What changed in this filing

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Item 1. Financial Statements

2024-11-12 compared with 2024-08-09 · 177 added, 124 removed, 464 unchanged (39% of the section changed)

2 unchanged sentences

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended For the Six Months Ended

June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023

For the Three Months Ended For the Nine Months Ended

September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023

(in thousands, except per share amounts)

2 unchanged sentences

Total revenue 23,783 36,186 81,900 104,319

Cost of sales – services (excluding depreciation and amortization) 15,933 18,838 32,992 37,930

Cost of sales – products (excluding depreciation and amortization) 819 1,544 1,140 4,016

Cost of sales – services (excluding impairment loss, depreciation and amortization) 12,689 20,683 45,681 58,613

Cost of sales – products (excluding impairment loss, depreciation and amortization) 1,128 545 2,268 4,561

Impairment loss on intangible assets 5,333 — 5,333 —

Depreciation and amortization 1,490 1,945 4,807 2,291

1 unchanged sentence

Gross profit 3,143 13,013 23,811 38,854

Operating expenses:

Research and development expenses 2,409 2,805 7,038 8,284

Selling, general and administrative expenses 23,225 19,552 56,346 62,351

Impairment loss on intangible assets 6,373 349 6,373 349

Total operating expenses 32,007 22,706 69,757 70,984

Operating loss ( 28,864 ) ( 9,693 ) ( 45,946 ) ( 32,130 )

13 unchanged sentences

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

For the Three Months Ended For the Six Months Ended

June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023

For the Three Months Ended For the Nine Months Ended

September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023

(in thousands)

Net loss $ ( 28,055 ) $ ( 8,672 ) $ ( 43,190 ) $ ( 27,442 )

Other comprehensive loss, net of tax:

Other comprehensive income (loss), net of tax:

Foreign currency translation adjustments 22 29 ( 34 ) 31

Actuarial loss on pension liability adjustment — — ( 30 ) —

Other comprehensive loss ( 21 ) ( 11 ) ( 86 ) 2

Other comprehensive income (loss) 22 29 ( 64 ) 31

Comprehensive loss $ ( 28,033 ) $ ( 8,643 ) $ ( 43,254 ) $ ( 27,411 )

2 unchanged sentences

CONSOLIDATED BALANCE SHEETS

June 30, 2024 December 31, 2023

September 30, 2024 December 31, 2023

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

27 unchanged sentences

Stockholders’ equity:

Common stock, $ 0.001 par value, 250,000,000 shares authorized, 72,223,328 shares and 70,239,890 shares issued and outstanding as of June 30, 2024 and December 31, 2023, respectively

Common stock, $ 0.001 par value, 250,000,000 shares authorized, 72,380,609 shares and 70,239,890 shares issued and outstanding as of September 30, 2024, and December 31, 2023, respectively

Additional paid-in capital 447,513 433,781

6 unchanged sentences

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended

June 30, 2024 June 30, 2023

For the Nine Months Ended

September 30, 2024 September 30, 2023

(in thousands)

4 unchanged sentences

Depreciation and amortization 9,368 5,987

Impairment loss on intangible assets 11,706 349

Deferred income tax provision 37 37

Accretion of discount in acquisition holdback — 2

Loss on disposal of fixed assets — 1

(Gain) loss on disposal of fixed assets ( 13 ) 1

(Recovery from) provision for doubtful accounts ( 28 ) 128

13 unchanged sentences

Purchase of investment ( 3,000 ) —

Purchases of property and equipment ( 332 ) ( 270 )

Purchases of property and equipment, net ( 381 ) ( 350 )

Net cash used in investing activities ( 12,485 ) ( 12,310 )

18 unchanged sentences

(in thousands)

Balance at March 31, 2024 71,758 $ 110 $ 436,616 $ ( 125 ) $ ( 282,205 ) $ 154,396

Balance at June 30, 2024 72,223 $ 111 $ 439,146 $ ( 146 ) $ ( 289,962 ) $ 149,149

Net loss — — — — ( 28,055 ) ( 28,055 )

Foreign currency translation loss — — — ( 21 ) — ( 21 )

Foreign currency translation gain — — — 22 — 22

Restricted stock unit awards vested, net of shares withheld to cover tax withholding 132 — ( 28 ) — — ( 28 )

