10-Q 1 tls-20240930.htm 10-Q tls-20240930
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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, 2024
¨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
x
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 5, 2024, the registrant had outstanding 72,380,609 shares of common stock.



Table of Contents to Third Quarter 2024 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, 2024September 30, 2023September 30, 2024September 30, 2023
(in thousands, except per share amounts)
Revenue – services$22,197 $34,385 $78,017 $94,866 
Revenue – products1,586 1,801 3,883 9,453 
Total revenue23,783 36,186 81,900 104,319 
Cost of sales – services (excluding impairment loss, depreciation and amortization)12,689 20,683 45,681 58,613 
Cost of sales – products (excluding impairment loss, depreciation and amortization)1,128 545 2,268 4,561 
Impairment loss on intangible assets5,333  5,333  
Depreciation and amortization1,490 1,945 4,807 2,291 
Total cost of sales20,640 23,173 58,089 65,465 
Gross profit3,143 13,013 23,811 38,854 
Operating expenses:
Research and development expenses2,409 2,805 7,038 8,284 
Selling, general and administrative expenses23,225 19,552 56,346 62,351 
Impairment loss on intangible assets6,373 349 6,373 349 
Total operating expenses32,007 22,706 69,757 70,984 
Operating loss(28,864)(9,693)(45,946)(32,130)
Other income983 1,222 3,299 5,367 
Interest expense(157)(178)(492)(611)
Loss before income taxes(28,038)(8,649)(43,139)(27,374)
Provision for income taxes(17)(23)(51)(68)
Net loss$(28,055)$(8,672)$(43,190)$(27,442)
Net loss per share:
Basic$(0.39)$(0.12)$(0.60)$(0.40)
Diluted$(0.39)$(0.12)$(0.60)$(0.40)
Weighted-average shares outstanding:
Basic72,309 69,571 71,654 69,062 
Diluted72,309 69,571 71,654 69,062 
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, 2024September 30, 2023September 30, 2024September 30, 2023
(in thousands)
Net loss$(28,055)$(8,672)$(43,190)$(27,442)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments22 29 (34)31 
Actuarial loss on pension liability adjustment  (30) 
Other comprehensive income (loss) 22 29 (64)31 
Comprehensive loss$(28,033)$(8,643)$(43,254)$(27,411)
See accompanying notes to the unaudited consolidated financial statements.
4

TELOS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, 2024December 31, 2023
(in thousands, except per share amount and share data)
Assets:
Cash and cash equivalents$69,762 $99,260 
Accounts receivable, net14,881 30,424 
Inventories, net 1,406 1,420 
Prepaid expenses12,017 7,520 
Other current assets1,253 1,367 
Total current assets99,319 139,991 
Property and equipment, net3,572 3,457 
Finance lease right-of-use assets, net5,696 6,612 
Operating lease right-of-use assets, net673 216 
Goodwill 17,922 17,922 
Intangible assets, net29,627 39,616 
Other assets9,520 885 
Total assets$166,329 $208,699 
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable and other accrued liabilities $6,289 $13,750 
Accrued compensation and benefits9,277 14,569 
Contract liabilities 6,779 6,728 
Finance lease obligations – current portion1,839 1,730 
Operating lease obligations – current portion205 97 
Other current liabilities2,904 2,324 
Total current liabilities27,293 39,198 
Finance lease obligations – non-current portion8,126 9,518 
Operating lease obligations – non-current portion472 123 
Deferred income taxes 849 813 
Other liabilities 106 44 
Total liabilities36,846 49,696 
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value, 250,000,000 shares authorized, 72,380,609 shares and 70,239,890 shares issued and outstanding as of September 30, 2024, and December 31, 2023, respectively
111 109 
Additional paid-in capital447,513 433,781 
Accumulated other comprehensive loss(124)(60)
Accumulated deficit(318,017)(274,827)
Total stockholders’ equity129,483 159,003 
Total liabilities and stockholders’ equity$166,329 $208,699 
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, 2024September 30, 2023
(in thousands)
Cash flows from operating activities:
Net loss$(43,190)$(27,442)
Adjustments to reconcile net loss to cash used in operating activities:
Stock-based compensation14,017 22,462 
Depreciation and amortization9,368 5,987 
Impairment loss on intangible assets11,706 349 
Deferred income tax provision37 37 
Accretion of discount in acquisition holdback 2 
(Gain) loss on disposal of fixed assets(13)1 
(Recovery from) provision for doubtful accounts(28)128 
Amortization of debt issuance costs52 51 
Gain on early extinguishment of other financing obligations (1,427)
Changes in other operating assets and liabilities:
Accounts receivable15,571 14,517 
Inventories14 1,893 
Prepaid expenses, other current assets, other assets(10,049)(4,106)
Accounts payable and other accrued payables(8,161)(14,942)
Accrued compensation and benefits(5,266)2,496 
Contract liabilities52 (670)
Other current liabilities470 (2,703)
Net cash used in operating activities(15,420)(3,367)
Cash flows from investing activities:
Capitalized software development costs(9,104)(11,960)
Purchase of investment(3,000) 
Purchases of property and equipment, net(381)(350)
Net cash used in investing activities(12,485)(12,310)
Cash flows from financing activities:
Payments under finance lease obligations(1,283)(1,180)
Payment of tax withholding related to net share settlement of equity awards(457)(1,676)
Proceeds from exercise of stock options149  
Payment of DFT holdback amount (564)
Repurchase of common stock (139)
