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

FORM 10-Q


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

For the quarterly period ended: June 30, ~~2022~~2023


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

Commission file number: 001-08443

TELOS CORPORATION

(Exact name of registrant as specified in its charter)


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

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

(703) 724-3800

(Registrant’s telephone number, including area code)

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


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

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

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

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

Large accelerated filer

☒¨

Accelerated filer

☐x

Non-accelerated filer

☐¨

Smaller reporting company

☐¨

Emerging growth company

☐¨

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

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

As of August ~~5, 2022,~~4, 2023, the registrant had outstanding ~~67,593,945~~69,582,809 shares of common stock.

~~Tab~~l eTable of Contents

Table of Contents to Second Quarter ~~2022~~2023 Form 10-Q


		Page
~~Part~~PART I - ~~Financial Information~~FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
	Consolidated Statements of Operations	3
	Consolidated Statements of Comprehensive Loss	4
	Consolidated Balance Sheets	5
	Consolidated Statements of Cash Flows	6
	Consolidated ~~Statement~~Statements of Changes in ~~Stockholders~~'Stockholders’ Equity	7
	Notes to ~~the~~ Consolidated Financial Statements	8
	1. Organization	8
	2. Significant Accounting Policies	8
	3. Revenue Recognition	10
	4. Accounts Receivable, Net	11
	5. Inventories, Net	12
	6. Property and Equipment, Net	12
	7. Goodwill	12
	8. Intangible Assets, Net	12
	9. ~~Acquisition~~	12
	~~10. Purchase of Telos ID Non-controlling Interests~~Other Balance Sheet Components	13
	1 1 . A ~~ccounts Payable~~10. Debt and Other ~~Accrued Liabilities~~Obligations	13
	1 2 ~~. Stock-Based Compensation~~	13
	1 3 ~~. Share Repurchases~~11. Acquisition	14
	12. Stock-Based Compensation	14
	113. Share Repurchases	416
	.14. Accumulated Other Comprehensive Loss	1416
	1 5 . 15. Loss per Share	1416
	1 6 .16. Related Party Transactions	1516
	1 7 .17. Segment Information	1517
	118. Commitments and Contingencies	818
	.19. Supplemental Cash Flow Information	18
	20. Revision of Prior Year Interim Financial Statements	1619
	1 9 ~~. Commitments and Contingencies~~	18
	~~20. Supplemental Cash Flow Information~~	18
Item 2.	~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations	1920
	Forward-Looking Statements	1920
	General and Business Overview	1920
	Business Environment	20
	Backlog	2221
	Financial Overview	22
	Results of Operations	22
	Non-GAAP Financial Measures	2524
	Liquidity and Capital Resources	2726
	Critical Accounting Policies and Estimates	2726
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27
Item 4.	Controls and Procedures	2827
~~Part~~PART II - ~~Other Information~~OTHER INFORMATION		3028
Item 1.	Legal Proceedings	3028
Item 1A.	Risk Factors	3028
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3028
Item 3.	Defaults ~~Upon~~upon Senior Securities	3029
Item 4.	Mine Safety Disclosures	3029
Item 5.	Other Information	3029
Item 6.	Exhibits	3129
	~~Signatures~~SIGNATURES	3230

~~Tab~~l eTable of Contents

PART I -– FINANCIAL INFORMATION

Item 1. Financial ~~Statements.~~Statements

~~Telos Corporation~~TELOS CORPORATION

~~Consolidated Statements of Operations~~CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


		For the Three Months Ended				For the Six Months Ended					For the Three Months Ended				For the Six Months Ended
		June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021			June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022

		(in thousands, except per share amounts)									(in thousands, except per share amounts)
Revenue – services	Revenue – services	$	50,270	$	49,003	$	98,378	$	101,061	Revenue – services	$	28,947	$	50,270	$	60,481	$	98,378
Revenue – products	Revenue – products	5,521		4,641		7,573		8,341		Revenue – products	3,964		5,521		7,652		$	7,573
Total revenue	Total revenue	55,791		53,644		105,951		109,402		Total revenue	32,911		55,791		68,133		105,951
Cost of sales – services	Cost of sales – services	31,436		28,609		61,167		68,099		Cost of sales – services	19,008		31,436		38,276		61,167
Cost of sales – products	Cost of sales – products	3,426		2,501		4,984		4,299		Cost of sales – products	1,544		3,426		4,016		4,984
Total cost of sales	Total cost of sales	34,862		31,110		66,151		72,398		Total cost of sales	20,552		34,862		42,292		66,151
Gross profit	Gross profit	20,929		22,534		39,800		37,004		Gross profit	12,359		20,929		25,841		39,800
Selling, general and administrative expenses:
Selling, general and administrative expenses										Selling, general and administrative expenses
Sales and marketing	Sales and marketing	4,741		5,043		9,993		8,869		Sales and marketing	1,793		4,741		3,436		9,993
Research and development	Research and development	4,489		5,327		9,919		9,388		Research and development	2,646		4,489		5,479		9,919
General and administrative	General and administrative	23,865		29,635		46,788		49,712		General and administrative	17,387		25,735		39,363		50,291
Total selling, general and administrative expenses	Total selling, general and administrative expenses	33,095		40,005		66,700		67,969		Total selling, general and administrative expenses	21,826		34,965		48,278		70,203
Operating loss	Operating loss	(12,166)		(17,471)		(26,900)		(30,965)		Operating loss	(9,467)		(14,036)		(22,437)		(30,403)
Other income/(expense)		118		32		130		(1,022)
Other income										Other income	1,649		118		4,145		130
Interest expense	Interest expense	(187)		(192)		(377)		(388)		Interest expense	(184)		(187)		(433)		(377)
Loss before income taxes	Loss before income taxes	(12,235)		(17,631)		(27,147)		(32,375)		Loss before income taxes	(8,002)		(14,105)		(18,725)		(30,650)
Provision for income taxes	Provision for income taxes	(54)		(13)		(125)		(47)		Provision for income taxes	(22)		(54)		(45)		(125)
Net loss	Net loss	$	(12,289)	$	(17,644)	$	(27,272)	$	(32,422)	Net loss	$	(8,024)	$	(14,159)	$	(18,770)	$	(30,775)

Net loss per share:	Net loss per share:									Net loss per share:
Basic	Basic	$	(0.18)	$	(0.26)	$	(0.40)	$	(0.49)	Basic	$	(0.12)	$	(0.21)	$	(0.27)	$	(0.45)
Diluted	Diluted	$	(0.18)	$	(0.26)	$	(0.40)	$	(0.49)	Diluted	$	(0.12)	$	(0.21)	$	(0.27)	$	(0.45)

Weighted average shares outstanding:
Weighted-average shares outstanding:										Weighted-average shares outstanding:
Basic	Basic	67,876		66,616		67,717		65,621		Basic	69,424		67,876		68,804		67,717
Diluted	Diluted	67,876		66,616		67,717		65,621		Diluted	69,424		67,876		68,804		67,717

See accompanying notes to the unaudited consolidated financial statements.

~~Tab~~l eTable of Contents

~~Telos Corporation~~TELOS CORPORATION

~~Consolidated Statements of Comprehensive Loss~~CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)


		For the Three Months Ended				For the Six Months Ended					For the Three Months Ended				For the Six Months Ended
		June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021			June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022

		(in thousands)									(in thousands)
Net loss	Net loss	$	(12,289)	$	(17,644)	$	(27,272)	$	(32,422)	Net loss	$	(8,024)	$	(14,159)	$	(18,770)	$	(30,775)
Other comprehensive (loss)/income, net of tax:
Other comprehensive loss, net of tax:										Other comprehensive loss, net of tax:
Foreign currency translation adjustments	Foreign currency translation adjustments	(11)		5		18		(27)		Foreign currency translation adjustments	(11)		(11)		2		18
Comprehensive loss	Comprehensive loss	$	(12,300)	$	(17,639)	$	(27,254)	$	(32,449)	Comprehensive loss	$	(8,035)	$	(14,170)	$	(18,768)	$	(30,757)

See accompanying notes to the unaudited consolidated financial statements.

~~Tab~~l eTable of Contents

~~Telos Corporation~~TELOS CORPORATION

~~Consolidated Balance Sheets~~CONSOLIDATED BALANCE SHEETS

(Unaudited)


		June 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022

		(in thousands, except per share and share data)					(in thousands, except per share amount and share data)
Assets:	Assets:					Assets:
Cash and cash equivalents	Cash and cash equivalents	$	122,588	$	126,562	Cash and cash equivalents	$	103,447	$	119,305
Accounts receivable, net	Accounts receivable, net	50,676		59,844		Accounts receivable, net	34,290		40,069
Inventories, net	Inventories, net	3,630		1,247		Inventories, net	1,767		2,877
Prepaid expenses	Prepaid expenses	6,778		3,329		Prepaid expenses	7,321		4,819
Other current assets	Other current assets	947		732		Other current assets	1,850		893
Total current assets	Total current assets	184,619		191,714		Total current assets	148,675		167,963
Property and equipment, net	Property and equipment, net	5,571		6,088		Property and equipment, net	3,842		4,787
Finance lease right-of-use assets, net	Finance lease right-of-use assets, net	8,442		9,053		Finance lease right-of-use assets, net	7,222		7,832
Operating lease right-of-use assets		569		852
Operating lease right-of-use assets, net						Operating lease right-of-use assets, net	326		341
Goodwill	Goodwill	17,922		17,922		Goodwill	17,922		17,922
Intangible assets, net	Intangible assets, net	23,783		19,199		Intangible assets, net	37,814		37,415
Other assets	Other assets	1,052		1,253		Other assets	1,059		1,137
Total assets	Total assets	$	241,958	$	246,081	Total assets	$	216,860	$	237,397
Liabilities and Stockholders' Equity:	Liabilities and Stockholders' Equity:					Liabilities and Stockholders' Equity:
Liabilities:	Liabilities:					Liabilities:
Accounts payable and other accrued liabilities	Accounts payable and other accrued liabilities	$	35,412	$	34,548	Accounts payable and other accrued liabilities	$	16,506	$	22,551
Accrued compensation and benefits	Accrued compensation and benefits	9,280		6,557		Accrued compensation and benefits	9,862		8,388
Contract liabilities	Contract liabilities	4,799		6,381		Contract liabilities	6,138		6,444
Finance lease obligations, current portion		1,525		1,461
Operating lease obligations, current portion		450		564
Finance lease obligations – current portion						Finance lease obligations – current portion	1,660		1,592
Operating lease obligations – current portion						Operating lease obligations – current portion	350		361
Other financing obligations – current portion						Other financing obligations – current portion	—		1,247
Other current liabilities	Other current liabilities	2,734		1,430		Other current liabilities	3,317		4,919
Total current liabilities	Total current liabilities	54,200		50,941		Total current liabilities	37,833		45,502
Finance lease obligations, non-current portion		12,066		12,840
Operating lease liabilities, non-current portion		192		388
Finance lease obligations – non-current portion						Finance lease obligations – non-current portion	10,406		11,248
Operating lease liabilities – non-current portion						Operating lease liabilities – non-current portion	—		27
Other financing obligations – non-current portion						Other financing obligations – non-current portion	—		7,211
Deferred income taxes	Deferred income taxes	748		723		Deferred income taxes	782		758
Other liabilities	Other liabilities	440		935		Other liabilities	303		297
Total liabilities	Total liabilities	67,646		65,827		Total liabilities	49,324		65,043
Commitments and contingencies (Note 1 9)		0		0
Stockholders’ equity
Common stock, $0.001 par value, 250,000,000 shares authorized, 67,594,301 shares and 66,767,450 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively		106		105
Commitments and contingencies						Commitments and contingencies
Stockholders’ equity:						Stockholders’ equity:
Common stock, $0.001 par value, 250,000,000 shares authorized, 69,466,777 shares and 67,431,632 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively						Common stock, $0.001 par value, 250,000,000 shares authorized, 69,466,777 shares and 67,431,632 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively	108		106
Additional paid-in capital	Additional paid-in capital	388,464		367,153		Additional paid-in capital	426,656		412,708
Accumulated other comprehensive loss		(9)		(27)
Accumulated other comprehensive income						Accumulated other comprehensive income	(53)		(55)
Accumulated deficit	Accumulated deficit	(214,249)		(186,977)		Accumulated deficit	(259,175)		(240,405)
Total stockholders’ equity	Total stockholders’ equity	174,312		180,254		Total stockholders’ equity	167,536		172,354
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	241,958	$	246,081	Total liabilities and stockholders’ equity	$	216,860	$	237,397

See accompanying notes to the unaudited consolidated financial statements.

~~Tab~~l eTable of Contents

~~Telos Corporation~~TELOS CORPORATION

~~Consolidated Statements of Cash Flows~~CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


		For the Six Months Ended					For the Six Months Ended
		June 30, 2022		June 30, 2021			June 30, 2023		June 30, 2022

		(in thousands)					(in thousands)
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net loss	Net loss	$	(27,272)	$	(32,422)	Net loss	$	(18,770)	$	(30,775)
Adjustments to reconcile net loss to cash flows provided by/(used in) operating activities:
Adjustments to reconcile net loss to cash (used in)/provided by operating activities:						Adjustments to reconcile net loss to cash (used in)/provided by operating activities:
Stock-based compensation	Stock-based compensation	29,504		35,006		Stock-based compensation	17,244		33,007
Depreciation and amortization	Depreciation and amortization	2,910		2,764		Depreciation and amortization	3,121		2,910
Deferred income tax provision	Deferred income tax provision	25		18		Deferred income tax provision	24		25
Accretion of discount on acquisition holdback		23		—
Accretion of discount in acquisition holdback						Accretion of discount in acquisition holdback	2		23
Loss on disposal of fixed assets	Loss on disposal of fixed assets	1		5		Loss on disposal of fixed assets	1		1
Provision for doubtful accounts	Provision for doubtful accounts	66		11		Provision for doubtful accounts	117		66
(Recovery from)/provision for inventory obsolescence		(108)		14
Changes in other operating assets and liabilities
Amortization of debt issuance costs						Amortization of debt issuance costs	35		—
Gain on early extinguishment of other financing obligations						Gain on early extinguishment of other financing obligations	(1,427)		—
Changes in other operating assets and liabilities:						Changes in other operating assets and liabilities:
Accounts receivable	Accounts receivable	9,102		(9,595)		Accounts receivable	5,662		9,102
Inventories	Inventories	(2,275)		1,513		Inventories	1,111		(2,383)
Prepaid expenses, other current assets, and other assets		(3,324)		(2,417)
Prepaid expenses, other current assets, other assets						Prepaid expenses, other current assets, other assets	(3,445)		(3,324)
Accounts payable and other accrued payables	Accounts payable and other accrued payables	567		1,278		Accounts payable and other accrued payables	(6,255)		567
Accrued compensation and benefits	Accrued compensation and benefits	419		632		Accrued compensation and benefits	(235)		419
Contract liabilities	Contract liabilities	(1,582)		271		Contract liabilities	(307)		(1,582)
Other current liabilities and other liabilities		76		(432)
Net cash provided by/(used in) operating activities		8,132		(3,354)
Other current liabilities						Other current liabilities	(1,091)		76
Net cash (used in)/provided by operating activities						Net cash (used in)/provided by operating activities	(4,213)		8,132
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Capitalized software development costs	Capitalized software development costs	(5,134)		(3,663)		Capitalized software development costs	(8,198)		(5,134)
Purchases of property and equipment	Purchases of property and equipment	(641)		(1,070)		Purchases of property and equipment	(270)		(641)
Net cash used in investing activities	Net cash used in investing activities	(5,775)		(4,733)		Net cash used in investing activities	(8,468)		(5,775)
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Payments under finance lease obligations	Payments under finance lease obligations	(710)		(650)		Payments under finance lease obligations	(775)		(710)
Payment of tax withholding related to net share settlement of equity awards	Payment of tax withholding related to net share settlement of equity awards	(2,886)		—		Payment of tax withholding related to net share settlement of equity awards	(1,584)		(2,886)
Repurchase of common stock	Repurchase of common stock	(2,603)		(1,251)		Repurchase of common stock	(139)		(2,603)
Proceeds from issuance of common stock, net of issuance costs		—		64,269
Repurchase of outstanding warrants		—		(26,894)
Distributions to Telos ID Class B member – non-controlling interest		—		(2,436)
Net cash (used in)/provided by financing activities		(6,199)		33,038
Payment of DFT holdback amount						Payment of DFT holdback amount	(564)		—
Payments for debt issuance costs						Payments for debt issuance costs	(114)		—
Net cash used in financing activities						Net cash used in financing activities	(3,176)		(6,199)
Net change in cash, cash equivalents, and restricted cash	Net change in cash, cash equivalents, and restricted cash	(3,842)		24,951		Net change in cash, cash equivalents, and restricted cash	(15,857)		(3,842)
Cash, cash equivalents and restricted cash, beginning of period		126,562		106,045
Cash, cash equivalents and restricted cash, end of period		$	122,720	$	130,996
Cash, cash equivalents, and restricted cash, beginning of period						Cash, cash equivalents, and restricted cash, beginning of period	119,438		126,562
Cash, cash equivalents, and restricted cash, end of period						Cash, cash equivalents, and restricted cash, end of period	$	103,581	$	122,720

See accompanying notes to the unaudited consolidated financial statements.