1 unchanged sentence

Issuance of common stock upon exercise of stock options 25 — 45 — — 45

Balance at September 30, 2024 72,380 $ 111 $ 447,513 $ ( 124 ) $ ( 318,017 ) $ 129,483

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

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

Net loss — — — — ( 8,672 ) ( 8,672 )

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

Foreign currency translation gain — — — 29 — 29

Restricted stock unit awards vested, net of shares withheld to cover tax withholding 156 — ( 90 ) — — ( 90 )

Stock-based compensation — — 5,218 — — 5,218

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

Balance at September 30, 2023 69,623 $ 108 $ 431,784 $ ( 24 ) $ ( 267,847 ) $ 164,021

Common Stock Additional Paid-in

11 unchanged sentences

Issuance of common stock for 401K match 370 — 1,618 — — 1,618

Balance at June 30, 2024 72,223 $ 111 $ 439,146 $ ( 146 ) $ ( 289,962 ) $ 149,149

Balance at September 30, 2024 72,380 $ 111 $ 447,513 $ ( 124 ) $ ( 318,017 ) $ 129,483

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

Balance at September 30, 2023 69,623 $ 108 $ 431,784 $ ( 24 ) $ ( 267,847 ) $ 164,021

See accompanying notes to the unaudited consolidated financial statements.

5 unchanged sentences

("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.

On March 13, 2024, the Board of Directors unanimously approved the dissolution of Telos APAC, a pre-operating foreign subsidiary, pursuant to a plan of complete liquidation and dissolution.

Telos APAC was dissolved on October 7, 2024.

SIGNIFICANT ACCOUNTING POLICIES

11 unchanged sentences

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.

Starting in the first quarter of 2024, we reclassified sales and marketing expenses and general and administrative expenses to be presented together as selling, general and administrative ("SG&A") expenses on the consolidated statements of operations.

In the third quarter of 2024, we started presenting impairment losses as separate line items from research and development ("R&D") expenses on the consolidated statements of operations.

The reclassifications had no net impact on gross profit, total operating expenses or net loss in the unaudited consolidated statements of operations.

Use of Estimates

11 unchanged sentences

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.

From time to time, the Company initiates restructuring activities to execute management's strategy and optimize its cost structure.

Restructuring activities may include streamlining its workforce or realignment of resources to support its business strategies and enhance operational efficiency.

2022 Restructuring Plan

As previously disclosed, 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 ("2022 restructuring").

The 2022 restructuring plan reduced the Company's workforce, with a majority of the affected employees separating from the business in early 2023.

4 unchanged sentences

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 completed 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.

Restructuring Expenses (Adjustments)

For the Three Months Ended For the Six Months Ended

June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023

The Company incurred a cumulative amount of $ 3.9 million of restructuring expenses, which is the total expected costs for this restructuring plan.

The actions under this restructuring plan were substantially completed in fiscal year 2023 and were fully paid in the third quarter of 2024.

2024 Restructuring Plan

Beginning in the third quarter of 2024, the Company undertook another restructuring action in an effort to optimize its strategic priorities and cost structure ("2024 restructuring").

As part of the 2024 restructuring plan, the Company decided to discontinue the development and/or sale of selected solutions or parts of solutions, which resulted in the impairment of capitalized software assets and a reduction in workforce.

The restructuring charges under the 2024 restructuring plan include severance and related benefit costs.

The Company accrues severance and related benefit costs under the 2024 restructuring plan when it is probable that a liability exists and the amount is reasonably estimated.

As of September 30, 2024, the cumulative amount of incurred severance and benefit costs related to the 2024 restructuring plan was $ 1.4 million.

The 2024 restructuring actions are expected to be completed and fully paid during the remainder of fiscal year 2024.

In addition, as a result of the Company's decision to abandon the development or sale of selected solutions in the third quarter of 2024, the Company wrote-off $ 6.4 million of its previously capitalized software assets.

This was reported as an impairment loss on intangible assets under operating expenses on the unaudited consolidated statement of operations.

