What changed in this filing

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2025-03-10 compared with 2024-03-15 · 271 added, 242 removed, 832 unchanged (38% of the section changed)

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Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Telos Corporation (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of operations, comprehensive (loss)/income, changes in stockholders’ equity/(deficit) and cash flows for each of the two years in the period ended December 31, 2023, including the related notes (collectively referred to as the “consolidated financial statements”).

We have audited the accompanying consolidated balance sheets of Telos Corporation and its subsidiaries (the “Company”) as of December 31, 2024 and 2023, and the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2024, including the related notes (collectively referred to as the “consolidated financial statements”).

We also have audited the Company’s internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

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Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting.

Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits.

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The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Revenue Recognition – Estimated Costs to Complete Long-term Contracts

As discussed in Note 3 to the consolidated financial statements, a portion of the Company’s revenues of $145.4 million for the year ended December 31, 2023 were generated from long-term contracts.

For the Company’s long-term contracts, due to the transfer of control over time, revenue is recognized based on progress towards completion of the performance obligation.

Management generally uses the cost-to-cost measure of progress on a proportional performance basis for its long-term contracts because management believes that measure best depicts the transfer of control to the customer, which occurs as the Company incurs costs on the contracts.

Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation, which includes both the actual costs already incurred and the estimated costs to complete.

Revenues are recorded proportionately as costs are incurred.

Due to the nature of the work required to be performed on certain of the performance obligations, management’s estimation of costs at completion is complex, subject to many variables and requires significant judgment.

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

The principal considerations for our determination that performing procedures relating to revenue recognition - estimated costs to complete long-term contracts is a critical audit matter are (i) the significant judgment by management when estimating costs at completion and (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant assumptions related to labor and subcontractor costs and materials and other direct costs.

Revenue Recognition

As described in Note 3 to the consolidated financial statements, the Company’s total revenue was $108.2 million for the year ended December 31, 2024.

Revenue is recognized 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.

Revenue is recognized using a variety of input and output methods that approximate the progress towards complete satisfaction of the performance obligation, including costs incurred, labor hours expended, and, for firm-fixed price stand ready obligations, time-elapsed measures.

The majority of revenue is recognized over time, as control is transferred continuously to customers who receive and consume the services performed by the Company.

For performance obligations in which control does not continuously transfer to the customer, the Company recognizes revenue at the point in time in which the customer obtains control of the transferred product or service.

The principal considerations for our determination that performing procedures relating to revenue recognition is a critical audit matter are a high degree of auditor effort in performing procedures and evaluating audit evidence related to the Company’s revenue recognition.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the determination of estimated contract revenue and costs.

These procedures included, among others, (i) testing management’s process for estimating costs at completion for a sample of contracts (ii) evaluating the appropriateness of the cost-to-cost measure of progress, (iii) testing the completeness and accuracy of data used by management, and (iv) evaluating the reasonableness of management’s significant assumptions related to labor and subcontractor costs and materials and other direct costs.

Evaluating management’s significant assumptions involved assessing whether the assumptions were reasonable by (i) performing a comparison of the originally estimated and actual costs incurred on a sample of similar completed contracts;

(ii) assessing the reasonableness of estimated costs to complete on a sample of in-process contracts, including the timing of costs incurred and the related impacts on revenue;

and (iii) performing retrospective reviews of a sample of contracts to understand and corroborate management’s estimation process and budget-to-actual variances, if any.

These procedures included testing the effectiveness of controls relating to the revenue recognition process.

These procedures also included, among others, (i) testing a sample of revenue recognized by obtaining and inspecting source documents, such as invoices, customer purchase orders, customer sales agreements, cost support, shipping documents, evidence of performance, customer acceptance support, and payment receipts from customers and (ii) testing a sample of outstanding customer invoice balances as of December 31, 2024 by obtaining subsequent payment receipts and, for invoices not yet paid, obtaining and inspecting source documents, such as invoices, customer purchase orders, customer sales agreements, shipping documents and payment receipts from customers.

/s/ PricewaterhouseCoopers LLP

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Total revenue 108,272 145,378

Cost of sales – services (excluding depreciation and amortization) 83,159 120,541

Cost of sales – products (excluding depreciation and amortization) 5,733 16,510

Cost of sales – services (excluding impairment loss, depreciation and amortization) 59,271 83,159

Cost of sales – products (excluding impairment loss, depreciation and amortization) 2,835 5,733

Impairment loss on intangible assets 5,333 —

Depreciation and amortization 6,404 3,544

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Gross profit 34,429 52,942

Operating expenses:

Research and development expenses 8,442 11,760

Selling, general and administrative expenses 75,487 81,010

Sales and marketing 7,122 16,582

Research and development 12,247 16,918

General and administrative 73,888 99,393

Total selling, general and administrative expenses 93,257 132,893

Impairment loss on intangible assets 6,373 487

Total operating expenses 90,302 93,257

Operating loss ( 55,873 ) ( 40,315 )

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Foreign currency translation adjustments ( 8 ) ( 5 )

Actuarial loss on pension liability adjustment ( 61 ) —

Other comprehensive loss ( 69 ) ( 5 )

Comprehensive loss $ ( 52,589 ) $ ( 34,427 )

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Operating lease obligations – current portion 210 97

Other financing obligations – current portion — 1,247

Other current liabilities 1,302 2,324

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Operating lease obligations – non-current portion 418 123

Other financing obligations – non-current portion — 7,211

Deferred income taxes 813 813

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Net loss $ ( 52,520 ) $ ( 34,422 )

Adjustments to reconcile net loss to cash flows from operations:

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

Stock-based compensation 21,411 24,396

Depreciation and amortization 11,867 8,942

Provision for doubtful accounts 152 99

Impairment loss on intangible assets 11,706 487

(Recovery from) provision for doubtful accounts, net ( 20 ) 152

Deferred income tax provision — 55

Loss on disposal of fixed assets 2 4

(Gain) loss on disposal of fixed assets ( 9 ) 2

Accretion of discount on acquisition holdback — 2

Amortization of debt issuance costs 70 69

Provision for inventory obsolescence 108 —

Gain on early extinguishment of other financing obligations — ( 1,427 )

