What changed in this filing

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Item 1. Financial Statements

2025-05-09 compared with 2024-11-12 · 153 added, 283 removed, 358 unchanged (55% of the section changed)

2 unchanged sentences

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended For the Nine Months Ended

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

For the Three Months Ended

March 31, 2025 March 31, 2024

(in thousands, except per share amounts)

2 unchanged sentences

Total revenue 30,616 29,619

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

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

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

Cost of sales – services (excluding depreciation and amortization) 15,491 17,059

Cost of sales – products (excluding depreciation and amortization) 1,440 321

Depreciation and amortization 1,503 1,278

4 unchanged sentences

Selling, general and administrative expenses 19,633 16,229

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

Total operating expenses 21,204 19,399

3 unchanged sentences

Loss before income taxes ( 8,608 ) ( 7,361 )

Provision for income taxes ( 17 ) ( 23 ) ( 51 ) ( 68 )

Benefit from (provision for) income taxes 4 ( 17 )

Net loss $ ( 8,604 ) $ ( 7,378 )

8 unchanged sentences

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

For the Three Months Ended For the Nine Months Ended

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

For the Three Months Ended

March 31, 2025 March 31, 2024

(in thousands)

Net loss $ ( 8,604 ) $ ( 7,378 )

Other comprehensive income (loss), net of tax:

Other comprehensive loss, net of tax:

Foreign currency translation adjustments 80 ( 35 )

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

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

Actuarial gain (loss) on pension liability adjustment 8 ( 30 )

Comprehensive loss $ ( 8,516 ) $ ( 7,443 )

2 unchanged sentences

CONSOLIDATED BALANCE SHEETS

September 30, 2024 December 31, 2023

March 31, 2025 December 31, 2024

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

27 unchanged sentences

Stockholders’ equity:

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

Common stock, $ 0.001 par value, 250,000,000 shares authorized, 73,319,993 shares and 72,514,652 shares issued and outstanding as of March 31, 2025, and December 31, 2024, respectively

Additional paid-in capital 461,994 454,502

6 unchanged sentences

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended

September 30, 2024 September 30, 2023

For the Three Months Ended

March 31, 2025 March 31, 2024

(in thousands)

1 unchanged sentence

Net loss $ ( 8,604 ) $ ( 7,378 )

Adjustments to reconcile net loss to cash used in operating activities:

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

Stock-based compensation 7,048 2,984

Depreciation and amortization 2,336 3,129

Impairment loss on intangible assets 11,706 349

Deferred income tax provision 37 37

Accretion of discount in acquisition holdback — 2

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

(Benefit from) provision for deferred income tax ( 4 ) 12

(Recovery from) provision for doubtful accounts ( 5 ) 41

Amortization of debt issuance costs 17 17

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

Changes in other operating assets and liabilities:

6 unchanged sentences

Other current liabilities 56 ( 306 )

Net cash used in operating activities ( 15,420 ) ( 3,367 )

Net cash provided by (used in) operating activities 6,106 ( 350 )

Cash flows from investing activities:

Capitalized software development costs ( 2,214 ) ( 3,202 )

Purchases of property and equipment ( 123 ) ( 97 )

Purchase of investment — ( 850 )

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

Net cash used in investing activities ( 2,337 ) ( 4,149 )

2 unchanged sentences

Payment of tax withholding related to net share settlement of equity awards ( 104 ) ( 430 )

Proceeds from exercise of stock options 149 —

Payment of DFT holdback amount — ( 564 )

Repurchase of common stock — ( 139 )

Payments for debt issuance costs — ( 114 )

Net cash used in financing activities ( 556 ) ( 846 )

10 unchanged sentences

(in thousands)

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

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

Foreign currency translation gain — — — 22 — 22

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

Stock-based compensation — — 8,350 — — 8,350

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

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

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

Balance at December 31, 2024 72,515 $ 111 $ 454,502 $ ( 129 ) $ ( 327,347 ) $ 127,137

Net loss — — — — ( 8,604 ) ( 8,604 )