Restructuring Expenses and Impairment Loss

Statements of Operations For the Three Months Ended For the Nine Months Ended

September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023

(in thousands)

Severance and related benefit costs $ — $ ( 3 ) $ ( 10 ) $ ( 103 )

Other related costs — — — 1,300

Total restructuring (adjustments) expenses $ — $ ( 3 ) $ ( 10 ) $ 1,197

2022 Restructuring Plan:

Severance and related benefit costs SG&A $ — $ — $ ( 10 ) $ ( 103 )

Other related costs SG&A — — — 1,300

2024 Restructuring Plan:

Severance and related benefit costs Cost of sales 393 — 393 —

Severance and related benefit costs R&D, SG&A 1,054 — 1,054 —

Total restructuring expenses 1,447 — 1,437 1,197

Impairment of intangible assets (1)

Impairment loss on intangible assets 6,373 — 6,373 —

Total restructuring expenses and impairment loss $ 7,820 $ — $ 7,810 $ 1,197

(1) The recoverability evaluation of intangible assets resulted in an $ 11.7 million impairment loss, of which $ 5.3 million was recorded under cost of sales for the discontinued parts of certain solutions, and $ 6.4 million was recorded under operating expenses as a result of the restructuring plan (see Note 8 - Intangible Assets, Net ).

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.

Any changes in the estimated costs of executing the approved restructuring plans are reflected in the Company's unaudited consolidated statement of operations.

Summary of Changes in Restructuring Expenses Accrual

2 unchanged sentences

Balance at December 31, 2023 $ 400

Adjustments ( 10 )

Expenses 1,437

Cash payments ( 490 )

Balance at June 30, 2024 $ 26

Balance at September 30, 2024 $ 1,347

(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).

The period for which tax years are open, 2021 to 2023, has not been extended beyond the applicable statute of limitations.

During September 2024, the Company was notified by the Internal Revenue Service that it is examining the Company's 2021 federal income tax return.

Recent Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board ("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 disclose 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.

Improvements to Reportable Segment Disclosures." This standard requires disclosures, on an annual and interim basis, of significant segment expenses that are regularly provided to our chief operating decision maker ("CODM") and the aggregate amount of other segment items included in each reported measure of segment profit or loss.

The ASU also requires that a public entity disclose the title and position of the CODM within the Company and an explanation of how the CODM uses the reported measures of segment profit or loss in assessing segment performance and deciding how to allocate resources.

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.

The amendments in this ASU should be applied retrospectively to all prior periods presented in the financial statements.

We are evaluating these new segment disclosure requirements and the impact of their adoption on our unaudited consolidated financial statements.

1 unchanged sentence

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.

Improvements to Income Tax Disclosure," which requires, on an annual basis, greater disaggregation of information about a reporting entity's effective tax rate reconciliation and additional information for reconciling items that meet a quantitative threshold.

The ASU also requires information on income taxes paid.

This standard applies to all entities subject to income taxes and will be effective for annual periods beginning after December 15, 2024, with early adoption permitted.

The ASU should be applied on a prospective basis, although retrospective application is permitted.

We are currently assessing the impact of the adoption of this ASU on our unaudited consolidated financial statements.

In November 2024, the FASB issued ASU 2024-03, "Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Topic 220):

Disaggregation of Income Statement Expenses." This standard requires additional disclosure of certain amounts included in the expense captions presented on the statement of operations, as well as disclosures about selling expenses.

The ASU is effective on a prospective basis, with the option for retrospective application, for annual periods beginning after December 15, 2026 and interim reporting periods beginning after December 15, 2027.

Early adoption is permitted for annual financial statements that have not yet been issued.

We are in the process of assessing the impact the adoption of this ASU on our unaudited consolidated financial statement.

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.

3 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 84 % and 82 % of our revenue for the three and six months ended June 30, 2024, respectively, and 88 % and 89 % of our revenue for the three and six months ended June 30, 2023, respectively.

Revenue transferred to customers over time accounted for 78 % and 81 % of our revenue for the three and nine months ended September 30, 2024, respectively, and 89 % of our revenue for the three and nine months ended September 30, 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.

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 16 % and 18 % of our revenue for the three and six months ended June 30, 2024, respectively, and 12 % and 11 % of our revenue for the three and six months ended June 30, 2023, respectively.