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Inventories ( 471 ) 1,457

Intangible assets – software held for resale — ( 7,120 )

Prepaid expenses, other current assets and other assets ( 11,455 ) ( 3,058 )

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Other current liabilities and other liabilities ( 1,195 ) ( 2,629 )

Net cash provided by operating activities 1,587 16,508

Net cash (used in) provided by operating activities ( 25,938 ) 1,587

Cash flows from investing activities:

Capitalized software development costs ( 11,505 ) ( 14,552 )

Purchases of property and equipment ( 926 ) ( 1,009 )

Purchase of investment ( 3,000 ) —

Purchases of property and equipment, net ( 2,252 ) ( 926 )

Net cash used in investing activities ( 16,757 ) ( 15,478 )

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Payments under finance lease obligations ( 1,730 ) ( 1,592 )

Repurchase of common stock ( 139 ) ( 11,145 )

Payment of tax withholding related to net share settlement of equity awards ( 457 ) ( 3,742 )

Payments for debt issuance costs ( 114 ) ( 95 )

Proceeds from exercise of stock options 203 —

Payments of DFT holdback amount — ( 564 )

Proceeds from other financing obligations — 9,092

Payments of other financing obligations — ( 635 )

Repurchase of common stock — ( 139 )

Payments for debt issuance costs — ( 114 )

Net cash used in financing activities ( 1,984 ) ( 6,151 )

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Restricted stock unit award vested, net of shares withheld to cover tax withholding 2,032 2 ( 3,743 ) — — ( 3,741 )

Repurchase of common stock ( 1,550 ) ( 1 ) ( 11,283 ) — — ( 11,284 )

Issuance of common stock for 401K match 777 1 1,942 — — 1,943

Balance December 31, 2023 70,240 109 433,781 ( 60 ) ( 274,827 ) 159,003

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Foreign currency translation loss — — — ( 8 ) — ( 8 )

Actuarial loss on pension liability adjustment — — — ( 61 ) — ( 61 )

Stock-based compensation — — 19,359 — — 19,359

Restricted stock unit award vested, net of shares withheld to cover tax withholding 1,792 2 ( 459 ) — — ( 457 )

Issuance of common stock upon exercise of stock options 113 — 203 — — 203

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

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

We own all of the issued and outstanding share capital of Xacta Corporation and ubIQuity.com, inc., (a holding company for Xacta Corporation), and 100 % ownership interest in Telos Identity Management Solutions, LLC ("Telos ID"), Teloworks, Inc.

("Teloworks") and Telos APAC Pte.

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") and Teloworks, Inc.

("Teloworks").

On March 13, 2024, the Board of Directors unanimously approved the dissolution of Telos APAC Pte.

("Telos APAC"), a pre-operating foreign subsidiary, pursuant to a plan of complete liquidation and dissolution.

Telos APAC was dissolved on October 7, 2024.

The dissolution of this subsidiary did not have a material impact on the Company's business, results of operations and financial condition.

SIGNIFICANT ACCOUNTING POLICIES

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

In the current period, we reclassified and presented depreciation and amortization separately from the cost of sales line items.

The reclassification had no impact on the statement of operations.

In the current year, we reclassified sales and marketing expenses and general and administrative expenses, and presented them together as selling, general and administrative ("SG&A") expenses on the consolidated statements of operations.

In addition, we presented impairment loss as a separate line item from research and development ("R&D") expenses on the consolidated statements of operations.

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

Segment Reporting

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

We identified our Chief Executive Officer as the CODM.

We operate our business in two reportable and operating segments:

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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 stock-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 share-based compensation, valuation and impairment of intangible assets and goodwill, restructuring expenses accruals, and contingencies.

Actual results could differ from those estimates.

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Restricted cash represents funds that are held in our money market account but precluded from use of general business needs through contractual requirements.

We report our restricted cash balance within "Other assets" on the consolidated balance sheets.

We report our restricted cash balance within "Other assets" on the consolidated balance sheets, see Note 9 – Other B a lance Sheet Comp onents .

Contract Balances

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Accounts receivable includes the following:

Billed Receivables - Billed receivables are balances where an invoice has been prepared and issued and is collectible under standard contract terms.

Where we anticipate that an invoice will be issued within a short period of time and where the funds are considered collectible within standard contract terms, we include this balance as billable accounts receivable.

Unbilled Receivables - Unbilled receivables are balances which have not yet been billed due to timing, most commonly just a month delayed from the timing of revenue recognition and the actual bill being presented to the customer.

Billed Receivables :

Billed receivables are balances where an invoice has been prepared and issued and is collectible under standard contract terms.

Unbilled Receivables :

Unbilled receivables are balances that have not yet been billed due to timing, most commonly just a month delayed from the timing of revenue recognition and the actual bill being presented to the customer.

The Company has fulfilled all requirements in order to bill the customer and collect the funds.

Contract Assets - Contract assets are receivables for which the right to consideration is conditional upon factors other than the passage of time.

Contract Assets:

Contract assets are receivables for which the right to consideration is conditional upon factors other than the passage of time.

The timing of these billings is generally driven by contractual terms, which may have billing milestones that are different from revenue recognition milestones.

Both billed and unbilled balances are recorded at their face amount less an allowance for credit losses over the contractual payment terms of the receivable.

Collectability of these amounts are periodically reviewed based upon management's knowledge and analysis of available information as of the balance sheet date, including any specific circumstances related to overdue balances, length of time that the receivable has been outstanding, historical bad debts and aging trends, and other general and contract specific factors.

Collectability of these amounts is periodically reviewed based upon management's knowledge and analysis of available information as of the balance sheet date, including any specific circumstances related to overdue balances, length of time that the receivable has been outstanding, historical bad debts and aging trends, and other general and contract specific factors.

The allowance for credit losses is adjusted based on such evaluation.

