What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-08-11 compared with 2025-05-09 · 78 added, 139 removed, 87 unchanged (71% of the section changed)

16 unchanged sentences

Economic Opportunities, Challenges and Risks

We generated approximately 89% of our total revenues from contracts with U.S.

government agencies in the first quarter of fiscal year ("FY") 2025.

We generated approximately 90% of our total revenues in the first half of fiscal year ("FY") 2025 from contracts with U.S.

government agencies.

Our business performance is affected by the overall level of U.S.

government spending and the alignment of our offerings and capabilities with the budget priorities of the U.S.

The new Presidential Administration is currently evaluating federal agencies and existing government contracts, grants, and programs for affordability, efficiency, and alignment with U.S.

The new Administration is currently evaluating federal agencies and existing government contracts, grants, and programs for affordability, efficiency, and alignment with U.S.

government objectives.

The Administration’s efforts to reduce federal spending create uncertainty and risk for government contractors, including potentially resulting in change in budgetary priorities and timing on issuing awards.

Decreases in, or delays in contract awards and in government spending on the types of programs that we support, and terminations or stop-work-orders on government contracts on which we are currently performing could adversely affect our future revenues and profitability.

Decreases or delays in contract awards and in government spending on the types of programs that we support, and terminations or stop-work-orders on government contracts on which we are currently performing, could adversely affect our future revenues and profitability.

The ongoing and potential future reforms to the U.S.

government acquisition process, including changes to procurement rules and regulations, could transform how contracts are awarded, negotiated, and managed, which could lead to delays in contract awards and/or modifications to the scope or terms of contracts we hold.

At the same time, given the nature of our business, the Administration’s focus on efficiency, along with the potential for certain traditionally government functions to be transferred to private entities, may present business opportunities for us.

On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted into law.

The OBBBA includes significant changes to the Internal Revenue Code, with various provisions changing the U.S.

federal income tax regulations and modifications to the Inflation Reduction Act of 2022.

Further, the OBBBA significantly impacts the defense sector through substantial funding allocations and strategic investments, including specific investments in areas like Artificial Intelligence (“AI”), and provides the Department of Defense with extended time, until 2029, to make strategic investments in the defense industrial base.

The increased funding and improved tax treatment for research and development could boost targeted defense investments, scale commercial technologies for military use, and support other related programs.

See Note 2 – Significant Accounting Policies on Income Taxes for additional information on key income tax provisions of the OBBBA.

In light of ongoing conflicts and heightened global instability as well as political tensions and related legal challenges, we expect continued uncertainty in the U.S.

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Initiatives to reduce governmental spending, federal budget and debt ceiling action, and U.S.

government policy positions, including trade policy, potential tax reform and U.S.

government policies or priorities, could materially impact federal spending broadly and the company’s programs in particular.

government policy positions, including trade policy, tax reform and U.S.

government policies or priorities, could materially impact federal spending broadly and our programs in particular.

Financial Overview

A number of factors have contributed to our first quarter of fiscal year 2025 results of operations, the most significant of which are described below.

More details on these changes are presented below within our "Results of Operations" section.

• The year-over-year increase in our Security Solutions revenue was primarily driven by the successful transition and ramping towards the full operational capacity of a significant program.

A number of factors have contributed to our financial performance in the second quarter ended June 30, 2025, the most significant of which are described below.

More details on these factors are presented below within our "Results of Operations" section.

• The year-over-year increase in revenue was primarily driven by the successful transition and ramping towards the full operational capacity of a significant program within our Security Solutions segment.

• Our TSA PreCheck ® enrollment revenue grew as a result of the expansion of TSA PreCheck enrollment sites.

• Our overall gross margin increased as the result of a more favorable program mix.

• Our operating expenses increased due to higher stock-based compensation expense, partially offset by the lower expense associated with the restructuring efforts undertaken in the third quarter of 2024.

Operating expenses, excluding stock-based compensation expense, declined year-over-year.

• We deployed $4.0 million to repurchase approximately 1.5 million shares of our common stock at a weighted-average share price of $2.69 per share.

Results of Operations

1 unchanged sentence

Consolidated Results of Operations

For the Three Months Ended

March 31, 2025 March 31, 2024 Dollar Change

For the Three Months Ended For the Six Months Ended

June 30, 2025 June 30, 2024 Dollar Change June 30, 2025 June 30, 2024 Dollar Change

(dollars in thousands)

15 unchanged sentences

Cost of sales, for both products and services, consists of labor, materials, subcontracting costs and an allocation of indirect costs.

