TELOS CORP 10-Q

Item 1. Financial Statements TELOS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For the Three Months Ended March 31, 2024 March 31, 2023 (in thousands, except per share amounts) Revenue – services $ 28,851 $ 31,534 Revenue – products 768 3,688 Total revenue 29,619 35,222 Cost of sales – services (excluding depreciation and amortization) 17,059 19,092 Cost of sales – products (excluding depreciation and amortization) 321 2,472 Depreciation and amortization 1,278 176 Total cost of sales 18,658 21,740 Gross profit 10,961 13,482 Research and development expenses 3,170 2,833 Selling, general and administrative expenses 16,229 23,619 Operating loss ( 8,438 ) ( 12,970 ) Other income 1,252 2,496 Interest expense ( 175 ) ( 249 ) Loss before income taxes ( 7,361 ) ( 10,723 ) Provision for income taxes ( 17 ) ( 23 ) Net loss $ ( 7,378 ) $ ( 10,746 ) Net loss per share: Basic $ ( 0.10 ) $ ( 0.16 ) Diluted $ ( 0.10 ) $ ( 0.16 ) Weighted-average shares outstanding: Basic 70,628 68,176 Diluted 70,628 68,176 See accompanying notes to the unaudited consolidated financial statements. 3 Table of Contents TELOS CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) For the Three Months Ended March 31, 2024 March 31, 2023 (in thousands) Net loss $ ( 7,378 ) $ ( 10,746 ) Other comprehensive loss, net of tax: Foreign currency translation adjustments ( 35 ) 13 Actuarial loss on pension liability adjustment ( 30 ) — Comprehensive loss $ ( 7,443 ) $ ( 10,733 ) See accompanying notes to the unaudited consolidated financial statements. 4 Table of Contents TELOS CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) March 31, 2024 December 31, 2023 (in thousands, except per share amount and share data) Assets: Cash and cash equivalents $ 93,915 $ 99,260 Accounts receivable, net 18,680 30,424 Inventories, net 1,465 1,420 Prepaid expenses 7,787 7,520 Other current assets 1,270 1,367 Total current assets 123,117 139,991 Property and equipment, net 2,907 3,457 Finance lease right-of-use assets, net 6,307 6,612 Operating lease right-of-use assets, net 771 216 Goodwill 17,922 17,922 Intangible assets, net 40,530 39,616 Other assets 3,798 885 Total assets $ 195,352 $ 208,699 Liabilities and Stockholders' Equity Liabilities: Accounts payable and other accrued liabilities $ 9,164 $ 13,750 Accrued compensation and benefits 11,233 14,569 Contract liabilities 5,993 6,728 Finance lease obligations – current portion 1,766 1,730 Operating lease obligations – current portion 195 97 Other current liabilities 2,032 2,324 Total current liabilities 30,383 39,198 Finance lease obligations – non-current portion 9,066 9,518 Operating lease obligations – non-current portion 576 123 Deferred income taxes 825 813 Other liabilities 106 44 Total liabilities 40,956 49,696 Commitments and contingencies Stockholders’ equity: Common stock, $ 0.001 par value, 250,000,000 shares authorized, 71,757,998 shares and 70,239,890 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively 110 109 Additional paid-in capital 436,616 433,781 Accumulated other comprehensive loss ( 125 ) ( 60 ) Accumulated deficit ( 282,205 ) ( 274,827 ) Total stockholders’ equity 154,396 159,003 Total liabilities and stockholders’ equity $ 195,352 $ 208,699 See accompanying notes to the unaudited consolidated financial statements. 5 Table of Contents TELOS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Three Months Ended March 31, 2024 March 31, 2023 (in thousands) Cash flows from operating activities: Net loss $ ( 7,378 ) $ ( 10,746 ) Adjustments to reconcile net loss to cash used in operating activities: Stock-based compensation 2,984 9,499 Depreciation and amortization 3,129 1,425 Deferred income tax provision 12 12 Accretion of discount in acquisition holdback — 2 Loss on disposal of fixed assets — 1 Provision for doubtful accounts 41 89 Amortization of debt issuance costs 17 17 Gain on early extinguishment of other financing obligations — ( 1,427 ) Changes in other operating assets and liabilities: Accounts receivable 11,703 5,279 Inventories ( 44 ) 1,248 Prepaid expenses, other current assets, other assets ( 171 ) ( 927 ) Accounts payable and other accrued payables ( 6,549 ) ( 4,489 ) Accrued compensation and benefits ( 3,054 ) ( 364 ) Contract liabilities ( 734 ) 758 Other current liabilities ( 306 ) ( 477 ) Net cash used in operating activities ( 350 ) ( 100 ) Cash flows from investing activities: Capitalized software development costs ( 3,202 ) ( 3,800 ) Purchase of investment ( 850 ) — Purchases of property and equipment ( 97 ) ( 223 ) Payment of DFT holdback amount — ( 564 ) Net cash used in investing activities ( 4,149 ) ( 4,587 ) Cash flows from financing activities: Payments under finance lease obligations ( 416 ) ( 383 ) Payment of tax withholding related to net share settlement of equity awards ( 430 ) ( 1,520 ) Repurchase of common stock — ( 139 ) Payments for debt issuance costs — ( 114 ) Net cash used in financing activities ( 846 ) ( 2,156 ) Net change in cash, cash equivalents, and restricted cash ( 5,345 ) ( 6,843 ) Cash, cash equivalents, and restricted cash, beginning of period 99,396 119,438 Cash, cash equivalents, and restricted cash, end of period $ 94,051 $ 112,595 See accompanying notes to the unaudited consolidated financial statements. 6 Table of Contents TELOS CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Shares Amount (in thousands) Balance at December 31, 2023 70,240 $ 109 $ 433,781 $ ( 60 ) $ ( 274,827 ) $ 159,003 Net loss — — — — ( 7,378 ) ( 7,378 ) Foreign currency translation loss — — — ( 35 ) — ( 35 ) Actuarial loss on pension liability adjustment — — — ( 30 ) — ( 30 ) Restricted stock unit awards vested, net of shares withheld to cover tax withholding 1,148 1 ( 431 ) — — ( 430 ) Stock-based compensation — 1,648 — — 1,648 Issuance of common stock for 401K match 370 — 1,618 — — 1,618 Balance at March 31, 2024 71,758 $ 110 $ 436,616 $ ( 125 ) $ ( 282,205 ) $ 154,396 Balance at December 31, 2022 67,431 $ 106 $ 412,708 $ ( 55 ) $ ( 240,405 ) $ 172,354 Net loss — — — — ( 10,746 ) ( 10,746 ) Foreign currency translation gain — — — 13 — 13 Restricted stock unit awards vested, net of shares withheld to cover tax withholding 1,180 1 ( 1,585 ) — — ( 1,584 ) Stock-based compensation — — 7,916 — — 7,916 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 See accompanying notes to the unaudited consolidated financial statements. 7 Table of Contents TELOS CORPORATION NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION 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 shares of Xacta Corporation and ubIQuity.com, inc. (a holding company for Xacta Corporation), and 100 % ownership interest in Telos Identity Management Solutions, LLC ("Telos ID"), Teloworks, Inc., and Telos APAC Pte. Ltd. ("Telos APAC"). On March 13, 2024, the Board unanimously approved the dissolution of Telos APAC, a pre-operating foreign subsidiary, pursuant to a plan of complete liquidation and dissolution. 2. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Principle of Consolidation The accompanying unaudited consolidated financial statements include the accounts of Telos and its subsidiaries (see Note 1 – Organization ), 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. 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) 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, 2023, included in our Annual Report on Form 10-K for the fiscal year then ended. We have continued to follow the accounting policies set forth in those financial statements. Basis of Comparison Certain prior-period amounts have been reclassified to conform to the current period presentation. Starting Q3 2023, we reclassified and presented depreciation and amortization separately from the cost of sales line items. Starting Q1 2024, we reclassified sales and marketing expenses and general and administrative expenses to be presented together as selling, general and administrative expenses. The reclassifications had no net impact on gross profit, total selling, general and administrative expenses or net loss in the unaudited consolidated statements of operations. Use of Estimates 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. The Company regularly assesses these estimates; however, actual results could differ from those estimates. 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. Actual results could differ from those estimates. The impact of changes in estimates is recorded in the period in which they become known. Selling, General and Administrative Expenses Selling, general and administrative expenses include general and administrative expenses, as well as direct and indirect sales and marketing expenses. These costs consists primarily of compensation and benefits (including incentive-based compensation), advertising, facilities, and certain types of depreciation and amortization. 