Payments for debt issuance costs (114)
Net cash used in financing activities(1,591)(3,673)
Net change in cash, cash equivalents, and restricted cash(29,496)(19,350)
Cash, cash equivalents, and restricted cash, beginning of period99,396 119,438 
Cash, cash equivalents, and restricted cash, end of period$69,900 $100,088 
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 Loss
Accumulated DeficitTotal Stockholders’
Equity
SharesAmount
(in thousands)
Balance at June 30, 202472,223 $111 $439,146 $(146)$(289,962)$149,149 
Net loss— — — — (28,055)(28,055)
Foreign currency translation gain— — — 22 — 22 
Restricted stock unit awards vested, net of shares withheld to cover tax withholding132 — (28)— — (28)
Stock-based compensation— — 8,350 — — 8,350 
Issuance of common stock upon exercise of stock options25 — 45 — — 45 
Balance at September 30, 202472,380 $111 $447,513 $(124)$(318,017)$129,483 
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 

Common StockAdditional Paid-in
Capital
Accumulated
Other Comprehensive Loss
Accumulated DeficitTotal Stockholders’
Equity
SharesAmount
(in thousands)
Balance at December 31, 202370,240 $109 $433,781 $(60)$(274,827)$159,003 
Net loss— — — — (43,190)(43,190)
Foreign currency translation loss— — — (34)— (34)
Actuarial loss on pension liability adjustment— — — (30)— (30)
Restricted stock unit awards vested, net of shares withheld to cover tax withholding1,687 2 (459)— — (457)
Stock-based compensation— — 12,424 — — 12,424 
Issuance of common stock upon exercise of stock options83 — 149 — — 149 
Issuance of common stock for 401K match370 — 1,618 — — 1,618 
Balance at September 30, 202472,380 $111 $447,513 $(124)$(318,017)$129,483 
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 
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. ("Telos APAC").
On March 13, 2024, the Board of Directors unanimously approved the dissolution of Telos APAC, a pre-operating foreign subsidiary, pursuant to a plan of complete liquidation and dissolution. Telos APAC was dissolved on October 7, 2024.
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 in the first quarter of 2024, we reclassified sales and marketing expenses and general and administrative expenses to be presented together as selling, general and administrative ("SG&A") expenses on the consolidated statements of operations. In the third quarter of 2024, we started presenting impairment losses as separate line items from research and development ("R&D") expenses on the consolidated statements of operations. The reclassifications had no net impact on gross profit, total operating expenses or net loss in the unaudited consolidated statements of operations.
Use of Estimates
Preparing unaudited consolidated financial statements in conformity with U.S. 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.
8

Selling, General and Administrative Expenses
Selling, general and administrative expenses include general and administrative expenses, as well as direct and indirect sales and marketing expenses. These costs consist primarily of compensation and benefits (including incentive-based compensation), advertising, facilities, and certain types of depreciation and amortization.
Restructuring Expenses
From time to time, the Company initiates restructuring activities to execute management's strategy and optimize its cost structure. Restructuring activities may include streamlining its workforce or realignment of resources to support its business strategies and enhance operational efficiency.
2022 Restructuring Plan
As previously disclosed, in the fourth quarter of 2022, the Company committed to a restructuring plan to streamline its workforce and spending to better align its cost structure with its volume of business ("2022 restructuring"). The 2022 restructuring plan reduced the Company's workforce, with a majority of the affected employees separating from the business in early 2023. In connection with this restructuring plan, we incurred restructuring-related costs, including employee severance and related benefit costs. Employee severance and related benefit costs include cash payments, outplacement services and continuing health insurance coverage. Severance costs pursuant to ongoing-benefit arrangements are recognized when probable and reasonably estimated. Other related costs include external consulting and advisory fees related to implementing the restructuring plan. These costs are recognized at fair value in the period in which the costs are incurred.
The Company incurred a cumulative amount of $3.9 million of restructuring expenses, which is the total expected costs for this restructuring plan. The actions under this restructuring plan were substantially completed in fiscal year 2023 and were fully paid in the third quarter of 2024.
2024 Restructuring Plan
Beginning in the third quarter of 2024, the Company undertook another restructuring action in an effort to optimize its strategic priorities and cost structure ("2024 restructuring"). As part of the 2024 restructuring plan, the Company decided to discontinue the development and/or sale of selected solutions or parts of solutions, which resulted in the impairment of capitalized software assets and a reduction in workforce. The restructuring charges under the 2024 restructuring plan include severance and related benefit costs. The Company accrues severance and related benefit costs under the 2024 restructuring plan when it is probable that a liability exists and the amount is reasonably estimated.