Revenue transferred to customers at a point in time accounted for 22 % and 19 % of our revenue for the three and nine months ended September 30, 2024, respectively, and 11 % of our revenue for the three and nine months ended September 30, 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.

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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 and six months ended June 30, 2024, and 2023.

No revenue adjustments were recorded during the three and nine months ended September 30, 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.

No contract loss was recorded during the three months ended June 30, 2024.

We recorded an immaterial contract loss during the six months ended June 30, 2024.

No contract loss was recorded during the three and six months ended June 30, 2023.

No contract loss was recorded during the three months ended September 30, 2024.

We recorded an immaterial contract loss during the nine months ended September 30, 2024.

No contract losses were recorded during the three and nine months ended September 30, 2023.

Disaggregated Revenues

6 unchanged sentences

Revenue by Customer Type

For the Three Months Ended For the Six Months Ended

June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023

For the Three Months Ended For the Nine Months Ended

September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023

Amount % Amount % Amount % Amount %

4 unchanged sentences

Revenue by Contract Type

For the Three Months Ended For the Six Months Ended

June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023

For the Three Months Ended For the Nine Months Ended

September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023

Amount % Amount % Amount % Amount %

5 unchanged sentences

Revenue Concentration Greater than 10% of Total Revenue

For the Three Months Ended For the Six Months Ended

June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023

For the Three Months Ended For the Nine Months Ended

September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023

Department of Defense ("DoD") 46 % 61 % 53 % 65 %

Department of Homeland Security ("DHS") 16 % 6 % 15 % 3 %

Contract Balances

Balance Sheet Presentation June 30, 2024 December 31, 2023

Balance Sheet Presentation September 30, 2024 December 31, 2023

(in thousands)

Billed accounts receivables (1)

Billed accounts receivable (1)

Accounts receivable, net $ 7,690 $ 17,818

4 unchanged sentences

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 and six months ended June 30, 2024, which was included in the contract liabilities balance at the beginning of each reporting period, was $ 1.9 million and $ 4.5 million, respectively.

Revenue recognized for the three and six months ended June 30, 2023, which was included in the contract liabilities balance at the beginning of each reporting period, was $ 1.6 million and $ 4.1 million, respectively.

As of June 30, 2024, we had approximately $ 31.2 million of remaining performance obligations, which we also refer to as funded backlog.

Revenue recognized for the three and nine months ended September 30, 2024, which was included in the contract liabilities balance at the beginning of each reporting period, was $ 1.2 million and $ 5.7 million, respectively.

Revenue recognized for the three and nine months ended September 30, 2023, which was included in the contract liabilities balance at the beginning of each reporting period, was $ 1.2 million and $ 5.3 million, respectively.

As of September 30, 2024, we had approximately $ 38.9 million of remaining performance obligations, which we also refer to as funded backlog.

We expect to recognize approximately 87 % of our remaining performance obligations over the next 12 months, and the balance thereafter.

1 unchanged sentence

Details of Accounts Receivable, Net

June 30, 2024 December 31, 2023

September 30, 2024 December 31, 2023

(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 90 % and 91 % of our billed and unbilled accounts receivable as of June 30, 2024 and December 31, 2023, respectively, were directly with U.S.

government, we have a concentration of credit risk associated with our accounts receivable, as 92 % and 91 % of our billed and unbilled accounts receivable as of September 30, 2024, and December 31, 2023, respectively, were directly with U.S.

government customers.

4 unchanged sentences

Details of Inventories, Net

June 30, 2024 December 31, 2023

September 30, 2024 December 31, 2023

(in thousands)

4 unchanged sentences

Details of Property and Equipment, Net

June 30, 2024 December 31, 2023

September 30, 2024 December 31, 2023

Gross Carrying Amount Accumulated Depreciation and Amortization Net Carrying Value Gross Carrying Amount Accumulated Depreciation and Amortization Net Carrying Value

4 unchanged sentences

Depreciation and Amortization Expense

For the Three Months Ended For the Six Months Ended

June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023

For the Three Months Ended For the Nine Months Ended

September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023

(in thousands)

Depreciation and amortization expense $ 329 $ 548 $ 1,223 $ 1,700

The goodwill balance was $ 17.9 million as of June 30, 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.

