March 31, 2022 67,867 $ 106 $ 378,546 $ 2 $ ( 203,593 ) $ 175,061

Net loss — — — — ( 14,159 ) ( 14,159 )

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

Restricted stock unit awards vested, net of shares withheld to cover tax withholding 87 — — — — —

Stock-based compensation — — 16,423 — — 16,423

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

Balance at June 30, 2022 67,594 $ 106 $ 391,967 $ ( 9 ) $ ( 217,752 ) $ 174,312

Common Stock Additional Paid-in

Capital Accumulated

Other Comprehensive Income Accumulated Deficit Total Stockholders’

Shares Amount

(in thousands)

Balance at December 31, 2022 67,431 $ 106 $ 412,708 $ ( 55 ) $ ( 240,405 ) $ 172,354

4 unchanged sentences

Issuance of common stock for 401K match 777 1 1,941 — — 1,942

Balance at March 31, 2023 69,388 $ 108 $ 420,980 $ ( 42 ) $ ( 251,151 ) $ 169,895

Balance at June 30, 2023 69,467 $ 108 $ 426,656 $ ( 53 ) $ ( 259,175 ) $ 167,536

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

3 unchanged sentences

Stock-based compensation — — 30,703 — — 30,703

Balance at March 31, 2022 67,867 $ 106 $ 378,546 $ 2 $ ( 203,593 ) $ 175,061

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

Balance at June 30, 2022 67,594 $ 106 $ 391,967 $ ( 9 ) $ ( 217,752 ) $ 174,312

See accompanying notes to the unaudited consolidated financial statements.

17 unchanged sentences

Basis of Comparison - Revision of Previously Issued Interim Financial Statements

During the course of preparing the Company's consolidated financial statements for the year ended December 31, 2022, we identified that stock-based compensation expense related to performance-based restricted stock unit (“PSU”) awards with market conditions was erroneously reversed when those PSUs were forfeited during the quarter ended March 31, 2022.

Although the Company has determined that the error did not have a material impact on its previously issued interim consolidated financial statements, it revised the previously reported interim financial information in conjunction with the issuance of its quarterly filings on Form 10-Q for the quarter ended March 31, 2023.

Further information regarding the misstatements and related revisions are included under N ote 20 – Revision of P rior Year Interim Financial Statements to the unaudited consolidated financial statements.

Further information regarding the misstatements and related revisions are included under Note 20 – Revision of Prior Year Interim Financial Statements to the unaudited consolidated financial statements.

Use of Estimates

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We base our estimates on historical experience, currently available information, and various other assumptions that we believe are reasonable under the circumstances.

Management evaluates these estimates and assumptions on an ongoing basis, including those relating to revenue recognition on cost estimation on certain contracts, allowance for credit losses, inventory obsolescence, valuation allowance for deferred tax assets, income taxes, certain assumptions related to share-based compensation, valuation of intangible assets and goodwill, restructuring expenses accruals, and contingencies.

Management evaluates these estimates and assumptions on an ongoing basis, including those relating to revenue recognition on cost estimation on certain contracts, allowance for credit losses, inventory obsolescence, valuation allowance for deferred tax assets, income taxes, certain assumptions related to stock-based compensation, valuation of intangible assets and goodwill, restructuring expenses accruals, and contingencies.

Actual results could differ from those estimates.

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

Stock-based Compensation

The Company grants stock-based compensation awards under the 2016 Omnibus Long-Term Incentive Plan, as amended (the "2016 LTIP").

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

The stock options granted under the 2016 LTIP expire no more than 10 years after the date of grant.

The service-based restricted stock units ("RSUs") granted generally vest in installments over a period of up to three years from the date of grant.

The PSUs 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 fair value of each RSU award is based on the closing stock price on the date of grant, while the fair value of the PSU awards with market condition is based on using a Monte Carlo simulation.

The Company estimates the fair value of stock options on the date of the grant using an option pricing model.

The option pricing model takes into consideration the current share price of the underlying common stock, exercise price of the option, expected term, risk-free interest rate and the volatility of share price.

These considerations directly affect the amount of compensation expense that will ultimately be recognized.