8 Table of Contents Restructuring Expenses In the fourth quarter of 2022, the Company committed to a restructuring plan to streamline its workforce and spending to better align its cost structure with its volume of business. The restructuring plan reduced the Company's workforce, with a majority of the affected employees separating from the business in early 2023. In connection with this restructuring plan, we incurred restructuring-related costs, including employee severance and related benefit costs. 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. Other related costs include external consulting and advisory fees related to implementing the restructuring plan. These costs are recognized at fair value in the period in which the costs are incurred. The Company incurred a cumulative amount of $ 3.9 million of restructuring expenses, which is the total expected costs for this restructuring plan, as disclosed in the Company's recent Annual Report on Form 10-K for the year ended December 31, 2023. The restructuring actions were substantially complete in fiscal year 2023. The restructuring expenses (adjustments) are included within "Selling, general and administrative expenses" on the Company's unaudited consolidated statements of operations. Table 2.1: Restructuring Expenses (Adjustments) For the Three Months Ended March 31, 2024 March 31, 2023 (in thousands) Severance and related benefit costs $ ( 10 ) $ ( 100 ) Other related costs — 1,300 Total restructuring (adjustments) expenses $ ( 10 ) $ 1,200 At each reporting date, the Company evaluates its restructuring expense accrual to determine if the liabilities reported are still appropriate. Any changes in the estimated costs of executing the approved restructuring plan are reflected in the Company's unaudited consolidated statement of operations. Table 2.2: Summary of Changes in Restructuring Expenses Accrual Severance and related benefit costs (1) (in thousands) Balance at December 31, 2023 $ 400 Adjustments ( 10 ) Cash payments ( 283 ) Balance at March 31, 2024 $ 107 (1) Restructuring expenses accrual is included within "Other current liabilities" on the Company's unaudited consolidated balance sheets (see Note 9 - Other Balance Sheet Components for further details.) Recent Accounting Pronouncements Adopted In November 2023, the FASB issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures." ASU 2023-07 will affect how we report segment information, starting with our Form 10-K for the year ended December 31, 2024, and our quarterly reports on Form 10-Q starting with our quarterly report for the quarter ended March 31, 2025. This standard requires that we provide disclosures of significant segment expenses and other segment items that are regularly provided to our chief operating decision maker ("CODM") and included in each reported measure of segment profit or loss. We will also have to disclose other segment items by reportable segment (i.e. the difference between reported segment revenues less the significant segment expenses (which are disclosed) less reported segment profit or loss). We will disclose the CODM and their position within the Company and details about the information that they regularly review to make capital allocation and other operating decisions about each segment, as well as an explanation of how the CODM uses the reported measures and other disclosures. We are currently evaluating these new segment disclosure requirements and the impact of their adoption on our unaudited consolidated financial statements. 9 Table of Contents Not Yet Adopted In December 2024, the FASB issued ASU No. 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosure," which requires public entities, on an annual basis, (1) to disclosure specific categories in the rate reconciliation, and (2) to provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5% of the amount computed by multiplying pretax income (loss) by the applicable statutory income tax rate). This ASU will be effective, for public entities, for the fiscal year beginning after December 15, 2024, with early adoption permitted. We are currently assessing the impact of the adoption of this ASU on our unaudited consolidated financial statements. In addition, 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. Unless otherwise discussed, the Company believes that issued standards not yet effective will not have a material effect on its financial statements. 3. 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. 