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We determine if an arrangement is a lease and we account for leases in accordance with ASC Topic 842, "Leases." We entered into contractual arrangements primarily for the use of real estate facilities and certain other equipment.

We determine the classification of the lease under these arrangements, if any, at inception based on:

(1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefits from the use of the asset throughout the period, and (3) whether we have a right to direct the use of the asset.

We determine the classification of the lease under these arrangements, if any, at inception based on (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefits from the use of the asset throughout the period, and (3) whether we have a right to direct the use of the asset.

Leased property meeting certain criteria is capitalized at the present value of the related minimum lease payments.

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In accordance with ASC 842, we recorded operating lease ROU assets, which represent our right to use an underlying asset for the lease term, and operating lease liabilities, which represent our obligation to make lease payments.

Generally, we enter into operating lease agreements for facilities.

Our operating leases are generally for equipment and office spaces.

The amount of operating lease liabilities due within 12 months are recorded in other current liabilities, with the remaining operating lease liabilities recorded as non-current liabilities in our consolidated balance sheets based on their contractual due dates.

The operating lease ROU assets and liabilities are recognized as of the lease commencement date at the present value of the lease payments over the lease term.

On lease arrangements where leases include options to extend the term of the lease, we include the impact of the options on the lease term, when we are reasonably certain that we will exercise such options.

Most of our leases do not provide an implicit rate that can readily be determined.

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The Company begins amortizing the capitalized implementation costs after all substantial testing is complete and ready for its intended use, and amortized over the expected term of the arrangement on a straight-line basis.

Software costs classified as held for resale are stated at the lower of cost or net realizable value.

Software held for resale is amortized into cost of sales on the consolidated statements of operations.

The Company reported the software held for resale as part of the Intangible Assets on the consolidated balance sheets.

Goodwill and Intangible Assets

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

Such circumstances could include, but are not limited to:

(1) a significant adverse change in legal factors or business climate, (2) a loss of key contracts or customers, or (3) negative operating performance indicators.

Such circumstances could include, but are not limited to, (1) a significant adverse change in legal factors or business climate, (2) a loss of key contracts or customers, or (3) negative operating performance indicators.

The Company performs its goodwill impairment test at the reporting unit level.

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The Company uses industry-accepted valuation models and set criteria that are reviewed and approved by management.

The methodology used to assess impairment is a combination of the income approach (i.e.

discounted cash flow ("DCF") method) and the market approach (i.e.

Comparable Public Company ("CPC") method) to determine the fair value.

The methodology used to assess impairment is a combination of the income approach (i.e., discounted cash flow ("DCF") method) and the market approach (i.e., Comparable Public Company ("CPC") method) to determine the fair value.

In the application of the income approach, the estimated fair value of the reporting unit is determined using a DCF analysis, which requires management's judgment with respect to forecasted revenue streams and operating margins, capital expenditures and the selection and use of an appropriate discount rate commensurate with the risk inherent in each of our reporting unit's current business model.

We utilize the weighted average cost of capital ("WACC") as derived by certain assumptions specific to our facts and circumstances as the discount rate.

We utilize the weighted average cost of capital as derived by certain assumptions specific to our facts and circumstances as the discount rate.

In the application of the market approach, the CPC method uses value multiples or ratio to the reporting accounting data (such as revenue) in measuring the market's perception of the reporting unit's enterprise value.

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

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

supported by little or no market activity).

As of December 31, 2023 and 2022, we did not have any financial instruments with significant Level 3 inputs and we did not have any financial instruments that are measured at fair value on a recurring basis.

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

Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

This hierarchy requires the use of observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

Except for the fair value of investment, the fair value of certain non-derivative financial instruments, including receivables, accounts payable and other accrued liabilities, approximates the carrying value due to the short-term nature of these instruments.

See Note 9 – Other Balance Sheet Components for further details on investment.

Research and Development

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Amortization of capitalized software development costs, not charged under cost of sales, are also reported as part of research and development expenses.

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 consist primarily of compensation and benefits (including incentive-based compensation), advertising, facilities, and certain types of depreciation and amortization.

Advertising Costs

Advertising costs are expensed and included in sales and marketing expense when incurred.

Advertising expense was $ 0.8 million and $ 1.3 million for the years ended December 31, 2023 and 2022, respectively.

Advertising costs are expensed and included in selling, general and administrative expenses when incurred.

Advertising expenses were $ 0.7 million and $ 0.8 million for the years ended December 31, 2024, and 2023, respectively.

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

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Business Combinations

Acquisitions were accounted for under U.S.

We evaluate acquisitions to determine whether it is a business combination or an asset acquisition and accounted for under U.S.

GAAP using the acquisition method in accordance with ASC 805, Business Combinations .

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Estimating the fair value of acquired assets and assumed liabilities, including intangibles, requires judgment about expected future cash flows, weighted-average cost of capital, discount rates and expected long-term growth rates.

No business combinations occurred during the years ended December 31, 2024, and 2023.

Stock-Based Compensation

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

The Company grants stock-based compensation awards under the Amended and Restated 2016 Omnibus Long-Term Incentive Plan (the "2016 LTIP").

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

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

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, who has the discretion to establish the terms, conditions and criteria of the various awards, including the weighting and vesting schedule of Service-Based RSUs and the performance conditions applicable to the Performance-Based RSUs, including the achievement of certain financial performance criteria or price targets for our common stock.

The restricted stock units granted are time-based ("Service-Based RSU" or "RSU") and performance-based ("Performance-Based RSU" or "PSU").

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

• Performance-Based RSUs vest upon the achievement of a defined performance target during a defined performance period from the date of grant.

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

Performance-Based RSUs vest upon the achievement of certain price targets or market conditions for the Company's common stock anytime or certain operational milestones over a three-year period from the date of grant.

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

• Performance-Based RSUs vest upon the achievement of a defined performance target during a defined performance period from the date of grant, or market conditions for its common stock, or certain operational milestone over a prescribed period.

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

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

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

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

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

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

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

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

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, including the weighting and vesting schedule of RSUs and the performance conditions applicable to the PSUs.