We recognized these stock-based payment transactions when services from the employees, directors and other eligible service providers are received and recognized a corresponding increase in additional paid-in capital in our unaudited consolidated balances sheets.

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 the employees, directors and other eligible service providers have rendered the requisite service and satisfied any other conditions necessary to earn the right to benefit from the instruments.

The stock-based compensation expense for an award is recognized ratably over the requisite service period, which is generally the vesting period or if it is probable that the performance condition will be satisfied.

For the comparative periods, the stock-based payment transactions are recognized in accordance with ASC 718, "Compensation - Stock Compensation" and ASU 2018-07, "Compensation - Stock Compensation (Topic 718):

Improvements to Non-employee Share-Based Payment Accounting".

Restructuring Expenses

2 unchanged sentences

In connection with this restructuring plan, we incurred restructuring-related costs, including employee severance and related benefit costs.

Employee severance and related benefit costs may include cash payments, outplacement services and continuing health insurance coverage.

Employee severance and related benefit costs include cash payments, outplacement services and continuing health insurance coverage.

Severance costs pursuant to ongoing-benefit arrangements are recognized when probable and reasonably estimated.

1 unchanged sentence

These costs are recognized at fair value in the period in which the costs are incurred.

In the Company's recent Annual Report on Form 10-K for the year ended December 31, 2022, the Company estimated that the expected restructuring expenses were $ 2.8 million as of December 31, 2022.

As of March 31, 2023, the Company has updated its total expected restructuring plan costs to $ 4.0 million.

The Company reviews the restructuring plan and may incur incremental restructuring costs during the remainder of 2023 when determined as probable and estimable.

In the Company's Annual Report on Form 10-K for the year ended December 31, 2022, the Company estimated that the expected restructuring expenses were $ 2.8 million as of December 31, 2022.

As of June 30, 2023, the Company has updated its total expected restructuring plan costs to $ 4.0 million, based on the Company's review of the restructuring plan for the remainder of 2023.

The restructuring expenses are recorded under "Selling, general and administrative expenses" in the Company's unaudited consolidated statements of operations.

6 unchanged sentences

Balance at December 31, 2022 $ 2,763 $ — $ 2,763

Charges/(adjustments) ( 100 ) 1,300 1,200

(Adjustments)/charges ( 103 ) 1,300 1,197

Cash payments ( 1,778 ) — ( 1,778 )

Balance at March 31, 2023 $ 990 $ 1,300 $ 2,290

Balance at June 30, 2023 $ 882 $ 1,300 $ 2,182

(1) Restructuring-related liabilities are reported as part of "Other current liabilities" in the Company's unaudited consolidated balance sheets, see Note 9 - Other Balance Sheet Components for further details.

Recent Accounting Pronouncements

From time to time, new accounting standards are issued by the Financial Accounting Standard Board or other standard-setting bodies and are adopted by the Company as of the specified accounting date.

From time to time, new accounting standards are issued by the Financial Accounting Standards Board or other standard-setting bodies and are adopted by the Company as of the specified accounting date.

Unless otherwise discussed, the Company believes that issued standards not yet effective will not have a material effect on its financial statements.

2 unchanged sentences

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.

Revenue transferred to customers over time accounted for 89 % and 96 % of our revenue for the three months ended March 31, 2023 and 2022, respectively.

Revenue transferred to customers over time accounted for 88 % and 89 % of our revenue for the three and six months ended June 30, 2023, respectively, and 90 % and 93 % of our revenue for the three and six months ended June 30, 2022, 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.

1 unchanged sentence

This coincides with the point in time the customer obtains control of the product or service, which typically occurs upon customer acceptance or receipt of the product or service, given that we maintain control of the product or service until that point.

Revenue transferred to customers at a point in time accounted for 11 % and 4 % of our revenue for the three months ended March 31, 2023 and 2022, respectively.

Revenue transferred to customers at a point in time accounted for 12 % and 11 % of our revenue for the three and six months ended June 30, 2023, respectively, and 10 % and 7 % of our revenue for the three and six months ended June 30, 2022, respectively.

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.

2 unchanged sentences

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 exceeds the total estimated revenue for a performance obligation.