The goodwill balance was $ 17.9 million as of September 30, 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 and six months ended June 30, 2024, and 2023 .

No impairment charges were recorded for the three and nine months ended September 30, 2024, and 2023.

INTANGIBLE ASSETS, NET

Details of Intangible Assets, Net

June 30, 2024 December 31, 2023

September 30, 2024 December 31, 2023

Estimated Useful Life Gross Carrying Amount Accumulated Amortization Net Carrying Value Gross Carrying Amount Accumulated Amortization Net Carrying Value

9 unchanged sentences

(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.

The Company evaluates its intangible assets for potential impairment whenever there is evidence that events or changes in circumstances indicate that the carrying value may not be recoverable.

During the third quarter of 2024, there were selected capitalized software projects for which the Company decided to discontinue the development and/or sale of all or a part of certain solutions and certain projects which the Company ceased use before the end of its useful life.

As a result of the Company's decision to abandon the associated software, the Company wrote-off $ 11.7 million of the previously capitalized software costs, of which $ 5.3 million was recorded as "Impairment loss on intangible assets" under cost of sales and $ 6.4 million was recorded as "Impairment loss on intangible assets" under operating expenses in the Company's unaudited statement of operations for the three and nine months ended September 30, 2024.

An impairment loss of $ 0.3 million was recorded under operating expenses for the three and nine months ended September 30, 2023, with no similar charges under cost of sales.

No impairment losses were recorded on other intangible assets during the three and nine months ended September 30, 2024, and 2023.

Amortization Expense

For the Three Months Ended For the Six Months Ended

June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023

For the Three Months Ended For the Nine Months Ended

September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023

(in thousands)

8 unchanged sentences

Details of Other Assets

June 30, 2024 December 31, 2023

September 30, 2024 December 31, 2023

(in thousands)

1 unchanged sentence

Restricted cash 138 136

Other 817 749

Other assets $ 9,520 $ 885

2 unchanged sentences

The Company believes the fair value option best reflects the economics of the underlying transaction.

During the three and six months ended June 30, 2024, the Company did not note any changes in the fair value.

During the three and nine months ended September 30, 2024, there were no changes in the fair value.

This is categorized as Level 3 as a result of the non-marketable observable inputs.

(2) Includes long-term prepaid assets in the amount of $ 5.3 million as of September 30, 2024.

Details of Accounts Payable and Other Accrued Liabilities

June 30, 2024 December 31, 2023

September 30, 2024 December 31, 2023

(in thousands)

3 unchanged sentences

Details of Other Current Liabilities

June 30, 2024 December 31, 2023

September 30, 2024 December 31, 2023

(in thousands)

21 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 June 30, 2024.

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

7 unchanged sentences

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, the Buyer and Telos will cooperate in preparing such a claim, which would be filed in Telos' name.

The 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.

1 unchanged sentence

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.

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.

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

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

During the third quarter of 2024, the Buyer, through Telos, filed a claim against the customer.

STOCK-BASED COMPENSATION

6 unchanged sentences

On May 16, 2024, the Company granted PSUs that could be settled in up to 1,335,281 shares of its common stock to certain senior executives and employees that will vest upon achieving certain operational milestones prior to January 1, 2027.

On May 28, 2024, the Company granted certain PSUs to certain senior executives and employees that could settle in up to 2,499,945 shares of its common stock.

On May 28, 2024, the Company granted PSUs to certain senior executives and employees that could settle in up to 2,499,945 shares of its common stock.

These PSUs may vest only if the Company achieves certain revenue and Free Cash Flow targets for fiscal year 2025.

The Company also granted certain PSUs containing market conditions to certain executives that could settle in up to 6,875,000 shares of its common stock.

The Company also granted PSUs containing market conditions to certain executives that could settle in up to 6,875,000 shares of its common stock.

These PSUs with market conditions may vest, in whole or in part, only if the Company's closing common stock price remains at or above certain specified stock prices for 50 consecutive calendar days prior to January 1, 2027.

7 unchanged sentences

The fair value for these market condition PSUs at the grant date ranges between $ 2.62 - $ 3.75 , and the derived service periods ranges between 0.63 - 1.31 years.