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

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

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

Stock-based compensation expense for awards with performance conditions 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.

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

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

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

Compensation expense for PSUs with market conditions is recognized based on the grant-date fair value calculated using the Monte Carlo model, as described above, or sooner if the market condition is achieved.

Previously recognized expense for awards with market conditions will never be reversed subsequent to completion of the derived service period even if the market conditions are never achieved.

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

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

Stock-based compensation expense is recognized as part of the cost of sales and operating expenses in our consolidated statements of operations.

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

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

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

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

Other Comprehensive (Loss) Income

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Restructuring Expenses

The determination of when the Company accrues for involuntary termination benefits under restructuring plans depends on whether the termination benefits are provided under an on-going benefit arrangement or under a one-time benefit arrangement.

The Company accounts for on-going benefit arrangements, such as those documented by employment agreements, in accordance with ASC 712 ("ASC 712"), "Compensation – Nonretirement Postemployment Benefits." Under ASC 712, liabilities for postemployment benefits are recorded at the time of obligations are probable of being incurred and can be reasonably estimated.

The determination of when the Company accrues for involuntary termination benefits under restructuring plans depends on whether the termination benefits are provided under an ongoing benefit arrangement or under a one-time benefit arrangement.

The Company accounts for ongoing benefit arrangements, such as those documented by employment agreements, in accordance with ASC 712 ("ASC 712"), "Compensation – Nonretirement Postemployment Benefits." Under ASC 712, liabilities for postemployment benefits are recorded at the time of obligations are probable of being incurred and can be reasonably estimated.

When applicable, the Company records such costs into operating expenses.

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

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 2022 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, the Company incurred restructuring-related costs, including employees' severance and related benefit costs.

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.

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

In fiscal year 2022, the Company estimated that the expected restructuring expenses were $ 2.8 million.

In fiscal year 2023, the Company updated its total expected restructuring plan costs to $ 3.9 million, based on the Company's review of the restructuring plan for the remainder of the fiscal year.

The restructuring expenses are recorded under "Selling, general and administrative expenses" on the Consolidated Statements of Operations.

The Company incurred a cumulative amount of $ 3.9 million of restructuring expenses , which is the total expected cost of 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.

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 December 31, 2024, the cumulative amount of incurred severance and benefit costs related to the 2024 restructuring plan was $ 1.3 million, of which $ 0.2 million was allocated to the Security Solutions segment and $ 0.1 million was allocated to the Secure Networks segment.

The 2024 restructuring actions were substantially completed in fiscal year 2024 and will be fully paid in early fiscal year 2025.

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 consolidated statement of operations.

Restructuring Expenses and Impairment Loss

Statements of Operations For the Year Ended December 31,

(in thousands)

2022 Restructuring Plan:

Severance and related benefit costs (adjustments) SG&A $ ( 10 ) $ ( 168 )

Other related costs SG&A — 1,300

2024 Restructuring Plan:

Severance and related benefit costs Cost of sales 341 —

Severance and related benefit costs R&D, SG&A 939 —

Total restructuring expenses 1,270 1,132

Impairment of intangible assets (1)

Impairment loss on intangible assets 6,373 —

Total restructuring expenses and impairment loss $ 7,643 $ 1,132

(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.

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Severance and related benefit costs (1)

Other related costs Total

(in thousands)

Balance at December 31, 2023 $ 400

(Adjustments)/charges ( 168 ) 1,300 1,132

Expenses (adjustments) 1,270

Cash payments ( 1,633 )

Balance at December 31, 2024 $ 37

(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.

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

Recently Accounting Pronouncements - Adopted

In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU No.

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

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

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

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

In October 2021, the FASB issued ASU No.

2021-08, "Business Combination (Topic 805):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers," which requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination.

The ASU improves comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination.

Entities should apply the amendments prospectively to business combinations that occur after the effective date.

This standard is effective for fiscal years beginning after December 15, 2022, with early adoption permitted.

This ASU is applied prospectively to business combinations occurring on or after the effective date of the amendment.

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

In September 2022, the FASB issued ASU No.

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

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

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

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

Recent Accounting Pronouncements - Not Yet Adopted

In June 2022, the FASB issued ASU No.

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

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

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

In July 2023, the FASB issued ASU 2023-03, "Presentation of Financial Statements (Topic 205), Income Statement - Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation - Stock Compensation (Topic 718)".

This update requires (1) to disclose and present income or loss related to common stock transactions on the face of the income statement, (2) to modify the existing classification and measurement of redeemable preferred shares and redeemable equity-classified shares, and (3) modify accounting treatment for stock-based compensation.

The FASB has not set an effective date on this ASU and adoption is permitted.

We are currently evaluating the impact of the ASU on our consolidated financial statement disclosures.

In August 2023, the FASB issued ASU No.

2023-05, "Business Combinations - Joint Venture Formations (Subtopic 805-60):

Recognition and Initial Measurement," which requires that a joint venture apply a new basis of accounting upon formation and would initially measure its assets and liabilities at fair value.

Joint ventures should apply the amendments prospectively with the formation date on or after January 1, 2025, with early adoption permitted.

In October 2023, the FASB issued ASU No.

2023-06, "Disclosure Improvements:

Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiatives," which modify the disclosure or presentation requirements of a variety of Topics in the Codification, certain of the amendment represent clarifications to or technical corrections of the current requirements.

The effective dates for each amendment will be the date on which the SEC's removal of that related disclosure requirement from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited.

For all entities within the scope of the affected Codification subtopics, if by June 30, 2027, the SEC has not removed the applicable requirement from Regulation S-X or Regulation S-K, the pending content of the associated amendment will be removed from the Codification and will not become effective for any entities.

This standard was effective for reporting periods beginning December 15, 2023.

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

In November 2023, the FASB issued ASU No.

2023-07, "Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosure," which requires improvement on reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses.

The standard will be effective for fiscal year beginning after December 15, 2023 and interim periods within 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 consolidated financial position, results of operations, and cash flows.

Improvements to Reportable Segment Disclosures," which requires improvement on reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses.