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 81 % and 89 % of our revenue for the three months ended March 31, 2024 and 2023, 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. For performance obligations in which control does not continuously transfer to the customer, we recognize revenue at the point in time in which each performance obligation is fully satisfied. 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 19 % and 11 % of our revenue for the three months ended March 31, 2024 and 2023, 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. 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. Our contracts may include various types of variable considerations and may include estimated amounts in the transaction price, based on all of the information available to us, 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 evaluate and include these estimated amounts of variable consideration in the transaction price and as performance on these contracts is complete, we adjust our revenue, when deemed necessary. No revenue adjustments were recorded during the three months ended March 31, 2024 and 2023. 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. We recorded an immaterial contract loss during the three months ended March 31, 2024. No contract loss was recorded during the three months ended March 31, 2023. Disaggregated Revenues In addition to our segment reporting, as further discussed in Note 1 6 – Segment Information , we disaggregate our revenues 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. Substantially most of our revenues are generated from U.S. customers, while international customers are de minimis; as such, the financial information by geographic location is not presented. 10 Table of Contents Table 3.1: Revenue by Customer Type For the Three Months Ended March 31, 2024 March 31, 2023 Amount % Amount % (dollars in thousands) Federal $ 26,607 90 % $ 32,989 94 % State & local, and commercial 3,012 10 % 2,233 6 % Total revenue $ 29,619 100 % $ 35,222 100 % Table 3.2: Revenue by Contract Type For the Three Months Ended March 31, 2024 March 31, 2023 Amount % Amount % (dollars in thousands) Firm fixed-price $ 22,836 77 % $ 27,013 77 % Time-and-materials 3,137 11 % 3,556 10 % Cost plus fixed fee 3,646 12 % 4,653 13 % Total revenue $ 29,619 100 % $ 35,222 100 % Table 3.3: Revenue Concentration Greater than 10% of Total Revenue For the Three Months Ended March 31, 2024 March 31, 2023 U.S. Department of Defense ("DoD") 56 % 68 % Table 3.4: Contract Balances Balance Sheet Presentation March 31, 2024 December 31, 2023 (in thousands) Billed accounts receivables (1) Accounts receivable, net $ 8,991 $ 17,818 Unbilled accounts receivable Accounts receivable, net 5,229 8,022 Contract assets Accounts receivable, net 4,460 4,584 Contract liabilities Contract liabilities 5,993 6,728 (1) Net of allowance for credit losses. The changes in the Company's contract assets and contract liabilities during the current 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, 2024 and 2023, that was included in the contract liabilities balance at the beginning of each reporting period was $ 2.7 million and $ 2.5 million, respectively. As of March 31, 2024, we had approximately $ 36.1 million of remaining performance obligations, which we also refer to as funded backlog. We expect to recognize approximately 89 % of our remaining performance obligations over the next 12 months, and the balance thereafter. 4. ACCOUNTS RECEIVABLE, NET Table 4: Details of Accounts Receivable, Net March 31, 2024 December 31, 2023 (in thousands) Billed accounts receivable $ 9,315 $ 18,101 Unbilled accounts receivable 5,229 8,022 Contract assets 4,460 4,584 Allowance for credit losses (1) ( 324 ) ( 283 ) Accounts receivable, net $ 18,680 $ 30,424 (1) Includes provision for credit losses, net of recoveries. 11 Table of Contents 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 96 % and 91 % of our billed and unbilled accounts receivable as of March 31, 2024 and December 31, 2023, respectively, were directly with U.S. government customers. While we acknowledge the potential material and adverse risk of such a significant concentration of credit risk, our past experience 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 guarantees from our customers. We maintain allowances for potential losses. 