~~Tab~~l eTable of Contents

~~Telos Corporation~~TELOS CORPORATION

~~Consolidated Statements of Changes in Stockholders' Equity~~CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)


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

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

Balance at March 31, 2022	Balance at March 31, 2022	67,867	$	106			$	376,913						$	2			$	(201,960)		$	175,061	Balance at March 31, 2022		67,867			$	106			$	378,546			$	2			$	(203,593)	$	175,061
Net loss	Net loss	—	—		—				—			(12,289)				(12,289)			Net loss	—			—			—				—				(14,159)				(14,159)
Foreign currency translation loss	Foreign currency translation loss	—	—		—				(11)			—				(11)			Foreign currency translation loss	—			—			—				(11)				—				(11)
Stock-based compensation expense, excluding accrued compensation		—	—		14,553				—			—				14,553
Restricted stock unit awards vested, net of shares withheld to cover tax withholding																			Restricted stock unit awards vested, net of shares withheld to cover tax withholding	87			—			—				—				—				—
Stock-based compensation																			Stock-based compensation	—			—			16,423				—				—				16,423
Repurchase of common stock	Repurchase of common stock	(360)	—		(3,002)				—			—				(3,002)			Repurchase of common stock	(360)			—			(3,002)				—				—				(3,002)
RSUs vested, net of shares withheld to cover tax withholding		87	—		—				—			—				—
Balance at June 30, 2022	Balance at June 30, 2022	67,594	$	106	$	388,464			$	(9)		$	(214,249)			$	174,312		Balance at June 30, 2022	67,594			$	106		$	391,967			$	(9)			$	(217,752)			$	174,312

Balance at March 31, 2021		64,625	$	103	$	284,470			$	12		$	(158,621)			$	125,964
Net loss		—	—		—				—			(17,644)				(17,644)
Issuance of common stock		2,050	2		64,267				—			—				64,269
Foreign currency translation gain		—	—		—				5			—				5
Stock-based compensation expense		—	—		21,336				—			—				21,336
Repurchase of outstanding warrants		—	—		(26,894)				—			—				(26,894)
Repurchase of common stock		(40)	—		(1,251)				—			—				(1,251)
Balance at June 30, 2021		66,635	$	105	$	341,928			$	17		$	(176,265)			$	165,785


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

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

Balance at December 31, 2021	Balance at December 31, 2021	66,767	$	105			$	367,153						$	(27)			$	(186,977)		$	180,254	Balance at December 31, 2021		66,767			$	105			$	367,153			$	(27)			$	(186,977)	$	180,254
Net loss	Net loss	—	—		—				—			(27,272)				(27,272)			Net loss	—			—			—				—				(30,775)				(30,775)
Foreign currency translation gain		—	—		—				18			—				18
Stock-based compensation expense, excluding accrued compensation		—	—		27,200				—			—				27,200
Foreign currency translation loss																			Foreign currency translation loss	—			—			—				18				—				18
Restricted stock unit awards vested, net of shares withheld to cover tax withholding																			Restricted stock unit awards vested, net of shares withheld to cover tax withholding	1,187			1			(2,887)				—				—				(2,886)
Stock-based compensation																			Stock-based compensation	—			—			30,703				—				—				30,703
Repurchase of common stock	Repurchase of common stock	(360)	—		(3,002)				—			—				(3,002)			Repurchase of common stock	(360)			—			(3,002)				—				—				(3,002)
RSUs vested, net of shares withheld to cover tax withholding		1,187	1		(2,887)				—			—				(2,886)
Balance at June 30, 2022	Balance at June 30, 2022	67,594	$	106	$	388,464			$	(9)		$	(214,249)			$	174,312		Balance at June 30, 2022	67,594			$	106		$	391,967			$	(9)			$	(217,752)			$	174,312

Balance at December 31, 2020		64,625	$	103	$	270,800			$	44		$	(143,843)			$	127,104
Net loss		—	—		—				—			(32,422)				(32,422)
Issuance of common stock		2,050	2		64,267				—			—				64,269
Foreign currency translation loss		—	—		—				(27)			—				(27)
Stock-based compensation expense		—	—		35,006				—			—				35,006
Repurchase of outstanding warrants		—	—		(26,894)				—			—				(26,894)
Repurchase of common stock		(40)	—		(1,251)				—			—				(1,251)
Balance at June 30, 2021		66,635	$	105	$	341,928			$	17		$	(176,265)			$	165,785

See accompanying notes to the unaudited consolidated financial statements.

~~Tab~~l eTable of Contents

~~Telos Corporation~~TELOS CORPORATION

~~Notes to the Unaudited Consolidated Financial Statements~~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 ~~share capital~~shares of Xacta Corporation, a subsidiary that develops, markets and sells government-validated secure enterprise solutions to government and commercial customers. We ~~also~~ own ~~all of~~ the issued and outstanding share capital of ~~Ubiquity.com, Inc.~~ubIQuity.com, inc., a holding company for Xacta Corporation. We also have a 100% ownership interest in Telos Identity Management Solutions, LLC (“("Telos ~~ID”~~ID"), Teloworks, Inc. ~~(“Teloworks”)~~, and Telos APAC Pte. Ltd. ~~(“Telos APAC”).~~

On November 12, 2020, we amended our charter to effect an approximate 0.794-for-1 reverse stock split with respect to our common stock. The par value and the authorized shares of the common stock were not adjusted as a result of the reverse stock split. The accompanying consolidated financial statements and notes to the consolidated financial statements give retroactive effect to the reverse stock split for all periods presented.

On November 19, 2020, we completed our initial public offering ("IPO") of shares of our common stock. We issued 17.2 million shares of our common stock at a price of $17.00 per share, generating net proceeds of approximately $272.8 million. We used approximately $108.9 million of the net proceeds in connection with the conversion of our outstanding shares of Exchangeable Redeemable Preferred Stock into the right to receive cash and shares of our common stock, $30.0 million to fund our acquisition of the outstanding Class B Units of Telos ID, and $21.0 million to repay our outstanding senior term loan and subordinated debt. We intend to use the remaining net proceeds for general corporate purposes.

On April 6, 2021, we completed our follow-on offering of 9.1 million shares of our common stock at a price of $33.00 per share, including 7.0 million shares of common stock held by certain existing stockholders of Telos. The offering generated approximately $64.3 million of net proceeds to Telos. We did not receive any proceeds from the shares of common stock sold by the selling stockholders. On April 19, 2021, we used approximately $1.3 million of the net proceeds to repurchase 39,682 shares of our common stock and $26.9 million to repurchase the warrants to purchase 900,970 shares of our common stock owned by certain affiliates of Enlightenment Capital Solutions ("EnCap"). We intend to use the remaining net proceeds for general corporate purposes.

2. SIGNIFICANT ACCOUNTING POLICIES

~~(a)~~Basis of Presentation and Principle of Consolidation

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

~~(b)~~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 in nature)~~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, ~~2021,~~2022, included in our Annual Report on Form 10-K for the fiscal year then ~~ended (the "2021 10-K").~~ended. We have continued to follow the accounting policies set forth in those financial statements.

~~(c)Segment Reporting~~

Operating segments are defined as components of an enterprise for which separate discrete financial information is available and evaluated regularly by the chief operating decision maker (“CODM”), or decision-making group, in deciding how to allocate resources and assess performance.

~~Tab~~l ~~e of Contents~~

During the fourth quarter of 2021, we reorganized our internal management reporting structure and the financial results evaluated by our CODM; therefore, we changed our operating segments to align with how our CODM currently oversees the business, allocates resources and evaluates operating performance. As a result of the segment reorganization, we reported 2 reportable and operating segments: Security Solutions and Secure Networks. The segments enable the alignment of our strategies and objectives and provide a framework for timely and rational allocation of resources within the lines of business. We eliminate any inter-segment revenues and expenses upon consolidation.

~~Prior period segment information has been recast to reflect the change. The segment reorganization had no impact on previously reported unaudited consolidated financial results.~~

~~(d)~~Basis of Comparison – - Revision of Previously Issued Interim Financial Statements

The Company recorded certain revisions related to the previously issued unaudited condensed consolidated financial statements. The Company considered the errors identified in accordance with the SEC's Staff Accounting Bulletin No. 99 and determined the impact was immaterial to the previously issued condensed consolidated interim financial statements. Nonetheless, the Company corrected these errors when identified in 2021.

During the ~~third quarter~~course of ~~2021,~~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 six months ended June 30, 2022. Although the Company ~~identified out-of-period adjustments~~has determined that the error did not have a material impact on ~~certain revenue and expense classification. Further, we corrected~~its previously issued interim consolidated financial statements, it revised the ~~cash flow presentation to properly reflect~~previously reported interim financial information in conjunction with the ~~final payment to fully acquire all~~issuance of its quarterly filings on Form 10-Q for the ~~membership interest of Telos ID as financing activities.~~ quarter ended June 30, 2023. Further information regarding the misstatements and related revisions are included inunder Note 1 8 20 – R ~~evision~~ Revision of Prior Year Interim Financial Statements to the ~~condensed~~unaudited consolidated financial statements.

~~(e)~~Use of Estimates

~~The preparation of~~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. ~~The most significant items involving management~~

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

~~(f)~~

Table of Contents

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") granted 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 or at the end of the defined performance period from the date of grant, whichever initially occurs. 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 balances 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. As of June 30, 2023, the Company has 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 costs (1)		Total

	(in thousands)
Balance at December 31, 2022	$	2,763	$	—	$	2,763
(Adjustments)/charges	(103)		1,300		1,197
Cash payments	(1,778)		—		(1,778)
Balance at June 30, 2023	$	882	$	1,300	$	2,182

(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.

Table of Contents

Recent Accounting Pronouncements

~~Changes~~From time to ~~U.S. GAAP~~time, new accounting standards are ~~established~~issued by the Financial Accounting Standards Board ~~("FASB") in~~or other standard-setting bodies and are adopted by the form of Accounting Standards Updates ("ASUs") to the FASB's Accounting Standards Codification ("ASC"). We consider the applicability and impact of all recent ASUs. ASUs not listed below were assessed and determined to be not applicable.

~~Accounting Pronouncements Not Yet Adopted~~

In October 2021, the FASB issued ASU No. 2021-08, “Business Combination (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,” which requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The ASU improves comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. Entities should apply the amendments prospectively to business combinations that occur after the effective date. This standard will be effective for reporting periods beginning after December 15, 2022, with early adoption permitted. While we are currently assessing the impactCompany as of the ~~adoption of this ASU, we do~~specified accounting date. Unless otherwise discussed, the Company believes that issued standards not ~~believe the adoption of this ASU~~yet effective will not have a material ~~impact~~effect on ~~our unaudited consolidated~~its financial ~~position, results of operations and cash flows.~~statements.

In June 2022, the FASB issued ASU No. 2022-03, "Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions," which clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. This standard will be effective for reporting periods beginning December 15, 2023, with early adoption permitted. While we are currently assessing the impact of the adoption of this ASU, we do not believe the adoption of this ASU will have a material impact on our unaudited consolidated financial position, results of operations and cash flows.

~~Tab~~l ~~e of Contents~~

3. REVENUE RECOGNITION

We ~~recognize~~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, and is classified as services revenue.~~perform. Revenue transferred to customers over time accounted for 88% and 89% of our revenue for the three and six months ended June 30, 2023, respectively, and 90% and 93% of our revenue for the three and six months ended June 30, 2022, ~~and 91% and 92% of our revenue for the three and six months ended June 30, 2021,~~ 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 as discussed further below.~~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 12% and 11% of our revenue for the three and six months ended June 30, 2023, respectively, and 10% and 7% of our revenue for the three and six months ended June 30, 2022, ~~and 9% and 8% of our revenue~~respectively.

Orders for the ~~three and six months ended June 30, 2021, respectively. Revenue~~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 ~~these contracts is recognized when~~ the ~~customer obtains control~~standalone selling price of the ~~transferred~~ product or service ~~which is generally upon delivery of~~underlying each performance obligation. The standalone selling price represents the amount we would sell the product or service to ~~the~~a customer ~~for their use, due to us maintaining control of the product until that point.~~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 six months ended June 30, ~~2022~~2023 and ~~2021.~~2022.

Disaggregated Revenues

~~We have identified 2 reportable segments.~~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. Substantially ~~all~~most of our revenues are generated from U.S. ~~customers.~~customers, while international customers are de minimis; as such, the financial information by geographic location is not presented.

Table 3.1: Revenue by Operating Segments
For the Three Months Ended For the Six Months Ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
(in thousands)
Security Solutions:
Services $ 25,298 $ 27,595 $ 50,165 $ 46,725
Products 5,521 4,641 7,573 8,341
Total Security Solutions revenue 30,819 32,236 57,738 55,066
Secure Networks:
Services 24,972 21,408 48,213 54,336
Products — — — —
Total Secure Networks revenue 24,972 21,408 48,213 54,336
Total revenue $ 55,791 $ 53,644 $ 105,951 $ 109,402


Table 3.2: Revenue by Customer Type
Table 3.1: Revenue by Customer Type										Table 3.1: Revenue by Customer Type
		For the Three Months Ended				For the Six Months Ended					For the Three Months Ended						For the Six Months Ended
		June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021			June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022
											Amount		%	Amount		%	Amount		%	Amount		%
		(in thousands)
Security Solutions:
											(dollars in thousands)
Federal	Federal	$	27,251	$	29,830	$	51,853	$	50,281	Federal	$	27,512	84 %	$	52,213	94 %	$	60,501	89 %	$	100,056	94 %
State & local, and commercial	State & local, and commercial	3,568		2,406		5,885		4,785		State & local, and commercial	5,399		16 %	3,578		6 %	7,632		11 %	5,895		6 %
Total Security Solutions revenue		30,819		32,236		57,738		55,066
Secure Networks:
Federal		24,962		21,302		48,203		54,198
State & local, and commercial		10		106		10		138
Total Secure Networks revenue		24,972		21,408		48,213		54,336
Total revenue	Total revenue	$	55,791	$	53,644	$	105,951	$	109,402	Total revenue	$	32,911	100 %	$	55,791	100 %	$	68,133	100 %	$	105,951	100 %

~~Tab~~l eTable of Contents


Table 3.3: Revenue by Contract Type
Table 3.2: Revenue by Contract Type										Table 3.2: Revenue by Contract Type
		For the Three Months Ended				For the Six Months Ended					For the Three Months Ended						For the Six Months Ended
		June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021			June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022
											Amount		%	Amount		%	Amount		%	Amount		%
		(in thousands)
Security Solutions:
											(dollars in thousands)
Firm fixed-price	Firm fixed-price	$	26,275	$	27,457	$	48,742	$	45,469	Firm fixed-price	$	25,293	77 %	$	45,305	81 %	$	52,306	77 %	$	86,581	82 %
Time-and-materials	Time-and-materials	2,731		3,059		5,646		6,060		Time-and-materials	3,548		11 %	2,731		5 %	7,104		10 %	5,646		5 %
Cost plus fixed fee	Cost plus fixed fee	1,813		1,720		3,350		3,537		Cost plus fixed fee	4,070		12 %	7,755		14 %	8,723		13 %	13,724		13 %
Total Security Solutions revenue		$	30,819	$	32,236	$	57,738	$	55,066
Secure Networks:
Firm fixed-price		19,030		18,885		37,839		50,014
Time-and-materials		—		—		—		29
Cost plus fixed fee		5,942		2,523		10,374		4,293
Total Secure Networks revenue		24,972		21,408		48,213		54,336
Total revenue	Total revenue	$	55,791	$	53,644	$	105,951	$	109,402	Total revenue	$	32,911	100 %	$	55,791	100 %	$	68,133	100 %	$	105,951	100 %

~~Revenue resulting from contracts and subcontracts with the U.S. government accounted~~

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

For the Three Months Ended

For the Six Months Ended

June 30, 2023

June 30, 2022

June 30, 2023

June 30, 2022

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

66%

72 %

67%

71 %


Table 3.4: Contract Balances
	Balance Sheet Presentation	June 30, 2023		December 31, 2022

		(in thousands)
Billed accounts receivables (1)	Accounts receivable, net	$	11,815	$	13,521
Unbilled accounts receivable	Accounts receivable, net	7,214		11,657
Contract assets	Accounts receivable, net	15,261		14,891
Contract liabilities	Contract liabilities	6,138		6,444

(1) Net of allowance for 94% and 95% of our revenue for the three months ended June 30, 2022 and 2021, respectively, and 94% and 96% of our revenue for the six months ended June 30, 2022 and 2021, respectively. 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 95% of our billed accounts receivable as of June 30, 2022, were directly with U.S. government customers. We perform ongoing credit evaluations of all our customers and generally do not require collateral or other guarantee from our customers. We maintain allowances for potential losses.

