SEC Form 10-Q filed by Telos Corporation

8/9/24 4:02:27 PM ET

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Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q


x			Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: June 30, 2024


¨			Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number: 001-08443

TELOS CORPORATION

(Exact name of registrant as specified in its charter)


Maryland						52-0880974
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

19886 Ashburn Road, Ashburn, Virginia						20147-2358
(Address of principal executive offices)						(Zip Code)

(703) 724-3800

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol	Name of each exchange on which registered
Common stock, $0.001 par value per share	TLS	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ¨ No x

As of August 2, 2024, the registrant had outstanding 72,256,759 shares of common stock.

Table of Contents to Second Quarter 2024 Form 10-Q


		Page
PART I - FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
	Consolidated Statements of Operations	3
	Consolidated Statements of Comprehensive Loss	4
	Consolidated Balance Sheets	5
	Consolidated Statements of Cash Flows	6
	Consolidated Statements of Changes in Stockholders’ Equity	7
	Notes to Consolidated Financial Statements	8
	1. Organization	8
	2. Significant Accounting Policies	8
	3. Revenue Recognition	10
	4. Accounts Receivable, Net	11
	5. Inventories, Net	12
	6. Property and Equipment, Net	12
	7. Goodwill	12
	8. Intangible Assets, Net	12
	9. Other Balance Sheet Components	13
	10. Debt and Other Obligations	13
	11. Stock-Based Compensation	14
	12. Share Repurchases	16
	13. Accumulated Other Comprehensive Loss	16
	14. Loss per Share	16
	15. Related Party Transactions	17
	16. Segment Information	17
	17. Commitments and Contingencies	18
	18. Supplemental Cash Flow Information	18
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
	Forward-Looking Statements	19
	General and Business Overview	19
	Business Environment	19
	Financial Overview	20
	Results of Operations	21
	Non-GAAP Financial Measures	23
	Liquidity and Capital Resources	26
	Critical Accounting Policies and Estimates	26
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	26
Item 4.	Controls and Procedures	27
PART II - OTHER INFORMATION		28
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults upon Senior Securities	28
Item 4.	Mine Safety Disclosures	28
Item 5.	Other Information	28
Item 6.	Exhibits	28
	SIGNATURES	29

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

TELOS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	For the Three Months Ended				For the Six Months Ended
	June 30, 2024		June 30, 2023		June 30, 2024		June 30, 2023

	(in thousands, except per share amounts)
Revenue – services	$	26,969	$	28,947	$	55,820	$	60,481
Revenue – products	1,529		3,964		2,297		7,652
Total revenue	28,498		32,911		58,117		68,133
Cost of sales – services (excluding depreciation and amortization)	15,933		18,838		32,992		37,930
Cost of sales – products (excluding depreciation and amortization)	819		1,544		1,140		4,016
Depreciation and amortization	2,039		170		3,317		346
Total cost of sales	18,791		20,552		37,449		42,292
Gross profit	9,707		12,359		20,668		25,841
Research and development expenses	1,459		2,646		4,629		5,479
Selling, general and administrative expenses	16,892		19,180		33,121		42,799
Operating loss	(8,644)		(9,467)		(17,082)		(22,437)
Other income	1,064		1,649		2,316		4,145
Interest expense	(160)		(184)		(335)		(433)
Loss before income taxes	(7,740)		(8,002)		(15,101)		(18,725)
Provision for income taxes	(17)		(22)		(34)		(45)
Net loss	$	(7,757)	$	(8,024)	$	(15,135)	$	(18,770)

Net loss per share:
Basic	$	(0.11)	$	(0.12)	$	(0.21)	$	(0.27)
Diluted	$	(0.11)	$	(0.12)	$	(0.21)	$	(0.27)

Weighted-average shares outstanding:
Basic	72,017		69,424		71,323		68,804
Diluted	72,017		69,424		71,323		68,804

See accompanying notes to the unaudited consolidated financial statements.

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TELOS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)


	For the Three Months Ended				For the Six Months Ended
	June 30, 2024		June 30, 2023		June 30, 2024		June 30, 2023

	(in thousands)
Net loss	$	(7,757)	$	(8,024)	$	(15,135)	$	(18,770)
Other comprehensive loss, net of tax:
Foreign currency translation adjustments	(21)		(11)		(56)		2
Actuarial loss on pension liability adjustment	—		—		(30)		—
Other comprehensive loss	(21)		(11)		(86)		2
Comprehensive loss	$	(7,778)	$	(8,035)	$	(15,221)	$	(18,768)

See accompanying notes to the unaudited consolidated financial statements.

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TELOS CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)


	June 30, 2024		December 31, 2023

	(in thousands, except per share amount and share data)
Assets:
Cash and cash equivalents	$	80,104	$	99,260
Accounts receivable, net	17,178		30,424
Inventories, net	1,369		1,420
Prepaid expenses	10,446		7,520
Other current assets	1,088		1,367
Total current assets	110,185		139,991
Property and equipment, net	2,876		3,457
Finance lease right-of-use assets, net	6,002		6,612
Operating lease right-of-use assets, net	723		216
Goodwill	17,922		17,922
Intangible assets, net	40,718		39,616
Other assets	3,954		885
Total assets	$	182,380	$	208,699
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable and other accrued liabilities	$	5,793	$	13,750
Accrued compensation and benefits	8,113		14,569
Contract liabilities	5,783		6,728
Finance lease obligations – current portion	1,802		1,730
Operating lease obligations – current portion	200		97
Other current liabilities	1,467		2,324
Total current liabilities	23,158		39,198
Finance lease obligations – non-current portion	8,604		9,518
Operating lease obligations – non-current portion	525		123
Deferred income taxes	837		813
Other liabilities	107		44
Total liabilities	33,231		49,696
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value, 250,000,000 shares authorized, 72,223,328 shares and 70,239,890 shares issued and outstanding as of June 30, 2024 and December 31, 2023, respectively	111		109
Additional paid-in capital	439,146		433,781
Accumulated other comprehensive loss	(146)		(60)
Accumulated deficit	(289,962)		(274,827)
Total stockholders’ equity	149,149		159,003
Total liabilities and stockholders’ equity	$	182,380	$	208,699

See accompanying notes to the unaudited consolidated financial statements.

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TELOS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the Six Months Ended
	June 30, 2024		June 30, 2023

	(in thousands)
Cash flows from operating activities:
Net loss	$	(15,135)	$	(18,770)
Adjustments to reconcile net loss to cash used in operating activities:
Stock-based compensation	5,203		17,244
Depreciation and amortization	6,620		3,121
Deferred income tax provision	24		24
Accretion of discount in acquisition holdback	—		2
Loss on disposal of fixed assets	—		1
(Recovery from) provision for doubtful accounts	(32)		117
Amortization of debt issuance costs	35		35
Gain on early extinguishment of other financing obligations	—		(1,427)
Changes in other operating assets and liabilities:
Accounts receivable	13,278		5,662
Inventories	51		1,111
Prepaid expenses, other current assets, other assets	(2,794)		(3,445)
Accounts payable and other accrued payables	(7,763)		(6,255)
Accrued compensation and benefits	(5,967)		(235)
Contract liabilities	(944)		(307)
Other current liabilities	(916)		(1,091)
Net cash used in operating activities	(8,340)		(4,213)
Cash flows from investing activities:
Capitalized software development costs	(6,315)		(8,198)
Purchase of investment	(3,000)		—
Purchases of property and equipment	(332)		(270)
Net cash used in investing activities	(9,647)		(8,468)
Cash flows from financing activities:
Payments under finance lease obligations	(842)		(775)
Payment of tax withholding related to net share settlement of equity awards	(430)		(1,584)
Proceeds from exercise of stock options	104		—
Payment of DFT holdback amount	—		(564)
Repurchase of common stock	—		(139)
Payments for debt issuance costs	—		(114)
Net cash used in financing activities	(1,168)		(3,176)
Net change in cash, cash equivalents, and restricted cash	(19,155)		(15,857)
Cash, cash equivalents, and restricted cash, beginning of period	99,396		119,438
Cash, cash equivalents, and restricted cash, end of period	$	80,241	$	103,581

See accompanying notes to the unaudited consolidated financial statements.