5. INVENTORIES, NET Table 5: Details of Inventories, Net March 31, 2024 December 31, 2023 (in thousands) Gross inventory $ 2,224 $ 2,179 Allowance for inventory obsolescence ( 759 ) ( 759 ) Inventories, net $ 1,465 $ 1,420 6. PROPERTY AND EQUIPMENT, NET Table 6.1: Details of Property and Equipment, Net March 31, 2024 December 31, 2023 Gross Carrying Amount Accumulated Depreciation and Amortization Net Carrying Value Gross Carrying Amount Accumulated Depreciation and Amortization Net Carrying Value (in thousands) Furniture and equipment $ 15,866 $ ( 13,539 ) $ 2,327 $ 16,213 $ ( 13,363 ) $ 2,850 Leasehold improvements 3,211 ( 2,631 ) 580 3,211 ( 2,604 ) 607 Total $ 19,077 $ ( 16,170 ) $ 2,907 $ 19,424 $ ( 15,967 ) $ 3,457 Table 6.2: Depreciation and Amortization Expense For the Three Months Ended March 31, 2024 March 31, 2023 (in thousands) Depreciation and amortization expense $ 635 $ 573 7. GOODWILL The goodwill balance was $ 17.9 million as of March 31, 2024, and December 31, 2023, 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, 2024 and 2023 . 8. INTANGIBLE ASSETS, NET Table 8.1: Details of Intangible Assets, Net March 31, 2024 December 31, 2023 Estimated Useful Life Gross Carrying Amount Accumulated Amortization Net Carrying Value Gross Carrying Amount Accumulated Amortization Net Carrying Value (in years) (in thousands) Acquired technology 8 $ 3,630 $ ( 1,210 ) $ 2,420 $ 3,630 $ ( 1,097 ) $ 2,533 Customer relationship 3 40 ( 35 ) 5 40 ( 32 ) 8 Software development costs 2 - 5 36,599 ( 14,252 ) 22,347 35,312 ( 12,256 ) 23,056 Subtotal 40,269 ( 15,497 ) 24,772 38,982 ( 13,385 ) 25,597 In-process software development costs (1) 15,758 — $ 15,758 14,019 — $ 14,019 Total $ 56,027 $ ( 15,497 ) $ 40,530 $ 53,001 $ ( 13,385 ) $ 39,616 (1) In-process software development costs are costs for software that is not yet available for its intended use or general release to customers as of balance sheet date, thus not yet amortized. 12 Table of Contents Table 8.2: Amortization Expense For the Three Months Ended March 31, 2024 March 31, 2023 (in thousands) Amortization expense related to: Software development costs - cost of sales (1) $ 1,158 $ — Software development costs - research and development 837 303 Other intangible assets - general and administrative 117 117 Total $ 2,112 $ 420 (1) Amortization expense for software development costs related to assets to be sold, leased, or otherwise marketed is charged under cost of sales on the unaudited consolidated statements of operations. 9. OTHER BALANCE SHEET COMPONENTS Table 9.1: Details of Other Assets March 31, 2024 December 31, 2023 (in thousands) Investment (1) $ 3,000 $ — Restricted cash 136 136 Other 662 749 Other assets $ 3,798 $ 885 (1) In March 2024, we made a $ 3.0 million investment in a privately held company via a simple agreement for future equity. We paid $ 0.9 million in March 2024 and the remainder was paid in April 2024. The Company elected to apply the fair value option on this investment, and we did not note any changes in the fair value during the three months ended March 31, 2024. Table 9.2: Details of Accounts Payable and Other Accrued Liabilities March 31, 2024 December 31, 2023 (in thousands) Accounts payable $ 2,206 $ 8,307 Accrued payables 6,958 5,443 Accounts payable and other accrued liabilities $ 9,164 $ 13,750 Table 9.3: Details of Other Current Liabilities March 31, 2024 December 31, 2023 (in thousands) Other accrued expenses $ 1,270 $ 1,427 Restructuring expenses accrual 107 400 Other 655 497 Other current liabilities $ 2,032 $ 2,324 10. DEBT AND OTHER OBLIGATIONS Revolving Credit Facility On December 30, 2022, 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"). The Loan is subject to acceleration in the event of customary events of default. The Company has not drawn any amount under the Loan. 13 Table of Contents Borrowings under the Credit Agreement will accrue interest, at our option, at one of three variable rates, plus a specified margin. We can elect to borrow at (i) the Alternative Base Rate, plus 0.9 %; (ii) Adjusted Daily Simple Secured Overnight Financing Rate ("SOFR"), plus 1.9 %; and (iii) Adjusted Term SOFR, plus 1.9 %, as such capitalized terms are defined and calculated in the Credit Agreement. The Company may elect to convert borrowings from one type of borrowing to another type per the terms of the Credit Agreement. After the occurrence and during the continuance of any event of default, the interest rate may increase by an additional 2.0 %. We are obligated to pay accrued interest (i) with respect to amounts accruing interest based on the