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Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended: September 30, 2022
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission file number: 001-08443
TELOS CORPORATION
(Exact name of registrant as specified in its charter)
Maryland52-0880974
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
19886 Ashburn Road, Ashburn, Virginia
20147-2358
(Address of principal executive offices)(Zip Code)
(703) 724-3800
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbolName of each exchange on which registered
Common stock, $0.001 par value per shareTLSThe Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒    No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes ☒      No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    Yes ☐    No 
As of November 4, 2022, the registrant had outstanding 67,210,624 shares of common stock.
1

Table of Contents
Table of Contents to Third Quarter 2022 Form 10-Q
2

Table of Contents
PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements.
Telos Corporation
Consolidated Statements of Operations
(Unaudited)
For the Three Months EndedFor the Nine Months Ended
September 30, 2022September 30, 2021September 30, 2022September 30, 2021
(in thousands, except per share amounts)
Revenue – services
$55,305 $62,955 $153,683 $164,016 
Revenue – products
8,288 6,026 15,861 14,367 
Total revenue63,593 68,981 169,544 178,383 
Cost of sales – services
36,746 40,137 97,913 108,236 
Cost of sales – products
5,902 3,967 10,886 8,266 
Total cost of sales42,648 44,104 108,799 116,502 
Gross profit20,945 24,877 60,745 61,881 
Selling, general and administrative expenses:
Sales and marketing3,042 5,363 13,035 14,233 
Research and development3,981 4,863 13,900 14,250 
General and administrative21,591 19,739 68,379 69,452 
Total selling, general and administrative expenses28,614 29,965 95,314 97,935 
Operating loss(7,669)(5,088)(34,569)(36,054)
Other income/(expense)518 20 648 (1,001)
Interest expense(181)(195)(558)(583)
Loss before income taxes(7,332)(5,263)(34,479)(37,638)
(Provision for)/benefit from income taxes (8)41 (133)(6)
Net loss$(7,340)$(5,222)$(34,612)$(37,644)
Net loss per share:
Basic$(0.11)$(0.08)$(0.51)$(0.57)
Diluted$(0.11)$(0.08)$(0.51)$(0.57)
Weighted average shares outstanding:
Basic67,493 66,755 67,641 65,999 
Diluted67,493 66,755 67,641 65,999 
See accompanying notes to unaudited consolidated financial statements.
3

Table of Contents
Telos Corporation
Consolidated Statements of Comprehensive Loss
(Unaudited)
For the Three Months EndedFor the Nine Months Ended
September 30, 2022September 30, 2021September 30, 2022September 30, 2021
(in thousands)
Net loss$(7,340)$(5,222)$(34,612)$(37,644)
Other comprehensive loss, net of tax:
Foreign currency translation adjustments(21)(13)(3)(40)
Comprehensive loss$(7,361)$(5,235)$(34,615)$(37,684)
See accompanying notes to unaudited consolidated financial statements.
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Telos Corporation
Consolidated Balance Sheets
(Unaudited)
September 30, 2022December 31, 2021
(in thousands, except per share and share data)
Assets:
Cash and cash equivalents$125,332 $126,562 
Accounts receivable, net50,983 59,844 
Inventories, net4,676 1,247 
Prepaid expenses6,069 3,329 
Other current assets930 732 
Total current assets187,990 191,714 
Property and equipment, net5,128 6,088 
Finance lease right-of-use assets, net8,137 9,053 
Operating lease right-of-use assets456 852 
Goodwill17,922 17,922 
Intangible assets, net26,858 19,199 
Other assets908 1,253 
Total assets$247,399 $246,081 
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and other accrued liabilities$37,583 $34,548 
Accrued compensation and benefits8,941 6,557 
Contract liabilities6,952 6,381 
Finance lease obligations, current portion1,558 1,461 
Operating lease obligations, current portion408 564 
Other current liabilities1,972 1,430 
Total current liabilities57,414 50,941 
Finance lease obligations, non-current portion11,660 12,840 
Operating lease liabilities, non-current portion108 388 
Deferred income taxes748 723 
Other liabilities436 935 
Total liabilities70,366 65,827 
Commitments and contingencies (Note 19)
Stockholders’ equity
Common stock, $0.001 par value, 250,000,000 shares authorized, 67,300,099 shares and 66,767,450 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively
106 105 
Additional paid-in capital398,546 367,153 
Accumulated other comprehensive loss(30)(27)
Accumulated deficit(221,589)(186,977)
Total stockholders’ equity177,033 180,254 
Total liabilities and stockholders’ equity$247,399 $246,081 
See accompanying notes to unaudited consolidated financial statements.
