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What changed in TELOS CORP's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of TELOS CORP's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+337 added−342 removedSource: 10-K (2024-03-15) vs 10-K (2023-03-16)

Top changes in TELOS CORP's 2023 10-K

337 paragraphs added · 342 removed · 218 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

59 edited+21 added−22 removed20 unchanged
Biggest changeGAAP" or "GAAP") and therefore require reconciliation; • Define allowable and unallowable costs and otherwise govern our right to reimbursement under various cost-type U.S. government contracts; • Require compliance with U.S. government Cost Accounting Standards; • Require reviews by the Defense Contract Audit Agency ("DCAA"), Defense Contract Management Agency and other U.S. government agencies for compliance with government requirements for a contractor's business system; • Restrict the use and dissemination of and require the protection of unclassified contract-related information and information classified for national security purposes and the export of certain products and technical data; • Impose acquisition regulations that define reimbursable and non-reimbursable costs; and • Restrict the use and dissemination of information classified for national security purposes and the export of certain products and technical data. 10 Table of Contents U.S. government customers employ several contracting methods to purchase services and products.
Biggest changeGAAP" or "GAAP") and therefore require reconciliation; • Define allowable and unallowable costs and otherwise govern our right to reimbursement under various cost-type U.S. government contracts; • Require compliance with U.S. government Cost Accounting Standards; • Require reviews by the Defense Contract Audit Agency, Defense Contract Management Agency and other U.S. government agencies for compliance with government requirements for a contractor's business system; and • Restrict the use and dissemination of, and require the protection of, unclassified contract-related information and information classified for national security purposes and the export of certain products and technical data.
Item 1. Business General Telos Corporation is a Maryland corporation headquartered in Ashburn, Virginia. Telos Corporation, together with its subsidiaries (the "Company" or "Telos" or "We"), offers technologically advanced, software-based security solutions that empower and protect the world's most security-conscious organizations against rapidly evolving, sophisticated and pervasive threats.
Item 1. Business General Overview Telos Corporation is a Maryland corporation headquartered in Ashburn, Virginia. Telos Corporation, together with its subsidiaries (the "Company" or "Telos" or "We"), offers technologically advanced, software-based security solutions that empower and protect the world's most security-conscious organizations against rapidly evolving, sophisticated and pervasive threats.
Xacta has disrupted the cyber risk and compliance management business across the U.S. federal government, replacing tedious manual activity with automation and delivering that automation to meet our customer's needs flexibly on premises, in hybrid environments, in the cloud, and across multi-cloud infrastructures. • Pursue strategic acquisition opportunities .
Xacta has disrupted the cyber risk and compliance management business across the U.S. federal government, replacing tedious manual activity with automation and delivering that automation to meet our customer's needs on-premises, in hybrid environments, in the cloud, and across multi-cloud infrastructures. • Pursue strategic acquisition opportunities .
Most of our contracts have cancellation terms that would permit us to recover all or a portion of our incurred costs and fees for work performed where the U.S. government issues a termination for convenience. A portion of our business is classified by the U.S. government and cannot be specifically described.
Most of our contracts have cancellation terms that permit us to recover all or a portion of our incurred costs and fees for work performed where the U.S. government issues a termination for convenience. A portion of our business is classified by the U.S. government and cannot be specifically described.
We consider the foundational value of integrity to be a non-negotiable requirement of employment, and an expectation of suppliers, partners, and our customers. We guard our reputation and will take action to protect it. An essential part of our brand promise is to always to engage employees, customers, partners, suppliers, and investors with integrity.
We consider the foundational value of integrity to be a non-negotiable requirement of employment, and an expectation of suppliers, partners, and our customers. We guard our reputation and will take necessary action to protect it. An essential part of our brand promise is always to engage employees, customers, partners, suppliers, and investors with integrity.
Customer acquisition often involves extensive interaction at all levels of an organizations, from executives, to decision makers, to end users. We seek to forge relationships throughout an organization in an effort to obtain broad consensus as part of the sales process.
Customer acquisition often involves extensive interaction at all levels of an organization, from executives, to decision makers, to end users. We seek to forge relationships throughout an organization in an effort to obtain broad consensus as part of the sales process.
The information on our website is not incorporated by reference into and is not part of this Annual Report on Form 10-K. The SEC also maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including Telos. 11 Table of Contents
The information on our website is not incorporated by reference into and is not part of this Annual Report on Form 10-K. The SEC also maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including Telos. 12 Table of Contents
We leverage the full power of Telos (executives, sales and channel partners) to gain access and build our brand awareness. Our sales strategy is to establish a customer foothold with one of our solutions and work to achieve rapid success. We then leverage this customer relationship to generate interest in other solutions from the Telos portfolio.
We leverage the full power of Telos (executives, sales and industry partners) to gain access and build our brand awareness. Our sales strategy is to establish a customer foothold with one of our solutions and work to achieve rapid success. We then leverage this customer relationship to generate interest in other solutions from the Telos portfolio.
With use cases including cyber risk management, risk remediation management, security authorization, compliance management, audit management, inventory management, vulnerability management, continuous compliance monitoring, and vendor and supply chain risk management, Xacta administers the key elements of more than 100 leading regulations and policies for IT security compliance, including the National Institute of Standards and Technology ("NIST") Risk Management Framework ("RMF"), RMF for Department of Defense ("DoD") IT, Committee of National Security Systems 1253, NIST Cybersecurity Framework, the Federal Risk and Authorization Management Program ("FedRAMP") and the DoD's Cybersecurity Maturity Model Certification ("CMMC") program. ◦ Cybersecurity services : proven solutions and services for the full cybersecurity lifecycle, including consulting services, assessment and compliance, engineering and evaluation, operations, and penetration testing.
With use cases including cyber risk management, risk remediation management, security authorization, compliance management, audit management, inventory management, vulnerability management, continuous compliance monitoring, and vendor and supply chain risk management, Xacta administers the key elements of more than 100 leading regulations and policies for IT security compliance, including the National Institute of Standards and Technology ("NIST") Risk Management Framework ("RMF"), RMF for Department of Defense ("DoD") IT, Committee on National Security Systems Instruction No. 1253, NIST Cybersecurity Framework, the Federal Risk and Authorization Management Program and the DoD's Cybersecurity Maturity Model Certification ("CMMC") program. ◦ Cybersecurity services : proven solutions and services for the full cybersecurity lifecycle, including consulting services, assessment and compliance, engineering and evaluation, operations, and penetration testing.
Marketing We build market awareness of Telos and our solutions through a variety of marketing programs, including regular briefings with industry analysts, public relations activities, government relations initiatives, web seminars, trade show exhibitions, speaking engagements, and website marketing.
Marketing We build market awareness of Telos and our solutions through a variety of marketing programs, including regular briefings with industry analysts, public relations activities, government relations initiatives, web seminars, trade show exhibitions, speaking engagements, and digital marketing.
See Item 1A, "Risk Factors", for discussion of risks related to our global climate-related risks and ESG matters. Company Website and Available Information Our corporate headquarters is located at 19886 Ashburn Road, Ashburn, Virginia 20147, and our telephone number is (703) 724-3800. Our website can be accessed at www.telos.com, which contains information about our Company and operations.
See Item 1A, "Risk Factors," for discussion of risks related to global climate and ESG matters. 11 Table of Contents Company Website and Available Information Our corporate headquarters is located at 19886 Ashburn Road, Ashburn, Virginia 20147, and our telephone number is (703) 724-3800. Our website can be accessed at www.telos.com, which contains information about our Company and operations.
In June 2022, ONYX won first place in the overall competition of the Mobile Fingerprint Information Technology Challenge hosted by the NIST. We maintain government certifications and designations that distinguish Telos ID, including TSA PreCheck ® enrollment provider, Designated Aviation Channeling provider, FBI-approved Channeler, and Financial Industry Regulatory Authority Electronic Fingerprint Submission provider.
In June 2022, ONYX won first place in the overall competition of the Mobile Fingerprint Information Technology Challenge hosted by the NIST. We maintain government certifications and designations that distinguish Telos ID, including TSA PreCheck ® enrollment provider, Aviation Channeling Services ("ACS") provider, FBI-approved Channeler, and Financial Industry Regulatory Authority Electronic Fingerprint Submission provider.
This commitment is reflected in our core values: Always with integrity, at Telos we: Build trusted relationships, Work hard together, Design and deliver superior solutions, and Have fun doing it. 9 Table of Contents These values are woven throughout the fabric of Telos. They are reflected in our hiring practices, reinforced regularly, and reviewed during appraisals.
This commitment is reflected in our core values: Always with integrity, at Telos we: Build trusted relationships, Work hard together, Design and deliver superior solutions, and Have fun doing it. These values are woven throughout the fabric of Telos. They are reflected in our hiring practices, reinforced regularly, and reviewed during appraisals.
We also offer secure mobility professional services, such as consulting and deployment services, to deliver integrated communications solutions that meet even the most complex needs of civilian, defense, and commercial customers. • Network Management and Defense: services for operating, administrating, and defending complex enterprise networks and for defensive cyber operations.
We also offer secure mobility professional services, such as consulting and deployment services, to deliver integrated communications solutions that meet even the most complex needs of civilian, defense, and commercial customers. 7 Table of Contents • Network Management and Defense: services for operating, administrating, and defending complex enterprise networks and services for defensive cyber operations.
IDTrust360 is the only commercially owned and operated platform on the market with direct interfaces to the Federal Bureau of Investigation's ("FBI") criminal records, Department of Homeland Security's ("DHS") terrorist watch list service, U.S. Department of Treasury's pay.gov, other government identity risk management systems, and numerous commercial identity, intelligence, and risk-based data sources.
IDTrust360 is a commercially owned and operated platform with direct interfaces to the Federal Bureau of Investigation's ("FBI") criminal records, Department of Homeland Security's ("DHS") terrorist watch list service, U.S. Department of Treasury's pay.gov, other government identity risk management systems, and numerous commercial identity, intelligence, and risk-based data sources.
We believe that we are well-positioned to sell our capabilities into a dynamic and growing commercial opportunity set and to innovate to address emerging and unique requirements. For example, we have leveraged core Xacta functionality to meet the needs of large financial services and customer relationship management firms.
We believe that we are well-positioned to sell our capabilities into a dynamic and growing commercial opportunity set and will continue innovating to address emerging and unique requirements. For example, we have leveraged core Xacta functionality to meet the needs of large financial services and customer relationship management firms.
Diversity and Inclusion We value diversity and inclusion and are committed to providing a work environment that is free of discrimination and harassment, where our employees can do their best work, bring their whole self to work, feel supported and in turn support others.
Diversity and Inclusion We value diversity and inclusion and are committed to providing a work environment free of discrimination and harassment, where our employees can do their best work, bring their whole selves to work, feel supported, and in turn, support others.
We are actively engaged with federal customers to integrate vital event records, government identification document records, and other fingerprint-based biometric records hosted across multiple agencies. This enables Telos to offer NIST-compliant digital identity services aligned with federal security mandates. ◦ ONYX ® : the world's first, most widely deployed, and most accurate touchless fingerprint biometric for mobile devices.
We actively engage with federal customers to integrate vital event records, government identification document records, and other fingerprint-based biometric records hosted across multiple agencies. This enables Telos to offer NIST-compliant digital identity services aligned with federal security mandates. ◦ ONYX ® : the world's first and most accurate touchless fingerprint biometric solution for mobile devices.
Last year, Telos announced a collaboration with IBM Security as part of IBM's Active Governance Services, which allows enterprises to operationalize and automate activities and solve challenges in cybersecurity compliance and regulatory risks.
In the past years, Telos announced a collaboration with IBM Security as part of IBM's Active Governance Services, which allows enterprises to operationalize and automate activities and solve challenges in cybersecurity compliance and regulatory risks.
Xacta delivers automated cyber risk and compliance management solutions to large commercial and government enterprises. Across the United States ("U.S.") federal government, Xacta is the de facto commercial cyber risk and compliance management solution.
Xacta delivers automated cyber risk and compliance management solutions to large commercial and government enterprises. Across the United States ("U.S.") federal government, Xacta is a leading commercial cyber risk and compliance management solution.
Sales and Marketing As part of the sales and channel program investments, we are also making corporate investments in functional areas such as contracts, solution architects, lead generation tools, and operations to ensure our back-office systems and processes scale for business growth.
Sales and Marketing As part of our sales and marketing investments, we also make corporate investments in functional areas such as contracts, solution architects, lead generation tools, and operations to ensure our back-office systems and processes scale for business growth.
We are making additional investments in these types of activities and targeting additional vertical-specific content creation, targeted advertising and brand awareness campaigns, social media campaigns, and search engine marketing. Our sales team works hand in hand with our marketing team and various subject matter experts to develop targeted awareness campaigns for our various solutions that generate valuable leads and contacts.
We will continue investing in these activities and targeting additional vertical-specific content creation, targeted advertising and brand awareness campaigns, social media campaigns, and search engine marketing. Our sales team works hand in hand with our marketing team and various subject matter experts to develop targeted awareness campaigns for our various solutions that generate valuable leads and contacts.
Government Contracts and Regulation Our business is heavily regulated and we must comply with and are affected by laws and regulations relating to the formation, administration and performance of U.S. government and other contracts.
See "Risk Factors — We are subject to the seasonality of U.S. government spending." Government Contracts and Regulation Our business is heavily regulated and we must comply with and are affected by laws and regulations relating to the formation, administration and performance of U.S. government and other contracts.
The Telos ACA offering is positioned to supply unique data sets to government agencies to allow them to better inform themselves as they defend and protect their networks and assets.
The Telos ACA offering is positioned to supply unique data sets to government agencies, allowing them to be better informed as they defend and protect their networks and assets.
We understand that a range of complementary capabilities may be needed to solve a single challenge, and we also recognize when a single solution might address multiple challenges. Our security solutions span across these three domains: Cybersecurity, Cloud Security and Enterprise Security. Business Segments We conduct our business through two reportable and operating segments: Security Solutions and Secure Networks.
We understand that a range of complementary capabilities may be needed to solve a single challenge, and we also recognize when a single solution might address multiple challenges. Our security solutions span these three domains: cybersecurity, cloud security and enterprise security.
These customers have a number of subsidiary agencies that have separate budgets and procurement functions. Our contracts may be with the highest level of these agencies or with the subsidiary agencies of these customers.
Department of State, the FBI, and the Department of Health and Human Services. These customers have a number of subsidiary agencies with separate budgets and procurement functions. Our contracts may be with the highest level of these agencies or with the subsidiary agencies of these customers.
For example, Telos AMHS is a web-centric system that replaced legacy capabilities like communications centers for the purpose of executing operational orders (through organizational messaging) across the U.S. federal government and around the world.