Stock-based compensation expense for these performance-based awards whose vesting is subject to the achievement of performance targets and fulfillment of the market conditions described above is recognized over the requisite service period for each tranche on a graded-vesting basis at the time the achievement of the condition becomes probable.

The Company recognizes compensation expense for the performance-based awards with market conditions based on the grant-date fair value calculated using the Monte Carlo model, as described above.

Stock-based compensation expense for the performance-based awards is estimated at each reporting date using management's expectation of the probable achievement of the specified performance targets and recognized over the requisite service period for each tranche on a graded-vesting basis.

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

There were no income tax benefits recognized on the share-based compensation expense for the three and six months ended June 30, 2024 and 2023.

For the three and six months ended June 30, 2024, the performance targets for outstanding PSUs granted prior to 2024 were not probable of being achieved.

Therefore, the Company recorded a cumulative catch-up adjustment for the change in its probability assessment, resulting in a $ 1.2 million decrease in stock-based compensation expense.

There were no income tax benefits recognized on the share-based compensation expense for the three and nine months ended September 30, 2024, and 2023.

In the second quarter of 2024, the performance targets for outstanding PSUs granted prior to 2024 were not probable of being achieved.

Therefore, the Company recorded a cumulative catch-up adjustment for the change in its probability assessment, resulting in a $ 1.2 million decrease in stock-based compensation expense for the nine months ended September 30, 2024.

The performance period for this PSU ended during the third quarter of 2024.

Details of Stock Compensation Expense by Category

For the Three Months Ended For the Six Months Ended

June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023

For the Three Months Ended For the Nine Months Ended

September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023

(in thousands)

9 unchanged sentences

Vested ( 1,806,608 ) — ( 1,806,608 ) 4.41

Forfeited ( 34,000 ) — ( 34,000 ) 3.30

Unvested outstanding units as of June 30, 2024 2,206,395 10,754,026 12,960,421 $ 3.65

As of June 30, 2024, the intrinsic value of the RSUs and PSUs outstanding, exercisable, and vested or expected to vest was $ 52.1 million.

There was approximately $ 30.4 million of total compensation costs related to stock-based awards not yet recognized as of June 30, 2024, which is expected to be recognized on a straight-line basis over a weighted-average remaining vesting period of 1.2 years.

Forfeited, cancelled, or expired ( 65,506 ) ( 43,800 ) ( 109,306 ) 13.82

Unvested outstanding units as of September 30, 2024 2,040,679 10,710,226 12,750,905 $ 3.53

As of September 30, 2024, the intrinsic value of the RSUs and PSUs outstanding, exercisable, and vested or expected to vest was $ 45.8 million.

There was approximately $ 24.7 million of total compensation costs related to stock-based awards not yet recognized as of September 30, 2024, which is expected to be recognized on a straight-line basis over a weighted-average remaining vesting period of 0.9 years.

Stock Options

4 unchanged sentences

Forfeited, cancelled, or expired — —

Outstanding option balance as of June 30, 2024 342,000 $ 1.80 8.9 $ 759,240

Exercisable stock option as of June 30, 2024 342,000 $ 1.80 8.9 $ 759,240

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, 2024.

Outstanding option balance as of September 30, 2024 317,000 $ 1.80 8.6 $ 567,430

Exercisable stock option as of September 30, 2024 317,000 $ 1.80 8.6 $ 567,430

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

As of June 30, 2024, there were no unrecognized compensation costs related to non-vested stock options.

As of September 30, 2024, there were no 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 repurchases during the three and six months ended June 30, 2024, and 2023.

As of June 30, 2024, there was approximately $ 38.7 million of the authorization remaining for future common stock repurchases under the SRP.

There were no share repurchases during the three and nine months ended September 30, 2024, and 2023.

As of September 30, 2024, there was approximately $ 38.7 million of the authorization remaining for future common stock repurchases under the SRP.

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.