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Telos Corporation
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30, 2022September 30, 2021
(in thousands)
Cash flows from operating activities:
Net loss$(34,612)$(37,644)
Adjustments to reconcile net loss to cash flows provided by operating activities:
Stock-based compensation44,225 47,378 
Depreciation and amortization4,427 4,223 
Deferred income tax provision25 28 
Accretion of discount on acquisition holdback36 7 
Loss on disposal of fixed assets2 9 
Provision for doubtful accounts97 7 
Recovery from inventory obsolescence(108)(2)
Changes in other operating assets and liabilities
Accounts receivable8,763 (18,852)
Inventories(3,321)1,288 
Prepaid expenses, other current assets, and other assets(2,486)(3,259)
Accounts payable and other accrued payables2,635 15,742 
Accrued compensation and benefits371 (519)
Contract liabilities571 1,579 
Other current liabilities and other liabilities(507)(348)
Net cash provided by operating activities20,118 9,637 
Cash flows from investing activities:
Capitalized software development costs(8,580)(6,672)
Purchases of property and equipment(815)(1,645)
Cash paid for acquisition (5,925)
Net cash used in investing activities(9,395)(14,242)
Cash flows from financing activities:
Payments under finance lease obligations(1,083)(993)
Payment of tax withholding related to net share settlement of equity awards(3,135) 
Repurchase of common stock(7,603)(1,251)
Proceeds from issuance of common stock, net of issuance costs 64,269 
Repurchase of outstanding warrants (26,894)
Distributions to Telos ID Class B member – non-controlling interest
 (2,436)
Net cash (used in)/provided by financing activities(11,821)32,695 
Net change in cash, cash equivalents, and restricted cash(1,098)28,090 
Cash, cash equivalents and restricted cash, beginning of period126,562 106,045 
Cash, cash equivalents and restricted cash, end of period$125,464 $134,135 
See accompanying notes to unaudited consolidated financial statements.
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Telos Corporation
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
Common StockAdditional Paid-in
Capital
Accumulated
Other Comprehensive Income/(Loss)
Accumulated DeficitTotal Stockholders’
Equity
SharesAmount
(in thousands)
Balance at June 30, 202267,594 $106 $388,464 $(9)$(214,249)$174,312 
Net loss— — — — (7,340)(7,340)
Foreign currency translation loss— — — (21)— (21)
Stock-based compensation expense, excluding accrued compensation— — 15,012 — — 15,012 
Repurchase of common stock(499)— (4,681)— — (4,681)
RSUs vested, net of shares withheld to cover tax withholding205 — (249)— — (249)
Balance at September 30, 202267,300 $106 $398,546 $(30)$(221,589)$177,033 
Balance at June 30, 202166,635 $105 $341,928 $17 $(176,265)$165,785 
Net loss— — — — (5,222)(5,222)
Foreign currency translation loss— — — (13)— (13)
Stock-based compensation expense— — 12,372 — — 12,372 
Balance at September 30, 202166,635 $105 $354,300 $4 $(181,487)$172,922 
Common StockAdditional Paid-in
Capital
Accumulated
Other Comprehensive Income/(Loss)
Accumulated DeficitTotal Stockholders’
Equity
SharesAmount
(in thousands)
Balance at December 31, 202166,767 $105 $367,153 $(27)$(186,977)$180,254 
Net loss— — — — (34,612)(34,612)
Foreign currency translation loss— — — (3)— (3)
Stock-based compensation expense, excluding accrued compensation— — 42,212 — — 42,212 
Repurchase of common stock(859)— (7,683)— — (7,683)
RSUs vested, net of shares withheld to cover tax withholding1,392 1 (3,136)— — (3,135)
Balance at September 30, 202267,300 $106 $398,546 $(30)$(221,589)$177,033 
Balance at December 31, 202064,625 $103 $270,800 $44 $(143,843)$127,104 
Net loss— — — — (37,644)(37,644)
Issuance of common stock2,050 2 64,267 — — 64,269 
Foreign currency translation loss— — — (40)— (40)
Stock-based compensation expense— — 47,378 — — 47,378 
Repurchase of outstanding warrants— — (26,894)— — (26,894)
Repurchase of common stock(40)— (1,251)— — (1,251)
Balance at September 30, 202166,635 $105 $354,300 $4 $(181,487)$172,922 
See accompanying notes to unaudited consolidated financial statements.