Alternative Base Rate, each calendar quarter and on the maturity date, (ii) with respect to amounts accruing interest based on Adjusted Daily Simple SOFR, on each one-month anniversary of the borrowing and on the maturity date, and (iii) with respect to amounts accruing interest based on Adjusted Term SOFR, at the end of the period specified per the Credit Agreement and on the maturity date. Upon five , three , or one day's prior notice, as applicable, we may prepay any portion or the entire amount of the Loan. We also paid costs and customary fees, including a closing fee, commitment fees and letter of credit participation fee, if any, payable to the Agent and Lenders, as applicable, in connection with the Loan. The Loan under the Credit Agreement is collateralized by substantially all of the Company's assets, including the Company's pledge of its domestic and material foreign subsidiary equity interests. The Loan has various covenants that may, among other things, affect our ability to create, incur, assume or suffer any indebtedness, merge into or consolidate with another entity, acquire entity interests, sell or transfer certain assets, enter into certain arrangements (such as sale and leaseback and swap agreements) or restrictive agreements, pay dividends and make certain restricted payments, and amend material documents related to any subordinated indebtedness and corporate agreements. 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, 2024. 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. On April 12, 2023, the Credit Agreement was amended to exclude from collateral the (i) amount collectible from a third party related to an Accounts Receivable Purchase Agreement and (ii) receivables generated by the Company from the sale of goods supplied to this third party in an amount not to exceed $ 25.0 million. Other Financing Obligations We entered into a Master Purchase Agreement ("MPA") with a third-party buyer ("Buyer") for $ 9.1 million relating to software licenses under a specific delivery order ("DO") with our customer resulting in proceeds from other financing obligations of $ 9.1 million in November 2022. Under the MPA, we sold, assigned and transferred all of our rights, title and interest in (i) the DO payments from the customer and (ii) the underlying licenses. The DO covers a base period with an option for the customer to exercise three ( 3 ) additional 12 -month periods through January 2026. The DO payments assigned to the Buyer are billable to the customer at the beginning of the base period and for each option year exercised. The underlying licenses were acquired for resale. On February 9, 2023, the customer notified us that it would not exercise the first option period under the DO. The MPA provides that, if the customer terminates the DO for non-renewal and the Buyer reasonably concludes that the customer's actions constitute grounds for filing a claim with the customer's contracting officer, Buyer and Telos will cooperate in preparing such a claim, which would be filed in Telos' name. Buyer has notified Telos of its intent to pursue a claim against the customer. Concurrently, the Company transferred all the rights, title and interest in the underlying licenses in exchange for the extinguishment of the outstanding financing obligations. The Company evaluated the transfer of the underlying licenses as consideration paid for the outstanding financing obligations under ASC 470-10, Debt , and the provisions of the MPA, and concluded that the transaction resulted in an extinguishment of debt. 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. 11. 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, restricted stock units with time-based vesting ("RSUs") and restricted stock units with performance-based vesting ("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. 