Foreign currency translation gain — — — 80 — 80

Actuarial gain on pension liability adjustment — — — 8 — 8

Restricted stock unit awards vested, net of shares withheld to cover tax withholding 76 — ( 104 ) — — ( 104 )

Stock-based compensation — — 5,534 — — 5,534

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

Common Stock Additional Paid-in

Capital Accumulated

Other Comprehensive Loss Accumulated Deficit Total Stockholders’

Shares Amount

(in thousands)

Issuance of common stock for 401K match 728 1 2,062 — — 2,063

Balance at March 31, 2025 73,319 $ 112 $ 461,994 $ ( 41 ) $ ( 335,951 ) $ 126,114

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

4 unchanged sentences

Stock-based compensation — — 1,648 — — 1,648

Issuance of common stock upon exercise of stock options 83 — 149 — — 149

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

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

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

Net loss — — — — ( 27,442 ) ( 27,442 )

Foreign currency translation gain — — — 31 — 31

Restricted stock unit awards vested, net of shares withheld to cover tax withholding 1,415 1 ( 1,676 ) — — ( 1,675 )

Stock-based compensation — — 18,811 — — 18,811

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

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

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

See accompanying notes to the unaudited consolidated financial statements.

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We own all of the issued and outstanding shares of Xacta Corporation and ubIQuity.com, inc.

(a holding company for Xacta Corporation), and 100 % ownership interest in Telos Identity Management Solutions, LLC ("Telos ID"), Teloworks, Inc., and Telos APAC Pte.

("Telos APAC").

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

(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 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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All intercompany transactions have been eliminated in consolidation.

The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S.

GAAP"), and the rules and regulations of the U.S.

Securities and Exchange commissions ("SEC").

Basis of Presentation for Interim Periods

Certain information and footnote disclosures normally included for the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S.

Certain information and footnote disclosures normally included for the annual financial statements prepared in accordance with U.S.

GAAP have been condensed or omitted for the interim periods presented.

We believe that the unaudited interim financial statements include all adjustments (which are normal and recurring) necessary for a fair statement of our financial position and the results of operations and cash flows for the periods presented.

We believe that the unaudited interim financial statements include all adjustments (which are normal and recurring) necessary to state fairly our financial position and the results of operations and cash flows for the periods presented.

The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for the year or future periods.

1 unchanged sentence

We have continued to follow the accounting policies set forth in those financial statements.

Basis of Comparison

Certain prior-period amounts have been reclassified to conform to the current period presentation.

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

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

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

Use of Estimates

Preparing unaudited consolidated financial statements in conformity with U.S.

The preparation of these unaudited consolidated financial statements, in conformity with U.S.

GAAP, requires management to make estimates and assumptions that affect the reported amounts of revenue, expenses, assets and liabilities, and disclosure of contingent assets and liabilities.

5 unchanged sentences

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

Selling, General and Administrative Expenses

Selling, general and administrative expenses include general and administrative expenses, as well as direct and indirect sales and marketing expenses.

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

Restructuring 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

As previously disclosed, in the fourth quarter of 2022, the Company committed to a restructuring plan to streamline its workforce and spending to better align its cost structure with its volume of business ("2022 restructuring").

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

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

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

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

Other related costs include external consulting and advisory fees related to implementing the restructuring plan.

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

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

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

2024 Restructuring Plan

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

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

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

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

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

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

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

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

Restructuring Expenses and Impairment Loss

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

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

(in thousands)

2022 Restructuring Plan:

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

Other related costs SG&A — — — 1,300

2024 Restructuring Plan:

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

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

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

Impairment of intangible assets (1)

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

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

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

At each reporting date, the Company evaluates its restructuring expense accrual to determine if the liabilities reported are still appropriate.

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

Summary of Changes in Restructuring Expenses Accrual

Severance and related benefit costs (1)

(in thousands)

Balance at December 31, 2023 $ 400

Expenses 1,437

Cash payments ( 490 )

Balance at September 30, 2024 $ 1,347

(1) Restructuring expenses accrual is included within "Other current liabilities" on the Company's unaudited consolidated balance sheets (see Note 9 - Other Balance Sheet Components for further details).