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Telos Corporation
Notes to the Unaudited Consolidated Financial Statements
1. ORGANIZATION
Telos Corporation, together with its subsidiaries (collectively, the "Company," "we," "our" or "Telos"), a Maryland corporation, is a leading provider of cyber, cloud and enterprise security solutions for the world's most security-conscious organizations. We own all of the issued and outstanding shares of Xacta Corporation, a subsidiary that develops, markets and sell government-validated secure enterprise solutions to government and commercial customers. We own the issued and outstanding share capital of Ubiquity.com, Inc., a holding company for Xacta Corporation. We also have a 100% ownership interest in Telos Identity Management Solutions, LLC ("Telos ID"), Teloworks, Inc., and Telos APAC Pte. Ltd.
2. SIGNIFICANT ACCOUNTING POLICIES
(a)Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of Telos Corporation and its subsidiaries (see Note 1 Organization), all of whose issued and outstanding share capital is wholly-owned directly and indirectly by Telos Corporation. All intercompany transactions have been eliminated in consolidation.
(b)Basis of Presentation for Interim Periods
Certain information and footnote disclosures normally included for the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted for the interim periods presented. We believe that the unaudited interim financial statements include all adjustments (which are normal and recurring) necessary to state fairly our financial position and the results of operations and cash flows for the periods presented.
The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for the year or future periods. The financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto for the year ended December 31, 2021, 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.
(c)Segment Reporting
Operating segments are defined as components of an enterprise for which separate discrete financial information is available and regularly evaluated by the chief operating decision maker (“CODM”), or decision-making group, in deciding how to allocate resources and assess performance.
During the fourth quarter of 2021, we reorganized our internal management reporting structure and the financial results evaluated by our CODM; therefore, we changed our operating segments to align with how our CODM currently oversees the business, allocates resources, and evaluates operating performance. As a result of the segment reorganization, we reported two reportable and operating segments: Security Solutions and Secure Networks. The segments enable the alignment of our strategies and objectives and provide a framework for the timely and rational allocation of resources within the lines of business. We eliminate any inter-segment revenues and expenses upon consolidation.
Prior period segment information has been recast to reflect the change. The segment reorganization had no impact on previously reported unaudited consolidated financial results.
(d)Basis of Comparison Revision of Previously Issued Interim Financial Statements
The Company recorded certain revisions related to the previously issued unaudited condensed consolidated financial statements. The Company considered the errors identified in accordance with the SEC's Staff Accounting Bulletin No. 99 and determined the impact was immaterial to the previously issued condensed consolidated interim financial statements. Nonetheless, the Company corrected these errors when identified in 2021.
During the third quarter of 2021, the Company identified out-of-period adjustments on certain revenue and expense classification. Further, we corrected the cash flow presentation to properly reflect the final payment to fully acquire all of the membership interest of Telos ID as financing activities. Further information regarding the misstatements and related revisions are included in Note 18 Revision of Prior Year Interim Financial Statements to the condensed consolidated financial statements.
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(e)Use of Estimates
Preparing unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of revenue, expenses, assets, and liabilities and disclosure of contingent assets and liabilities. The Company regularly assesses these estimates; however, actual results could differ from those estimates. We base our estimates on historical experience, currently available information, and various other assumptions that we believe are reasonable under the circumstances. The most significant items involving management estimates include estimates of revenue recognition, allowance for credit losses, allowance for inventory obsolescence, the valuation allowance for deferred tax assets, the provision for income taxes, share-based compensation, contingencies and litigation, and valuation of intangibles and goodwill. The impact of changes in estimates is recorded in the period in which they become known.
(f)Software Development Cost (Cloud-computing implementation costs)
ASC 350-40 requires hosting arrangements that are service contracts to follow the guidance for internal-use software to determine which implementation costs can be capitalized. As of September 30, 2022, the capitalized implementation costs related to hosting arrangements that were incurred during the application development stage aggregated to $0.3 million. These costs are related primarily to the implementation of a new enterprise resource planning system. The capitalized implementation costs will be amortized over the expected term of the arrangement on a straight-line basis. Amortization begins when the component of the hosting arrangement is ready for its intended use after all substantial testing is complete and classified in the same line item on our consolidated statement of operations as the expense for fees for the associated hosting arrangement.
