
		For the Three Months Ended				For the Six Months Ended					For the Three Months Ended				For the Nine Months Ended
		June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022			September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022

		(in thousands, except per share amounts)									(in thousands, except per share amounts)
Revenue – services	Revenue – services	$	28,947	$	50,270	$	60,481	$	98,378	Revenue – services	$	34,385	$	55,305	$	94,866	$	153,683
Revenue – products	Revenue – products	3,964		5,521		7,652		$	7,573	Revenue – products	1,801		8,288		9,453		15,861
Total revenue	Total revenue	32,911		55,791		68,133		105,951		Total revenue	36,186		63,593		104,319		169,544
Cost of sales – services		19,008		31,436		38,276		61,167
Cost of sales – products		1,544		3,426		4,016		4,984
Cost of sales – services (exclusive of depreciation and amortization shown separately below)										Cost of sales – services (exclusive of depreciation and amortization shown separately below)	20,683		36,555		58,613		97,311
Cost of sales – products (exclusive of depreciation and amortization shown separately below)										Cost of sales – products (exclusive of depreciation and amortization shown separately below)	545		5,902		4,561		10,886
Depreciation and amortization										Depreciation and amortization	1,945		191		2,291		602
Total cost of sales	Total cost of sales	20,552		34,862		42,292		66,151		Total cost of sales	23,173		42,648		65,465		108,799
Gross profit	Gross profit	12,359		20,929		25,841		39,800		Gross profit	13,013		20,945		38,854		60,745
Selling, general and administrative expenses	Selling, general and administrative expenses									Selling, general and administrative expenses
Sales and marketing	Sales and marketing	1,793		4,741		3,436		9,993		Sales and marketing	1,728		3,042		5,164		13,035
Research and development	Research and development	2,646		4,489		5,479		9,919		Research and development	3,154		3,981		8,633		13,900
General and administrative	General and administrative	17,387		25,735		39,363		50,291		General and administrative	17,824		22,706		57,187		72,997
Total selling, general and administrative expenses	Total selling, general and administrative expenses	21,826		34,965		48,278		70,203		Total selling, general and administrative expenses	22,706		29,729		70,984		99,932
Operating loss	Operating loss	(9,467)		(14,036)		(22,437)		(30,403)		Operating loss	(9,693)		(8,784)		(32,130)		(39,187)
Other income	Other income	1,649		118		4,145		130		Other income	1,222		518		5,367		648
Interest expense	Interest expense	(184)		(187)		(433)		(377)		Interest expense	(178)		(181)		(611)		(558)
Loss before income taxes	Loss before income taxes	(8,002)		(14,105)		(18,725)		(30,650)		Loss before income taxes	(8,649)		(8,447)		(27,374)		(39,097)
Provision for income taxes	Provision for income taxes	(22)		(54)		(45)		(125)		Provision for income taxes	(23)		(8)		(68)		(133)
Net loss	Net loss	$	(8,024)	$	(14,159)	$	(18,770)	$	(30,775)	Net loss	$	(8,672)	$	(8,455)	$	(27,442)	$	(39,230)

Net loss per share:	Net loss per share:									Net loss per share:
Basic	Basic	$	(0.12)	$	(0.21)	$	(0.27)	$	(0.45)	Basic	$	(0.12)	$	(0.13)	$	(0.40)	$	(0.58)
Diluted	Diluted	$	(0.12)	$	(0.21)	$	(0.27)	$	(0.45)	Diluted	$	(0.12)	$	(0.13)	$	(0.40)	$	(0.58)

Weighted-average shares outstanding:	Weighted-average shares outstanding:									Weighted-average shares outstanding:
Basic	Basic	69,424		67,876		68,804		67,717		Basic	69,571		67,493		69,062		67,641
Diluted	Diluted	69,424		67,876		68,804		67,717		Diluted	69,571		67,493		69,062		67,641


		For the Three Months Ended				For the Six Months Ended					For the Three Months Ended				For the Nine Months Ended
		June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022			September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022

		(in thousands)									(in thousands)
Net loss	Net loss	$	(8,024)	$	(14,159)	$	(18,770)	$	(30,775)	Net loss	$	(8,672)	$	(8,455)	$	(27,442)	$	(39,230)
Other comprehensive loss, net of tax:	Other comprehensive loss, net of tax:									Other comprehensive loss, net of tax:
Foreign currency translation adjustments	Foreign currency translation adjustments	(11)		(11)		2		18		Foreign currency translation adjustments	29		(21)		31		(3)
Comprehensive loss	Comprehensive loss	$	(8,035)	$	(14,170)	$	(18,768)	$	(30,757)	Comprehensive loss	$	(8,643)	$	(8,476)	$	(27,411)	$	(39,233)


		June 30, 2023		December 31, 2022			September 30, 2023		December 31, 2022

		(in thousands, except per share amount and share data)					(in thousands, except per share amount and share data)
Assets:	Assets:					Assets:
Cash and cash equivalents	Cash and cash equivalents	$	103,447	$	119,305	Cash and cash equivalents	$	99,953	$	119,305
Accounts receivable, net	Accounts receivable, net	34,290		40,069		Accounts receivable, net	25,424		40,069
Inventories, net	Inventories, net	1,767		2,877		Inventories, net	984		2,877
Prepaid expenses	Prepaid expenses	7,321		4,819		Prepaid expenses	8,102		4,819
Other current assets	Other current assets	1,850		893		Other current assets	1,750		893
Total current assets	Total current assets	148,675		167,963		Total current assets	136,213		167,963
Property and equipment, net	Property and equipment, net	3,842		4,787		Property and equipment, net	3,390		4,787
Finance lease right-of-use assets, net	Finance lease right-of-use assets, net	7,222		7,832		Finance lease right-of-use assets, net	6,917		7,832
Operating lease right-of-use assets, net	Operating lease right-of-use assets, net	326		341		Operating lease right-of-use assets, net	274		341
Goodwill	Goodwill	17,922		17,922		Goodwill	17,922		17,922
Intangible assets, net	Intangible assets, net	37,814		37,415		Intangible assets, net	38,984		37,415
Other assets	Other assets	1,059		1,137		Other assets	1,038		1,137
Total assets	Total assets	$	216,860	$	237,397	Total assets	$	204,738	$	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	$	16,506	$	22,551	Accounts payable and other accrued liabilities	$	7,457	$	22,551
Accrued compensation and benefits	Accrued compensation and benefits	9,862		8,388		Accrued compensation and benefits	12,593		8,388
Contract liabilities	Contract liabilities	6,138		6,444		Contract liabilities	5,775		6,444
Finance lease obligations – current portion	Finance lease obligations – current portion	1,660		1,592		Finance lease obligations – current portion	1,695		1,592
Operating lease obligations – current portion	Operating lease obligations – current portion	350		361		Operating lease obligations – current portion	224		361
Other financing obligations – current portion	Other financing obligations – current portion	—		1,247		Other financing obligations – current portion	—		1,247
Other current liabilities	Other current liabilities	3,317		4,919		Other current liabilities	1,839		4,919
Total current liabilities	Total current liabilities	37,833		45,502		Total current liabilities	29,583		45,502
Finance lease obligations – non-current portion	Finance lease obligations – non-current portion	10,406		11,248		Finance lease obligations – non-current portion	9,965		11,248
Operating lease liabilities – non-current portion	Operating lease liabilities – non-current portion	—		27		Operating lease liabilities – non-current portion	65		27
Other financing obligations – non-current portion	Other financing obligations – non-current portion	—		7,211		Other financing obligations – non-current portion	—		7,211
Deferred income taxes	Deferred income taxes	782		758		Deferred income taxes	795		758
Other liabilities	Other liabilities	303		297		Other liabilities	309		297
Total liabilities	Total liabilities	49,324		65,043		Total liabilities	40,717		65,043
Commitments and contingencies	Commitments and contingencies					Commitments and contingencies
Stockholders’ equity:	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		108		106
Common stock, $0.001 par value, 250,000,000 shares authorized, 69,623,209 shares and 67,431,632 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively						Common stock, $0.001 par value, 250,000,000 shares authorized, 69,623,209 shares and 67,431,632 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively	108		106
Additional paid-in capital	Additional paid-in capital	426,656		412,708		Additional paid-in capital	431,784		412,708
Accumulated other comprehensive income	Accumulated other comprehensive income	(53)		(55)		Accumulated other comprehensive income	(24)		(55)
Accumulated deficit	Accumulated deficit	(259,175)		(240,405)		Accumulated deficit	(267,847)		(240,405)
Total stockholders’ equity	Total stockholders’ equity	167,536		172,354		Total stockholders’ equity	164,021		172,354
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	216,860	$	237,397	Total liabilities and stockholders’ equity	$	204,738	$	237,397