The period for which tax years are open, 2021 to 2024, has not been extended beyond the applicable statute of limitations.

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

In September 2024, were were advised by the Internal Revenue Services ("IRS") regarding an audit of our 2021 federal income tax return.

In April 2025, the IRS notified us that they completed their examination of our 2021 federal income tax return with no changes to our reported tax .

Recent Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board ("FASB") issued ASU 2023-07, "Segment Reporting (Topic 280):

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

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

ASU 2023-07 will affect how we report segment information, starting with our Form 10-K for the year ended December 31, 2024, and our quarterly reports on Form 10-Q starting with our quarterly report for the quarter ended March 31, 2025.

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

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

In December 2023, the FASB issued ASU No.

The Company adopted all applicable standards effective as of December 31, 2024, within these unaudited consolidated financial statements, with no material impact as a result of the adoption.

In December 2023, the Financial Accounting Standards Board ("FASB") issued ASU No.

2023-09, "Income Taxes (Topic 740):

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

The ASU also requires information on income taxes paid.

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

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

Improvements to Income Tax Disclosure," which requires public entities, on an annual basis, (1) to disclosure specific categories in the rate reconciliation, and (2) to provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5% of the amount computed by multiplying pretax income (loss) by the applicable statutory income tax rate).

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

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

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

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

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

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

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

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

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

This ASU is effective on a prospective basis, with the option for retrospective application.

All public 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 unaudited consolidated financial statements.

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

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The majority of our revenue is recognized over time, as control is transferred continuously to our customers, who receive and consume benefits as we perform.

Revenue transferred to customers over time accounted for 78 % and 81 % of our revenue for the three and nine months ended September 30, 2024, respectively, and 89 % of our revenue for the three and nine months ended September 30, 2023, respectively.

Revenue transferred to customers over time accounted for 79 % and 81 % of our revenue for the three months ended March 31, 2025, and 2024, respectively.

All of our business groups earn services revenue under a variety of contract types, including time and materials, firm-fixed price, firm-fixed price level of effort, and cost-plus fixed fee contract types, which may include variable consideration.

For performance obligations in which control does not continuously transfer to the customer, we recognize revenue at the point in time when each performance obligation is fully satisfied.

For performance obligations in which control does not continuously transfer to the customer, we recognize revenue at the point in time in which each performance obligation is fully satisfied.

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

Revenue transferred to customers at a point in time accounted for 22 % and 19 % of our revenue for the three and nine months ended September 30, 2024, respectively, and 11 % of our revenue for the three and nine months ended September 30, 2023, respectively.

Revenue transferred to customers at a point in time accounted for 21 % and 19 % of our revenue for the three months ended March 31, 2025, and 2024, respectively.

Orders for the sale of software licenses may contain multiple performance obligations, such as maintenance, training, or consulting services, which are typically delivered over time, consistent with the transfer of control disclosed above for the provision of services.

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We evaluate and include these estimated amounts of variable consideration in the transaction price and as performance on these contracts is complete, we adjust our revenue, when deemed necessary.

No revenue adjustments were recorded during the three and nine months ended September 30, 2024, and 2023.

No revenue adjustments were recorded during the three months ended March 31, 2025, and 2024.

We provide for anticipated losses on contracts during the period when the loss is determined by recording an expense for the total expected costs that exceeds the total estimated revenue for a performance obligation.

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

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

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

We recorded an immaterial contract loss during the three months ended March 31, 2025, and 2024.

Disaggregated Revenues

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We treat sales to U.S.

customers as sales within the U.S., regardless of where the services are performed.

customers as sales within the U.S.

regardless of where the services are performed.