Table 3.4: Revenue Concentrations Greater than 10% of Total Revenue
For the Three Months Ended For the Six Months Ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
U.S. Department of Defense ("DoD") 72% 67% 71% 76%
Civilian 22% 28% 23% 20%

~~Contract Balances~~

Table 3.5: Contract Balances
June 30, 2022 December 31, 2021
(in thousands)
Contract assets (unbilled receivables) $ 36,216 $ 41,374
Contract liabilities 4,799 6,381

The change in the Company's contract assets and contract liabilities during the current period ~~were~~was primarily the result of the timing differences between the Company's performance, invoicing and customer payments. Revenue recognized for the three and six months ended June 30, ~~2022,~~2023, that was included in the contract liabilities balance at the beginning of each reporting period was $1.6 million and $4.1 million, respectively. Revenue recognized for the three and six months ended June 30, ~~2021,~~2022, that was included in the contract liabilities balance at the beginning of each reporting period was ~~$1.2~~and $1.6 million and ~~$3.2~~$4.1 million, respectively.

As of June 30, ~~2022,~~2023, we had ~~$100.5~~approximately $66.5 million of remaining performance obligations, which we also refer to as funded backlog. We expect to recognize approximately ~~76%~~80% of our remaining performance obligations ~~as revenue in 2022, an additional 20% in 2023,~~over the next 12 months, and the balance thereafter.

4. ACCOUNTS RECEIVABLE, NET


Table 4: Details of Accounts Receivable, Net	Table 4: Details of Accounts Receivable, Net					Table 4: Details of Accounts Receivable, Net
		June 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022

		(in thousands)					(in thousands)
Billed accounts receivable	Billed accounts receivable	$	14,638	$	18,586	Billed accounts receivable	$	12,065	$	13,655
Unbilled receivables		36,216		41,374
Allowance for credit losses		(178)		(116)
Unbilled accounts receivable						Unbilled accounts receivable	7,214		11,657
Contract assets						Contract assets	15,261		14,891
Allowance for credit losses (1)						Allowance for credit losses (1)	(250)		(134)
Accounts receivable, net	Accounts receivable, net	$	50,676	$	59,844	Accounts receivable, net	$	34,290	$	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 June 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.

~~Tab~~l eTable of Contents

5. INVENTORIES, NET


Table 5: Details of Inventories, Net	Table 5: Details of Inventories, Net					Table 5: Details of Inventories, Net
		June 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022

		(in thousands)					(in thousands)
Gross inventory	Gross inventory	$	4,383	$	2,108	Gross inventory	$	2,532	$	3,642
Allowance for inventory obsolescence	Allowance for inventory obsolescence	(753)		(861)		Allowance for inventory obsolescence	(765)		(765)
Inventories, net	Inventories, net	$	3,630	$	1,247	Inventories, net	$	1,767	$	2,877

6. PROPERTY AND EQUIPMENT, NET


Table 6: Details of Property and Equipment, Net
Table 6.1: Details of Property and Equipment, Net						Table 6.1: Details of Property and Equipment, Net
		June 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022

		(in thousands)					(in thousands)
Furniture and equipment	Furniture and equipment	$	15,866	$	15,420	Furniture and equipment	$	16,063	$	16,033
Leasehold improvement	Leasehold improvement	3,009		2,994		Leasehold improvement	3,173		3,145
Property and equipment, at cost	Property and equipment, at cost	18,875		18,414		Property and equipment, at cost	19,236		19,178
Accumulated depreciation		(13,304)		(12,326)
Accumulated depreciation and amortization						Accumulated depreciation and amortization	(15,394)		(14,391)
Property and equipment, net	Property and equipment, net	$	5,571	$	6,088	Property and equipment, net	$	3,842	$	4,787

Depreciation expense was $0.5 million and $1.2 million for the three and six months ended June 30, 2022, respectively, compared to $0.5 million and $0.9 million for the three and six months ended June 30, 2021.


Table 6.2: Depreciation and Amortization Expense
	For the Three Months Ended				For the Six Months Ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022

	(in thousands)
Depreciation & amortization expense	$	579	$	598	$	1,152	$	1,157

7. GOODWILL

The goodwill balance was $17.9 million as of June 30, ~~2022,~~2023, and December 31, ~~2021,~~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. ~~For the three and six months ended June 30, 2022 and 2021, no~~No impairment charges were ~~taken.~~

~~8. INTANGIBLE ASSETS, NET~~

Table 8.1: Details of Intangible Assets, Net
June 30, 2022 December 31, 2021
Gross Accumulated Amortization Net Gross Accumulated Amortization Net
(in thousands)
Acquired technology $ 3,630 $ (416) $ 3,214 $ 3,630 $ (256) $ 3,374
Customer relationships 40 (12) 28 40 (5) 35
Software development costs 27,652 (7,111) 20,541 22,222 (6,432) 15,790
$ 31,322 $ (7,539) $ 23,783 $ 25,892 $ (6,693) $ 19,199

~~Amortization expense was $0.4 million and $0.8 million~~recorded for the three and six months ended June 30, ~~2022, respectively,~~2023 and ~~$0.5~~2022.

8. INTANGIBLE ASSETS, NET


Table 8: Details of Intangible Assets, Net
		June 30, 2023						December 31, 2022
	Estimated Useful Life	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value		Gross Carrying Amount		Accumulated Amortization		Net Carrying Value

	(in years)	(in thousands)
Acquired technology	8	$	3,630	$	(870)	$	2,760	$	3,630	$	(643)	$	2,987
Customer relationship	3	40		(25)		15		40		(19)		21
Software development costs	2 - 5	43,694		(8,655)		35,039		35,080		(7,793)		27,287
Subtotal		47,364		(9,550)		37,814		38,750		(8,455)		30,295
Software held for resale (1)		—		—		—		7,120		—		7,120
Total		$	47,364	$	(9,550)	$	37,814	$	45,870	$	(8,455)	$	37,415

(1) 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.

Amortization expense related to capitalized software development costs was $0.6 million and $0.9 million for the three and six months ended June 30, ~~2021,~~2023, respectively, and $0.3 million and $0.7 million for the three and six months ended June 30, 2022, respectively.

Amortization expense related to other intangible assets was $0.1 million and $0.2 million for the three and six months ended June 30, 2023, respectively, and $0.1 million and $0.2 million for the three and six months ended June 30, 2022, respectively.

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9. OTHER BALANCE SHEET COMPONENTS


Table 9.1: Details of Accounts Payable and Other Accrued Liabilities
	June 30, 2023		December 31, 2022

	(in thousands)
Accounts payable	$	11,985	$	12,606
Accrued payables	4,521		9,945
Accounts payable and other accrued liabilities	$	16,506	$	22,551


Table 9.2: Details of Other Current Liabilities
	June 30, 2023		December 31, 2022

	(in thousands)
Other accrued expenses	$	725	$	1,530
Restructuring expenses accrual	2,182		2,763
Other	410		626
Other current liabilities	$	3,317	$	4,919

10. DEBT AND OTHER OBLIGATIONS

Revolving Credit Facility

On December 30, 2022 (the "Closing Date"), 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 June 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.

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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, 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, Buyer and Telos will cooperate in preparing such a claim, which would be filed in Telos' name. Buyer has notified Telos of its intent to pursue a claim against the customer.

Concurrently, the Company transferred all the rights, title and interest in the underlying licenses in exchange for the extinguishment of the outstanding financing obligations. The Company evaluated the transfer of the underlying licenses as consideration paid for the outstanding financing obligations under ASC 470-10, Debt, and the provisions of the MPA, and concluded that the transaction resulted in an extinguishment of debt. The Company recorded the difference between the carrying value of the Company's debt instrument and the underlying licenses as a gain on early extinguishment of other financing obligations. No gain was reported for the three months ended June 30, 2023. For the six months ended June 30, 2023, the Company reported a gain of $1.4 million, which was recorded as "Other income" in the unaudited consolidated statements of operations.

11. 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. ~~The acquisition adds several new patents to the Company’s library of biometric and digital identity intellectual property. The addition of contactless biometrics technology will enable~~On February 2, 2023, the Company ~~to better serve~~paid DFT the ~~needs~~holdback amount of organizations in existing and new markets. The acquisition of the assets of DFT has been accounted for under U.S. GAAP using the acquisition method of accounting. The total purchase consideration of $6.7 million has been allocated among the assets acquired at their fair value at the acquisition date.

~~Tab~~l ~~e of Contents~~

The Company recognized $3.7 million of intangible assets and $3.0 million of goodwill, which is housed in the Telos ID reporting unit, part of the Security Solutions operating segment. Goodwill is primarily attributable to an excess of the purchase price over the acquired identifiable net tangible and intangible assets. The acquired intangible assets will be amortized on a straight-line basis over 3 - 8 years. The acquisition was considered an asset purchase for tax purposes and the recognized goodwill is deductible for tax purposes.

~~10. PURCHASE OF TELOS ID NON-CONTROLLING INTERESTS~~

Telos ID was formed as a limited liability company under the Delaware Limited Liability Company Act in 2007. Prior to the IPO, the Company owned a 50% interest in Telos ID, with the remaining interest owned by Hoya ID Fund A, LLC ("Hoya") as the non-controlling interest. Distributions were made to the members only when and to the extent determined by Telos ID’s Board of Directors, in accordance with its Operating Agreement.

On October 5, 2020, we entered into a Membership Interest Purchase Agreement between the Company and Hoya to purchase all of the Class B Units of Telos ID owned by Hoya (the “Telos ID Purchase”). Upon the closing of the Telos ID Purchase, Telos ID became our wholly owned subsidiary. On November 23, 2020, the Telos ID Purchase was consummated with the Company transferring $30.0 million in cash and issuing 7.3 million shares of our common stock at $20.39 per share (which totals approximately $148.4 million); the total consideration transferred to Hoya was $178.4$0.6 million. As part of the common stock issuance, the Company recognized an increase to additional paid-in capital (“APIC”) of $148.4 million. The Company further recognized a reduction to APIC of $173.9 million as part of the elimination of Hoya’s non-controlling interest in Telos ID. The net impact to APIC associated with the acquisition of the additional 50% interest in Telos ID was a reduction of $25.5 million. Hoya received a final distribution of $2.4 million in January 2021.

~~11. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES~~

Table 11: Details of Accounts Payable and Other Accrued Liabilities
June 30, 2022 December 31, 2021
(in thousands)
Accounts payable - trade $ 15,929 $ 7,869
Accrued liabilities 18,109 25,300
Others 1,374 1,379
Accounts payable and other accrued liabilities $ 35,412 $ 34,548

12. STOCK-BASED COMPENSATION

~~Our 2016 Omnibus Long-Term Incentive Plan (the "2016 LTIP") provides~~Stock-based compensation expense recognized for ~~the grant of~~ restricted stock units ~~with time-based vesting ("Service-Based RSU" or "RSU")~~ and ~~restricted~~ stock ~~units with performance-based vesting (Performance-Based RSU" or "PRSU")~~options granted to ~~our senior executives, directors,~~ employees and ~~other service providers. Awards granted under~~non-employees is included in the ~~2016 LTIP vest over the periods determined by the Board~~consolidated statement of ~~Directors or the Compensation Committee of the Board of Directors, generally~~ ~~one~~ to three years. The Company records stock-based compensation related to accrued compensation in which it intends to settle in shares of the Company’s common stock. However, it is the Company’s discretion whether this compensation will ultimately be paid in stock or cash, as it has the right to dictate the form of these payments up until the date at which they are paid.

~~The stock-based compensation expense includes an immaterial adjustment of $0.7 million and $1.3 million for the three and six months ended June 30, 2022 related to the prior year.~~operations. There were 0no income tax benefits recognized on the ~~share-based~~stock-based compensation expense for both periods.

Table 12.1: Details of Stock Compensation Expense by Department
For the Three Months Ended For the Six Months Ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
(in thousands)
Cost of sales – services $ 862 $ 631 $ 1,869 $ 1,256
Sales and marketing 1,420 2,233 3,088 3,780
Research and development 692 648 1,987 1,109
General and administrative 12,232 17,824 22,560 28,861
Total stock-based compensation expense $ 15,206 $ 21,336 $ 29,504 $ 35,006
Restricted Stock


Table 12.1: Details of Stock Compensation Expense by Department
	For the Three Months Ended				For the Six Months Ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022

	(in thousands)
Cost of sales – services	$	225	$	862	$	551	$	1,869
Sales and marketing	43		1,420		101		3,088
Research and development	847		692		1,617		1,987
General and administrative	6,630		14,102		14,975		26,063
Total	$	7,745	$	17,076	$	17,244	$	33,007


Table 12.2: Restricted Stock Unit Activity
	Service-Based	Performance-Based	Total Shares	Weighted-Average Grant Date Fair Value
Unvested outstanding units as of December 31, 2022	3,570,082	336,785	3,906,867	$	19.53
Granted	1,604,843	—	1,604,843	1.98
Vested	(1,613,809)	—	(1,613,809)	26.38
Forfeited	(386,694)	(71,177)	(457,871)	14.36
Unvested outstanding units as of June 30, 2023	3,174,422	265,608	3,440,030	$	9.42

1314

~~Tab~~l eTable of Contents

Table 12.2: Service-Based RSU and Performance-Based RSU Award Activity
Service-Based RSU Performance-Based RSU Total Weighted-Average Grant Date Fair Value
Unvested outstanding units as of December 31, 2021 3,030,608 492,727 3,523,335 $ 34.24
Granted 3,759,037 — 3,759,037 10.01
Vested (1,416,116) — (1,416,116) 32.83
Forfeited (260,588) (113,566) (374,154) 33.15
Unvested outstanding units as of June 30, 2022 5,112,941 379,161 5,492,102 $ 18.04

As of June 30, ~~2022,~~2023, the intrinsic value of the RSUs and ~~PRSUs~~PSUs outstanding ~~exercisable,~~ and vested or expected to vest was ~~$44.2~~$8.8 million. There was ~~$61.0~~approximately $12.1 million of total compensation costs related to stock-based awards not yet recognized as of June 30, ~~2022,~~2023, which is expected to be recognized on a straight-line basis over a weighted-average remaining vesting period of ~~approximately 1.3~~0.7 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.


Table 12.3: Stock Options Fair Value and Weighted-Average Assumptions
	For the Six Months Ended
	June 30, 2023	June 30, 2022
Weighted-average fair value of underlying stock options	$1.06	$—
Expected term (in years)	5.5 - 10.0	0
Risk-free interest rate	3.5%	—%
Expected volatility	30.7% - 35.1%	—%
Expected dividend yield	—%	—%


Table 12.4: Stock Option Activity
	Stock Options Outstanding	Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding option balance as of December 31, 2022	—	$	—	0.0	$	—
Granted	400,000	1.80
Exercised	—	—
Forfeited, cancelled, or expired	—	—
Outstanding option balance as of June 30, 2023	400,000	$	1.80	9.8	$	304,000
Vested and exercisable stock option as of June 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 June 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.

During the three and six months ended June 30, 2023, the stock-based compensation expense on stock options recorded as part of general and administrative expenses was immaterial, with no similar expense in 2022. As of June 30, 2023, there were approximately $0.4 million of unrecognized compensation costs related to non-vested stock options.

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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 June 30, ~~2022,~~2023, there was ~~$47.0~~approximately $38.7 million of the authorization remaining ~~authorization~~ for future common stock repurchases under the SRP.

Table 13: Shares Repurchase Activity
For the Three Months Ended For the Six Months Ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
(in thousands, except per share and share data)
Amount paid for shares repurchased (1)
$ 3,002 $ — $ 3,002 $ —
Number of shares repurchased 360,439 — 360,439 —
Average per share price paid (1)
$ 8.33 $ — $ 8.33 $ —

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

~~As of August 5, 2022, the Company repurchased an additional 142,536 shares of its common stock, for $1.1 million since June 30, 2022.~~


Table 13: Share Repurchase Program Activity
	For the Three Months Ended				For the Six Months Ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022

	(in thousands, except per share and share data)
Amount paid for shares repurchased (1)	$	—	$	3,002	$	—	$	3,002
Number of shares repurchased	—		360,439		—		360,439
Average per share price paid (1)	$	—	$	8.33	$	—	$	8.33

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 ~~loss.~~losses.