No contract losses were recorded during the three months ended March 31, 2023 and 2022.

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, 2023 and 2022.

Disaggregated Revenues

7 unchanged sentences

Revenue by Customer Type

For the Three Months Ended

March 31, 2023 March 31, 2022

Amount % Amount %

For the Three Months Ended For the Six Months Ended

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

Amount % Amount % Amount % Amount %

(dollars in thousands)

3 unchanged sentences

Revenue by Contract Type

For the Three Months Ended

March 31, 2023 March 31, 2022

Amount % Amount %

For the Three Months Ended For the Six Months Ended

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

Amount % Amount % Amount % Amount %

(dollars in thousands)

4 unchanged sentences

Revenue Concentration Greater than 10% of Total Revenue

For the Three Months Ended

March 31, 2023 March 31, 2022

For the Three Months Ended For the Six Months Ended

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

Department of Defense ("DoD") 66 % 72 % 67 % 71 %

Civilian 26 % 24 %

Contract Balances

Balance Sheet Presentation March 31, 2023 December 31, 2022

Balance Sheet Presentation June 30, 2023 December 31, 2022

(in thousands)

5 unchanged sentences

(1) Net of allowance for credit losses.

The significant change in the Company's contract assets and contract liabilities during the current period was 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, 2023 and 2022, that was included in the contract liabilities balance at the beginning of each reporting period was $ 2.5 million and $ 2.5 million, respectively.

As of March 31, 2023, we had approximately $ 77.4 million of remaining performance obligations, which we also refer to as funded backlog.

We expect to recognize approximately 70 % of our remaining performance obligations as revenue in 2023, an additional 29 % in 2024, and the balance thereafter.

The change in the Company's contract assets and contract liabilities during the current period was 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, 2023, 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, 2022, that was included in the contract liabilities balance at the beginning of each reporting period was and $ 1.6 million and $ 4.1 million, respectively.

As of June 30, 2023, we had approximately $ 66.5 million of remaining performance obligations, which we also refer to as funded backlog.

We expect to recognize approximately 80 % of our remaining performance obligations over the next 12 months, and the balance thereafter.

ACCOUNTS RECEIVABLE, NET

Details of Accounts Receivable, Net

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

(in thousands)

7 unchanged sentences

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 and unbilled accounts receivable as of March 31, 2023 were directly with U.S.

government, we have a concentration of credit risk associated with our accounts receivable, as 91 % of our billed and unbilled accounts receivable as of June 30, 2023, were directly with U.S.

government customers.

4 unchanged sentences

Details of Inventories, Net

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

(in thousands)

4 unchanged sentences

Details of Property and Equipment, Net

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

(in thousands)

4 unchanged sentences

Property and equipment, net $ 3,842 $ 4,787

Depreciation and amortization expense was $ 0.6 million for both three months ended March 31, 2023 and 2022, respectively.

The goodwill balance was $ 17.9 million as of March 31, 2023, and December 31, 2022, of which $ 3.0 million is allocated to the Security Solutions segment and $ 14.9 million is allocated to the Secure Networks segment.

Depreciation and Amortization Expense

For the Three Months Ended For the Six Months Ended

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

(in thousands)

Depreciation & amortization expense $ 579 $ 598 $ 1,152 $ 1,157

The goodwill balance was $ 17.9 million as of June 30, 2023, and December 31, 2022, 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.

No impairment charges were recorded for the three months ended March 31, 2023 and 2022 .

No impairment charges were recorded for the three and six months ended June 30, 2023 and 2022 .

INTANGIBLE ASSETS, NET

Details of Intangible Assets, Net

March 31, 2023

June 30, 2023

December 31, 2022

11 unchanged sentences

See Note 10 – Debt and Other Obligations for related details.

Amortization expense related to capitalized software development costs was $ 0.3 million for both three months ended March 31, 2023 and 2022.

Amortization expense related to other intangible assets was $ 0.1 million for both three months ended March 31, 2023 and 2022.

Amortization expense related to capitalized software development costs was $ 0.6 million and $ 0.9 million for the three and six months ended June 30, 2023, respectively, and $ 0.3 million and $ 0.7 million for the three and six months ended June 30, 2022, respectively.