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TELOS CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)


	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount

	(in thousands)
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

Balance at March 31, 2023	69,388	$	108	$	420,980	$	(42)	$	(251,151)	$	169,895
Net loss	—	—		—		—		(8,024)		(8,024)
Foreign currency translation loss	—	—		—		(11)		—		(11)
Restricted stock unit awards vested, net of shares withheld to cover tax withholding	79	—		—		—		—		—
Stock-based compensation	—	—		5,676		—		—		5,676
Balance at June 30, 2023	69,467	$	108	$	426,656	$	(53)	$	(259,175)	$	167,536


	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount

	(in thousands)
Balance at December 31, 2023	70,240	$	109	$	433,781	$	(60)	$	(274,827)	$	159,003
Net loss	—	—		—		—		(15,135)		(15,135)
Foreign currency translation loss	—	—		—		(56)		—		(56)
Actuarial loss on pension liability adjustment	—	—		—		(30)		—		(30)
Restricted stock unit awards vested, net of shares withheld to cover tax withholding	1,555	2		(430)		—		—		(428)
Stock-based compensation	—	—		4,073		—		—		4,073
Issuance of common stock upon exercise of stock options	58	—		104		—		—		104
Issuance of common stock for 401K match	370	—		1,618		—		—		1,618
Balance at June 30, 2024	72,223	$	111	$	439,146	$	(146)	$	(289,962)	$	149,149

Balance at December 31, 2022	67,431	$	106	$	412,708	$	(55)	$	(240,405)	$	172,354
Net loss	—	—		—		—		(18,770)		(18,770)
Foreign currency translation gain	—	—		—		2		—		2
Restricted stock unit awards vested, net of shares withheld to cover tax withholding	1,259	1		(1,585)		—		—		(1,584)
Stock-based compensation	—	—		13,592		—		—		13,592
Issuance of common stock for 401K match	777	1		1,941		—		—		1,942
Balance at June 30, 2023	69,467	$	108	$	426,656	$	(53)	$	(259,175)	$	167,536

See accompanying notes to the unaudited consolidated financial statements.

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TELOS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

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

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

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principle of Consolidation

The accompanying unaudited consolidated financial statements include the accounts of Telos and its subsidiaries (see Note 1 – Organization), all of whose issued and outstanding share capital is wholly owned directly and indirectly by Telos Corporation. All intercompany transactions have been eliminated in consolidation.

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. 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.

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. The financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto for the year ended December 31, 2023, included in our Annual Report on Form 10-K for the fiscal year then ended. 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 Q3 2023, we reclassified and presented depreciation and amortization separately from the cost of sales line items. Starting Q1 2024, we reclassified sales and marketing expenses and general and administrative expenses to be presented together as selling, general and administrative expenses. The reclassifications had no net impact on gross profit, total selling, general and administrative expenses or net loss in the unaudited consolidated statements of operations.

Use of Estimates

Preparing 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. The Company regularly assesses these estimates; however, actual results could differ from those estimates. 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. 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.

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Restructuring Expenses

In the fourth quarter of 2022, the Company committed to a restructuring plan to streamline its workforce and spending to better align its cost structure with its volume of business. The 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, as disclosed in the Company's recent Annual Report on Form 10-K for the year ended December 31, 2023. The restructuring actions were substantially completed in fiscal year 2023.

The restructuring expenses (adjustments) are included within "Selling, general and administrative expenses" on the Company's unaudited consolidated statements of operations.


Table 2.1: Restructuring Expenses (Adjustments)
	For the Three Months Ended				For the Six Months Ended
	June 30, 2024		June 30, 2023		June 30, 2024		June 30, 2023

	(in thousands)
Severance and related benefit costs	$	—	$	(3)	$	(10)	$	(103)
Other related costs	—		—		—		1,300
Total restructuring (adjustments) expenses	$	—	$	(3)	$	(10)	$	1,197

At each reporting date, the Company evaluates its restructuring expense accrual to determine if the liabilities reported are still appropriate. Any changes in the estimated costs of executing the approved restructuring plan are reflected in the Company's unaudited consolidated statement of operations.


Table 2.2: Summary of Changes in Restructuring Expenses Accrual
	Severance and related benefit costs (1)

	(in thousands)
Balance at December 31, 2023	$	400
Adjustments	(10)
Cash payments	(364)
Balance at June 30, 2024	$	26

(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).

Recent Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board ("FASB") issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures." ASU 2023-07 will affect how we report segment information, starting with our Form 10-K for the year ended December 31, 2024, and our quarterly reports on Form 10-Q starting with our quarterly report for the quarter ended March 31, 2025. This standard requires that we disclose significant segment expenses and other segment items that are regularly provided to our chief operating decision maker ("CODM") and included in each reported measure of segment profit or loss. We will also have to disclose other segment items by reportable segment (i.e., the difference between reported segment revenues less the significant segment expenses (which are disclosed) less reported segment profit or loss). We will disclose the CODM and their position within the Company and details about the information that they regularly review to make capital allocation and other operating decisions about each segment, as well as an explanation of how the CODM uses the reported measures and other disclosures. 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. 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosure," which requires public entities, on an annual basis, (1) to disclosure specific categories in the rate reconciliation, and (2) to provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5% of the amount computed by multiplying pretax income (loss) by the applicable statutory income tax rate). This ASU will be effective, for public entities, for the fiscal year beginning after December 15, 2024, with early adoption permitted. We are currently assessing the impact of the adoption of this ASU on our unaudited consolidated financial statements.

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

3. REVENUE RECOGNITION

We account for revenue in accordance with ASC Topic 606, "Revenue from Contracts with Customers." The unit of account in ASC 606 is a performance obligation, which is a promise in a contract with a customer to transfer a good or service to the customer.

The majority of our revenue is recognized over time, as control is transferred continuously to our customers, who receive and consume benefits as we perform. Revenue transferred to customers over time accounted for 84% and 82% of our revenue for the three and six months ended June 30, 2024, respectively, and 88% and 89% of our revenue for the three and six months ended June 30, 2023, respectively. 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. This coincides with the point in time the customer obtains control of the product or service, which typically occurs upon customer acceptance or receipt of the product or service, given that we maintain control of the product or service until that point. Revenue transferred to customers at a point in time accounted for 16% and 18% of our revenue for the three and six months ended June 30, 2024, respectively, and 12% and 11% of our revenue for the three and six months ended June 30, 2023, respectively.

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. When an order contains multiple performance obligations, we allocate the transaction price to the performance obligations based on the standalone selling price of the product or service underlying each performance obligation. The standalone selling price represents the amount we would sell the product or service to a customer on a standalone basis.

For certain performance obligations where we are not primarily responsible for fulfilling the promise to provide the goods or services to the customer, do not have inventory risk and have limited discretion in establishing the price for the goods or services, we recognize revenue on a net basis.