Operating expenses increased by $1.8 million, or 9.3%, in the first quarter of 2025, compared to the same period in 2024.

Selling, general and administrative expenses increased by $3.4 million, or 21.0%, in the first quarter of 2025, compared to the same period in 2024, due to higher stock-based compensation costs.

Research and development expenses declined by $1.6 million, or 50.4%, in the first quarter of 2025, compared to the same period in 2024, due to lower amortization costs and stock-based compensation expenses, coupled with the discontinued development of selected solutions.

Other income decreased by 55.2% in the first quarter of 2025, compared to the same period in 2024, primarily due to a decrease in dividend income from money market placements.

Operating Expenses.

In the second quarter of 2025, operating expenses increased by $3.5 million, or 18.9%, compared to the same quarter in 2024.

Research and development ("R&D") expenses slightly increased by $0.1 million, or 3.6%, in the second quarter of 2025, compared to the same period in 2024.

Selling, general and administrative ("SG&A") expenses increased by $3.4 million, or 20.2%, in the second quarter of 2025, compared to the same period in 2024, due to higher stock-based compensation costs, partially offset by lower labor costs due to the restructuring efforts taken in the third quarter of 2024 and lower cash incentive compensation expense.

For the six months ended June 30, 2025, operating expenses increased by $5.3 million, or 14.0%, compared with the same period in 2024.

R&D expenses declined by $1.5 million, or 33.4%, in the first half of 2025, compared to the same period in 2024, due to lower amortization costs associated with the discontinued development of selected solutions in the third quarter of 2024.

SG&A expenses increased by $6.8 million, or 20.6%, in the first half of 2025, compared to the same period in 2024, due to higher stock-based compensation costs, partially offset by lower labor costs due to the restructuring efforts taken in the third quarter of 2024 and lower cash incentive compensation expense.

Other income .

Other income decreased by $0.5 million, or 48.0%, for the second quarter of 2025, compared to the same period in 2024.

Similarly, other income for the six months ended June 30, 2025, decreased by $1.2 million, or 51.9%, compared to the same period in 2024.

The decreases in other income for both periods were primarily due to the changes in dividend income from money market placements.

Segment Results

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Security Solutions Segment - Financial Results

For the Three Months Ended

March 31, 2025 March 31, 2024 Dollar Change

For the Three Months Ended For the Six Months Ended

June 30, 2025 June 30, 2024 Dollar Change June 30, 2025 June 30, 2024 Dollar Change

(dollars in thousands)

5 unchanged sentences

Gross margin 34.8 % 40.7 % 38.4 % 43.5 %

For the quarter ended March 31, 2025, Security Solutions segment revenue increased by 38.5%, compared to the same period in 2024, primarily due to the successful ramp towards the full operational capacity of a significant program and increased volume of product sales.

For the quarter ended March 31, 2025, Security Solutions segment gross profit increased by 28.2%, compared with the same period in 2024, due to higher segment revenues.

Segment gross margin decreased from 46.3% in 2024 to 42.8% in 2025, primarily due to the result of the unfavorable program mix within the segment and increased costs on a specific program.

Three Months Ended June 30, 2025, Compared with Three Months Ended June 30, 2024

Security Solutions segment revenue for the second quarter of 2025 increased by $14.6 million, or 81.8%, compared to the same period in 2024, primarily due to the successful ramp towards the full operational capacity of a significant program and increase in volume on another large program.

Security Solutions gross profit for the second quarter of 2025 increased by $4.0 million, or 55.5%, compared with the same period in 2024, due to higher segment revenues.

Segment gross margin decreased from 40.7% to 34.8% for the second quarter of 2025, compared with the same period in 2024, primarily due to revenue mix partially offset by the impact of lower depreciation and amortization expense on higher revenue.

Six Months Ended June 30, 2025, Compared with Six Months Ended June 30, 2024

Security Solutions segment revenue for the six months ended June 30, 2025, increased by $21.8 million, or 59.7%, compared to the same period in 2024, primarily due to the successful ramp towards the full operational capacity of a significant program and increase in volume on another large program.

Segment gross profit for the six months ended June 30, 2025, increased by $6.5 million, or 40.7%, compared to the same period in 2024, due to higher segment revenues.