14 Table of Contents There were no income tax benefits recognized on the share-based compensation expense for both periods. Table 11.1: Details of Stock Compensation Expense by Department For the Three Months Ended March 31, 2024 March 31, 2023 (in thousands) Cost of sales – services $ 257 $ 326 Research and development 428 770 Selling, general and administrative 2,299 8,403 Total $ 2,984 $ 9,499 Restricted Stock Table 11.2: Restricted Stock Activity Service-Based Performance-Based Total Shares Weighted-Average Grant Date Fair Value Unvested outstanding units as of December 31, 2023 2,132,613 43,800 2,176,413 $ 5.07 Granted 36,626 — 36,626 3.84 Vested ( 1,260,068 ) — ( 1,260,068 ) 4.60 Forfeited ( 15,000 ) — ( 15,000 ) 4.25 Unvested outstanding units as of March 31, 2024 894,171 43,800 937,971 $ 5.68 As of March 31, 2024, the intrinsic value of the RSUs and PSUs outstanding, exercisable, and vested or expected to vest was $ 3.9 million. There was approximately $ 2.1 million of total compensation costs related to stock-based awards not yet recognized as of March 31, 2024, which is expected to be recognized on a straight-line basis over a weighted-average remaining vesting period of 0.7 years. Stock Options Table 11.3: Stock Option Activity Stock Options Outstanding Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (in years) Aggregate Intrinsic Value Outstanding option balance as of December 31, 2023 400,000 $ 1.80 9.4 $ 740,000 Granted — — 0.0 — Exercised — — 0.0 — Forfeited, cancelled, or expired — — 0.0 — Outstanding option balance as of March 31, 2024 400,000 1.80 9.1 $ 944,000 Exercisable stock option as of March 31, 2024 — — 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 March 31, 2024. 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. As of March 31, 2024, there were approximately $ 0.04 million of unrecognized compensation costs related to non-vested stock options. 12. 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. There were no share purchases during the first quarter of 2024 and 2023. As of March 31, 2024, there was approximately $ 38.7 million of the authorization remaining for future common stock repurchases under the SRP. 15 Table of Contents 13. ACCUMULATED OTHER COMPREHENSIVE LOSS 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 (loss) income. Table 13: Details of Changes in Accumulated Other Comprehensive Loss by Category Foreign currency translation adjustment Pension liability adjustment Total (in thousands) Balance as of December 31, 2023 $ ( 167 ) $ 107 $ ( 60 ) Other comprehensive loss before reclassification ( 35 ) ( 30 ) ( 65 ) Balance as of March 31, 2024 $ ( 202 ) $ 77 $ ( 125 ) 14. LOSS PER SHARE 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. Table 14: Potentially Dilutive Securities For the Three Months Ended March 31, 2024 March 31, 2023 (in thousands) Unvested restricted stock and restricted stock units 1,245 410 For the three months ended March 31, 2024 and 2023, the outstanding PSUs aggregating to 43,800 and 265,608 , 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. 15. RELATED PARTY TRANSACTIONS Emmett J. Wood, the brother of our Chairman and CEO, had been an employee of the Company since 1996. 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 . One of the Company’s directors served as a consultant to the Company under a consultancy agreement that expired on December 31, 2023. The Company, at its election, paid the director's 2023 consultancy fees in a fixed amount, in the form of RSUs. On January 3, 2023, the Company granted the director 16,859 RSUs for his consulting services through June 30, 2023, one-half of which vested on March 3, 2023, and the other half vested on May 18, 2023. Beginning in July 2023, the director was paid a firm-fixed monthly retainer fee, plus additional fees and contingent bonus payments upon achievement of certain contract goals, payable in cash through the expiration of the agreement. 16. SEGMENT INFORMATION We operate our business in two reportable and operating segments: Security Solutions and Secure Networks. These segments enable the alignment of our strategies and objectives and provide a framework for the timely and rational allocation of resources within the business lines. Our Security Solutions segment is primarily focused on cybersecurity, cloud and identity solutions, and secure messaging through Xacta ® , Telos Ghost ® , Telos Advanced Cyber Analytics ("Telos ACA TM "), Telos Automated Message Handling System ("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 the progress or completion of cloud 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. Gross profit and margin are a function of operational efficiency on security solutions and changes in the volume of software sales. 