		For the Six Months Ended					For the Nine Months Ended
		June 30, 2023		June 30, 2022			September 30, 2023		September 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	$	(18,770)	$	(30,775)	Net loss	$	(27,442)	$	(39,230)
Adjustments to reconcile net loss to cash (used in)/provided by operating activities:
Adjustments to reconcile net loss to cash flows from operations:						Adjustments to reconcile net loss to cash flows from operations:
Stock-based compensation	Stock-based compensation	17,244		33,007		Stock-based compensation	22,462		48,843
Depreciation and amortization	Depreciation and amortization	3,121		2,910		Depreciation and amortization	6,336		4,427
Deferred income tax provision	Deferred income tax provision	24		25		Deferred income tax provision	37		25
Accretion of discount in acquisition holdback	Accretion of discount in acquisition holdback	2		23		Accretion of discount in acquisition holdback	2		36
Loss on disposal of fixed assets	Loss on disposal of fixed assets	1		1		Loss on disposal of fixed assets	1		2
Provision for doubtful accounts	Provision for doubtful accounts	117		66		Provision for doubtful accounts	128		97
Amortization of debt issuance costs	Amortization of debt issuance costs	35		—		Amortization of debt issuance costs	51		—
Gain on early extinguishment of other financing obligations	Gain on early extinguishment of other financing obligations	(1,427)		—		Gain on early extinguishment of other financing obligations	(1,427)		—
Changes in other operating assets and liabilities:	Changes in other operating assets and liabilities:					Changes in other operating assets and liabilities:
Accounts receivable	Accounts receivable	5,662		9,102		Accounts receivable	14,517		8,763
Inventories	Inventories	1,111		(2,383)		Inventories	1,893		(3,429)
Prepaid expenses, other current assets, other assets	Prepaid expenses, other current assets, other assets	(3,445)		(3,324)		Prepaid expenses, other current assets, other assets	(4,106)		(2,486)
Accounts payable and other accrued payables	Accounts payable and other accrued payables	(6,255)		567		Accounts payable and other accrued payables	(14,942)		2,635
Accrued compensation and benefits	Accrued compensation and benefits	(235)		419		Accrued compensation and benefits	2,496		371
Contract liabilities	Contract liabilities	(307)		(1,582)		Contract liabilities	(670)		571
Other current liabilities	Other current liabilities	(1,091)		76		Other current liabilities	(2,703)		(507)
Net cash (used in)/provided by operating activities	Net cash (used in)/provided by operating activities	(4,213)		8,132		Net cash (used in)/provided by operating activities	(3,367)		20,118
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Capitalized software development costs	Capitalized software development costs	(8,198)		(5,134)		Capitalized software development costs	(11,960)		(8,580)
Purchases of property and equipment	Purchases of property and equipment	(270)		(641)		Purchases of property and equipment	(350)		(815)
Net cash used in investing activities	Net cash used in investing activities	(8,468)		(5,775)		Net cash used in investing activities	(12,310)		(9,395)
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	(775)		(710)		Payments under finance lease obligations	(1,180)		(1,083)
Payment of tax withholding related to net share settlement of equity awards	Payment of tax withholding related to net share settlement of equity awards	(1,584)		(2,886)		Payment of tax withholding related to net share settlement of equity awards	(1,676)		(3,135)
Repurchase of common stock	Repurchase of common stock	(139)		(2,603)		Repurchase of common stock	(139)		(7,603)
Payment of DFT holdback amount	Payment of DFT holdback amount	(564)		—		Payment of DFT holdback amount	(564)		—
Payments for debt issuance costs	Payments for debt issuance costs	(114)		—		Payments for debt issuance costs	(114)		—
Net cash used in financing activities	Net cash used in financing activities	(3,176)		(6,199)		Net cash used in financing activities	(3,673)		(11,821)
Net change in cash, cash equivalents, and restricted cash	Net change in cash, cash equivalents, and restricted cash	(15,857)		(3,842)		Net change in cash, cash equivalents, and restricted cash	(19,350)		(1,098)
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, 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	Cash, cash equivalents, and restricted cash, end of period	$	100,088	$	125,464


		Common Stock			Additional Paid-in Capital				Accumulated Other Comprehensive Income			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		69,388	$	108			$	420,980						$	(42)			$	(251,151)		$	169,895
Balance at June 30, 2023																			Balance at June 30, 2023	69,467			$	108		$	426,656		$	(53)		$	(259,175)		$	167,536
Net loss	Net loss	—	—		—				—			(8,024)				(8,024)			Net loss	—			—		—			—			(8,672)			(8,672)
Foreign currency translation gain	Foreign currency translation gain	—	—		—				(11)			—				(11)			Foreign currency translation gain	—			—		—			29			—			29
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	—		—				—			—				—			Restricted stock unit awards vested, net of shares withheld to cover tax withholding	156			—		(90)			—			—			(90)
Stock-based compensation	Stock-based compensation	—			5,676				—			—				5,676			Stock-based compensation	—			—		5,218			—			—			5,218
Balance at June 30, 2023		69,467	$	108	$	426,656			$	(53)		$	(259,175)			$	167,536
Balance at September 30, 2023																			Balance at September 30, 2023	69,623			$	108	$	431,784		$	(24)		$	(267,847)		$	164,021

Balance at March 31, 2022		67,867	$	106	$	378,546			$	2		$	(203,593)			$	175,061
Balance at June 30, 2022																			Balance at June 30, 2022	67,594			$	106	$	391,967		$	(9)		$	(217,752)		$	174,312
Net loss	Net loss	—	—		—				—			(14,159)				(14,159)			Net loss	—			—		—			—			(8,455)			(8,455)
Foreign currency translation loss	Foreign currency translation loss	—	—		—				(11)			—				(11)			Foreign currency translation loss	—			—		—			(21)			—			(21)
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	—		—				—			—				—			Restricted stock unit awards vested, net of shares withheld to cover tax withholding	205			—		(249)			—			—			(249)
Stock-based compensation	Stock-based compensation	—	—		16,423				—			—				16,423			Stock-based compensation	—			—		16,127			—			—			16,127
Repurchase of common stock	Repurchase of common stock	(360)	—		(3,002)				—			—				(3,002)			Repurchase of common stock	(499)			—		(4,681)			—			—			(4,681)
Balance at June 30, 2022		67,594	$	106	$	391,967			$	(9)		$	(217,752)			$	174,312
Balance at September 30, 2022																			Balance at September 30, 2022	67,300			$	106	$	403,164		$	(30)		$	(226,207)		$	177,033


		Common Stock			Additional Paid-in Capital				Accumulated Other Comprehensive Income			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	Balance at December 31, 2022		67,431			$	106			$	412,708			$	(55)			$	(240,405)	$	172,354
Net loss	Net loss	—	—		—				—			(18,770)				(18,770)			Net loss	—			—				—				—				(27,442)				(27,442)
Foreign currency translation gain	Foreign currency translation gain	—	—		—				2			—				2			Foreign currency translation gain	—			—			—				31				—				31
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)			Restricted stock unit awards vested, net of shares withheld to cover tax withholding	1,415			1			(1,676)				—				—				(1,675)
Stock-based compensation	Stock-based compensation	—			13,592				—			—				13,592			Stock-based compensation	—						18,811				—				—				18,811
Issuance of common stock for 401K match	Issuance of common stock for 401K match	777	1		1,941				—			—				1,942			Issuance of common stock for 401K match	777			1			1,941				—				—				1,942
Balance at June 30, 2023		69,467	$	108	$	426,656			$	(53)		$	(259,175)			$	167,536
Balance at September 30, 2023																			Balance at September 30, 2023	69,623			$	108		$	431,784			$	(24)			$	(267,847)			$	164,021

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	—	—		—				—			(30,775)				(30,775)			Net loss	—			—			—				—				(39,230)				(39,230)
Foreign currency translation loss	Foreign currency translation loss	—	—		—				18			—				18			Foreign currency translation loss	—			—			—				(3)				—				(3)
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)			Restricted stock unit awards vested, net of shares withheld to cover tax withholding	1,392			1			(3,136)				—				—				(3,135)
Stock-based compensation	Stock-based compensation	—	—		30,703				—			—				30,703			Stock-based compensation	—			—			46,830				—				—				46,830
Repurchase of common stock	Repurchase of common stock	(360)	—		(3,002)				—			—				(3,002)			Repurchase of common stock	(859)			—			(7,683)				—				—				(7,683)
Balance at June 30, 2022		67,594	$	106	$	391,967			$	(9)		$	(217,752)			$	174,312
Balance at September 30, 2022																			Balance at September 30, 2022	67,300			$	106		$	403,164			$	(30)			$	(226,207)			$	177,033

Telos Corporation, together with its subsidiaries (collectively, the "Company," "we," "our" or "Telos"), a Maryland corporation, is a leading provider of cyber, cloud and enterprise security solutions for the world's most security-conscious organizations. We own all of the issued and outstanding shares of Xacta Corporation ~~a subsidiary that develops, markets~~ and ~~sells government-validated secure enterprise solutions to government and commercial customers. We own the issued and outstanding share capital of~~ ubIQuity.com, inc.~~, a~~ (a holding company for Xacta ~~Corporation. We also have a~~Corporation), and 100% ownership interest in Telos Identity Management Solutions, LLC ("Telos ID"), Teloworks, Inc., and Telos APAC Pte. Ltd.

Certain information and footnote disclosures normally included for the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted for the interim periods presented. We believe that the unaudited interim financial statements include all adjustments (which are normal and recurring) necessary to state fairly our financial position and the results of operations and cash flows for the periods presented.

The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for the year or future periods. The financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto for the year ended December 31, 2022, included in our Annual Report on Form 10-K for the fiscal year then ended. We have continued to follow the accounting policies set forth in those financial statements.

During the course of preparing the Company's consolidated financial statements for the year ended December 31, 2022, we identified that stock-based compensation expense related to performance-based restricted stock unit (“PSU”) awards with market conditions was erroneously reversed when those PSUs were forfeited during the three and ~~six~~nine months ended ~~June~~September 30, 2022. Although the Company has determined that the error did not have a material impact on its previously issued interim consolidated financial statements, it revised the previously reported interim financial information in conjunction with the issuance of its quarterly filings on Form 10-Q for the quarter ended ~~June~~September 30, 2023. Further information regarding the misstatements and related revisions are included under Note 20 – Revision of Prior Year Interim Financial Statements to the unaudited consolidated financial statements.

Preparing unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of revenue, expenses, assets and liabilities, and disclosure of contingent assets and liabilities. The Company regularly assesses these estimates; however, actual results could differ from those estimates. We base our estimates on historical experience, currently available information, and various other assumptions that we believe are reasonable under the circumstances.