Segment gross margin decreased from 43.5% in FY2024 to 38.4% in FY2025, primarily due to revenue mix partially offset by the impact of lower depreciation and amortization on higher revenue.

Table MD&A 3:

Secure Networks Segment - Financial Results

For the Three Months Ended

March 31, 2025 March 31, 2024 Dollar Change

For the Three Months Ended For the Six Months Ended

June 30, 2025 June 30, 2024 Dollar Change June 30, 2025 June 30, 2024 Dollar Change

(dollars in thousands)

5 unchanged sentences

Gross margin 18.1 % 23.0 % 21.2 % 22.1 %

For the quarter ended March 31, 2025, Secure Networks segment revenue decreased by 56.3%, compared to the same period in 2024, primarily due to the ramp down of several programs within the portfolio.

For the quarter ended March 31, 2025, Secure Networks segment gross profit decreased by 51.9%, compared with the same period in 2024, due to lower revenue.

Segment gross margin expanded to 23.4% for the first quarter of 2025, from 21.3% for the same period in 2024, primarily due to the impact of indirect costs allocation on revenue.

Non-GAAP Financial Measures

In addition to our results determined in accordance with U.S.

GAAP, we believe the non-GAAP financial measures of EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin, Adjusted Net (Loss) Income, Adjusted Earnings Per Share ("EPS"), Adjusted Gross Profit, Cash Gross Profit, Adjusted Gross Margin, Cash Gross Margin and Free Cash Flow are useful in evaluating our operating performance.

We believe that this non-GAAP financial information, when taken collectively with our GAAP results, may be helpful to readers of our financial statements because it provides consistency and comparability with past financial performance and assists in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their GAAP results.

The non-GAAP financial information is presented for supplemental informational purposes only, should not be considered a substitute for financial information presented in accordance with GAAP, and may be different from similarly-titled non-GAAP measures used by other companies.

A reconciliation is provided below for each of these non-GAAP financial measures to the most directly comparable financial measure stated in accordance with GAAP.

We believe these non-GAAP financial measures facilitate comparison of our operating performance on a consistent basis between periods by excluding certain items that may, or could, have a disproportionately positive or negative impact on our results of operations in any particular period.

When viewed in combination with our results prepared in accordance with GAAP, these non-GAAP financial measures help provide a broader picture of factors and trends affecting our results of operations.

EBITDA, Adjusted EBITDA, EBITDA Margin and Adjusted EBITDA Margin

EBITDA, Adjusted EBITDA, EBITDA Margin and Adjusted EBITDA Margin are supplemental measures of operating performance that are not made under GAAP and do not represent, and should not be considered as, an alternative to net loss as determined by GAAP.

We define EBITDA as net (loss) income, adjusted for non-operating (income) expense, interest expense, provision for (benefit from) income taxes, and depreciation and amortization.

We define Adjusted EBITDA as EBITDA, adjusted for stock-based compensation expense and restructuring expenses.

We define EBITDA Margin as EBITDA as a percentage of total revenue.

We define Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of total revenue.

We believe that EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin provide the Board, management and investors with clear representation of our core operating performance and trends, provide greater visibility into the long-term financial performance of the Company, and eliminate the impact of items that do not relate to the ongoing operating performance of the business.

Further, Adjusted EBITDA is used by the Board and management to prepare and approve our annual budget, and to evaluate the performance of certain management personnel when determining incentive compensation.

Table MD&A 4:

Reconciliation of Net Loss to EBITDA and Adjusted EBITDA;

Net Loss Margin to EBITDA Margin and Adjusted EBITDA Margin

For the Three Months Ended

March 31, 2025 March 31, 2024

Amount Margin Amount Margin

(dollars in thousands)

Net loss $ (8,604) (28.1 %) $ (7,378) (24.9 %)

Other income (561) (1.8 %) (1,252) (4.2 %)

Interest expense 147 0.5 % 175 0.5 %

(Benefit from) provision for income taxes (4) — % 17 0.1 %

Depreciation and amortization 2,336 7.6 % 3,129 10.6 %

EBITDA (Non-GAAP) (6,686) (21.8 %) (5,309) (17.9 %)

Stock-based compensation expense (1)

7,048 23.0 % 2,984 10.0 %

Restructuring adjustments (2)

— — % (10) — %

Adjusted EBITDA (Non-GAAP) $ 362 1.2 % $ (2,335) (7.9) %

(1) The stock-based compensation expense to EBITDA as of March 31, 2025, and 2024 is made up of $5.5 million and $1.6 million, respectively, of stock-based compensation expense for the awarded RSUs, PSUs, and stock options, and $1.5 million and $1.3 million, respectively, of other sources of stock-based compensation expense.