As of September 30, 2024, the cumulative amount of incurred severance and benefit costs related to the 2024 restructuring plan was $1.4 million. The 2024 restructuring actions are expected to be completed and fully paid during the remainder of fiscal year 2024.
In addition, as a result of the Company's decision to abandon the development or sale of selected solutions in the third quarter of 2024, the Company wrote-off $6.4 million of its previously capitalized software assets. This was reported as an impairment loss on intangible assets under operating expenses on the unaudited consolidated statement of operations.
Table 2.1: Restructuring Expenses and Impairment Loss
Statements of OperationsFor the Three Months EndedFor the Nine Months Ended
September 30, 2024September 30, 2023September 30, 2024September 30, 2023
(in thousands)
2022 Restructuring Plan:
Severance and related benefit costsSG&A$ $ $(10)$(103)
Other related costsSG&A   1,300 
2024 Restructuring Plan:
Severance and related benefit costsCost of sales393  393  
Severance and related benefit costsR&D, SG&A1,054  1,054  
Total restructuring expenses1,447  1,437 1,197 
Impairment of intangible assets (1)
Impairment loss on intangible assets6,373  6,373  
Total restructuring expenses and impairment loss$7,820 $ $7,810 $1,197 
(1) The recoverability evaluation of intangible assets resulted in an $11.7 million impairment loss, of which $5.3 million was recorded under cost of sales for the discontinued parts of certain solutions, and $6.4 million was recorded under operating expenses as a result of the restructuring plan (see Note 8 - Intangible Assets, Net).
9

At each reporting date, the Company evaluates its restructuring expense accrual to determine if the liabilities reported are still appropriate. Any changes in the estimated costs of executing the approved restructuring plans are reflected in the Company's unaudited consolidated statement of operations.
Table 2.2: Summary of Changes in Restructuring Expenses Accrual
Severance and related benefit costs (1)
(in thousands)
Balance at December 31, 2023$400 
Expenses1,437 
Cash payments(490)
Balance at September 30, 2024$1,347 
(1) Restructuring expenses accrual is included within "Other current liabilities" on the Company's unaudited consolidated balance sheets (see Note 9 - Other Balance Sheet Components for further details).
Income Taxes
The period for which tax years are open, 2021 to 2023, has not been extended beyond the applicable statute of limitations. During September 2024, the Company was notified by the Internal Revenue Service that it is examining the Company's 2021 federal income tax return.
Recent Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board ("FASB") issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures." This standard requires disclosures, on an annual and interim basis, of significant segment expenses that are regularly provided to our chief operating decision maker ("CODM") and the aggregate amount of other segment items included in each reported measure of segment profit or loss. The ASU also requires that a public entity disclose the title and position of the CODM within the Company and an explanation of how the CODM uses the reported measures of segment profit or loss in assessing segment performance and deciding how to allocate resources. ASU 2023-07 will affect how we report segment information, starting with our Form 10-K for the year ended December 31, 2024, and our quarterly reports on Form 10-Q starting with our quarterly report for the quarter ended March 31, 2025. The amendments in this ASU should be applied retrospectively to all prior periods presented in the financial statements. We are evaluating these new segment disclosure requirements and the impact of their adoption on our unaudited consolidated financial statements.
In December 2023, the FASB issued ASU No. 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosure," which requires, on an annual basis, greater disaggregation of information about a reporting entity's effective tax rate reconciliation and additional information for reconciling items that meet a quantitative threshold. The ASU also requires information on income taxes paid. This standard applies to all entities subject to income taxes and will be effective for annual periods beginning after December 15, 2024, with early adoption permitted. The ASU should be applied on a prospective basis, although retrospective application is permitted. We are currently assessing the impact of the adoption of this ASU on our unaudited consolidated financial statements.
In November 2024, the FASB issued ASU 2024-03, "Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Topic 220): Disaggregation of Income Statement Expenses." This standard requires additional disclosure of certain amounts included in the expense captions presented on the statement of operations, as well as disclosures about selling expenses. The ASU is effective on a prospective basis, with the option for retrospective application, for annual periods beginning after December 15, 2026 and interim reporting periods beginning after December 15, 2027. Early adoption is permitted for annual financial statements that have not yet been issued. We are in the process of assessing the impact the adoption of this ASU on our unaudited consolidated financial statement.
In 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.
10

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 78% and 81% of our revenue for the three and nine months ended September 30, 2024, respectively, and 89% of our revenue for the three and nine months ended September 30, 2023, respectively. 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 22% and 19% of our revenue for the three and nine months ended September 30, 2024, respectively, and 11% of our revenue for the three and nine months ended September 30, 2023, respectively.