Recognizing the limitations of their legacy systems, organizations are replacing existing systems and processes with Telos solutions. For example, Telos AMHS is a web-centric system that replaced legacy capabilities like communications centers for the purpose of executing operational orders (through organizational messaging) across the U.S. federal government and around the world.
Security Solutions represented 55.5%, 51.0% and 65.2% of total revenues for fiscal years 2022, 2021, and 2020, respectively. 5 Table of Contents • Information Assurance: ◦ Xacta ® : a premier platform for enterprise cyber risk management and security compliance automation, delivering security awareness for systems in the cloud, on-premises, and in hybrid and multi-cloud environments.
Security Solutions represented 53.3% and 55.5% of total revenues for fiscal years 2023 and 2022, respectively. The Security Solutions segment offers the following solutions and services: • Information Assurance: ◦ Xacta ® : a premier platform for enterprise cyber risk management and security compliance automation, delivering security awareness for systems in the cloud, on-premises, and in hybrid and multi-cloud environments.
While we believe that our employee population is gender and ethnically diverse for our industry and operating markets, with approximately 27% of our global population self-identifying as female and approximately 29% self-identifying as underrepresented minorities, our objective is to continue to improve our hiring, development, training, advancement, and retention of diverse talent and to foster an inclusive environment at Telos.
While we believe that our employee population is gender and ethnically diverse for our industry and operating markets, with approximately 25% of our global population self-identifying as female and approximately 38% self-identifying as underrepresented minorities, our objective is to continue to improve our hiring, development, training, advancement, and retention of diverse talent and to foster an inclusive environment at Telos. 10 Table of Contents Seasonality We generally experience seasonality due to our key customers' fiscal year ends and procurement cycles.
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 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 with confidence in their security and privacy. Our mission is to protect our customers' people, information, and digital assets with offerings for cybersecurity, cloud security, and enterprise security.
Our security engineers and subject matter experts assess our customers' cybersecurity environments and design, engineer, and operate systems needed to strengthen their cybersecurity postures. Our cloud solutions leverage the specialized skills and experience needed to help our customers plan, engineer, execute, and accelerate secure cloud migrations while assuring ongoing management and security of enterprise cloud technology environments.
Our cloud solutions leverage the specialized skills and experience needed to help our customers plan, engineer, execute, and accelerate secure cloud migrations while assuring ongoing management and security of enterprise cloud technology environments.
Secure Networks represented 44.5%, 49.0% and 34.8% of total revenues for the years ended December 31, 2022, 2021, and 2020, respectively. • Secure Mobility: solutions for business and government that enable remote work and minimize operational and security concerns across and beyond the enterprise.
Secure Networks represented 46.7% and 44.5% of total revenues for the years ended December 31, 2023 and 2022, respectively. These are our solutions and services in our Secure Networks segment: • Secure Mobility: solutions for business and government that enable remote work and minimize operational and security concerns across and beyond the enterprise.
Cybersecurity, cloud security, and enterprise security of the modern organization share much in common, yet also call for a diverse range of skills, capabilities, and experience in order to meet the requirements of security-conscious customers.
Ransomware, insider threats, cybercrime, and advanced persistent threats continue to menace public and private enterprises across all industries. Cybersecurity, cloud security, and enterprise security of the modern organization share much in common, yet also call for a diverse range of skills, capabilities, and experience in order to meet the requirements of security-conscious customers.
Security Solutions Segment: The Security Solutions segment focuses on cybersecurity, cloud, and identity solutions. Cybersecurity solutions help our customers ensure the ongoing security, integrity and compliance of their on-premises and related cloud-based systems by reducing threats and vulnerabilities to foil cyber adversaries before they can attack.
Cybersecurity solutions help our customers ensure the ongoing security, integrity and compliance of their on-premises and related cloud-based systems by reducing threats and vulnerabilities to foil cyber adversaries before they can attack. Our security engineers and subject matter experts assess our customers' cybersecurity environments and design, engineer, and operate systems needed to strengthen their cybersecurity postures.
Telos AMHS is used by military field operatives for critical communications on the battlefield using the Defense Information System Agency's Organizational Messaging Service and its specialized communications protocols. Telos AMHS is also used by the intelligence community for timely situational awareness and assessment reporting utilizing the Director of National Intelligence's Information Transport Service, Organizational Messaging data standards and computing infrastructure.
Telos AMHS is also used by the Intelligence Community ("IC") for timely situational awareness and assessment reporting utilizing the Director of National Intelligence's Information Transport Service, Organizational Messaging data standards and computing infrastructure.
We have also leveraged our U.S. federal government identity management qualifications to improve the speed and accuracy of vetting results for more than 100 airports, air carriers, and general aviation across the country.
We have also leveraged our U.S. federal government identity management qualifications to improve the speed and accuracy of vetting results for more than 100 airports, air carriers, and general aviation across the country. We intend to continue innovating and developing additional offerings for cloud, mobile, and Internet of Things ("IoT") devices. • Target and replace inefficient legacy products .
Our consolidated revenues are 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.
Our consolidated revenues are 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 and local governments, and commercial markets. Our security solutions are the product of the extensive labor investment in developing our intellectual property and highly sophisticated software technology.
The operating results of these classified programs are included in our consolidated financial statements. These regulations and risks are described in more detail below under "Risk Factors" in this Annual Report on Form 10-K.
The operating results of these classified programs are included in our consolidated financial statements. These regulations and risks are described in more detail below under "Risk Factors" in this Annual Report on Form 10-K. Environmental, Social, and Governance Matters We strive to operate our business in an environmentally responsible manner and in support of sustainable long-term financial performance.
We have historically focused on the U.S. federal government and believe that we are an established leader in providing security solutions to federal agencies, including DoD and the IC. Nonetheless, we believe the U.S. federal government represents a significant growth opportunity, and we expect to continue to invest in products to serve additional customers in this vertical.
We have historically focused on the U.S. federal government and believe we are an established leader in providing security solutions to federal agencies, including DoD and the IC.
We have a variety of upsell opportunities that allow us to expand our presence within a customer account. For example, there are various complementary Xacta features that build on each other and are sold separately.
We have a variety of upsell opportunities that allow us to expand our presence within a customer account. For example, various complementary Xacta features build on each other and are sold separately. Much of our business is awarded through the submission of formal competitive bids; however, a portion of our revenue is awarded through limited competition or sole-source contracts.
Telos provides an extensive range of wired and wireless, fixed and deployable, classified and unclassified voice, data, and video secure network solutions and services to support defense and civilian missions.
Telos provides an extensive range of wired and wireless, fixed and deployable, classified and unclassified voice, data, and video secure network solutions and services to support defense and civilian missions. Capabilities include network design, operations, and sustainment, system integration and engineering, network security and compliance, deployable comms, service desk, defensive cyber operations, and program management.
Secure Networks Segment: Secure Networks focuses on enterprise security. The Secure Networks segment provides secure networking architectures and solutions to the U.S. DoD, the federal IC, and other federal governmental agencies. Our net-centric solutions enable collaboration and connectivity to increase efficiency, reduce costs, and improve mission outcomes.
Secure Networks Segment: With a focus on enterprise security, the Secure Networks segment provides secure networking architectures and solutions to our customers through secure mobility solutions and network management and defense services. Our net-centric solutions enable collaboration and connectivity to increase efficiency, reduce costs, and improve mission outcomes.
Seasonality We generally experience seasonality due to the fiscal year ends and procurement cycles of our key customers. We derive a substantial portion of our revenue from the U.S. government whose fiscal year ends on September 30 of each year, which may favorably impact our third fiscal quarter.
We derive a substantial portion of our revenue from the U.S. government, whose fiscal year ends on September 30 of each year, which may favorably impact our third fiscal quarter. In addition, our quarterly results may be impacted by the number of working days in a given quarter.
We believe that a targeted and opportunistic acquisition strategy will be a force multiplier for our organic growth opportunity.
We believe that a targeted and opportunistic acquisition strategy will be a force multiplier for our organic growth opportunity. Customers Our primary customers include the U.S. federal government, large commercial businesses, state and local governments, and international customers.
Our Mission Our mission is to protect our customers' people, systems, and vital information assets with offerings for cybersecurity, cloud security, and enterprise security. In the current global environment, our mission is more critical than ever. The emergence of each new information and communications technology ("ICT") introduces new vulnerabilities, as security is still too often overlooked in solution development.
In the current global environment, our mission is more critical than ever. The emergence of each new information and communications technology ("ICT") introduces new vulnerabilities, as security is still too often overlooked in solution development. Networks and applications meant to enhance productivity and profitability often jeopardize an organization due to poor planning, misconfiguration, or an unknown gap in security.
Much of our business is awarded through the submission of formal competitive bids, however, a significant portion of our revenue is awarded through limited competition or sole-source contracts. Partner Organizations Our sales team works with partner organizations like AWS, Microsoft Azure, and Oracle to pursue mutual customers and leverage their marketplace platforms and marketing programs.
Partner Organizations Our sales team works with partner organizations like AWS, Microsoft Azure, and Oracle to pursue mutual customers and leverage their marketplace platforms and marketing programs.
We invest substantial resources in research and development to innovate new solutions, enhance our offerings and grow opportunities by developing new features and modules for our existing platforms. We are committed to and view our continued investment in research and development as a key factor to our long-term business success.
Research and Development We developed proprietary software-based solutions in various platforms related to security and cyber risk management. We invest substantial resources in research and development to innovate new solutions, enhance our offerings and grow opportunities by developing new features and modules for our existing platforms.
We are adding commission incentivized, sales personnel aligned to market segments focused on commercial industry and whitespace U.S. federal, IC and DOD market areas. We are concentrated on Xacta and Telos Ghost sales efforts in the financial services, insurance, healthcare, energy, and other highly regulated critical infrastructure markets.
Sales We expanded our sales capability for markets in which we are well known, such as the U.S. government, certain critical infrastructure sectors, and certain commercial verticals such as healthcare and financial services. We added commission incentivized sales personnel aligned to market segments focused on the U.S. federal government, the IC and the DoD market areas.
Our identity solutions deliver digital identity, biometric, and nationwide enrollment services and address Know Your Customer and identity management challenges for enterprises working within regulated and critical infrastructure environments.
Our identity solutions deliver digital identity, biometric, and nationwide enrollment services and address Know Your Customer and identity management challenges for enterprises working within regulated and critical infrastructure environments. Our secure messaging services are used to securely transmit messages that provide direction and establish a formal position, commitment, or responses requiring the authority of an organization.
Once our security solutions are embedded in our customers' technology infrastructure, these customer relationships often expand and lead to us providing additional security solutions. Our Growth Strategies We are pursuing multiple strategies in order to grow the Company, in both our commercial and government business end markets. Our key strategies are: • Broaden reach within the U.S. federal government .
We ensure the consistency and continuity of network management services required in today's mission-critical network environments. Our Growth Strategies We are pursuing multiple strategies in order to grow the Company in both our commercial and government business end markets. Our key growth strategies include: • Broaden reach within the U.S. federal government .
As a result, we seek to remain competitive in terms of salary structures, incentive compensation programs, fringe benefits, opportunities for growth, and individual recognition and award programs. Our management team is committed to maintaining a corporate culture that fosters mutual respect and job satisfaction for our people while delivering innovation and value to customers and shareholders.
Telos places a strong emphasis on supporting our people. Our management team is committed to maintaining a corporate culture that fosters mutual respect and job satisfaction for our people while delivering innovation and value to customers and shareholders.
Human Capital Resources As of December 31, 2022, we had 738 employees, of whom approximately 90.4% are located in the United States. Approximately 413 of our U.S.-based employees held U.S. security clearances, and 23% self-identify as veterans of U.S. military service. None of our employees are represented by a labor union or covered by a collective bargaining agreement.
Approximately 377 of our U.S.-based employees held U.S. security clearances, and 26% self-identify as veterans of U.S. military service. Our employees are not represented by a labor union or covered by a collective bargaining agreement. We have not experienced any work stoppages, and we consider relations with our employees to be good.
With a pedigree in information and cybersecurity that spans three decades, our certified personnel provide services and solutions that deliver continuous security assurance for business, government, and critical infrastructure. • Secure Communications: ◦ Telos Ghost ® : a virtual obfuscation network-as-a-service with encryption and managed attribution capabilities to ensure the safety and privacy of people, information, and resources on the network.
With a pedigree in information and cybersecurity that spans three decades, our certified cybersecurity personnel provide services and solutions that deliver continuous security assurance for business, government, and critical infrastructure. • Secure Communications: ◦ Telos Automated Message Handling System ("Telos AMHS"): web-based organizational message distribution and management for mission-critical communications; the recognized gold standard for organizational messaging in the U.S. government.
Information exchanged at this level and for these purposes requires operational requirements for time-sensitive, guaranteed delivery, precedence, high availability, and reliability. ◦ Telos Advanced Cyber Analytics ("ACA") : a solution-as-a-service that delivers timely, accurate, actionable intelligence at speed and scale to illuminate threats to enterprise assets.
Information exchanged at this level and for these purposes requires operational requirements for time-sensitive, guaranteed delivery, precedence, high availability, and reliability. ◦ Telos Advanced Cyber Analytics ("Telos ACA") : a solution that is a dynamic, proprietary threat feed source of global Internet Protocol ("IP") addresses known to engage in potentially malicious activity, including mass scanning and generic opportunistic attacks.
Telos Ghost is currently used by DoD, the Intelligence Community ("IC") and commercial organizations for a variety of highly sensitive applications, including cyber threat research, open-source intelligence, supply chain security vulnerability assessment, worldwide investigative and recovery services, and hiding critical assets. ◦ Telos Automated Message Handling System ("AMHS"): web-based organizational message distribution and management for mission-critical communications; the recognized gold standard for organizational messaging in the U.S. government.
Telos Ghost is used for a variety of highly sensitive applications, including cyber threat research, open-source intelligence, supply chain security vulnerability assessment, worldwide investigative and recovery services, and hiding critical assets. • Digital Identity Solutions: ◦ IDTrust360 ® : an enterprise digital trusted identity risk platform for extending flexible hybrid cloud identity services.
These segments enable the alignment of our strategies and objectives and provide a framework for the timely and rational allocation of resources within the line of business. Additional information regarding our segments is presented in Note 21 - Seg ment Information to the consolidated financial statements at Item 8 of this Form 10-K.
Additional information regarding our segments is presented in Note 1 8 – Segment Information to the consolidated financial statements at Item 8 of this Form 10-K. 5 Table of Contents Security Solutions Segment: The Security Solutions segment focuses on cybersecurity, cloud, identity solutions, and secure messaging.
The Company publicly reports certain climate change-related information via CDP and formed an Environmental, Social and Governance ("ESG") task force to address ESG matters. The Board of Directors authorized the Nominating and Corporate Governance Committee to oversee the Company's ESG efforts, which includes climate-related risks and opportunities.