The other sources of stock-based compensation consist of accrued compensation, which the Company intends to settle in shares of the Company's common stock.

However, the Company has the discretion to determine whether this compensation will ultimately be paid in stock or cash up until the date at which they are paid.

Any change to the expected payment form would result in out-of-quarter adjustments to this add back to Adjusted EBITDA.

(2) The restructuring (adjustments) expenses include severance and other related benefit costs (including outplacement services and continuing health insurance coverage), external consulting and advisory fees related to implementing the restructuring plan.

Adjusted Net Loss and Adjusted EPS

Adjusted Net (Loss) Income and Adjusted EPS are supplemental measures of operating performance that are not made under GAAP and do not represent, and should not be considered as, alternatives to net (loss) income as determined by GAAP.

We define Adjusted Net (Loss) Income as net loss, adjusted for non-operating (income) expense, stock-based compensation expense and restructuring expense.

We define Adjusted EPS as Adjusted Net (Loss) Income divided by the weighted-average number of common shares outstanding for the period.

Adjusted Net (Loss) Income and Adjusted EPS provide the Board, management and investors with clear representation of our core operating performance and trends, provide greater visibility into the long-term financial performance of the Company, and eliminate the impact of items that do not relate to the ongoing operating performance of the business.

Table MD&A 5:

Reconciliation of Net Loss to Adjusted Net Loss;

EPS to Adjusted EPS

For the Three Months Ended

March 31, 2025 March 31, 2024

Net Loss Adjusted Earnings Per Share Adjusted

Net Loss Adjusted Earnings Per Share

(in thousands, except per share data)

Net loss $ (8,604) $ (0.12) $ (7,378) $ (0.10)

Other income (561) (0.01) (1,252) (0.02)

Stock-based compensation expense (1)

7,048 0.10 2,984 0.04

Restructuring adjustments (2)

Adjusted net loss (Non-GAAP measure) $ (2,117) $ (0.03) $ (5,656) $ (0.08)

Weighted-average shares of common stock outstanding, basic 72,715 70,628

(1) The stock-based compensation expense to net loss as of March 31, 2025, and 2024 is made up of $5.5 million and $1.6 million, respectively, of stock-based compensation expense for the awarded RSUs, PSUs and stock options, and $1.5 million and $1.3 million, respectively, of other sources of stock-based compensation expense.

The other sources of stock-based compensation consist of accrued compensation, which the Company intends to settle in shares of the Company's common stock.

However, the Company has the discretion to determine whether this compensation will ultimately be paid in stock or cash up until the date at which they are paid.

Any change to the expected payment form would result in out-of-quarter adjustments to this add back to Adjusted Net Loss.

Adjusted Gross Profit, Cash Gross Profit, Adjusted Gross Margin and Cash Gross Margin

Adjusted Gross Profit, Cash Gross Profit, Adjusted Gross Margin and Cash Gross Margin are supplemental measures of operating performance that are not made under GAAP and do not represent, and should not be considered as, alternatives to gross profit and gross margin as determined by GAAP.

We define Adjusted Gross Profit as gross profit, plus stock-based compensation expense, impairment loss on intangible assets, and restructuring expenses charged under cost of sales.

We define Adjusted Gross Margin as Adjusted Gross Profit as a percentage of total revenue.

We define Cash Gross Profit as Adjusted Gross Profit, plus depreciation and amortization charged under cost of sales.

We define Cash Gross Margin as Cash Gross Profit as a percentage of total revenue.

Adjusted Gross Profit, Cash Gross Profit, Adjusted Gross Margin and Cash Gross Margin provide management and investors a clear representation of the core economics of gross profit and gross margin without the impact of non-cash expenses and sunk costs expended.

Table MD&A 6:

Reconciliation of Gross Profit to Adjusted Gross Profit and Cash Gross Profit;

Gross Margin to Adjusted Gross Margin and Cash Gross Margin

For the Three Months Ended

March 31, 2025 March 31, 2024

Amount Margin Amount Margin

(dollars in thousands)

Gross profit $ 12,182 39.8% $ 10,961 37.0%

Stock-based compensation expense — cost of sales 190 0.6% 257 0.9%

Adjusted gross profit (Non-GAAP) 12,372 40.4% 11,218 37.9%

Depreciation and amortization — cost of sales 1,503 4.9% 1,278 4.3%

Cash gross profit (Non-GAAP) $ 13,875 45.3% $ 12,496 42.2%

Free Cash Flow

Free cash flow is a supplemental measure of operating and cash flow performance that is not made under GAAP and does not represent, and should not be considered as an alternative to, net cash flow provided by (used in) operating activities, as determined by GAAP.