The standard was effective for fiscal year beginning after December 15, 2023, and requires application on a retrospective basis, and for interim periods within fiscal year beginning after December 15, 2024.

We adopted this standard during the fourth quarter of fiscal year ended December 31, 2024, and disclosed the significant segment expense categories that are regularly provided to the CODM on an annual basis, as well as disclosing how segment measures of profit or loss are used by the CODM.

The adoption of this standard only affected our disclosures, with no impact on our consolidated financial statements.

Recently Accounting Pronouncements - Not Yet Adopted

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

Unless disclosed below, there are no issued standards not yet effective that are deemed applicable to the Company's consolidated financial statements.

In December 2023, the FASB issued ASU No.

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Improvements to Income Tax Disclosure," which requires public entities, on an annual basis, (1) disclose specific categories in the rate reconciliation, and (2) 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 fiscal year beginning after December 15, 2024, with early adoption permitted.

This ASU will be effective, for public entities, for fiscal years beginning after December 15, 2024, with early adoption permitted.

We are currently assessing the impact of the adoption of this ASU on our consolidated financial position, results of operations, and cash flows.

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.

All public business entities are required to adopt the guidance in annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027, with early adoption permitted.

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

REVENUE RECOGNITION

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Our contracts with the U.S.

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

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

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

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

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

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

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

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

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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.

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

Revenue is recognized using a variety of input and output methods that approximate the progress towards complete satisfaction of the performance obligation;

including cost incurred, labor hours expended, and time-elapsed measures for our fixed-price stand ready obligations.

For certain contracts, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations.

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

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

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

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

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

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

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

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We evaluated the resulting changes to revenue under the applicable cost-plus fixed-fee contracts, as variable consideration, and determined the most likely amount to which we expect to be entitled, to the extent that no constraint exists that would preclude recognizing this revenue or result in a significant reversal of cumulative revenue recognized.

We included these estimated amounts of variable consideration in the transaction price and as performance on these contracts is complete, we adjusted our revenue by $( 0.1 ) million during the year ended December 31, 2023.

No revenue adjustment was recorded during fiscal year ended December 31, 2022.

We included these estimated amounts of variable consideration in the transaction price and as performance on these contracts is complete, if any.

An immaterial revenue adjustment was recorded during fiscal years ended December 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 year ended December 31, 2023.

No contract loss was recorded during the year ended December 31, 2024.

We recorded an immaterial contract loss during the year ended December 31, 2023.

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

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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.

Notably, 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.

Revenue by Customer Type

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Department of Defense ("DoD")

Security Solutions segment 24 % 18 %

Secure Networks segment 29 % 47 %

Department of Homeland Security ("DHS")

Security Solutions segment 15 % N/A

Contract Balances

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As of December 31, 2024, we had approximately $ 51.2 million of remaining performance obligations, which we also refer to as funded backlog.

We expect to recognize approximately 90 % of our remaining performance obligations as revenue in 2024, and approximately 3 % by 2025, with the remainder recognized thereafter.

We expect to recognize approximately 95 % of our remaining performance obligations over the next 12 months, and the balance thereafter.

ACCOUNTS RECEIVABLE, NET

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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 91 % of our billed and unbilled accounts receivable, as of December 31, 2023, were directly with U.S.

government, we have a concentration of credit risk associated with our accounts receivable, as 88 % and 91 % of our billed and unbilled accounts receivable, as of December 31, 2024, and 2023, respectively, were directly with U.S.

government customers.

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Balance Beginning

of Year Bad Debt

Write-Offs / Recoveries (2)

of Year Provision for (Recovery from) Credit Losses (1)

Write-Offs (2)

(in thousands)

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For the Year Ended December 31, 2023 134 152 ( 3 ) 283

(1) Accounts receivable reserves and reversals of allowance for subsequent collection, net

(2) Accounts receivable written-off and subsequent recoveries, net

(1) Current year account receivable reserves for expected credit losses and subsequent recoveries, net

(2) Accounts receivable written-off

On July 15, 2016, the Company entered into an accounts receivable purchase agreement under which the Company could sell certain accounts receivable (balance not to exceed $ 10.0 million) to a third party, or the "Factor," without recourse to the Company, with an availability period through June 30, 2022, and from year to year thereafter unless terminated in writing by the parties.

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The net assets attributable to the reporting units are determined based upon the estimated assets and liabilities attributable to the reporting units in deriving its free cash flows.

For fiscal year 2023, we performed a qualitative assessment on our reporting units and identified that it is "more-likely-than-not" that the estimated fair value of our Security Solutions reporting unit exceeded its carrying value.

For fiscal year 2024, we performed a qualitative assessment of our reporting units and identified that it is more likely than not that the estimated fair value of the reporting units exceeds their carrying value and thus, we did not proceed to the two-step goodwill impairment test.

For fiscal year 2023, we performed a qualitative assessment of our reporting units and identified that it is more likely than not that the estimated fair value of our Security Solutions reporting unit exceeded its carrying value.

In contrast, based on the initial qualitative assessment of our Secure Networks reporting unit, we determined that it is not more likely than not that the fair value of this reporting unit exceeds its carrying value, therefore we performed a quantitative impairment test.

Based on the quantitative assessment on our Secure Networks reporting unit as of December 31, 2023, the estimated fair value exceeded its carrying value.

Based on the quantitative assessment of our Secure Networks reporting unit as of December 31, 2023, the estimated fair value exceeded its carrying value.

Based on the results of our annual impairment test of goodwill performed, the estimated fair value of our respective reporting units exceeded their respective carrying value, and no impairment charges were taken during the years ended December 31, 2024, and 2023.

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16,725 — 16,725 14,019 — 14,019

Software held for resale (3)

— — — 7,120 — 7,120

Total $ 47,761 $ ( 17,351 ) $ 30,410 $ 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.

(2) An impairment charge of $ 0.5 million was recorded against software development costs in fiscal year 2023 related to the write-off of certain software projects.

(3) This amount is net of $ 0.7 million charged into cost of sales in fiscal year 2022.