By making these disclosures, however, we have not concluded that the information disclosed is material to our business. The Board of Directors authorized the Nominating and Corporate Governance Committee to oversee the Company's ESG efforts, which include climate-related risks and opportunities.
Our commercial customers include leading enterprises such as Amazon.com, Inc., Zscaler and Salesforce.com, Inc. 7 Table of Contents Our security solutions are the product of the extensive labor investment in developing our intellectual property and highly sophisticated software technology. These investments helped us expand with commercial customers, and win additional contracts within the military, the IC and civilian government agencies.
These investments helped us expand with commercial customers, and win additional contracts within the military, the IC and civilian government agencies.
Our federal government customers include the DoD, the Central Intelligence Agency and multiple other agencies within the IC, Defense Manpower Data Center, and multiple civilian agencies, including the DHS, the U.S. Department of State, the FBI, Department of Health and Human Services, and U.S. Census Bureau ("Census").
Once our security solutions are embedded in our customers' technology infrastructure, these customer relationships often expand and lead to opportunities to provide additional security solutions. 8 Table of Contents Our U.S. federal government customers include the DoD, the Central Intelligence Agency, and multiple other agencies within the IC, and multiple civilian agencies, including but not limited to, the DHS, the U.S.
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We completed our initial public offering ("IPO") on November 19, 2020, and a follow-on offering on April 6, 2021. In addition, on July 30, 2021, we acquired the assets of Diamond Fortress Technologies ("DFT") and its wholly-owned subsidiaries.
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Fiscal year 2023 was a transition year for Telos, with a focus on streamlining our operations while rebuilding and growing our revenue base by generating new business wins.
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Networks and applications meant to enhance productivity and profitability often jeopardize an organization due to poor planning, misconfiguration, or an unknown gap in security. Ransomware, insider threats, cybercrime, and advanced persistent threats continue to menace public and private enterprises across all industries.
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Our 2023 business development priorities were to: • Reorganize internally to consolidate and centralize business development resources; • Add new talent to drive execution of solution development and new business generation; • Maximize existing strategic partnerships for market expansion; and • Increase our opportunity portfolio and quality of contract vehicles.
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It enables organizations to detect malicious activity earlier and to uncover and identify previously unknown attacks and new malicious behavior. Further, it assists in attributing events and provides sophisticated and comprehensive analytics without expensive overhead.
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To improve our path forward, we planned to: • Optimize our solution portfolio through accelerated plays on various programs and enhance program management; • Expand our pipeline and strengthen proposals for new businesses; and • Engage all employees through synergy, setting performance goals, and improving benefits.
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With fully automated external data collection and assessment, Telos ACA determines patterns of behavior exhibited by threat actors, and provides the necessary information to reduce vulnerabilities within the IT infrastructure before attackers can exploit them. 6 Table of Contents • Digital Identity Solutions: ◦ IDTrust360 ® : an enterprise-class digital trusted identity risk platform for extending flexible hybrid cloud identity services.
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Business Segments We conduct our business through two reportable and operating segments: Security Solutions and Secure Networks. These segments enable the alignment of our strategies and objectives and provide a framework for the timely and rational allocation of resources within the line of business.
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Capabilities include network design, operations, and sustainment; system integration and engineering; network security and compliance; deployable comms; robotic process automation and other digital transformation capabilities; service desk; defensive cyber operations; and program management.
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Telos AMHS™ is used by military field operatives for critical communications on the battlefield using the Defense Information System Agency's Organizational Messaging Service and its specialized communications protocols.
Removed
We ensure the consistency and continuity of network management services required in today's mission-critical network environments. Key Customers Our customer base consists of the U.S. federal government, large commercial businesses, state and local governments, and international customers.
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Telos ACA™ allows security operation centers the advantage of being able to reduce "noisy" IP security threat alerts and thereby increase operational efficiency, the ability to potentially identify forthcoming mass exploitation events, and the ability to improve the focus of ongoing threat hunts. 6 Table of Contents Telos ACA leverages a sophisticated global sensor network of nodes that run 24/7/365 and analyzes and aggregates anomalous Internet activity in near real time.
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We intend to continue innovating and are developing additional offerings for cloud, mobile, and internet of things ("IoT") devices. • Grow our revenue and expand margins with robust sales channels . We have formed a sales organization with a vertical sales component functioning as the direct channel to a wider account universe comprised of commercial and government customers.
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Telos ACA intelligence is seamlessly and conveniently delivered as an industry-standard Structured Threat Information eXpression/Trusted Automated eXchange of Intelligence Information ("STIX/TAXII") based threat feed. STIX states the "what" of threat intelligence, while TAXII defines "how" that information is relayed. STIX and TAXII are machine-readable and, therefore, easily automated.
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This vertical is focused on quick-turn, transactional sales. We continue expanding our partner program to include a variety of channels, including resellers, integrators, and contract partners to help us gain access to new markets more quickly. For example, both Telos Ghost and Xacta are now available through various AWS and Microsoft Azure marketplaces, serving markets requiring varying levels of security.
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This allows for easy consumption into third-party security tools, where the threat feed can be used to enrich and provide relevant information related to potential malicious network activity within environments.
Removed
The growth of our sales team and the accelerated expansion of these channel partner initiatives are anticipated to drive revenue growth and material gross margin expansion over time. • Target and replace inefficient legacy products . Recognizing the limitations of their legacy systems, organizations are replacing existing systems and processes with Telos solutions.
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Telos ACA provides the IP, metadata, and raw data elements to improve threat hunting and eliminate threat noise. ◦ Telos Ghost ® : a virtual obfuscation network-as-a-service with encryption and managed attribution capabilities to ensure the safety and privacy of people, information, and resources on the network.
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We have expanded our sales capability for markets in which we are well known, such as the U.S. government, certain critical infrastructure sectors, and certain commercial verticals such as healthcare and financial services. 8 Table of Contents We built a dedicated channel team to include the launch of the Telos CyberProtect Partner Program.
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Nonetheless, we believe the U.S. federal government continues to represent a significant growth opportunity, and we expect to continue to invest in products and solutions to serve additional customers within the U.S. federal government.
Removed
This ecosystem includes a variety of partner types including distributors (such as DLT, a tech data company), resellers, referral partners, technology integration partners, managed service providers, consulting partners and more.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeMany of these third-party providers attempt to impose limitations on their liability for such errors, disruptions, defects, performance deficiencies, or failures, and if enforceable, we may have additional liability to our customers or third-party providers. 14 Table of Contents In the future, we may experience disruptions, failures, data loss, outages, and other performance problems with our infrastructure and cloud-based offerings due to a variety of factors, including infrastructure changes, introductions of new functionality, human or software errors, employee misconduct, capacity constraints, denial of service attacks, phishing attacks, computer viruses, malicious or destructive code, or other security-related incidents, and our disaster recovery planning may not be sufficient for all situations.
Biggest changeMany of these third-party providers attempt to impose limitations on their liability for such errors, disruptions, defects, performance deficiencies, or failures, and if enforceable, we may have additional liability to our customers or third-party providers.
We rely on subcontractors and other suppliers to provide raw materials, major components and subsystems for our products or to perform a portion of the services that we provide to our customers. Occasionally, we rely on only one or two sources of supply, which, if disrupted, could have an adverse effect on our ability to meet our commitments to customers.
We rely on subcontractors and other suppliers to provide materials, major components and subsystems for our products or to perform a portion of the services that we provide to our customers. Occasionally, we rely on only one or two sources of supply, which, if disrupted, could have an adverse effect on our ability to meet our commitments to customers.
The ongoing pandemic may adversely affect our customers' ability to perform their missions and is, in many cases disrupting their operations. It may also result in a change in spending priorities on the part of our customers, which could precipitate the cancellation, delay or deferral of programs, contracts or business opportunities.
The pandemic may adversely affect our customers' ability to perform their missions and is, in many cases disrupting their operations. It may also result in a change in spending priorities on the part of our customers, which could precipitate the cancellation, delay or deferral of programs, contracts or business opportunities.
These economic conditions can arise suddenly and the full impact of such conditions can remain uncertain at any point in time. In addition, geopolitical developments, such as the recent invasion of Ukraine by Russia, can increase levels of political and economic unpredictability globally and increase the volatility of global financial markets.
These economic conditions can arise suddenly and the full impact of such conditions can remain uncertain at any point in time. In addition, geopolitical developments, such as the invasion of Ukraine by Russia, can increase levels of political and economic unpredictability globally and increase the volatility of global financial markets.
We are dependent on a few key customer contracts for a significant portion of our future revenue, and a significant reduction in services or delay in implementation to one or more of these contracts would reduce or delay our future revenue and could materially affect our anticipated operating results.
We are dependent on a few key customer contracts for a significant portion of our future revenue, and a significant reduction in goods and services or delay in implementation to one or more of these contracts would reduce or delay our future revenue and could materially affect our anticipated operating results.
U.S. government may terminate, cancel, modify or curtail our contracts at any time prior to completion and, if we do not replace them, this may adversely affect our future revenues and could adversely impact our earnings .
U.S. government may terminate, cancel, delay, modify or curtail our contracts at any time prior to completion and, if we do not replace them, this may adversely affect our future revenues and could adversely impact our earnings .
While we have security measures in place to protect our customers and our customers' customers' data, our services and underlying infrastructure may in the future be materially breached or compromised as a result of the following: • Third-party attempts to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information to gain access to our customers' data, our data or our IT systems; • Efforts by individuals or groups of hackers and sophisticated organizations, including state-sponsored organizations or nation-states; • Cyberattacks on our internally built infrastructure; • Vulnerabilities resulting from enhancements and updates to our existing solutions; • Vulnerabilities in the products or components across the broad ecosystem that our services operate in or are dependent on; • Vulnerabilities existing within newly acquired or integrated technologies and infrastructures; • Attacks on, or vulnerabilities in, the many different underlying networks and services that power the internet that our products depend on, most of which are not under our control or the control of our vendors, partners, or customers; and • Employee or contractor errors or intentional acts that compromise our security systems.
While we have security measures in place to protect our data, the data of our customers or end-users of our services, our services and underlying infrastructure may in the future be materially breached or compromised as a result of the following: • Third-party attempts to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information to gain access to our customers' data, our data or our IT systems; • Efforts by individuals or groups of hackers and sophisticated organizations, including state-sponsored organizations or nation-states; • Cyberattacks on our internally built infrastructure; • Vulnerabilities resulting from enhancements and updates to our existing solutions; • Vulnerabilities in the products or components across the broad ecosystem that our services operate in or are dependent on; • Vulnerabilities existing within newly acquired or integrated technologies and infrastructures; • Vulnerabilities existing within third-party software or services that we employ; • Attacks on, or vulnerabilities in, the many different underlying networks and services that power the Internet that our products depend on, most of which are not under our control or the control of our vendors, partners, or customers; and • Employee or contractor errors or intentional acts that compromise our security systems.
This process is also subject to the risk of delays associated with customers' internal budgeting and other procedures for approving large capital expenditures, deploying new technologies within their networks and testing and accepting new technologies that affect key operations. As a result, the sales and implementation cycles associated with certain of our services can be lengthy.
This process is also subject to the risk of delays associated with customers' internal budgeting and other procedures for approving large capital expenditures, deploying new technologies within their networks and testing and accepting new technologies that affect key operations. As a result, the sales and implementation cycles associated with certain of our services can be difficult to predict and lengthy.
Our future success also depends in part on our ability to expand our relationship with our current customers by selling additional features and services, more subscriptions or enhanced editions of our services. This may also require increasingly sophisticated and costly sales efforts that are targeted at senior leaders.
Our future success also depends in part on our ability to expand our relationships with our current customers by selling additional features and services, more subscriptions or enhanced editions of our services. This may also require increasingly sophisticated and costly sales efforts that are targeted at senior leaders.
In the future, we may increasingly focus on such customers, including in the banking, financial services, healthcare, manufacturing, telecommunication, airlines and aerospace, insurance, retail, transportation, shipping and logistics, and energy industries, as well as other critical infrastructure industries.
In the future, we may increasingly focus on commercial customers, including in the banking, financial services, healthcare, manufacturing, telecommunication, airlines and aerospace, insurance, retail, transportation, shipping and logistics, and energy industries, as well as other critical infrastructure industries.
We will face risks associated with the growth of our business in new commercial markets and with new customer verticals, and we may neither be able to continue our organic growth nor have the necessary resources to dedicate to the overall growth of our business.
We will face risks associated with the growth of our business in new commercial markets and with new customer verticals, and we may not be able to continue our organic growth nor have the necessary resources to dedicate to the overall growth of our business.
Results may be affected by various factors, including those described in these risk factors. We cannot guarantee that our stock repurchase program will be fully implemented or that it will enhance long-term stockholder value.
Results may be affected by various factors, including those described in these risk factors. We cannot guarantee that our share repurchase program will be fully implemented or that it will enhance long-term stockholder value.
Obtaining the necessary authorizations, including any required license, may be time-consuming, is not guaranteed and may result in the delay or loss of sales opportunities. Furthermore, the U.S. export control laws and economic sanctions laws prohibit the shipment of certain products and services to U.S. embargoed or sanctioned countries, governments and persons.
Obtaining the necessary authorizations, including any required license, may be time-consuming, is not guaranteed and may result in the delay or loss of sales opportunities. 22 Table of Contents Furthermore, the U.S. export control laws and economic sanctions laws prohibit the shipment of certain products and services to U.S. embargoed or sanctioned countries, governments and persons.
Competition for skilled personnel is intense and many U.S. government programs also require contractors to have security clearances, certain of which can be difficult and time-consuming to obtain. We may not be successful in attracting and retaining qualified personnel.
Competition for skilled personnel is intense and many U.S. government programs also require contractors to have security clearances, certain of which can be difficult and time-consuming to obtain. 14 Table of Contents We may not be successful in attracting and retaining qualified personnel.
The COVID-19 pandemic disrupted the normal operations of many businesses and other organizations, including the temporary closure or scale-back of business operations and the imposition of either quarantine or remote work or meeting requirements for employees, either by government order or on a voluntary basis.
In addition, the recent COVID-19 pandemic disrupted the normal operations of many businesses and other organizations, including the temporary closure or scale-back of business operations and the imposition of either quarantine or remote work or meeting requirements for employees, either by government order or on a voluntary basis.
Moreover, as we continue to target selling our solutions and services to larger organizations, these larger organizations may demand substantial price concessions. In addition, we may need to change pricing policies to accommodate government pricing guidelines for our contracts with federal, state, local, and foreign governments and government agencies.
Moreover, as we continue to target selling our solutions and services to larger organizations, these larger organizations may demand substantial price concessions. We may also need to change pricing policies to accommodate government pricing guidelines for our contracts with federal, state, local, and foreign governments and government agencies.