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

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Revenue by Customer Type

For the Three Months Ended For the Nine Months Ended

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

Amount % Amount % Amount % Amount %

For the Three Months Ended

March 31, 2025 March 31, 2024

Amount % Amount %

(dollars in thousands)

3 unchanged sentences

Revenue by Contract Type

For the Three Months Ended For the Nine Months Ended

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

Amount % Amount % Amount % Amount %

For the Three Months Ended

March 31, 2025 March 31, 2024

Amount % Amount %

(dollars in thousands)

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Revenue Concentration Greater than 10% of Total Revenue

For the Three Months Ended For the Nine Months Ended

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

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

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

For the Three Months Ended

March 31, 2025 March 31, 2024

Department of Defense

Security Solutions segment 39 % 37 %

Secure Networks segment 15 % 19 %

Department of Homeland Security

Security Solutions segment 16 % 16 %

Contract Balances

Balance Sheet Presentation September 30, 2024 December 31, 2023

Balance Sheet Presentation March 31, 2025 December 31, 2024

(in thousands)

Billed accounts receivable (1)

Billed accounts receivables (1)

Accounts receivable, net $ 9,333 $ 10,014

4 unchanged sentences

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

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

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

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

Revenue recognized for the three months ended March 31, 2025, and 2024, that was included in the contract liabilities balance at the beginning of each reporting period was $ 2.4 million and $ 2.7 million, respectively.

As of March 31, 2025, we had approximately $ 51.4 million of remaining performance obligations, which we also refer to as funded backlog.

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

1 unchanged sentence

Details of Accounts Receivable, Net

September 30, 2024 December 31, 2023

March 31, 2025 December 31, 2024

(in thousands)

5 unchanged sentences

Accounts receivable, net $ 18,750 $ 19,172

(1) Includes provision for credit losses, net of recoveries.

(1) Includes recoveries from credit losses, net of provision.

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 92 % and 91 % of our billed and unbilled accounts receivable as of September 30, 2024, and December 31, 2023, respectively, were directly with U.S.

government, we have a concentration of credit risk associated with our accounts receivable, as 74 % and 88 % of our billed and unbilled accounts receivable as of March 31, 2025, and December 31, 2024, respectively, were directly with U.S.

government customers.

4 unchanged sentences

Details of Inventories, Net

September 30, 2024 December 31, 2023

March 31, 2025 December 31, 2024

(in thousands)

4 unchanged sentences

Details of Property and Equipment, Net

September 30, 2024 December 31, 2023

March 31, 2025 December 31, 2024

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

4 unchanged sentences

Depreciation and Amortization Expense

For the Three Months Ended For the Nine Months Ended

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

For the Three Months Ended

March 31, 2025 March 31, 2024

(in thousands)

Depreciation and amortization expense $ 445 $ 635

The goodwill balance was $ 17.9 million as of September 30, 2024, and December 31, 2023, of which $ 3.0 million is allocated to the Security Solutions segment and $ 14.9 million is allocated to the Secure Networks segment.

The goodwill balance was $ 17.9 million as of March 31, 2025, and December 31, 2024, of which $ 3.0 million is allocated to the Security Solutions segment and $ 14.9 million is allocated to the Secure Networks segment.

Goodwill is subject to annual impairment tests and if triggering events are present in the interim before the annual tests, we will assess impairment.

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

No impairment charges were recorded for the three months ended March 31, 2025, and 2024 .

INTANGIBLE ASSETS, NET

Details of Intangible Assets, Net

September 30, 2024 December 31, 2023

March 31, 2025

December 31, 2024

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

9 unchanged sentences

(1) In-process software development costs are costs for software that is not yet available for its intended use or general release to customers as of balance sheet date, thus not yet amortized.

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

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

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

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

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

Amortization Expense

For the Three Months Ended For the Nine Months Ended

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

For the Three Months Ended

March 31, 2025 March 31, 2024

(in thousands)

8 unchanged sentences

Details of Other Assets

September 30, 2024 December 31, 2023

March 31, 2025 December 31, 2024

(in thousands)

Prepaid expense – long-term portion $ 2,090 $ 4,975

Investment (1)

1 unchanged sentence

Other assets $ 5,299 $ 8,189

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

(1) In March 2024, we 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.