Amortization expense related to other intangible assets was $ 0.1 million and $ 0.2 million for the three and six months ended June 30, 2023, respectively, and $ 0.1 million and $ 0.2 million for the three and six months ended June 30, 2022, respectively.

OTHER BALANCE SHEET COMPONENTS

Details of Accounts Payable and Other Accrued Liabilities

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

(in thousands)

3 unchanged sentences

Details of Other Current Liabilities

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

(in thousands)

5 unchanged sentences

Revolving Credit Facility

On December 30, 2022 (the "Closing Date"), we entered into a Credit Agreement (the "Credit Agreement"), by and among the Company, as borrower, Xacta Corporation, ubIQuity.com.

inc, Teloworks, Inc., and Telos Identity Management Solutions, LLC, as guarantors, the lenders' party thereto (the "Lenders"), and JPMorgan Chase Bank N.A., as administrative agent for the Lenders (in such capacity, the "Agent").

On December 30, 2022 (the "Closing Date"), we entered into a Credit Agreement (the "Credit Agreement"), by and among the Company, as borrower, Xacta Corporation, ubIQuity.com, inc, Teloworks, Inc., and Telos Identity Management Solutions, LLC, as guarantors, the lenders party thereto (the "Lenders"), and JPMorgan Chase Bank N.A., as administrative agent for the Lenders (in such capacity, the "Agent").

The Credit Agreement provides for a $ 30.0 million senior secured revolving credit facility with a maturity date of December 30, 2025, with the option of issuing letters of credit thereunder with a sub-limit of $ 5.0 million, and with an uncommitted expansion feature of up to $ 30.0 million of additional revolver capacity (the "Loan").

13 unchanged sentences

The Credit Agreement also requires certain financial covenants to maintain a Senior Leverage Ratio on the last day of any fiscal quarter, no greater than 3 to 1.

We were in compliance with all covenants as of March 31, 2023.

We were in compliance with all covenants as of June 30, 2023.

The occurrence of an event of default under the Credit Agreement could result in the Loan and other obligations becoming immediately due and payable and allow the Lenders to exercise all rights and remedies available to them under the Credit Agreement.

12 unchanged sentences

The Company recorded the difference between the carrying value of the Company's debt instrument and the underlying licenses as a gain on early extinguishment of other financing obligations.

During the three months ended March 31, 2023, the Company reported a gain of $ 1.4 million, which was recorded as "Other income" in the unaudited consolidated statements of operations.

No gain was reported for the three months ended June 30, 2023.

For the six months ended June 30, 2023, the Company reported a gain of $ 1.4 million, which was recorded as "Other income" in the unaudited consolidated statements of operations.

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.

3 unchanged sentences

STOCK-BASED COMPENSATION

The Company grants stock-based compensation awards under the 2016 Omnibus Long-Term Incentive Plan, as amended (the "2016 LTIP").

We may grant restricted stock awards ("RSA"), restricted stock units with time-based vesting ("RSUs") and PSUs.

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, which has the discretion to establish the terms, conditions and criteria of the various awards.

The RSUs granted to eligible employees generally vest in installments over a period of up to three years.

PSUs will vest upon the achievement of a defined performance target or market conditions for the Company's common stock, certain operational milestones over prescribed period, or at the end of the defined performance period from the date of grant.

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

Stock-based compensation expense recognized for restricted stock units and stock options granted to employees and non-employees is included in the consolidated statement of operations.

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

Restricted Stock

Details of Stock Compensation Expense by Department

For the Three Months Ended

March 31, 2023 March 31, 2022

For the Three Months Ended For the Six Months Ended

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

(in thousands)

4 unchanged sentences

Total $ 7,745 $ 17,076 $ 17,244 $ 33,007

Restricted Stock Activity

Restricted Stock Unit Activity

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

3 unchanged sentences

Forfeited ( 386,694 ) ( 71,177 ) ( 457,871 ) 14.36

Unvested outstanding units as of March 31, 2023 1,869,527 265,608 2,135,135 $ 14.67

As of March 31, 2023, the intrinsic value of the RSUs and PSUs outstanding, exercisable, and vested or expected to vest was $ 5.4 million.