In 2023, as a result of the impairment assessment, the Company identified conditions demonstrating impairment of certain software development costs and an impairment charge of $ 0.5 million was recorded under " Research and Development " expenses in the Company's consolidated statements of operations.

No similar impairment charge was recorded on software development costs during the fiscal year ended December 31, 2022.

In 2024, there were selected capital software projects for which the Company decided to discontinue the development and/or sale of all or part of certain solutions and certain projects that 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 within the Security Solutions segment, and $ 6.4 million was recorded as "Impairment loss on intangible assets" under operating expenses in the Company's consolidated statements of operations during the fiscal year ended December 31, 2024.

In 2023, as a result of the impairment assessment, the Company identified conditions demonstrating impairment of certain software development costs and an impairment charge of $ 0.5 million was reported as "Impairment loss on intangible assets" under operating expenses in the Company's consolidated statements of operations during the fiscal year ended December 31, 2023.

The Company did not recognize any impairment charges on other intangible assets for the periods presented.

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Software development costs - cost of sales (1)

$ 6,015 $ 2,840

Software development costs - research and development 2,286 1,623

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Year Ending December 31, 2029 264

Thereafter 264

(1) This does not include amortization of in-process software development costs, as estimation of the timing of future amortization expenses would be impractical.

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OTHER BALANCE SHEET COMPONENTS

Details of Other Assets

As of December 31,

(in thousands)

Prepaid expenses – long-term portion $ 4,975 $ 593

Investment (1)

Restricted cash 139 136

Other assets $ 8,189 $ 885

(1) In March 2024, the Company made a $ 3.0 million investment in a privately held company via a simple agreement for future equity.

The Company elected to apply the fair value option on this investment.

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

The fair value of this investment was based on non-marketable observable inputs, which represent Level 3 measurement within the fair value hierarchy.

Changes in the fair value of this investment are recognized within "Other Income (Expenses)" on the consolidated statements of operations, if any.

During fiscal year 2024, there were no changes in the fair value of this investment.

Details of Accounts Payable and Other Accrued Liabilities

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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, see Note 8 – Intangible Assets, net for further details.

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.

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

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.

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

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

Share Repurchase Program Activity

For the Year Ended December 31,

(in thousands, except per share and share data)

Amounts paid for shares repurchased (1) (2)

Number of shares repurchased — 1,550,162

Average per share price paid (1)

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

(2) Includes $ 0.1 million of unpaid common stock repurchased paid in fiscal year 2023.

There were no share repurchases during the year ended December 31, 2024, and 2023.

As of December 31, 2024, there was $ 38.7 million of the authorization remaining for future common stock repurchases under the SRP.

Accumulated Other Comprehensive Loss

Details of Changes in Accumulated Other Comprehensive Loss by Category

Foreign currency translation adjustment Actuarial gain on pension liability adjustment Total

Foreign currency translation adjustment Pension liability adjustment Total

(in thousands)

Balance as of December 31, 2022 $ ( 162 ) $ 107 $ ( 55 )

Other comprehensive loss before reclassification ( 28 ) — ( 28 )

Other comprehensive loss, net of tax ( 5 ) — ( 5 )

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

Other comprehensive loss before reclassification ( 5 ) — ( 5 )

Other comprehensive loss, net of tax ( 8 ) ( 61 ) ( 69 )

Balance as of December 31, 2024 $ ( 175 ) $ 46 $ ( 129 )

STOCK-BASED COMPENSATION

In October 2020, the Company amended the 2016 LTIP to increase the total number of shares available for issuance from 4,500,000 to 9,400,000 (equivalent to 7,459,913 shares after the stock split in November 2020) and extended the term to September 30, 2030.

On May 8, 2023, the Company further amended the 2016 LTIP with an additional 6,000,000 shares available for issuance, increasing the total number of shares available to 13,459,913 .

On May 8, 2023, the Company amended the 2016 LTIP with an additional 6,000,000 shares available for issuance, increasing the total number of shares available to 13,459,913 .

Further, on May 21, 2024, the Company authorized an additional 8,500,000 shares to be available under the Amended and Restated 2016 LTIP, increasing the total number of shares available for issuance under the 2016 LTIP to 21,959,913 shares.

As of December 31, 2024, approximately 1.0 million shares of our common stock were reserved for future grants under the 2016 LTIP, as amended.

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

Stock-based compensation expense recognized for restricted stock units and stock options granted to employees and non-employees is included in the Consolidated Statements of Operations.

In addition, stock-based compensation expense includes an immaterial increase of $ 1.3 million for the year ended December 31, 2022, to correct a prior period error.

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

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

Details of Stock-based Compensation Expense

Details of Stock Compensation Expense by Category

For the Year Ended December 31,

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Cost of sales - services $ 828 $ 900

Sales and marketing 188 4,668

Research and development ( 121 ) 1,989

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Total $ 21,411 $ 24,396

(1) Stock-based compensation expense related to stock options was $ 0.3 million for the year ended December 31, 2023.

There was no similar stock-based compensation expense on stock options in fiscal year 2022.

(1) Stock-based compensation expense related to stock options was $ 0.1 million and $ 0.3 million for the years ended December 31, 2024 and 2023.

Restricted Stock

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Vested ( 1,910,651 ) — ( 1,910,651 ) 4.41

Forfeited ( 415,513 ) ( 292,985 ) ( 708,498 ) 19.11

Forfeited, cancelled, or expired ( 114,082 ) ( 90,796 ) ( 204,878 ) 9.25

Unvested outstanding units as of December 31, 2024 1,952,103 10,683,230 12,635,333 $ 3.52

Our key assumptions used to calculate the grant date fair value of the PSU awards include a performance period ranging from 2.45 to 2.92 years, expected volatility between 57.4 % - 58.8 %, and a risk-free rate of 0.18 % - 0.29 %.

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

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 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 financial performance targets for fiscal year 2025.

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.

Our key assumptions used to calculate the grant date fair value of the PSU awards with market condition granted in fiscal year 2024 include a performance period of 2.59 years, an expected volatility of 83.9 %, and a risk-free rate of 4.70 %.