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

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

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

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 unaudited consolidated statements of operations, if any.

We did not note any changes in the fair value during the three months ended March 31, 2025, and 2024.

Details of Accounts Payable and Other Accrued Liabilities

September 30, 2024 December 31, 2023

March 31, 2025 December 31, 2024

(in thousands)

3 unchanged sentences

Details of Other Current Liabilities

September 30, 2024 December 31, 2023

March 31, 2025 December 31, 2024

(in thousands)

3 unchanged sentences

Other current liabilities $ 1,404 $ 1,302

DEBT AND OTHER OBLIGATIONS

REVOLVING CREDIT FACILITY

6 unchanged sentences

(ii) Adjusted Daily Simple Secured Overnight Financing Rate ("SOFR"), plus 1.9 %;

and (iii) Adjusted Term SOFR, plus 1.9 %, as such capitalized terms are defined and calculated in the Credit Agreement.

or (iii) Adjusted Term SOFR, plus 1.9 %, as such capitalized terms are defined and calculated in the Credit Agreement.

The Company may elect to convert borrowings from one type of borrowing to another type per the terms of the Credit Agreement.

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

We were in compliance with all covenants as of September 30, 2024.

We were in compliance with all covenants as of March 31, 2025.

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

On April 12, 2023, the Credit Agreement was amended to exclude from collateral the (i) amount collectible from a third party related to an Accounts Receivable Purchase Agreement and (ii) receivables generated by the Company from the sale of goods supplied to this third party in an amount not to exceed $ 25.0 million.

Other Financing Obligations

We entered into a Master Purchase Agreement ("MPA") with a third-party buyer ("Buyer") for $ 9.1 million relating to software licenses under a specific delivery order ("DO") with our customer, resulting in proceeds from other financing obligations of $ 9.1 million in November 2022.

Under the MPA, we sold, assigned and transferred all of our rights, title and interest in (i) the DO payments from the customer and (ii) the underlying licenses.

The DO covers a base period with an option for the customer to exercise three ( 3 ) additional 12 -month periods through January 2026.

The DO payments assigned to the Buyer are billable to the customer at the beginning of the base period and for each option year exercised.

The underlying licenses were acquired for resale.

On February 9, 2023, the customer notified us that it would not exercise the first option period under the DO.

Concurrently, the Company transferred all the rights, title and interest in the underlying licenses in exchange for the extinguishment of the outstanding financing obligations.

The Company evaluated the transfer of the underlying licenses as consideration paid for the outstanding financing obligations under ASC 470-10, Debt , and the provisions of the MPA, and concluded that the transaction resulted in an extinguishment of debt.

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

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

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

The MPA provides that, if the customer terminates the DO for non-renewal and the Buyer reasonably concludes that the customer's actions constitute grounds for filing a claim with the customer's contracting officer, the Buyer and Telos will cooperate in preparing such a claim, which would be filed in Telos' name.

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

STOCK-BASED COMPENSATION

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

We have granted stock options, restricted stock units with time-based vesting ("RSUs") and restricted stock units with performance-based vesting ("PSUs").

We have granted stock options, restricted stock units with time-based vesting ("RSUs") and restricted stock units with performance-based vesting ("PSU").

Awards granted under the 2016 LTIP vest over the periods determined by the Board of Directors or the Compensation Committee of the Board of Directors, which has the discretion to establish the terms, conditions and criteria of the various awards.

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

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

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

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 revenue and Free Cash Flow 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.

The Company estimates the fair value for each tranche of the stock-based compensation awards subject to market conditions on the date of grant using a Monte Carlo simulation valuation model.

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 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 awards is recognized over the derived service period as determined through the Monte Carlo simulation model.

Our key assumptions include a performance period of 2.59 years, an expected volatility of 83.9 %, and a risk-free rate of 4.7 %.

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.