There was approximately $ 15.2 million of total compensation costs related to stock-based awards not yet recognized as of March 31, 2023, which is expected to be recognized on a straight-line basis over a weighted-average remaining vesting period of 0.9 years.

Unvested outstanding units as of June 30, 2023 3,174,422 265,608 3,440,030 $ 9.42

As of June 30, 2023, the intrinsic value of the RSUs and PSUs outstanding and vested or expected to vest was $ 8.8 million.

There was approximately $ 12.1 million of total compensation costs related to stock-based awards not yet recognized as of June 30, 2023, which is expected to be recognized on a straight-line basis over a weighted-average remaining vesting period of 0.7 years.

Stock Options

The Company uses the Black-Scholes option pricing model to calculate the estimated fair value of stock options on the date of grant.

Option awards are generally granted with an exercise price equal to the market price of the Company's stock at the date of grant.

The following weighted-average assumptions are used in the Black-Scholes valuation model to estimate the fair value of stock option awards, as granted.

• Expected term of the option – For options granted to employees and directors, the Company estimates the term over which option holders are expected to hold their stock option by using the "simplified method" in accordance with Staff Accounting Bulletin ("SAB") No.

107, Share-Based Payments , and SAB No.

110, Simplified Method for Plain Vanilla Share Options , to calculate the expected term of stock options determined to be "plain vanilla." The Company's stock option exercise history does not provide a reasonable basis to compute the expected term for stock options.

Under this approach, the expected term is presumed to be a midpoint between the vesting date and the contractual end of the stock option grant.

For options granted to non-employees, the Company elected to use the contractual term as the expected term.

• Risk-free interest rate – Based on the daily yield curve rates for U.S.

Treasury obligations with terms that approximate the expected term of the stock options.

• Expected volatility – Due to the absence of the Company's historical price volatility for the expected contractual term of the stock options, the Company utilized the historical price volatility of a peer group.

• Expected dividend yield – The Company has not declared dividends, nor does it expect to in the foreseeable future.

Therefore, a zero value was assumed for the expected dividend yield.

Stock Options Fair Value and Weighted-Average Assumptions

For the Six Months Ended

June 30, 2023 June 30, 2022

Weighted-average fair value of underlying stock options $ 1.06 $ —

Expected term (in years) 5.5 - 10.0

Risk-free interest rate 3.5 % — %

Expected volatility 30.7 % - 35.1 %

Expected dividend yield — % — %

Stock Option Activity

Stock Options Outstanding Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term

Aggregate Intrinsic Value

Outstanding option balance as of December 31, 2022 — $ — 0.0 $ —

Granted 400,000 1.80

Exercised — —

Forfeited, cancelled, or expired — —

Outstanding option balance as of June 30, 2023 400,000 $ 1.80 9.8 $ 304,000

Vested and exercisable stock option as of June 30, 2023 — $ — 0.0 $ —

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the quoted closing price of the Company's common stock as of June 30, 2023.

The fair value of the stock options is expensed on a straight-line basis over the vesting period of one year , including the stock options granted to directors, as the next annual stockholders meeting is expected to occur at the same approximate time each year.

During the three and six months ended June 30, 2023, the stock-based compensation expense on stock options recorded as part of general and administrative expenses was immaterial, with no similar expense in 2022.

As of June 30, 2023, there were approximately $ 0.4 million of unrecognized compensation costs related to non-vested stock options.

SHARE REPURCHASES

2 unchanged sentences

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

There were no share purchases during the first quarter of 2023 and 2022.

As of March 31, 2023, there was approximately $ 38.7 million of the authorization remaining for future common stock repurchases under the SRP.

As of June 30, 2023, there was approximately $ 38.7 million of the authorization remaining for future common stock repurchases under the SRP.

Share Repurchase Program Activity

For the Three Months Ended For the Six Months Ended

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

(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

ACCUMULATED OTHER COMPREHENSIVE LOSS

3 unchanged sentences

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 loss.