Our contracts may include various types of variable considerations and may include estimated amounts in the transaction price, based on all of the information available to us, and to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when any uncertainty associated with the variable consideration is resolved. We evaluate and include these estimated amounts of variable consideration in the transaction price and as performance on these contracts is complete, we adjust our revenue, when deemed necessary. No revenue adjustments were recorded during the three and six months ended June 30, 2024, and 2023.

We provide for anticipated losses on contracts during the period when the loss is determined by recording an expense for the total expected costs that exceeds the total estimated revenue for a performance obligation. No contract loss was recorded during the three months ended June 30, 2024. We recorded an immaterial contract loss during the six months ended June 30, 2024. No contract loss was recorded during the three and six months ended June 30, 2023.

Disaggregated Revenues

In addition to our segment reporting, as further discussed in Note 16 – Segment Information, we disaggregate our revenues by customer and contract types. We treat sales to U.S. customers as sales within the U.S., regardless of where the services are performed. Substantially most of our revenues are generated from U.S. customers, while international customers are de minimis; as such, the financial information by geographic location is not presented.


Table 3.1: Revenue by Customer Type
	For the Three Months Ended						For the Six Months Ended
	June 30, 2024			June 30, 2023			June 30, 2024			June 30, 2023
	Amount		%	Amount		%	Amount		%	Amount		%

	(dollars in thousands)
Federal	$	24,832	87 %	$	27,512	84 %	$	51,439	89%	$	60,501	89%
State & local, and commercial	3,666		13 %	5,399		16 %	6,678		11%	7,632		11%
Total revenue	$	28,498	100 %	$	32,911	100 %	$	58,117	100 %	$	68,133	100 %

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Table 3.2: Revenue by Contract Type
	For the Three Months Ended						For the Six Months Ended
	June 30, 2024			June 30, 2023			June 30, 2024			June 30, 2023
	Amount		%	Amount		%	Amount		%	Amount		%

	(dollars in thousands)
Firm fixed-price	$	22,179	78 %	$	25,293	77 %	$	45,015	77%	$	52,306	77%
Time-and-materials	3,022		11 %	3,548		11 %	6,159		11%	7,104		10%
Cost plus fixed fee	3,297		11 %	4,070		12 %	6,943		12%	8,723		13%
Total revenue	$	28,498	100 %	$	32,911	100 %	$	58,117	100 %	$	68,133	100 %

Table 3.3: Revenue Concentration Greater than 10% of Total Revenue

For the Three Months Ended

For the Six Months Ended

June 30, 2024

June 30, 2023

June 30, 2024

June 30, 2023

U.S. Department of Defense ("DoD")

56%

66%

56%

67%


Table 3.4: Contract Balances
	Balance Sheet Presentation	June 30, 2024		December 31, 2023

		(in thousands)
Billed accounts receivables (1)	Accounts receivable, net	$	9,605	$	17,818
Unbilled accounts receivable	Accounts receivable, net	4,197		8,022
Contract assets	Accounts receivable, net	3,376		4,584
Contract liabilities	Contract liabilities	5,783		6,728

(1) Net of allowance for credit losses.

The changes in the Company's contract assets and contract liabilities during the current period were primarily the result of the timing differences between the Company's performance, invoicing and customer payments. Revenue recognized for the three and six months ended June 30, 2024, which was included in the contract liabilities balance at the beginning of each reporting period, was $1.9 million and $4.5 million, respectively. Revenue recognized for the three and six months ended June 30, 2023, which was included in the contract liabilities balance at the beginning of each reporting period, was $1.6 million and $4.1 million, respectively.

As of June 30, 2024, we had approximately $31.2 million of remaining performance obligations, which we also refer to as funded backlog. We expect to recognize approximately 92% of our remaining performance obligations over the next 12 months, and the balance thereafter.

4. ACCOUNTS RECEIVABLE, NET


Table 4: Details of Accounts Receivable, Net
	June 30, 2024		December 31, 2023

	(in thousands)
Billed accounts receivable	$	9,649	$	18,101
Unbilled accounts receivable	4,197		8,022
Contract assets	3,376		4,584
Allowance for credit losses (1)	(44)		(283)
Accounts receivable, net	$	17,178	$	30,424

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

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5. INVENTORIES, NET


Table 5: Details of Inventories, Net
	June 30, 2024		December 31, 2023

	(in thousands)
Gross inventory	$	2,128	$	2,179
Allowance for inventory obsolescence	(759)		(759)
Inventories, net	$	1,369	$	1,420

6. PROPERTY AND EQUIPMENT, NET


Table 6.1: Details of Property and Equipment, Net
	June 30, 2024						December 31, 2023
	Gross Carrying Amount		Accumulated Depreciation and Amortization		Net Carrying Value		Gross Carrying Amount		Accumulated Depreciation and Amortization		Net Carrying Value

	(in thousands)
Furniture and equipment	$	15,537	$	(13,385)	$	2,152	$	16,213	$	(13,363)	$	2,850
Leasehold improvements	3,394		(2,670)		724		3,211		(2,604)		607
Total	$	18,931	$	(16,055)	$	2,876	$	19,424	$	(15,967)	$	3,457


Table 6.2: Depreciation and Amortization Expense
	For the Three Months Ended				For the Six Months Ended
	June 30, 2024		June 30, 2023		June 30, 2024		June 30, 2023

	(in thousands)
Depreciation and amortization expense	$	259	$	579	$	894	$	1,152

7. GOODWILL

The goodwill balance was $17.9 million as of June 30, 2024, and December 31, 2023, of which $3.0 million is allocated to the Security Solutions segment and $14.9 million is allocated to the Secure Networks segment. Goodwill is subject to annual impairment tests and if triggering events are present in the interim before the annual tests, we will assess impairment. No impairment charges were recorded for the three and six months ended June 30, 2024, and 2023.

8. INTANGIBLE ASSETS, NET


Table 8.1: Details of Intangible Assets, Net
		June 30, 2024						December 31, 2023
	Estimated Useful Life	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value		Gross Carrying Amount		Accumulated Amortization		Net Carrying Value

	(in years)	(in thousands)
Acquired technology	8	$	3,630	$	(1,324)	$	2,306	$	3,630	$	(1,097)	$	2,533
Customer relationship	3	40		(39)		1		40		(32)		8
Software development costs	2 - 5	38,648		(17,061)		21,587		35,312		(12,256)		23,056
Subtotal		42,318		(18,424)		23,894		38,982		(13,385)		25,597
In-process software development costs (1)		16,824		—		16,824		14,019		—		14,019
Total		$	59,142	$	(18,424)	$	40,718	$	53,001	$	(13,385)	$	39,616

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

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Table 8.2: Amortization Expense
	For the Three Months Ended				For the Six Months Ended
	June 30, 2024		June 30, 2023		June 30, 2024		June 30, 2023

	(in thousands)
Amortization expense related to:
Software development costs – cost of sales (1)	$	1,949	$	—	$	3,107	$	—
Software development costs – research and development	860		558		1,697		861
Other intangible assets – general and administrative	117		117		234		234
Total	$	2,926	$	675	$	5,038	$	1,095

(1) Amortization expense for software development costs related to assets to be sold, leased, or otherwise marketed is charged under cost of sales on the unaudited consolidated statements of operations.

9. OTHER BALANCE SHEET COMPONENTS


Table 9.1: Details of Other Assets
	June 30, 2024		December 31, 2023

	(in thousands)
Investment (1)	$	3,000	$	—
Restricted cash	137		136
Other	817		749
Other assets	$	3,954	$	885

(1) In March 2024, the Company made a $3.0 million investment in a privately held company via a simple agreement for future equity. The Company elected to apply the fair value option on this investment. The Company believes the fair value option best reflects the economics of the underlying transaction. During the three and six months ended June 30, 2024, the Company did not note any changes in the fair value.


Table 9.2: Details of Accounts Payable and Other Accrued Liabilities
	June 30, 2024		December 31, 2023

	(in thousands)
Accounts payable	$	2,437	$	8,307
Accrued payables	3,356		5,443
Accounts payable and other accrued liabilities	$	5,793	$	13,750


Table 9.3: Details of Other Current Liabilities
	June 30, 2024		December 31, 2023

	(in thousands)
Other accrued expenses	$	941	$	1,427
Restructuring expenses accrual	26		400
Other	500		497
Other current liabilities	$	1,467	$	2,324

10. DEBT AND OTHER OBLIGATIONS

Revolving Credit Facility

On December 30, 2022, we entered into a Credit Agreement (the "Credit Agreement"), by and among the Company, as borrower, Xacta Corporation, ubIQuity.com, inc., Teloworks, Inc., and Telos Identity Management Solutions, LLC, as guarantors, the lenders party thereto (the "Lenders"), and JPMorgan Chase Bank N.A., as administrative agent for the Lenders (in such capacity, the "Agent"). The Credit Agreement provides for a $30.0 million senior secured revolving credit facility with a maturity date of December 30, 2025, with the option of issuing letters of credit thereunder with a sub-limit of $5.0 million, and with an uncommitted expansion feature of up to $30.0 million of additional revolver capacity (the "Loan"). The Loan is subject to acceleration in the event of customary events of default. The Company has not drawn any amount under the Loan.

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Borrowings under the Credit Agreement will accrue interest, at our option, at one of three variable rates, plus a specified margin. We can elect to borrow at (i) the Alternative Base Rate, plus 0.9%; (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. The Company may elect to convert borrowings from one type of borrowing to another type per the terms of the Credit Agreement. After the occurrence and during the continuance of any event of default, the interest rate may increase by an additional 2.0%. We are obligated to pay accrued interest (i) with respect to amounts accruing interest based on the Alternative Base Rate, each calendar quarter and on the maturity date, (ii) with respect to amounts accruing interest based on Adjusted Daily Simple SOFR, on each one-month anniversary of the borrowing and on the maturity date, and (iii) with respect to amounts accruing interest based on Adjusted Term SOFR, at the end of the period specified per the Credit Agreement and on the maturity date. 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.

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.

The Loan has various covenants that may, among other things, affect our ability to create, incur, assume or suffer any indebtedness, merge into or consolidate with another entity, acquire entity interests, sell or transfer certain assets, enter into certain arrangements (such as sale and leaseback and swap agreements) or restrictive agreements, pay dividends and make certain restricted payments, and amend material documents related to any subordinated indebtedness and corporate agreements. The Credit Agreement also requires certain financial covenants to maintain a Senior Leverage Ratio on the last day of any fiscal quarter, no greater than 3 to 1. We were in compliance with all covenants as of June 30, 2024.

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

Concurrently, the Company transferred all the rights, title and interest in the underlying licenses in exchange for the extinguishment of the outstanding financing obligations. 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 June 30, 2023. For the six months ended June 30, 2023, the Company reported a gain of $1.4 million, which was recorded as "Other income" in the unaudited consolidated statements of operations.

11. 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"). 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.

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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 certain PSUs to certain senior executives and employees that could settle in up to 2,499,945 shares of its common stock. These PSUs may vest only if the Company achieves certain revenue and free cash flow targets for fiscal year 2025. The Company also granted certain PSUs containing market conditions to certain executives that could settle in up to 6,875,000 shares of its common stock. 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.

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

Stock-based compensation expense recognized for restricted stock units and stock options granted to employees and non-employees is included in the unaudited consolidated statements of operations, net of adjustments. There were no income tax benefits recognized on the share-based compensation expense for the three and six months ended June 30, 2024 and 2023. For the three and six months ended June 30, 2024, the performance targets for outstanding PSUs granted prior to 2024 were not probable of being achieved. Therefore, the Company recorded a cumulative catch-up adjustment for the change in its probability assessment, resulting in a $1.2 million decrease in stock-based compensation expense.


Table 11.1: Details of Stock Compensation Expense by Category
	For the Three Months Ended				For the Six Months Ended
	June 30, 2024		June 30, 2023		June 30, 2024		June 30, 2023

	(in thousands)
Cost of sales – services	$	228	$	225	$	485	$	551
Research and development	(877)		847		(449)		1,617
Selling, general and administrative	2,868		6,673		5,167		15,076
Total	$	2,219	$	7,745	$	5,203	$	17,244

Restricted Stock


Table 11.2: Restricted Stock Unit Activity
	Service-Based	Performance-Based	Total Shares	Weighted-Average Grant Date Fair Value
Unvested outstanding units as of December 31, 2023	2,132,613	43,800	2,176,413	$	5.07
Granted	1,775,180	10,710,226	12,485,406	3.47
Vested	(1,667,398)	—	(1,667,398)	4.21
Forfeited	(34,000)	—	(34,000)	3.30
Unvested outstanding units as of June 30, 2024	2,206,395	10,754,026	12,960,421	$	3.65

As of June 30, 2024, the intrinsic value of the RSUs and PSUs outstanding, exercisable, and vested or expected to vest was $52.1 million. There was approximately $30.4 million of total compensation costs related to stock-based awards not yet recognized as of June 30, 2024, which is expected to be recognized on a straight-line basis over a weighted-average remaining vesting period of 1.2 years.

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Stock Options


Table 11.3: Stock Option Activity
	Stock Options Outstanding	Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding option balance as of December 31, 2023	400,000	$	1.80	9.4	$	740,000
Granted	—	—
Exercised	(58,000)	1.80
Forfeited, cancelled, or expired	—	—
Outstanding option balance as of June 30, 2024	342,000	$	1.80	8.9	$	759,240
Exercisable stock option as of June 30, 2024	342,000	$	1.80	8.9	$	759,240

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the quoted closing price of the Company's common stock as of June 30, 2024.

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

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

12. 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. 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 six months ended June 30, 2024, and 2023. As of June 30, 2024, there was approximately $38.7 million of the authorization remaining for future common stock repurchases under the SRP.

13. ACCUMULATED OTHER COMPREHENSIVE LOSS

For one of our wholly-owned subsidiaries, the functional currency is the local currency. For this subsidiary, the translation of its foreign currency into U.S. dollars is performed for assets and liabilities using current foreign currency exchange rates in effect at the balance sheet date and for revenue and expense accounts using average foreign currency exchange rates during the periods presented. Translation gains and losses are included in stockholders’ equity as a component of accumulated other comprehensive (loss) income.


Table 13: Details of Changes in Accumulated Other Comprehensive Loss by Category
	Foreign currency translation adjustment		Pension liability adjustment		Total

	(in thousands)
Balance as of December 31, 2023	$	(167)	$	107	$	(60)
Other comprehensive loss before reclassification	(56)		(30)		(86)
Balance as of June 30, 2024	$	(223)	$	77	$	(146)

14. LOSS PER SHARE

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

Table 14: Potentially Dilutive Securities

For the Three Months Ended

For the Six Months Ended

June 30, 2024

June 30, 2023

June 30, 2024

June 30, 2023

(in thousands)

Weighted-average number of shares – unvested restricted stock units and stock options

654

269

1,058

401

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

15. RELATED PARTY TRANSACTIONS

Emmett J. 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 paid to him as compensation for his remaining tenure in 2023 was $249,000.

One of the Company’s directors served as a consultant to the Company under a consultancy agreement that expired on December 31, 2023. The Company, at its election, paid the director's 2023 consultancy fees in a fixed amount, in the form of RSUs. On January 3, 2023, the Company granted the director 16,859 RSUs for his consulting services through June 30, 2023, one-half of which vested on March 3, 2023, and the other half vested on May 18, 2023. Beginning in July 2023, the director was paid a firm-fixed monthly retainer fee, plus additional fees and contingent bonus payments upon achievement of certain contract goals, payable in cash through the expiration of the agreement.

16. SEGMENT INFORMATION

We operate our business in two reportable and operating segments: 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 Ghost®, Telos Advanced Cyber Analytics ("Telos ACATM"), Telos Automated Message Handling System ("Telos AMHS") and Telos ID offerings. We recognize revenue on contracts from providing various system platforms in the cloud, on-premises, and in hybrid cloud environments, as well as software sales or software-as-a-service. 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. 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.


Table 16: Results of Operations by Business Segment
	For the Three Months Ended				For the Six Months Ended
	June 30, 2024		June 30, 2023		June 30, 2024		June 30, 2023

	(in thousands)
Revenues
Security Solutions	$	17,867	$	17,196	$	36,507	$	36,969
Secure Networks	10,631		15,715		21,610		31,164
Total revenue	28,498		32,911		58,117		68,133
Gross profit
Security Solutions	7,265		9,551		15,891		19,825
Secure Networks	2,442		2,808		4,777		6,016
Total gross profit	9,707		12,359		20,668		25,841
Research and development expenses	1,459		2,646		4,629		5,479
Selling, general and administrative expenses	16,892		19,180		33,121		42,799
Operating loss	(8,644)		(9,467)		(17,082)		(22,437)
Other income	1,064		1,649		2,316		4,145
Interest expense	(160)		(184)		(335)		(433)
Loss before income taxes	(7,740)		(8,002)		(15,101)		(18,725)
Provision for income taxes	(17)		(22)		(34)		(45)
Net loss	$	(7,757)	$	(8,024)	$	(15,135)	$	(18,770)

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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. Interest income, interest expense, other income and expense items, and income taxes, as reported in the consolidated financial statements, are not part of the segment profitability measure and are primarily recorded at the corporate level.

Management does not utilize total assets by segment to evaluate segment performance or allocate resources. As a result, assets are not tracked by segment, and therefore, total assets by segment are not disclosed.

17. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

From time to time, the Company may be a party to litigation or claims arising in the ordinary course of business, including those relating to employment matters, relationships with clients and contractors, intellectual property disputes, and other business matters. These legal proceedings seek various remedies, including claims for monetary damages in varying amounts, none of which are considered material, or are unspecified as to amount. Although the outcome of any such matter is inherently uncertain and may be materially adverse, based on current information, management believes that the outcome of such known matters will not have a material adverse effect on the Company's business or its unaudited consolidated financial statements as of June 30, 2024.

Other - Government Contracts

As a U.S. government contractor, we are subject to various audits and investigations by the U.S. government to determine whether our operations are being conducted in accordance with applicable regulatory requirements. U.S. government investigations of our operations, whether relating to government contracts or conducted for other reasons, could result in administrative, civil, or criminal liabilities, including repayments, fines or penalties being imposed upon us, suspension, proposed debarment, debarment from eligibility for future U.S. government contracting, or suspension of export privileges. Suspension or debarment could have a material adverse effect on us because of our dependence on contracts with the U.S. government. U.S. government investigations often take years to complete and many result in no adverse action against us. We also provide products and services to customers outside of the United States, which are subject to U.S. and foreign laws and regulations and foreign procurement policies and practices. Our compliance with local regulations or applicable U.S. government regulations also may be audited or investigated.

18. SUPPLEMENTAL CASH FLOW INFORMATION


Table 18.1: Details of Cash, Cash Equivalents, and Restricted Cash
	June 30, 2024		December 31, 2023

	(in thousands)
Cash and cash equivalents	$	80,104	$	99,260
Restricted cash (1)	137		136
Cash, cash equivalents, and restricted cash	$	80,241	$	99,396

(1) Restricted cash consists of a commercial money market account held as a deposit on the Ashburn lease and is included within "Other assets" on the unaudited consolidated balance sheets.


Table 18.2: Supplemental Cash Flow Information
	For the Six Months Ended
	June 30, 2024		June 30, 2023

	(in thousands)
Cash paid during the period for:
Interest	$	287	$	409
Income taxes	100		147
Non-cash investing and financing activities:
Operating lease ROU assets obtained in exchange for operating lease liabilities	$	626	$	15
Capital expenditure activity in accounts payable and other accrued liabilities	147		536
Issuance of common stock for 401K match	1,619		1,943
Intangible assets transferred to extinguish other financing obligations	—		7,089

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. Several important factors could cause the Company's actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth in the risk factors section included in the Company's Form 10-K for the year ended December 31, 2023, as filed with the Securities and Exchange Commission on March 15, 2024.

General and Business Overview

We offer technologically advanced, software-based security solutions that empower and protect the world's most security-conscious organizations against rapidly evolving, sophisticated and pervasive threats. Our portfolio of security products, services and expertise empowers our customers with capabilities to reach new markets, serve their stakeholders more effectively, and successfully defend the nation or their enterprise. We protect our customers' people, information, and digital assets so they can pursue their corporate goals and conduct their global missions with confidence in their security and privacy. Our primary customers include the U.S. federal government, large commercial businesses, state and local governments, and international customers. Our consolidated revenue is largely attributable to prime contracts or to subcontracts with our contractors engaged in work for the U.S. government, with the remaining attributable to state, local, and commercial markets.

Information regarding our two reportable segments – Security Solutions and Secure Networks – is presented in Note 16 - Segment Information to the unaudited consolidated financial statements at Item 1 of this Form 10-Q.

The restructuring initiatives carried out by the Company in fiscal year 2023 are exhibiting promising outcomes in fiscal year 2024 in the form of new business wins. The Company will continue to focus on optimizing its solution portfolio, expanding its business pipeline, strengthening proposals for new business and building a healthy culture by engaging employees through improved synergy, performance management, and benefits. With this foundation established, the Company's priorities for fiscal year 2024 include beginning to execute on significant new business wins with our prime partners (pending favorable outcomes on ongoing protests), ramping TSA PreCheck® enrollment sites to achieve program growth, and strategically increasing the Company's business development pipeline.

Business Environment

U.S. Budget

After using continuing resolutions (“CRs”) to fund the government for the first six months of fiscal year (“FY”) 2024 at the previous year’s levels, Congress completed action in late March on all appropriations bills for FY2024. This has allowed federal departments and agencies to begin proceeding with new program starts and acceleration for the final six months of the fiscal year. With the enactment of the Fiscal Responsibility Act ("FRA"), appropriations bills were marked up in the House and Senate in June and July. The FRA caps total base discretionary spending at $1.6 trillion for FY 2024, with base defense spending capped at $886 billion (a three percent increase from FY 2023) and base non-defense spending capped at $704 billion (up to a nine percent decrease from FY 2023, depending on how it is measured).

There will be debate in Congress on whether to adjust the spending caps in order to boost defense spending to meet increased challenges abroad. Of interest, the Senate passed a package of national security-oriented bills passed by the House on April 20, 2024, that provided supplemental appropriations for Israel, Ukraine, and the Indo-Pacific, as well as a fourth bill that addressed sanctions and other economic concerns. Three of the four bills being considered provide roughly $96 billion in new budget authority. The proposed budget also calls for new increases in funding for non-defense cybersecurity programs and initiatives, many of which continue to prioritize accelerated cloud adoption, IT modernization, further private sector collaboration for sector risk management responsibilities, ensuring adequate cyber threat information sharing, and supply chain risk management. These priorities continue to align with the solutions Telos has been developing and bringing to market for the past several years. However, in the current political environment in Congress and with the presidential election looming in November 2024, it is highly questionable whether Congress and the President can reach an agreement on FY2025 appropriations bills prior to the start of FY2025 on October 1, 2024; this means the Defense Department along with the rest of the federal government will likely begin the fiscal year funded by a CR at FY2024 spending levels.

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Cybersecurity Landscape

In recent years, we have seen cybersecurity threats become more complex, with threat actors leveraging a wide variety of tactics to exploit their victims. With this growing threat, below are some trends to consider when looking at the cybersecurity landscape:

Rising Threats, Rising Liability: Ransomware remains arguably the most severe cyber threat to enterprises in the commercial, state, and local government and education sectors. One reason for the rise of ransomware attacks is that it is exceedingly profitable for cybercriminals, and ransomware victims generally settle the ransom rather than restoring the system from backups or dealing with the fallout from a data breach. Aside from the financial costs of paying the ransom and restoring the system, the consequences of a successful ransomware attack can include damage to the organization's reputation, stolen sensitive data being used for malicious purposes, and loss of business.

The Nation's Critical Systems Are Still at Risk: Critical infrastructure and industrial IoT are among the categories at greatest risk of cyberattacks.

The Challenging Complexity of Regulatory Compliance: Government mandates stronger security in highly regulated industries. These government initiatives and audit fatigue continue to burden highly regulated organizations, with automation solutions being recognized as the most effective remedy for the many repetitive and redundant tasks that security compliance requires.

Additionally, the SEC has finalized and adopted new cybersecurity rules for publicly traded companies, which (if they survive challenges in court) will require registrants to disclose additional cyber-related information in their regulatory filings. Specifically, registrants will have to: (1) regularly disclose their governance methods, risk analysis and management processes; (2) meet specific disclosure requirements and deadlines for reporting and describing material cyber incidents; and (3) describe the board's oversight of risks from cybersecurity threats, and management's expertise and role in assessing and managing material risks from cybersecurity threats. The required reporting of this information will lead many companies to proactively establish policies that will improve their cyber risk management posture and enable them to better withstand heightened public and regulatory scrutiny.

Identity Assurance and Privacy Protection are Essential for Today's Enterprises: Identity and access management continues to be a major cybersecurity concern for organizations and individuals that need to ensure their security and protect their privacy. Trusted identities are essential to confidence in IT and physical security strategies and to the success of Zero Trust security models and architectures.

Artificial Intelligence: Cybercriminals are using Artificial Intelligence ("AI") to launch more sophisticated attacks that can quickly adapt to changing environments, making detection harder. To protect against AI-powered cyberattacks, organizations must stay vigilant and adopt advanced cybersecurity tools and techniques that can detect and respond to these threats in a timely manner before they cause damage.

Financial Overview

A number of factors have contributed to our second quarter ended June 30, 2024 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.

•Decline in year-over-year revenue primarily driven by successful completion and ramp down of programs in Secure Networks.

•Growth in TSA PreCheck revenue driven by the increase in our TSA PreCheck enrollment locations.

•Reduction in gross margins primarily driven by the impact of increased amortization of software development costs.

•Lower operating costs primarily due to lower stock-based compensation expenses.

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Results of Operations


Table MD&A 1: Consolidated Results of Operations
	For the Three Months Ended						For the Six Months Ended
	June 30, 2024			June 30, 2023			June 30, 2024			June 30, 2023

	(dollars in thousands)
Revenue	$	28,498		$	32,911		$	58,117		$	68,133
Cost of sales	18,791			20,552			37,449			42,292
Gross profit	9,707			12,359			20,668			25,841
Gross margin	34.1		%	37.6		%	35.6		%	37.9		%
Research and development ("R&D") expenses	1,459			2,646			4,629			5,479
R&D expenses as percentage of revenue	5.1		%	8.0		%	8.0		%	8.0		%
Selling, general and administrative ("SG&A") expenses	16,892			19,180			33,121			42,799
SG&A expenses as percentage of revenue	59.3		%	58.3		%	57.0		%	62.8		%
Operating loss	(8,644)			(9,467)			(17,082)			(22,437)
Other income	1,064			1,649			2,316			4,145
Interest expense	(160)			(184)			(335)			(433)
Loss before income taxes	(7,740)			(8,002)			(15,101)			(18,725)
Provision for income taxes	(17)			(22)			(34)			(45)
Net loss	$	(7,757)		$	(8,024)		$	(15,135)		$	(18,770)

Consolidated Results

Our business segments have different factors driving revenue fluctuations and profitability. The discussion of the changes in our revenue and profitability are covered in greater detail in the following section, "Segment Results." We generate revenue from the delivery of products and services to our customers. Cost of sales, for both products and services, consists of labor, materials, subcontracting costs and an allocation of indirect costs.

R&D expenses.

In the second quarter of 2024, R&D expenses decreased by $1.2 million, or 44.9%, compared to the same quarter in 2023. Similarly, R&D expenses decreased by $0.9 million, or 15.5%, for the six months ended June 30, 2024, compared to the same period in the prior year. The decreases in R&D expenses for both periods were primarily due to the completion of certain development projects in 2023 and lower stock-based compensation expenses, partially offset by lower capitalization and higher amortization expense.

SG&A expenses.

SG&A expenses for the three months ended June 30, 2024 decreased by $2.3 million, or 11.9%, compared to the same period in 2023. Likewise, SG&A expenses decreased by $9.7 million, or 22.6%, for the six months ended June 30, 2024, compared to the same period in the prior year. The decreases in SG&A expense for both periods were primarily due to the decline in stock-based compensation costs, depreciation and amortization expenses, and outside services, partially offset by an increase in labor costs.

In addition, there were $1.2 million of restructuring expenses for the six months ended June 30, 2023, with no similar charges in 2024.

Other income.

Other income decreased by $0.6 million for the three months ended June 30, 2024, compared to the same period in 2023, due to the change in dividend income from money market placements.

Other income for the six months ended June 30, 2024 was $2.3 million as compared to $4.1 million for the six months ended June 30, 2023. The decrease was primarily due to the gain on early extinguishment of other financing obligations of $1.4 million in fiscal year 2023, without a similar gain in fiscal year 2024. The remaining variance is attributable to the change in dividend income from money market placements.

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Segment Results

The accounting policies of each business segment are the same as those followed by the Company as a whole. Management evaluates business segment performance based on gross profit.


Table MD&A 2: Security Solutions Segment - Financial Results
	For the Three Months Ended						For the Six Months Ended
	June 30, 2024			June 30, 2023			June 30, 2024			June 30, 2023

	(dollars in thousands)
Revenue	$	17,867		$	17,196		$	36,507		$	36,969
Cost of sales (excluding depreciation and amortization)	8,565			7,477			17,304			16,806
Depreciation and amortization	2,037			168			3,312			338
Total cost of sales	10,602			7,645			20,616			17,144
Gross profit	$	7,265		$	9,551		$	15,891		$	19,825
Gross margin	40.7		%	55.5		%	43.5		%	53.6		%

For the three months ended June 30, 2024, Security Solutions segment revenue slightly increased by $0.7 million, or 3.9%, compared to the same period in 2023, primarily due to the growth in TSA PreCheck, partially offset by contraction elsewhere in the portfolio.

Security Solutions segment revenue for the six months ended June 30, 2024, slightly decreased by $0.5 million, or 1.2%, compared to the same period in 2023, primarily due to the reductions in two large programs, partially offset by the growth in TSA PreCheck.

Security Solutions gross profit for the second quarter of 2024 decreased by $2.3 million, or 23.9%, compared with the same period in 2023. Likewise, segment gross profit for the six months ended June 30, 2024, decreased by $3.9 million, or 19.8%, compared to the same period in 2023. In addition, Security Solution gross margin for the second quarter of 2024 decreased from 55.5% to 40.7%, while year to date segment gross margin decreased from 53.6% to 43.5%. The decrease in gross profit and gross margin for the three and six months ended June 30, 2024, was primarily due to the increased amortization of software development costs and program mix within the portfolio.


Table MD&A 3: Secure Networks Segment - Financial Results
	For the Three Months Ended						For the Six Months Ended
	June 30, 2024			June 30, 2023			June 30, 2024			June 30, 2023

	(dollars in thousands)
Revenue	$	10,631		$	15,715		$	21,610		$	31,164
Cost of sales (excluding depreciation and amortization)	8,187			12,905			16,828			25,140
Depreciation and amortization	2			2			5			8
Cost of sales	8,189			12,907			16,833			25,148
Gross profit	$	2,442		$	2,808		$	4,777		$	6,016
Gross margin	23.0		%	17.9		%	22.1		%	19.3		%

Secure Networks segment revenue for the three months ended June 30, 2024, decreased by $5.1 million, or 32.4%, compared to the same period in 2023. Likewise, Secure Network segment revenue for the six months ended June 30, 2024 decreased by $9.6 million, or 30.7%, compared to the same period in 2023. The decrease in revenue for the three and six months ended June 30, 2024, is primarily due to the successful completion and ramp down of programs.

Gross profit for Secure Networks slightly decreased by $0.4 million, or 13.0%, for the second quarter of 2024, compared with the same period in 2023. Segment gross profit for the six months ended June 30, 2024, decreased by $1.2 million, or 20.6%, compared to the same period in 2023. The change in gross profit for the three and six months ended June 30, 2024, is primarily due to lower revenue, partially offset by improved margin across the portfolio.

Secure Networks gross margin increased to 23.0% for the second quarter of 2024 from 17.9% for the same period in 2023. Likewise, segment gross margin in the first half of 2024 increased from 19.3% in 2023 to 22.1% in 2024. The gross margin expansion, for the three and six months ended June 30, 2024, is primarily due to strong program management and favorable program mix.

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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"), Cash Gross Profit, 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, Adjusted EBITDA and Adjusted EBITDA Margin
	For the Three Months Ended						For the Six Months Ended
	June 30, 2024			June 30, 2023			June 30, 2024			June 30, 2023
	Amount		Margin	Amount		Margin	Amount		Margin	Amount		Margin

	(dollars in thousands)
Net loss	$	(7,757)	(27.2 %)	$	(8,024)	(24.4 %)	$	(15,135)	(26.0) %	$	(18,770)	(27.5) %
Other income	(1,064)		(3.7 %)	(1,649)		(5.0 %)	(2,316)		(4.0) %	(4,145)		(6.1) %
Interest expense	160		0.5 %	184		0.5 %	335		0.5 %	433		0.6 %
Provision for income taxes	17		0.1 %	22		0.1 %	34		0.1 %	45		0.1 %
Depreciation and amortization	3,491		12.2 %	1,696		5.2 %	6,620		11.4 %	3,121		4.5 %
EBITDA (Non-GAAP)	(5,153)		(18.1 %)	(7,771)		(23.6 %)	(10,462)		(18.0) %	(19,316)		(28.4) %
Stock-based compensation expense (1)	2,219		7.8 %	7,745		23.5 %	5,203		8.9 %	17,244		25.3 %
Restructuring (adjustments) expenses (2)	—		— %	(3)		— %	(10)		— %	1,197		1.8 %
Adjusted EBITDA (Non-GAAP)	$	(2,934)	(10.3) %	$	(29)	(0.1) %	$	(5,269)	(9.1) %	$	(875)	(1.3) %

(1) The stock-based compensation expense to EBITDA is made up of stock-based compensation expense for the awarded RSUs, PSUs, and stock options, and other sources. Stock-based compensation expense for the awarded RSUs, PSUs and stock options was $2.4 million and $4.1 million for the three and six months ended June 30, 2024, respectively, and $5.7 million and $13.6 million, for the three and six months ended June 30, 2023, respectively. Stock-based compensation (adjustments) expense from other sources was $(0.2) million and $1.1 million for the three and six months ended June 30, 2024, respectively and $2.1 million and $3.7 million for the three and six months ended June 30, 2023, respectively. 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, it is the Company’s discretion whether this compensation will ultimately be paid in stock or cash. The Company has the right to dictate the form of these payments 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.

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Adjusted Net (Loss) Income 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 and GAAP EPS to Non-GAAP Adjusted Net Loss and Adjusted EPS
	For the Three Months Ended								For the Six Months Ended
	June 30, 2024				June 30, 2023				June 30, 2024				June 30, 2023
	Adjusted Net Loss		Adjusted Earnings Per Share		Adjusted Net Loss		Adjusted Earnings Per Share		Adjusted Net Loss		Adjusted Earnings Per Share		Adjusted Net Loss		Adjusted Earnings Per Share

	(in thousands, except per share data)
Net loss	$	(7,757)	$	(0.11)	$	(8,024)	$	(0.12)	$	(15,135)	$	(0.21)	$	(18,770)	$	(0.27)
Adjustments:
Other income	(1,064)		(0.01)		(1,649)		(0.02)		(2,316)		(0.03)		(4,145)		(0.06)
Stock-based compensation expense (1)	2,219		0.03		7,745		0.11		5,203		0.07		17,244		0.25
Restructuring (adjustments) expenses (2)	—		—		(3)		—		(10)		—		1,197		0.01
Adjusted net loss (Non-GAAP measure)	$	(6,602)	$	(0.09)	$	(1,931)	$	(0.03)	$	(12,258)	$	(0.17)	$	(4,474)	$	(0.07)
Weighted-average shares of common stock outstanding, basic	72,017				69,424				71,323				68,804

(1) The stock-based compensation expense to net loss is made up of stock-based compensation expense for the awarded RSUs, PSUs, and stock options, and other sources. Stock-based compensation expense for the awarded RSUs, PSUs and stock options was $2.4 million and $4.1 million for the three and six months ended June 30, 2024, respectively, and $5.7 million and $13.6 million, for the three and six months ended June 30, 2023, respectively. Stock-based compensation (adjustments) expense from other sources was $(0.2) million and $1.1 million for the three and six months ended June 30, 2024, respectively and $2.1 million and $3.7 million for the three and six months ended June 30, 2023, respectively. 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, it is the Company’s discretion whether this compensation will ultimately be paid in stock or cash. The Company has the right to dictate the form of these payments 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) Income.

Cash Gross Profit and Cash Gross Margin

Cash Gross Profit 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 Cash Gross Profit as gross profit, plus noncash charges for stock-based compensation expense, depreciation and amortization, as well as non-recurring items (such as restructuring expenses) charged under cost of sales. We define Cash Gross Margin as Cash Gross Profit as a percentage of total revenue.

Cash Gross Profit 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.

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Table MD&A 6: Reconciliation of Gross Profit to Cash Gross Profit; Gross Margin to Cash Gross Margin
	For the Three Months Ended						For the Six Months Ended
	June 30, 2024			June 30, 2023			June 30, 2024			June 30, 2023
	Amount		Margin	Amount		Margin	Amount		Margin	Amount		Margin

	(dollars in thousands)
Gross profit	$	9,707	34.1%	$	12,359	37.6%	$	20,668	35.6%	$	25,841	37.9%
Adjustments:
Stock-based compensation expense — cost of sales	228		0.8%	225		0.7%	485		0.8%	551		0.8%
Depreciation and amortization — cost of sales	2,039		7.1%	170		0.5%	3,317		5.7%	346		0.5%
Cash gross profit (Non-GAAP)	$	11,974	42.0%	$	12,754	38.8 %	$	24,470	42.1%	$	26,738	39.2 %

Free Cash Flow

Free cash flow, as reconciled in the table below, is a non-GAAP financial measure defined as net cash provided by (used in) operating activities, less purchases of property and equipment, and capitalized software development costs. This non-GAAP financial measure may be a useful measure for investors and other users of our financial statements as a supplemental measure of our cash performance and to assess the quality of our earnings as a key performance measure in evaluating management.

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 Used in Operating Activities to Free Cash Flow
	For the Three Months Ended				For the Six Months Ended
	June 30, 2024		June 30, 2023		June 30, 2024		June 30, 2023

	(in thousands)
Net cash used in operating activities	$	(7,990)	$	(4,113)	$	(8,340)	$	(4,213)
Adjustments:
Purchases of property and equipment	(235)		(47)		(332)		(270)
Capitalized software development costs	(3,113)		(4,398)		(6,315)		(8,198)
Free cash flow (Non-GAAP)	$	(11,338)	$	(8,558)	$	(14,987)	$	(12,681)

Each of EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin, Adjusted Net (Loss) Income, Adjusted EPS, Cash Gross Profit, 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) Income, Adjusted EPS, Cash Gross Profit, 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) Income, Adjusted EPS, Cash Gross Profit, 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.

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Liquidity and Capital Resources

Our primary sources of liquidity are cash on hand, future operating cash flows, and, if needed, borrowings under our $30.0 million revolving credit facility, with an available expansion feature of up to $30.0 million of additional revolver facility. 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 June 30, 2024, we had cash and cash equivalents of $80.1 million and our working capital was $87.0 million.

We place a strong emphasis on liquidity management. This focus gives us the flexibility for capital deployment while preserving a strong balance sheet to position us for future opportunities. We believe we have adequate funds on hand to execute our financial and operating strategy. Our overall financial position and liquidity are strong. Although no assurances can be given, we believe the available cash balances and access to our revolving credit facility are sufficient to maintain the liquidity we require to meet our operating, investing and financing needs for the next 12 months.

Cash Flow


Table MD&A 8: Net Change in Cash, Cash Equivalents, and Restricted Cash
	For the Six Months Ended
	June 30, 2024		June 30, 2023

	(in thousands)
Net cash used in operating activities	$	(8,340)	$	(4,213)
Net cash used in investing activities	(9,647)		(8,468)
Net cash used in financing activities	(1,168)		(3,176)
Net change in cash, cash equivalents, and restricted cash	$	(19,155)	$	(15,857)

Net cash used in operating activities for the six months ended June 30, 2024, was $8.3 million, an increase of $4.1 million compared to the same period in 2023. The change is primarily driven by the Company's operating losses, the timing of receipts of customer payments, the timing of payments to vendors and employees, and the timing of inventory turnover, adjusted for certain 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, 2024, increased by $1.2 million, compared to the same period of the prior year, primarily due to the cash outflow from the purchase of an investment of $3.0 million in 2024, with no similar transaction in 2023. This is partially offset by a decrease in capital expenditures in 2024.

Net cash used in financing activities for the six months ended June 30, 2024, decreased by $2.0 million, compared to the same period in 2023. This is primarily attributable to the decreases in payment of tax withholding related to net share settlement of equity awards of $0.4 million in the first half of 2024, compared with $1.6 million in the same period of 2023, and a $0.6 million payment for the Diamond Fortress Technologies ("DFT") holdback in February 2023, with no similar payment in 2024.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires us to make estimates, judgments, and assumptions that affect the amounts reported. Actual results could differ from those estimates. The 2023 Form 10-K, as filed with the SEC on March 15, 2024, 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 six months ended June 30, 2024.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), which are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, including this Report, are recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Company under the Exchange Act is accumulated and communicated to the Company's management, including its principal executive officer ("CEO") and principal financial officer ("CFO") as appropriate to allow timely decisions regarding required disclosure.

The Company's management, including the Company's CEO and CFO, conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this Report and, based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2024.

Changes in Internal Control over Financial Reporting

There were no changes in the Company's internal control over financial reporting during the quarter ended June 30, 2024, identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Table of Contents

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

Information regarding legal proceedings is included under Note 17 – Commitments and Contingencies to the unaudited consolidated financial statements.

Item 1A. Risk Factors

We have disclosed under "Item 1A – Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2023, the risk factors which may materially affect our business, financial conditions or results of operations. There have been no material changes from the risk factors previously disclosed.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

(a) None.

(b) None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

(a) None.

(b) None.

(c) During the three months ended June 30, 2024, no director or officer of the Company adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as each term is defined in Item 408(a) of Regulation S-K.

Item 6. Exhibits


Exhibit Number		Description
10.1	*	Amended and Restated 2016 Omnibus Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.1 filed with the Company's Current Report on Form 8-K on May 22, 2024)
31.1	+	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	+	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	^	Certification pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	+	XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH	+	XBRL Taxonomy Extension Schema Document
101.CAL	+	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	+	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	+	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	+	XBRL Taxonomy Extension Presentation Linkbase Document
104	+	Cover Page Interactive Data File - the cover page iXBRL tags are embedded within the Inline XBRL document contained in Exhibit 101


*			Constitute a management contract or compensatory plan or arrangement
+			Filed herewith
^			Furnished herewith

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


TELOS CORPORATION


/s/ John B. Wood						August 9, 2024
By: John B. Wood
Chief Executive Officer (Principal Executive Officer)


/s/ Mark Bendza						August 9, 2024
By: Mark Bendza
Chief Financial Officer (Principal Financial Officer)


/s/ Victoria Harding						August 9, 2024
By: Victoria Harding
Controller and Chief Accounting Officer (Principal Accounting Officer)

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Date	Price Target	Rating	Analyst
11/10/2023	$2.75 → $4.50	Neutral → Buy	B. Riley Securities
9/27/2023	$2.50 → $4.00	Market Perform → Outperform	Northland Capital
1/3/2023	$5.00	Outperform → Market Perform	Northland Capital
11/15/2022	$4.50 → $5.00	Buy → Neutral	B. Riley Securities
11/9/2022	$15.00 → $4.00	Buy → Neutral	DA Davidson
9/12/2022	$15.00	Neutral → Outperform	Wedbush
2/25/2022	$14.00	Outperform → Market Perform	BMO Capital
1/19/2022	$20.00	Neutral → Buy	Colliers Securities

SEC Form 10-Q filed by Telos Corporation

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