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

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

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

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

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

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

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

Details of Stock Compensation Expense by Category

For the Three Months Ended For the Nine Months Ended

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

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

On May 8, 2025, the Company's stockholders approved an amendment to the 2016 LTIP that increased the number of shares available for issuance under the 2016 LTIP by an additional 4,900,000 shares, increasing the total number of shares available for issuance under the 2016 LTIP.

As of March 31, 2025, approximately 1.1 million shares of our common stock were available for future grants under the 2016 LTIP.

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

Details of Stock Compensation Expense by Department

For the Three Months Ended

March 31, 2025 March 31, 2024

(in thousands)

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Restricted Stock

Restricted Stock Unit Activity

Restricted Stock Activity

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

2 unchanged sentences

Vested ( 109,375 ) — ( 109,375 ) 9.30

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

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

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

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

Forfeited ( 56,380 ) ( 79,043 ) ( 135,423 ) 3.47

Unvested outstanding units as of March 31, 2025 1,786,348 10,604,187 12,390,535 $ 3.20

On February 20, 2025, the Company amended certain previously granted PSUs that could settle in up to 2,462,445 shares of its common stock, and would only vest if the Company achieves certain financial performance targets for fiscal year 2025.

The amendment eliminated one of the financial performance targets.

As of March 31, 2025, and 2024, the intrinsic value of the RSUs and PSUs outstanding, exercisable, and vested or expected to vest was $ 29.5 million and $ 3.9 million, respectively.

There were approximately $ 11.2 million of total compensation costs related to stock-based awards not yet recognized as of March 31, 2025, which is expected to be recognized on a straight-line basis over a weighted-average remaining vesting period of 0.5 years.

Stock Options

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

Granted — — 0.0 —

Exercised — — 0.0 —

Forfeited, cancelled, or expired — — 0.0 —

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

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

The 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 September 30, 2024.

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

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

Outstanding option balance as of March 31, 2025 287,000 $ 1.80 8.1 $ 166,460

Exercisable stock option as of March 31, 2025 287,000 $ 1.80 8.1 $ 166,460

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

As of March 31, 2025, there were no unrecognized compensation costs related to non-vested stock options.

SHARE REPURCHASES

On May 24, 2022, the Company announced that the Board of Directors approved a share repurchase program ("SRP") authorizing the Company to repurchase up to $ 50.0 million of its common stock.

On May 24, 2022, the Company announced that the Board of Directors approved a new share repurchase program ("SRP") authorizing the Company to repurchase up to $ 50.0 million of its common stock.

Pursuant to this authorization, the Company may repurchase shares of its common stock on a discretionary basis from time to time through open market purchases.

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

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

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

There were no share purchases during the first quarter of 2025 and 2024.

As of March 31, 2025, there was approximately $ 38.7 million of the authorization remaining for future common stock repurchases under the SRP.

ACCUMULATED OTHER COMPREHENSIVE LOSS

Details of Changes in the Components of Accumulated Other Comprehensive Loss

Details of Changes in Accumulated Other Comprehensive Loss by Category

Foreign currency translation adjustment Pension liability adjustment Total

1 unchanged sentence

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

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

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

Other comprehensive loss before reclassification, net of tax 80 8 88

Balance as of March 31, 2025 $ ( 95 ) $ 54 $ ( 41 )

LOSS PER SHARE

1 unchanged sentence

Potentially Dilutive Securities

For the Three Months Ended For the Nine Months Ended

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

For the Three Months Ended

March 31, 2025 March 31, 2024

(in thousands)

Weighted-average number of shares – unvested restricted stock units and stock options 628 1,245

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

RELATED PARTY TRANSACTIONS

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

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

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

One of the Company’s directors also served as a consultant to the Company under a consultancy agreement that expired on December 31, 2023.

The Company, at its election, paid the director a fixed amount, in the form of RSUs, for his services from January 1 through June 30, 2023.

On January 3, 2023, the Company granted the director 16,859 RSUs, one-half of which vested on March 3, 2023, and the other half vested on May 18, 2023.