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 nine months ended September 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 September 30, 2024. We recorded an immaterial contract loss during the nine months ended September 30, 2024. No contract losses were recorded during the three and nine months ended September 30, 2023.
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 EndedFor the Nine Months Ended
September 30, 2024September 30, 2023September 30, 2024September 30, 2023
Amount%Amount%Amount%Amount%
(dollars in thousands)
Federal$20,607 87 %$32,955 91 %$72,046 88%$93,456 90%
State, local, and commercial3,176 13 %3,231 9 %9,854 12%10,863 10%
Total revenue$23,783 100 %$36,186 100 %$81,900 100 %$104,319 100 %
11

Table 3.2: Revenue by Contract Type
For the Three Months EndedFor the Nine Months Ended
September 30, 2024September 30, 2023September 30, 2024September 30, 2023
Amount%Amount%Amount%Amount%
(dollars in thousands)
Firm fixed-price$18,293 77 %$27,809 77 %$63,308 77%$80,116 77%
Time-and-materials3,045 13 %3,504 10 %9,204 11%10,608 10%
Cost plus fixed fee2,445 10 %4,873 13 %9,388 12%13,595 13%
Total revenue$23,783 100 %$36,186 100 %$81,900 100%$104,319 100 %
Table 3.3: Revenue Concentration Greater than 10% of Total Revenue
For the Three Months EndedFor the Nine Months Ended
September 30, 2024September 30, 2023September 30, 2024September 30, 2023
U.S. Department of Defense ("DoD")46%61%53%65%
U.S. Department of Homeland Security ("DHS")16%6%15%3%
Table 3.4: Contract Balances
Balance Sheet PresentationSeptember 30, 2024December 31, 2023
(in thousands)
Billed accounts receivable (1)
Accounts receivable, net$7,690 $17,818 
Unbilled accounts receivableAccounts receivable, net3,857 8,022 
Contract assetsAccounts receivable, net3,334 4,584 
Contract liabilitiesContract liabilities6,779 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 nine months ended September 30, 2024, which was included in the contract liabilities balance at the beginning of each reporting period, was $1.2 million and $5.7 million, respectively. Revenue recognized for the three and nine months ended September 30, 2023, which was included in the contract liabilities balance at the beginning of each reporting period, was $1.2 million and $5.3 million, respectively.
As of September 30, 2024, we had approximately $38.9 million of remaining performance obligations, which we also refer to as funded backlog. We expect to recognize approximately 87% 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, 2024December 31, 2023
(in thousands)
Billed accounts receivable$7,738 $18,101 
Unbilled accounts receivable3,857 8,022 
Contract assets3,334 4,584 
Allowance for credit losses (1)
(48)(283)
Accounts receivable, net$14,881 $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 92% and 91% of our billed and unbilled accounts receivable as of September 30, 2024, and December 31, 2023, respectively, were directly with U.S. government 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.
12

5. INVENTORIES, NET
Table 5: Details of Inventories, Net
September 30, 2024December 31, 2023
(in thousands)
Gross inventory$2,165 $2,179 
Allowance for inventory obsolescence(759)(759)
Inventories, net$1,406 $1,420 
6. PROPERTY AND EQUIPMENT, NET
Table 6.1: Details of Property and Equipment, Net
September 30, 2024December 31, 2023
Gross Carrying AmountAccumulated Depreciation and AmortizationNet Carrying ValueGross Carrying AmountAccumulated Depreciation and AmortizationNet Carrying Value
(in thousands)
Furniture and equipment$16,425 $(13,551)$2,874 $16,213 $(13,363)$2,850 
Leasehold improvements3,395 (2,697)698 3,211 (2,604)607 
Total$19,820 $(16,248)$3,572 $19,424 $(15,967)$3,457 
Table 6.2: Depreciation and Amortization Expense
For the Three Months EndedFor the Nine Months Ended
September 30, 2024September 30, 2023September 30, 2024September 30, 2023
(in thousands)
Depreciation and amortization expense$329 $548 $1,223 $1,700 
7. GOODWILL
The goodwill balance was $17.9 million as of September 30, 2024, and December 31, 2023, of which $3.0 million is allocated to the Security Solutions segment and $14.9 million is allocated to the Secure Networks segment. Goodwill is subject to annual impairment tests, and, if triggering events are present in the interim before the annual tests, we will assess impairment. No impairment charges were recorded for the three and nine months ended September 30, 2024, and 2023.
8. INTANGIBLE ASSETS, NET
Table 8.1: Details of Intangible Assets, Net
September 30, 2024December 31, 2023
Estimated Useful LifeGross Carrying AmountAccumulated AmortizationNet Carrying ValueGross Carrying AmountAccumulated AmortizationNet Carrying Value
(in years)(in thousands)
Acquired technology8$3,630 $(1,437)$2,193 $3,630 $(1,097)$2,533 
Customer relationship340 (40) 40 (32)8 
Software development costs
2 - 5
26,316 (14,255)12,061 35,312 (12,256)23,056 
Subtotal29,986 (15,732)14,254 38,982 (13,385)25,597 
In-process software development costs (1)
15,373 — 15,373 14,019 — 14,019 
Total$45,359 $(15,732)$29,627 $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.