Management evaluates these estimates and assumptions on an ongoing basis, including those relating to revenue recognition on cost estimation on certain contracts, allowance for credit losses, inventory obsolescence, valuation allowance for deferred tax assets, income taxes, certain assumptions related to stock-based compensation, valuation of intangible assets and goodwill, restructuring expenses accruals, and contingencies. Actual results could differ from those estimates. The impact of changes in estimates is recorded in the period in which they become known.

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~~during a defined performance ~~period from the date of grant, whichever initially occurs.~~period. The fair value of each RSU award is based on the closing stock price on the date of grant, while the fair value of the PSU awards with market condition is based on using a Monte Carlo simulation.

The Company estimates the fair value of stock options on the date of the grant using an option pricing model. The option pricing model takes into consideration the current share price of the underlying common stock, exercise price of the option, expected term, risk-free interest rate and the volatility of share price. These considerations directly affect the amount of compensation expense that will ultimately be recognized.

We recognized these stock-based payment transactions when services from the employees, directors and other eligible service providers are received and recognized a corresponding increase in additional paid-in capital in our unaudited consolidated ~~balances~~balance sheets. The measurement objective for these equity awards is the estimated fair value at the date of grant of the equity instruments that we are obligated to issue when the employees, directors and other eligible service providers have rendered the requisite service and satisfied any other conditions necessary to earn the right to benefit from the instruments. The stock-based compensation expense for an award is recognized ratably over the requisite service period, which is generally the vesting period or if it is probable that the performance condition will be satisfied. For the comparative periods, the stock-based payment transactions are recognized in accordance with ASC 718, "Compensation - Stock Compensation" and ASU 2018-07, "Compensation - Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting".

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,~~In early 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.


Table 2: Summary of Changes in Restructuring Expenses Accrual	Table 2: Summary of Changes in Restructuring Expenses Accrual							Table 2: Summary of Changes in Restructuring Expenses Accrual
		Severance and related benefit costs (1)		Other related costs (1)		Total			Severance and related benefit costs (1)		Other related costs		Total

		(in thousands)							(in thousands)
Balance at December 31, 2022	Balance at December 31, 2022	$	2,763	$	—	$	2,763	Balance at December 31, 2022	$	2,763	$	—	$	2,763
(Adjustments)/charges	(Adjustments)/charges	(103)		1,300		1,197		(Adjustments)/charges	(103)		1,300		1,197
Cash payments	Cash payments	(1,778)		—		(1,778)		Cash payments	(1,981)		(1,300)		(3,281)
Balance at June 30, 2023		$	882	$	1,300	$	2,182
Balance at September 30, 2023								Balance at September 30, 2023	$	679	$	—	$	679

The majority of our revenue is recognized over time, as control is transferred continuously to our customers, who receive and consume benefits as we perform. Revenue transferred to customers over time accounted for ~~88% and~~ 89% of our revenue for the three and ~~six~~nine months ended ~~June~~September 30, 2023, ~~respectively,~~ and ~~90%~~87% and ~~93%~~91% of our revenue for the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively. All of our business groups earn services revenue under a variety of contract types, including time and materials, firm-fixed price, firm-fixed price level of effort, and cost-plus fixed fee contract types, which may include variable consideration.

For performance obligations in which control does not continuously transfer to the customer, we recognize revenue at the point in time in which each performance obligation is fully satisfied. This coincides with the point in time the customer obtains control of the product or service, which typically occurs upon customer acceptance or receipt of the product or service, given that we maintain control of the product or service until that point. Revenue transferred to customers at a point in time accounted for ~~12% and~~ 11% of our revenue for the three and ~~six~~nine months ended ~~June~~September 30, 2023, ~~respectively,~~ and ~~10%~~13% and 7%9% of our revenue for the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively.

Orders for the sale of software licenses may contain multiple performance obligations, such as maintenance, training, or consulting services, which are typically delivered over time, consistent with the transfer of control disclosed above for the provision of services. When an order contains multiple performance obligations, we allocate the transaction price to the performance obligations based on the standalone selling price of the product or service underlying each performance obligation. The standalone selling price represents the amount we would sell the product or service to a customer on a standalone basis.

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 most~~Most of our revenues are generated from U.S. customers, while international customers are de minimis; as such, the financial information by geographic location is not presented.


Table 3.1: Revenue by Customer Type	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 Nine Months Ended
		June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022				September 30, 2023			September 30, 2022			September 30, 2023			September 30, 2022
		Amount		%	Amount		%	Amount		%	Amount		%		Amount		%	Amount		%	Amount		%	Amount		%

		(dollars in thousands)													(dollars in thousands)
Federal	Federal	$	27,512	84 %	$	52,213	94 %	$	60,501	89 %	$	100,056	94 %	Federal	$	32,955	91 %	$	60,294	95 %	$	93,456	90 %	$	160,351	95 %
State & local, and commercial	State & local, and commercial	5,399		16 %	3,578		6 %	7,632		11 %	5,895		6 %	State & local, and commercial	3,231		9 %	3,299		5 %	10,863		10 %	9,193		5 %
Total revenue	Total revenue	$	32,911	100 %	$	55,791	100 %	$	68,133	100 %	$	105,951	100 %	Total revenue	$	36,186	100 %	$	63,593	100 %	$	104,319	100 %	$	169,544	100 %


Table 3.2: 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 Nine Months Ended
		June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022				September 30, 2023			September 30, 2022			September 30, 2023			September 30, 2022
		Amount		%	Amount		%	Amount		%	Amount		%		Amount		%	Amount		%	Amount		%	Amount		%

		(dollars in thousands)													(dollars in thousands)
Firm fixed-price	Firm fixed-price	$	25,293	77 %	$	45,305	81 %	$	52,306	77 %	$	86,581	82 %	Firm fixed-price	$	27,809	77 %	$	54,055	85 %	$	80,116	77 %	$	140,636	83 %
Time-and-materials	Time-and-materials	3,548		11 %	2,731		5 %	7,104		10 %	5,646		5 %	Time-and-materials	3,504		10 %	3,457		5 %	10,608		10 %	9,104		5 %
Cost plus fixed fee		4,070		12 %	7,755		14 %	8,723		13 %	13,724		13 %
Cost plus fixed-fee														Cost plus fixed-fee	4,873		13 %	6,081		10 %	13,595		13 %	19,804		12 %
Total revenue	Total revenue	$	32,911	100 %	$	55,791	100 %	$	68,133	100 %	$	105,951	100 %	Total revenue	$	36,186	100 %	$	63,593	100 %	$	104,319	100 %	$	169,544	100 %

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

For the Three Months Ended

For the Six Months Ended

For the Three Months Ended

For the Nine Months Ended

June 30, 2023

June 30, 2022

June 30, 2023

June 30, 2022

September 30, 2023

September 30, 2022

September 30, 2023

September 30, 2022

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

66%

72 %

67%

71 %

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

61%

77 %

65%

74 %

Table 3.4: Contract Balances

Balance Sheet Presentation

June 30, 2023

December 31, 2022

Balance Sheet Presentation

September 30, 2023

December 31, 2022

(in thousands)

Billed accounts receivables (1)

Accounts receivable, net

11,815

13,521

Billed accounts receivables (1)

Accounts receivable, net

12,355

13,521

Unbilled accounts receivable

Accounts receivable, net

7,214

11,657

Unbilled accounts receivable

Accounts receivable, net

7,211

11,657

Contract assets

Accounts receivable, net

15,261

14,891

Contract assets

Accounts receivable, net

5,858

14,891

Contract liabilities

6,138

6,444

Contract liabilities

5,775

6,444

The change in the Company's contract assets and contract liabilities during the current period was primarily the result of the timing differences between the Company's performance, invoicing and customer payments. Revenue recognized for the three and ~~six~~nine months ended ~~June~~September 30, 2023, that was included in the contract liabilities balance at the beginning of each reporting period was ~~$1.6~~$1.2 million and ~~$4.1~~$5.3 million, respectively. Revenue recognized for the three and ~~six~~nine months ended ~~June~~September 30, 2022, that was included in the contract liabilities balance at the beginning of each reporting period was ~~and $1.6~~$0.9 million and ~~$4.1~~$5.0 million, respectively.


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

		(in thousands)					(in thousands)
Billed accounts receivable	Billed accounts receivable	$	12,065	$	13,655	Billed accounts receivable	$	12,614	$	13,655
Unbilled accounts receivable	Unbilled accounts receivable	7,214		11,657		Unbilled accounts receivable	7,211		11,657
Contract assets	Contract assets	15,261		14,891		Contract assets	5,858		14,891
Allowance for credit losses (1)	Allowance for credit losses (1)	(250)		(134)		Allowance for credit losses (1)	(259)		(134)
Accounts receivable, net	Accounts receivable, net	$	34,290	$	40,069	Accounts receivable, net	$	25,424	$	40,069

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~~September 30, 2023, were directly with U.S. government customers. While we acknowledge the potential material and adverse risk of such a significant concentration of credit risk, our past experience collecting substantially all of such receivables provides us with an informed basis that such risk, if any, is manageable. We perform ongoing credit evaluations of all of our customers and generally do not require collateral or other guarantee from our customers. We maintain allowances for potential losses.