In addition, as new and existing competitors introduce new products or services that compete with ours, or revise their pricing structures, we may be unable to attract new customers at the same price or based on the same pricing model as we have used historically.
Further, as new and existing competitors introduce new products or services that compete with ours, or revise their pricing structures, we may be unable to attract new customers at the same price or based on the same pricing model as we have used historically.
We may not achieve anticipated revenue growth from our sales force if we are unable to hire and develop talented sales personnel, if our new sales personnel are unable to achieve desired productivity levels in a reasonable period of time or if we are unable to retain our existing sales force.
We may not achieve anticipated revenue growth from our growth team if we are unable to hire and develop talented business development and sales personnel, if our new business development and sales personnel are unable to achieve desired productivity levels in a reasonable period of time, or if we are unable to retain our existing sales force.
In May 2022, our Board of Directors approved a stock repurchase program for the repurchase of up to $50.0 million of our outstanding shares of our common stock. As of December 31, 2022, approximately $38.7 million remained available under the stock repurchase program.
In May 2022, our Board of Directors approved a share repurchase program ("SRP") for the repurchase of up to $50.0 million of our outstanding shares of our common stock. As of December 31, 2023, approximately $38.7 million remained available under the stock repurchase program.
Our ability to increase our customer base and achieve broader market acceptance of our solutions and services will depend, to a significant extent, on our ability to perform at a high level in our sales and marketing operations and activities.
Our ability to increase our customer base and achieve broader market acceptance of our solutions and services will depend, to a significant extent, on our ability to perform at a high level in our business development, growth, sales and marketing operations and activities.
In addition, our sales process is highly dependent on the reputation of our solutions and business reputation and on positive recommendations from our existing customers.
In addition, our sales process is highly dependent on the reputation of our solutions and support and on positive recommendations from our existing customers.
The above factors may also negatively impact our ability to successfully expand into emerging market countries, where we have little or no operating experience, where it can be costly and challenging to establish and maintain operations, including hiring and managing required personnel, and difficult to promote our brand, and where we may not benefit from any first-to-market advantage or otherwise succeed.
In addition, these factors may also negatively impact our ability to successfully expand into emerging market countries, where we have little or no operating experience, where it can be costly and challenging to establish and maintain operations, including hiring and managing required personnel, and difficult to promote our brand, and where we may not benefit from any first-to-market advantage or otherwise succeed.
We depend on computing infrastructure operated by third parties to support some of our solutions and customers, and any errors, disruption, performance problems, or failure in their or our operational infrastructure could adversely affect our business, financial condition, and results of operations.
We depend on computing infrastructure operated by third parties to support some of our solutions and customers, and to help complete critical business functions. Any errors, disruption, performance problems, or failure in their or our operational infrastructure could adversely affect our business, financial condition, and results of operations.
These risks are mitigated, to the extent possible, by our ability to maintain and improve business and data governance policies, enhanced processes and internal security controls, including our ability to escalate and respond to known and potential risks.
To the extent possible, these risks are mitigated by our ability to maintain and improve information security governance policies, enhanced processes and internal security controls, including our ability to escalate and respond to known and potential risks.
These difficulties could be further amplified by the high cost of living in the Washington D.C. metropolitan area, where our headquarters and one of our other offices are located. If we fail to attract new personnel or fail to retain and motivate our current key employees or group, our business and future growth prospects could be severely harmed.
These difficulties could be further amplified by the high cost of living in the Washington D.C. metropolitan area, where our headquarters is located. If we fail to attract new personnel or fail to retain and motivate our current key employees or group, our business and future growth prospects could be severely harmed.
Sales to customers outside the United States expose us to risks inherent in international operations. We sell our services outside the U.S. and are subject to risks and challenges associated with international business.
Sales to customers outside the United States expose us to risks inherent in international operations. We sell our services outside the United States and are subject to unique risks and challenges associated with international business.
The relationship we have with our partners, and that our partners have with our customers, provides our customers with enhanced value for our solutions and services. Our agreements with our partners are generally non-exclusive; therefore, our partners may offer customer solutions from several companies, including solutions and services that compete with ours.
The relationship we have with our partners, and that our partners have with our customers, provides our customers with enhanced value for our solutions and services. 18 Table of Contents Our agreements with our partners are generally non-exclusive; therefore, our partners may offer customer solutions from several companies, including solutions and services that compete with ours.
If one or more of our subcontractors or suppliers is unable to satisfactorily provide on a timely basis the agreed-upon supplies or perform the agreed-upon services, our ability to perform our obligations as a prime contractor may be adversely affected.
If one or more of our suppliers or subcontractors is unable to satisfactorily provide on a timely basis the agreed-upon supplies or perform the agreed-upon services per its contractual obligations, our ability to perform our obligations as a prime contractor may be adversely affected, and we may be exposed to liability.
Global clim a te-related risks could negatively affect our business. There are inherent climate-related risks wherever business is conducted. Access to clean water and reliable energy in the communities where we conduct our business, whether for our offices, vendors, customers or other stakeholders, is a priority.
This may, in turn, adversely affect our results of operations and growth prospects. Global clim a te-related risks could negatively affect our business. There are inherent climate-related risks wherever business is conducted. Access to clean water and reliable energy in the communities where we conduct our business, whether for our offices, vendors, customers or other stakeholders, is a priority.
Significant judgments, estimates, and assumptions used in preparing our consolidated financial statements include, or may in the future include, those related to revenue recognition, goodwill and other long-lived assets, and income taxes. Weakened global economic conditions may adversely affect our industry, business, operating results and financial condition. Our overall performance depends in part on worldwide economic and geopolitical conditions.
Significant judgments, estimates, and assumptions used in preparing our consolidated financial statements include, or may in the future include, those related to revenue recognition, goodwill and other long-lived assets, and income taxes. 24 Table of Contents Weakened global economic conditions may adversely affect our industry, business, operating results and financial condition.
We plan to expand our operations in new commercial markets, including those where we may have limited operating experience, and may be subject to increased business, technology and economic risks that could affect our financial results. In recent periods, we have increased our focus on commercial customers.
To increase our revenue, and achieve and maintain profitability, we plan to expand our operations in new commercial markets, including those where we may have limited operating experience, and may be subject to increased business, technology and economic risks that could affect our financial results.
Our operating results could also be adversely affected by spending caps or changes in the budgetary priorities of the U.S. government, as well as delays in program starts or the award of contracts or task orders under contracts.
Our operating results could also be adversely affected by spending caps or changes in the budgetary priorities of the U.S. government, as well as delays in program starts or the award of contracts or task orders under contracts. In recent years, U.S. government appropriations have been affected by larger U.S. government budgetary issues and related legislation.
We expect that we may change our pricing model from time to time, including as a result of competition, global economic conditions, and general reductions in our customers' spending levels, pricing studies, or changes in how our solutions are broadly consumed.
From time to time, we change our pricing model in response to competition, global economic conditions, and general reductions in our customers' spending levels, pricing studies, or changes in how our solutions are broadly consumed.
Some large competitors offer capabilities in a number of markets that overlap many of the same areas in which we offer services, while certain companies are focused upon only one or a few of such markets. Some of the firms that compete with us in multiple areas include Northrop Grumman, Lockheed Martin, General Dynamics, Perspecta and Idemia.
Some large competitors offer capabilities in a number of markets that overlap many of the same areas in which we offer services, while certain companies are focused upon only one or a few of such markets. Some of the firms that compete with us in multiple areas include large, established defense contractors.
Any decisions by the U.S. government to not exercise contract options or to terminate, cancel, modify or curtail our major programs or contracts would adversely affect our revenues, revenue growth and profitability. 19 Table of Contents We are subject to the seasonality of U.S. government spending.
Any decisions by the U.S. government to not exercise contract options or to terminate, cancel, delay, modify or curtail our major programs or contracts would adversely affect our revenues, revenue growth and profitability.
The overarching complexity of privacy and data protection laws and regulations around the world pose a compliance challenge that could manifest in costs, damages, or liability in other forms as a result of failure to implement proper programmatic controls, failure to adhere to those controls, or the malicious or inadvertent breach of applicable privacy and data protection requirements by us, our employees, our business partners, or our customers.
A number of proposals are pending before U.S. federal, state, and foreign legislative and regulatory bodies that could significantly affect our business. 21 Table of Contents The overarching complexity of privacy and data protection laws and regulations around the world pose a compliance challenge that could manifest in costs, damages, or liability in other forms as a result of failure to implement proper programmatic controls, failure to adhere to those controls, or the malicious or inadvertent breach of applicable privacy and data protection requirements by us, our employees, our business partners, or our customers.
Our growth depends, in part, on the success of our strategic relationship with our partner organizations or channel partners. To grow our business, we will continue to build, grow and maintain relationships with third parties, such as partner organizations or channel partners, that provide complementary cybersecurity offerings. Identifying partners, and negotiating relationships with them, requires significant time and resources.
To grow our business, we will continue to build, grow and maintain relationships with third parties, such as partner organizations, that provide complementary cybersecurity offerings. Identifying partners, and negotiating relationships with them, requires significant time and resources.
Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances beyond our control could result in the actual operating results being different from our guidance, and the differences may be adverse and material.
Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances beyond our control could result in the actual operating results being different from our guidance, and the differences may be adverse and material.
Entering new verticals and expanding in the verticals in which we are already operating will continue to require significant resources and there is no guarantee that such efforts will be successful or beneficial to us. Historically, sales to a new customer have often led to additional sales to the same customer or similarly situated customers.
Entering new verticals and expanding in the verticals in which we are already operating will continue to require significant resources and there is no guarantee that such efforts will be successful or beneficial to us.
Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations, and policies that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our solutions. 20 Table of Contents These existing and proposed laws and regulations can be costly to comply with and can make our solutions and services less effective or valuable, delay or impede the development of new products, result in negative publicity, increase our operating costs, require us to modify our data handling practices, limit our operations, impose substantial fines and penalties, require significant management time and attention, or put our data or technology at risk.
These existing and proposed laws and regulations can be costly to comply with and can make our solutions and services less effective or valuable, delay or impede the development of new products, result in negative publicity, increase our operating costs, require us to modify our data handling practices, limit our operations, impose substantial fines and penalties, require significant management time and attention, or put our data or technology at risk.
Our systems and the third-party systems upon which we and our customers rely are also vulnerable to damage or interruption from catastrophic occurrences such as earthquakes, floods, fires, power loss, telecommunication failures, cybersecurity threats, terrorist attacks, social unrest, natural disasters, public health crises, geopolitical and similar events, or acts of misconduct.
Our systems and the third-party systems, upon which we and our customers rely, are also vulnerable to damage or interruption from catastrophic occurrences, telecommunication failures, cybersecurity threats, social unrest, geopolitical and similar events, or acts of misconduct.
A failure to attract, train, retain and motivate key and skilled employees, including key members of our management team, would adversely affect our ability to execute our strategy and may disrupt our operations. Our success depends upon the continued services of our highly qualified and experienced executive officers and other key members of management.
A failure to attract, train, retain and motivate key and skilled employees, including key members of our management team, would adversely affect our ability to execute our strategy and may disrupt our operations. Our business relies heavily upon the expertise and services of our employees.
It is important that our existing customers renew their subscriptions or contracts for our solutions and services when existing contract terms expire, in order for us to maintain or improve our results of operations.
To continue to maintain and grow our business, it is important that our existing customers renew their subscriptions or contracts for our solutions and services when existing contract terms expire.
The loss of, or our inability to obtain or maintain, any of these technology licenses could delay the introduction of new products or services until equivalent technology, if available, is identified, licensed and integrated.
The loss of, or our inability to obtain or maintain, any of these technology licenses could delay the introduction of new products or services until equivalent technology, if available, is identified, licensed and integrated. The inability to set optimal pricing structures for our solutions and services could adversely impact our business, financial condition and results of operations.
Although we have developed systems and processes designed to protect our customers' and our customers' customers' sensitive data, as well as our data, we can provide no assurances that such measures will provide absolute security. In the normal course of business, we are the target of malicious cyberattack attempts.
Although we have developed systems and processes designed to assess, identify, and manage material cybersecurity risks, we can provide no assurances that such systems and processes will provide absolute security. In the normal course of business, we are the target of malicious cyberattack attempts.
In addition, some of our contracts have provisions relating to cost controls and audit rights, and if we fail to meet the terms specified in those contracts, we may not realize their full benefits. Lower earnings caused by cost overruns or poor cost controls would have a negative impact on our results of operations.
In addition, some of our contracts have provisions relating to cost controls and audit rights, and if we fail to meet the terms specified in those contracts, we may not realize their full benefits.
If government funding relating to our contracts with the U.S. government becomes unavailable, or is reduced or delayed, or planned orders are reduced, our contracts or subcontracts may be terminated or adjusted by the U.S. government or the prime contractor.
The programs we participate in must compete with other programs and policy imperatives during the budget and appropriations process. If government funding relating to our contracts with the U.S. government becomes unavailable, or is reduced or delayed, or planned orders are reduced, our contracts or subcontracts may be terminated or adjusted by the U.S. government or the prime contractor.
Generally, our customer contracts are either fixed-priced or cost-reimbursable. Under fixed-price contracts, which represented approximately 82.9% of our 2022 revenues, we receive a fixed price irrespective of the actual costs we incur and, consequently, we carry the burden of any cost overruns.
Under fixed-price contracts, which represented approximately 78.5% of our 2023 revenues, we receive a fixed price irrespective of the actual costs we incur and, consequently, we carry the burden of any cost overruns.
Actual results could differ materially from those projected in the forward-looking statements contained in this Form 10-K as a result of the risk factors discussed below and elsewhere in this Form 10-K.
Actual results could differ materially from those projected in the forward-looking statements contained in this Form 10-K as a result of the risk factors discussed below and elsewhere in this Form 10-K. Business and Operational Risks Our business could be negatively affected by cyber or other information security breaches, threats or other disruptions.
As we expand into and within new and emerging markets and heavily regulated industry verticals, we will likely face additional regulatory scrutiny, risks, and burdens from the governments and agencies which regulate those markets and industries.
As we expand into and within new and emerging markets and heavily regulated industry verticals, we will likely face additional regulatory scrutiny, risks, and burdens from the governments and agencies which regulate those markets and industries. Failure to deliver high-quality technical support services may adversely affect our relationships with our customers and our financial results.
From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives. Such changes in our executive management team may be disruptive to our business.
Our success depends upon the continued services of our highly qualified and experienced executive officers and other key members of management. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives. Such changes in our executive management team may be disruptive to our business.
The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors.
The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. We do not accept any responsibility for any projections or reports published by any such third parties.