13

The Company evaluates its intangible assets for potential impairment whenever there is evidence that events or changes in circumstances indicate that the carrying value may not be recoverable. During the third quarter of 2024, there were selected capitalized software projects for which the Company decided to discontinue the development and/or sale of all or a part of certain solutions and certain projects which the Company ceased use before the end of its useful life. As a result of the Company's decision to abandon the associated software, the Company wrote-off $11.7 million of the previously capitalized software costs, of which $5.3 million was recorded as "Impairment loss on intangible assets" under cost of sales and $6.4 million was recorded as "Impairment loss on intangible assets" under operating expenses in the Company's unaudited statement of operations for the three and nine months ended September 30, 2024. An impairment loss of $0.3 million was recorded under operating expenses for the three and nine months ended September 30, 2023, with no similar charges under cost of sales.
No impairment losses were recorded on other intangible assets during the three and nine months ended September 30, 2024, and 2023.
Table 8.2: Amortization Expense
For the Three Months EndedFor the Nine Months Ended
September 30, 2024September 30, 2023September 30, 2024September 30, 2023
(in thousands)
Amortization expense related to:
Software development costs – cost of sales (1)
$1,402 $1,767 $4,509 $1,767 
Software development costs – research and development588 (19)2,286 843 
Other intangible assets – general and administrative115 117 348 350 
Total$2,105 $1,865 $7,143 $2,960 
(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
September 30, 2024December 31, 2023
(in thousands)
Investment (1)
$3,000 $ 
Restricted cash138 136 
Other (2)
6,382 749 
Other assets$9,520 $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 nine months ended September 30, 2024, there were no changes in the fair value. This is categorized as Level 3 as a result of the non-marketable observable inputs.
(2) Includes long-term prepaid assets in the amount of $5.3 million as of September 30, 2024.
Table 9.2: Details of Accounts Payable and Other Accrued Liabilities
September 30, 2024December 31, 2023
(in thousands)
Accounts payable$2,796 $8,307 
Accrued payables3,493 5,443 
Accounts payable and other accrued liabilities$6,289 $13,750 
Table 9.3: Details of Other Current Liabilities
September 30, 2024December 31, 2023
(in thousands)
Other accrued expenses$1,085 $1,427 
Restructuring expenses accrual1,347 400 
Other472 497 
Other current liabilities$2,904 $2,324 
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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.
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 September 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. 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.
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The MPA provides that, if the customer terminates the DO for non-renewal and the Buyer reasonably concludes that the customer's actions constitute grounds for filing a claim with the customer's contracting officer, the Buyer and Telos will cooperate in preparing such a claim, which would be filed in Telos' name. During the third quarter of 2024, the Buyer, through Telos, filed a claim against the customer.
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.
On May 21, 2024, the Company authorized an additional 8,500,000 shares to be available under the 2016 LTIP, increasing the total number of shares available for issuance under the 2016 LTIP to 21,959,913 shares.
On May 16, 2024, the Company granted PSUs that could be settled in up to 1,335,281 shares of its common stock to certain senior executives and employees that will vest upon achieving certain operational milestones prior to January 1, 2027.
On May 28, 2024, the Company granted PSUs to certain senior executives and employees that could settle in up to 2,499,945 shares of its common stock. These PSUs may vest only if the Company achieves certain revenue and Free Cash Flow targets for fiscal year 2025. The Company also granted PSUs containing market conditions to certain executives that could settle in up to 6,875,000 shares of its common stock. These PSUs with market conditions may vest, in whole or in part, only if the Company's closing common stock price remains at or above certain specified stock prices for 50 consecutive calendar days prior to January 1, 2027.
The Company estimates the fair value for each tranche of the stock-based compensation awards subject to market conditions on the date of grant using a Monte Carlo simulation valuation model. Monte Carlo approaches are a class of computational algorithms that rely on repeated random sampling to compute their results. This approach allows the calculation of the value of such PSUs based on a large number of possible stock price path scenarios. The risk-free rate is based on the U.S. treasury zero-coupon issues in effect at the time of grant over the performance period. The expense for these awards is recognized over the derived service period as determined through the Monte Carlo simulation model.
Our key assumptions include a performance period of 2.59 years, an expected volatility of 83.9%, and a risk-free rate of 4.7%. The fair value for these market condition PSUs at the grant date ranges between $2.62 - $3.75, and the derived service periods ranges between 0.63 - 1.31 years.
The Company recognizes compensation expense for the performance-based awards with market conditions based on the grant-date fair value calculated using the Monte Carlo model, as described above. Stock-based compensation expense for the performance-based awards is estimated at each reporting date using management's expectation of the probable achievement of the specified performance targets and recognized over the requisite service period for each tranche on a graded-vesting basis.