Details of Changes in Accumulated Other Comprehensive Loss by Category

Details of Changes in the Components of Accumulated Other Comprehensive Loss

Foreign currency translation adjustment Pension liability adjustment Total

1 unchanged sentence

Balance as of December 31, 2023 $ ( 167 ) $ 107 $ ( 60 )

Other comprehensive loss before reclassification ( 56 ) ( 30 ) ( 86 )

Balance as of June 30, 2024 $ ( 223 ) $ 77 $ ( 146 )

Other comprehensive loss ( 34 ) ( 30 ) ( 64 )

Balance as of September 30, 2024 $ ( 201 ) $ 77 $ ( 124 )

LOSS PER SHARE

1 unchanged sentence

Potentially Dilutive Securities

For the Three Months Ended For the Six Months Ended

June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023

For the Three Months Ended For the Nine Months Ended

September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023

(in thousands)

Weighted-average number of shares – unvested restricted stock units and stock options 524 667 869 522

For the three and six months ended June 30, 2024, and 2023, the outstanding PSUs aggregating to 9,418,745 and 265,608 shares, respectively, have been excluded from the calculation of potentially dilutive securities above because the issuance of shares is contingent upon certain conditions which were not satisfied by the end of the current quarter.

For the three and nine months ended September 30, 2024, and 2023, the outstanding PSUs aggregating to 10,710,226 and 265,608 shares, respectively, have been excluded from the calculation of potentially dilutive securities above because the issuance of shares is contingent upon certain conditions which were not satisfied by the end of the current quarter.

RELATED PARTY TRANSACTIONS

1 unchanged sentence

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.

The amount earned by him as total compensation in 2023, including stock award and other benefits, was $ 249,000 .

One of the Company’s directors also 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 a fixed amount, in the form of RSUs, for his services from January 1 through June 30, 2023.

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.

From July 1 through December 31, 2023, the director was paid a fixed monthly retainer fee, plus additional fees and contingent bonus payments upon achievement of certain contract goals.

Cash payments made for his consulting services were $ 32,000 for the three and nine months ended September 30, 2023.

SEGMENT INFORMATION

2 unchanged sentences

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 ("Telos AMHS") and Telos ID offerings.

Our Security Solutions segment is primarily focused on cybersecurity, cloud and identity solutions, and secure messaging through Xacta ® , Telos Automated Message Handling System ("Telos AMHS™") and Telos ID offerings.

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

9 unchanged sentences

Results of Operations by Business Segment

For the Three Months Ended For the Six Months Ended

June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023

For the Three Months Ended For the Nine Months Ended

September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023

(in thousands)

2 unchanged sentences

Total revenue 23,783 36,186 81,900 104,319

Cost of sales (excluding impairment loss, depreciation and amortization)

Security Solutions 9,201 8,498 26,505 25,304

Secure Networks 4,616 12,730 21,444 37,870

Total cost of sales (excluding impairment loss, depreciation and amortization) 13,817 21,228 47,949 63,174

Impairment loss on intangible assets

Security Solutions 5,333 — 5,333 —

Secure Networks — — — —

Total impairment loss on intangible assets 5,333 — 5,333 —

Depreciation and amortization

Security Solutions 1,488 1,943 4,800 2,281

Secure Networks 2 2 7 10

Total depreciation and amortization 1,490 1,945 4,807 2,291

Security Solutions 2,310 9,354 18,201 29,179

Secure Networks 833 3,659 5,610 9,675

Total gross profit 3,143 13,013 23,811 38,854

Research and development expenses 1,459 2,646 4,629 5,479

Selling, general and administrative expenses 16,892 19,180 33,121 42,799

Operating expenses (1)

32,007 22,706 69,757 70,984

Operating loss ( 28,864 ) ( 9,693 ) ( 45,946 ) ( 32,130 )

4 unchanged sentences

Net loss $ ( 28,055 ) $ ( 8,672 ) $ ( 43,190 ) $ ( 27,442 )

(1) This includes an impairment loss of $ 6.4 million for the three and nine months ended September 30, 2024, and $ 0.3 million for the three and nine months ended September 30, 2023.

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

7 unchanged sentences

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 June 30, 2024.

Other - Government Contracts

11 unchanged sentences

Details of Cash, Cash Equivalents, and Restricted Cash

June 30, 2024 December 31, 2023

September 30, 2024 December 31, 2023

(in thousands)

4 unchanged sentences

Supplemental Cash Flow Information

For the Six Months Ended

June 30, 2024 June 30, 2023

For the Nine Months Ended

September 30, 2024 September 30, 2023

(in thousands)

8 unchanged sentences

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