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

Details of Accumulated Other Comprehensive Loss

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

(in thousands)

5 unchanged sentences

Potentially Dilutive Securities

For the Three Months Ended

March 31, 2023 March 31, 2022

For the Three Months Ended For the Six Months Ended

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

(in thousands)

Unvested restricted stock and restricted stock units 269 57 401 211

For the three months ended March 31, 2023 and 2022, PSUs in the amount of 265,608 and 439,786 , respectively, have been excluded from the calculation of potentially dilutive securities above because the issuance of shares is contingent upon the satisfaction of certain conditions which were not satisfied by the end of the period.

Total 269 57 401 211

For the three and six months ended June 30, 2023 and 2022, the outstanding PSUs aggregating to 265,608 and 379,161 , respectively, have been excluded from the calculation of potentially dilutive securities above because the issuance of shares is contingent upon the satisfaction of certain conditions which were not satisfied by the end of the period.

RELATED PARTY TRANSACTIONS

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

The amounts paid to him as compensation were $ 249,000 and $ 512,000 for the three months ended March 31, 2023 and 2022, respectively.

Additionally, Mr.

Wood owned 199,785 and 178,041 shares of the Company’s common stock as of March 31, 2023 and December 31, 2022, respectively.

In January 2023, he tendered his resignation as an employee effective February 7, 2023.

The amount paid to him as compensation for his remaining tenure in 2023 was $ 249,000 .

For the three and six months ended June 30, 2022, the Company paid him $ 93,000 and $ 605,000 , respectively.

Additionally, Mr.

Wood directly owned 199,785 and 178,041 shares of the Company’s common stock as of June 30, 2023 and December 31, 2022, respectively.

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

1 unchanged sentence

The Company, at its election, would pay the director's 2023 consultancy fees in a fixed amount, in the form of restricted stock units.

On January 3, 2023, the Company granted the director 16,859 RSUs for his consulting services, one-half of which vested on March 3, 2023, and the other half vesting on or about May 18, 2023, subject to the director's continued performance under the 2023 consulting agreement.

During the three months ended March 31, 2022, the Company paid $ 25,000 , and granted him 26,091 RSUs on February 1, 2022, for his consulting services in 2022, which RSUs vested quarterly in four equal amounts through the end of the year.

Consequently, on January 3, 2023, the Company granted the director 16,859 RSUs, one-half of which vested on March 3, 2023, and the other half vested on May 18, 2023, as compensation for the first half of his 2023 consulting services.

No cash payments were made for his consulting services for the three and six months ended June 30, 2023.

In July 2023, the director and the Company amended the 2023 consulting agreement, further extending his services through December 31, 2023.

The amended 2023 consulting agreement stipulates a firm-fixed monthly retainer fee, plus additional fees and contingent bonus payments upon achievement of certain contract goals, payable in cash.

On February 1, 2022, the Company granted him 26,091 RSUs for his consulting services in 2022, which RSUs vested quarterly in four equal amounts through the end of the year.

No cash payments were made for the three months ended June 30, 2022, while the amounts paid in cash for his consulting services were $ 25,000 for the six months ended June 30, 2022.

SEGMENT INFORMATION

7 unchanged sentences

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.

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

Gross profit and margin are a function of operational efficiency on security solutions and changes in the volume of software sales.

4 unchanged sentences

Results of Operations by Business Segment

For the Three Months Ended

March 31, 2023 March 31, 2022

For the Three Months Ended For the Six Months Ended

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

(in thousands)

23 unchanged sentences

On February 1, 2023, the Court dismissed the lawsuit in its entirety for failure to state a claim.

The Court's order of dismissal provided the Plaintiffs twenty-one days within which to file a motion for leave to file an amended complaint, should they have a good faith basis to do so.

On March 1, 2023, the Plaintiffs filed a motion for leave to file an amended complaint, and on March 13, 2023, the Court granted the parties' consent motion permitting the filing of a consolidated amended class action complaint and establishing a briefing schedule for Telos' forthcoming motion to dismiss that amended complaint.

The Court's order of dismissal provided the Plaintiffs the opportunity to file a motion for leave to file an amended complaint, should they have a good faith basis to do so.