Stock-based compensation expense recognized for restricted stock units and stock options granted to employees and non-employees is included in the unaudited consolidated statements of operations, net of adjustments. There were no income tax benefits recognized on the share-based compensation expense for the three and nine months ended September 30, 2024, and 2023.
In the second quarter of 2024, the performance targets for outstanding PSUs granted prior to 2024 were not probable of being achieved. Therefore, the Company recorded a cumulative catch-up adjustment for the change in its probability assessment, resulting in a $1.2 million decrease in stock-based compensation expense for the nine months ended September 30, 2024. The performance period for this PSU ended during the third quarter of 2024.
Table 11.1: Details of Stock Compensation Expense by Category
For the Three Months EndedFor the Nine Months Ended
September 30, 2024September 30, 2023September 30, 2024September 30, 2023
(in thousands)
Cost of sales – services$115 $73 $600 $624 
Research and development188 328 (261)1,945 
Selling, general and administrative8,511 4,817 13,678 19,893 
Total$8,814 $5,218 $14,017 $22,462 
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Restricted Stock
Table 11.2: Restricted Stock Unit Activity
Service-BasedPerformance-BasedTotal SharesWeighted-Average Grant Date Fair Value
Unvested outstanding units as of December 31, 20232,132,613 43,800 2,176,413 $5.07 
Granted1,780,180 10,710,226 12,490,406 3.47 
Vested(1,806,608) (1,806,608)4.41 
Forfeited, cancelled, or expired(65,506)(43,800)(109,306)13.82 
Unvested outstanding units as of September 30, 20242,040,679 10,710,226 12,750,905 $3.53 
As of September 30, 2024, the intrinsic value of the RSUs and PSUs outstanding, exercisable, and vested or expected to vest was $45.8 million. There was approximately $24.7 million of total compensation costs related to stock-based awards not yet recognized as of September 30, 2024, which is expected to be recognized on a straight-line basis over a weighted-average remaining vesting period of 0.9 years.
Stock Options
Table 11.3: Stock Option Activity
Stock Options OutstandingWeighted-Average Exercise PriceWeighted-Average Remaining Contractual Term (in years)Aggregate Intrinsic Value
Outstanding option balance as of December 31, 2023400,000 $1.80 9.4$740,000 
Granted  
Exercised(83,000)1.80 
Forfeited, cancelled, or expired  
Outstanding option balance as of September 30, 2024317,000 $1.80 8.6$567,430 
Exercisable stock option as of September 30, 2024317,000 $1.80 8.6$567,430 
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the quoted closing price of the Company's common stock as of September 30, 2024.
The fair value of the stock options, including the stock options granted to directors, is expensed on a straight-line basis over the vesting period of one year, as the annual stockholders meeting is expected to occur at the same approximate time each year.
As of September 30, 2024, there were no unrecognized compensation costs related to non-vested stock options.
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 nine months ended September 30, 2024, and 2023. As of September 30, 2024, there was approximately $38.7 million of the authorization remaining for future common stock repurchases under the SRP.
13. ACCUMULATED OTHER COMPREHENSIVE LOSS
Table 13: Details of Changes in the Components of Accumulated Other Comprehensive Loss
Foreign currency translation adjustmentPension liability adjustmentTotal
(in thousands)
Balance as of December 31, 2023$(167)$107 $(60)
Other comprehensive loss(34)(30)(64)
Balance as of September 30, 2024$(201)$77 $(124)
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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 EndedFor the Nine Months Ended
September 30, 2024September 30, 2023September 30, 2024September 30, 2023
(in thousands)
Weighted-average number of shares – unvested restricted stock units and stock options524 667 869 522 
For the three and nine months ended September 30, 2024, and 2023, the outstanding PSUs aggregating to 10,710,226 and 265,608 shares, respectively, have been excluded from the calculation of potentially dilutive securities above because the issuance of shares is contingent upon certain conditions which were not satisfied by the end of the current quarter.
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 earned by him as total compensation in 2023, including stock award and other benefits, was $249,000.
One of the Company’s directors also served as a consultant to the Company under a consultancy agreement that expired on December 31, 2023. The Company, at its election, paid the director a fixed amount, in the form of RSUs, for his services from January 1 through June 30, 2023. On January 3, 2023, the Company granted the director 16,859 RSUs, one-half of which vested on March 3, 2023, and the other half vested on May 18, 2023. From July 1 through December 31, 2023, the director was paid a fixed monthly retainer fee, plus additional fees and contingent bonus payments upon achievement of certain contract goals. Cash payments made for his consulting services were $32,000 for the three and nine months ended September 30, 2023.
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 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.