We define Free Cash Flow as net cash provided by (used in) operating activities, less purchases of property and equipment, and capitalized software development costs.

We use Free Cash Flow to understand the cash flows that directly correspond with our operations and the investments we must make in those operations, using a methodology that combines operating cash flows and capital expenditures.

Further, Free Cash Flow may be useful to management and investors in evaluating the Company's operating performance and liquidity, and to evaluate the performance of certain management personnel when determining incentive compensation.

Table MD&A 7:

Reconciliation of Net Cash Provided by (Used in) Operating Activities to Free Cash Flow

For the Three Months Ended

March 31, 2025 March 31, 2024

(in thousands)

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

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

Purchases of property and equipment (123) (97)

Free cash flow (Non-GAAP) $ 3,769 $ (3,649)

Each of EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin, Adjusted Net Loss, Adjusted EPS, Adjusted Gross Profit, Cash Gross Profit, Adjusted Gross Margin, Cash Gross Margin and Free Cash Flow has limitations as an analytical tool, and you should not consider any of them in isolation, or as a substitute for analysis of our results as reported under GAAP.

Among other limitations, each of EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin, Adjusted Net Loss, Adjusted EPS, Adjusted Gross Profit, Cash Gross Profit, Adjusted Gross Margin, Cash Gross Margin and Free Cash Flow does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments, does not reflect the impact of certain cash and non-cash charges resulting from matters we consider not to be indicative of our ongoing operations, and does not reflect income tax expense or benefit.

Other companies in our industry may calculate Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net (Loss) Income, Adjusted EPS, Cash Gross Profit, Cash Gross Margin and Free Cash Flow differently than we do, which limits their usefulness as comparative measures.

Because of these limitations, neither EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin, Adjusted Net Loss, Adjusted EPS, Adjusted Gross Profit, Cash Gross Profit, Adjusted Gross Margin, Cash Gross Margin nor Free Cash Flow should be considered as a replacement for gross profit, gross margin, net (loss) income, earnings per share or net cash flows (used in) provided by operating activities, as determined by GAAP, or as a measure of our profitability.

We compensate for these limitations by relying primarily on our GAAP results and using non-GAAP measures only for supplemental purposes.

Three Months Ended June 30, 2025, Compared with Three Months Ended June 30, 2024

Secure Networks segment revenue for the three months ended June 30, 2025, decreased by $7.1 million, or 67.1%, compared to the same period in 2024, primarily due to the ramp down of several programs within the portfolio.

Segment gross profit for Secure Networks for the second quarter of 2025, decreased by $1.8 million, or 74.0%, compared with the same period in 2024, due to lower segment revenues.

Segment gross margin decreased from 23.0% to 18.1% for the second quarter of 2025, compared with the same period in 2024, primarily due to the results of revenue mix.

Six Months Ended June 30, 2025, Compared with Six Months Ended June 30, 2024

Secure Network segment revenue for the six months ended June 30, 2025, decreased by $13.3 million, or 61.6%, compared to the same period in 2024.

The decrease in revenue for the six months ended June 30, 2025, was primarily due to the ramp down of several programs within the portfolio.

Segment gross profit for the six months ended June 30, 2025, decreased by $3.0 million, or 63.2%, compared to the same period in 2024, due to lower segment revenue.

Segment gross margin in the first half of 2025 decreased from 22.1% in 2024 to 21.2% in 2025.

The decline in segment gross margin for the six months ended June 30, 2025, was primarily due to the results of revenue mix.

Liquidity and Capital Resources

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While a variety of factors related to sources and uses of cash, such as timeliness of accounts receivable collections, vendor credit terms, or significant collateral requirements, ultimately impact our liquidity, such factors may or may not have a direct impact on our liquidity.

As of March 31, 2025, we had cash and cash equivalents of $57.8 million and our working capital was $70.6 million.

As of June 30, 2025, we had cash and cash equivalents of $57.0 million and our working capital was $64.0 million.

We place a strong emphasis on liquidity management.

