Telos Corporation

08/11/2025 | Press release | Distributed by Public on 08/11/2025 14:03

Quarterly Report for Quarter Ending June 30, 2025 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. Several important factors could cause the Company's actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth in the risk factors section included in the Company's Form 10-K for the year ended December 31, 2024, as filed with the Securities and Exchange Commission on March 10, 2025.
General and Business Overview
We offer technologically advanced, software-based security solutions that empower and protect the world's most security-conscious organizations against rapidly evolving, sophisticated and pervasive threats. Our portfolio of security products, services and expertise empowers our customers with capabilities to reach new markets, serve their stakeholders more effectively, and successfully defend the nation or their enterprise. We protect our customers' people, information, and digital assets so they can pursue their corporate goals and conduct their global missions with confidence in their security and privacy. Our primary customers include the U.S. federal government, large commercial businesses, state and local governments, and international customers. Our consolidated revenue is largely attributable to prime contracts or to subcontracts with our contractors engaged in work for the U.S. government, with the remaining attributable to state, local, and commercial markets.
Information regarding our two reportable segments - Security Solutions and Secure Networks - is presented in Note 15 - Segment Informationto the unaudited consolidated financial statements at Item 1 of this Form 10-Q.
Economic Opportunities, Challenges and Risks
We generated approximately 90% of our total revenues in the first half of fiscal year ("FY") 2025 from contracts with U.S. government agencies. Our business performance is affected by the overall level of U.S. government spending and the alignment of our offerings and capabilities with the budget priorities of the U.S. government.
The new Administration is currently evaluating federal agencies and existing government contracts, grants, and programs for affordability, efficiency, and alignment with U.S. government objectives. The Administration's efforts to reduce federal spending create uncertainty and risk for government contractors, including potentially resulting in change in budgetary priorities and timing on issuing awards. Decreases or delays in contract awards and in government spending on the types of programs that we support, and terminations or stop-work-orders on government contracts on which we are currently performing, could adversely affect our future revenues and profitability. The ongoing and potential future reforms to the U.S. government acquisition process, including changes to procurement rules and regulations, could transform how contracts are awarded, negotiated, and managed, which could lead to delays in contract awards and/or modifications to the scope or terms of contracts we hold. At the same time, given the nature of our business, the Administration's focus on efficiency, along with the potential for certain traditionally government functions to be transferred to private entities, may present new business opportunities for us.
On July 4, 2025, the One Big Beautiful Bill Act ("OBBBA") was enacted into law. The OBBBA includes significant changes to the Internal Revenue Code, with various provisions changing the U.S. federal income tax regulations and modifications to the Inflation Reduction Act of 2022. Further, the OBBBA significantly impacts the defense sector through substantial funding allocations and strategic investments, including specific investments in areas like Artificial Intelligence ("AI"), and provides the Department of Defense with extended time, until 2029, to make strategic investments in the defense industrial base. The increased funding and improved tax treatment for research and development could boost targeted defense investments, scale commercial technologies for military use, and support other related programs. See Note 2 - Significant Accounting Policies on Income Taxes for additional information on key income tax provisions of the OBBBA.
In light of ongoing conflicts and heightened global instability as well as political tensions and related legal challenges, we expect continued uncertainty in the U.S. political, budget and regulatory environment. Initiatives to reduce governmental spending, federal budget and debt ceiling action, and U.S. government policy positions, including trade policy, tax reform and U.S. government policies or priorities, could materially impact federal spending broadly and our programs in particular.
Financial Overview
A number of factors have contributed to our financial performance in the second quarter ended June 30, 2025, the most significant of which are described below. More details on these factors are presented below within our "Results of Operations" section.
•The year-over-year increase in revenue was primarily driven by the successful transition and ramping towards the full operational capacity of a significant program within our Security Solutions segment.
•Our TSA PreCheck®enrollment revenue grew as a result of the expansion of TSA PreCheck enrollment sites.
•Our operating expenses increased due to higher stock-based compensation expense, partially offset by the lower expense associated with the restructuring efforts undertaken in the third quarter of 2024. Operating expenses, excluding stock-based compensation expense, declined year-over-year.