16 Table of Contents Our Secure Networks segment provides secure networking architectures and solutions to our customers through secure mobility solutions, and network management and defense services. Revenue is recognized over time as the work progresses on contracts related to managing network services and information delivery. Contract costs include labor, material, and overhead costs. Variances in costs recognized from period to period primarily reflect increases and decreases in activity levels on individual contracts. Table 16: Results of Operations by Business Segment For the Three Months Ended March 31, 2024 March 31, 2023 (in thousands) Revenues Security Solutions $ 18,640 $ 19,773 Secure Networks 10,979 15,449 Total revenue 29,619 35,222 Gross profit Security Solutions 8,626 10,274 Secure Networks 2,335 3,208 Total gross profit 10,961 13,482 Research and development expenses 3,170 2,833 Selling, general and administrative expenses 16,229 23,619 Operating loss ( 8,438 ) ( 12,970 ) Other income 1,252 2,496 Interest expense ( 175 ) ( 249 ) Loss before income taxes ( 7,361 ) ( 10,723 ) Provision for income taxes ( 17 ) ( 23 ) Net loss $ ( 7,378 ) $ ( 10,746 ) We measure each segment's profitability based on gross profit. We account for inter-segment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. 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. Management does not utilize total assets by segment to evaluate segment performance or allocate resources. As a result, assets are not tracked by segment, and therefore, total assets by segment are not disclosed. 17. COMMITMENTS AND CONTINGENCIES Legal Proceedings From time to time, the Company may be a party to litigation or claims arising in the ordinary course of business, including those relating to employment matters, relationship with clients and contractors, intellectual property disputes, and other business matters. These legal proceedings seek various remedies, including claims for monetary damages in varying amounts, none of which are considered material, or are unspecified as to amount. Although the outcome of any such matter is inherently uncertain and may be materially adverse, based on current information, management believes that the outcome of such known matters will not have a material adverse effect on the Company's business or its unaudited consolidated financial statements as of March 31, 2024. Other - Government Contracts As a U.S. government contractor, we are subject to various audits and investigations by the U.S. government to determine whether our operations are being conducted in accordance with applicable regulatory requirements. U.S. government investigations of our operations, whether relating to government contracts or conducted for other reasons, could result in administrative, civil, or criminal liabilities, including repayments, fines or penalties being imposed upon us, suspension, proposed debarment, debarment from eligibility for future U.S. government contracting, or suspension of export privileges. Suspension or debarment could have a material adverse effect on us because of our dependence on contracts with the U.S. government. U.S. government investigations often take years to complete and many result in no adverse action against us. We also provide products and services to customers outside of the United States, which are subject to U.S. and foreign laws and regulations and foreign procurement policies and practices. Our compliance with local regulations or applicable U.S. government regulations also may be audited or investigated. 17 Table of Contents 18. SUPPLEMENTAL CASH FLOW INFORMATION Table 18.1: Details of Cash, Cash Equivalents, and Restricted Cash March 31, 2024 December 31, 2023 (in thousands) Cash and cash equivalents $ 93,915 $ 99,260 Restricted cash (1) 136 136 Cash, cash equivalents, and restricted cash $ 94,051 $ 99,396 (1) Restricted cash consists of a commercial money market account held as a deposit on the Ashburn lease and is included within "Other assets" on the unaudited consolidated balance sheets. Table 18.2: Supplemental Cash Flow Information For the Three Months Ended March 31, 2024 March 31, 2023 (in thousands) Cash paid during the period for: Interest $ 146 $ 219 Non-cash investing and financing activities: Operating lease ROU assets obtained in exchange for operating lease liabilities $ 626 $ 117 Capital expenditure activity in accounts payable and other accrued liabilities 154 273 Purchase of investment in accounts payable and other accrued liabilities 2,150 — Issuance of common stock for 401K match 1,618 1,942 Intangible assets transferred to extinguish other financing obligations — 7,089 Withholding tax on net share settlement under other current liabilities — 65 18 Table of Contents