Table 14: Details of Accumulated Other Comprehensive Loss	Table 14: Details of Accumulated Other Comprehensive Loss					Table 14: Details of Accumulated Other Comprehensive Loss
		June 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022

		(in thousands)					(in thousands)
Cumulative foreign currency translation loss	Cumulative foreign currency translation loss	$	(116)	$	(134)	Cumulative foreign currency translation loss	$	(160)	$	(162)
Cumulative actuarial gain on pension liability adjustment	Cumulative actuarial gain on pension liability adjustment	107		107		Cumulative actuarial gain on pension liability adjustment	107		107
Accumulated other comprehensive loss	Accumulated other comprehensive loss	$	(9)	$	(27)	Accumulated other comprehensive loss	$	(53)	$	(55)

15. LOSS PER SHARE

Basic net earnings (loss) per share is computed by dividing the net earnings (loss) by the weighted-average number of common shares outstanding for the period, without consideration for potentially dilutive securities. Diluted net earnings (loss) per share is computed by dividing the net earnings (loss) by the weighted-average number of shares of common stock and dilutive common stock equivalents outstanding for the period determined using the treasury-stock and if-converted methods. Dilutive common stock equivalents are comprised of unvested restricted common stock and warrants.

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 Ended		For the Six Months Ended
	June 30, 2023	June 30, 2022	June 30, 2023	June 30, 2022

	(in thousands)
Unvested restricted stock and restricted stock units	269	57	401	211
Total	269	57	401	211

~~Tab~~l eFor the three and six months ended June 30, 2023 and 2022, the outstanding PSUs aggregating to 265,608 and 379,161, respectively, have been excluded from the calculation of ~~Contents~~

Table 15: Potentially Dilutive Securities
For the Three Months Ended For the Six Months Ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
(in thousands)
Unvested restricted stock and restricted stock units 57 1,030 211 239
Common stock warrants, exercisable at $1.665 per share — 856 — 857
Total 57 1,886 211 1,096
Unvested antidilutive stock units excluded from the dilutive effect (stock units) 3,056 — 1,348 —
potentially dilutive securities above because the issuance of shares is contingent upon the satisfaction of certain conditions which were not satisfied by the end of the period.

16. RELATED PARTY TRANSACTIONS

Emmett J. Wood, the brother of our Chairman and CEO, ~~has~~had been an employee of the Company since 1996. In January 2023, he tendered his resignation as an employee effective February 7, 2023. The ~~amounts~~amount paid to ~~this individual~~him as compensation ~~were $93,000 and $605,000~~ for his remaining tenure in 2023 was $249,000. For the three and six months ended June 30, 2022, ~~respectively,~~the Company paid him $93,000 and ~~$83,000 and $301,000 for the three and six months ended June 30, 2021,~~$605,000, respectively. Additionally, Mr. Wood directly owned ~~94,547~~199,785 and ~~73,562~~178,041 shares of the Company’s common stock as of June 30, ~~2022,~~2023 and December 31, ~~2021.~~2022, respectively.

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One of the Company’s directors serves as a consultant to the Company. ~~In February 2022,~~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 ~~provide that~~further extend for another six months by mutual agreement of the parties. The Company, at its election, would pay the ~~remainder of the director’s consulting~~director's 2023 consultancy fees ~~for 2022~~ in a fixed ~~price~~ amount, in the form of restricted stock units. ~~The~~Consequently, on January 3, 2023, the Company granted the director ~~26,091 restricted stock units~~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. No cash payments were made for his consulting services for the three and six months ended June 30, 2023. In July 2023, the director and the Company amended the 2023 consulting agreement, further 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. On February 1, 2022, the Company granted him 26,091 RSUs for his consulting services in 2022, which ~~vest~~RSUs vested quarterly in four equal amounts through the end of the ~~year, subject to~~year. No cash payments were made for the ~~director’s continued performance under~~three months ended June 30, 2022, while the ~~consulting agreement. The~~ amounts paid in cash for his consulting services were $25,000 for the ~~three and~~ six months ended June 30, ~~2022, and $70,500 and $141,000 for the three and six months ended June 30, 2021, respectively.~~2022.

17. SEGMENT INFORMATION

~~As noted~~We operate our business in ~~Note~~ 2 ~~- Significant Accounting Policies, during the fourth quarter of 2021, as a result of the segment reorganization, our CODM began evaluating, overseeing~~two reportable and ~~managing the financial performance of our operations through 2~~ operating segments: Security Solutions and Secure Networks. ~~The~~These segments enable the alignment of our strategies and objectives and provide a framework for the timely and rational allocation of resources within the ~~lines of business. We eliminate any inter-segment revenues and expenses upon consolidation.~~business lines.

~~The~~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 AMHS and Telos® ID offerings. We recognize revenue on contracts from providing various system platforms in the cloud, on-premises, and in hybrid cloud environments, as well as software sales or software-as-a-service. Revenue associated with the segment's custom solutions is recognized as work progresses or upon delivery of services and products. Fluctuation in revenue from period to period is the result of the volume of software sales, and the progress or completion of cloud ~~and/~~or cybersecurity solutions during the period. The majority of the operating costs ~~relates~~relate to labor, material, and overhead costs. Software sales have immaterial ~~operation~~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.

~~The~~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 ~~level~~levels on individual contracts.

~~Tab~~l ~~e of Contents~~


Table 17: Results of Operations by Business Segment	Table 17: Results of Operations by Business Segment									Table 17: Results of Operations by Business Segment
		For the Three Months Ended				For the Six Months Ended					For the Three Months Ended				For the Six Months Ended
		June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021			June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022

		(in thousands)									(in thousands)
Revenues:
Revenue										Revenue
Security Solutions	Security Solutions	$	30,819	$	32,236	$	57,738	$	55,066	Security Solutions	$	17,196	$	30,819	$	36,969	$	57,738
Secure Networks	Secure Networks	24,972		21,408		48,213		54,336		Secure Networks	15,715		24,972		31,164		48,213
Total revenue	Total revenue	55,791		53,644		105,951		109,402		Total revenue	32,911		55,791		68,133		105,951
Gross profit:
Gross profit										Gross profit
Security Solutions	Security Solutions	16,433		17,188		31,485		26,515		Security Solutions	9,551		16,433		19,825		31,485
Secure Networks	Secure Networks	4,496		5,346		8,315		10,489		Secure Networks	2,808		4,496		6,016		8,315
Total gross profit	Total gross profit	20,929		22,534		39,800		37,004		Total gross profit	12,359		20,929		25,841		39,800
Selling, general and administrative expenses	Selling, general and administrative expenses	33,095		40,005		66,700		67,969		Selling, general and administrative expenses	21,826		34,965		48,278		70,203
Operating loss	Operating loss	(12,166)		(17,471)		(26,900)		(30,965)		Operating loss	(9,467)		(14,036)		(22,437)		(30,403)
Other income/(expense)		118		32		130		(1,022)
Other income										Other income	1,649		118		4,145		130
Interest expense	Interest expense	(187)		(192)		(377)		(388)		Interest expense	(184)		(187)		(433)		(377)
Loss before income taxes	Loss before income taxes	(12,235)		(17,631)		(27,147)		(32,375)		Loss before income taxes	(8,002)		(14,105)		(18,725)		(30,650)
Provision for income taxes	Provision for income taxes	(54)		(13)		(125)		(47)		Provision for income taxes	(22)		(54)		(45)		(125)
Net loss	Net loss	$	(12,289)	$	(17,644)	$	(27,272)	$	(32,422)	Net loss	$	(8,024)	$	(14,159)	$	(18,770)	$	(30,775)

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. Under U.S. government Cost Accounting Standards, indirect costs including depreciation and amortization expense, are collected in numerous indirect cost pools, which are then collectively allocated out to the Company’s reportable segments based on a representative causal or beneficial relationship of the costs in the pool to the costs in the base. While depreciation and amortization expense is a component of the allocated costs, the allocation process precludes depreciation and amortization expense from being specifically identified by the Company’s individual reportable and operating segments. For this reason, the non-cash items by a reportable and operating segment have not been reported above.

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.

~~18. REVISION OF PRIOR YEAR INTERIM FINANCIAL STATEMENTS~~

During the third quarter of 2021, the Company identified that stock compensation for a single individual was incorrectly charged to "cost of sales - services" instead of "general and administrative expense." The total amount of stock compensation incorrectly charged to cost of sales was $0.3 million, of which $0.1 million was related to the first quarter of 2021, and $0.2 million related to the second quarter of 2021. The Company corrected the error during the third quarter of 2021.

During the third quarter of 2021, the Company identified that the allocation of stock compensation for two of the Company's overhead cost pools was incorrectly charged to "cost of sales" instead of "general and administrative expense" during the second quarter of 2021. The total amount of the allocated stock compensation incorrectly charged to cost of sales was $0.7 million, which the Company corrected during the third quarter of 2021.

In the third quarter of 2021, the Company identified $1.1 million in revenue related to the stub period of a newly awarded contract that should have been recognized as income during the second quarter of 2021. The Company initially corrected the error during the third quarter of 2021. Additionally, and related to this contract, in the fourth quarter of 2021 the Company identified $0.3 million of products revenue for the second quarter of 2021 that should be classified in the condensed consolidated statements of operations as services revenue.

The Company erroneously presented the $2.4 million final payment to fully acquire all membership interest of Telos ID as an operating activity on the condensed consolidated statements of cash flows. The Company corrected the presentation to properly reflect the final payment within financing activities on the consolidated statements of cash flows in the fourth quarter of 2021.

~~Tab~~l ~~e of Contents~~

Table 18.1: Impact of the Correction to the Condensed Consolidated Statement of Operations
For the Three Months Ended June 30, 2021 For the Six Months Ended June 30, 2021
Previously Reported Error Correction As Adjusted Previously Reported Error Correction As Adjusted
(in thousands, except per share amounts)
Revenue - services $ 47,618 $ 1,385 $ 49,003 $ 99,676 $ 1,385 $ 101,061
Revenue - products 4,941 (300) 4,641 8,641 (300) 8,341
Revenue 52,559 1,085 53,644 108,317 1,085 109,402
Cost of sales - services 29,501 (892) 28,609 69,103 (1,004) 68,099
Costs and expenses 32,002 (892) 31,110 73,402 (1,004) 72,398
General and administrative 28,743 892 29,635 48,708 1,004 49,712
Selling, general and administrative expenses 39,113 892 40,005 66,965 1,004 67,969
Operating loss (18,556) 1,085 (17,471) (32,050) 1,085 (30,965)
Loss before income taxes (18,716) 1,085 (17,631) (33,460) 1,085 (32,375)
Net loss (18,729) 1,085 (17,644) (33,507) 1,085 (32,422)
Net loss attributable to Telos Corporation (18,729) 1,085 (17,644) (33,507) 1,085 (32,422)
Net loss per share attributable to Telos Corporation
Basic $ (0.28) $ 0.02 $ (0.26) $ (0.51) $ 0.02 $ (0.49)
Diluted $ (0.28) $ 0.02 $ (0.26) $ (0.51) $ 0.02 $ (0.49)

Table 18.2: Impact of the Correction to the Condensed Consolidated Statement of Comprehensive Loss
For the Three Months Ended June 30, 2021 For the Six Months Ended June 30, 2021
Previously Reported Error Correction As Adjusted Previously Reported Error Correction As Adjusted
(in thousands)
Net loss $ (18,729) $ 1,085 $ (17,644) $ (33,507) $ 1,085 $ (32,422)
Comprehensive loss attributable to Telos Corporation (18,724) 1,085 (17,639) (33,534) 1,085 (32,449)

Table 18.3. Impact of the Correction to the Condensed Consolidated Statement of Cash Flows
For the Six Months Ended June 30, 2021
Previously Reported Error Correction As Adjusted
(in thousands)
Net loss $ (33,507) $ 1,085 (32,422)
Changes in other operating assets and liabilities (10,074) 1,351 (8,723)
Cash used in operating activities (5,790) 2,436 (3,354)
Distribution to Telos ID Class B member – non-controlling interest — (2,436) (2,436)
Cash provided by financing activities 35,474 (2,436) 33,038

Table 18.4. Impact of the Correction to the Condensed Consolidated Statement of Changes in Stockholders' Equity
For the Three Months Ended June 30, 2021 For the Six Months Ended June 30, 2021
Previously Reported Error Correction As Adjusted Previously Reported Error Correction As Adjusted
(in thousands)
Net loss $ (18,729) $ 1,085 $ (17,644) $ (33,507) $ 1,085 $ (32,422)
Accumulated deficit (177,350) 1,085 (176,265) (177,350) 1,085 (176,265)
Total Stockholders' equity 164,700 1,085 165,785 164,700 1,085 165,785

~~Tab~~l eTable of Contents

~~19. COMMITMENT~~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.~~Virginia ("Court"). In the complaint, the ~~plaintiffs,~~Plaintiffs, who purport to represent a class of purchasers of Telos common stock between November 19, 2020, and March 16, 2022, allege 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~~Company's 2021 performance. On June 15, 2022, the Plaintiffs filed a consolidated complaint which 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.

The Company ~~is vigorously defending the case, but given the early stage, although a loss may reasonably be possible, the Company is unable to predict the likelihood of success of plaintiffs'~~does not believe that there are claims or ~~estimate a loss or range of loss. As a result, no material liability has been recorded as of June 30, 2022 and December, 31, 2021, respectively.~~

In addition, the Company is a party to litigation arising in the ordinary course of business. In the opinion of management, while the results of such litigation cannot be predicted with any reasonable degree of certainty, the final outcome of such known matters will not, based upon all available information,proceedings that would have a material adverse effect on the ~~Company's~~business, or the unaudited consolidated financial ~~position, results~~statements of ~~operations or cash flows.~~the Company as of June 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.

~~20.~~19. SUPPLEMENTAL CASH FLOW INFORMATION


Table 20.1: Details of Cash, Cash Equivalent, and Restricted Cash
Table 19.1: Details of Cash, Cash Equivalents, and Restricted Cash						Table 19.1: Details of Cash, Cash Equivalents, and Restricted Cash
		June 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022

		(in thousands)					(in thousands)
Cash and cash equivalents	Cash and cash equivalents	$	122,588	$	126,562	Cash and cash equivalents	$	103,447	$	119,305
Restricted cash (1)	Restricted cash (1)	132		—		Restricted cash (1)	134		133
Cash, cash equivalents, and restricted cash	Cash, cash equivalents, and restricted cash	$	122,720	$	126,562	Cash, cash equivalents, and restricted cash	$	103,581	$	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 ~~Consolidated Balance Sheets~~unaudited consolidated balance sheets.


Table 20.2: Supplemental Cash Flow Information
Table 19.2: Supplemental Cash Flow Information						Table 19.2: Supplemental Cash Flow Information
		For the Six Months Ended					For the Six Months Ended
		June 30, 2022		June 30, 2021			June 30, 2023		June 30, 2022

		(in thousands)					(in thousands)
Cash paid during the period for:	Cash paid during the period for:					Cash paid during the period for:
Interest	Interest	$	353	$	388	Interest	$	409	$	353
Income taxes	Income taxes	188		54		Income taxes	147		188
Non-cash investing and financing activities:	Non-cash investing and financing activities:					Non-cash investing and financing activities:
Operating lease ROU assets obtained in exchange for operating lease liabilities	Operating lease ROU assets obtained in exchange for operating lease liabilities	282		322		Operating lease ROU assets obtained in exchange for operating lease liabilities	$	15	$	282
Capital expenditure activity in accounts payable and other accrued liabilities	Capital expenditure activity in accounts payable and other accrued liabilities	296		—		Capital expenditure activity in accounts payable and other accrued liabilities	536		296
Common stock repurchase under SRP		400		—
Issuance of common stock for 401K match						Issuance of common stock for 401K match	1,943		—
Intangible assets transferred to extinguish other financing obligations						Intangible assets transferred to extinguish other financing obligations	7,089		—
Common stock repurchases under SRP						Common stock repurchases under SRP	—		400

~~Tab~~l eTable of Contents

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 $1.9 million and $3.5 million for the three and six months ended June 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 June 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
	Three Months Ended June 30, 2022						Six Months Ended June 30, 2022
	As Previously Reported		Adjustment		As Revised		As Previously Reported		Adjustment		As Revised

	(in thousands, except per share data)
General and administrative	$	23,865	$	1,870	$	25,735	$	46,788	$	3,503	$	50,291
Total selling, general and administrative expenses	33,095		1,870		34,965		66,700		3,503		70,203
Operating loss	(12,166)		(1,870)		(14,036)		(26,900)		(3,503)		(30,403)
Loss before income taxes	(12,235)		(1,870)		(14,105)		(27,147)		(3,503)		(30,650)
Net loss	(12,289)		(1,870)		(14,159)		(27,272)		(3,503)		(30,775)

Net loss per share, basic	$	(0.18)	$	(0.03)	$	(0.21)	$	(0.40)	$	(0.05)	$	(0.45)
Net loss per share, diluted	(0.18)		(0.03)		(0.21)		(0.40)		(0.05)		(0.45)


Table 20.2: Impact of the Correction to the Unaudited Consolidated Statement of Comprehensive Loss
	Three Months Ended June 30, 2022						Six Months Ended June 30, 2022
	As Previously Reported		Adjustment		As Revised		As Previously Reported		Adjustment		As Revised

	(in thousands)
Net loss	$	(12,289)	$	(1,870)	$	(14,159)	$	(27,272)	$	(3,503)	$	(30,775)
Comprehensive loss	(12,300)		(1,870)		(14,170)		(27,254)		(3,503)		(30,757)


Table 20.3: Impact of the Correction to the Unaudited Consolidated Statement of Changes in Stockholders' Equity
	Three Months Ended June 30, 2022						Six Months Ended June 30, 2022
	As Previously Reported		Adjustment		As Revised		As Previously Reported		Adjustment		As Revised

	(in thousands)
Additional paid-in capital, beginning	$	376,913	$	1,633	$	378,546	$	367,153	$	—	$	367,153
Stock-based compensation	14,553		1,870		16,423		27,200		3,503		30,703
Additional paid-in capital, end	388,464		3,503		391,967		388,464		3,503		391,967

Accumulated deficit, beginning	$	(201,960)	$	(1,633)	$	(203,593)	$	(186,977)	$	—	$	(186,977)
Net loss	(12,289)		(1,870)		(14,159)		(27,272)		(3,503)		(30,775)
Accumulated deficit, end	(214,249)		(3,503)		(217,752)		(214,249)		(3,503)		(217,752)

Table of Contents

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. ~~For this purpose, any~~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”~~"believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. ~~There are a number of~~Several important factors ~~that~~ could cause the ~~Company’s~~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~~Company's Form 10-K for the year ended December 31, ~~2021,~~2022, as filed with the ~~SEC.~~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~~world's most security-conscious organizations against rapidly evolving, sophisticated and pervasive threats. Our portfolio of security products, services and expertise ~~empower~~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’~~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 ~~mission~~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 ~~protect~~prime contracts or to subcontracts with our ~~customers’ people, systems,~~contractors engaged in work for the U.S. government, with the remaining attributable to state, local and vital information assets with offerings for cybersecurity, cloud security, and enterprise security. In the current global environment, our mission is more critical than ever. The emergence of each new information and communications technology introduces new vulnerabilities, as security is still too often overlooked in solution development. Networks and applications meant to enhance productivity and profitability often jeopardize an organization due to poor planning, misconfiguration, or an unknown gap in security. Ransomware, insider threats, cybercrime, and advanced persistent threats continue to menace public and private enterprises across all industries.

Cybersecurity, cloud security, and enterprise security of the modern organization share much in common, yet also call for a diverse range of skills, capabilities, and experience in order to meet the requirements of security-conscious customers. Decades of experience in developing, orchestrating, and delivering solutions across these three domains give us the vision and the confidence to provide solutions that empower and protect the enterprise at an integrated, holistic level. Our experience in addressing challenges in one area of an enterprise helps us meet requirements in others. We understand that a range of complementary capabilities may be needed to solve a single challenge, and we also recognize when a single solution might address multiple challenges. Our security solutions span across the following domains: cybersecurity, cloud security, and enterprise security.commercial markets.

~~As a result of the change in~~Information regarding our ~~organization and leadership structure in the fourth quarter of 2021, we established and operate in~~ two reportable segments – Security Solutions and Secure ~~Networks.~~Networks – is presented in Note 17 - Segment Information to the unaudited consolidated financial statements at Item 1 of this Form 10-Q.

~~Security Solutions~~

~~Security Solutions focuses~~Fiscal year 2023 will continue to be a transition year for Telos, focusing on ~~cybersecurity, cloud~~streamlining our operations and ~~identity solutions, which includes Information Assurance, Secure Communications,~~rebuilding and ~~Telos ID. Cybersecurity solutions help our customers ensure~~growing the ~~ongoing security, integrity, and compliance of their on-premises and related cloud-based systems~~revenue base by ~~reducing threats and vulnerabilities to foil cyber adversaries before they can attack.~~generating new business wins. Our security engineers and subject matter experts assess our customers’ cybersecurity environments and design, engineer, and operate systems needed to strengthen their cybersecurity posture. Our cloud solutions leverage the specialized skills and experience needed to help our customers plan, engineer, execute and accelerate secure cloud migrations while assuring ongoing management and security of enterprise cloud technology environments. Our identity solutions deliver digital identity, biometric, and nationwide enrollment services and address Know Your Customer ("KYC") and identity management challenges for enterprises working within regulated and critical infrastructure environments.2023 business development priorities are to:

•~~Information Assurance~~

◦~~Xacta: a premier platform for enterprise cyber risk management~~Reorganize internally to consolidate and security compliance automation, delivering security awareness for systems in the cloud, on-premises, and in hybrid and multi-cloud environments. Xacta delivers automated cyber risk and compliance management solutions to large commercial and government enterprises. Across the U.S. federal government, Xacta is the de facto commercial cyber risk and compliance management solution.

◦~~Telos Advanced Cyber Analytics ("ACA")~~: a solution-as-a-service that delivers timely, accurate, actionable intelligence at speed and scale to illuminate threats to enterprise assets. It enables organizations to detect malicious activity earlier and to uncover and identify previously unknown attacks and new malicious behavior. Further, it assists in the attribution of events and provides sophisticated and comprehensive analytics without expensive overhead.

~~Tab~~l ~~e of Contents~~

•~~Secure Communications:~~

◦~~Telos Ghost:~~ a virtual obfuscation network-as-a-service with encryption and managed attribution capabilities to ensure the safety and privacy of people, information, and resources on the network. Telos Ghost seeks to eliminate cyberattack surfaces by obfuscating and encrypting data, masking user identity and location, and hiding network resources. It provides the additional layers of security and privacy needed for intelligence gathering, cyber threat protection, securing critical infrastructure, and protecting communications and applications when operations, property, and even lives can be jeopardized by a single error in security.

◦~~Telos Automated Message Handling System (“AMHS”):~~ web-based organizational message distribution and management for mission-critical communications; the recognized gold standard for organizational messaging in the U.S. government. Telos AMHS is used by military field operatives for critical communications on the battlefield and is the only web-based solution for assured messaging and directory services using the Defense Information System Agency's Organizational Messaging Service and its specialized communications protocols.centralize business development resources;

•~~Telos ID:offering identity trust~~Add new talent to drive execution of solution development and ~~digital services through IDTrust360~~® – an enterprise-class digital identity risk platform for extending flexible hybrid cloud identity services enabled for mobile and enterprise environments and custom digital identity services that mitigate threats through the integration of advanced technologies that fuse biometrics, credentials, and other identity-centric data used to continuously monitor trust. In April 2021, we announced the acquisition of the assets of DFT, whose ONYX® ~~touchless mobile fingerprint software is being integrated with the IDTrust360 platform. We maintain government certifications and designations that distinguish Telos ID, including TSA PreCheck~~® ~~enrollment provider, Designated Aviation Channeling provider, FBI-approved Channeler, and Financial Industry Regulatory Authority Electronic Fingerprint Submission provider.~~

~~Secure Networks~~

Secure Networks focuses on enterprise security. Secure Networks provides secure networking architectures and solutions to the DoD, the federal Intelligence Community and other federal government agencies. Our net-centric solutions enable collaboration and connectivity in order to increase efficiency, reduce costs, and improve mission outcomes. We provide an extensive range of wired and wireless, fixed and deployable, classified and unclassified voice, data, and video secure network solutions and services to support defense and civilian missions. Capabilities include network design, operations and sustainment; system integration and engineering; network security and compliance; deployable comms; innovation and digital transformation; service desk; defensive cyber operations; and program management.

•~~Secure Mobility:~~ ~~solutions for~~new business and government that enable remote work and minimize operational and security concerns across and beyond the enterprise. Our secure mobility team brings credentials to every engagement, supplying deep expertise and experience as well as highly desirable clearances and industry-recognized certifications for network engineering, mobility, and security.generation;

•~~Network Management~~Maximize existing strategic partnerships for market expansion; and ~~Defense:~~

• ~~services for operating, administrating,~~Increase our opportunity portfolio and ~~defending complex enterprise networks and defensive cyber operations. Our diverse portfolio~~quality of capabilities such as defensive cyber operations and robotic process automation addresses common and uncommon requirements in many industries and disciplines, ranging from the military and government agencies to Fortune 500 companies.contract vehicles.

Business Environment

~~Our business performance continues~~U.S. Budget

In March 2023, the White House released its proposed FY2024 budget, which called for a $26 billion increase for the Department of Defense ("DOD") next year, a little more than 3% above the FY2023 enacted level. The debt ceiling legislation (the "Fiscal Responsibility Act") subsequently approved by Congress contains spending caps, which reflect that level of defense spending, as do the defense authorization and appropriations bills currently under consideration in the House and Senate. There are also many in Congress who want to boost this increase further via a subsequent supplemental appropriations bill to offset current and expected inflationary trends and the threats posed by foreign adversaries. Final decisions on defense spending will not be ~~heavily affected~~made until this fall, at the earliest.

The President's FY2024 budget also proposed increased investments for cybersecurity within numerous federal civilian departments and agencies, including $3.1 billion in funding for the Cybersecurity and Infrastructure Security Agency, a 5% increase, of which $98 million is intended to implement the Cyber Incident Reporting for Critical Infrastructure Act. In general, the President's budget also reflects the prioritization of accelerated cloud adoption, IT modernization, further private sector collaboration for sector risk management responsibilities, ensuring adequate cyber threat information sharing, and supply chain risk management. These priorities align with the solutions Telos has been developing and bringing to market for the past several years.

However, such increased spending by civilian agencies on cybersecurity could be difficult to achieve, given the cap on non-defense discretionary spending included in the Fiscal Responsibility Act and subsequent efforts by the ~~overall level of U.S. government spending and the alignment of our solutions with the priorities of the U.S. government. U.S. government spending and contracts continue~~House majority to ~~be affected by the federal budget and appropriations process and related legislation.~~

~~Congress reached an agreement~~seek even further reductions in March 2022 on fiscal year ("FY") 2022 appropriations legislation, which allows our federal customers to finally operate under more normal conditions and with updated funding levels through the remainder of FY 2022. Of note, the final FY 2022 appropriations bill provided $728.5 billion for the DoD and related activities.all non-defense discretionary spending. This amount is $32.5 billion more than the FY 2021 enacted level, and is an increase above the level proposed last spring by President Biden for FY 2022. This total does not include emergency supplemental appropriations enacted to deal with impacts from the Ukraine conflict, which further increased total defense spending this year.

Given the current political climate in Washington, it is highly questionable whether Congress will be able to enact FY 2023 appropriations legislation prior to the start of the fiscal year. This could again result in the need to fund much, if not all, of the federal government via continuing resolution(s) for an unknown length of time, or else face a government shutdown. Such delays in finalizing FY 2023 appropriations could, in turn,would impact future ~~planning~~cybersecurity investments by ~~Telos and our government~~potential civilian federal customers.

~~Tab~~l eTable of Contents

~~The President’s FY 2023 budget request, which was released~~For both defense and non-defense spending, it is also doubtful that a divided Congress and the White House can reconcile their differences over fiscal policy before the start of FY2024 on ~~March 25, 2022,~~ ~~calls for approximately 4% more in defense spending than was provided for FY 2022.However,~~October 1, 2023. Failing to do so would mean the federal government could face a shutdown this ~~proposed FY 2023 budget was developed prior to Russia’s invasion~~fall or, at best, will begin another fiscal year under the constraints of ~~Ukraine~~a continuing resolution, with funding frozen at FY2023 levels and ~~did not include expenditures related to that ongoing event. The proposed FY 2023 budget also assumes an inflation rate for DoD~~restrictions likely on new contracts and acceleration of 2.2%, which Pentagon officials subsequently acknowledged will need to be adjusted higher. As such, there is significant congressional support for boosting defense spending further to account for these factors and other needs. ~~The House and Senate versions~~current programs. Finally, under the terms of the ~~FY 2023 National Defense Authorization~~Fiscal Responsibility Act, ~~reflect this, authorizing~~if all appropriations ~~of $37 billion (House) and $45 billion (Senate) more than proposed~~legislation is not enacted by ~~the President’s budget. Actual final~~January 1, appropriations ~~levels for national defense~~government-wide will ~~not be determined until this fall, at the earliest.~~

The proposed FY 2023 budget also calls for an increase in federal civilian agency (non-defense) cybersecurity funding of nearly 10.7%. The Biden Administration says it is seeking to increase investments across the various civilian federal agencies to help align themrevert to the ~~cybersecurity practices and priorities outlined~~FY2023 level minus an additional one percent. This uncertainty could also impact federal customers' ability to move forward on their planned expenditures in the President’s Executive Order 14028, “Improving the Nation’s Cybersecurity.” The proposed budget says this specifically includes providing funding to facilitate the ongoing transition to a Zero Trust approach to cybersecurity, per the direction of President Biden's May 12, 2021 Executive Order on "Improving the Nation's Cybersecurity." Also in accordance with that order, various federal departments and agencies have been taking steps to enhance public sector and critical infrastructure cybersecurity and to accelerate the adoption of Zero Trust architecture throughout government, and the proposed budget would further support those efforts. Congress has just begun work on the FY 2023 appropriations bills for civilian agencies, so it is unknown what the final funding levels will be for civilian agency cybersecurity.FY2024.

Cybersecurity Landscape

~~Over~~In recent years, we have seen cybersecurity threats become more complex, with threat actors leveraging a wide variety of tactics to exploit their victims. With this growing threat, below are some trends to consider when looking at the past few years, continued and increasingly damaging ransomware and other cyberattacks against federal, state and local governments, the K-12 and higher education sectors, and private sector enterprises have resulted in intensified efforts to better defend against such attacks. The growing demand for these solutions continues to provide Telos with the privilege of offering our expertise to protect these vitally important organizations.cybersecurity landscape:

Rising Threats, Rising Liability: Ransomware remains arguably the most severe cyber threat to enterprises in the commercial, state, and ~~state,~~ local government and education sectors. ~~Our Xacta offering empowers these organizations and institutions to maintain a strong cyber risk posture to minimize~~One reason for the ~~risk~~rise of ransomware ~~gaining~~attacks is that it is exceedingly profitable for cybercriminals, and ransomware victims generally settle the ransom than restoring the system from backups or dealing with the fallout from a ~~foothold in their IT environment. Our Telos ACA offering provides real-~~data breach. Aside from the financial costs of paying the ransom and ~~near-real-time intelligence into known~~restoring the system, the consequence of a successful ransomware attack can include damage to the organization's reputation, stolen sensitive data being used for malicious purposes, and ~~unknown threats to give organizations advanced warning~~loss of ransomware and other threats. Should ransomware get loose in the enterprise network, Telos Ghost, our virtual obfuscation network offering, can hide vital resources from view to prevent the payload from reaching them.business.

The Nation's Critical Systems Are Still at Risk: Critical infrastructure and industrial ~~internet~~Internet of ~~things~~Things ("IoT") are among the categories at greatest risk of cyberattacks. Energy, utilities, transportation, and food supply were among the critical infrastructure sectors that experienced high-profile breaches or ransomware attacks over the past year. Telos Ghost can hide critical IoT and industrial control systems from the public internet to keep them from being compromised. Telos Ghost can also cordon off financial data, medical records, intellectual property, and other crown-jewel assets from visibility or accessibility by adversaries.

~~Telos Ghost complements Zero Trust security, creating an additional layer~~The Challenging Complexity of defense against intruders by hiding critical resources and users in an anonymous undiscoverable network. As noted above, it protects the crown-jewel assets of critical infrastructure from unauthorized access. Xacta streamlines and automates the critical processes of the leading cybersecurity standards and frameworks, particularly the Federal Risk and Authorization Management Program ("FedRAMP"), allowing all process participants to collaborate within the same Xacta application to attain a FedRAMP Authority to Operate. Xacta is also a trailblazer in adopting the Open Security Controls Assessment Language, a multi-format framework adopted by FedRAMP to allow security professionals to automate security assessment, auditing, and continuous monitoring processes.

The Cyber Incident Reporting for Critical Infrastructure Act of 2022, which was signed into law on March 15, 2022, will require critical infrastructure owners and operators as well as federal agencies to report to the Cybersecurity & Infrastructure Security Agency significant cyber incidents within 72 hours and any ransomware payments made within 24 hours. Telos believes that having to make such disclosures will make organizations even more sensitive to boosting their cybersecurity posture; our Xacta solution will help illuminate their risk profile and our Telos ACA solution will illuminate threats so that they can better understand the issues and address them proactively.

The Securities and Exchange Commission has also proposed new, mandatory cyber risk management and cybersecurity incident reporting requirements for publicly traded companies. Telos believes this will ensure companies take steps to employ a sound cyber risk management strategy based on recognized best practices, such as the National Institute of Standards and Technology Cybersecurity Framework, and Telos solutions will support this.

Regulatory Compliance~~Tab~~l ~~e of Contents~~:

Government mandates ~~and initiatives to assure~~ stronger security in highly regulated ~~industries, as noted above, also lead to opportunities for Xacta. An update to the research study Telos conducted last year reveals that~~industries. These government initiatives and audit fatigue ~~continues~~continue to burden ~~these~~highly regulated organizations, with automation solutions being recognized as the most effective remedy for the many repetitive and redundant tasks that security compliance requires. ~~Xacta streamlines, harmonizes,~~

Additionally, the Securities and ~~automates the security controls~~Exchange Commission ("SEC") has finalized and ~~processes that comprise the leading~~adopted new cybersecurity ~~standards and frameworks,~~rules for publicly traded companies, which will require registrants to disclose additional cyber-related information in ~~on-premises, cloud, hybrid, and multi-cloud environments.~~

~~COVID-19 Pandemic~~

Despite the pandemic’s resultant shift to teleworking by federal employees and contractors, the government successfully maintained the continuity of services, as did Telos. As the government has developed and implemented its reopening process, and made adjustments based on changing circumstances, officials have saidtheir regulatory filings. Specifically, they will ~~seek~~have to: (1) regularly disclose their governance methods, risk analysis and management processes; (2) meet specific disclosure requirements and deadlines for cybersecurity reporting and describing material cyber incidents; and (3) describe the board's oversight of risks from cybersecurity threats, and management's expertise and role in assessing and managing material risks from cybersecurity threats. The required reporting of this information will lead many companies to ~~continue~~proactively establish policies that will improve their cyber risk management posture and enable them to maximize the use of teleworking by federal employees. This stance has continued during subsequent surges of COVID-19 variants. As such, with much of the business of government still being conducted by federal employees working remotely through the use of information technology systems, we believe there will continuebetter withstand heightened public and regulatory scrutiny.

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

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

Global Networks and Worldwide Communications Need Baked-in Security: Enterprises also need resilient cyber and information security capabilities to protect and defend critical infrastructure to ensure mission success.

Telos has several available solutions (Xacta, Telos Ghost, Telos ACA and IDTrust 360®) to help our customers protect and secure their on-premise, cyber, and cloud-based networks, and mitigate risk to critical infrastructure. Further, Secure Networks offers secure mobility solutions and ~~services provided by Telos.~~management expertise to defend against cyber threats and vulnerabilities.

Backlog

~~We develop~~Backlog is a useful measure in developing our annual budgeted revenue by estimating for the upcoming year our continuing business from existing customers and active contracts. We consider backlog, both funded and unfunded (as explained below), other expected annual renewals, and expansion planned by our current customers.

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Total backlog consists of the aggregate contract revenues remaining to be earned by us at a given time over the life of our contracts, whether funded or unfunded. Funded backlog consists of the aggregate contract revenues remaining to be earned at a given time, which, in the case of U.S. government contracts, means that they have been funded by the procuring agency. Unfunded backlog is the difference between total backlog and funded backlog and includes potential revenues that may be earned if customers exercise delivery orders and/or renewal options to continue these contracts. Based on historical experience, we generally assume option year renewals to be exercised. Most of our customers fund contracts on athe basis of one year or less, and, as a result, funded backlog is generally expected to be earned within one year from any point in time, whereas unfunded backlog is expected to be earned over a longer period.

Financial Overview

A number of factors have contributed to the results of our second quarter of fiscal year 2023, the most noteworthy or significant of which are described below. More details on these changes are presented below within our "Results of Operations" section.

•The winding down of certain projects and lower revenue on existing major programs resulted in a decline in the current quarter's revenue.

•Actions to cushion the impact of lower revenue on profitability, maintain gross margin level, and improve net loss position.

•Lower operating costs through a combination of lower stock-based compensation, aggressive cost management and the results of the restructuring plan.

Results of Operations


Table MD&A 1: Results of Operations
Table MD&A 1: Consolidated Results of Operations														Table MD&A 1: Consolidated Results of Operations
		For the Three Months Ended						For the Six Months Ended							For the Three Months Ended						For the Six Months Ended
		June 30, 2022			June 30, 2021			June 30, 2022			June 30, 2021				June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022

		(in thousands)													(dollars in thousands)
Revenue	Revenue	$	55,791		53,644			105,951			109,402			Revenue	$	32,911		$	55,791		$	68,133		$	105,951
Cost of sales	Cost of sales	34,862			31,110			66,151			72,398			Cost of sales	20,552			34,862			42,292			66,151
Gross profit	Gross profit	20,929			22,534			39,800			37,004			Gross profit	12,359			20,929			25,841			39,800
Gross margin	Gross margin	37.5		%	42.0		%	37.6		%	33.8		%	Gross margin	37.6		%	37.5		%	37.9		%	37.6		%
Selling, general and administrative expenses:
Sales and marketing		4,741			5,043			9,993			8,869
Research and development		4,489			5,327			9,919			9,388
General and administrative		23,865			29,635			46,788			49,712
Total selling, general and administrative expenses		33,095			40,005			66,700			67,969
Selling, general and administrative expenses														Selling, general and administrative expenses	21,826			34,965			48,278			70,203
Selling, general and administrative expenses as percentage of revenue	Selling, general and administrative expenses as percentage of revenue	59.3		%	74.6		%	63.0		%	62.1		%	Selling, general and administrative expenses as percentage of revenue	66.3		%	62.7		%	70.9		%	66.3		%
Operating loss	Operating loss	(12,166)			(17,471)			(26,900)			(30,965)			Operating loss	(9,467)			(14,036)			(22,437)			(30,403)
Other income/(expense)		118			32			130			(1,022)
Other income														Other income	1,649			118			4,145			130
Interest expense	Interest expense	(187)			(192)			(377)			(388)			Interest expense	(184)			(187)			(433)			(377)
Loss before income taxes	Loss before income taxes	(12,235)			(17,631)			(27,147)			(32,375)			Loss before income taxes	(8,002)			(14,105)			(18,725)			(30,650)
Provision for income taxes	Provision for income taxes	(54)			(13)			(125)			(47)			Provision for income taxes	(22)			(54)			(45)			(125)
Net loss	Net loss	$	(12,289)		$	(17,644)		$	(27,272)		$	(32,422)		Net loss	$	(8,024)		$	(14,159)		$	(18,770)		$	(30,775)

~~Company~~Consolidated Results

Our business segments have different factors driving revenue fluctuations and profitability. The discussion of the changes in our revenue and profitability is covered in greater detail under the section that follows "Segment Results." We generate revenue from the delivery of ~~product~~products and services to our customers. The discussion of material changes in our net revenue should be read in conjunction with the subsequent discussion of changes in our consolidated cost of sales and our business segment results of operations. Cost of sales, for both ~~services~~products and ~~products,~~services, consists of ~~material,~~ labor, materials, subcontracting costs and an allocation of indirect costs.

~~Tab~~l ~~e of Contents~~Selling, general, and administrative expenses (SG&A).

~~Three Months Ended~~SG&A decreased by $13.1 million, or 37.6%, for the three months ended June 30, ~~2022 Compared with Three Months Ended June 30, 2021~~

Revenue increased by 4.0% to $55.8 million for the second quarter of 2022, from $53.6 million for the same period in 2021. Services revenue increased by $1.3 million, or 2.6%, during the second quarter of 20222023, compared to the same period in ~~2021. The increase in services revenue was~~2022. This decrease is primarily due to ~~sales offerings within Secure Networks. Product revenue increased $0.9~~lower stock-based compensation costs of $8.7 million, reduced labor costs of $2.6 million as a result of a decrease in personnel, and change in capitalized research and development costs of $2.1 million driven by the timing in software projects.

SG&A decreased by $21.9 million, or ~~19.0%~~31.2%, ~~during~~for the ~~second quarter of 2022~~six months ended June 30, 2023, as compared to the same period in ~~2021. The increase in product revenue was~~the prior year primarily due to ~~various product delivery within Security Solutions. Due to~~lower stock-based compensation costs of $14.4 million, reduced labor costs of $5.3 million as a result of a decrease in personnel, and change in capitalized research and development costs of $3.2 million driven by the ~~various solution offerings within the business groups, sales may vary from period to period according to the solution mix and~~ timing ~~of deliverables for a particular period.~~in software projects, partially offset by $1.2 million in restructuring charges.

~~Cost of sales~~Other income. Other income increased by ~~12.1% to $34.9~~$1.5 million for the ~~second quarter~~three months ended June 30, 2023, due to increases in dividend income from money market placements as a result of ~~2022, from $31.1 million for~~increasing interest rates, compared to the same period in ~~2021, as a result~~2022.

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Other income increased ~~revenue. The change in cost of sales is directly driven~~ by ~~the change in mix and nature of the programs. Cost of sales for Security Solutions decreased to $14.4~~$4.0 million for the ~~second quarter of 2022 from $15.0 million for~~six months ended June 30, 2023, as compared to the same period in ~~2021. While~~ the ~~cost~~prior year primarily due to an increase in dividend income from money market placement of ~~sales decreased between periods, the cost~~$2.7 million, and a gain on early extinguishment of ~~sales as~~other financing obligations of $1.4 million in 2023 without a ~~percentage of revenue remained at 46.7%. Cost of sales for Secure Networks increased to $20.5 million for the second quarter of 2022 from $16.1 million for~~similar gain in the same period in ~~2021. Likewise, cost of sales as a percentage of revenue increased to 82.0% from 75.0%.~~2022.

Gross profit decreased by 7.1% to $20.9 million for the second quarter of 2022 from $22.5 million for the same period in 2021. Gross margin decreased to 37.5% for the second quarter of 2022 from 42.0% for the same period in 2021, due to various changes in the mix of contracts within each of Security Solutions and Secure Networks, as well as the relative weighting of revenue between these segments.

Selling, general, and administrative (“SG&A”) expense decreased by 17.3% to $33.1 million for the second quarter of 2022, from $40.0 million for the same period in 2021, primarily attributable to a decrease in stock-based compensation by $6.6 million, offset by an increase in labor costs by $0.5 million.

~~Operating loss~~Interest expenses. There was $12.2 million for the second quarter of 2022, compared to $17.5 million for the same period in 2021, primarily due to a decrease in SG&A expenses partially offset by a decrease in gross profit in the second quarter of 2022 as mentioned above.

~~There were~~ no significant ~~changes~~change in interest expense ~~and other~~between comparable periods.

Provision for income ~~and expenses between the comparable periods.~~

taxes. The ~~slight increase~~change in the income tax provision for the ~~second quarter of 2022~~three and six months ended June 30, 2023, compared to the same period in ~~2021~~2022, is based on the estimated annual effective tax rate applied to the pretax loss incurred for the quarter plus discrete tax items, based on our expectation of pretax loss for the fiscal year.

Net loss was $12.3 million for the second quarter of 2022, compared to $17.6 million for the same period in 2021, primarily due to a decrease in SG&A expenses partially offset by a decrease in gross profit in the second quarter of 2022 as mentioned above.

~~Six Months Ended June 30, 2022 Compared with Six Months Ended June 30, 2021~~

Revenue decreased by 3.2% to $106.0 million during the six months ended June 30, 2022, from $109.4 million for the same period in 2021. Services revenue decreased by $2.7 million, or 2.7%, during the six months ended June 30, 2022 compared to the same period in 2021. Product revenue also decreased by $0.8 million, or 9.2%, during the six months ended June 30, 2022 compared to the same period in 2021. The decrease in revenue was attributable to the impact of certain projects nearing their completion within Secure Networks.

Cost of sales decreased by 8.6% to $66.2 million for the six months ended June 30, 2022, from $72.4 million for the same period in 2021. Cost of sales for Security Solutions decreased to $26.3 million for the six months ended June 30, 2022, from $28.6 million for the same period in 2021. In addition, cost of sales as a percentage of revenue decreased to 45.5% from 51.8%. Cost of sales for Secure Networks decreased to $39.9 million for the six months ended June 30, 2022 from $43.8 million for the same period in 2021. While the costs of sales decreased between periods, the cost of sales as a percentage of revenue increased to 82.8% from 80.7%. The overall decrease in cost of sales was due to various changes in the mix of contracts within each of Security Solutions and Secure Networks, and winding down of lower-margin projects.

Gross profit increased by 7.6% to $39.8 million for the six months ended June 30, 2022, from $37.0 million for the same period in 2021. Gross margin increased to 37.6% for the six months ended June 30, 2022 from 33.8% for the same period in 2021, due to a change in the mix of contracts within each of Security Solutions and Secure Networks, as well as the relative weighting of revenue between Security Solutions and Secure Networks.

SG&A expense decreased by 1.9% to $66.7 million for the six months ended June 30, 2022, from $68.0 million for the same period in 2021, primarily attributable to a decrease in stock-based compensation by $7.0 million, offset by the increases in labor costs by $4.8 million and outside services by $0.9 million.

~~Tab~~l ~~e of Contents~~

Operating loss was $26.9 million for the six months ended June 30, 2022, compared to $31.0 million for the same period in 2021, primarily due to the increase in gross profit and decrease in SG&A expenses in 2022 compared with the same period in the prior year as mentioned above.

Other expense of $1.0 million for the six months ended June 30, 2021, was attributable to an accrual for a litigation settlement agreement, with no similar cost in 2022. There was no significant change in interest expense between comparable periods.

The slight increase in the income tax provision for the six months ended June 30, 2022 compared to the same period in 2021 is based on the estimated annual effective tax rate applied to the pretax loss incurred for the six months period plus discrete tax items, based on our expectation of pretax loss for the fiscal year.

Net loss was $27.3 million for the six months ended June 30, 2022, compared to $32.4 million for the same period in 2021, primarily attributable to the increase in gross profit and decreases in certain SG&A and other expenses as mentioned above.

Segment Results

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


Table MD&A 2: Security Solutions Segment - Financial Results	Table MD&A 2: Security Solutions Segment - Financial Results									Table MD&A 2: Security Solutions Segment - Financial Results
		For the Three Months Ended				For the Six Months Ended					For the Three Months Ended						For the Six Months Ended
		June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021			June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022

		(in thousands)									(dollars in thousands)
Revenue	Revenue	$	30,819	$	32,236	$	57,738	$	55,066	Revenue	$	17,196		$	30,819		$	36,969		$	57,738
Gross profit	Gross profit	$	16,433	$	17,188	$	31,485	$	26,515	Gross profit	9,551			16,433			19,825			31,485
Gross margin	Gross margin	53 %		53 %		55 %		48 %		Gross margin	55.5		%	53.3		%	53.6		%	54.5		%

For the three months ended June 30, ~~2022,~~2023, Security ~~Solutions'~~Solutions segment revenue decreased by ~~approximately 4%~~$13.6 million, or 44.2%, compared to the same period in ~~2021. This was driven primarily by a decrease of $2.3 million in services revenue, offset by an increase of $0.9 million in product revenue compared to the same period in 2021. This is~~2022, primarily due to ~~the decrease in sales offerings for~~lower volume on certain ~~projects winding down within the segment's business lines.~~major programs.

~~Revenue~~Security Solutions segment revenue for the six months ended June 30, ~~2022 increased~~2023, decreased by ~~approximately 5%, which was primarily driven by an increase of $3.4~~$20.8 million, ~~in services revenue~~or 36.0%, compared to the same period in ~~2021,~~2022, primarily due to ~~an increase in sales offerings within the segment.~~lower revenues on major programs.

Gross profit for Security ~~Solutions' gross profit~~Solutions decreased by $6.9 million, or 41.9%, for the second quarter of ~~2022 decreased by $0.8 million or 4%~~2023 compared towith the same period in ~~2021. With revenue decreased, segment gross margin remained at 53% between comparable periods.~~

~~Security Solutions' gross profit for the six months ended June 30,~~ 2022, ~~increased by $5.0 million or 19% compared~~primarily due to the ~~same period~~decrease in ~~2021. Likewise, segment~~revenue, partially offset by lower indirect expenses due to restructuring and other cost actions. Segment gross margin increased to ~~55%~~55.5% for the ~~six months ended June 30, 2022~~second quarter of 2023 from ~~48%~~53.3% for the same period in ~~2021. The increase in profitability was~~2022, primarily due to ~~growth in high margin projects under this segment.~~

Table MD&A 3: Secure Networks Segment - Financial Results
For the Three Months Ended For the Six Months Ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
(in thousands)
Revenue $ 24,972 $ 21,408 $ 48,213 $ 54,336
Gross profit $ 4,496 $ 5,346 $ 8,315 $ 10,489
Gross margin 18 % 25 % 17 % 19 %

~~Secure Networks'~~ revenue for the second quarter of 2022 increased by approximately 17% compared to the same period in 2021. This was driven by an increase of $3.6 million in service revenue due to new awards, timing of significant orders and higher segment offerings on several existing projects.mix.

For the six months ended June 30, ~~2022, Secure Networks' revenue~~2023, Security Solutions segment gross profit decreased by ~~11%~~$11.7 million, or 37.0%, compared to the same period in ~~2021. This was~~2022, primarily due to the ~~ramping down~~decrease in revenue but partially offset by significantly lower indirect expenses. Segment gross margin decreased from 54.5% to 53.6% as a result of ~~certain large projects under our~~ a lower revenue base for indirect expenses.


Table MD&A 3: Secure Networks Segment - Financial Results
	For the Three Months Ended						For the Six Months Ended
	June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022

	(dollars in thousands)
Revenue	$	15,715		$	24,972		$	31,164		$	48,213
Gross profit	2,808			4,496			6,016			8,315
Gross margin	17.9		%	18.0		%	19.3		%	17.2		%

Secure Networks ~~offerings.~~

~~Secure Networks' gross profit~~segment revenue for the ~~second quarter of 2022,~~three months ended June 30, 2023, decreased by ~~$0.9~~$9.3 million, or ~~16%~~37.1%, compared to the same period in ~~2021. Segment gross margin~~2022, primarily due to the successful wind-down of large programs as expected.

For the six months ended June 30, 2023, Secure Networks segment revenue decreased by $17.0 million, or 35.4%, compared to ~~18% for the second quarter of 2022 from 25% for~~ the same period in ~~2021. This is~~2022, primarily due to the ~~various changes in the mix~~successful wind-down of ~~contracts within the segment and timing of order delivery.~~

~~Tab~~l ~~e of Contents~~

large programs as expected.

Gross profit for Secure Networks decreased by $1.7 million, or 37.5%, for the second quarter of 2023, compared with the same period in 2022, primarily due to lower revenue, partially offset by lower indirect expenses. Segment gross margin slightly decreased to 17.9% for the second quarter of 2023 from 18.0% for the same period in 2022.

For the six months ended June 30, ~~2022~~2023, Secure Networks segment gross profit decreased by ~~$2.2~~$2.3 million, or ~~21%~~27.6% compared to the same period in ~~2021, as a result of the decline in year-to-date segment revenue. Secure Networks'~~2022, primarily due to lower revenue, partially offset by lower indirect expenses. Segment gross margin ~~also decreased~~increased from 17.2% in 2022 to ~~17% for the for the six months ended 2022 from 19% compared to the same period~~19.3% in ~~2021~~2023 due to improved performance on several programs and a shift in the ~~sale mix.~~mix across the portfolio driven by the wind-down of lower-margin programs.

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Non-GAAP Financial Measures

In addition to our results determined in accordance with U.S. GAAP, we believe the non-GAAP financial measures of ~~Enterprise~~ EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin, Adjusted Net ~~Income~~ Income/(Loss), Adjusted Earnings Per Share ("EPS") and Free Cash Flow are useful in evaluating our operating performance. We believe that this non-GAAP financial information, when taken collectively with our GAAP results, may be helpful to readers of our financial statements because it provides consistency and comparability with past financial performance and assists in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their GAAP results. The non-GAAP financial information is presented for supplemental informational purposes only, should not be considered a substitute for financial information presented in accordance with GAAP, and may be different from ~~similarly titled~~similarly-titled non-GAAP measures used by other companies. A reconciliation is provided below for each of these non-GAAP financial measures to the most directly comparable financial measure stated in accordance with GAAP.

We use ~~the following~~these non-GAAP financial measures to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget, to develop short-term and long-term operating plans, and to evaluate the performance of certain management personnel when determining incentive compensation. We believe these non-GAAP financial measures facilitate comparison of our operating performance on a consistent basis between periods by excluding certain items that may, or could, have a disproportionately positive or negative impact on our results of operations in any particular period. When viewed in combination with our results prepared in accordance with GAAP, these non-GAAP financial measures help provide a broader picture of factors and trends affecting our results of operations.

~~Enterprise~~ EBITDA, Adjusted EBITDA, EBITDA Margin and Adjusted EBITDA Margin

~~Both Enterprise~~ EBITDA, Adjusted EBITDA, EBITDA Margin and Adjusted EBITDA Margin are supplemental measures of operating performance that are not made under GAAP and ~~that~~ do not represent, and should not be considered as, an alternative to net ~~(loss) income~~loss as determined by GAAP. We define ~~Enterprise~~ EBITDA as net (loss)/income, adjusted for non-operating (income)/expense, ~~(income),~~ interest expense, (benefit from)/provision for ~~(benefit from)~~ income taxes, and depreciation and amortization. We define Adjusted EBITDA as ~~Enterprise~~ EBITDA, adjusted for stock-based compensation ~~expense.~~expense and restructuring expenses/(adjustments). We define EBITDA Margin as EBITDA as a percentage of total revenue. We define Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of total revenue.


Table MD&A 4: Reconciliation of Net Loss to Enterprise EBITDA and Adjusted EBITDA
Table MD&A 4: Reconciliation of Net Loss to EBITDA, Adjusted EBITDA, EBITDA Margin and Adjusted EBITDA Margin										Table MD&A 4: Reconciliation of Net Loss to EBITDA, Adjusted EBITDA, EBITDA Margin and Adjusted EBITDA Margin
											For the Three Months Ended						For the Six Months Ended
		For the Three Months Ended				For the Six Months Ended					June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022
		June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021			Amount		Margin	Amount		Margin	Amount		Margin	Amount		Margin

		(in thousands)									(dollars in thousands)
Net loss	Net loss	$	(12,289)	$	(17,644)	$	(27,272)	$	(32,422)	Net loss	$	(8,024)	(24.4 %)	$	(14,159)	(25.4 %)	$	(18,770)	(27.5) %	$	(30,775)	(29.0) %
Adjustments:
Non-operating (income)/expense		(118)		(32)		(130)		1,022
Other income										Other income	(1,649)		(5.0 %)	(118)		(0.2 %)	(4,145)		(6.1) %	(130)		(0.1) %
Interest expense	Interest expense	187		192		377		388		Interest expense	184		0.5 %	187		0.3 %	433		0.6 %	377		0.4 %
Provision for income taxes	Provision for income taxes	54		13		125		47		Provision for income taxes	22		0.1 %	54		0.1 %	45		0.1 %	125		0.1 %
Depreciation and amortization	Depreciation and amortization	1,505		1,404		2,910		2,764		Depreciation and amortization	1,696		5.2 %	1,505		2.7 %	3,121		4.5 %	2,910		2.7 %
Enterprise EBITDA		(10,661)		(16,067)		(23,990)		(28,201)
EBITDA (Non-GAAP)										EBITDA (Non-GAAP)	(7,771)		(23.6 %)	(12,531)		(22.5 %)	(19,316)		(28.4) %	(27,493)		(25.9) %
Stock-based compensation expense (1)	Stock-based compensation expense (1)	15,206		21,336		29,504		35,006		Stock-based compensation expense (1)	7,745		23.5 %	17,076		30.6 %	17,244		25.3 %	33,007		31.1 %
Adjusted EBITDA		$	4,545	$	5,269	$	5,514	$	6,805
Restructuring expenses/(adjustments) (2)										Restructuring expenses/(adjustments) (2)	(3)		— %	—		— %	1,197		1.8 %	—		— %
Adjusted EBITDA (Non-GAAP)										Adjusted EBITDA (Non-GAAP)	$	(29)	(0.1 %)	$	4,545	8.1 %	$	(875)	(1.3 %)	$	5,514	5.2	%

(1)The stock-based compensation adjustment to EBITDA is made up of stock-based compensation expense for the awarded RSUs, PSUs and stock options, and of other sources. Stock-based compensation expense for the awarded RSUs, PSUs and stock options was $5.7 million and $13.6 million for the three and six months ended June 30, 2023, respectively, and $16.4 million and $30.7 million for the three and six months ended June 30, 2022, ~~is made up of $14.6~~respectively. Stock-based compensation from other sources was $2.1 million and ~~$27.2~~$3.7 million ~~of stock-based compensation expenses~~ for the ~~awarded RSUs~~three and ~~PRSUs,~~six months ended June 30, 2023, respectively, and $0.7 million and $2.3 million ~~of other sources of stock-based compensation expense,~~for the three and six months ended June 30, 2022, respectively. The other ~~source~~sources of stock-based compensation consist of accrued compensation, which the Company intends to settle in shares of the Company's common stock. However, it is the ~~Company's~~Company’s discretion whether this compensation will ultimately be paid in stock or cash. The Company has the right to dictate the form of these payments up until the date at which they are paid. Any change to the expected payment form would result in ~~out of quarter~~out-of-quarter adjustments to this add back to Adjusted EBITDA.

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

~~Tab~~l eTable of Contents

Adjusted Net (Loss)/Income ~~(Loss)~~ and Adjusted EPS

Adjusted Net (Loss)/Income ~~(Loss)~~ and Adjusted EPS are supplemental measures of operating performance that are not made under GAAP and ~~that~~ do not represent, and should not be considered as, alternatives to net ~~income~~ income/(loss) as determined by GAAP. We define Adjusted Net (Loss)/Income ~~(Loss)~~ as net ~~income (loss),~~loss, adjusted for non-operating (income)/expense, ~~(income) and~~ stock-based compensation ~~expense.~~expense and restructuring expense/(adjustments). We define Adjusted EPS as Adjusted Net ~~Income (Loss)~~Loss divided by the weighted-average number of common shares outstanding for the period.

Table MD&A 5: Reconciliation of Net Loss to Adjusted Net Income and Adjusted EPS
For the Three Months Ended For the Six Months Ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
Adjusted Net Income/(Loss) Adjusted Per Share Adjusted Net Income/(Loss) Adjusted Per Share Adjusted Net Income/(Loss) Adjusted Per Share Adjusted Net Income/(Loss) Adjusted Per Share
(in thousands, except per share data)
Reported GAAP measure $ (12,289) $ (0.18) $ (17,644) $ (0.26) $ (27,272) $ (0.40) $ (32,422) $ (0.49)
Adjustments:
Non-operating (income)/ expense (118) — (32) — (130) — 1,022 0.02
Stock-based compensation expense (2)
15,206 0.22 21,336 0.32 29,504 0.43 35,006 0.53
Adjusted non-GAAP measure $ 2,799 $ 0.04 $ 3,660 $ 0.06 $ 2,102 $ 0.03 $ 3,606 $ 0.06
Weighted-average shares of common stock outstanding 67,876 66,616 67,717 65,621


Table MD&A 5: Reconciliation of Net Loss to Non-GAAP Adjusted Net (Loss)/Income and Adjusted EPS
	For the Three Months Ended								For the Six Months Ended
	June 30, 2023				June 30, 2022				June 30, 2023				June 30, 2022
	Adjusted Net (Loss)/Income		Adjusted Earnings Per Share		Adjusted Net (Loss)/Income		Adjusted Earnings Per Share		Adjusted Net (Loss)/Income		Adjusted Earnings Per Share		Adjusted Net (Loss)/Income		Adjusted Earnings Per Share

	(in thousands, except per share data)
Net loss	$	(8,024)	$	(0.12)	$	(14,159)	$	(0.21)	$	(18,770)	$	(0.27)	$	(30,775)	$	(0.45)
Adjustments:
Other income	(1,649)		(0.02)		(118)		—		(4,145)		(0.06)		(130)		—
Stock-based compensation expense (1)	7,745		0.11		17,076		0.25		17,244		0.25		33,007		0.48
Restructuring expenses/(adjustments) (2)	(3)		—		—		—		1,197		0.01		—		—
Adjusted net (loss)/income (Non-GAAP)	$	(1,931)	$	(0.03)	$	2,799	$	0.04	$	(4,474)	$	(0.07)	$	2,102	$	0.03
Weighted-average shares of common stock outstanding, basic	69,424				67,876				68,804				67,717

~~(2)~~(1)The stock-based compensation adjustment to ~~net loss~~Net (Loss)/Income is made up of stock-based compensation expense for the awarded RSUs, PSUs and stock options, and of other sources. Stock-based compensation expense for the awarded RSUs, PSUs and stock options was $5.7 million and $13.6 million for the three and six months ended June 30, 2023, respectively, and $16.4 million and $30.7 million for the three and six months ended June 30, 2022, ~~is made up of $14.6~~respectively. Stock-based compensation from other sources was $2.1 million and ~~$27.2~~$3.7 million ~~of stock-based compensation expense~~ for the ~~awarded RSUs~~three and ~~PRSUs,~~six months ended June 30, 2023, respectively, and $0.7 million and $2.3 million ~~of other sources of stock-based compensation expense,~~for the three and six months ended June 30, 2022, respectively. The other ~~source~~sources of stock-based compensation consist of accrued compensation, which the Company intends to settle in shares of the Company's common stock. However, it is the ~~Company's~~Company’s discretion whether this compensation will ultimately be paid in stock or cash. The Company has the right to dictate the form of these payments up until the date at which they are paid. Any change to the expected payment form would result in out-of-quarter adjustments to this add back to Adjusted Net ~~Income/~~(Loss)./Income.

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

Free Cash Flow

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


Table MD&A 6: Free Cash Flow	Table MD&A 6: Free Cash Flow									Table MD&A 6: Free Cash Flow
		For the Three Months Ended				For the Six Months Ended					For the Three Months Ended				For the Six Months Ended
		June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021			June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022

		(in thousands)									(in thousands)
Net cash flows provided by/(used in) operating activities		$	7,883	$	3,528	$	8,132	$	(3,354)
Net cash (used in)/provided by operating activities										Net cash (used in)/provided by operating activities	$	(4,113)	$	7,883	$	(4,213)	$	8,132
Adjustments:	Adjustments:									Adjustments:
Purchase of property and equipment		(95)		(590)		(641)		(1,070)
Purchases of property and equipment										Purchases of property and equipment	(47)		(95)		(270)		(641)
Capitalized software development costs	Capitalized software development costs	(2,339)		(1,498)		(5,134)		(3,663)		Capitalized software development costs	(4,398)		(2,339)		(8,198)		(5,134)
Free cash flow		$	5,449	$	1,440	$	2,357	$	(8,087)
Free cash flow (Non-GAAP)										Free cash flow (Non-GAAP)	$	(8,558)	$	5,449	$	(12,681)	$	2,357

Table of Contents

Each of ~~Enterprise~~ EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin, Adjusted Net ~~Income~~ Income/(Loss), Adjusted EPS and Free Cash Flow has limitations as an analytical tool, and you should not consider any of them in isolation, or as a substitute for analysis of our results as reported under GAAP. Among other limitations, each of ~~Enterprise~~ EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin, Adjusted Net ~~Income~~ Income/(Loss), Adjusted EPS and Free Cash Flow does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments, does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations, and does not reflect income tax expense or benefit. Other companies in our industry may calculate ~~Enterprise~~Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net ~~Income~~ Income/(Loss), Adjusted EPS and Free Cash Flow differently than we do, which limits their usefulness as a comparative ~~measure.~~measures. Because of these limitations, neither ~~Enterprise~~ EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin, Adjusted Net ~~Income~~ Income/(Loss), Adjusted EPS nor Free Cash Flow should be considered as a replacement for net (loss)/income, ~~(loss),~~ earnings per share or net cash flows provided by/ ~~(used~~(used in) operating activities, as determined by GAAP, or as a measure of our profitability. We compensate for these limitations by relying primarily on our GAAP results and using non-GAAP measures only for supplemental purposes.

~~Tab~~l ~~e of Contents~~

Liquidity and Capital Resources

~~Upon the closing~~Our primary sources of ~~the IPO in November 2020, we issued 17.2~~liquidity are cash on hand, future operating cash flows, and, if needed, borrowings under our $30.0 million ~~shares~~revolving credit facility, with an available expansion feature of ~~our common stock at a price of $17.00 per share, generating net proceeds of approximately $272.8 million. We used approximately $108.9~~up to $30.0 million of ~~the net proceeds in connection with the exchangeable redeemable preferred stock conversion, $30.0 million~~additional revolver facility. While a variety of factors related to ~~fund~~sources and uses of cash, such as timeliness of accounts receivable collections, vendor credit terms, or significant collateral requirements, ultimately impact our ~~acquisition of the outstanding Class B Units of Telos ID (see~~ ~~Note~~ 10 –~~Purchase of Telos ID~~ ~~Non-controlling~~ I ~~nteres~~ts~~), and $21.0 million to repay~~liquidity, such factors may or may not have a direct impact on our ~~outstanding senior term loan and subordinated debt .~~

On April 6, 2021, we completed our follow-on offering of 9.1 million shares of our common stock at a price of $33.00 per share, including 7.0 million shares of common stock by certain existing stockholders of Telos. The offering generated approximately $64.3 million of net proceeds to Telos. We did not receive any proceeds from the shares of common stock sold by the selling stockholders. On April 19, 2021, we used approximately $1.3 million of the net proceeds to repurchase 39,682 shares of our common stock and $26.9 million to repurchase 900,970 outstanding warrants for our common stock held by EnCap fund holders. Further, on July 30, 2021, we used approximately $5.9 million of the net proceeds to acquire the assets of DFT (see ~~Note~~ 9 – ~~Acquisition). We intend to use the remaining net proceeds of the IPO and the follow-on offering for general corporate purposes.~~

Our overall financial position and liquidity are strong. Our working capital was $130.4 million and $140.8 million as of June 30, 2022, and December 31, 2021, respectively. Although no assurances can be given, we expect that funds generated from operations are sufficient to maintain the liquidity we require to meet our operating, investing and financing needs for the next 12 months.liquidity.

As of June 30, ~~2022,~~2023, we had a cash and cash ~~equivalent balance~~equivalents of ~~$122.6~~$103.4 million ~~compared to $126.6 million at December 31, 2021.~~and our working capital was $110.8 million.

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

Cash ~~provided by~~Flow


Table MD&A 7: Net Change in Cash, Cash Equivalents, and Restricted Cash
	For the Six Months Ended
	June 30, 2023		June 30, 2022

	(in thousands)
Net cash (used in)/provided by operating activities	$	(4,213)	$	8,132
Net cash used in investing activities	(8,468)		(5,775)
Net cash used in financing activities	(3,176)		(6,199)
Net change in cash, cash equivalents, and restricted cash	$	(15,857)	$	(3,842)

Net cash used in operating activities ~~was $8.1 million~~ for the six months ended June 30, ~~2022,~~2023, was $4.2 million, an increase of $12.3 million in cash outflow, compared to ~~cash used in operating activities of $3.4 million for~~ the same period in ~~2021. Cash provided by or used in operating activities~~2022. The change is primarily driven by the ~~Company’s~~Company's operating ~~income (loss),~~losses, the timing of ~~receipt~~receipts of customer payments, the timing of ~~our~~ payments to vendors and employees, and the timing of inventory turnover, adjusted for certain non-cash items that do not impact cash flows from operating activities.

~~Cash~~Net cash used in investing activities ~~was approximately $5.8~~for the six months ended June 30, 2023, increased by $2.7 million compared to the same period of the prior year, primarily due to the higher investment in software development costs of $8.2 million and ~~$4.7~~$5.1 million for the six months ended June 30, 2023 and 2022, respectively, partially offset by the slight decrease in purchases of property and ~~2021, respectively,~~equipment.

Net cash used in financing activities for the six months ended June 30, 2023, decreased by $3.0 million compared to the same period in 2022. This is primarily ~~due~~attributable to ~~software development costs~~the decrease in payment of ~~$5.1 million and $3.7~~tax withholding related to net share settlement of equity awards of $1.6 million for the six months ended June 30, ~~2022 and 2021, respectively, and the purchase of property and equipment.~~

~~Cash used in financing activities was $6.2 million for the six months ended June 30, 2022,~~2023, compared to cash provided by financing activities of $33.0 million for the same period in 2021. This is primarily attributable to payments under finance leases for both periods, payment of tax withholding related to a net share settlement of an equity awards ofwith $2.9 million in the ~~first quarter~~same period of 2022, and the ~~repurchase~~cash outflow on repurchases of common stock of $2.6 million in 2022 compared with $0.1 million in 2023 under the share repurchase program ~~described below~~(see Note 13 – Share Repurchases). This is partially offset by the payment of the DFT holdback amount of $0.6 million in the second quarter of 2022. By contrast, in 2021 there was a cash inflow from the follow-on offering that generated $64.3 million of net proceeds, reduced by $2.4 million of final distributions to the Class B Members of Telos ID in the first quarter, $26.9 million used to repurchase the outstanding warrants and $1.3 million to repurchase the common stock held by EnCap fund holders.February 2023.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires us to make estimates, judgments, and assumptions that affect the amounts reported. Actual results could differ from those estimates. The ~~2021~~2022 Form 10-K, as filed with the SEC on March ~~28, 2022,~~16, 2023, includes a summary of critical accounting policies we believe are the most important to aid in understanding our financial results. There have been no changes to those critical accounting policies that have had a material impact on our reported amounts of assets, liabilities, revenues, or expenses during the six months ended June 30, ~~2022.~~2023.

Table of Contents

Item 3. Quantitative and Qualitative Disclosures about Market Risk

None.

~~Tab~~l ~~e of Contents~~

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company ~~has established~~maintains disclosure controls and procedures ~~to ensure that information required to be disclosed~~(as defined in ~~this quarterly report on Form 10-Q was properly recorded, processed, summarized~~Rules 13a-15(e) and ~~reported within~~15d-15(e) under the ~~time periods specified in the Commission's rules and forms. The Company's controls and procedures~~Securities Exchange Act of 1934, as amended (the "Exchange Act")), which are designed to ensure that information required to be disclosed by the Company in ~~the~~ reports that it files or submits under the ~~Securities~~ Exchange Act, ~~of 1934, as amended (the "Exchange Act")~~including this Report, are recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Company under the Exchange Act is accumulated and communicated to the Company's management, including its principal executive officer ("CEO") and principal financial officer ("CFO") as appropriate to allow timely decisions regarding required disclosure.

~~We carried out~~The Company's management, including the Company's CEO and CFO, conducted an evaluation of the effectiveness of the ~~design and operation of our~~Company's disclosure controls and procedures ~~(as defined in Exchange Act Rules 13a-15(e)~~as of the end of the period covered by this Report and, ~~15d-15(e)) at June 30, 2022,~~ based on that evaluation, the ~~evaluation of these controls~~CEO and procedures required by paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Exchange Act. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer. Based upon the evaluation, our Chief Executive Officer and Chief Financial OfficerCFO concluded that ~~on June 30, 2022, our~~the Company’s disclosure controls and procedures were ~~not~~ effective ~~as a result of~~at the ~~previously identified material weaknesses disclosed below.~~

~~Internal Control over Financial Reporting~~

In connection with its evaluation of the internal control over financial reporting for the year ended December 31, 2021, management identified the following material weaknesses in our internal control over financial reporting:

a.Management did not maintain appropriately designed entity-level controls impacting the control environment and monitoring activities to prevent or detect material misstatements to the consolidated financial statements. Specifically, the Company did not have sufficient qualified resources to effectively design, operate and oversee internal control over financial reporting, which contributed to the failure in the effectiveness of certain controls.

b.Management did not maintain appropriately designed information technology general controls in the areas of user access, change management, and segregation of duties, including controls over the recording of journal entries and safeguarding of assets, related to certain information technology systems that support the Company’s financial reporting process.

c.~~Management did not maintain appropriately designed and implemented controls over the following:~~

i.~~Recording of revenue in accordance with ASC Topic 606, "Revenue from Contracts with Customers.”~~

~~ii.Accounting for software development costs in accordance with ASC Topic 985-20, “Software – Costs of Software to be Sold, Leased, or Marketed,” and ASC Topic 350-40, “Internal Use Software.”~~

~~iii.Review of completeness and accuracy of award stock-based compensation expense, and review of the key inputs and assumptions utilized in third-party valuations.~~

~~iv.Preparation and review of projected financial information utilized in the valuation of the business combination.~~

v.~~Financial statement close process to ensure the consistent execution, accuracy, and timely review of account reconciliations, as well as review of the statement of cash flows.~~

~~vi.Coding of transactions within the purchase to disbursement cycle.~~

~~Tab~~l ~~e of Contents~~

~~These material weaknesses were partially related to employee turnover, resulting in a temporary shortage of qualified personnel to effectively perform the internal controls referenced above.~~

~~The Company is working to remediate the material weaknesses in internal control over financial reporting and is taking steps to improve the internal control environment. Specifically, the Company is:~~

a.~~Hiring additional accounting personnel and implementing training of new and existing personnel on proper execution of designed control procedures;~~

b.Enhancing processes, and designing and implementing internal controls around revenue recognition, software development costs, stock-based compensation, business combination, and financial close and reporting; and,

c.~~Enhancing user access provisioning and monitoring controls to enforce appropriate system access and segregation of duties.~~

~~The material weaknesses will be considered remediated when management concludes that, through testing, the applicable remedial controls are designed and implemented effectively.~~

~~We are still assessing the design and operating effectiveness of these measures and, as such, the identified material weaknesses have not been fully remediated~~reasonable assurance level as of June 30, ~~2022. We will continue to monitor the effectiveness of these remediation measures and will make any changes and take other actions that we deem appropriate.~~2023.

Changes in Internal Control over Financial Reporting

~~Other than the ongoing remediation activities listed above, there has been~~There was no change in ~~our~~the Company's internal control over financial reporting during the quarter ended June 30, ~~2022~~2023, identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that ~~has~~have materially affected, or isare reasonably likely to materially affect, ~~our~~the Company’s internal control over financial reporting.

2927

~~Tab~~l eTable of Contents

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

Information regarding legal proceedings ~~may be found in~~is included under Note 1 918 – Commitments and Contingencies to the unaudited consolidated financial statements.

Item 1A. Risk Factors

~~There were no material changes in the period ended June 30, 2022, in our risk factors as~~We have disclosed under "Item 1A – Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022, the risk factors which may materially affect our business, financial conditions or results of operations. Except as set forth below, there have been no material changes from the risk factors previously disclosed. You should carefully consider the risk factors set forth below and in the Annual Report on Form 10-K, and other information set forth elsewhere in this Quarterly Report on Form 10-Q. You should be aware that these risk factors and other information may not describe every risk facing the Company. In addition, risks and uncertainties not currently known to us or that we currently do not believe are material could also materially and adversely affect our business, financial condition or results of operations.

An impairment charge of goodwill or other intangibles could have a material adverse impact on our results of operations.

Goodwill was $17.9 million as of June 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. Intangible assets were $37.8 million and $37.4 million as of June 30, 2023, and December 31, 2022, respectively. Under generally accepted accounting principles ("GAAP"), we are required to test the carrying value of goodwill and intangible assets at least annually or sooner if events occur that indicate impairment could exist. These events or circumstances could include a significant change in the business climate, including a sustained decline in a reporting unit’s fair value, legal and regulatory factors, operating performance indicators, competition and other factors. GAAP requires us to assign and then test goodwill at the reporting unit level.

If over a sustained period of time we experience a decrease in our stock price and market capitalization, which may serve as an estimate of the fair value of our reporting unit, an indication of impairment may have occurred. If the fair value of our reporting unit is less than its net book value, we may be required to record goodwill impairment charges in the future. In addition, if the revenue and cash flows generated from any of our other intangible assets is not sufficient to support its net book value, we may be required to record an impairment charge.

During the first half of 2023, the price per share of our common stock as traded on the NASDAQ Global Market declined below net book value per share. If our stock price remains below net book value per share or other negative business factors described above exist, we may be required to perform a goodwill impairment analysis before the end of the year. That analysis or the annual analysis may result in an impairment charge that could be significant and could have a material adverse impact on our results of operations for the period in which the charge is taken.

A decline in the federal budget, changes in spending or budgetary priorities of the U.S. government, a prolonged U.S. government shutdown or delays in contract awards may significantly and adversely affect our future revenues, cash flow and financial results.

In recent years, U.S. government appropriations have been affected by larger U.S. government budgetary issues and related legislation. As a result, DoD funding levels have fluctuated and have been difficult to predict. Future spending levels are subject to a wide range of factors, including Congressional action. In addition, in recent years, the U.S. government has been unable to complete its budget process before the end of its fiscal year, resulting in both a government shutdown and continuing resolutions to extend sufficient funds only for U.S. government agencies to continue operating. Most recently, the federal government was shut down due to a lack of funding for over one month between late 2018 and early 2019. Additionally, the national debt has recently threatened to reach the statutory debt ceiling in 2023, and such an event in future years could result in the U.S. government defaulting on its debts.

As a result, government spending levels are difficult to predict beyond the near term due to numerous factors, including the external threat environment, future government priorities and the state of government finances. Significant changes in government spending or changes in U.S. government priorities, policies and requirements could have a material adverse effect on our results of operations, financial condition or liquidity.

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

(a) None.

(b) None.

~~(a)Unregistered Sales~~Table of ~~Securities~~Contents

~~None.~~

~~(b)Use of Proceeds~~

~~None.~~

~~(c)Issuer Purchases of Equity Securities~~

Common Stock Purchase Activity During the Three Months Ended June 30, 2022
Period
Total Number of Shares Purchased (1)
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Repurchases Plans (1)
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans (1)
April 1, 2022 through April 30, 2022 — $ — — $ —
May 1, 2022 through May 31, 2022 — — — $ 50,000,000
June 1, 2022 through June 30, 2022 360,439 8.33 360,439 $ 46,997,511
Total 360,439 $ 8.33 360,439

~~(1)~~ On May 24, 2022, the Board of Directors authorized a share repurchase program, pursuant to which the Company can repurchase up to $50.0 million of issued and outstanding common stock. The repurchase program has no expiration date and may be modified, suspended, or terminated at any time. In June 2022, the Company repurchased 360,439 shares of common stock under the program for an aggregate price of $3.0 million in open market.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

~~Tab~~l ~~e of Contents~~

Item 6. Exhibits


Exhibit ~~No.~~ Number		Description
10.1	* +	Form of ~~Exhibit~~Telos Corporation Notice of Grant of Option
10.2	* +	Form of Telos Corporation Notice of Grant of Restricted Shares and/or Restricted Share Units (Time-Based)
31.1	v+	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	v+	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32	z^	Certification ~~of Chief Executive~~ ~~Officer and Chief Financial Officer~~ pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS	v+	XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH	v+	XBRL Taxonomy Extension Schema Document

101.CAL	v+	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	v+	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	v+	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	v+	XBRL Taxonomy Extension Presentation Linkbase Document

104	v+	Cover Page Interactive Data ~~File. (formatted as~~File - the cover page iXBRL tags are embedded within the Inline XBRL ~~tags and~~document contained in Exhibit ~~101)~~101



v*			~~Filed herewith.~~constitutes a management contract or compensatory plan or arrangement
z+			~~Furnished herewith.~~filed herewith
^			furnished herewith

3129

~~Tab~~l eTable of Contents

SIGNATURES

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


TELOS CORPORATION


	/s/ John B. Wood	August 9, ~~2022~~2023
By:	John B. Wood
	Chief Executive Officer
	~~(Principal~~ (Principal Executive Officer)


	/s/ Mark Bendza	August 9, ~~2022~~2023
By:	Mark Bendza
	Chief Financial Officer
	~~(Principal~~ (Principal Financial Officer)


	/s/ Victoria Harding	August 9, ~~2022~~2023
By:	Victoria Harding
	Controller and Chief Accounting Officer
	~~(Principal~~ (Principal Accounting Officer)

3230


Table 3.5: Contract Balances
	June 30, 2022		December 31, 2021

	(in thousands)
Contract assets (unbilled receivables)	$	36,216	$	41,374
Contract liabilities	4,799		6,381


Table 12.2: Service-Based RSU and Performance-Based RSU Award Activity
	Service-Based RSU	Performance-Based RSU	Total	Weighted-Average Grant Date Fair Value
Unvested outstanding units as of December 31, 2021	3,030,608	492,727	3,523,335	$	34.24
Granted	3,759,037	—	3,759,037	10.01
Vested	(1,416,116)	—	(1,416,116)	32.83
Forfeited	(260,588)	(113,566)	(374,154)	33.15
Unvested outstanding units as of June 30, 2022	5,112,941	379,161	5,492,102	$	18.04


Table 13: Shares Repurchase Activity
	For the Three Months Ended				For the Six Months Ended
	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021

	(in thousands, except per share and share data)
Amount paid for shares repurchased (1)	$	3,002	$	—	$	3,002	$	—
Number of shares repurchased	360,439		—		360,439		—
Average per share price paid (1)	$	8.33	$	—	$	8.33	$	—


Table 18.1: Impact of the Correction to the Condensed Consolidated Statement of Operations
	For the Three Months Ended June 30, 2021						For the Six Months Ended June 30, 2021
	Previously Reported		Error Correction		As Adjusted		Previously Reported		Error Correction		As Adjusted

	(in thousands, except per share amounts)
Revenue - services	$	47,618	$	1,385	$	49,003	$	99,676	$	1,385	$	101,061
Revenue - products	4,941		(300)		4,641		8,641		(300)		8,341
Revenue	52,559		1,085		53,644		108,317		1,085		109,402
Cost of sales - services	29,501		(892)		28,609		69,103		(1,004)		68,099
Costs and expenses	32,002		(892)		31,110		73,402		(1,004)		72,398
General and administrative	28,743		892		29,635		48,708		1,004		49,712
Selling, general and administrative expenses	39,113		892		40,005		66,965		1,004		67,969
Operating loss	(18,556)		1,085		(17,471)		(32,050)		1,085		(30,965)
Loss before income taxes	(18,716)		1,085		(17,631)		(33,460)		1,085		(32,375)
Net loss	(18,729)		1,085		(17,644)		(33,507)		1,085		(32,422)
Net loss attributable to Telos Corporation	(18,729)		1,085		(17,644)		(33,507)		1,085		(32,422)
Net loss per share attributable to Telos Corporation
Basic	$	(0.28)	$	0.02	$	(0.26)	$	(0.51)	$	0.02	$	(0.49)
Diluted	$	(0.28)	$	0.02	$	(0.26)	$	(0.51)	$	0.02	$	(0.49)


Common Stock Purchase Activity During the Three Months Ended June 30, 2022
Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Repurchases Plans (1)	Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans (1)
April 1, 2022 through April 30, 2022	—	$	—	—	$	—
May 1, 2022 through May 31, 2022	—	—		—	$	50,000,000
June 1, 2022 through June 30, 2022	360,439	8.33		360,439	$	46,997,511
Total	360,439	$	8.33	360,439