•We deployed $4.0 million to repurchase approximately 1.5 million shares of our common stock at a weighted-average share price of $2.69 per share.
Results of Operations
Table MD&A 1: Consolidated Results of Operations
For the Three Months Ended For the Six Months Ended
June 30, 2025 June 30, 2024 Dollar Change June 30, 2025 June 30, 2024 Dollar Change
(dollars in thousands)
Revenue $ 35,968 $ 28,498 $ 7,470 $ 66,584 $ 58,117 $ 8,467
Cost of sales 24,036 18,791 5,245 42,470 37,449 5,021
Gross profit 11,932 9,707 2,225 24,114 20,668 3,446
Gross margin 33.2 % 34.1 % 36.2 % 35.6 %
Operating expenses 21,815 18,351 3,464 43,019 37,750 5,269
Operating expenses as percentage of revenue 60.7 % 64.4 % 64.6 % 65.0 %
Operating loss (9,883) (8,644) (1,239) (18,905) (17,082) (1,823)
Other income 553 1,064 (511) 1,114 2,316 (1,202)
Interest expense (141) (160) 19 (288) (335) 47
Loss before income taxes (9,471) (7,740) (1,731) (18,079) (15,101) (2,978)
Provision for income taxes (46) (17) (29) (42) (34) (8)
Net loss $ (9,517) $ (7,757) $ (1,760) $ (18,121) $ (15,135) $ (2,986)
Consolidated Results
Our business segments have different factors driving revenue fluctuations and profitability. The discussion of the changes in our revenue and profitability are covered in greater detail in the following section, "Segment Results." We generate revenue from the delivery of products and services to our customers. Cost of sales, for both products and services, consists of labor, materials, subcontracting costs and an allocation of indirect costs.
Operating Expenses.
In the second quarter of 2025, operating expenses increased by $3.5 million, or 18.9%, compared to the same quarter in 2024. Research and development ("R&D") expenses slightly increased by $0.1 million, or 3.6%, in the second quarter of 2025, compared to the same period in 2024. Selling, general and administrative ("SG&A") expenses increased by $3.4 million, or 20.2%, in the second quarter of 2025, compared to the same period in 2024, due to higher stock-based compensation costs, partially offset by lower labor costs due to the restructuring efforts taken in the third quarter of 2024 and lower cash incentive compensation expense.
For the six months ended June 30, 2025, operating expenses increased by $5.3 million, or 14.0%, compared with the same period in 2024. R&D expenses declined by $1.5 million, or 33.4%, in the first half of 2025, compared to the same period in 2024, due to lower amortization costs associated with the discontinued development of selected solutions in the third quarter of 2024. SG&A expenses increased by $6.8 million, or 20.6%, in the first half of 2025, compared to the same period in 2024, due to higher stock-based compensation costs, partially offset by lower labor costs due to the restructuring efforts taken in the third quarter of 2024 and lower cash incentive compensation expense.
Other income.
Other income decreased by $0.5 million, or 48.0%, for the second quarter of 2025, compared to the same period in 2024. Similarly, other income for the six months ended June 30, 2025, decreased by $1.2 million, or 51.9%, compared to the same period in 2024. The decreases in other income for both periods were primarily due to the changes in dividend income from money market placements.
Segment Results
The accounting policies of each business segment are the same as those followed by the Company as a whole. Management evaluates business segment performance based on gross profit.
Table MD&A 2: Security Solutions Segment - Financial Results
For the Three Months Ended For the Six Months Ended
June 30, 2025 June 30, 2024 Dollar Change June 30, 2025 June 30, 2024 Dollar Change
(dollars in thousands)
Revenue $ 32,474 $ 17,867 $ 14,607 $ 58,292 $ 36,507 $ 21,785
Cost of sales (excluding depreciation and amortization) 19,462 8,565 10,897 32,719 17,304 15,415
Depreciation and amortization 1,714 2,037 (323) 3,215 3,312 (97)
Total cost of sales 21,176 10,602 10,574 35,934 20,616 15,318
Gross profit $ 11,298 $ 7,265 $ 4,033 $ 22,358 $ 15,891 $ 6,467
Gross margin 34.8 % 40.7 % 38.4 % 43.5 %
Three Months Ended June 30, 2025, Compared with Three Months Ended June 30, 2024
Security Solutions segment revenue for the second quarter of 2025 increased by $14.6 million, or 81.8%, compared to the same period in 2024, primarily due to the successful ramp towards the full operational capacity of a significant program and increase in volume on another large program.