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

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

For the three months ended March 31, 2025, and 2024, the outstanding PSUs aggregating to 10,604,187 and 43,800 , respectively, have been excluded from the calculation of potentially dilutive securities above because the issuance of shares is contingent upon the satisfaction of certain conditions which were not satisfied by the end of the period.

SEGMENT INFORMATION

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Security Solutions and Secure Networks.

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

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

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

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

Revenue associated with the segment's custom solutions is recognized as work progresses or upon delivery of services and products.

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

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

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

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.

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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Results of Operations by Business Segment

For the Three Months Ended For the Nine Months Ended

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

For the Three Months Ended

March 31, 2025 March 31, 2024

Security Solutions Secure Networks Total Security Solutions Secure Networks Total

(in thousands)

Security Solutions $ 18,332 $ 19,795 $ 54,839 $ 56,764

Secure Networks 5,451 16,391 27,061 47,555

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

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

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

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

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

Impairment loss on intangible assets

Security Solutions 5,333 — 5,333 —

Secure Networks — — — —

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

Revenues $ 25,818 $ 4,798 $ 30,616 $ 18,640 $ 10,979 $ 29,619

Cost of sales

Depreciation and amortization (1)

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

Secure Networks 2 2 7 10

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

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

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

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

Operating expenses (1)

1,501 2 1,503 1,275 3 1,278

Stock-based compensation expense (1)

169 21 190 176 81 257

Other segment items (2)

13,088 3,653 16,741 8,563 8,560 17,123

Total cost of sales 14,758 3,676 18,434 10,014 8,644 18,658

Gross profit $ 11,060 $ 1,122 12,182 $ 8,626 $ 2,335 10,961

Operating expenses:

Research and development expenses 1,571 3,170

Selling, general and administrative expenses 19,633 16,229

Total operating expenses 21,204 19,399

Operating loss ( 9,022 ) ( 8,438 )

2 unchanged sentences

Loss before income taxes ( 8,608 ) ( 7,361 )

Provision for income taxes ( 17 ) ( 23 ) ( 51 ) ( 68 )

Benefit from (provision for) income taxes 4 ( 17 )

Net loss $ ( 8,604 ) $ ( 7,378 )

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

(1) The significant segment expense categories and amounts align with the segment-level information regularly provided by 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 Chief Executive Officer, whom we identified as the CODM, evaluates the segment's performance based on metrics, such as segment revenue and gross profit, to align with our strategies and objectives, and provide a framework for the timely and rational allocation of 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 the three months ended March 31, 2025, and 2024.

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.

5 unchanged sentences

These legal proceedings seek various remedies, including claims for monetary damages in varying amounts, none of which are considered material, or are unspecified as to amount.

Although the outcome of any such matter is inherently uncertain and may be materially adverse, based on current information, management believes that the outcome of such known matters will not have a material adverse effect on the Company's business or its unaudited consolidated financial statements as of September 30, 2024.

Other - Government Contracts

8 unchanged sentences

Our compliance with local regulations or applicable U.S.

government regulations also may be audited or investigated.

government regulations may also be audited or investigated.

SUPPLEMENTAL CASH FLOW INFORMATION

Details of Cash, Cash Equivalents, and Restricted Cash

September 30, 2024 December 31, 2023

March 31, 2025 December 31, 2024

(in thousands)

4 unchanged sentences

Supplemental Cash Flow Information

For the Nine Months Ended

September 30, 2024 September 30, 2023

For the Three Months Ended

March 31, 2025 March 31, 2024

(in thousands)

1 unchanged sentence

Interest $ 129 $ 146

Income taxes 100 147

Non-cash investing and financing activities:

Operating lease ROU assets obtained in exchange for operating lease liabilities $ 626 $ 67

Capital expenditure activity in accounts payable and other accrued liabilities $ 288 $ 154

Issuance of common stock for 401K match 2,063 1,618

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

Purchase of investment in accounts payable and other accrued liabilities — 2,150

Operating lease ROU assets obtained in exchange for operating lease liabilities — 626

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements