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Item 1. Financial Statements

2025-08-11 compared with 2025-05-09 · 206 added, 123 removed, 388 unchanged (46% of the section changed)

2 unchanged sentences

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended

March 31, 2025 March 31, 2024

For the Three Months Ended For the Six Months Ended

June 30, 2025 June 30, 2024 June 30, 2025 June 30, 2024

(in thousands, except per share amounts)

15 unchanged sentences

Loss before income taxes ( 9,471 ) ( 7,740 ) ( 18,079 ) ( 15,101 )

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

Provision for income taxes ( 46 ) ( 17 ) ( 42 ) ( 34 )

Net loss $ ( 9,517 ) $ ( 7,757 ) $ ( 18,121 ) $ ( 15,135 )

8 unchanged sentences

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

For the Three Months Ended

March 31, 2025 March 31, 2024

For the Three Months Ended For the Six Months Ended

June 30, 2025 June 30, 2024 June 30, 2025 June 30, 2024

(in thousands)

3 unchanged sentences

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

Other comprehensive (loss) income ( 5 ) ( 21 ) 83 ( 86 )

Comprehensive loss $ ( 9,522 ) $ ( 7,778 ) $ ( 18,038 ) $ ( 15,221 )

2 unchanged sentences

CONSOLIDATED BALANCE SHEETS

March 31, 2025 December 31, 2024

June 30, 2025 December 31, 2024

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

3 unchanged sentences

Prepaid expenses 15,772 15,092

Deferred program expenses 5,860 —

Other current assets 865 793

22 unchanged sentences

Stockholders’ equity:

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

Common stock, $ 0.001 par value, 250,000,000 shares authorized, 72,441,668 shares and 72,514,652 shares issued and outstanding as of June 30, 2025, and December 31, 2024, respectively

Additional paid-in capital 463,816 454,502

6 unchanged sentences

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended

March 31, 2025 March 31, 2024

For the Six Months Ended

June 30, 2025 June 30, 2024

(in thousands)

4 unchanged sentences

Depreciation and amortization 4,845 6,620

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

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

Deferred income tax provision 27 24

Recovery from doubtful accounts ( 20 ) ( 32 )

Amortization of debt issuance costs 35 35

2 unchanged sentences

Inventories ( 1,079 ) 51

Prepaid expenses, other current assets, other assets 2,722 ( 171 )

Prepaid expenses, deferred program expenses, other current assets, other assets ( 1,933 ) ( 2,794 )

Accounts payable and other accrued payables 7,496 ( 7,763 )

11 unchanged sentences

Payment of tax withholding related to net share settlement of equity awards ( 1,062 ) ( 430 )

Repurchases of common stock ( 4,002 ) —

Proceeds from exercise of stock options — 104

Net cash used in financing activities ( 5,978 ) ( 1,168 )

10 unchanged sentences

(in thousands)

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

Net loss — — — — ( 9,517 ) ( 9,517 )

Foreign currency translation loss — — — ( 5 ) — ( 5 )

Restricted stock unit awards vested, net of shares withheld to cover tax withholding 611 ( 958 ) — — ( 958 )

Stock-based compensation — — 6,781 — — 6,781

Repurchases of common stock ( 1,488 ) ( 1 ) ( 4,001 ) — — ( 4,002 )

Balance at June 30, 2025 72,442 $ 111 $ 463,816 $ ( 46 ) $ ( 345,468 ) $ 118,413

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

Net loss — — — — ( 7,757 ) ( 7,757 )

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

Restricted stock unit awards vested, net of shares withheld to cover tax withholding 407 1 — — — 1

Stock-based compensation — — 2,426 — — 2,426

Issuance of common stock upon exercise of stock options 58 — 104 — — 104

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

Common Stock Additional Paid-in

Capital Accumulated

Other Comprehensive Loss Accumulated Deficit Total Stockholders’

Shares Amount

(in thousands)

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

4 unchanged sentences

Stock-based compensation — — 12,315 — — 12,315

Repurchases of common stock ( 1,488 ) ( 1 ) ( 4,001 ) — — ( 4,002 )

Issuance of common stock for 401(k) match 728 1 2,062 — — 2,063

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

Balance at June 30, 2025 72,442 $ 111 $ 463,816 $ ( 46 ) $ ( 345,468 ) $ 118,413

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

4 unchanged sentences

Stock-based compensation — — 4,073 — — 4,073

Issuance of common stock upon exercise of stock options 58 — 104 — — 104

Issuance of common stock for 401(k) match 370 — 1,618 — — 1,618

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

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

See accompanying notes to the unaudited consolidated financial statements.

3 unchanged sentences

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 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.

(a holding company for Xacta Corporation), and Teloworks, Inc.

("Teloworks"), and 100 % ownership interest in Telos Identity Management Solutions, LLC ("Telos ID").

SIGNIFICANT ACCOUNTING POLICIES

4 unchanged sentences

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

Securities and Exchange commissions ("SEC").

Securities and Exchange Commission ("SEC").

Basis of Presentation for Interim Periods

11 unchanged sentences

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

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

Actual results could differ from those estimates.

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

Actual results could differ from these estimates.

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

Deferred Program Expenses

Deferred program expenses include direct contract costs identifiable with or allocable to a specific contract.

These costs are capitalized as deferred program expenses when the costs are expected to be recovered over a period of time.

These costs are amortized using the straight-line method over the expected contract period of performance or recognized upon delivery of the performance obligation.

If the contract period of performance is beyond twelve months, we classify the cost as long-term and is included within "Other assets" on the unaudited consolidated balance sheets.

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

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

In September 2024, we 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.

On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted into law, which includes significant amendments to the Internal Revenue Code.

The OBBBA imposes various changes to U.S.

federal income tax regulations, such as restoring bonus depreciation, and removing the requirement to capitalize and amortize domestic research and development expenditures.

The OBBBA also included certain modifications to the Inflation Reduction Act of 2022, including the repeal or acceleration of the sunset of certain tax credits and elimination of certain penalties for violations of certain regulatory credit programs.

The legislation has multiple effective dates, with certain provisions effective in 2025 and others implemented through 2027.

We are currently evaluating the potential impact of these provisions on our unaudited consolidated financial statements.

Recent Accounting Pronouncements

10 unchanged sentences

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.

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

2 unchanged sentences

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

Revenue transferred to customers over time accounted for 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 in which each performance obligation is fully satisfied.

Revenue transferred to customers over time accounted for 68 % and 73 % of our revenue for the three and six months ended June 30, 2025, respectively, and 84 % and 82 % of our revenue for the three and six months ended June 30, 2024, respectively.

On the other hand, 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.

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 21 % and 19 % of our revenue for the three months ended March 31, 2025, and 2024, respectively.

Revenue transferred to customers at a point in time accounted for 32 % and 27 % of our revenue for the three and six months ended June 30, 2025, respectively, and 16 % and 18 % of our revenue for the three and six months ended June 30, 2024, respectively.

The change in revenue mix for the three and six months ended June 30, 2025, as compared to the prior periods, was primarily driven by an increase in product sales volume.

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.

4 unchanged sentences

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

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

No revenue adjustments were recorded during the three and six months ended June 30, 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.

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

No contract loss was recorded during the three months ended June 30, 2025, and 2024.

We recorded an immaterial contract loss during the six months ended June 30, 2025, and 2024.

Disaggregated Revenues

1 unchanged sentence

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 United States, regardless of where the services are performed.

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

2 unchanged sentences

Revenue by Customer Type

For the Three Months Ended

March 31, 2025 March 31, 2024

Amount % Amount %

For the Three Months Ended For the Six Months Ended

June 30, 2025 June 30, 2024 June 30, 2025 June 30, 2024

Amount % Amount % Amount % Amount %

(dollars in thousands)

3 unchanged sentences

Revenue by Contract Type

For the Three Months Ended

March 31, 2025 March 31, 2024

Amount % Amount %

For the Three Months Ended For the Six Months Ended

June 30, 2025 June 30, 2024 June 30, 2025 June 30, 2024

Amount % Amount % Amount % Amount %

(dollars in thousands)

3 unchanged sentences

Total revenue $ 35,968 100 % $ 28,498 100 % $ 66,584 100 % $ 58,117 100 %

A majority of the Company's revenue was derived under prime contracts and subcontracts with agencies and departments of the federal government.

No other customer accounted for 10% or more of the Company's revenue during the three and six months ended June 30, 2025, and 2024.

Revenue Concentration Greater than 10% of Total Revenue

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 %

For the Three Months Ended For the Six Months Ended

June 30, 2025 June 30, 2024 June 30, 2025 June 30, 2024

(in thousands)

Federal government:

Security Solutions $ 29,032 $ 14,209 $ 51,684 $ 29,872

Secure Networks 3,640 10,623 8,288 21,567

Total $ 32,672 $ 24,832 $ 59,972 $ 51,439

Contract Balances

Balance Sheet Presentation March 31, 2025 December 31, 2024

Balance Sheet Presentation June 30, 2025 December 31, 2024

(in thousands)

6 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 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.

Revenue recognized for the three and six months ended June 30, 2025, which was included in the contract liabilities balance at the beginning of each reporting period, was $ 1.7 million and $ 4.1 million, respectively.

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

As of June 30, 2025, we had approximately $ 51.7 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

March 31, 2025 December 31, 2024

June 30, 2025 December 31, 2024

(in thousands)

5 unchanged sentences

Accounts receivable, net $ 19,105 $ 19,172

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

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

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 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, we have a concentration of credit risk associated with our accounts receivable, as 75 % and 88 % of our billed and unbilled accounts receivable as of June 30, 2025, and December 31, 2024, respectively, were with U.S.

government customers.

While we acknowledge the potential material and adverse risk of such a significant concentration of credit risk, our past experience collecting substantially all of such receivables provides us with an informed basis that such risk, if any, is manageable.

We perform ongoing credit evaluations of all of our customers and generally do not require collateral or other guarantees from our customers.

We perform ongoing credit evaluations of all of our customers and generally do not require collateral or other guarantees.

We maintain allowances for potential losses.

1 unchanged sentence

Details of Inventories, Net

March 31, 2025 December 31, 2024

June 30, 2025 December 31, 2024

(in thousands)

4 unchanged sentences

Details of Property and Equipment, Net

March 31, 2025 December 31, 2024

June 30, 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

March 31, 2025 March 31, 2024

For the Three Months Ended For the Six Months Ended

June 30, 2025 June 30, 2024 June 30, 2025 June 30, 2024

(in thousands)

Depreciation and amortization expense $ 422 $ 259 $ 867 $ 894

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.

The goodwill balance was $ 17.9 million as of June 30, 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 months ended March 31, 2025, and 2024 .

If the financial performance of our Secure Networks reporting segment remains at the current level for a sustained period of time, and after considering other qualitative factors, there may be a triggering event indicating goodwill may be impaired in our Secure Networks reporting unit.

Accordingly, management may need to perform a quantitative impairment test over the Secure Networks reporting unit to determine if an impairment loss should be recorded which may have an adverse impact on our results of operations.

No impairment charges were recorded for the three and six months ended June 30, 2025, and 2024.

INTANGIBLE ASSETS, NET

Details of Intangible Assets, Net

March 31, 2025

December 31, 2024

June 30, 2025 December 31, 2024

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

10 unchanged sentences

Amortization Expense

For the Three Months Ended

March 31, 2025 March 31, 2024

For the Three Months Ended For the Six Months Ended

June 30, 2025 June 30, 2024 June 30, 2025 June 30, 2024

(in thousands)

8 unchanged sentences

Details of Other Assets

March 31, 2025 December 31, 2024

June 30, 2025 December 31, 2024

(in thousands)

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

Investment (1)

$ 3,000 $ 3,000

Prepaid expense – long-term portion 665 4,975

Restricted cash 139 139

Other assets $ 4,000 $ 8,189

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

(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.

1 unchanged sentence

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.

Changes in the fair value of this investment are recognized within "Other income" on the unaudited consolidated statements of operations, if any.

During the three and six months ended June 30, 2025, and 2024, the Company did not recognize any changes in the fair value.

Details of Accounts Payable and Other Accrued Liabilities

March 31, 2025 December 31, 2024

June 30, 2025 December 31, 2024

(in thousands)

3 unchanged sentences

Details of Other Current Liabilities

March 31, 2025 December 31, 2024

June 30, 2025 December 31, 2024

(in thousands)

11 unchanged sentences

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

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

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

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

2 unchanged sentences

Upon five , three , or one day's prior notice, as applicable, we may prepay any portion or the entire amount of the Loan.

We also paid costs and customary fees, including a closing fee, commitment fees and letter of credit participation fee, if any, payable to the Agent and Lenders, as applicable, in connection with the Loan.

We also paid costs and customary fees, including a closing fee, commitment fees and letter of credit participation fee, payable to the Agent and Lenders, as applicable, in connection with the Loan.

The Loan under the Credit Agreement is collateralized by substantially all of the Company's assets, including the Company's pledge of its domestic and material foreign subsidiary equity interests.

1 unchanged sentence

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

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

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

2 unchanged sentences

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 ("PSU").

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

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

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

PSUs will vest upon the achievement of a defined performance target or market conditions for the Company's common stock, 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

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 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.

As of June 30, 2025, approximately 1.6 million shares of our common stock were available for future grants under the 2016 LTIP.

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 stock-based compensation expense for the three and six months ended June 30, 2025, and 2024.

Details of Stock Compensation Expense by Category

For the Three Months Ended For the Six Months Ended

June 30, 2025 June 30, 2024 June 30, 2025 June 30, 2024

(in thousands)

4 unchanged sentences

Restricted Stock

Restricted Stock Activity

Restricted Stock Unit Activity

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

3 unchanged sentences

Forfeited ( 108,416 ) ( 154,649 ) ( 263,065 ) 3.42

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

Unvested outstanding units as of June 30, 2025 2,180,395 13,626,369 15,806,764 $ 3.24

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.

On May 14, 2025, the Company granted PSUs that could settle in up to 65,000 shares of its common stock to an employee that will vest only if the Company achieves a certain operational milestone prior to January 1, 2027.

In addition, the Company granted PSUs to an employee that could settle in up to 50,000 shares and will vest only if the Company achieves certain financial performance targets for fiscal year 2025.

On June 11, 2025, the Company granted PSUs containing stock price market conditions to certain employees that could settle in up to 1,060,000 shares of its common stock.

These PSUs will 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 days prior to January 1, 2027.

On June 11, 2025, the Company also granted to certain executives PSUs with market conditions dependent on total shareholder return ("TSR"), that could settle in up to 2,206,163 shares of its common stock.

The vesting criteria for these awards are based on the Company's TSR performance relative to the TSR performance of the Company's current compensation peer group over the three-year performance period, June 1, 2025, through May 31, 2028, and conditioned upon neutral or positive free cash flow (i.e.

cash flows from operating activities less capital expenditure) at the end of each fiscal year in the performance period.

The final payout of these PSUs will vary between 0 % to 200 % of the target number of PSUs granted, depending on the TSR performance and meeting the free cash flow requirements.

For the Company's stock-based compensation awards subject to market conditions, the grant date fair value per share is based on a Monte Carlo simulation method.

The expenses for these awards are recognized over the derived service period as determined through the Monte Carlo simulation model (as defined below).

For the awards subject to stock price market conditions, the Monte Carlo approach uses 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 a zero-coupon yield from the Treasury Constant Maturities yield curve at the time of grant over the performance period.

Our key assumptions include a performance period of 1.56 years, an expected volatility of 97.5 %, and a risk-free rate of 3.9 %.

The fair value for these stock price market condition PSUs at the grant date ranges between $ 1.17 – $ 1.51 , and the derived service period ranges between 0.8 – 0.94 years.

For the awards subject to TSR market conditions, the Monte Carlo simulation simulates a distribution of stock prices for the Company and its current compensation peer group throughout the remaining performance period based on certain assumptions of stock price performance.

Monte Carlo valuations of relative TSR PSUs depend on two sets of prices:

realized performance and simulated performance.

Our key assumptions include a performance period of 2.97 years, an expected volatility of 114.7 %, and a risk-free rate of 3.8 %.

The fair value for these relative TSR market condition PSUs at the grant date was $ 4.82 .

As of June 30, 2025, and 2024, the intrinsic value of the RSUs and PSUs outstanding, exercisable, and vested or expected to vest was $ 50.1 million and $ 52.1 million, respectively.

There was approximately $ 23.2 million of total compensation costs related to stock-based awards not yet recognized as of June 30, 2025, which is expected to be recognized on a straight-line basis over a weighted-average remaining vesting period of 0.8 years.

Stock Options

2 unchanged sentences

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

Granted — — 0.0 —

Exercised — —

Forfeited, cancelled, or expired — —

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 aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the quoted closing price of the Company's common stock as of March 31, 2025.

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.

Outstanding option balance as of June 30, 2025 287,000 $ 1.80 7.9 $ 393,190

Exercisable stock options as of June 30, 2025 287,000 $ 1.80 7.9 $ 393,190

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 annual stockholders meeting is expected to occur at the same approximate time each year.

As of June 30, 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 new 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 share repurchase program ("SRP") authorizing the Company to repurchase up to $ 50.0 million of its common stock.

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

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

There were no share purchases during the first quarter of 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.

As of June 30, 2025, there was approximately $ 34.7 million of the authorization remaining for future common stock repurchases under the SRP.

Share Repurchase Activity

For the Three Months Ended For the Six Months Ended

June 30, 2025 June 30, 2024 June 30, 2025 June 30, 2024

(in thousands, except per share and share data)

Amounts paid for shares repurchased (1)

$ 4,002 $ — $ 4,002 $ —

Number of shares repurchased 1,488,227 — 1,488,227 —

Average per share price paid (1)

$ 2.69 $ — $ 2.69 $ —

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

ACCUMULATED OTHER COMPREHENSIVE LOSS

3 unchanged sentences

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

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

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

Other comprehensive income before reclassification, net of tax 75 8 83

Balance as of June 30, 2025 $ ( 100 ) $ 54 $ ( 46 )

LOSS PER SHARE

1 unchanged sentence

Potentially Dilutive Securities

For the Three Months Ended

March 31, 2025 March 31, 2024

For the Three Months Ended For the Six Months Ended

June 30, 2025 June 30, 2024 June 30, 2025 June 30, 2024

(in thousands)

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

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.

Weighted-average number of shares – unvested RSUs, PSUs and stock options 976 654 1,158 1,058

For the three and six months ended June 30, 2025, and 2024, outstanding PSUs aggregating to 11,372,034 and 9,418,745 shares, respectively, have been excluded from the calculation of potentially dilutive securities above because the issuance of these shares is contingent upon certain conditions which were not satisfied by the end of the period.

SEGMENT INFORMATION

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• 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 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.

• Our Secure Networks segment provides secure networking architectures and solutions to our customers through secure mobility solutions, and network management and defense services.

Revenue is recognized over time as the work progresses on contracts related to managing network services and information delivery.

Contract costs include labor, material, and overhead costs.

Variances in costs recognized from period to period primarily reflect increases and decreases in activity levels on individual contracts.

Results of Operations by Business Segment

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

Our Chief Executive Officer, as the chief operating decision maker ("CODM"), evaluates the segment's performance based on metrics, such as segment revenue and gross profit, that align with our strategies and objectives, and provide a framework for the timely and rational allocation of resources between the segments.

Results of Operations by Business Segment (Quarter)

For the Three Months Ended

March 31, 2025 March 31, 2024

June 30, 2025 June 30, 2024

Security Solutions Secure Networks Total Security Solutions Secure Networks Total

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Loss before income taxes ( 9,471 ) ( 7,740 )

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

Provision for income taxes ( 46 ) ( 17 )

Net loss $ ( 9,517 ) $ ( 7,757 )

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

Results of Operations by Business Segment (Year-to-Date)

For the Six Months Ended

June 30, 2025 June 30, 2024

Security Solutions Secure Networks Total Security Solutions Secure Networks Total

(in thousands)

Revenues $ 58,292 $ 8,292 $ 66,584 $ 36,507 $ 21,610 $ 58,117

Cost of Sales

Depreciation and amortization (1)

3,215 3 3,218 3,312 5 3,317

Stock-based compensation expense (1)

308 31 339 338 147 485

Other segment items (2)

32,411 6,502 38,913 16,966 16,681 33,647

Total cost of sales 35,934 6,536 42,470 20,616 16,833 37,449

Gross profit $ 22,358 $ 1,756 24,114 $ 15,891 $ 4,777 20,668

Operating expenses

Research and development expenses 3,083 4,629

Selling, general and administrative expenses 39,936 33,121

Total operating expenses 43,019 37,750

Operating loss ( 18,905 ) ( 17,082 )

Other income 1,114 2,316

Interest expense ( 288 ) ( 335 )

Loss before income taxes ( 18,079 ) ( 15,101 )

Provision for income taxes ( 42 ) ( 34 )

Net loss $ ( 18,121 ) $ ( 15,135 )

(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.

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.

There were no inter-segment sales and transfers during the three and six months ended June 30, 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 March 31, 2025.

Other - Government Contracts

4 unchanged sentences

Suspension or debarment could have a material adverse effect on us because of our dependence on contracts with the U.S.

government investigations often take years to complete and many result in no adverse action against us.

government investigations often take years to complete and many result in no adverse action.

We also provide products and services to customers outside of the United States, which are subject to U.S.

4 unchanged sentences

Details of Cash, Cash Equivalents, and Restricted Cash

March 31, 2025 December 31, 2024

June 30, 2025 December 31, 2024

(in thousands)

4 unchanged sentences

Supplemental Cash Flow Information

For the Three Months Ended

March 31, 2025 March 31, 2024

For the Six Months Ended

June 30, 2025 June 30, 2024

(in thousands)

1 unchanged sentence

Interest $ 252 $ 287

Income taxes 39 100

Non-cash investing and financing activities:

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

Issuance of common stock for 401(k) match $ 2,063 $ 1,619

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

Capital expenditure activity in accounts payable and other accrued liabilities 130 147

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