5 unchanged sentences

Net Change in Cash, Cash Equivalents, and Restricted Cash

For the Three Months Ended

March 31, 2025 March 31, 2024

For the Six Months Ended

June 30, 2025 June 30, 2024

(in thousands)

3 unchanged sentences

Net change in cash, cash equivalents, and restricted cash $ 2,420 $ (19,155)

Net cash provided by operating activities for the three months ended March 31, 2025, was $6.1 million, an increase of $6.5 million compared to the same period in 2024.

The change is primarily driven by the Company's operating losses, the timing of receipts of customer payments, and the timing of payments to vendors and employees, adjusted for certain non-cash items that do not impact cash flows from operating activities.

Net cash used in investing activities for the three months ended March 31, 2025, decreased by $1.8 million, compared to the same period of the prior year, primarily due to the decreases in capital expenditures in 2024 and purchase of an investment of $0.9 million in 2024, with no similar transaction in 2025.

Net cash used in financing activities for the three months ended March 31, 2025, slightly decreased by $0.3 million, compared to the same period in 2024.

This is primarily attributable to the decreases in payment of tax withholding related to net share settlement of equity awards of $0.1 million in the first quarter of 2025, compared with $0.4 million in the same period of 2024.

Net cash provided by operating activities for the six months ended June 30, 2025, was $13.1 million, an increase of $21.4 million, compared to the same period in 2024.

The increase is attributable to the favorable changes in working capital primarily driven by timing of receipts from customer and the timing of payments to vendors, coupled with higher cash earnings (i.e., net loss, excluding non-cash items that do not impact cash flows from operating activities).

Net cash used in investing activities for the six months ended June 30, 2025, decreased by $5.0 million, compared to the same period of the prior year, primarily due to the decreases in capital expenditures in 2025 and purchase of an investment of $3.0 million in 2024, with no similar transaction in 2025.

Net cash used in financing activities for the six months ended June 30, 2025, increased by $4.8 million, compared to the same period in 2024.

This is primarily attributable to the increases in payment of tax withholding related to net share settlement of equity awards of $1.1 million in the first half of 2025, compared with $0.4 million in the same period of 2024, and the repurchase of common stock of $4.0 million in 2025 under the share repurchase program (See N ote 12 – Share Repurchases ), with no similar activity in 2024.

Critical Accounting Policies and Estimates

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Actual results could differ from those estimates.

The 2024 Form 10-K, as filed with the SEC on March 10, 2025, includes a summary of critical accounting policies we believe are the most important to aid in understanding our financial results.

There have been no changes to those critical accounting policies that have had a material impact on our reported amounts of assets, liabilities, revenues, or expenses during the three months ended March 31, 2025.

Our 2024 Form 10-K, as filed with the SEC on March 10, 2025, includes a summary of critical accounting policies and estimates we believe are the most important to aid in understanding our financial results.

Stock-Based Compensation

The stock-based compensation expense related to the stock options, RSUs and PSUs awarded under the Amended and Restated 2016 Omnibus Long-Term Incentive Plan (the “2016 LTIP”) is recognized ratably over the requisite service period.

For awards with performance conditions, stock-based compensation expense is estimated at each reporting date using management’s expectation of the probable achievement of the specific performance targets and recognized over the requisite service period for each tranche on a graded-vesting basis.

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

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

Estimating the fair value of PSUs with market condition, using the Monte Carlo simulation valuation model, requires assumptions as to the fair value of the underlying common stock, the estimated performance period, expected volatility, risk-free rate, and derived service period.

See Note 11 – Stock-Based Compensation for additional information.

We test for goodwill impairment at the reporting unit level.

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

When evaluating goodwill for impairment, we first assess qualitative factors which could include, but not limited to, macroeconomic conditions, industry and market conditions, overall company financial performance and events affecting the reporting units or the Company as a whole.

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.

Based on the result of our interim qualitative assessment, we determined that it is more-likely-than-not that the estimated fair value of the reporting units exceeds their carrying value and thus, no impairment charges were taken during the three and six months ended June 30, 2025.

Other critical accounting policies and estimates include revenue recognition, goodwill and long-lived assets, and income taxes, as discussed in our 2024 Form 10-K.

There have been no changes to these critical accounting policies and estimates that have had a material impact on our reported amounts of assets, liabilities, revenues, or expenses during the six months ended June 30, 2025.

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 2. Management’s Discussion and Analysis