Security Solutions gross profit for the second quarter of 2025 increased by $4.0 million, or 55.5%, compared with the same period in 2024, due to higher segment revenues.
Segment gross margin decreased from 40.7% to 34.8% for the second quarter of 2025, compared with the same period in 2024, primarily due to revenue mix partially offset by the impact of lower depreciation and amortization expense on higher revenue.
Six Months Ended June 30, 2025, Compared with Six Months Ended June 30, 2024
Security Solutions segment revenue for the six months ended June 30, 2025, increased by $21.8 million, or 59.7%, compared to the same period in 2024, primarily due to the successful ramp towards the full operational capacity of a significant program and increase in volume on another large program.
Segment gross profit for the six months ended June 30, 2025, increased by $6.5 million, or 40.7%, compared to the same period in 2024, due to higher segment revenues.
Segment gross margin decreased from 43.5% in FY2024 to 38.4% in FY2025, primarily due to revenue mix partially offset by the impact of lower depreciation and amortization on higher revenue.
Table MD&A 3: Secure Networks Segment - Financial Results
For the Three Months Ended For the Six Months Ended
June 30, 2025 June 30, 2024 Dollar Change June 30, 2025 June 30, 2024 Dollar Change
(dollars in thousands)
Revenue $ 3,494 $ 10,631 $ (7,137) $ 8,292 $ 21,610 $ (13,318)
Cost of sales (excluding depreciation and amortization) 2,859 8,187 (5,328) 6,533 16,828 (10,295)
Depreciation and amortization 1 2 (1) 3 5 (2)
Cost of sales 2,860 8,189 (5,329) 6,536 16,833 (10,297)
Gross profit $ 634 $ 2,442 $ (1,808) $ 1,756 $ 4,777 $ (3,021)
Gross margin 18.1 % 23.0 % 21.2 % 22.1 %
Three Months Ended June 30, 2025, Compared with Three Months Ended June 30, 2024
Secure Networks segment revenue for the three months ended June 30, 2025, decreased by $7.1 million, or 67.1%, compared to the same period in 2024, primarily due to the ramp down of several programs within the portfolio.
Segment gross profit for Secure Networks for the second quarter of 2025, decreased by $1.8 million, or 74.0%, compared with the same period in 2024, due to lower segment revenues.
Segment gross margin decreased from 23.0% to 18.1% for the second quarter of 2025, compared with the same period in 2024, primarily due to the results of revenue mix.
Six Months Ended June 30, 2025, Compared with Six Months Ended June 30, 2024
Secure Network segment revenue for the six months ended June 30, 2025, decreased by $13.3 million, or 61.6%, compared to the same period in 2024. The decrease in revenue for the six months ended June 30, 2025, was primarily due to the ramp down of several programs within the portfolio.
Segment gross profit for the six months ended June 30, 2025, decreased by $3.0 million, or 63.2%, compared to the same period in 2024, due to lower segment revenue.
Segment gross margin in the first half of 2025 decreased from 22.1% in 2024 to 21.2% in 2025. The decline in segment gross margin for the six months ended June 30, 2025, was primarily due to the results of revenue mix.
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 revolving credit facility with a maturity date of December 30, 2025, and with an available expansion feature of up to $30.0 million of additional revolver facility. While a variety of factors related to sources and uses of cash, such as timeliness of accounts receivable collections, vendor credit terms, or significant collateral requirements, ultimately impact our liquidity, such factors may or may not have a direct impact on our liquidity.
As of June 30, 2025, we had cash and cash equivalents of $57.0 million and our working capital was $64.0 million.
We place a strong emphasis on liquidity management. This focus gives us the flexibility for capital deployment while preserving a strong balance sheet to position us for future opportunities. We believe we have adequate funds on hand to execute our financial and operating strategy. Our overall financial position and liquidity are strong. Although no assurances can be given, we believe the available cash balances and access to our revolving credit facility are sufficient to maintain the liquidity we require to meet our operating, investing and financing needs for the next 12 months.