In addition, any negative publicity arising from these disruptions could harm our reputation and brand and adversely affect our business. Furthermore, our solutions are, in many cases, important or essential to our customers' operations, including in some cases, their cybersecurity or oversight and compliance programs, and subject to service level agreements.
Furthermore, our solutions are, in many cases, important or essential to our customers' operations, including in some cases, their cybersecurity or oversight and compliance programs, and subject to service level agreements.
A failure to maintain our relationships with our third-party providers (or obtain adequate replacements), and to receive services from such providers that do not contain any material errors or defects, could adversely affect our ability to deliver effective products and solutions to our customers and adversely affect our business and results of operations.
A failure to maintain our relationships with our third-party providers (or obtain adequate replacements), and to receive services from such providers that do not contain any material errors or defects, could adversely affect our ability to deliver effective products and solutions to our customers and adversely affect our business and results of operations. 16 Table of Contents We depend on third parties for certain operational services and components of our products in order to fully perform under our contracts, and the failure or disruption of a third party to perform these services could have an adverse impact on our business.
Adverse events affecting the programs subject to these contracts could also negatively affect our ability to process transactions under those contracts, which could adversely affect our revenue and the results of operations. Some of our security solutions have lengthy sales and implementation cycles, which could significantly impact our results of operations if projected orders are not realized .
Adverse events affecting the programs subject to these contracts could also negatively affect our ability to process transactions under those contracts, which could adversely affect our revenue and the results of operations.
We market the majority of our security solutions directly to U.S. government customers. The sale and implementation of our services to these entities typically involves a lengthy education process and a significant technical evaluation and commitment of capital and other resources.
The sale and implementation of our services to these entities typically involves a lengthy education process and a significant technical evaluation and commitment of capital and other resources, which adds uncertainty to our sales cycle.
In addition, the application, interpretation, and enforcement of these laws and regulations are often uncertain, and may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices. A number of proposals are pending before U.S. federal, state, and foreign legislative and regulatory bodies that could significantly affect our business.
In addition, the application, interpretation, and enforcement of these laws and regulations are often uncertain, and may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices.
Failure to maintain high-quality technical support, or a market perception that we do not maintain high-quality support, could adversely affect our reputation, our ability to sell our offerings to existing and prospective customers, and our business, operating results and financial position. Failure to effectively develop and execute our sales and business development capabilities will impair our ability to grow.
Failure to maintain high-quality technical support, or a market perception that we do not maintain high-quality support, could adversely affect our reputation, our ability to sell our offerings to existing and prospective customers, and our business, operating results and financial position. Our growth depends, in part, on the success of our strategic relationship with our partner organizations.
The threats we face vary from attacks common to most industries to more advanced and persistent, highly organized adversaries who target us because we protect national security information. If we are unable to protect sensitive information, our customers or governmental authorities could question the adequacy of our threat mitigation and detection processes and procedures.
The threats we face vary from attacks common to most industries to more advanced and persistent, highly organized adversaries who target us because we protect national security information.
Because we do not carry insurance for all of these possible losses, and significant recovery time could be required to resume operations, our financial condition and operating results could be materially adversely affected by such an event outside of our control. 23 Table of Contents Increased scrutiny of our environmental, social and governance responsibilities may result in additional costs and risks, and may adversely impact our reputation, employee retention, and willingness of customers and suppliers to do business with us.
Because we do not carry insurance for all of these possible losses, and significant recovery time could be required to resume operations, our financial condition and operating results could be materially adversely affected by such an event outside of our control.
Finally, the detection, prevention and remediation of known or potential security vulnerabilities, including those arising from third-party hardware or software, may result in additional financial burdens due to additional direct and indirect costs, such as additional infrastructure capacity spending to mitigate any system degradation. 12 Table of Contents Our business could be negatively affected by cyber or other security threats or other disruptions.
Finally, the detection, prevention and remediation of known or potential security vulnerabilities, including those arising from third-party hardware or software, may result in additional financial burdens due to additional direct and indirect costs, such as additional infrastructure capacity spending to mitigate any system degradation. 13 Table of Contents If our customers do not renew their subscriptions or contracts for our solutions and services and expand our relationship with them, our revenue could decline and our results of operations would be adversely impacted.
Similarly, the rate at which our customers purchase new or enhanced services depends on a number of factors, some of which are beyond our control. If customers do not renew or extend their subscriptions or contracts, do not purchase additional features or enhanced solutions, or if attrition rates increase, our business could be harmed.
Similarly, the rate at which our customers purchase new or enhanced services depends on a number of factors, some of which are beyond our control. If our efforts to maintain and expand our relationships with our existing customers are not successful, our business could be harmed.
Any of these factors could negatively impact our business and results of operations.
Although our international operations have historically generated a small proportion of our revenues, any of these factors could negatively impact our business and results of operations.
If we are unable to license third-party technology that is used in our products and services to perform key functions, the loss could have an adverse effect on our revenues. The third-party technology licenses used by us may not continue to be available on commercially reasonable terms or at all.
If we are unable to license third-party technology that is used in our products and services to perform key functions, the loss could have an adverse effect on our revenues. We currently incorporate technology that we license from third-parties, including software, into our solutions.
We depend, in part, on sales to the U.S. government, and changes in spending or budgetary priorities or delays in contract awards may significantly affect our future revenue and adversely impact our financial condition and results of operations . Our sales are highly concentrated with the U.S. government. The customer relationship with the U.S. government involves certain unique risks.
A decline in the federal budget, changes in spending or budgetary priorities of the U.S. government, a prolonged U.S. government shutdown or delays in contract awards may significantly and adversely affect our future revenues, cash flow and financial results. Our customers are substantially U.S. government agencies. The customer relationship with the U.S. government involves certain unique risks.
In addition, it is possible that others may independently develop substantially equivalent intellectual property. If we do not effectively protect our intellectual property, our business could suffer. In the future, we may have to resort to litigation to enforce our intellectual property rights, protect our trade secrets, or determine the validity and scope of the proprietary rights of others.
In addition, it is possible that others may independently develop substantially equivalent intellectual property. If we do not effectively protect our intellectual property, our business could suffer. 17 Table of Contents To protect our intellectual property rights, we may be required to spend significant resources to monitor and protect our rights.
If environmental or climate-change laws or regulations are adopted or changed that impose significant new costs, operational restrictions or compliance requirements upon our business or our products, they could increase our capital expenditures, reduce our margins and adversely affect our financial position. 24 Table of Contents In addition, our reputation and client relationships may be damaged as a result of our practices related to climate change, including our involvement, or our clients' involvement, in certain industries or projects associated with causing or exacerbating climate change, as well as any decisions we make to continue to conduct or change our activities in response to considerations relating to climate change.
In addition, our reputation and client relationships may be damaged as a result of our practices related to climate change, including our involvement, or our clients' involvement, in certain industries or projects associated with causing or exacerbating climate change, as well as any decisions we make to continue to conduct or change our activities in response to considerations relating to climate change. 25 Table of Contents Item 1B.
While this approach to expansion within new commercial markets and verticals has proven successful in the past, it is uncertain we will achieve the same penetration and organic growth in the future, and our reputation, business, financial condition, and results of operations could be negatively impacted.
Although sales to a new customer have often led to additional sales to the same customer or similarly situated customers, it is uncertain we will achieve the same penetration and organic growth in the future, and our reputation, business, financial condition, and results of operations could be negatively impacted.
We do not accept any responsibility for any projections or reports published by any such third parties. 21 Table of Contents Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the guidance furnished by us will not materialize or will vary significantly from actual results.
Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release.
If we do not compete effectively, we may suffer price reductions, reduced gross margins, and loss of market share. 18 Table of Contents Due to the competitive bidding process to obtain U.S. government contracts, both upon initial issuance and re-competition, and the likelihood of bid protest, we may be unable to achieve or sustain revenue growth and profitability.
Due to the competitive bidding process to obtain U.S. government contracts, both upon initial issuance and re-competition, and the likelihood of bid protest, we may be unable to achieve or sustain revenue growth and profitability. Many of our U.S. government contracts are awarded through a competitive bidding process upon initial award and renewal, and we expect this will continue.
In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2022, we and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting related to the design and controls over the assessment of the accounting for forfeitures of non-standard equity awards.
In fiscal year ended 2022, management identified a material weakness related to ineffective design and maintenance of controls over the assessment of the accounting for forfeitures of non-standard equity awards.
The stock repurchase program could affect the price of our common stock, increase volatility, diminish our cash reserves, and even if fully implemented may not enhance long-term stockholder value.
The stock repurchase program could affect the price of our common stock, increase volatility, diminish our cash reserves, and even if fully implemented may not enhance long-term stockholder value. 23 Table of Contents If we fail to maintain an effective system of internal control, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.
Our quarterly and annual operating results could be materially harmed if orders forecasted for a specific customer for a particular period of time are not realized. 13 Table of Contents Failure to deliver high-quality technical support services may adversely affect our relationships with our customers and our financial results.
Our quarterly and annual operating results could be materially harmed if orders forecasted for a specific customer for a particular period of time are not realized. 15 Table of Contents Failure to effectively develop and execute our sales and business development capabilities will harm our ability to grow our business.
Industry and Economic Risk The business environment in which we operate is highly competitive, and we may not be able to compete successfully against existing or future competitors. We operate in diverse industry segments. Based on our current market analysis, there is no single company or small group of companies in a dominant competitive position.
We operate in an intensely competitive market and diverse industry segment, and we expect competition to increase in the future from established businesses and new market entrants. Based on our current market analysis, there is no single company or small group of companies in a dominant competitive position.
Because many of our contracts involve advanced designs and innovative technologies, we may experience unforeseen technological difficulties and cost overruns. Under both types of contracts, if we are unable to control costs or if our initial cost estimates are incorrect, we can lose money on these contracts.
Because many of our contracts involve advanced designs and innovative technologies, we may experience unforeseen technological difficulties and cost overruns.
Our business could be adversely affected by events outside of our control, such as natural disasters, fire, power outages and other catastrophic events, and interruption by man-made problems such as wars or terrorism . We may be impacted by natural disasters, wars, terrorist attacks, power outages, health epidemics or pandemics, or other events outside of our control.
In addition, any negative publicity arising from these disruptions could harm our reputation and brand and adversely affect our business. We may be also be impacted by natural disasters, wars, terrorist attacks, power outages, public health crisis (epidemics or pandemics), or other events outside of our control.
Our business could suffer if we lost the right to use these technologies. A third party could claim that the licensed software infringes a patent or other proprietary right.
As a result, our margins and results of operations could be significantly harmed. A third-party could claim that the licensed software infringes a patent or other proprietary right.
The government market in which we primarily operate is characterized by rapidly changing technologies. The product and program needs of our government and commercial customers change and evolve regularly. Accordingly, our future performance in part depends on our ability to identify emerging technological trends, develop and manufacture competitive products, and bring those products to market quickly at cost-effective prices.
Accordingly, our future performance in part depends on our ability to identify emerging technological trends, develop and manufacture competitive products, and bring those products to market quickly at cost-effective prices. If we fail to effectively anticipate, identify and respond to those changes in a timely manner, our business could be negatively impacted.
Investor advocacy groups, institutional investors, investment funds, proxy advisory services, stockholders, and customers are increasingly focused on companies' ESG practices. Additionally, public interest and legislative pressure related to public companies' ESG practices continue to grow.
Additionally, public interest and legislative pressure related to public companies' ESG practices continue to grow.
Potential future acquisitions, strategic investments, partnerships, divestitures, mergers or joint ventures may subject us to significant risks, any of which could harm our business. Our long-term strategy may include identifying and acquiring, partnering with, investing in or merging with suitable candidates on acceptable terms, or divesting of certain business lines or activities.
We have in the past acquired, and may in the future seek to acquire or invest in complementary businesses, products or technologies to enhance our technical capabilities or otherwise offer growth opportunities. Our long-term strategy may include identifying and acquiring, partnering with, investing in or merging with suitable candidates on acceptable terms, or divesting of certain business lines or activities.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeItem 2. Properties We lease approximately 191,700 square feet of space for our corporate headquarters, integration facility, and primary service depot in Ashburn, Virginia. The lease expires in May 2029. We lease additional office space in facilities located in Maryland, Virginia, Florida, Alabama and Nevada under various leases expiring through January 2024.
Biggest changeItem 2. Properties We lease approximately 191,700 square feet of space for our corporate headquarters, integration facility, and primary service depot in Ashburn, Virginia. The lease expires in May 2029. We leased additional office space in facilities located in Maryland, Florida and Nevada under various leases expiring through July 2027.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeThe repurchase program has no expiration date and may be modified, suspended, or terminated at any time. For the fourth quarter of 2022, the Company repurchased 690,992 shares of common stock under the program for an aggregate price of $3.6 million in open market.
Biggest changeThe repurchase program has no expiration date and may be modified, suspended, or terminated at any time. There were no repurchases of common stock in fiscal year 2023, and approximately $38.7 million remained available for future common stock repurchases under the SRP as of December 31, 2023. Item 6. [Reserved] None 28 Table of Contents
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock is traded on the Nasdaq Global Market under the symbol "TLS." As of March 10, 2023, there were approximately 148 holders of record of Telos common stock.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock is traded on the Nasdaq Global Market under the symbol "TLS." As of March 8, 2024, there were approximately 152 holders of record of Telos common stock, par value $0.001 par value.
We did not sell any equity securities during the 12 months ended December 31, 2022, that were not registered under the Securities Act and were not previously disclosed on a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.
Sales of Equity Securities and Use of Proceeds There were no sales of unregistered equity securities during the three months ended December 31, 2023, that were not registered under the Securities Act and were not previously disclosed on a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.
Removed
Common Stock Purchase Activity During the Three Months Ended December 31, 2022 Period Total Number of Shares Purchased (1) (2) Average Price Paid per Share (1) Total Number of Shares Purchased as Part of Publicly Announced Repurchases Plans (1) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans (1) October 1, 2022 - October 31, 2022 91,106 $ 9.22 91,106 $ 41,477,041 November 1, 2022 - November 30, 2022 282,198 4.57 282,198 $ 40,187,217 December 1, 2022 - December 31, 2022 910,380 4.63 317,688 $ 38,715,568 Total 1,283,684 $ 5.21 690,992 (1) On May 24, 2022, the Board of Directors authorized a Share Repurchase Program, pursuant to which the Company can repurchase up to $50.0 million of issued and outstanding common stock.
Added
For information regarding securities authorized for issuance under our stock-based compensation plan, see N ote 1 2 – Stock-Base d Compensation to the Consolidated Financial Statements contained in Item 8.
Removed
(2) The Total Number of Shares Purchased includes shares withheld by the Company upon the vesting of restricted stock units to satisfy tax withholding obligations of the holders of those restricted stock units.