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Table 16: Results of Operations by Business Segment
For the Three Months EndedFor the Nine Months Ended
September 30, 2024September 30, 2023September 30, 2024September 30, 2023
(in thousands)
Revenues
Security Solutions$18,332 $19,795 $54,839 $56,764 
Secure Networks5,451 16,391 27,061 47,555 
Total revenue23,783 36,186 81,900 104,319 
Cost of sales (excluding impairment loss, depreciation and amortization)
Security Solutions9,201 8,498 26,505 25,304 
Secure Networks4,616 12,730 21,444 37,870 
Total cost of sales (excluding impairment loss, depreciation and amortization)13,817 21,228 47,949 63,174 
Impairment loss on intangible assets
Security Solutions5,333  5,333  
Secure Networks    
Total impairment loss on intangible assets5,333  5,333  
Depreciation and amortization
Security Solutions1,488 1,943 4,800 2,281 
Secure Networks2 2 7 10 
Total depreciation and amortization1,490 1,945 4,807 2,291 
Gross profit
Security Solutions2,310 9,354 18,201 29,179 
Secure Networks833 3,659 5,610 9,675 
Total gross profit3,143 13,013 23,811 38,854 
Operating expenses (1)
32,007 22,706 69,757 70,984 
Operating loss(28,864)(9,693)(45,946)(32,130)
Other income983 1,222 3,299 5,367 
Interest expense(157)(178)(492)(611)
Loss before income taxes(28,038)(8,649)(43,139)(27,374)
Provision for income taxes(17)(23)(51)(68)
Net loss$(28,055)$(8,672)$(43,190)$(27,442)
(1) This includes an impairment loss of $6.4 million for the three and nine months ended September 30, 2024, and $0.3 million for the three and nine months ended September 30, 2023.
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 September 30, 2024.
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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
September 30, 2024December 31, 2023
(in thousands)
Cash and cash equivalents$69,762 $99,260 
Restricted cash (1)
138 136 
Cash, cash equivalents, and restricted cash$69,900 $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 Nine Months Ended
September 30, 2024September 30, 2023
(in thousands)
Cash paid during the period for:
Interest$427 $548 
Income taxes100 147 
Non-cash investing and financing activities:
Operating lease ROU assets obtained in exchange for operating lease liabilities$626 $67 
Capital expenditure activity in accounts payable and other accrued liabilities1,041 173 
Issuance of common stock for 401K match1,619 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 continues to optimize its solution portfolio, expand its business pipeline, strengthen new business proposals and build a healthy culture by engaging employees through improved synergy, performance management, and benefits. With this foundation established, the Company's current year priorities remain focused on strategically increasing its business development pipeline, effective execution of significant new business wins with our prime partners, and further expansion of TSA PreCheck® enrollment sites.
Business Environment
U.S. Budget
The fiscal year ("FY") 2024 budget appropriation was approved in March 2024 and has allowed federal departments and agencies to proceed 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 FY2024, with base defense spending capped at $886 billion (a three percent increase from FY2023) and base non-defense spending capped at $704 billion (up to a nine percent decrease from FY2023).
In March 2024, the U.S. President proposed the annual appropriations for FY2025 to fit within the tight caps set as part of last year's debt ceiling agreements. The Defense Department budget includes $850 billion in discretionary budget authority for 2025, a $34 billion or 4.1% increase from the 2023 enacted level. This growth is in alignment with levels agreed to in the FRA of 2023 and enables the DoD to make the investments necessary to execute the Administration's 2022 National Security Strategy and 2022 National Defense Strategy.
The President's FY2025 budget also proposed several increases for key cyber programs and initiatives. For FY2025, the White House had directed agencies to prioritize cyber investments in "secure by design" technologies and the modernization of legacy technology. The budget provides $13 billion in cybersecurity funding across civilian departments and agencies to advance the Administration's commitment to making cyberspace more resilient and defensible. The proposed FY2025 budget includes $3 billion for the Cybersecurity and Infrastructure Security Agency ("CISA"), a $103 million increase over the agency's current budget. CISA's 2025 cyber budget proposal also includes $469.8 million for the Continuous Diagnostics and Mitigation ("CDM") program, wherein the agency would use the CDM funding to complete mobile asset deployments, continued asset deployments, initiate Internet of Things ("IoT") activities in asset management, continue to fill gaps in identity and access management capabilities, and align the agency to Zero Trust use cases. In the wake of the President's executive order on artificial intelligence last fall, the 2025 budget proposal includes plenty of AI-related spending, much of which intersects with cybersecurity and AI safety. This includes $470 million to deploy Federal network tools, including endpoint detection and response capabilities; $394 million for CISA's internal cybersecurity and analytical capabilities; $41 million for critical infrastructure security coordination; and $116 million for critical infrastructure cyber event reporting.
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Congress was unable to enact any of its annual appropriation bills before the start of FY2025 on October 1, 2024. Instead, Congress passed and the President has signed into law a Continuing Resolution ("CR") that will extend funding for the federal government until December 20, 2024. The CR provides minimal needed spending adjustments for certain programs to ensure that the federal government can receive adequate funding to operate for the duration of the CR. However, in the current political environment in Congress and with the presidential election in November 2024, it is highly questionable whether Congress and the President will reach an agreement on FY2025 appropriations bills within the duration of the CR. This means the Defense Department and the rest of the federal government will likely be restricted from beginning their planned expenditures in FY2025.