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.

On December 1, 2024, the Company granted PSUs to an employee that could settle in up to 20,000 shares of its common stock and may vest upon achieving certain operational milestones prior to January 1, 2028.

As of December 31, 2024, the intrinsic value of the RSUs and PSUs outstanding, exercisable, and vested or expected to vest was $ 43.2 million.

There was $ 3.5 million of total compensation costs related to stock-based awards not yet recognized as of December 31, 2023, which is expected to be recognized on a straight-line basis over a weighted-average remaining vesting period of 0.5 years.

Total unrecognized compensation cost related to unvested RSUs and PSUs was $ 17.0 million as of December 31, 2024, of which $ 2.0 million relates to PSUs that were not probable of achievement.

The remaining $ 15.0 million of unrecognized compensation cost is expected to be recognized on a straight-line basis over a weighted-average remaining vesting period of 0.7 years.

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.

This was recorded as a stock-based compensation adjustment under R&D expenses and SG&A expenses in the Company's statements of operations for the year ended December 31, 2024.

The performance period for these PSUs ended during the third quarter of 2024.

Stock Options

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

Exercised ( 113,000 ) 1.80

Forfeited, cancelled, or expired — —

Outstanding option balance as of December 31, 2024 287,000 $ 1.80 8.4 $ 464,940

Exercisable stock option as of December 31, 2024 287,000 $ 1.80 8.4 $ 464,940

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

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

Stock Options Fair Value and Weighted-Average Assumptions

For the Year Ended December 31,

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

Expected term (in years) 5.5 - 10

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

(in years) 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 December 31, 2023 400,000 $ 1.80 9.4 $ 740,000

Exercisable stock option as of December 31, 2023 — $ — 0.0 $ —

Our key assumptions used to calculate the fair value of the stock options granted in fiscal year 2023 include an expected term ranging from 5.5 to 10 years, expected volatility between 30.7 % - 35.1 %, and a risk-free rate of 3.5 %.

The weighted-average fair value of the underlying stock options at the grant date was $ 1.06 .

There were no new stock options granted in fiscal year 2024.

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 December 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 December 31, 2023, there were approximately $ 0.1 million of unrecognized compensation costs related to non-vested stock options.

As of December 31, 2024, there were no unrecognized compensation costs related to non-vested stock options.

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

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The lease of the Ashburn facility is accounted for as a finance lease.

Under this lease agreement, the basic rent increases by a fixed 2.5 % escalation annually, expiring on May 28, 2029.

The other office spaces and equipment leased are accounted for as operating leases.

We have included options to extend in the operating lease ROU assets and liabilities when we are reasonably certain that we will exercise such options.

In May 2014, the Company entered into a new lease arrangement with the new landlord on the Ashburn facility, which expires on May 28, 2029.

In accordance with this lease agreement, the basic rent increases by a fixed 2.5 % escalation annually.

Details of Lease Costs

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Finance leases 4.3 years 5.3 years

Operating leases 3.4 years 1.0 year

Operating leases 2.8 years 3.4 years

Weighted average discount rate:

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As of December 31, 2024, the Plan held 1,609,480 shares of Telos common stock.

Prior to March 2022, we matched one-half of employee contribution to the Plan up to a maximum of 2 % of such employee's eligible annual base salary.

In March 2022, we increased the maximum employer match up to 4 % of the employee's eligible annual base salary.

Participant contributions are always fully vested immediately at the time of contribution.

Telos' contributions vest at the rate of 20 % each year, with full vesting occurring after completion of five years of service.

We matched one-half of employee contribution to the Plan up to a maximum of 4 % of such employee's eligible annual base salary.

Prior to September 2023, Telos' contributions vested at the rate of 20 % each year, with full vesting occurring after completion of five years of service.

Effective September 1, 2023, we changed our Telos-contributed matching funds to a two -year vesting schedule:

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The Telos employer matching contribution is funded in the first quarter of the subsequent year.

Our total contributions to the Plan for 2023 and 2022 were $ 2.1 million and $ 2.2 million, respectively.

Components of Provision for/(Benefit from) Income Taxes

Our total contributions to the Plan for 2024 and 2023 were $ 2.1 million for both periods.

Components of Provision for Income Taxes

For the Year Ended December 31,

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Balance at beginning of year $ 54,999 $ 57,559

(Reductions)/additions ( 2,560 ) 1,971

Additions (reductions) 12,118 ( 2,560 )

Balance at end of year $ 67,117 $ 54,999

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

Based on available evidence, we have determined that a full valuation allowance is required as of December 31, 2023 and 2022.

As a result of a full valuation allowance against our deferred tax assets and liabilities, a deferred tax liability related to indefinite-lived goodwill remains on our consolidated balance sheets on December 31, 2023 and 2022.

Based on available evidence, we have determined that a valuation allowance is required as of December 31, 2024, and 2023 against the net of our deferred tax assets and liabilities to the extent that only a deferred tax liability related to indefinite-lived goodwill remains on our consolidated balance sheets on December 31, 2024, and 2023.

On December 31, 2024, for federal income tax purposes, there was approximately a $ 71.9 million net operating loss available to be carried forward to offset future taxable income.

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Under the provisions of ASC 740, we determined that there were approximately $ 1.5 million and $ 1.2 million of unrecognized tax benefits as of December 31, 2024, and 2023, respectively.

Included in the balance of unrecognized tax benefits as of December 31, 2023 and 2022 were $ 0.01 million and $ 0.10 million, respectively, of tax benefits that, if recognized, would impact the effective tax rate.

There was no tax benefit included on the unrecognized tax benefits as of December 31, 2024.

There was $ 0.01 million of tax benefits included in the balance of unrecognized tax benefits as of December 31, 2023, that if recognized, would impact the effective tax rate.

Also included in the balance of unrecognized tax benefits as of December 31, 2024, and 2023 were $ 1.5 million and $ 1.2 million, respectively, of tax benefits that, if recognized, would not impact the effective tax rate due to the Company's valuation allowance.