Added
Purchases of Equity Securities On May 24, 2022, the Board of Directors authorized a Share Repurchase Program ("SRP"), pursuant to which the Company can repurchase up to $50.0 million of issued and outstanding common stock. The shares may be repurchased on a discretionary basis from time to time through open market purchases.
Removed
For information regarding securities authorized for issuance under our stock-based compensation plan, see Note 16 - Stock-Based Compensation to the Consolidated Financial Statements contained in Item 8. 26 Table of Contents Stock Performance Graph This performance graph shall not be deemed to be "soliciting material" or to be "filed" with the SEC, and this performance graph shall not be incorporated by reference into any of Telos filings under the Securities Act or the Securities Exchange Act of 1934 and related regulations, or any other document, whether made before or after the date of this report and despite any general incorporation language contained in a filing or document (except to the extent Telos specifically incorporates this section by reference into a filing or document).
Removed
The following graph compares the total cumulative return to stockholders on our common stock since our IPO price of $17.00 on November 19, 2020 (the date our common stock commenced trading on the NASDAQ National Market) to two indices: (i) the Standard & Poor's 500 Index, and (ii) the Russell 2000 Index.
Removed
An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each index at the market close on November 18, 2020, and its relative performance is tracked quarterly through December 31, 2022. The comparisons in the graph are required by the U.S.
Removed
Securities and Exchange Commission, based on historical data and are not intended to forecast or be indicative of possible future performance of our common stock. Item 6. [Reserved] 27 Table of Contents

Item 6. [Reserved]

Selected Financial Data — reserved (removed by SEC in 2021)

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Biggest changeItem 6. [Reserved] 27 Item 7. Management ' s Discussion and Analysis of Financial Condition and Results of Operations 28 General Overview 28 Business Environment 28 Opportunities, Challenges and Risks 30 Backlog 31 Financial Overview 31 K ey Performance Measure 32 Results of Operations 32 Non-GAAP Financial Measures 33 Liquidity and Capital Resources 35 Critical Accounting Policies and Estimates 37
Biggest changeItem 6. [Reserved] 28 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 29 Business Overview 29 Business Environment 29 Backlog 31 Financial Hig hlights 31 Results of Operations 32 Key Performance Measure 33 Non-GAAP Financial Measures 33 Liquidity and Capital Resources 36 Critical Accounting Policies and Estimates 37 Item 7A.
Added
Quantitative and Qualitative Disclosures about Market Risk 39 Item 8.
Added
Consolidated Financial Statements and Supplementary Data 40 Report of Independent Registered Public Accounting Firm (PCAOB ID No. 238) 40 Consolidated Statements of Operations 42 Consolidated Statements of Comprehensive Loss 43 Consolidated Balance Sheets 44 Consolidated Statements of Cash Flows 45 Consolidated Statements of Changes in Stockholders' Equity 46 Notes to the Consolidated Financial Statements 47 1. Organization 47 2.
Added
Significant Accounting Policies 47 3. Revenue Recognition 55 4. Accounts Receivable, Net 58 5. Inventories, Net 58 6. Property and Equipment, Net 58 7. Goodwill 59 8. Intangible Assets, Net 59 9. Other Balance Sheet Components 60 1 0 . Debt and Other Obligations 61 1 1 . Stockholders' Equity 62 1 2 . Stock-Based Compensation 62 1 3 .
Added
Leases 64 1 4 . Employee Benefit Plan 65 1 5 . Income Taxes 66 1 6 . (Loss)/Earnings Per Share 68 1 7 . Related Party Transactions 68 1 8 . Segment Information 69 19 . Commitments and Contingencies 70 2 0 . Supplemental Cash F low Information 70

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeResults of Operations Consolidated Results Table MD&A 2: Consolidated Financial Results Comparison For the Year Ended December 31, 2022 2021 Change ($) (dollars in thousands) Revenue $ 216,887 $ 242,433 $ (25,546) Cost of sales 137,844 156,404 (18,560) Gross profit 79,043 86,029 (6,986) Gross margin 36.4 % 35.5 % Selling, general and administrative expenses 132,893 127,493 5,400 Selling, general and administrative expense as percentage of revenue 61.3 % 52.6 % Operating loss (53,850) (41,464) (12,386) Other income/(expense) 1,350 (921) 2,271 Interest expense (874) (777) (97) Loss before income taxes (53,374) (43,162) (10,212) (Provision for)/benefit from income taxes (54) 28 (82) Net loss $ (53,428) $ (43,134) $ (10,294) Our business segments have different factors driving revenue fluctuations and profitability.
Biggest changeMore details on these changes are presented below within our "Results of Operations" section. • The successful completion of certain programs, lower revenue on ongoing major programs and the loss of a program resulted in a decline in fiscal year 2023 compared with 2022 results, partially offset by some new program wins across the portfolio and the ramp of TSA PreCheck. • TSA announced Telos Corporation as TSA's second official TSA PreCheck enrollment and renewal provider in August 2023. • Operating costs were lower, in part, as a result of the restructuring plan announced in the first quarter of 2023. • Lower operating costs resulted in an improvement in profitability and earnings per share. 31 Table of Contents Results of Operations Consolidated Results Table MD&A 2: Consolidated Financial Results Comparison For the Year Ended December 31, 2023 2022 (dollars in thousands) Revenue $ 145,378 $ 216,887 Cost of sales (excluding depreciation and amortization) 88,892 137,051 Depreciation and amortization 3,544 793 Total cost of sales 92,436 137,844 Gross profit 52,942 79,043 Gross margin 36.4 % 36.4 % Selling, general and administrative expenses 93,257 132,893 Selling, general and administrative expense as percentage of revenue 64.1 % 61.3 % Operating loss (40,315) (53,850) Other income 6,715 1,350 Interest expense (786) (874) Loss before income taxes (34,386) (53,374) Provision for income taxes (36) (54) Net loss $ (34,422) $ (53,428) Our business segments have different factors driving revenue fluctuations and profitability.
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. 33 Table of Contents EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin EBITDA, Adjusted EBITDA 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.
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. 33 Table of Contents EBITDA, Adjusted EBITDA, EBITDA Margin and Adjusted EBITDA Margin 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 expense/(income), interest expense, provision for/(benefit from) income taxes, and depreciation and amortization. We define Adjusted EBITDA as EBITDA, adjusted for restructuring expenses and stock-based compensation expense. We define Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of total revenue.
We define EBITDA as net (loss)/income, adjusted for non-operating (income)/expense, interest expense, provision for/(benefit from) income taxes, and depreciation and amortization. We define Adjusted EBITDA as EBITDA, adjusted for stock-based compensation expense and restructuring expenses. We define EBITDA Margin as EBITDA as a percentage of total revenue.
The other source of stock-based compensation consists 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 other source of stock-based compensation consists 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.
For contracts where revenue is recognized over time, we recognized revenue based on progress towards completion of the performance obligation, using costs incurred to date relative to total estimated cost at completion to measure progress on a proportional performance basis for our contracts.
For contracts where revenue is recognized over time, we recognize revenue based on progress towards completion of the performance obligation, using costs incurred to date relative to total estimated cost at completion to measure progress on a proportional performance basis for our contracts.
Changes in costs of revenue as a percentage of revenue other than from revenue volume or cost mix are driven by changes in the compensation expense and other allocated costs and/or cumulative revenue adjustments due to changes in estimates.
Changes in costs of revenue as a percentage of revenue other than from revenue volume or cost mix are driven by changes in compensation expense and other allocated costs and/or cumulative revenue adjustments due to changes in estimates.
To that end, although we continue to offer resold products through our contract vehicles, we have focused on selling solutions and outsourcing product sales, as well as designing and delivering Telos manufactured and branded technologies. We believe our contract portfolio is characterized as having low to moderate financial risk due to the limited number of long-term fixed-price development contracts.
Although we continue to offer resold products through our contract vehicles, we have focused on selling solutions and outsourcing product sales, as well as designing and delivering Telos manufactured and branded technologies. We believe our contract portfolio is characterized as having low to moderate financial risk due to the limited number of long-term fixed-price development contracts.
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 disproportionate positive or negative impact on our results of operations in any particular period.
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.
Our actual results and timing of selected events in future periods may differ materially from those anticipated or implied in these forward-looking statements as a result of many factors, including those discussed under Item 1A, " Risk Factors ," and elsewhere in this 10-K. See also " Spe cial Note Regarding Forward-Looking Statements " at the beginning of this 10-K.
Our actual results and timing of selected events in future periods may differ materially from those anticipated or implied in these forward-looking statements as a result of many factors, including those discussed under Item 1A, " Risk Factors ", and elsewhere in this 10-K. See also " Special Note Regarding Forward-Looking Statements " at the beginning of this 10-K.
Among other limitations, each of EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income/(Loss), Adjusted EPS and Free Cash Flow does not reflect our future requirements for capital expenditures or contractual commitments, does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations, and does not reflect income tax expense or benefit.
Among other limitations, each of EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin, Adjusted Net (Loss)/Income, Adjusted EPS, Cash Gross Profit, Cash 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.
Our firm-fixed-price activities consist principally of contracts for products and services at established contract prices. Our time-and-material contracts generally allow the pass-through of allowable costs plus a profit margin.
Our firm-fixed-price activities consist primarily of contracts for products and services at established contract prices. Our time-and-material contracts generally allow the pass-through of allowable costs plus a profit margin.
GAAP, we believe the non-GAAP financial measures of EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income (Loss), Adjusted Earnings Per Share ("EPS") and Free Cash Flow are useful in evaluating our operating performance.
GAAP, we believe the non-GAAP financial measures of EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin, Adjusted Net (Loss)/Income, Adjusted Earnings Per Share ("EPS"), Cash Gross Profit, Cash Gross Margin and Free Cash Flow are useful in evaluating our operating performance.
Other companies in our industry may calculate Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income/(Loss), Adjusted EPS and Free Cash Flow differently than we do, which limits their usefulness as comparative measures.
Other companies in our industry may calculate Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net (Loss)/Income, Adjusted EPS, Cash Gross Profit, Cash Gross Margin and Free Cash Flow differently than we do, which limits their usefulness as comparative measures.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Information The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K ("10-K").
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K ("10-K").
As of December 31, 2022, there were no outstanding balances under the revolving credit facility and we were in compliance with all covenants contained in the Credit Agreement.
As of December 31, 2023, there were no outstanding balances under the revolving credit facility and we were in compliance with all covenants contained in the Credit Agreement.
Because of these limitations, neither EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income/(Loss), Adjusted EPS nor Free Cash Flow should be considered as a replacement for net (loss)/income, earnings per share or net cash flows provided by operating activities, as determined by GAAP, or as a measure of our profitability.
Because of these limitations, neither EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin, Adjusted Net (Loss)/Income, Adjusted EPS, Cash Gross Profit, Cash 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 operating activities, as determined by GAAP, or as a measure of our profitability.
Although no assurances can be given, we believe that funds generated from operations, 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.
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.
Our contracts may have a single performance obligation or multiple performance obligations. When there are multiple performance obligations within a contract, we allocate the transaction price, net of any discounts, to each performance obligation based on the standalone selling price of the product or service underlying each performance obligation.
When there are multiple performance obligations within a contract, we allocate the transaction price, net of any discounts, to each performance obligation based on the standalone selling price of the product or service underlying each performance obligation.
Adjusted Net Income and Adjusted EPS - Non-GAAP Adjusted Net 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 (loss)/income as determined by GAAP.
Adjusted Net (Loss)/Income and Adjusted EPS 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 (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.
We evaluate our results of operations by considering the drivers causing changes in these measures. We evaluate significant trends and fluctuations in our contract portfolio over time due to contract awards and completions, changes in customer requirements and changes in the volume of product and software sales.
We evaluate significant trends and fluctuations in our contract portfolio over time due to contract awards and completions, changes in customer requirements and changes in the volume of product and software sales.
Other Financing Obligations Telos entered into a Master Purchase Agreement ("MPA") with a third-party buyer ("Buyer") for $9.1 million ("Assignment Price") 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.
Other Financing Obligations In November 2022, we entered into a Master Purchase Agreement with a third-party for $9.1 million relating to software licenses under a specific delivery order with a customer resulting in proceeds from other financing obligation.
During the year ended December 31, 2022, there is no catch-up revenue recognized as a result of changes in contract estimates noted.
During the year ended December 31, 2023, there is an immaterial catch-up revenue adjustment as a result of the changes in contract estimates noted.
For 2022, 2021, and 2020, the Company's revenue derived from firm-fixed-price contracts was 82.9%, 87.6%, and 84.3%, respectively; cost-plus contracts revenue was 11.1%, 7.3%, and 8.2%, respectively; and time-and-material contracts was 6.0%, 5.1%, and 7.5%, respectively.
For 2023 and 2022, the Company's revenue derived from firm-fixed-price contracts was 78.5% and 82.9%, respectively; cost-plus contracts revenue was 12.1% and 11.1%, respectively; and time-and-material contracts was 9.3% and 6.0%, respectively.
U.S. government has increasingly relied on contracts that are subject to a competitive bidding process (including indefinite delivery, IDIQ, GSA schedules, OTA, and other multi-award contracts), which has resulted in greater competition and increased pricing pressure.
Our revenues are generated from a number of contract vehicles and task orders. The U.S. government has increasingly relied on contracts that are subject to a competitive bidding process (including IDIQ, GSA schedules, OTA, and other multi-award contracts), which has resulted in greater competition and increased pricing pressure.
Table MD&A 7: Free Cash Flow For the Year Ended December 31, 2022 2021 (in thousands) Net cash flows provided by operating activities $ 16,508 $ 7,262 Adjustments: Purchases of property and equipment (1,009) (3,201) Capitalized software development costs (12,708) (9,968) Net cash proceeds from resale of software 8,457 — Free cash flow $ 11,248 $ (5,907) Each of EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income/(Loss), Adjusted EPS and Free Cash Flow has limitations as an analytical tool, and you should not consider any of them in isolation, or as a substitute for analysis of our results as reported under GAAP.
Further, Free Cash Flow may be useful to management and investors in evaluating the Company's operating performance and liquidity. 35 Table of Contents Table MD&A 7: Free Cash Flow For the Year Ended December 31, 2023 2022 (in thousands) Net cash flows provided by operating activities $ 1,587 $ 16,508 Adjustments: Purchases of property and equipment (926) (1,009) Capitalized software development costs (14,552) (12,708) Net cash proceeds from resale of software — 8,457 Free cash flow (Non-GAAP) $ (13,891) $ 11,248 Each of EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin, Adjusted Net (Loss)/Income, Adjusted EPS, Cash Gross Profit, Cash 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.
We define Adjusted Net Income as net loss, adjusted for non-operating expense/(income), restructuring expenses and stock-based compensation expense. We define Adjusted EPS as Adjusted Net Income divided by the weighted-average number of common shares outstanding for the period.
We define Adjusted EPS as Adjusted Net (Loss)/Income divided by the weighted-average number of common shares outstanding for the period.
The Company performs the quantitative goodwill impairment test by calculating the fair value of the reporting unit and comparing it to its respective carrying value including goodwill. If the fair value is less than the carrying value, the amount of impairment expense is equal to the difference between the reporting unit's fair value and the reporting unit's carrying value.
The Company performs the quantitative goodwill impairment test by calculating the fair value of the reporting unit and comparing it to its respective carrying value including goodwill.
Changes in operating cash flows are driven by changes in cash generated through delivery of products and services, fluctuations in current assets and liabilities and the impact of changes in the timing of cash receipts or disbursements.
Changes in operating cash flows are driven by changes in cash generated through delivery of products and services, fluctuations in current assets and liabilities and the impact of changes in the timing of cash receipts or disbursements. Non-GAAP Measures In addition to our results determined in accordance with U.S.
Senior Credit Facility On December 30, 2022, Telos (as borrower) and its subsidiaries (as guarantors) entered into a Credit Agreement with JPMorgan Chase Bank, N.A. that provides for a $30.0 million senior secured revolving credit facility, with the option of issuing letters of credits thereunder and with an uncommitted expansion feature of up to $30.0 million of additional revolver capacity (the "Loan").
("Credit Agreement") that provides for a $30.0 million senior secured revolving credit facility, with the option of issuing letters of credits thereunder and with an uncommitted expansion feature of up to $30.0 million of additional revolver capacity, maturing on December 30, 2025.
We record net deferred assets to the extent we believe these assets will more likely than not be realized. The realizability of net deferred tax assets is based on all available evidence, including future taxable income projections, tax planning strategies, and reversal of taxable temporary differences.
The realizability of net deferred tax assets is based on all available evidence, including future taxable income projections, tax planning strategies, and reversal of taxable temporary differences.
Cash Flow Table MD&A 8: Cash Flows Information For the Year Ended December 31, 2022 2021 (in thousands) Net cash provided by operating activities $ 16,508 $ 7,262 Net cash used in investing activities (13,717) (19,094) Net cash (used in)/provided by financing activities (9,915) 32,349 Net change in cash, cash equivalents, and restricted cash $ (7,124) $ 20,517 Net cash provided by operating activities for the years ended December 31, 2022 and 2021 was $16.5 million and $7.3 million, respectively.
Table MD&A 8: Cash Flows Information For the Year Ended December 31, 2023 2022 (in thousands) Net cash provided by operating activities $ 1,587 $ 16,508 Net cash used in investing activities (15,478) (13,717) Net cash used in financing activities (6,151) (9,915) Net change in cash, cash equivalents, and restricted cash $ (20,042) $ (7,124) Net cash provided by operating activities for the years ended December 31, 2023 and 2022 was $1.6 million and $16.5 million, respectively, a decrease in cash inflow of $14.9 million compared with prior year.
See Note 22 - Commitment and Contingenc ies , to the Consolidated Financial Statements for further discussion of other commitment and contingencies. Critical Accounting Policies and Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported.
See Not e 1 0 – Debt and Other Ob ligations to the consolidated financial statements for a detailed discussion of our debt financing arrangements. Critical Accounting Policies and Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported.
Our revenues are generated from a number of contract vehicles and task orders. Over the past several years we have sought to diversify and improve our operating margins through an evolution of our business from an emphasis on product reselling to that of an advanced solutions technologies provider.
We expect that a majority of the business that we seek in the foreseeable future will be awarded through a competitive bidding process. Over the past several years we sought to diversify and improve our operating margins through an evolution of our business from an emphasis on product reselling to that of an advanced solutions technologies provider.
The critical accounting policies requiring estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated financial statements in fiscal year 2022 are described below.
The critical accounting policies requiring estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated financial statements in fiscal year 2023 are described below. This is not intended to be a comprehensive list of all significant accounting policies that are more fully described in the notes to consolidated financial statements contained within this report.
Recent Accounting Pronouncements See Note 2 - Significant Accounting Policies of the Consolidated Financial Statements for a discussion of recently issued accounting pronouncements. Item 7A. Quantitative and Qualitative Disclosures about Market Risk None. 39 Table of Contents
Recent Accounting Pronouncements See Note 2 - Significant Accounting Policies of the Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.
Commitments The Company does not have any other contractual obligations at December 31, 2022, except for the commitments on the existing lease obligations on various office space and equipment under non-cancelable operating and finance leases. We reported current and long term lease liabilities.
By contrast, in 2022, there was a cash inflow from the other financing obligations of $9.1 million. Commitments from Contractual Obligations The Company does not have any other material cash requirements from contractual obligations at December 31, 2023, except for the commitments on the existing lease obligations on various office space and equipment under non-cancelable operating and finance leases.
Management believes that our critical accounting policies are those that are both material to the presentation of our financial condition and results of operations and require management's most difficult, subjective and complex judgments.
Our estimates and assumptions have been prepared on the basis of the most current reasonably available information, and may change in the future as more current information is available. 37 Table of Contents Management believes that our critical accounting policies are those that are both material to the presentation of our financial condition and results of operations and require management's most difficult, subjective and complex judgments.
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.
We believe we have adequate funds on hand to execute our financial and operating strategy. Our overall financial position and liquidity are strong.
The timing of the satisfaction of performance obligations varies across our businesses due to our diverse product and service mix, customer base, and contractual terms. Significant judgment can be required in determining certain performance obligations, and these determinations could change the amount of revenue and profit recorded in a given period.
Significant judgment can be required in determining certain performance obligations, and these determinations could change the amount of revenue and profit recorded in a given period. Our contracts may have a single performance obligation or multiple performance obligations.
The Company has the right to dictate the form of these payments up until the date at which they are paid.
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 a change in estimate that would add back to Adjusted Net (Loss)/Income.
We compensate for these limitations by relying primarily on our GAAP results and using non-GAAP measures only for supplemental purposes. Liquidity and Capital Resources Our primary sources of liquidity are cash on hand, cash flow from operations, and availability under our revolving credit facility.
We compensate for these limitations by relying primarily on our GAAP results and using non-GAAP measures only for supplemental purposes.
Despite the budget and competitive pressure affecting the industry, we believe we are well-positioned to expand existing customer relationships and benefit from opportunities that we have not previously pursued.
Despite the budget and competitive pressure affecting the industry, we believe we are well-positioned to expand existing customer relationships and benefit from opportunities that we have not previously pursued. Business Environment U.S. Budget Congress has been unable to complete action on all appropriations bills for Fiscal Year ("FY") 2024, which began on October 1, 2023.
We measure fair value based on a discounted cash flow method, which requires management's judgment with respect to forecasted revenue, operating margins, capital expenditures, and selection and use of an appropriate discount rate commensurate with the risk inherent in each of our reporting units' current business models.
If the fair value is less than the carrying value, the amount of impairment expense is equal to the difference between the reporting unit's fair value and the reporting unit's carrying value. 38 Table of Contents Determining the fair value of a reporting unit requires management's judgment and involves the use of significant estimates and assumptions, including forecasted revenue, operating margins, capital expenditures, and selection and use of an appropriate discount rate commensurate with the risk inherent in each of our reporting units' current business models.
(2) The stock-based compensation adjustment to net loss for fiscal year 2022 is made up of $62.5 million of stock-based compensation expenses for the awarded RSUs and PRSUs, and $2.1 million of other sources of stock-based compensation expense.
Stock-based compensation expense for the awarded RSUs, PSUs and stock options was $22.9 million and $62.5 million for fiscal year 2023 and 2022, respectively. Stock-based compensation expense from other sources was $1.5 million and $2.1 million for the fiscal year 2023 and 2022, respectively.
Table MD&A 5: Reconciliation of Net Loss to EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin For the Year Ended December 31, 2022 2021 Amount Margin Amount Margin (dollars in thousands) Net loss $ (53,428) (24.6) % $ (43,134) (17.8) % Other (income)/expense (1,350) (0.6) % 921 0.4 % Interest expense 874 0.4 % 777 0.3 % Provision for/(benefit from) income taxes 54 — % (28) — % Depreciation and amortization 5,890 2.7 % 5,624 2.4 % EBITDA (47,960) (22.1) % (35,840) (14.7) % Restructuring expenses (1) 2,767 1.3 % — — % Stock-based compensation expense (2) 64,660 29.8 % 60,231 24.8 % Adjusted EBITDA $ 19,467 9.0 % $ 24,391 10.1 % (1) The restructuring expenses adjustment to EBITDA includes severance and other related benefit costs (including outplacement services and continuing health insurance coverage) associated with a reduction in workforce.
Table MD&A 5: Reconciliation of Net Loss to EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin For the Year Ended December 31, 2023 2022 Amount Margin Amount Margin (dollars in thousands) Net loss $ (34,422) (23.7) % $ (53,428) (24.6) % Other income (6,715) (4.6) % (1,350) (0.6) % Interest expense 786 0.5 % 874 0.4 % Provision for income taxes 36 — % 54 — % Depreciation and amortization 9,429 6.5 % 5,890 2.7 % EBITDA (Non-GAAP) (30,886) (21.3) % (47,960) (22.1) % Stock-based compensation expense (1) 24,396 16.8 % 64,660 29.8 % Restructuring expenses (2) 1,132 0.8 % 2,767 1.3 % Adjusted EBITDA (Non-GAAP) $ (5,358) (3.7) % $ 19,467 9.0 % (1) The stock-based compensation adjustment to EBITDA is made up of stock-based compensation expense for the awarded service-based restricted stock units ("RSUs"), performance-based restricted stock units ("PSUs"), stock options, and other sources.
Based on our qualitative assessment, we concluded that it was more-likely-than-not that the estimated fair value of the reporting units exceeded their carrying value and thus, we did not proceed to the two-step goodwill impairment test. 38 Table of Contents Income Taxes We account for income taxes in accordance with ASC 740, "Income Taxes." Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect our best estimate of current and future taxes to be paid.
Income Taxes We account for income taxes in accordance with ASC 740, "Income Taxes." Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect our best estimate of current and future taxes to be paid. We record net deferred assets to the extent we believe these assets will more likely than not be realized.
In addition, the estimate of the total fair value of our reporting units is compared to the market capitalization of the Company. We amortized intangible assets over their respective estimated useful lives, and reviewed them for impairment whenever events or changes in business circumstances indicate the carrying value may not be recoverable.
We amortize intangible assets over their respective estimated useful lives, and review them for impairment whenever events or changes in business circumstances indicate the carrying value may not be recoverable. Likewise, we evaluated our intangible assets for potential impairment. As a result of the assessment, we identified conditions demonstrating an impairment of certain software development costs.
We have various lease agreements pursuant to ASC 842, "Leases" that require us to record the present value of the minimum lease payments for such lease properties. On December 30, 2022, we entered into a revolving credit facility with JPMorgan Chase Bank, N.A.
We have various lease agreements pursuant to ASC 842, "Leases" that require us to record the present value of the minimum lease payments for such lease properties. In addition, there were no outstanding commitments that were considered material for capital expenditures on December 31, 2023.
The Office of Management and Budget has already given federal departments and agencies guidance for cybersecurity priorities to include in their FY 2024 proposed budgets, including accelerated adoption of the cloud, IT modernization, further private sector collaboration for sector risk management responsibilities and ensuring adequate cyber threat information sharing, and supply chain risk management.
In general, the President's budget reflected 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.
(2) The stock-based compensation adjustment to EBITDA for fiscal year 2022 is made up of $62.5 million of stock-based compensation expenses for the awarded service-based restricted stock units ("RSUs") and performance-based restricted stock units ("PRSUs"), and $2.1 million of other sources of stock-based compensation expense.
Stock-based compensation expense for the awarded RSUs, PSUs and stock options was $22.9 million and $62.5 million for fiscal year 2023 and 2022, respectively. Stock-based compensation expense from other sources was $1.5 million and $2.1 million for the fiscal year 2023 and 2022, respectively.
Table MD&A 4: Secure Networks Segment - Financial Results Comparison For the Year Ended December 31, 2022 2021 Change ($) (dollars in thousands) Revenues $ 96,433 $ 118,899 $ (22,466) Gross profit 17,095 21,125 (4,030) Gross margin 17.7 % 17.8 % (0.1) % Our Secure Networks segment revenue decreased by $22.5 million or 18.9% in 2022 compared to 2021, primarily due to the expected wind-down in 2022 and completion of large programs in the second half of 2022.
Table MD&A 4: Secure Networks Segment - Financial Results Comparison For the Year Ended December 31, 2023 2022 (dollars in thousands) Revenues $ 67,962 $ 96,433 Cost of sales (excluding depreciation and amortization) 54,622 79,308 Depreciation and amortization 12 30 Total cost of sales 54,634 79,338 Gross profit $ 13,328 $ 17,095 Gross margin 19.6 % 17.7 % Our Secure Networks segment revenue decreased by $28.5 million, or 29.5%, in 2023, compared to 2022, primarily due to the successful completion of certain programs and lower revenues on ongoing programs as expected, partially offset by new program wins.
Table MD&A 9: Contractual Obligations Payments due by Period Total 2023 2024 - 2026 2027 - 2029 Thereafter (in thousands) Other financing obligations $ 8,458 $ 1,247 $ 7,211 $ — $ — Finance lease obligations (1) 15,118 2,203 6,944 5,971 — Operating lease obligations (1) (2) 400 373 27 — — Total contract obligations $ 23,976 $ 3,823 $ 14,182 $ 5,971 $ — (1) Includes interest expense $ 2,278 $ 611 $ 1,303 $ 364 $ — (2) Includes operating lease right-of-use obligations and short-term leases with terms of 12 months or less.
Table MD&A 9: Contractual Obligations Payments due by Period Total 2024 2025 - 2027 2028 - 2030 Thereafter (in thousands) Finance lease obligations (1) 12,915 2,258 7,116 3,541 — Operating lease obligations (1) (2) 241 105 111 25 — Total contract obligations $ 13,156 $ 2,363 $ 7,227 $ 3,566 $ — (1) Includes interest expense. $ 1,688 $ 536 $ 1,022 $ 130 $ — (2) Includes operating lease right-of-use obligations and short-term leases with terms of 12 months or less.
The costs associated with the restructuring plan include employee severance–related benefit costs (including outplacement services and continuing health insurance coverage). 31 Table of Contents Key Performance Measures The primary financial performance measures we use to manage our business and monitor results of operations are revenue, gross profit, and Adjusted EBITDA.
Key Performance Measures The primary financial performance measures we use to manage our business and monitor results of operations are revenue, gross profit, and Adjusted EBITDA. We evaluate our results of operations by considering the drivers causing changes in these measures.