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

		(in thousands)					(in thousands)
Gross inventory	Gross inventory	$	2,532	$	3,642	Gross inventory	$	1,749	$	3,642
Allowance for inventory obsolescence	Allowance for inventory obsolescence	(765)		(765)		Allowance for inventory obsolescence	(765)		(765)
Inventories, net	Inventories, net	$	1,767	$	2,877	Inventories, net	$	984	$	2,877


Table 6.1: 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, 2023		December 31, 2022			September 30, 2023		December 31, 2022

		(in thousands)					(in thousands)
Furniture and equipment	Furniture and equipment	$	16,063	$	16,033	Furniture and equipment	$	15,659	$	16,033
Leasehold improvement	Leasehold improvement	3,173		3,145		Leasehold improvement	3,211		3,145
Property and equipment, at cost	Property and equipment, at cost	19,236		19,178		Property and equipment, at cost	18,870		19,178
Accumulated depreciation and amortization	Accumulated depreciation and amortization	(15,394)		(14,391)		Accumulated depreciation and amortization	(15,480)		(14,391)
Property and equipment, net	Property and equipment, net	$	3,842	$	4,787	Property and equipment, net	$	3,390	$	4,787


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

		(in thousands)									(in thousands)
Depreciation & amortization expense	Depreciation & amortization expense	$	579	$	598	$	1,152	$	1,157	Depreciation & amortization expense	$	548	$	619	$	1,700	$	1,776

The goodwill balance was $17.9 million as of ~~June~~September 30, 2023, and December 31, 2022, of which $3.0 million is allocated to the Security Solutions segment and $14.9 million is allocated to the Secure Networks segment. Goodwill is subject to annual impairment tests and if triggering events are present in the interim before the annual tests, we will assess impairment. No impairment charges to goodwill were recorded for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022.


Table 8: Details of Intangible Assets, Net
Table 8.1: Details of Intangible Assets, Net															Table 8.1: Details of Intangible Assets, Net
			June 30, 2023						December 31, 2022								September 30, 2023						December 31, 2022
		Estimated Useful Life	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value		Gross Carrying Amount		Accumulated Amortization		Net Carrying Value			Estimated Useful Life	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value		Gross Carrying Amount		Accumulated Amortization		Net Carrying Value

		(in years)	(in thousands)													(in years)	(in thousands)
Acquired technology	Acquired technology	8	$	3,630	$	(870)	$	2,760	$	3,630	$	(643)	$	2,987	Acquired technology	8	$	3,630	$	(983)	$	2,647	$	3,630	$	(643)	$	2,987
Customer relationship	Customer relationship	3	40		(25)		15		40		(19)		21		Customer relationship	3	40		(29)		11		40		(19)		21
Software development costs(1)	Software development costs(1)	2 - 5	43,694		(8,655)		35,039		35,080		(7,793)		27,287		Software development costs(1)	2 - 5	46,729		(10,403)		36,326		35,080		(7,793)		27,287
Subtotal	Subtotal		47,364		(9,550)		37,814		38,750		(8,455)		30,295		Subtotal		50,399		(11,415)		38,984		38,750		(8,455)		30,295
Software held for resale ~~(1)~~(2)	Software held for resale ~~(1)~~(2)		—		—		—		7,120		—		7,120		Software held for resale ~~(1)~~(2)		—		—		—		7,120		—		7,120
Total	Total		$	47,364	$	(9,550)	$	37,814	$	45,870	$	(8,455)	$	37,415	Total		$	50,399	$	(11,415)	$	38,984	$	45,870	$	(8,455)	$	37,415

~~Amortization expense related to capitalized~~The Company evaluates its intangible assets for potential impairment whenever there is evidence that events or changes in circumstances indicate that the carrying value may not be recoverable. As a result of the interim assessment, the Company identified conditions demonstrating an impairment of certain software development ~~costs~~costs. An impairment charge of $0.3 million was ~~$0.6 million~~recorded under "Research and ~~$0.9 million~~Development" expenses in the Company's unaudited consolidated statements of operations for the three and ~~six~~nine months ended ~~June~~September 30, ~~2023, respectively, and $0.3 million and $0.7 million for~~2023. No similar impairment charges were recorded during the three and ~~six~~nine months ended ~~June~~September 30, ~~2022, respectively.~~


Table 8.2: Amortization Expense
	For the Three Months Ended				For the Nine Months Ended
	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022

	(in thousands)
Amortization expense related to:
Software development costs - cost of sales (1)	$	1,767	$	—	$	1,767	$	—
Software development costs - research and development	(19)		354		843		1,034
Other intangible assets - general and administrative	117		117		350		284
Total	$	1,865	$	471	$	2,960	$	1,318


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

		(in thousands)					(in thousands)
Accounts payable	Accounts payable	$	11,985	$	12,606	Accounts payable	$	2,761	$	12,606
Accrued payables	Accrued payables	4,521		9,945		Accrued payables	4,696		9,945
Accounts payable and other accrued liabilities	Accounts payable and other accrued liabilities	$	16,506	$	22,551	Accounts payable and other accrued liabilities	$	7,457	$	22,551


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

		(in thousands)					(in thousands)
Other accrued expenses	Other accrued expenses	$	725	$	1,530	Other accrued expenses	$	736	$	1,530
Restructuring expenses accrual	Restructuring expenses accrual	2,182		2,763		Restructuring expenses accrual	679		2,763
Other	Other	410		626		Other	424		626
Other current liabilities	Other current liabilities	$	3,317	$	4,919	Other current liabilities	$	1,839	$	4,919

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 has various covenants that may, among other things, affect our ability to create, incur, assume or suffer any indebtedness, merge into or consolidate with another entity, acquire entity interests, sell or transfer certain assets, enter into certain arrangements (such as sale and leaseback and swap agreements) or restrictive agreements, pay dividends and make certain restricted payments, and amend material documents related to any subordinated indebtedness and corporate agreements. The Credit Agreement also requires certain financial covenants to maintain a Senior Leverage Ratio (as defined in the Credit Agreement) on the last day of any fiscal quarter, no greater than ~~3 to 1.~~3-to-1. We were in compliance with all covenants as of ~~June~~September 30, 2023.

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

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

On July 30, 2021, the Company acquired the assets of Diamond Fortress Technologies ("DFT") and wholly-owned subsidiaries for a total purchase consideration of $6.7 million, inclusive of $0.3 million related to a pre-existing contractual arrangement with DFT. Upon closing, $5.9 million of cash was paid with an additional $0.6 million payable to DFT 18 months after the close date (the "holdback"). The holdback amount has been discounted to its present value of $0.5 million using a discount rate relevant to the acquisition. On February 2, 2023, the Company paid DFT the holdback amount of $0.6 million.


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

	(in thousands)
Cost of sales – services	$	73	$	929	$	624	$	2,798
Sales and marketing	24		611		125		3,699
Research and development	328		897		1,945		2,884
General and administrative (1)	4,793		13,399		19,768		39,462
Total	$	5,218	$	15,836	$	22,462	$	48,843

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

~~Table of Contents~~


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	1,743,689	—	1,743,689	1.99
Vested	(1,807,929)	—	(1,807,929)	25.96
Forfeited	(396,694)	(71,177)	(467,871)	14.39
Unvested outstanding units as of September 30, 2023	3,109,148	265,608	3,374,756	$	8.34

As of ~~June~~September 30, 2023, the intrinsic value of the RSUs and PSUs outstanding and vested or expected to vest was ~~$8.8~~$8.1 million. There ~~was~~were approximately ~~$12.1~~$7.1 million of total compensation costs related to stock-based awards not yet recognized as of ~~June~~September 30, 2023, which is expected to be recognized on a straight-line basis over a ~~weighted-average~~weighted average remaining vesting period of ~~0.7~~0.6 years.

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.


Table 12.4: Stock Option Activity	Table 12.4: Stock Option Activity							Table 12.4: Stock Option Activity
		Stock Options Outstanding	Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value			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	Outstanding option balance as of December 31, 2022	—	$	—	0.0	$	—	Outstanding option balance as of December 31, 2022	—	$	—	0.0	$	—
Granted	Granted	400,000	1.80					Granted	400,000	1.80
Exercised	Exercised	—	—					Exercised	—	—
Forfeited, cancelled, or expired	Forfeited, cancelled, or expired	—	—					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	$	—
Outstanding option balance as of September 30, 2023								Outstanding option balance as of September 30, 2023	400,000	$	1.80	9.6	$	236,000
Exercisable stock option as of September 30, 2023								Exercisable stock option as of September 30, 2023	—	$	—	0.0	$	—

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


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

		(in thousands, except per share and share data)									(in thousands, except per share and share data)
Amount paid for shares repurchased (1)	Amount paid for shares repurchased (1)	$	—	$	3,002	$	—	$	3,002	Amount paid for shares repurchased (1)	$	—	$	4,681	$	—	$	7,683
Number of shares repurchased	Number of shares repurchased	—		360,439		—		360,439		Number of shares repurchased	—		498,731		—		859,170
Average per share price paid (1)	Average per share price paid (1)	$	—	$	8.33	$	—	$	8.33	Average per share price paid (1)	$	—	$	9.38	$	—	$	8.94

Our functional currency is the U.S. ~~Dollar.~~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~~dollars is performed for assets and liabilities using current foreign currency exchange rates in effect at the balance sheet date and for revenue and expense accounts using average foreign currency exchange rates during the periods presented. Translation gains and losses are included in stockholders’ equity as a component of accumulated other comprehensive losses.


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

		(in thousands)					(in thousands)
Cumulative foreign currency translation loss	Cumulative foreign currency translation loss	$	(160)	$	(162)	Cumulative foreign currency translation loss	$	(131)	$	(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	$	(53)	$	(55)	Accumulated other comprehensive loss	$	(24)	$	(55)


Table 15: Potentially Dilutive Securities	Table 15: Potentially Dilutive Securities					Table 15: Potentially Dilutive Securities
		For the Three Months Ended		For the Six Months Ended			For the Three Months Ended		For the Nine Months Ended
		June 30, 2023	June 30, 2022	June 30, 2023	June 30, 2022		September 30, 2023	September 30, 2022	September 30, 2023	September 30, 2022

		(in thousands)					(in thousands)
Unvested restricted stock and restricted stock units	Unvested restricted stock and restricted stock units	269	57	401	211	Unvested restricted stock and restricted stock units	667	833	522	435
Total	Total	269	57	401	211	Total	667	833	522	435

For the three and ~~six~~nine months ended ~~June~~September 30, 2023, and 2022, the outstanding PSUs aggregating to 265,608 and ~~379,161,~~336,785, respectively, have been excluded from the calculation of potentially dilutive securities above because the issuance of shares is contingent upon the satisfaction of certain conditions ~~which~~that were not satisfied by the end of the period.

Emmett J. Wood, the brother of our Chairman and CEO, had been an employee of the Company since 1996. In January 2023, he tendered his resignation as an employee, effective February 7, 2023. The amount paid to him as compensation for his remaining tenure in 2023 was $249,000. For the three and ~~six~~nine months ended ~~June~~September 30, 2022, the Company paid him ~~$93,000~~$91,000 and ~~$605,000,~~$696,000, respectively. ~~Additionally, Mr. Wood directly owned 199,785 and 178,041 shares of the Company’s common stock as of June 30, 2023 and December 31, 2022, respectively.~~

One of the Company’s directors serves as a consultant to the Company. On January 1, 2023, the director and the Company amended the consulting agreement under which he provides services ("2023 consulting agreement"), extending his services through June 30, 2023, with the option to further extend for another six months by mutual agreement of the parties. The Company, at its election, would pay the director's 2023 consultancy fees in a fixed amount, in the form of restricted stock units. Consequently, on January 3, 2023, the Company granted the director 16,859 RSUs, one-half of which vested on March 3, 2023, and the other half vested on May 18, 2023, as compensation for the first half of his 2023 consulting services. ~~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. Cash payments made for his consulting services were $32,000 for the three and nine months ended September 30, 2023.

On February 1, 2022, the Company granted him 26,091 RSUs for his consulting services in 2022, which RSUs vested quarterly in four equal amounts through the end of the year. No cash payments were made for the three months ended ~~June~~September 30, 2022, while the amounts paid in cash for his consulting services were $25,000 for the ~~six~~nine months ended ~~June~~September 30, 2022.

•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~~Automated Message Handling System ("AMHS") and Telos ID offerings. We recognize revenue on contracts ~~from~~by providing various system platforms in the cloud, on-premises, and in hybrid cloud environments, as well as software sales or software-as-a-service. Revenue associated with the segment's custom solutions is recognized as work progresses or upon delivery of services and products. Fluctuation in revenue from period to period is the result of the volume of software sales, and the progress or completion of cloud or cybersecurity solutions during the period. The majority of the operating costs relate to labor, material, and overhead costs. Software sales have immaterial operating costs associated with them, thus yielding higher margins. Gross profit and margin are a function of operational efficiency on security solutions and changes in the volume of software sales.

•Our Secure Networks segment provides secure networking architectures and solutions to our customers through secure mobility solutions, and network management and defense services. Revenue is recognized over time as the work progresses on contracts related to managing network services and information delivery. Contract costs include labor, material, and overhead costs. Variances in costs recognized from period to period primarily reflect increases and decreases in activity levels on individual contracts.


Table 17: Results of Operations by Business Segment	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 Nine Months Ended
		June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022			September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022

		(in thousands)									(in thousands)
Revenue	Revenue									Revenue
Security Solutions	Security Solutions	$	17,196	$	30,819	$	36,969	$	57,738	Security Solutions	$	19,795	$	32,440	$	56,764	$	90,178
Secure Networks	Secure Networks	15,715		24,972		31,164		48,213		Secure Networks	16,391		31,153		47,555		79,366
Total revenue	Total revenue	32,911		55,791		68,133		105,951		Total revenue	36,186		63,593		104,319		169,544
Gross profit	Gross profit									Gross profit
Security Solutions	Security Solutions	9,551		16,433		19,825		31,485		Security Solutions	9,354		15,577		29,179		47,062
Secure Networks	Secure Networks	2,808		4,496		6,016		8,315		Secure Networks	3,659		5,368		9,675		13,683
Total gross profit	Total gross profit	12,359		20,929		25,841		39,800		Total gross profit	13,013		20,945		38,854		60,745
Selling, general and administrative expenses	Selling, general and administrative expenses	21,826		34,965		48,278		70,203		Selling, general and administrative expenses	22,706		29,729		70,984		99,932
Operating loss	Operating loss	(9,467)		(14,036)		(22,437)		(30,403)		Operating loss	(9,693)		(8,784)		(32,130)		(39,187)
Other income	Other income	1,649		118		4,145		130		Other income	1,222		518		5,367		648
Interest expense	Interest expense	(184)		(187)		(433)		(377)		Interest expense	(178)		(181)		(611)		(558)
Loss before income taxes	Loss before income taxes	(8,002)		(14,105)		(18,725)		(30,650)		Loss before income taxes	(8,649)		(8,447)		(27,374)		(39,097)
Provision for income taxes	Provision for income taxes	(22)		(54)		(45)		(125)		Provision for income taxes	(23)		(8)		(68)		(133)
Net loss	Net loss	$	(8,024)	$	(14,159)	$	(18,770)	$	(30,775)	Net loss	$	(8,672)	$	(8,455)	$	(27,442)	$	(39,230)

We measure each segment's profitability based on gross profit. We account for inter-segment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. Interest income, interest expense, other income and expense items, and income taxes, as reported in the consolidated financial statements, are not part of the segment profitability measure and are primarily recorded at the corporate level.

On February 7, 2022, Telos and certain of its current and former officers were named as defendants in a lawsuit filed in the United States District Court for the Eastern District of Virginia ("Court"). In the complaint, the Plaintiffs, who ~~purport~~purported to represent a class of purchasers of Telos common stock between November 19, 2020, and March 16, 2022, ~~allege~~alleged that the defendants violated securities laws by failing to disclose delays relating to the launch of certain contracts between Telos and the Transportation Security Administration ("TSA") and the Centers for Medicare and Medicaid Services and to take into account those delays when providing a financial forecast for the Company's 2021 performance. On June 15, 2022, the Plaintiffs filed a consolidated complaint ~~which~~that added claims (i) concerning Telos' disclosure of revenue projections for these contracts, (ii) against the directors of Telos at the time of its initial public offering, and (iii) pursuant to Sections 11 and 15 of the Securities Act of 1933. On February 1, 2023, the Court dismissed the lawsuit in its entirety for failure to state a claim. The Court's order of dismissal provided the Plaintiffs the opportunity to file a motion for leave to file an amended complaint, should they have a good faith basis to do so. On March 13, 2023, the Court granted the parties' consent motion permitting the filing of a consolidated amended class action complaint and establishing a briefing schedule for Telos' motion to dismiss that amended complaint. On April 14, 2023, Telos moved to dismiss the consolidated amended class action complaint. At the conclusion of a hearing held on June 21, 2023, the Court dismissed the consolidated amended class action complaint with prejudice. No appeal from the order of dismissal was taken, and it is final.

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.


Table 19.1: Details of Cash, Cash Equivalents, 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, 2023		December 31, 2022			September 30, 2023		December 31, 2022

		(in thousands)					(in thousands)
Cash and cash equivalents	Cash and cash equivalents	$	103,447	$	119,305	Cash and cash equivalents	$	99,953	$	119,305
Restricted cash (1)	Restricted cash (1)	134		133		Restricted cash (1)	135		133
Cash, cash equivalents, and restricted cash	Cash, cash equivalents, and restricted cash	$	103,581	$	119,438	Cash, cash equivalents, and restricted cash	$	100,088	$	119,438


Table 19.2: 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 Nine Months Ended
		June 30, 2023		June 30, 2022			September 30, 2023		September 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	$	409	$	353	Interest	$	548	$	523
Income taxes	Income taxes	147		188		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	$	15	$	282	Operating lease ROU assets obtained in exchange for operating lease liabilities	$	67	$	396
Capital expenditure activity in accounts payable and other accrued liabilities	Capital expenditure activity in accounts payable and other accrued liabilities	536		296		Capital expenditure activity in accounts payable and other accrued liabilities	173		400
Issuance of common stock for 401K match	Issuance of common stock for 401K match	1,943		—		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		—		Intangible assets transferred to extinguish other financing obligations	7,089		—
Common stock repurchases under SRP	Common stock repurchases under SRP	—		400		Common stock repurchases under SRP	—		80

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~~$1.1 million and ~~$3.5~~$4.6 million for the three and ~~six~~nine months ended ~~June~~September 30, 2022. Although the Company has determined that the error did not have a material impact on its previously issued interim consolidated financial statements, it revised the previously reported interim financial information in conjunction with the issuance of its quarterly filings on Form 10-Q for the quarter ended ~~June~~September 30, 2023. The errors had no net impact on cash flows from operating, investing or financing activities in the consolidated statement of cash flows.


Table 20.1: Impact of the Correction to the Unaudited Consolidated Statement of Operations	Table 20.1: Impact of the Correction to the Unaudited Consolidated Statement of Operations													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							For the Three Months Ended September 30, 2022						For the Nine Months Ended September 30, 2022
		As Previously Reported		Adjustment		As Revised		As Previously Reported		Adjustment		As Revised			As Previously Reported		Adjustment		As Revised		As Previously Reported		Adjustment		As Revised

		(in thousands, except per share data)													(in thousands, except per share data)
General and administrative	General and administrative	$	23,865	$	1,870	$	25,735	$	46,788	$	3,503	$	50,291	General and administrative	$	21,591	$	1,115	$	22,706	$	68,379	$	4,618	$	72,997
Total selling, general and administrative expenses	Total selling, general and administrative expenses	33,095		1,870		34,965		66,700		3,503		70,203		Total selling, general and administrative expenses	28,614		1,115		29,729		95,314		4,618		99,932
Operating loss	Operating loss	(12,166)		(1,870)		(14,036)		(26,900)		(3,503)		(30,403)		Operating loss	(7,669)		(1,115)		(8,784)		(34,569)		(4,618)		(39,187)
Loss before income taxes	Loss before income taxes	(12,235)		(1,870)		(14,105)		(27,147)		(3,503)		(30,650)		Loss before income taxes	(7,332)		(1,115)		(8,447)		(34,479)		(4,618)		(39,097)
Net loss	Net loss	(12,289)		(1,870)		(14,159)		(27,272)		(3,503)		(30,775)		Net loss	(7,340)		(1,115)		(8,455)		(34,612)		(4,618)		(39,230)

Net loss per share, basic	Net loss per share, basic	$	(0.18)	$	(0.03)	$	(0.21)	$	(0.40)	$	(0.05)	$	(0.45)	Net loss per share, basic	$	(0.11)	$	(0.02)	$	(0.13)	$	(0.51)	$	(0.07)	$	(0.58)
Net loss per share, diluted	Net loss per share, diluted	(0.18)		(0.03)		(0.21)		(0.40)		(0.05)		(0.45)		Net loss per share, diluted	(0.11)		(0.02)		(0.13)		(0.51)		(0.07)		(0.58)


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

		(in thousands)													(in thousands)
Net loss	Net loss	$	(12,289)	$	(1,870)	$	(14,159)	$	(27,272)	$	(3,503)	$	(30,775)	Net loss	$	(7,340)	$	(1,115)	$	(8,455)	$	(34,612)	$	(4,618)	$	(39,230)
Comprehensive loss	Comprehensive loss	(12,300)		(1,870)		(14,170)		(27,254)		(3,503)		(30,757)		Comprehensive loss	(7,361)		(1,115)		(8,476)		(34,615)		(4,618)		(39,233)


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

		(in thousands)													(in thousands)
Additional paid-in capital, beginning	Additional paid-in capital, beginning	$	376,913	$	1,633	$	378,546	$	367,153	$	—	$	367,153	Additional paid-in capital, beginning	$	388,464	$	3,503	$	391,967	$	367,153	$	—	$	367,153
Stock-based compensation	Stock-based compensation	14,553		1,870		16,423		27,200		3,503		30,703		Stock-based compensation	15,012		1,115		16,127		42,212		4,618		46,830
Additional paid-in capital, end	Additional paid-in capital, end	388,464		3,503		391,967		388,464		3,503		391,967		Additional paid-in capital, end	398,546		4,618		403,164		398,546		4,618		403,164

Accumulated deficit, beginning	Accumulated deficit, beginning	$	(201,960)	$	(1,633)	$	(203,593)	$	(186,977)	$	—	$	(186,977)	Accumulated deficit, beginning	$	(214,249)	$	(3,503)	$	(217,752)	$	(186,977)	$	—	$	(186,977)
Net loss	Net loss	(12,289)		(1,870)		(14,159)		(27,272)		(3,503)		(30,775)		Net loss	(7,340)		(1,115)		(8,455)		(34,612)		(4,618)		(39,230)
Accumulated deficit, end	Accumulated deficit, end	(214,249)		(3,503)		(217,752)		(214,249)		(3,503)		(217,752)		Accumulated deficit, end	(221,589)		(4,618)		(226,207)		(221,589)		(4,618)		(226,207)

This Quarterly Report on Form 10-Q contains forward-looking statements. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. Several important factors could cause the Company's actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth in the risk factors section included in the Company's Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission ("SEC") on March 16, 2023.

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

~~In March 2023, the White House released its~~The President’s proposed FY2024 budget ~~which~~released in March called for a $26 billion increase for the Department of Defense ("~~DOD"~~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~~enacted into law in early June contains spending caps which ~~reflect~~reflected that level of defense spending, as dohave the House and Senate versions of the defense authorization and appropriations ~~bills currently under consideration in the House and Senate. There~~bills. While 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~~inflation and the continued threats posed by foreign ~~adversaries. Final~~adversaries, final decisions on FY 2024 defense spending ~~will~~are now not likely to be made until ~~this fall,~~December at the very 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.agencies. 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~~caps on non-defense discretionary spending included in the Fiscal Responsibility Act and subsequent efforts by the House majority to seek ~~even~~ further reductions in all non-defense discretionary spending. This ~~would~~could impact future cybersecurity investments by current and potential civilian federal customers.

~~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~~was unable to enact any of its annual appropriation bills before the start of FY2024 on October 1, ~~2023. Failing to do so would mean~~2023 and instead approved a Continuing Resolution (“CR”), which funded the ~~federal~~ government ~~could face a shutdown this fall or, at best, will begin another fiscal year under the constraints of a continuing resolution, with funding frozen~~ at FY2023 levels until November 17, 2023 and ~~restrictions likely on~~restricted new contracts and acceleration of current programs. It is unlikely Congress will enact any individual appropriation bills before the current CR expires, and prospects for approving another CR by then are uncertain. Failure to enact a new CR by November 17, 2023 would result in a federal government shutdown after that date. Finally, under the terms of the Fiscal Responsibility Act, if all appropriations legislation is not enacted by January 1, 2024, and the government remains under another CR, appropriations government-wide will revert to the FY2023 level minus an additional one percent. This uncertainty could ~~also~~ impact federal customers' ability to move forward on their planned expenditures in FY2024.

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

Additionally, the ~~Securities and Exchange Commission ("SEC")~~SEC has finalized and adopted new cybersecurity rules for publicly traded companies, which will require registrants to disclose additional cyber-related information in their regulatory filings. Specifically, they will 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 proactively establish policies that will improve their cyber risk management posture and enable them to better withstand heightened public and regulatory scrutiny.

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

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

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 the 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.


Table MD&A 1: Consolidated 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 Nine Months Ended
		June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022				September 30, 2023			September 30, 2022			September 30, 2023			September 30, 2022

		(dollars in thousands)													(dollars in thousands)
Revenue		$	32,911		$	55,791		$	68,133		$	105,951
Cost of sales		20,552			34,862			42,292			66,151
Total revenue														Total revenue	$	36,186		$	63,593		$	104,319		$	169,544
Cost of sales (exclusive of depreciation and amortization shown separately below)														Cost of sales (exclusive of depreciation and amortization shown separately below)	21,228			42,457			63,174			108,197
Depreciation and amortization														Depreciation and amortization	1,945			191			2,291			602
Total cost of sales														Total cost of sales	23,173			42,648			65,465			108,799
Gross profit	Gross profit	12,359			20,929			25,841			39,800			Gross profit	13,013			20,945			38,854			60,745
Gross margin	Gross margin	37.6		%	37.5		%	37.9		%	37.6		%	Gross margin	36.0		%	32.9		%	37.2		%	35.8		%
Selling, general and administrative expenses	Selling, general and administrative expenses	21,826			34,965			48,278			70,203			Selling, general and administrative expenses	22,706			29,729			70,984			99,932
Selling, general and administrative expenses as percentage of revenue	Selling, general and administrative expenses as percentage of revenue	66.3		%	62.7		%	70.9		%	66.3		%	Selling, general and administrative expenses as percentage of revenue	62.7		%	46.7		%	68.0		%	58.9		%
Operating loss	Operating loss	(9,467)			(14,036)			(22,437)			(30,403)			Operating loss	(9,693)			(8,784)			(32,130)			(39,187)
Other income	Other income	1,649			118			4,145			130			Other income	1,222			518			5,367			648
Interest expense	Interest expense	(184)			(187)			(433)			(377)			Interest expense	(178)			(181)			(611)			(558)
Loss before income taxes	Loss before income taxes	(8,002)			(14,105)			(18,725)			(30,650)			Loss before income taxes	(8,649)			(8,447)			(27,374)			(39,097)
Provision for income taxes	Provision for income taxes	(22)			(54)			(45)			(125)			Provision for income taxes	(23)			(8)			(68)			(133)
Net loss	Net loss	$	(8,024)		$	(14,159)		$	(18,770)		$	(30,775)		Net loss	$	(8,672)		$	(8,455)		$	(27,442)		$	(39,230)

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

Selling, general, and administrative expenses (SG&A). SG&A decreased by ~~$13.1~~$7.0 million, or ~~37.6%~~23.6%, for the three months ended ~~June~~September 30, 2023, compared to the same period in 2022. ~~This decrease is primarily due to lower stock-based compensation costs of $8.7~~Sales and marketing expenses decreased by $1.3 million, ~~reduced labor costs of $2.6 million as a result of a decrease in personnel, and change in capitalized~~ research and development expenses decreased by $0.8 million, and general and administrative expenses decreased by $4.9 million. Lower compensation costs are the primary driver for reductions across all of ~~$2.1 million driven by the timing in software projects.~~these areas.

SG&A decreased by ~~$21.9~~$28.9 million, or ~~31.2%~~29.0%, for the ~~six~~nine months ended ~~June~~September 30, 2023, as compared to the same period in the prior ~~year~~year. Sales and marketing expenses decreased by $7.9 million primarily due to lower ~~stock-based~~compensation costs. Research and development expenses decreased by $5.3 million due to lower compensation costs and increased capitalization of ~~$14.4~~software development. General and administrative expenses also decreased by $15.8 million ~~reduced labor~~due to lower compensation 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 timing in software projects,~~ partially offset by ~~$1.2 million in~~ restructuring ~~charges.~~expenses.

Other income increased by ~~$4.0~~$4.7 million for the ~~six~~nine months ended ~~June~~September 30, 2023, as compared to the same period in the prior year, primarily due to an increase in dividend income from money market placement of ~~$2.7~~$3.3 million, and a gain on early extinguishment of other financing obligations of $1.4 million in 2023 without a similar gain in the same period in 2022.


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 Nine Months Ended
		June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022				September 30, 2023			September 30, 2022			September 30, 2023			September 30, 2022

		(dollars in thousands)													(dollars in thousands)
Revenue	Revenue	$	17,196		$	30,819		$	36,969		$	57,738		Revenue	$	19,795		$	32,440		$	56,764		$	90,178
Cost of sales (exclusive of depreciation and amortization shown separately below)														Cost of sales (exclusive of depreciation and amortization shown separately below)	8,498			16,680			25,304			42,536
Depreciation and amortization														Depreciation and amortization	1,943			183			2,281			580
Total cost of sales														Total cost of sales	10,441			16,863			27,585			43,116
Gross profit	Gross profit	9,551			16,433			19,825			31,485			Gross profit	$	9,354		$	15,577		$	29,179		$	47,062
Gross margin	Gross margin	55.5		%	53.3		%	53.6		%	54.5		%	Gross margin	47.3		%	48.0		%	51.4		%	52.2		%

Gross profit for Security Solutions decreased by ~~$6.9~~$6.2 million, or ~~41.9%~~39.9%, for the ~~second~~third quarter of 2023 compared with the same period in 2022, primarily due to the decrease in revenue ~~partially offset by lower indirect expenses due to restructuring~~ and ~~other cost actions.~~a slight decrease in gross margin. Segment gross margin ~~increased~~decreased to ~~55.5%~~47.3% for the ~~second~~third quarter of 2023 from ~~53.3%~~48.0% for the same period in 2022, primarily due to amortization of software development costs partially offset by favorable revenue mix.

For the ~~six~~nine months ended ~~June~~September 30, 2023, Security Solutions segment gross profit decreased by ~~$11.7~~$17.9 million, or ~~37.0%~~38.0%, compared to the same period in 2022, primarily due to the decrease in revenue ~~but partially offset by significantly lower indirect expenses.~~and a small decrease in gross margin. Segment gross margin decreased from ~~54.5%~~52.2% to ~~53.6% as a result~~51.4%, primarily due to amortization of ~~a lower~~software development costs partially offset by favorable revenue ~~base for indirect expenses.~~mix within the portfolio.


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

		(dollars in thousands)													(dollars in thousands)
Revenue	Revenue	$	15,715		$	24,972		$	31,164		$	48,213		Revenue	$	16,391		$	31,153		$	47,555		$	79,366
Cost of sales (exclusive of depreciation and amortization shown separately below)														Cost of sales (exclusive of depreciation and amortization shown separately below)	12,730			25,777			37,870			65,661
Depreciation and amortization														Depreciation and amortization	2			8			10			22
Total cost of sales														Total cost of sales	12,732			25,785			37,880			65,683
Gross profit	Gross profit	2,808			4,496			6,016			8,315			Gross profit	$	3,659		$	5,368		$	9,675		$	13,683
Gross margin	Gross margin	17.9		%	18.0		%	19.3		%	17.2		%	Gross margin	22.3		%	17.2		%	20.3		%	17.2		%

Gross profit for Secure Networks decreased by $1.7 million, or ~~37.5%~~31.8%, for the ~~second~~third quarter of 2023, compared with the same period in 2022, primarily due to lower revenue but partially offset by ~~lower indirect expenses.~~higher gross margins. Segment gross margin ~~slightly decreased~~increased to ~~17.9%~~22.3% for the ~~second~~third quarter of 2023 from ~~18.0%~~17.2% for the same period in ~~2022.~~2022, primarily due to strong program management and the successful wind-down of certain lower-margin programs.

For the ~~six~~nine months ended ~~June~~September 30, 2023, Secure Networks segment gross profit decreased by ~~$2.3~~$4.0 million, or ~~27.6%~~29.3%, compared to the same period in 2022, primarily due to lower revenue, partially offset by ~~lower indirect expenses.~~higher gross margins. Segment gross margin increased from 17.2% in 2022 to ~~19.3%~~20.3% in 2023 due to ~~improved performance on several programs~~strong program management and a shift in the mix across the portfolio driven by the successful wind-down of lower-margin programs.

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

We use 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.

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

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
June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022
Amount Margin Amount Margin Amount Margin Amount Margin
(dollars in thousands)
Net loss $ (8,024) (24.4 %) $ (14,159) (25.4 %) $ (18,770) (27.5) % $ (30,775) (29.0) %
Other income (1,649) (5.0 %) (118) (0.2 %) (4,145) (6.1) % (130) (0.1) %
Interest expense 184 0.5 % 187 0.3 % 433 0.6 % 377 0.4 %
Provision for income taxes 22 0.1 % 54 0.1 % 45 0.1 % 125 0.1 %
Depreciation and amortization 1,696 5.2 % 1,505 2.7 % 3,121 4.5 % 2,910 2.7 %
EBITDA (Non-GAAP) (7,771) (23.6 %) (12,531) (22.5 %) (19,316) (28.4) % (27,493) (25.9) %
Stock-based compensation expense (1)
7,745 23.5 % 17,076 30.6 % 17,244 25.3 % 33,007 31.1 %
Restructuring expenses/(adjustments) (2)
(3) — % — — % 1,197 1.8 % — — %
Adjusted EBITDA (Non-GAAP) $ (29) (0.1 %) $ 4,545 8.1 % $ (875) (1.3 %) $ 5,514 5.2 %
We believe that EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin provide the Board, management and investors with clear representation of our core operating performance and trends, provide greater visibility into the long-term financial performance of the Company, and eliminate the impact of items that do not relate to the ongoing operating performance of the business. Further, Adjusted EBITDA and Adjusted EBITDA Margin are used by the Board and management to prepare and approve our annual budget, and to evaluate the performance of certain management personnel when determining incentive compensation.


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

	(dollars in thousands)
Net loss	$	(8,672)	(24.0 %)	$	(8,455)	(13.3 %)	$	(27,442)	(26.3) %	$	(39,230)	(23.1) %
Other income	(1,222)		(3.4 %)	(518)		(0.8 %)	(5,367)		(5.1) %	(648)		(0.4) %
Interest expense	178		0.5 %	181		0.3 %	611		0.6 %	558		0.3 %
Provision for income taxes	23		0.1 %	8		— %	68		0.1 %	133		0.1 %
Depreciation and amortization	3,215		8.9 %	1,517		2.4 %	6,336		6.0 %	4,427		2.6 %
EBITDA (Non-GAAP)	(6,478)		(17.9 %)	(7,267)		(11.4 %)	(25,794)		(24.7) %	(34,760)		(20.5) %
Stock-based compensation expense (1)	5,218		14.4 %	15,836		24.9 %	22,462		21.5 %	48,843		28.8 %
Restructuring expenses (2)	—		— %	—		— %	1,197		1.2 %	—		— %
Adjusted EBITDA (Non-GAAP)	$	(1,260)	(3.5 %)	$	8,569	13.5 %	$	(2,135)	(2.0 %)	$	14,083	8.3	%

(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~~$5.2 million and ~~$13.6~~$18.6 million for the three and ~~six~~nine months ended ~~June~~September 30, 2023, respectively, and ~~$16.4~~$16.1 million and ~~$30.7~~$46.8 million for the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively. ~~Stock-based~~No stock-based compensation from other sources was ~~$2.1~~recorded for the three months ended September 30, 2023, while $3.8 million was recorded for the nine months ended September 30, 2023. Stock-based compensation (adjustment)/expense from other sources was $(0.3) million and ~~$3.7~~$2.0 million for the three and ~~six~~nine months ended ~~June 30, 2023, respectively, and $0.7 million and $2.3 million for the three and six months ended June~~September 30, 2022, respectively. The other sources of stock-based compensation consist of accrued compensation, which the Company intends to settle in shares of the Company's common stock. However, it is the Company’s discretion whether this compensation will ultimately be paid in stock or cash. The Company has the right to dictate the form of these payments up until the date at which they are paid. Any change to the expected payment form would result in out-of-quarter adjustments to this add back to Adjusted EBITDA.

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

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


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

	(in thousands, except per share data)
Net loss	$	(8,672)	$	(0.12)	$	(8,455)	$	(0.13)	$	(27,442)	$	(0.40)	$	(39,230)	$	(0.58)
Adjustments:
Other income	(1,222)		(0.02)		(518)		(0.01)		(5,367)		(0.08)		(648)		(0.01)
Stock-based compensation expense (1)	5,218		0.07		15,836		0.24		22,462		0.33		48,843		0.72
Restructuring expenses (2)	—		—		—		—		1,197		0.02		—		—
Adjusted net (loss)/income, Adjusted EPS (Non-GAAP)	$	(4,676)	$	(0.07)	$	6,863	$	0.10	$	(9,150)	$	(0.13)	$	8,965	$	0.13
Weighted-average shares of common stock outstanding, basic	69,571				67,493				69,062				67,641

(1) The stock-based compensation adjustment to ~~Net (Loss)~~net (loss)/~~Income~~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~~$5.2 million and ~~$13.6~~$18.6 million for the three and ~~six~~nine months ended ~~June~~September 30, 2023, respectively, and ~~$16.4~~$16.1 million and ~~$30.7~~$46.8 million for the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively. ~~Stock-based~~No stock-based compensation from other sources was ~~$2.1~~recorded for the three months ended September 30, 2023, while $3.8 million was recorded for the nine months ended September 30, 2023. Stock-based compensation (adjustment)/expense from other sources was $(0.3) million and ~~$3.7~~$2.0 million for the three and ~~six~~nine months ended ~~June 30, 2023, respectively, and $0.7 million and $2.3 million for the three and six months ended June~~September 30, 2022, respectively. The other sources of stock-based compensation consist of accrued compensation, which the Company intends to settle in shares of the Company's common stock. However, it is the Company’s discretion whether this compensation will ultimately be paid in stock or cash. The Company has the right to dictate the form of these payments up until the date at which they are paid. Any change to the expected payment form would result in out-of-quarter adjustments to this add back to Adjusted Net (Loss)/Income.

Non-GAAP Gross Profit and Non-GAAP Gross Margin are supplemental measures of operating performance that are not made under GAAP and do not represent, and should not be considered as, alternatives to gross profit and gross margin as determined by GAAP. We define Non-GAAP Gross Profit as gross profit, adjusted for stock-based compensation expense, and depreciation and amortization charged under cost of sales. We define Non-GAAP Gross Margin as Non-GAAP Gross Profit as a percentage of total revenue.


Table MD&A 6: Reconciliation of Gross Profit to Non-GAAP Gross Profit; Gross Margin to Non-GAAP Gross Margin
	For the Three Months Ended						For the Nine Months Ended
	September 30, 2023			September 30, 2022			September 30, 2023			September 30, 2022
	Amount		Margin	Amount		Margin	Amount		Margin	Amount		Margin

	(dollars in thousands)
Gross profit	$	13,013	36.0 %	$	20,945	32.9 %	$	38,854	37.2 %	$	60,745	35.8 %
Adjustments:
Stock-based compensation expense — cost of sales	73		0.2 %	929		1.5 %	624		0.6 %	2,798		1.6 %
Depreciation and amortization — cost of sales	1,945		5.3 %	191		0.3 %	2,291		2.2 %	602		0.4 %
Non-GAAP gross profit	$	15,031	41.5 %	$	22,065	34.7 %	$	41,769	40.0 %	$	64,145	37.8 %

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

Table MD&A 6: Free Cash Flow
For the Three Months Ended For the Six Months Ended
June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022
(in thousands)
Net cash (used in)/provided by operating activities $ (4,113) $ 7,883 $ (4,213) $ 8,132
Adjustments:
Purchases of property and equipment (47) (95) (270) (641)
Capitalized software development costs (4,398) (2,339) (8,198) (5,134)
Free cash flow (Non-GAAP) $ (8,558) $ 5,449 $ (12,681) $ 2,357
We use Free Cash Flow to understand the cash flows that directly correspond with our operations and the investments we must make in those operations, using a methodology that combines operating cash flows and capital expenditures. Further, Free Cash Flow may be useful to management and investors in evaluating the Company's operating performance and liquidity.

~~Table of Contents~~


Table MD&A 7: Free Cash Flow
	For the Three Months Ended				For the Nine Months Ended
	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022

	(in thousands)
Net cash provided by/(used in) operating activities	$	846	$	11,986	$	(3,367)	$	20,118
Adjustments:
Purchases of property and equipment	(80)		(174)		(350)		(815)
Capitalized software development costs	(3,762)		(3,446)		(11,960)		(8,580)
Free cash flow (Non-GAAP)	$	(2,996)	$	8,366	$	(15,677)	$	10,723

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

Our primary sources of liquidity are cash on hand, future operating cash flows, and, if needed, borrowings under our $30.0 million revolving credit facility, with an available expansion feature of up to $30.0 million of additional revolver facility. While a variety of factors related to sources and uses of cash, such as timeliness of accounts receivable collections, vendor credit terms, or significant collateral requirements, ultimately impact our liquidity, such factors may or may not have a direct impact on our liquidity.

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


Table MD&A 7: Net Change in Cash, Cash Equivalents, and Restricted Cash
Table MD&A 8: Net Change in Cash, Cash Equivalents, and Restricted Cash						Table MD&A 8: Net Change in Cash, Cash Equivalents, and Restricted Cash
		For the Six Months Ended					For the Nine Months Ended
		June 30, 2023		June 30, 2022			September 30, 2023		September 30, 2022

		(in thousands)					(in thousands)
Net cash (used in)/provided by operating activities	Net cash (used in)/provided by operating activities	$	(4,213)	$	8,132	Net cash (used in)/provided by operating activities	$	(3,367)	$	20,118
Net cash used in investing activities	Net cash used in investing activities	(8,468)		(5,775)		Net cash used in investing activities	(12,310)		(9,395)
Net cash used in financing activities	Net cash used in financing activities	(3,176)		(6,199)		Net cash used in financing activities	(3,673)		(11,821)
Net change in cash, cash equivalents, and restricted cash	Net change in cash, cash equivalents, and restricted cash	$	(15,857)	$	(3,842)	Net change in cash, cash equivalents, and restricted cash	$	(19,350)	$	(1,098)

Net cash used in operating activities for the ~~six~~nine months ended ~~June~~September 30, 2023, was ~~$4.2~~$3.4 million, ~~an increase~~a decrease in cash inflow of ~~$12.3~~$23.5 million in cash outflow, compared to the same period in 2022. The change is primarily driven by the Company's operating losses, the timing of receipts of customer payments, the timing of payments to vendors and employees, and the timing of inventory turnover, adjusted for certain non-cash items (i.e. stock-based compensation costs lower by $26.4 million) that do not impact cash flows from operating activities.

Net cash used in investing activities for the ~~six~~nine months ended ~~June~~September 30, 2023, increased by ~~$2.7~~$2.9 million compared to the same period of the prior year, primarily due to the higher investment in software development costs of ~~$8.2~~$12.0 million and ~~$5.1~~$8.6 million for the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022, respectively, partially offset by the slight decrease in purchases of property and equipment.

Net cash used in financing activities for the ~~six~~nine months ended ~~June~~September 30, 2023, decreased by ~~$3.0~~$8.1 million compared to the same period in 2022. This is primarily attributable to the decrease in payment of tax withholding related to net share settlement of equity awards of ~~$1.6~~$1.7 million for the ~~six~~nine months ended ~~June~~September 30, 2023, compared with ~~$2.9~~$3.1 million in the same period of 2022, and the cash outflow on repurchases of common stock of ~~$2.6~~$7.6 million in 2022 compared with $0.1 million in 2023 under the share repurchase program (see Note 13 – Share Repurchases). This is partially offset by the payment of the DFT holdback amount of $0.6 million in February 2023.

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 2022 Form 10-K, as filed with the SEC on March 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~~nine months ended ~~June~~September 30, 2023.

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

The Company's management, including the Company's CEO and CFO, conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this Report and, based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of ~~June~~September 30, 2023.

There was no change in the Company's internal control over financial reporting during the quarter ended ~~June~~September 30, 2023, identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

We have disclosed under "Item 1A – Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2022, the risk factors ~~which~~that 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.

Goodwill was $17.9 million as of ~~June~~September 30, 2023, and December 31, 2022, of which $3.0 million is allocated to the Security Solutions segment and $14.9 million is allocated to the Secure Networks segment. Intangible assets were ~~$37.8~~$39.0 million and $37.4 million as of ~~June~~September 30, 2023, and December 31, 2022, respectively. Under ~~generally accepted accounting principles ("GAAP"),~~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~~three quarters 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 drops and 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.

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~~over the last few 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,~~Not long ago, the federal government was shut down due to a lack of funding for over one month between late 2018 and early ~~2019. Additionally,~~2019, and currently, the federal government is funded under a continuing resolution until November 17, 2023. Moreover, 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.


Exhibit Number		Description
10.1	* +	Annual Incentive Plan, as amended (Incorporated by reference to Exhibit 99.1 filed with the Company's Current Report on Form ~~of Telos Corporation Notice of Grant of Option~~8-K on
~~10.2~~	* +	~~Form of Telos Corporation Notice of Grant of Restricted Shares and/or Restricted Share Units (Time-Based)~~September 20, 2023)
31.1	+	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	+	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	^	Certification pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	+	XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH	+	XBRL Taxonomy Extension Schema Document
101.CAL	+	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	+	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	+	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	+	XBRL Taxonomy Extension Presentation Linkbase Document
104	+	Cover Page Interactive Data File - the cover page iXBRL tags are embedded within the Inline XBRL document contained in Exhibit 101


TELOS CORPORATION


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


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


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


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)


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


		Page
PART I - FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
	Consolidated Statements of Operations	3
	Consolidated Statements of Comprehensive Loss	4
	Consolidated Balance Sheets	5
	Consolidated Statements of Cash Flows	6
	Consolidated Statements of Changes in Stockholders’ Equity	7
	Notes to Consolidated Financial Statements	8
	1. Organization	8
	2. Significant Accounting Policies	8
	3. Revenue Recognition	10
	4. Accounts Receivable, Net	11
	5. Inventories, Net	12
	6. Property and Equipment, Net	12
	7. Goodwill	12
	8. Intangible Assets, Net	12
	9. Other Balance Sheet Components	13
	10. Debt and Other Obligations	13
	11. Acquisition	14
	12. Stock-Based Compensation	1415
	13. Share Repurchases	16
	14. Accumulated Other Comprehensive Loss	1617
	15. Loss per Share	1617
	16. Related Party Transactions	1617
	17. Segment Information	1718
	18. Commitments and Contingencies	1819
	19. Supplemental Cash Flow Information	1819
	20. Revision of Prior Year Interim Financial Statements	1920
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2021
	Forward-Looking Statements	2021
	General and Business Overview	2021
	Business Environment	2021
	Backlog	2122
	~~Financial Overview~~Business Hi ghlights	2223
	Results of Operations	2223
	Non-GAAP Financial Measures	2425
	Liquidity and Capital Resources	2628
	Critical Accounting Policies and Estimates	2628
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	2728
Item 4.	Controls and Procedures	2729
PART II - OTHER INFORMATION		2830
Item 1.	Legal Proceedings	2830
Item 1A.	Risk Factors	2830
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2830
Item 3.	Defaults upon Senior Securities	2931
Item 4.	Mine Safety Disclosures	2931
Item 5.	Other Information	2931
Item 6.	Exhibits	2931
	SIGNATURES	3032


Table 12.3: Stock Options Fair Value and Weighted-Average Assumptions
	For the ~~Six~~Nine Months Ended
	~~June~~September 30, 2023	~~June~~September 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	—%	—%


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


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


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


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

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


*			constitutes a management contract or compensatory plan or arrangement
+			filed herewith
^			furnished herewith