On March 13, 2023, the Court granted the parties' consent motion permitting the filing of a consolidated amended class action complaint and establishing a briefing schedule for Telos' motion to dismiss that amended complaint.

On April 14, 2023, Telos moved to dismiss the consolidated amended class action complaint.

The Company does not believe that there are claims or proceedings that would have a material adverse effect on the business, or the unaudited consolidated financial statements of the Company as of March 31, 2023.

At the conclusion of a hearing held on June 21, 2023, the Court dismissed the consolidated amended class action complaint with prejudice.

No appeal from the order of dismissal was taken, and it is final.

Other - Government Contracts

11 unchanged sentences

Details of Cash, Cash Equivalents, and Restricted Cash

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

(in thousands)

4 unchanged sentences

Supplemental Cash Flow Information

For the Three Months Ended

March 31, 2023 March 31, 2022

For the Six Months Ended

June 30, 2023 June 30, 2022

(in thousands)

1 unchanged sentence

Interest $ 409 $ 353

Income taxes 147 188

Non-cash investing and financing activities:

1 unchanged sentence

Capital expenditure activity in accounts payable and other accrued liabilities 536 296

Withholding tax on net share settlement under other current liabilities 65 —

Issuance of common stock for 401K match 1,943 —

Intangible assets transferred to extinguish the other financing obligations 7,089 —

Intangible assets transferred to extinguish other financing obligations 7,089 —

Common stock repurchases under SRP — 400

REVISION OF PRIOR YEAR INTERIM FINANCIAL STATEMENTS

During the course of preparing the Company's consolidated financial statements for the year ended December 31, 2022, we identified that stock-based compensation expense related to the PSU awards with market conditions was erroneously reversed when those PSUs were forfeited during the quarter ended March 31, 2022.

Due to the error, general and administrative expense was understated by $ 1.6 million in the first quarter of 2022.

During the course of preparing the Company's consolidated financial statements for the year ended December 31, 2022, we identified that stock-based compensation expense related to the PSU awards with market conditions was erroneously reversed when those PSUs were forfeited.

Due to the error, general and administrative expense was understated by $ 1.9 million and $ 3.5 million for the three and six months ended June 30, 2022.

The errors had no net impact on cash flows from operating, investing or financing activities in the consolidated statement of cash flows.

The following tables set forth the effects of the revisions of previously issued unaudited quarterly consolidated financial statements to correct for prior period error.

The following tables set forth the effects of the revisions of previously issued unaudited quarterly consolidated financial statements to correct for prior period errors.

Impact of the Correction to the Unaudited Consolidated Statement of Operations

For the Three Months Ended March 31, 2022

As Previously Reported Adjustment As Revised

Three Months Ended June 30, 2022 Six Months Ended June 30, 2022

As Previously Reported Adjustment As Revised As Previously Reported Adjustment As Revised

(in thousands, except per share data)

7 unchanged sentences

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

For the Three Months Ended March 31, 2022

As Previously Reported Adjustment As Revised

Three Months Ended June 30, 2022 Six Months Ended June 30, 2022

As Previously Reported Adjustment As Revised As Previously Reported Adjustment As Revised

(in thousands)

2 unchanged sentences

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

For the Three Months Ended March 31, 2022

As Previously Reported Adjustment As Revised

Three Months Ended June 30, 2022 Six Months Ended June 30, 2022

As Previously Reported Adjustment As Revised As Previously Reported Adjustment As Revised

(in thousands)

Additional paid-in capital, beginning $ 376,913 $ 1,633 $ 378,546 $ 367,153 $ — $ 367,153

Stock-based compensation 14,553 1,870 16,423 27,200 3,503 30,703

Additional paid-in capital, end 388,464 3,503 391,967 388,464 3,503 391,967

Accumulated deficit, beginning $ ( 201,960 ) $ ( 1,633 ) $ ( 203,593 ) $ ( 186,977 ) $ — $ ( 186,977 )

Net loss ( 12,289 ) ( 1,870 ) ( 14,159 ) ( 27,272 ) ( 3,503 ) ( 30,775 )

1 unchanged sentence

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