The increase in the income tax provision in 2022 compared to 2021 is primarily due to an increase in state income taxes. 32 Table of Contents Segment Results The accounting policies of each business segment are the same as those followed by the Company as a whole. Management evaluates business segment performance based on gross profit.
There was no significant change in interest expense between comparable periods. Provision for income taxes. There was no significant change in the provision for income taxes in 2023, compared to 2022. Segment Results The accounting policies of each business segment are the same as those followed by the Company as a whole.
We expect that a majority of the business that we seek in the foreseeable future will be awarded through a competitive bidding process. 30 Table of Contents Backlog Backlog is a useful measure in developing our annual budgeted revenue by estimating for the upcoming year our continuing business from existing customers and active contracts.
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. 30 Table of Contents Backlog Backlog is a useful measure in developing our annual budgeted revenue by estimating for the upcoming year our continuing business from existing customers and active contracts.
We use the following 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.
Further, Adjusted EBITDA is 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.
Selling, general, and administrative ("SG&A") expenses increased by $5.4 million or 4.2% in 2022 compared to 2021. This is primarily due to increases in stock-based compensation by $3.6 million and labor costs by $3.0 million, offset by a decrease in outside services of $1.3 million.
Selling, general, and administrative ("SG&A") . SG&A expenses decreased by $39.6 million, or 29.8%, in 2023 compared to 2022. Sales and marketing expenses decreased by $9.5 million primarily due to lower compensation-related expenses. Research and development expenses decreased by $4.7 million primarily due to lower compensation-related expenses and increased capitalization of software development by $1.9 million.
Table MD&A 3: Security Solutions Segment - Financial Results Comparison For the Year Ended December 31, 2022 2021 Change ($) (dollars in thousands) Revenues $ 120,454 $ 123,534 $ (3,080) Gross profit 61,948 64,904 (2,956) Gross margin 51.4 % 52.5 % (1.1) % Our Security Solutions segment revenue decreased by $3.1 million or 2.5% in fiscal year 2022 compared to fiscal year 2021, primarily as a result of the Census program ending in 2021.
Table MD&A 3: Security Solutions Segment - Financial Results Comparison For the Year Ended December 31, 2023 2022 (dollars in thousands) Revenues $ 77,416 $ 120,454 Cost of sales (excluding depreciation and amortization) 34,270 57,743 Depreciation and amortization 3,532 763 Total cost of sales 37,802 58,506 Gross profit $ 39,614 $ 61,948 Gross margin 51.2 % 51.4 % 32 Table of Contents Our Security Solutions segment revenue decreased by $43.0 million or 35.7% in fiscal year 2023, compared to fiscal year 2022, primarily due to lower revenues on ongoing programs and the loss of a program, partially offset by some new program wins and the initial ramp of the TSA PreCheck program.
Likewise, the segment gross profit decreased by $3.0 million or 4.6% in 2022 compared to 2021 and segment gross margin also decreased from 52.5% in 2021 to 51.4% in 2022. The decrease in gross margin is the result of changes in the mix of programs within the portfolio and lower margin of certain projects within the segment.
Likewise, the segment gross profit decreased by $22.3 million or 36.1% in 2023, compared to 2022, primarily due to the decrease in revenue. Segment gross margin slightly decreased from 51.4% in 2022 to 51.2% in 2023 primarily due to higher amortization of software development costs, offset by high margin new program wins, mix within the portfolio and lower stock-based compensation.
This is primarily attributable to payments under finance leases for both periods, payments of tax withholding related to the net share settlement of equity awards of $5.7 million in 2022, and the repurchase of common stock of $11.1 million in 2022 under the Share Repurchase Program, partially offset by the proceeds from the other financing obligations of $9.1 million.
The decrease in cash outflow from financing activities is primarily attributable to decreases in payments of tax withholding related to the net share settlement of equity awards of $3.7 million in 2023, compared with $5.7 million in 2022.
Table MD&A 6: Reconciliation of Net Loss to Non-GAAP Adjusted Net Income and Adjusted EPS For the Year Ended December 31, 2022 2021 Adjusted Net Income/(Loss) Adjusted Earnings Per Share Adjusted Net Income/(Loss) Adjusted Earnings Per Share (in thousands, except per share data) Reported GAAP measure $ (53,428) $ (0.79) $ (43,134) $ (0.65) Adjustments: Other (income)/expense (1,350) (0.02) 921 0.01 Restructuring expenses (1) 2,767 0.04 — — Stock-based compensation expense (2) 64,660 0.96 60,231 0.91 Adjusted non-GAAP measure $ 12,649 $ 0.19 $ 18,018 $ 0.27 Weighted-average shares of common stock outstanding, basic 67,559 66,374 (1) The restructuring expenses adjustment to net loss includes severance and other related benefit costs (including outplacement services and continuing health insurance coverage) associated with a reduction in workforce.
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. 34 Table of Contents Table MD&A 6: Reconciliation of Net Loss and GAAP EPS to Non-GAAP Adjusted Net Income and Adjusted EPS For the Year Ended December 31, 2023 2022 Adjusted Net Income/(Loss) Adjusted Earnings Per Share Adjusted Net Income/(Loss) Adjusted Earnings Per Share (in thousands, except per share data) Net loss $ (34,422) $ (0.50) $ (53,428) $ (0.79) Adjustments: Other income (6,715) (0.10) (1,350) (0.02) Stock-based compensation expense (1) 24,396 0.35 64,660 0.96 Restructuring expenses (2) 1,132 0.02 2,767 0.04 Adjusted net (loss)/income (Non-GAAP) $ (15,609) $ (0.23) $ 12,649 $ 0.19 Weighted-average shares of common stock outstanding, basic 69,256 67,559 (1) The stock-based compensation adjustment to EBITDA is made up of stock-based compensation expense for the awarded service-based restricted stock units ("RSUs"), performance-based restricted stock units ("PSUs"), stock options, and other sources.
The $9.2 million increase is due to favorable changes in certain operating assets and liabilities, particularly on receivables. 36 Table of Contents Net cash used in investing activities for the years ended December 31, 2022 and 2021 was $13.7 million and $19.1 million, respectively. Our investing activities include cash paid for capital expenditure and business acquisition.
Net cash used in investing activities for the years ended December 31, 2023, increased by $1.8 million in cash outflow compared to the same period in 2022, primarily due to higher investments in software development costs of $14.6 million and $12.7 million for the years ended December 31, 2023 and 2022, respectively. 36 Table of Contents For the year ended December 31, 2023, net cash used in financing activities was $6.2 million compared to $9.9 million in 2022.
The growing demand for these solutions continues to provide Telos with the privilege of offering our expertise to protect these vitally important organizations. Ransomware remains arguably the most severe cyber threat to enterprises in the commercial, state, and local government and education sectors.
With this growing threat, below are some trends to consider when looking at the cybersecurity landscape: Rising Threats, Rising Liability: Ransomware remains arguably the most severe cyber threat to enterprises in the commercial, state, and local government and education sectors.
An update to the research study Telos conducted last year reveals that audit fatigue continues to burden these organizations, with automation solutions being recognized as the most effective remedy for the many repetitive and redundant tasks that security compliance requires.
These government initiatives and audit fatigue continue to burden highly regulated organizations, with automation solutions being recognized as the most effective remedy for the many repetitive and redundant tasks that security compliance requires. Additionally, the 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.
Other income/(expense) increased by $2.3 million due to dividend income from money market placements amounting to $1.0 million earned in 2022 without similar income in 2021, and other expenses of $0.9 million for the settlement of outstanding litigation in 2021, with no similar cost in 2022. There was no significant change in interest expense between comparable periods.
Other income increased by $5.4 million in 2023, compared to 2022, primarily due to an increase in dividend income from money market placements of $3.9 million, and a gain on early extinguishment of other financing obligation of $1.4 million in 2023, without a similar gain in 2022. Interest expense .
In addition, on December 30, 2022, we entered into a $30.0 million senior secured revolving credit facility, with an expansion feature of up to $30.0 million of additional revolver capacity. 35 Table of Contents We place a strong emphasis on cash flow generation.
Liquidity and Capital Resources Our primary sources of liquidity are cash on hand, future operating cash flows, and if needed, borrowings under our $30.0 million senior secured revolving credit facility, with an expansion feature of up to $30.0 million of additional revolver capacity.
Table MD&A 1: Backlog by Segment As of December 31, 2022 2021 (in thousands) Security Solutions Funded backlog $ 33,784 $ 35,382 Unfunded backlog 47,509 54,198 Total Security Solutions backlog 81,292 89,580 Secure Networks Funded backlog 48,454 88,097 Unfunded backlog 82,296 68,730 Total Secure Networks backlog 130,750 156,827 Total Funded backlog 82,238 123,479 Unfunded backlog 129,805 122,928 Total backlog $ 212,043 $ 246,407 Financial Overview A number of factors have affected our current and future financial growth, the most significant of which are described below.
Table MD&A 1: Backlog by Segment As of December 31, 2023 2022 (in thousands) Security Solutions Funded backlog $ 24,538 $ 33,784 Unfunded backlog 41,398 47,509 Total Security Solutions backlog 65,936 81,293 Secure Networks Funded backlog 27,530 48,454 Unfunded backlog 24,636 82,296 Total Secure Networks backlog 52,166 130,750 Total Funded backlog 52,068 82,238 Unfunded backlog 66,034 129,805 Total backlog $ 118,102 $ 212,043 Increases in backlog is a result from the award of new contracts and the renewal or extension of existing contracts.
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. Information regarding our segments is presented in Note 21 - Segment Information to the consolidated financial statements at Item 8 of this Form 10-K.
Additional information regarding our segments is also presented in Note 1 8 – Segment Information to the consolidated financial statements at Item 8 of this Form 10-K. Opportunities, Challenges and Risks As discussed under Item 1A, " Risk Factor s ", we derive a substantial portion of our revenues from contracts and subcontracts with the U.S. government.
The Challenging Complexity of Regulatory Compliance Government mandates and initiatives to assure stronger security in highly regulated industries, as noted above, also lead to opportunities for Telos solutions and services.
The Nation's Critical Systems Are Still at Risk: Critical infrastructure and industrial IoT are among the categories at greatest risk of cyberattacks. The Challenging Complexity of Regulatory Compliance: Government mandates stronger security in highly regulated industries.
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Management's Discussion and Analysis for the Year Ended December 31, 2020 Management's discussion and analysis of the financial condition and results of operations for the year December 31, 2020, including a comparison of our results for the years ended December 31, 2021 and 2020, is included in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the Securities and Exchange Commission on March 28, 2022.
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In this section, we discuss our financial condition, changes in financial condition and results of operations for the year ended December 31, 2023, compared to the year ended December 31, 2022.
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Overview We offer technologically advanced, software-based security solutions that empower and protect the world's most security-conscious organizations against rapidly evolving, sophisticated and pervasive threats. Our portfolio of security products, services and expertise empowers our customers with capabilities to reach new markets, serve their stakeholders more effectively, and successfully defend the nation or their enterprise.
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Business Overview For an overview of our business, including our business segments and discussion of our products and services we provide, see Item 1, " Business " of this Annual Report on Form 10-K.
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Business Environment Our business performance continues to be heavily affected by the overall level of U.S. government spending and the alignment of our solutions with the priorities of the U.S. government. U.S. government spending and contracts continue to be affected by the federal budget, and appropriations process and related legislation.
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Instead, Congress has resorted to approving a series of continuing resolutions (“CRs”), which have funded the government at FY2023 levels for over five months with no new program starts. Some appropriations bills were finally approved in early March 2024, but most federal spending remains under a CR.
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Congress could not agree on fiscal year ("FY") 2023 appropriations legislation before the start of the fiscal year on October 1, 2022.
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This means the President’s proposed three percent increase in defense spending, which was also provided for by the spending caps contained in the debt ceiling legislation (the "Fiscal Responsibility Act”) signed into law last June 2023, have so far not been approved.
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As a result, the entire federal government operated for nearly three months under the terms of a continuing resolution ("CR"), which only permitted agencies to spend at FY 2022 appropriations levels without any adjustments for the dramatic increase in inflation we have seen over the past year.
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The FY2024 National Defense Authorization Act enacted in December 2023 does not authorize that propose three percent hike in defense spending, but actual appropriated defense spending has remained at FY2023 levels under these CRs, and it will continue to be frozen until a full-year defense appropriations bill can be signed into law. 29 Table of Contents The President's FY2024 budget also proposed increased investments for cybersecurity within numerous federal civilian departments and agencies.
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Moreover, federal departments and agencies were generally precluded from moving forward on new contract starts or accelerating current projects while they were funded by a CR. Congress finally reached an agreement and completed action in late December on an omnibus appropriations package to fund the entire federal government through the remainder of FY 2023.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk 39 Item 8.
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk In the normal course of business, we are exposed to a variety of financial risks such as interest rate risk, foreign currency translation risk, and counterparty risk, which can affect our operations and profitability.
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Consolidated Financial Statements and Supplementary Data 40 Report of Independent Registered Public Accounting Firm (PCAOB ID No. 238) 40 Report of Independent Registered Public Accounting Firm (PCAOB ID No. 243) 42 Consolidated Statements of Operations 43 Consolidated Statements of Comprehensive (Loss) / Income 44 Consolidated Balance Sheets 45 Consolidated Statements of Cash Flows 46 Consolidated Statements of Changes in Stockholders' Equity / (Deficit) 47 Notes to the Consolidated Financial Statements 48 1.
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Our cash and cash equivalents include highly liquid investments that have a maturity of three months or less at the date of purchase, and would not be significantly affected by increases or decreases in interest rates mainly due to the short-term nature of these instruments.
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Organization 48 2. Significant Accounting Policies 48 3. Revenue Recognition 55 4. Accounts Receivable, Net 58 5. Inventories, Net 58 6. Property and Equipment, Net 59 7. Goodwill 59 8. Intangible Assets, Net 59 9. Other Balance Sheet Components 60 10. Acquisition 60 11. Purchase of Telos ID Non-controlling Interests 61 12. Debt and Other Obligations 61 13.
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The majority of our business is transacted in U.S. dollars, and the impact of the foreign currency fluctuation as we report for our foreign subsidiary upon translation of its financials into U.S. dollars was insignificant. Further, we do not enter into financial instruments for trading purposes. 39 Table of Contents
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Exchangeable Redeemable Preferred Stock Conversion 63 14. Stockholders' Equity 63 15. Employee Benefit Plan 64 16. Stock-Based Compensation 65 17. ( Loss )/Earnings Per Share 66 18. Income Taxes 66 19. Leases 68 2 0 . Related Party Transactions 69 2 1 . Segment Information 70 2 Table of Contents 2 2 . Commitments and Contingencies 71 2 3 .
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Supplemental Cash flow Information 71 2 4 . R evision of Unaudited Quarterly Financial Data 72

Other TLS 10-K year-over-year comparisons