(g)Reclassifications
Certain reclassifications have been made to prior years' consolidated financial statements to conform to the current year's presentation. The reclassification had no impact on our total assets or liabilities nor on our net loss or stockholders' equity.
(h)Recent Accounting Pronouncements
Changes to U.S. GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of Accounting Standards Updates ("ASUs") to the FASB's Accounting Standards Codification ("ASC"). We consider the applicability and impact of all recent ASUs. ASUs not listed below were assessed and determined to be not applicable.
Accounting Pronouncements Not Yet Adopted
In October 2021, the FASB issued ASU No. 2021-08, “Business Combination (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,” which requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The ASU improves comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. Entities should apply the amendments prospectively to business combinations that occur after the effective date. This standard will be effective for reporting periods beginning after December 15, 2022, with early adoption permitted. While we are currently assessing the impact of the adoption of this ASU, we do not believe the adoption of this ASU will have a material impact on our unaudited consolidated financial position, results of operations, and cash flows.
In June 2022, the FASB issued ASU No. 2022-03, "Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions," which clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. This standard will be effective for reporting periods beginning December 15, 2023, with early adoption permitted. While we are currently assessing the impact of the adoption of this ASU, we do not believe the adoption of this ASU will have a material impact on our unaudited consolidated financial position, results of operations, and cash flows.
In September 2022, the FASB issued ASU No. 2022-04, "Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations," which requires a company that uses a supplier finance program in connection with the purchase of goods or services to disclose sufficient information about the program to allow a user of the financial statements to understand the program's nature, activity during the period, changes from period to period, and potential magnitude. This standard will be effective for reporting periods beginning December 15, 2022, with early adoption permitted. While we are currently assessing the impact of the adoption of this ASU, we do not believe the adoption of this ASU will have a material impact on our unaudited consolidated financial position, results of operations, and cash flows.
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3. REVENUE RECOGNITION
We recognize revenue in accordance with ASC Topic 606, "Revenue from Contracts with Customers." The unit of account in ASC 606 is a performance obligation, which is a promise in a contract with a customer to transfer a good or service to the customer.
The majority of our revenue is recognized over time, as control is transferred continuously to our customers who receive and consume benefits as we perform, and is classified as services revenue. Revenue transferred to customer over time accounted for 87% and 91% of our revenue for the three and nine months ended September 30, 2022, respectively, and 91% and 92% of our revenue for the three and nine months ended September 30, 2021, respectively. All of our business groups earn services revenue under a variety of contract types, including time and materials, firm-fixed-price, firm-fixed-price level of effort, and cost-plus fixed-fee contract types, which may include variable consideration.
We also recognize revenue at a point in time on certain contracts, when our customer obtains control of the transferred product, generally upon delivery, and the revenue is classified as product revenue. Revenue transferred to customers at a point in time accounted for 13% and 9% of our revenue for the three and nine months ended September 30, 2022, respectively, and 9% and 8% of our revenue for the three and nine months ended September 30, 2021, respectively.
For certain performance obligations where we are not primarily responsible for fulfilling the promise to provide the goods or services to the customer, do not have inventory risk, and have limited discretion in establishing the price for the goods or services, we recognize revenue on a net basis.
We provide for anticipated losses on contracts during the period when the loss is determined by recording an expense for the total expected costs that exceed the total estimated revenue for a performance obligation. No contract losses were recorded during the three and nine months ended September 30, 2022, and 2021.
Disaggregated Revenues
In addition to our segment reporting, as further discussed in Note 17 Segment Information, we disaggregate our revenue by customer and contract types. We treat sales to U.S. customers as sales within the United States, regardless of where the services are performed. Substantially all of our revenues are generated from U.S. customers.
Table 3.1: Revenue by Customer Type
For the Three Months EndedFor the Nine Months Ended
September 30, 2022September 30, 2021September 30, 2022September 30, 2021
Amount%Amount%Amount%Amount%
(in thousands)
Federal$60,294 95 %$66,612 97 %$160,351 95 %$171,091 96 %
State & local, and commercial3,299 5 %2,369 3 %9,193 5 %7,292 4 %
Total revenue$63,593 $68,981 $169,544 $178,383 
Table 3.2: Revenue by Contract Type
For the Three Months EndedFor the Nine Months Ended
September 30, 2022September 30, 2021September 30, 2022September 30, 2021
Amount%Amount%Amount%Amount%
(in thousands)
Firm fixed-price$54,055 85 %$60,349 87 %$140,636 83 %$155,832 87 %
Time-and-materials3,457 5 %3,154 5 %9,104 5 %9,243 5 %
Cost plus fixed fee6,081 10 %5,478 8 %19,804 12 %13,308 8 %
Total revenue$63,593 $68,981 $169,544 $178,383 
As our primary customer base includes agencies of the U.S. government, we have a concentration of credit risk associated with our accounts receivable, as 95% of our billed accounts receivable, as of September 30, 2022, were directly with U.S. government customers. We perform ongoing credit evaluations of all our customers and generally do not require collateral or other guarantees from our customers. We maintain allowances for potential losses.
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Table 3.3: Revenue Concentrations Greater than 10% of Total Revenue
For the Three Months EndedFor the Nine Months Ended
September 30, 2022September 30, 2021September 30, 2022September 30, 2021
U.S. Department of Defense ("DoD")77%74%74%75%
Civilian federal agencies18%23%21%21%
Contract Balances
Table 3.4: Contract Balances
September 30, 2022December 31, 2021
(in thousands)
Contract assets (unbilled receivables)$28,290 $41,374 
Contract liabilities6,952 6,381 
The change in the Company's contract assets and contract liabilities during the period was primarily the result of the timing differences between the Company's performance, invoicing and customer payments. Revenue recognized for the three and nine months ended September 30, 2022, that was included in the contract liabilities balance at the beginning of each reporting period, was $0.9 million and $5.0 million, respectively. Revenue recognized for the three and nine months ended September 30, 2021, that was included in the contract liabilities balance at the beginning of each reporting period, was $0.8 million and $4.1 million, respectively.
As of September 30, 2022, we had $111.4 million of remaining performance obligations, which we also refer to as funded backlog. We expect to recognize approximately 85% of our remaining performance obligations over the next 12 months and the balance thereafter.
4. ACCOUNTS RECEIVABLE, NET
Table 4: Details of Accounts Receivable, Net
September 30, 2022December 31, 2021
(in thousands)
Billed accounts receivable$22,903 $18,586 
Unbilled receivables28,290 41,374 
Allowance for credit losses(210)(116)
Accounts receivable, net$50,983 $59,844 
5. INVENTORIES, NET
Table 5: Details of Inventories, Net
September 30, 2022December 31, 2021
(in thousands)
Gross inventory$5,429 $2,108 
Allowance for inventory obsolescence(753)(861)
Inventories, net$4,676 $1,247 
6. PROPERTY AND EQUIPMENT, NET
Table 6: Details of Property and Equipment, Net
September 30, 2022December 31, 2021
(in thousands)
Furniture and equipment$15,765 $15,420 
Leasehold improvement3,073 2,994 
Property and equipment, at cost18,838 18,414 
Accumulated depreciation(13,710)(12,326)
Property and equipment, net$5,128 $6,088 
Depreciation expense was $0.6 million and $1.8 million for the three and nine months ended September 30, 2022, respectively, compared to $0.6 million and $1.5 million for the three and nine months ended September 30, 2021, respectively.
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7. GOODWILL
The goodwill balance was $17.9 million as of September 30, 2022, and December 31, 2021, of which $3.0 million is allocated to the Security Solutions segment and $14.9 million is allocated to the Secure Networks segment. Goodwill is subject to annual impairment tests and if triggering events are present in the interim before the annual tests, we will assess impairment. No impairment charges were taken for the three and nine months ended that September 30, 2022, and 2021.
8. INTANGIBLE ASSETS, NET
Table 8.1: Details of Intangible Assets, Net
September 30, 2022December 31, 2021
GrossAccumulated AmortizationNetGrossAccumulated AmortizationNet
(in thousands)
Acquired technology$3,630 $(529)$3,101 $3,630 $(256)$3,374 
Customer relationships40 (16)24 40 (5)35 
Software development costs31,199 (7,466)23,733 22,222 (6,432)15,790 
$34,869 $(8,011)$26,858 $25,892 $(6,693)$19,199 
Amortization expense was $0.5 million and $1.3 million for the three and nine months ended September 30, 2022, respectively, and $0.4 million and $1.3 million for the three and nine months ended September 30, 2021, respectively.
9. ACQUISITION
On July 30, 2021, the Company acquired the assets of Diamond Fortress Technologies ("DFT") and wholly-owned subsidiaries for a total purchase consideration of $6.7 million, inclusive of $0.3 million related to a pre-existing contractual arrangement with DFT. Upon closing, $5.9 million of cash was paid with an additional $0.6 million payable to DFT 18 months after the close date (the "holdback"). The holdback amount has been discounted to its present value of $0.5 million using a discount rate relevant to the acquisition. The acquisition adds several new patents to the Company’s library of biometric and digital identity intellectual property. The addition of contactless biometrics technology will enable the Company to better serve the needs of organizations in existing and new markets. The acquisition of the assets of DFT has been accounted for under U.S. GAAP using the acquisition method of accounting. The total purchase consideration of $6.7 million has been allocated among the assets acquired at their fair value at the acquisition date.
The Company recognized $3.7 million of intangible assets and $3.0 million of goodwill, which is housed in the Telos ID reporting unit, part of the Security Solutions operating segment. Goodwill is primarily attributable to an excess of the purchase price over the acquired identifiable net tangible and intangible assets. The acquired intangible assets will be amortized on a straight-line basis over three to eight years. The acquisition was considered an asset purchase for tax purposes, and the recognized goodwill is deductible for tax purposes.
10. PURCHASE OF TELOS ID NON-CONTROLLING INTERESTS
Telos ID was formed as a limited liability company under the Delaware Limited Liability Company Act in 2007. Prior to the IPO, the Company owned a 50% interest in Telos ID, with the remaining interest owned by Hoya ID Fund A, LLC ("Hoya") as the non-controlling interest. Distributions were made to the members only when and to the extent determined by Telos ID’s Board of Directors, in accordance with its Operating Agreement.
On October 5, 2020, we entered into a Membership Interest Purchase Agreement between the Company and Hoya to purchase all of the Class B Units of Telos ID owned by Hoya (the “Telos ID Purchase”). Upon the closing of the Telos ID Purchase, Telos ID became our wholly-owned subsidiary. On November 23, 2020, the Telos ID Purchase was consummated with the Company transferring $30.0 million in cash and issuing 7.3 million shares of our common stock at $20.39 per share (which totals approximately $148.4 million); the total consideration transferred to Hoya was $178.4 million. As part of the common stock issuance, the Company recognized an increase to additional paid-in capital (“APIC”) of $148.4 million. The Company further recognized a reduction to APIC of $173.9 million as part of eliminating Hoya’s non-controlling interest in Telos ID. The net impact to APIC associated with acquiring the additional 50% interest in Telos ID was a reduction of $25.5 million. Hoya received a final distribution of $2.4 million in January 2021.
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11. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES
Table 11: Details of Accounts Payable and Other Accrued Liabilities
September 30, 2022December 31, 2021
(in thousands)
Accounts payable - trade$16,339 $7,869 
Accrued liabilities19,870 25,300 
Others1,374 1,379 
Accounts payable and other accrued liabilities$37,583 $34,548 
12. STOCK-BASED COMPENSATION
Our 2016 Omnibus Long-Term Incentive Plan (the "2016 LTIP") provides for the grant of restricted stock units with time-based vesting ("Service-Based RSU" or "RSU") and restricted stock units with performance-based vesting ("Performance-Based RSU" or "PRSU") to our senior executives, directors, employees, and other service providers. Awards granted under the 2016 LTIP vest over the periods determined by the Board of Directors or the Compensation Committee of the Board of Directors, generally one to three years. The Company records stock-based compensation related to accrued compensation in which it intends to settle in shares of the Company’s common stock. However, it is the Company’s discretion whether this compensation will ultimately be paid in stock or cash, as it has the right to dictate the form of these payments up until the date they are paid.
The stock-based compensation expense includes an immaterial adjustment of $1.3 million for the nine months ended September 30, 2022, related to the prior year. There were no income tax benefits recognized on the share-based compensation expense for both periods.
Table 12.1: Details of Stock Compensation Expense by Department
For the Three Months EndedFor the Nine Months Ended
September 30, 2022September 30, 2021September 30, 2022September 30, 2021
(in thousands)
Cost of sales – services
$929 $718 $2,798 $1,974 
Sales and marketing611 1,536 3,699 5,316 
Research and development897 970 2,884 2,079 
General and administrative12,284 9,148 34,844 38,009 
Total stock-based compensation expense$14,721 $12,372 $44,225 $47,378 
Table 12.2: Service-Based RSU and Performance-Based RSU Award Activity
Service-Based RSUPerformance-Based RSUTotalWeighted-Average Grant Date Fair Value
Unvested outstanding units as of December 31, 2021
3,030,608 492,727 3,523,335 $34.24 
Granted3,897,786  3,897,786 10.00 
Vested(1,653,308) (1,653,308)31.21 
Forfeited(360,762)(155,942)(516,704)33.22 
Unvested outstanding units as of September 30, 2022
4,914,324 336,785 5,251,109 $17.23 
As of September 30, 2022, the intrinsic value of the RSUs and PRSUs outstanding, exercisable, and vested or expected to vest was $46.5 million. There was $42.7 million of total compensation costs related to stock-based awards not yet recognized as of September 30, 2022, which is expected to be recognized on a straight-line basis over a weighted-average remaining vesting period of approximately one year.
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13. SHARE REPURCHASES
On May 24, 2022, the Company announced that the Board of Directors approved a new share repurchase program ("SRP") authorizing the Company to repurchase up to $50.0 million of its common stock. Pursuant to this authorization, the Company may repurchase shares of its common stock on a discretionary basis from time to time through open market purchases. The repurchase program has no expiration date and may be modified, suspended, or terminated at any time. As of September 30, 2022, there was $42.3 million of the remaining authorization for future common stock repurchases under the SRP.
Table 13: Shares Repurchase Activity
For the Three Months EndedFor the Nine Months Ended
September 30, 2022September 30, 2021September 30, 2022September 30, 2021
(in thousands, except per share and share data)
Amount paid for shares repurchased (1)
$4,681 $ $7,683 $ 
Number of shares repurchased498,731  859,170  
Average per share price paid (1)
$9.38 $ $8.94 $ 
(1)Includes commissions paid for repurchases on the open market.
As of November 4, 2022, the Company has repurchased an additional 106,623 shares of its common stock for $1.0 million since September 30, 2022.
14. ACCUMULATED OTHER COMPREHENSIVE LOSS
Our functional currency is the U.S. Dollar. For one of our wholly-owned subsidiaries, the functional currency is the local currency. For this subsidiary, the translation of its foreign currency into U.S. Dollars is performed for assets and liabilities using current foreign currency exchange rates in effect at the balance sheet date and for revenue and expense accounts using average foreign currency exchange rates during the periods presented. Translation gains and losses are included in stockholders’ equity as a component of accumulated other comprehensive loss.
Table 14: Details of Accumulated Other Comprehensive Loss
September 30, 2022December 31, 2021
(in thousands)
Cumulative foreign currency translation loss$(137)$(134)
Cumulative actuarial gain on pension liability adjustment107 107 
Accumulated other comprehensive loss$(30)$(27)
15. LOSS PER SHARE
Basic net earnings (loss) per share is computed by dividing the net earnings (loss) by the weighted-average number of common shares outstanding for the period, without consideration for potentially dilutive securities. Diluted net earnings (loss) per share is computed by dividing the net earnings (loss) by the weighted-average number of shares of common stock and dilutive common stock equivalents outstanding for the period determined using the treasury-stock and if-converted methods. Dilutive common stock equivalents are comprised of unvested restricted common stock and warrants.
For the period of net loss, potentially dilutive securities are not included in the calculation of diluted net earnings (loss) per share, because to do so would be anti-dilutive.
Table 15: Potentially Dilutive Securities
For the Three Months EndedFor the Nine Months Ended
September 30, 2022September 30, 2021September 30, 2022September 30, 2021
(in thousands)
Unvested restricted stock and restricted stock units833 313 435 394 
Common stock warrants, exercisable at $1.665 per share
   405 
Total833 313 435 799 
Unvested antidilutive stock units excluded from the dilutive effect (stock units)1,218 965 
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16. RELATED PARTY TRANSACTIONS
Emmett J. Wood, the brother of our Chairman and CEO, has been an employee of the Company since 1996. The amounts paid to this individual as compensation were $91,000 and $696,000 for the three and nine months ended September 30, 2022, respectively, and $88,000 and $389,000 for the thr