Cash Flow
Table MD&A 4: Net Change in Cash, Cash Equivalents, and Restricted Cash
For the Six Months Ended
June 30, 2025 June 30, 2024
(in thousands)
Net cash provided by (used in) operating activities $ 13,056 $ (8,340)
Net cash used in investing activities (4,658) (9,647)
Net cash used in financing activities (5,978) (1,168)
Net change in cash, cash equivalents, and restricted cash $ 2,420 $ (19,155)
Net cash provided by operating activities for the six months ended June 30, 2025, was $13.1 million, an increase of $21.4 million, compared to the same period in 2024. The increase is attributable to the favorable changes in working capital primarily driven by timing of receipts from customer and the timing of payments to vendors, coupled with higher cash earnings (i.e., net loss, excluding non-cash items that do not impact cash flows from operating activities).
Net cash used in investing activities for the six months ended June 30, 2025, decreased by $5.0 million, compared to the same period of the prior year, primarily due to the decreases in capital expenditures in 2025 and purchase of an investment of $3.0 million in 2024, with no similar transaction in 2025.
Net cash used in financing activities for the six months ended June 30, 2025, increased by $4.8 million, compared to the same period in 2024. This is primarily attributable to the increases in payment of tax withholding related to net share settlement of equity awards of $1.1 million in the first half of 2025, compared with $0.4 million in the same period of 2024, and the repurchase of common stock of $4.0 million in 2025 under the share repurchase program (See Note 12 - Share Repurchases), with no similar activity in 2024.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates, judgments, and assumptions that affect the amounts reported. Actual results could differ from those estimates. Our 2024 Form 10-K, as filed with the SEC on March 10, 2025, includes a summary of critical accounting policies and estimates we believe are the most important to aid in understanding our financial results.
Stock-Based Compensation
The stock-based compensation expense related to the stock options, RSUs and PSUs awarded under the Amended and Restated 2016 Omnibus Long-Term Incentive Plan (the "2016 LTIP") is recognized ratably over the requisite service period.
For awards with performance conditions, stock-based compensation expense is estimated at each reporting date using management's expectation of the probable achievement of the specific performance targets and recognized over the requisite service period for each tranche on a graded-vesting basis. Stock-based compensation expense for PSUs with market conditions is recognized based on the grant-date fair value calculated using the Monte Carlo model, as described below, or sooner if the market conditions is achieved.
The fair value of the PSUs is equal to the closing stock price on the date of the grant or the fair value of the award on the grant date as determined through an independent valuation for PSUs with market conditions. Estimating the fair value of PSUs with market condition, using the Monte Carlo simulation valuation model, requires assumptions as to the fair value of the underlying common stock, the estimated performance period, expected volatility, risk-free rate, and derived service period. See Note 11 - Stock-Based Compensationfor additional information.
Goodwill
We test for goodwill impairment at the reporting unit level. Between annual evaluations, if events occur or circumstances change that would more-likely-than-not reduce the fair value of the reporting units below its carrying amount, then impairment must be evaluated. When evaluating goodwill for impairment, we first assess qualitative factors which could include, but not limited to, macroeconomic conditions, industry and market conditions, overall company financial performance and events affecting the reporting units or the Company as a whole.
If the financial performance of our Secure Networks reporting segment remains at the current level for a sustained period of time, and after considering other qualitative factors, there may be a triggering event indicating goodwill may be impaired in our Secure Networks reporting unit. Accordingly, management may need to perform a quantitative impairment test over the Secure Networks reporting unit to determine if an impairment loss should be recorded which may have an adverse impact on our results of operations.
Based on the result of our interim qualitative assessment, we determined that it is more-likely-than-not that the estimated fair value of the reporting units exceeds their carrying value and thus, no impairment charges were taken during the three and six months ended June 30, 2025.
Other critical accounting policies and estimates include revenue recognition, goodwill and long-lived assets, and income taxes, as discussed in our 2024 Form 10-K. There have been no changes to these critical accounting policies and estimates that have had a material impact on our reported amounts of assets, liabilities, revenues, or expenses during the six months ended June 30, 2025.
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