We report interest and penalties as a component of income tax expense.

The Company had accrued interest and penalties related to the unrecognized tax benefits of $ 0.01 million and $ 0.10 million, which were recorded in other liabilities as of December 31, 2023 and 2022, respectively.

There was no accrued interest and penalties related to the unrecognized tax benefits as of December 31, 2024.

The Company had accrued interest and penalties related to the unrecognized tax benefits of $ 0.01 million, which was recorded in other liabilities as of December 31, 2023.

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

The period for which tax years are open, 2013 to 2023, has not been extended beyond the applicable statute of limitations.

As of December 31, 2023, the Company is not under examination by any federal tax jurisdiction, but is currently under examination by a state tax jurisdiction.

The period for which tax years are open with regards to unrecognized tax benefits, 2013 to 2024, has not been extended beyond the applicable statute of limitations.

We file income tax returns in the U.S.

federal jurisdiction and are subject to the continuous examination of our income tax returns by the Internal Revenue Service ("IRS") and other tax authorities.

The applicable statute of limitations is no longer open for audit or examination for the years before 2021 for federal income taxes in the U.S.

We were notified by the IRS in September 2024 regarding an audit of our 2021 federal income tax return.

As of the date of these financial statements, the audit is still ongoing and no final determination or audit report has been issued.

Reconciliation of the Beginning and Ending Amounts of Unrecognized Tax Benefit

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Balance at beginning of year $ 1,228 $ 1,357

Decrease in prior year tax positions ( 169 ) ( 5 )

Increase (decrease) in prior year tax positions 123 ( 169 )

Increase related to current year tax positions 177 131

1 unchanged sentence

Balance at end of year $ 1,515 $ 1,228

(LOSS)/EARNINGS PER SHARE

LOSS PER SHARE

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

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Total 834 687

As of December 31, 2023 and 2022, performance-based RSUs of 43,800 and 336,785 , respectively, have been excluded in the calculation of the potentially dilutive securities above because issuance of such shares are contingent upon the satisfaction of certain conditions which were not satisfied by the end of the reporting period.

As of December 31, 2024, and 2023, PSUs of 10,683,230 and 43,800 , respectively, have been excluded in the calculation of the potentially dilutive securities above because issuance of such shares are contingent upon the satisfaction of certain conditions which were not satisfied by the end of the reporting period.

RELATED PARTY TRANSACTIONS

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

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

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

The amounts paid to him as compensation for his remaining tenure in 2023 was $ 0.2 million, while the amount paid for the year ended December 31, 2022, was $ 1.3 million.

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

On January 1, 2023, the director and the Company amended the consulting agreement under which he provides services ("2023 consulting agreement"), extending his services through June 30, 2023.

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

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 his consultancy services through June 30, 2023.

In July 2023, the director and the Company amended the 2023 consulting agreement, 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.

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

The Company granted the director 26,091 RSUs on February 1, 2022, which vested quarterly in four equal amounts through the end of the fiscal year 2022, subject to the director's continued performance under the consulting agreement.

The cash amount paid for his consultancy services were $ 0.09 million and $ 0.03 million for the years ended December 31, 2023, and 2022, respectively.

The amounts paid to him as total compensation in 2023, including stock awards and other benefits, was $ 0.2 million.

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 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 firm-fixed monthly retainer fee, plus additional fees and contingent bonus payments upon achievement of certain contract goals, payable in cash.

Cash payments made for his consulting services were $ 0.1 million for the year ended December 31, 2023.

SEGMENT INFORMATION

As noted in Note 2 – Significant Accounting Policies , we conduct our operations through two operating segments:

As noted in Note 2 – Significant Accounting Policies , we conduct our operations through two reportable and operating segments:

Security Solutions and Secure Networks.

• 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"), Telos Automated Message Handling System ("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 ("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.

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

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

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

Other segment expenses relate to labor, material, and overhead costs.

Software sales generally yield higher margins.

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

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For the Year Ended December 31,

Security Solutions Secure Networks Total Security Solutions Secure Networks Total

(in thousands)

Security Solutions $ 77,416 $ 120,454

Secure Networks 67,962 96,433

Total revenue 145,378 216,887

Security Solutions 39,614 61,948

Secure Networks 13,328 17,095

Total gross profit 52,942 79,043

Revenues $ 76,760 $ 31,512 $ 108,272 $ 77,416 $ 67,962 $ 145,378

Cost of sales

Impairment loss on intangible assets (1)

5,333 — 5,333 — — —

Depreciation and amortization (1)

6,396 8 6,404 3,532 12 3,544

Stock-based compensation expense (1)

667 161 828 668 232 900

Other segment items (2)

36,685 24,593 61,278 33,602 54,390 87,992

Total cost of sales 49,081 24,762 73,843 37,802 54,634 92,436

Gross profit 27,679 6,750 34,429 39,614 13,328 52,942

Operating expenses

Research and development expenses 8,442 11,760

Selling, general and administrative expenses 75,487 81,010

Impairment loss on intangible assets 6,373 487

Total operating expenses 90,302 93,257

Operating loss ( 55,873 ) ( 40,315 )

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Net loss $ ( 52,520 ) $ ( 34,422 )

(1) The significant segment expense categories and amounts align with the segment-level information regularly provided to the CODM.

(2) Other segment items for each reportable segment include direct labor, direct subcontractor costs, direct materials and inventory, other direct non-labor costs, fringes, overhead, and facility costs.

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.

The CODM evaluates the segment's performance based on metrics, such as segment revenues and gross profit, to align with our strategies and objectives, and provide a framework to allocate resources between the segments.

We account for inter-segment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices, if any.

There were no inter-segment sales and transfers during fiscal years 2024 and 2023.

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.

Management does not utilize total assets by segment, nor provide segment asset information to the CODM, 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.

COMMITMENT AND CONTINGENCIES

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.

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, relationships 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.

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

Common stock repurchase under accounts payable and other accrued liabilities — 139

Deferred financing costs in accounts payable and other accrued liabilities — 114

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk