10-Q 1 tls-20230930.htm 10-Q tls-20230930
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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: September 30, 2023
¨Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission file number: 001-08443
Telos logo.jpg
TELOS CORPORATION
(Exact name of registrant as specified in its charter)
Maryland52-0880974
(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 classTrading symbolName of each exchange on which registered
Common stock, $0.001 par value per shareTLSThe 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 filerx
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 November 3, 2023, the registrant had outstanding 69,623,209 shares of common stock.

Table of Contents to Third Quarter 2023 Form 10-Q
Page
2
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
TELOS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months EndedFor the Nine Months Ended
September 30, 2023September 30, 2022September 30, 2023September 30, 2022
(in thousands, except per share amounts)
Revenue – services$34,385 $55,305 $94,866 $153,683 
Revenue – products1,801 8,288 9,453 15,861 
Total revenue36,186 63,593 104,319 169,544 
Cost of sales – services (exclusive of depreciation and amortization shown separately below)20,683 36,555 58,613 97,311 
Cost of sales – products (exclusive of depreciation and amortization shown separately below)545 5,902 4,561 10,886 
Depreciation and amortization1,945 191 2,291 602 
Total cost of sales23,173 42,648 65,465 108,799 
Gross profit13,013 20,945 38,854 60,745 
Selling, general and administrative expenses
Sales and marketing 1,728 3,042 5,164 13,035 
Research and development 3,154 3,981 8,633 13,900 
General and administrative 17,824 22,706 57,187 72,997 
Total selling, general and administrative expenses22,706 29,729 70,984 99,932 
Operating loss(9,693)(8,784)(32,130)(39,187)
Other income1,222 518 5,367 648 
Interest expense(178)(181)(611)(558)
Loss before income taxes(8,649)(8,447)(27,374)(39,097)
Provision for income taxes(23)(8)(68)(133)
Net loss$(8,672)$(8,455)$(27,442)$(39,230)
Net loss per share:
Basic$(0.12)$(0.13)$(0.40)$(0.58)
Diluted$(0.12)$(0.13)$(0.40)$(0.58)
Weighted-average shares outstanding:
Basic69,571 67,493 69,062 67,641 
Diluted69,571 67,493 69,062 67,641 
See accompanying notes to the unaudited consolidated financial statements.
3
TELOS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
For the Three Months EndedFor the Nine Months Ended
September 30, 2023September 30, 2022September 30, 2023September 30, 2022
(in thousands)
Net loss$(8,672)$(8,455)$(27,442)$(39,230)
Other comprehensive loss, net of tax:
Foreign currency translation adjustments29 (21)31 (3)
Comprehensive loss$(8,643)$(8,476)$(27,411)$(39,233)
See accompanying notes to the unaudited consolidated financial statements.
4
TELOS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, 2023December 31, 2022
(in thousands, except per share amount and share data)
Assets:
Cash and cash equivalents$99,953 $119,305 
Accounts receivable, net25,424 40,069 
Inventories, net 984 2,877 
Prepaid expenses8,102 4,819 
Other current assets1,750 893 
Total current assets136,213 167,963 
Property and equipment, net3,390 4,787 
Finance lease right-of-use assets, net6,917 7,832 
Operating lease right-of-use assets, net274 341 
Goodwill 17,922 17,922 
Intangible assets, net38,984 37,415 
Other assets1,038 1,137 
Total assets$204,738 $237,397 
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and other accrued liabilities $7,457 $22,551 
Accrued compensation and benefits12,593 8,388 
Contract liabilities 5,775 6,444 
Finance lease obligations – current portion1,695 1,592 
Operating lease obligations – current portion224 361 
Other financing obligations – current portion— 1,247 
Other current liabilities1,839 4,919 
Total current liabilities29,583 45,502 
Finance lease obligations – non-current portion9,965 11,248 
Operating lease liabilities – non-current portion65 27 
Other financing obligations – non-current portion— 7,211 
Deferred income taxes 795 758 
Other liabilities 309 297 
Total liabilities40,717 65,043 
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value, 250,000,000 shares authorized, 69,623,209 shares and 67,431,632 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively
108 106 
Additional paid-in capital431,784 412,708 
Accumulated other comprehensive income(24)(55)
Accumulated deficit(267,847)(240,405)
Total stockholders’ equity164,021 172,354 
Total liabilities and stockholders’ equity$204,738 $237,397 
See accompanying notes to the unaudited consolidated financial statements.
5
TELOS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended
September 30, 2023September 30, 2022
(in thousands)
Cash flows from operating activities:
Net loss$(27,442)$(39,230)
Adjustments to reconcile net loss to cash flows from operations:
Stock-based compensation22,462 48,843 
Depreciation and amortization6,336 4,427 
Deferred income tax provision37 25 
Accretion of discount in acquisition holdback2 36 
Loss on disposal of fixed assets1 2 
Provision for doubtful accounts128 97 
Amortization of debt issuance costs51 — 
Gain on early extinguishment of other financing obligations(1,427)— 
Changes in other operating assets and liabilities:
Accounts receivable14,517 8,763 
Inventories1,893 (3,429)
Prepaid expenses, other current assets, other assets(4,106)(2,486)
Accounts payable and other accrued payables(14,942)2,635 
Accrued compensation and benefits2,496 371 
Contract liabilities(670)571 
Other current liabilities(2,703)(507)
Net cash (used in)/provided by operating activities(3,367)20,118 
Cash flows from investing activities:
Capitalized software development costs(11,960)(8,580)
Purchases of property and equipment(350)(815)
Net cash used in investing activities(12,310)(9,395)
Cash flows from financing activities:
Payments under finance lease obligations(1,180)(1,083)
Payment of tax withholding related to net share settlement of equity awards(1,676)(3,135)
Repurchase of common stock(139)(7,603)
Payment of DFT holdback amount(564)— 
Payments for debt issuance costs(114)— 
Net cash used in financing activities(3,673)(11,821)
Net change in cash, cash equivalents, and restricted cash(19,350)(1,098)
Cash, cash equivalents, and restricted cash, beginning of period119,438 126,562 
Cash, cash equivalents, and restricted cash, end of period$100,088 $125,464 
See accompanying notes to the unaudited consolidated financial statements.
6
TELOS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Common StockAdditional Paid-in
Capital		Accumulated
Other Comprehensive Income		Accumulated DeficitTotal Stockholders’
Equity
SharesAmount
(in thousands)
Balance at June 30, 202369,467 $108 $426,656 $(53)$(259,175)$167,536 
Net loss— — — — (8,672)(8,672)
Foreign currency translation gain— — — 29 — 29 
Restricted stock unit awards vested, net of shares withheld to cover tax withholding156 — (90)— — (90)
Stock-based compensation— — 5,218 — — 5,218 
Balance at September 30, 202369,623 $108 $431,784 $(24)$(267,847)$164,021 
Balance at June 30, 202267,594 $106 $391,967 $(9)$(217,752)$174,312 
Net loss— — — — (8,455)(8,455)
Foreign currency translation loss— — — (21)— (21)
Restricted stock unit awards vested, net of shares withheld to cover tax withholding205 — (249)— — (249)
Stock-based compensation— — 16,127 — — 16,127 
Repurchase of common stock(499)— (4,681)— — (4,681)
Balance at September 30, 202267,300 $106 $403,164 $(30)$(226,207)$177,033 
Common StockAdditional Paid-in
Capital		Accumulated
Other Comprehensive Income		Accumulated DeficitTotal Stockholders’
Equity
SharesAmount
(in thousands)
Balance at December 31, 202267,431 $106 $412,708 $(55)$(240,405)$172,354 
Net loss— — — — (27,442)(27,442)
Foreign currency translation gain— — — 31 — 31 
Restricted stock unit awards vested, net of shares withheld to cover tax withholding1,415 1 (1,676)— — (1,675)
Stock-based compensation— 18,811 — — 18,811 
Issuance of common stock for 401K match777 1 1,941 — — 1,942 
Balance at September 30, 202369,623 $108 $431,784 $(24)$(267,847)$164,021 
Balance at December 31, 202166,767 $105 $367,153 $(27)$(186,977)$180,254 
Net loss— — — — (39,230)(39,230)
Foreign currency translation loss— — — (3)— (3)
Restricted stock unit awards vested, net of shares withheld to cover tax withholding1,392 1 (3,136)— — (3,135)
Stock-based compensation— — 46,830 — — 46,830 
Repurchase of common stock(859)— (7,683)— — (7,683)
Balance at September 30, 202267,300 $106 $403,164 $(30)$(226,207)$177,033 
See accompanying notes to the unaudited consolidated financial statements.
7
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.
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 to state fairly our financial position and the results of operations and cash flows for the periods presented.
The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for the year or future periods. The financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto for the year ended December 31, 2022, 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 - Revision of Previously Issued Interim Financial Statements
Certain prior-period amounts have been reclassified to conform to the current period presentation. In the current period, the Company reclassified and presented depreciation and amortization separately from the cost of sales line items. The reclassification had no impact on the statement of operations.
During the course of preparing the Company's consolidated financial statements for the year ended December 31, 2022, we identified that stock-based compensation expense related to performance-based restricted stock unit (“PSU”) awards with market conditions was erroneously reversed when those PSUs were forfeited during the three and nine months ended September 30, 2022. Although the Company has determined that the error did not have a material impact on its previously issued interim consolidated financial statements, it revised the previously reported interim financial information in conjunction with the issuance of its quarterly filings on Form 10-Q for the quarter ended September 30, 2023. Further information regarding the misstatements and related revisions are included under Note 20 – Revision of Prior Year Interim Financial Statements to the unaudited consolidated financial statements.
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 stock-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.
8
Stock-based Compensation
The Company grants stock-based compensation awards under the 2016 Omnibus Long-Term Incentive Plan, as amended (the "2016 LTIP"). Our 2016 LTIP provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, and dividend equivalent rights to our senior executives, directors, employees, and other eligible service providers. The stock options granted under the 2016 LTIP expire no more than 10 years after the date of grant.
The service-based restricted stock units ("RSUs") generally vest in installments over a period of up to three years from the date of grant. The PSUs vest upon the achievement of a defined performance target during a defined performance period. The fair value of each RSU award is based on the closing stock price on the date of grant, while the fair value of the PSU awards with market condition is based on using a Monte Carlo simulation.
The Company estimates the fair value of stock options on the date of the grant using an option pricing model. The option pricing model takes into consideration the current share price of the underlying common stock, exercise price of the option, expected term, risk-free interest rate and the volatility of share price. These considerations directly affect the amount of compensation expense that will ultimately be recognized.
We recognized these stock-based payment transactions when services from the employees, directors and other eligible service providers are received and recognized a corresponding increase in additional paid-in capital in our unaudited consolidated balance sheets. The measurement objective for these equity awards is the estimated fair value at the date of grant of the equity instruments that we are obligated to issue when the employees, directors and other eligible service providers have rendered the requisite service and satisfied any other conditions necessary to earn the right to benefit from the instruments. The stock-based compensation expense for an award is recognized ratably over the requisite service period, which is generally the vesting period or if it is probable that the performance condition will be satisfied. For the comparative periods, the stock-based payment transactions are recognized in accordance with ASC 718, "Compensation - Stock Compensation" and ASU 2018-07, "Compensation - Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting".
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.
In the Company's Annual Report on Form 10-K for the year ended December 31, 2022, the Company estimated that the expected restructuring expenses were $2.8 million as of December 31, 2022. In early 2023, the Company updated its total expected restructuring plan costs to $4.0 million, based on the Company's review of the restructuring plan for the remainder of 2023. The restructuring expenses are recorded under "Selling, general and administrative expenses" in the Company's unaudited consolidated statements of operations.
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: Summary of Changes in Restructuring Expenses Accrual
Severance and related benefit costs (1)
Other related costsTotal
(in thousands)
Balance at December 31, 2022$2,763 $— $2,763 
(Adjustments)/charges(103)1,300 1,197 
Cash payments(1,981)(1,300)(3,281)
Balance at September 30, 2023$679 $— $679 
(1) Restructuring-related liabilities are reported as part of "Other current liabilities" in the Company's unaudited consolidated balance sheets, see Note 9 - Other Balance Sheet Components for further details.
9
Recent Accounting Pronouncements
From time to time, new accounting standards are issued by the Financial Accounting Standards 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 89% of our revenue for the three and nine months ended September 30, 2023, and 87% and 91% of our revenue for the three and nine months ended September 30, 2022, respectively. All of our business groups earn services revenue under a variety of contract types, including time and materials, firm-fixed price, firm-fixed price level of effort, and cost-plus fixed fee contract types, which may include variable consideration.
For performance obligations in which control does not continuously transfer to the customer, we recognize revenue at the point in time in which each performance obligation is fully satisfied. 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 11% of our revenue for the three and nine months ended September 30, 2023, and 13% and 9% of our revenue for the three and nine months ended September 30, 2022, 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.
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 exceed the total estimated revenue for a performance obligation. No contract losses were recorded during the three and nine months ended September 30, 2023, and 2022.
Disaggregated Revenues
In addition to our segment reporting, as further discussed in Note 17 – 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. 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 EndedFor the Nine Months Ended
September 30, 2023September 30, 2022September 30, 2023September 30, 2022
Amount%Amount%Amount%Amount%
(dollars in thousands)
Federal$32,955 91 %$60,294 95 %$93,456 90 %$160,351 95 %
State & local, and commercial3,231 9 %3,299 5 %10,863 10 %9,193 5 %
Total revenue$36,186 100 %$63,593 100 %$104,319 100 %$169,544 100 %
10
Table 3.2: Revenue by Contract Type
For the Three Months EndedFor the Nine Months Ended
September 30, 2023September 30, 2022September 30, 2023September 30, 2022
Amount%Amount%Amount%Amount%
(dollars in thousands)
Firm fixed-price$27,809 77 %$54,055 85 %$80,116 77 %$140,636 83 %
Time-and-materials3,504 10 %3,457 5 %10,608 10 %9,104 5 %
Cost plus fixed-fee4,873 13 %6,081 10 %13,595 13 %19,804 12 %
Total revenue$36,186 100 %$63,593 100 %$104,319 100 %$169,544 100 %
Table 3.3: Revenue Concentration Greater than 10% of Total Revenue
For the Three Months EndedFor the Nine Months Ended
September 30, 2023September 30, 2022September 30, 2023September 30, 2022
U.S. Department of Defense ("DoD")61%77 %65%74 %
Table 3.4: Contract Balances
Balance Sheet PresentationSeptember 30, 2023December 31, 2022
(in thousands)
Billed accounts receivables (1)
Accounts receivable, net$12,355 $13,521 
Unbilled accounts receivableAccounts receivable, net7,211 11,657 
Contract assetsAccounts receivable, net5,858 14,891 
Contract liabilitiesContract liabilities5,775 6,444 
(1) Net of allowance for credit losses.
The change in the Company's contract assets and contract liabilities during the current period was primarily the result of the timing differences between the Company's performance, invoicing and customer payments. Revenue recognized for the three and nine months ended September 30, 2023, that was included in the contract liabilities balance at the beginning of each reporting period was $1.2 million and $5.3 million, respectively. Revenue recognized for the three and nine months ended September 30, 2022, that was included in the contract liabilities balance at the beginning of each reporting period was $0.9 million and $5.0 million, respectively.
As of September 30, 2023, we had approximately $79.0 million of remaining performance obligations, which we also refer to as funded backlog. We expect to recognize approximately 84% 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
September 30, 2023December 31, 2022
(in thousands)
Billed accounts receivable$12,614 $13,655 
Unbilled accounts receivable7,211 11,657 
Contract assets5,858 14,891 
Allowance for credit losses (1)
(259)(134)
Accounts receivable, net$25,424 $40,069 
(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 91% of our billed and unbilled accounts receivable as of September 30, 2023, 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 guarantee from our customers. We maintain allowances for potential losses.
11
5. INVENTORIES, NET
Table 5: Details of Inventories, Net
September 30, 2023December 31, 2022
(in thousands)
Gross inventory$1,749 $3,642 
Allowance for inventory obsolescence(765)(765)
Inventories, net$984 $2,877 
6. PROPERTY AND EQUIPMENT, NET
Table 6.1: Details of Property and Equipment, Net
September 30, 2023December 31, 2022
(in thousands)
Furniture and equipment$15,659 $16,033 
Leasehold improvement3,211 3,145 
Property and equipment, at cost18,870 19,178 
Accumulated depreciation and amortization(15,480)(14,391)
Property and equipment, net$3,390 $4,787 
Table 6.2: Depreciation and Amortization Expense
For the Three Months EndedFor the Nine Months Ended
September 30, 2023September 30, 2022September 30, 2023September 30, 2022
(in thousands)
Depreciation & amortization expense$548 $619 $1,700 $1,776 
7. GOODWILL
The goodwill balance was $17.9 million as of September 30, 2023, and December 31, 2022, 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 to goodwill were recorded for the three and nine months ended September 30, 2023 and 2022.
8. INTANGIBLE ASSETS, NET
Table 8.1: Details of Intangible Assets, Net
September 30, 2023
December 31, 2022
Estimated Useful LifeGross Carrying AmountAccumulated AmortizationNet Carrying ValueGross Carrying AmountAccumulated AmortizationNet Carrying Value
(in years)(in thousands)
Acquired technology8$3,630 $(983)$2,647 $3,630 $(643)$2,987 
Customer relationship340 (29)11 40 (19)21 
Software development costs (1)
2 - 5
46,729 (10,403)36,326 35,080 (7,793)27,287 
Subtotal50,399 (11,415)38,984 38,750 (8,455)30,295 
Software held for resale (2)
— — — 7,120 — 7,120 
Total$50,399 $(11,415)$38,984 $45,870 $(8,455)$37,415 
(1) An impairment charge of $0.3 million was recorded against software development costs in the third quarter of 2023 related to the write-off of a certain software project.
(2) This amount is net of $0.6 million charged into cost for sales for the period ended December 31, 2022. See Note 10 – Debt and Other Obligations for related details.
The Company evaluates its intangible assets for potential impairment whenever there is evidence that events or changes in circumstances indicate that the carrying value may not be recoverable. As a result of the interim assessment, the Company identified conditions demonstrating an impairment of certain software development costs. An impairment charge of $0.3 million was recorded under "Research and Development" expenses in the Company's unaudited consolidated statements of operations for the three and nine months ended September 30, 2023. No similar impairment charges were recorded during the three and nine months ended September 30, 2022.
12
No impairment charges were recorded on other intangible assets during the three and nine months ended September 30, 2023, and 2022.
Table 8.2: Amortization Expense
For the Three Months EndedFor the Nine Months Ended
September 30, 2023September 30, 2022September 30, 2023September 30, 2022
(in thousands)
Amortization expense related to:
Software development costs - cost of sales (1)
$1,767 $— $1,767 $— 
Software development costs - research and development(19)354 843 1,034 
Other intangible assets - general and administrative117 117 350 284 
Total$1,865 $471 $2,960 $1,318 
(1) Amortization expense for software development costs related to assets to be sold, leased, or otherwise marketed are charged under cost of sales on the unaudited consolidated statements of operations.
9. OTHER BALANCE SHEET COMPONENTS
Table 9.1: Details of Accounts Payable and Other Accrued Liabilities
September 30, 2023December 31, 2022
(in thousands)
Accounts payable$2,761 $12,606 
Accrued payables4,696 9,945 
Accounts payable and other accrued liabilities$7,457 $22,551 
Table 9.2: Details of Other Current Liabilities
September 30, 2023December 31, 2022
(in thousands)
Other accrued expenses$736 $1,530 
Restructuring expenses accrual679 2,763 
Other424 626 
Other current liabilities$1,839 $4,919 
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.
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.
13
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 (as defined in the Credit Agreement) on the last day of any fiscal quarter, no greater than 3-to-1. We were in compliance with all covenants as of September 30, 2023.
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 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, see Note 8 – Intangible Assets, net for further details.
On February 9, 2023, the customer notified us that it would not exercise the first option period under the DO. The MPA provides that, if the customer terminates the DO for non-renewal and the Buyer reasonably concludes that the customer's actions constitute grounds for filing a claim with the customer's contracting officer, 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 September 30, 2023. For the nine months ended September 30, 2023, the Company reported a gain of $1.4 million, which was recorded as "Other income" in the unaudited consolidated statements of operations.
11. ACQUISITION
On July 30, 2021, the Company acquired the assets of Diamond Fortress Technologies ("DFT") and wholly-owned subsidiaries for a total purchase consideration of $6.7 million, inclusive of $0.3 million related to a pre-existing contractual arrangement with DFT. Upon closing, $5.9 million of cash was paid with an additional $0.6 million payable to DFT 18 months after the close date (the "holdback"). The holdback amount has been discounted to its present value of $0.5 million using a discount rate relevant to the acquisition. On February 2, 2023, the Company paid DFT the holdback amount of $0.6 million.
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12. STOCK-BASED COMPENSATION
Stock-based compensation expense recognized for restricted stock units and stock options granted to employees and non-employees is included in the consolidated statement of operations. There were no income tax benefits recognized on the stock-based compensation expense for both periods.
Table 12.1: Details of Stock Compensation Expense by Department
For the Three Months EndedFor the Nine Months Ended
September 30, 2023September 30, 2022September 30, 2023September 30, 2022
(in thousands)
Cost of sales – services$73 $929 $624 $2,798 
Sales and marketing24 611 125 3,699 
Research and development328 897 1,945 2,884 
General and administrative (1)
4,793 13,399 19,768 39,462 
Total$5,218 $15,836 $22,462 $48,843 
(1) During the three and nine months ended September 30, 2023, the stock-based compensation expense related to stock options was $0.1 million and $0.2 million, respectively, and is recorded as part of selling, general and administrative expenses. There was no similar expense in 2022.
Restricted Stock
Table 12.2: Restricted Stock Unit Activity
Service-BasedPerformance-BasedTotal SharesWeighted-Average Grant Date Fair Value
Unvested outstanding units as of December 31, 20223,570,082 336,785 3,906,867 $19.53 
Granted1,743,689 — 1,743,689 1.99 
Vested(1,807,929)— (1,807,929)25.96 
Forfeited(396,694)(71,177)(467,871)14.39 
Unvested outstanding units as of September 30, 20233,109,148 265,608 3,374,756 $8.34 
As of September 30, 2023, the intrinsic value of the RSUs and PSUs outstanding and vested or expected to vest was $8.1 million. There were approximately $7.1 million of total compensation costs related to stock-based awards not yet recognized as of September 30, 2023, which is expected to be recognized on a straight-line basis over a weighted average remaining vesting period of 0.6 years.
Stock Options
The Company uses the Black-Scholes option pricing model to calculate the estimated fair value of stock options on the date of grant. Option awards are generally granted with an exercise price equal to the market price of the Company's stock at the date of grant. The following weighted-average assumptions are used in the Black-Scholes valuation model to estimate the fair value of stock option awards, as granted.
•Expected term of the option – For options granted to employees and directors, the Company estimates the term over which option holders are expected to hold their stock option by using the "simplified method" in accordance with Staff Accounting Bulletin ("SAB") No. 107, Share-Based Payments, and SAB No. 110, Simplified Method for Plain Vanilla Share Options, to calculate the expected term of stock options determined to be "plain vanilla." The Company's stock option exercise history does not provide a reasonable basis to compute the expected term for stock options. Under this approach, the expected term is presumed to be a midpoint between the vesting date and the contractual end of the stock option grant. For options granted to non-employees, the Company elected to use the contractual term as the expected term.
•Risk-free interest rate – Based on the daily yield curve rates for U.S. Treasury obligations with terms that approximate the expected term of the stock options.
•Expected volatility – Due to the absence of the Company's historical price volatility for the expected contractual term of the stock options, the Company utilized the historical price volatility of a peer group.
•Expected dividend yield – The Company has not declared dividends, nor does it expect to in the foreseeable future. Therefore, a zero value was assumed for the expected dividend yield.
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Table 12.3: Stock Options Fair Value and Weighted-Average Assumptions
For the Nine Months Ended
September 30, 2023September 30, 2022
Weighted-average fair value of underlying stock options$1.06$—
Expected term (in years)
5.5 - 10.0
0
Risk-free interest rate3.5%—%
Expected volatility
30.7% - 35.1%
—%
Expected dividend yield—%—%
Table 12.4: Stock Option Activity
Stock Options OutstandingWeighted-Average Exercise Price
Weighted-Average Remaining Contractual Term
(in years)
Aggregate Intrinsic Value
Outstanding option balance as of December 31, 2022— $— 0.0$— 
Granted400,000 1.80 
Exercised— — 
Forfeited, cancelled, or expired— — 
Outstanding option balance as of September 30, 2023400,000 $1.80 9.6$236,000 
Exercisable stock option as of September 30, 2023— $— 0.0$— 
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the quoted closing price of the Company's common stock as of September 30, 2023.
The fair value of the stock options is expensed on a straight-line basis over the vesting period of one year, including the stock options granted to directors, as the next annual stockholders meeting is expected to occur at the same approximate time each year.
As of September 30, 2023, there were approximately $0.3 million of unrecognized compensation costs related to non-vested stock options.
13. SHARE REPURCHASES
On May 24, 2022, the Company announced that the Board of Directors approved a new share repurchase program ("SRP") authorizing the Company to repurchase up to $50.0 million of its common stock. 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. As of September 30, 2023, there was approximately $38.7 million of the authorization remaining for future common stock repurchases under the SRP.
Table 13: Share Repurchase Program Activity
For the Three Months EndedFor the Nine Months Ended
September 30, 2023September 30, 2022September 30, 2023September 30, 2022
(in thousands, except per share and share data)
Amount paid for shares repurchased (1)
$— $4,681 $— $7,683 
Number of shares repurchased— 498,731 — 859,170 
Average per share price paid (1)
$— $9.38 $— $8.94 
(1) Includes commissions paid for repurchases on the open market.
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14. ACCUMULATED OTHER COMPREHENSIVE LOSS
Our functional currency is the U.S. dollar. For one of our wholly-owned subsidiaries, the functional currency is the local currency. For this subsidiary, the translation of its foreign currency into U.S. dollars is performed for assets and liabilities using current foreign currency exchange rates in effect at the balance sheet date and for revenue and expense accounts using average foreign currency exchange rates during the periods presented. Translation gains and losses are included in stockholders’ equity as a component of accumulated other comprehensive losses.
Table 14: Details of Accumulated Other Comprehensive Loss
September 30, 2023December 31, 2022
(in thousands)
Cumulative foreign currency translation loss$(131)$(162)
Cumulative actuarial gain on pension liability adjustment107 107 
Accumulated other comprehensive loss$(24)$(55)
15. 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 15: Potentially Dilutive Securities
For the Three Months EndedFor the Nine Months Ended
September 30, 2023September 30, 2022September 30, 2023September 30, 2022
(in thousands)
Unvested restricted stock and restricted stock units667 833 522 435 
Total667 833 522 435 
For the three and nine months ended September 30, 2023, and 2022, the outstanding PSUs aggregating to 265,608 and 336,785, respectively, have been excluded from the calculation of potentially dilutive securities above because the issuance of shares is contingent upon the satisfaction of certain conditions that were not satisfied by the end of the period.
16. 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. For the three and nine months ended September 30, 2022, the Company paid him $91,000 and $696,000, respectively.
One of the Company’s directors serves as a consultant to the Company. On January 1, 2023, the director and the Company amended the consulting agreement under which he provides services ("2023 consulting agreement"), extending his services through June 30, 2023, with the option to further extend for another six months by mutual agreement of the parties. The Company, at its election, would pay the director's 2023 consultancy fees in a fixed amount, in the form of restricted stock units. Consequently, on January 3, 2023, the Company granted the director 16,859 RSUs, one-half of which vested on March 3, 2023, and the other half vested on May 18, 2023, as compensation for the first half of his 2023 consulting services. In July 2023, the director and the Company amended the 2023 consulting agreement, extending his services through December 31, 2023. The amended 2023 consulting agreement stipulates a firm-fixed monthly retainer fee, plus additional fees and contingent bonus payments upon achievement of certain contract goals, payable in cash. Cash payments made for his consulting services were $32,000 for the three and nine months ended September 30, 2023.
On February 1, 2022, the Company granted him 26,091 RSUs for his consulting services in 2022, which RSUs vested quarterly in four equal amounts through the end of the year. No cash payments were made for the three months ended September 30, 2022, while the amounts paid in cash for his consulting services were $25,000 for the nine months ended September 30, 2022.
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17. 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 ACA"), Telos Automated Message Handling System ("AMHS") and Telos ID offerings. We recognize revenue on contracts by 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 operating 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 17: Results of Operations by Business Segment
For the Three Months EndedFor the Nine Months Ended
September 30, 2023September 30, 2022September 30, 2023September 30, 2022
(in thousands)
Revenue
Security Solutions$19,795 $32,440 $56,764 $90,178 
Secure Networks16,391 31,153 47,555 79,366 
Total revenue36,186 63,593 104,319 169,544 
Gross profit
Security Solutions9,354 15,577 29,179 47,062 
Secure Networks3,659 5,368 9,675 13,683 
Total gross profit13,013 20,945 38,854 60,745 
Selling, general and administrative expenses22,706 29,729 70,984 99,932 
Operating loss(9,693)(8,784)(32,130)(39,187)
Other income1,222 518 5,367 648 
Interest expense(178)(181)(611)(558)
Loss before income taxes(8,649)(8,447)(27,374)(39,097)
Provision for income taxes(23)(8)(68)(133)
Net loss$(8,672)$(8,455)$(27,442)$(39,230)
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.
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18. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
On February 7, 2022, Telos and certain of its current and former officers were named as defendants in a lawsuit filed in the United States District Court for the Eastern District of Virginia ("Court"). In the complaint, the Plaintiffs, who purported to represent a class of purchasers of Telos common stock between November 19, 2020, and March 16, 2022, alleged that the defendants violated securities laws by failing to disclose delays relating to the launch of certain contracts between Telos and the Transportation Security Administration ("TSA") and the Centers for Medicare and Medicaid Services and to take into account those delays when providing a financial forecast for the Company's 2021 performance. On June 15, 2022, the Plaintiffs filed a consolidated complaint that added claims (i) concerning Telos' disclosure of revenue projections for these contracts, (ii) against the directors of Telos at the time of its initial public offering, and (iii) pursuant to Sections 11 and 15 of the Securities Act of 1933. On February 1, 2023, the Court dismissed the lawsuit in its entirety for failure to state a claim. The Court's order of dismissal provided the Plaintiffs the opportunity to file a motion for leave to file an amended complaint, should they have a good faith basis to do so. On March 13, 2023, the Court granted the parties' consent motion permitting the filing of a consolidated amended class action complaint and establishing a briefing schedule for Telos' motion to dismiss that amended complaint. On April 14, 2023, Telos moved to dismiss the consolidated amended class action complaint. At the conclusion of a hearing held on June 21, 2023, the Court dismissed the consolidated amended class action complaint with prejudice. No appeal from the order of dismissal was taken, and it is final.
From time to time, the Company may be a party to litigation or claims arising in the ordinary course of business. Management does not believe that there are litigation or claims that would have a material adverse effect on the business, or the unaudited consolidated financial statements of the Company as of September 30, 2023.
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.
19. SUPPLEMENTAL CASH FLOW INFORMATION
Table 19.1: Details of Cash, Cash Equivalents, and Restricted Cash
September 30, 2023December 31, 2022
(in thousands)
Cash and cash equivalents$99,953 $119,305 
Restricted cash (1)
135 133 
Cash, cash equivalents, and restricted cash$100,088 $119,438 
(1) Restricted cash consists of a commercial money market account held as a deposit on the Ashburn lease and is recorded under "Other assets" on the unaudited consolidated balance sheets.
Table 19.2: Supplemental Cash Flow Information
For the Nine Months Ended
September 30, 2023September 30, 2022
(in thousands)
Cash paid during the period for:
Interest$548 $523 
Income taxes147 188 
Non-cash investing and financing activities:
Operating lease ROU assets obtained in exchange for operating lease liabilities$67 $396 
Capital expenditure activity in accounts payable and other accrued liabilities173 400 
Issuance of common stock for 401K match1,943 — 
Intangible assets transferred to extinguish other financing obligations7,089 — 
Common stock repurchases under SRP— 80 
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20. REVISION OF PRIOR YEAR INTERIM FINANCIAL STATEMENTS
During the course of preparing the Company's consolidated financial statements for the year ended December 31, 2022, we identified that stock-based compensation expense related to the PSU awards with market conditions was erroneously reversed when those PSUs were forfeited. Due to the error, general and administrative expense was understated by $1.1 million and $4.6 million for the three and nine months ended September 30, 2022. Although the Company has determined that the error did not have a material impact on its previously issued interim consolidated financial statements, it revised the previously reported interim financial information in conjunction with the issuance of its quarterly filings on Form 10-Q for the quarter ended September 30, 2023. The errors had no net impact on cash flows from operating, investing or financing activities in the consolidated statement of cash flows.
The following tables set forth the effects of the revisions of previously issued unaudited quarterly consolidated financial statements to correct for prior period errors.
Table 20.1: Impact of the Correction to the Unaudited Consolidated Statement of Operations
For the Three Months Ended September 30, 2022For the Nine Months Ended September 30, 2022
As Previously ReportedAdjustmentAs RevisedAs Previously ReportedAdjustmentAs Revised
(in thousands, except per share data)
General and administrative$21,591 $1,115 $22,706 $68,379 $4,618 $72,997 
Total selling, general and administrative expenses28,614 1,115 29,729 95,314 4,618 99,932 
Operating loss(7,669)(1,115)(8,784)(34,569)(4,618)(39,187)
Loss before income taxes(7,332)(1,115)(8,447)(34,479)(4,618)(39,097)
Net loss(7,340)(1,115)(8,455)(34,612)(4,618)(39,230)
Net loss per share, basic$(0.11)$(0.02)$(0.13)$(0.51)$(0.07)$(0.58)
Net loss per share, diluted(0.11)(0.02)(0.13)(0.51)(0.07)(0.58)
Table 20.2: Impact of the Correction to the Unaudited Consolidated Statement of Comprehensive Loss
For the Three Months Ended September 30, 2022For the Nine Months Ended September 30, 2022
As Previously ReportedAdjustmentAs RevisedAs Previously ReportedAdjustmentAs Revised
(in thousands)
Net loss$(7,340)$(1,115)$(8,455)$(34,612)$(4,618)$(39,230)
Comprehensive loss(7,361)(1,115)(8,476)(34,615)(4,618)(39,233)
Table 20.3: Impact of the Correction to the Unaudited Consolidated Statement of Changes in Stockholders' Equity
For the Three Months Ended September 30, 2022For the Nine Months Ended September 30, 2022
As Previously ReportedAdjustmentAs RevisedAs Previously ReportedAdjustmentAs Revised
(in thousands)
Additional paid-in capital, beginning$388,464 $3,503 $391,967 $367,153 $— $367,153 
Stock-based compensation15,012 1,115 16,127 42,212 4,618 46,830 
Additional paid-in capital, end398,546 4,618 403,164 398,546 4,618 403,164 
Accumulated deficit, beginning$(214,249)$(3,503)$(217,752)$(186,977)$— $(186,977)
Net loss(7,340)(1,115)(8,455)(34,612)(4,618)(39,230)
Accumulated deficit, end(221,589)(4,618)(226,207)(221,589)(4,618)(226,207)
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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, 2022, as filed with the Securities and Exchange Commission ("SEC") on March 16, 2023.
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 17 – Segment Information to the unaudited consolidated financial statements at Item 1 of this Form 10-Q.
Fiscal year 2023 continues to be a transition year for Telos, focusing on streamlining our operations and rebuilding and growing the revenue base by generating new business wins. Our 2023 business development priorities are to:
•Reorganize internally to consolidate and centralize business development resources;
•Add new talent to drive execution of solution development and new business generation;