Cybersecurity Landscape
The scope of cybersecurity is on the edge of transformative changes. Cyber threats are not just escalating in frequency but are also becoming more sophisticated, thus challenging traditional security standards. In this rapidly evolving cybersecurity landscape, the need for vigilant defense is vital, and cybersecurity is a priority for organizations to mitigate their risk and keep safe from threats and exploitation. Understanding the threat environment and the impending trends (both current and future) is a matter of foresight and is crucial in designing effective security strategies. The Defense Department's budget continues to invest in cybersecurity programs to protect the nation from malicious cyber actors and cyber campaigns. These investments strengthen cyber protection standards for the defense industrial base ("DIB") and cybersecurity of DoD networks. With this growing threat, below are some trends to consider when looking at the cybersecurity landscape:
Addresses Emerging Cyber and Counterintelligence Threats: The FY2025 budget expands the Department of Justice’s ("DOJ") ability to pursue threats through investments in the FBI’s cyber and counterintelligence investigative capabilities. These investments sustain the FBI’s cyber intelligence, counterintelligence, and analysis capabilities and include funding to enhance those cyber response and counterintelligence capabilities. The budget also includes funding to expand a new section within the DOJ’s National Security Division to focus on cyber threats. These investments align with the National Cybersecurity Strategy that emphasizes a whole-of-nation approach to addressing ongoing cyber threats. Finally, the budget also provides for the DOJ to support the implementation of Executive Order 14110, “Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence.”
Rising Threats, Rising Liability: Ransomware remains arguably the most severe cyber threat to enterprises in the commercial, state, and local government and education sectors. Phishing is one of the top distribution channels for ransomware. Modern phishing attacks have become adept at bypassing traditional security measures, using more personalized and technically advanced tactics to deceive users. 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 IoT continues its rapid growth, interconnecting an increasing number of devices. However, this expansion brings with it a host of security challenges. The widespread range of IoT devices make them attractive targets for cyberattacks, and their interrelated nature can lead to pervasive susceptibilities.
Navigating a Changing Regulatory Landscape and Compliance: The regulatory landscape governing cybersecurity is developing swiftly. Over time, the government mandates stronger security in highly regulated industries. These government initiatives and audit fatigue continue to burden highly regulated organizations, with automation solutions recognized as the most effective remedy for the many repetitive and redundant tasks that security compliance requires.
Additionally, the SEC adopted new rules on cybersecurity risk management, strategy, governance and incident disclosure by public companies. The required reporting of this information leads 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 continue 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. The shift to a Zero Trust framework represents a fundamental change in approach in cybersecurity, focusing on identity and access management, continuous monitoring and robust authentication mechanisms to establish a secure digital environment.
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Enhancing Identity Security: The shift towards biometric authentication methods is redesigning identity verification in the digital domain. Integrating biometrics with multi-factor authentication can provide a robust defense against unauthorized access.
Machine Learning: Artificial Intelligence ("AI") and Machine Learning are set to play a critical role in cybersecurity. Cybercriminals are using AI to launch more sophisticated attacks that can quickly adapt to changing environments, making detection harder. AI's advanced data analysis capabilities are increasingly used for defensive measures over time. 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. The DoD budget provides $455 million to extend the frontiers of AI for science and technology and to increase AI’s safety, security, and resilience. These investments enhance the DoD’s computing capabilities and support the development of AI testbeds to build foundation models for energy security, national security, and climate resilience as well as tools to evaluate AI capabilities to generate outputs that may represent nuclear, nonproliferation, biological, chemical, critical-infrastructure, and energy security threats or hazards.
Financial Overview
A number of factors have contributed to our third quarter ended September 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.
The decline in our year-over-year revenue was primarily driven by the successful completion and ramp down of programs in Secure Networks without corresponding new business wins to backfill completed programs.
The growth in TSA PreCheck revenue was driven by the increase in our enrollment locations.
The reduction in our gross margins was driven by the impact of an impairment loss on intangible assets of $5.3 million and an increase in restructuring expenses of $0.4 million.
Higher operating expenses were due to an impairment loss on intangible assets of $6.4 million and higher stock-based compensation expense.
Results of Operations
Table MD&A 1: Consolidated Results of Operations
For the Three Months EndedFor the Nine Months Ended
September 30, 2024September 30, 2023Dollar ChangeSeptember 30, 2024September 30, 2023Dollar Change
(dollars in thousands)
Revenue$23,783 $36,186 $(12,403)$81,900 $104,319 $(22,419)
Cost of sales20,640 23,173 (2,533)58,089 65,465 (7,376)
Gross profit3,143 13,013 (9,870)23,811 38,854 (15,043)
Gross margin13.2 %36.0 %29.1 %37.2 %
Operating expenses32,007 22,706 9,301 69,757 70,984