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SIGNIFICANT ACCOUNTING POLICIES (Policies) | 9 Months Ended
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Sep. 30, 2024
Accounting Policies [Abstract] |
Basis of Presentation and Principle of Consolidation | Basis of Presentation and Principle of Consolidation The accompanying unaudited consolidated financial statements include the accounts of Telos and its subsidiaries (see Note 1 – Organization), all of whose issued and outstanding share capital is wholly owned directly and indirectly by Telos Corporation. All intercompany transactions have been eliminated in consolidation.
Basis of Comparison | Basis of Comparison Certain prior-period amounts have been reclassified to conform to the current period presentation. Starting in the first quarter of 2024, we reclassified sales and marketing expenses and general and administrative expenses to be presented together as selling, general and administrative ("SG&A") expenses on the consolidated statements of operations. In the third quarter of 2024, we started presenting impairment losses as separate line items from research and development ("R&D") expenses on the consolidated statements of operations. The reclassifications had no net impact on gross profit, total operating expenses or net loss in the unaudited consolidated statements of operations.
Use of Estimates | Use of Estimates Preparing unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of revenue, expenses, assets and liabilities, and disclosure of contingent assets and liabilities. The Company regularly assesses these estimates; however, actual results could differ from those estimates. We base our estimates on historical experience, currently available information, and various other assumptions that we believe are reasonable under the circumstances. Management evaluates these estimates and assumptions on an ongoing basis, including those relating to revenue recognition on cost estimation on certain contracts, allowance for credit losses, inventory obsolescence, valuation allowance for deferred tax assets, income taxes, certain assumptions related to share-based compensation, valuation of intangible assets and goodwill, restructuring expenses accruals, and contingencies. Actual results could differ from those estimates. The impact of changes in estimates is recorded in the period in which they become known.
Selling, General and Administrative Expenses | Selling, General and Administrative Expenses Selling, general and administrative expenses include general and administrative expenses, as well as direct and indirect sales and marketing expenses. These costs consist primarily of compensation and benefits (including incentive-based compensation), advertising, facilities, and certain types of depreciation and amortization.
Restructuring Expenses | Restructuring Expenses From time to time, the Company initiates restructuring activities to execute management's strategy and optimize its cost structure. Restructuring activities may include streamlining its workforce or realignment of resources to support its business strategies and enhance operational efficiency. 2022 Restructuring Plan As previously disclosed, in the fourth quarter of 2022, the Company committed to a restructuring plan to streamline its workforce and spending to better align its cost structure with its volume of business ("2022 restructuring"). The 2022 restructuring plan reduced the Company's workforce, with a majority of the affected employees separating from the business in early 2023. In connection with this restructuring plan, we incurred restructuring-related costs, including employee severance and related benefit costs. Employee severance and related benefit costs include cash payments, outplacement services and continuing health insurance coverage. Severance costs pursuant to ongoing-benefit arrangements are recognized when probable and reasonably estimated. Other related costs include external consulting and advisory fees related to implementing the restructuring plan. These costs are recognized at fair value in the period in which the costs are incurred. The Company incurred a cumulative amount of $3.9 million of restructuring expenses, which is the total expected costs for this restructuring plan. The actions under this restructuring plan were substantially completed in fiscal year 2023 and were fully paid in the third quarter of 2024. 2024 Restructuring Plan Beginning in the third quarter of 2024, the Company undertook another restructuring action in an effort to optimize its strategic priorities and cost structure ("2024 restructuring"). As part of the 2024 restructuring plan, the Company decided to discontinue the development and/or sale of selected solutions or parts of solutions, which resulted in the impairment of capitalized software assets and a reduction in workforce. The restructuring charges under the 2024 restructuring plan include severance and related benefit costs. The Company accrues severance and related benefit costs under the 2024 restructuring plan when it is probable that a liability exists and the amount is reasonably estimated. As of September 30, 2024, the cumulative amount of incurred severance and benefit costs related to the 2024 restructuring plan was $1.4 million. The 2024 restructuring actions are expected to be completed and fully paid during the remainder of fiscal year 2024. In addition, as a result of the Company's decision to abandon the development or sale of selected solutions in the third quarter of 2024, the Company wrote-off $6.4 million of its previously capitalized software assets. This was reported as an impairment loss on intangible assets under operating expenses on the unaudited consolidated statement of operations.
Table 2.1: Restructuring Expenses and Impairment Loss
| Statements of Operations | For the Three Months Ended |  | For the Nine Months Ended
| September 30, 2024 |  | September 30, 2023 |  | September 30, 2024 |  | September 30, 2023
|  | (in thousands)
2022 Restructuring Plan: |  |  |  |  |  |  |  |
Severance and related benefit costs | SG&A | $ | — |  |  | $ | — |  |  | $ | (10) |  |  | $ | (103) |
Other related costs | SG&A | — |  |  | — |  |  | — |  |  | 1,300 |
2024 Restructuring Plan: |  |  |  |  |  |  |  |
Severance and related benefit costs | Cost of sales | 393 |  |  | — |  |  | 393 |  |  | — |
Severance and related benefit costs | R&D, SG&A | 1,054 |  |  | — |  |  | 1,054 |  |  | — |
Total restructuring expenses |  | 1,447 |  |  | — |  |  | 1,437 |  |  | 1,197 |
Impairment of intangible assets (1) | Impairment loss on intangible assets | 6,373 |  |  | — |  |  | 6,373 |  |  | — |
Total restructuring expenses and impairment loss |  | $ | 7,820 |  |  | $ | — |  |  | $ | 7,810 |  |  | $ | 1,197 |
(1) The recoverability evaluation of intangible assets resulted in an $11.7 million impairment loss, of which $5.3 million was recorded under cost of sales for the discontinued parts of certain solutions, and $6.4 million was recorded under operating expenses as a result of the restructuring plan (see Note 8 - Intangible Assets, Net). At each reporting date, the Company evaluates its restructuring expense accrual to determine if the liabilities reported are still appropriate. Any changes in the estimated costs of executing the approved restructuring plans are reflected in the Company's unaudited consolidated statement of operations.
Table 2.2: Summary of Changes in Restructuring Expenses Accrual
| Severance and related benefit costs (1)
| (in thousands)
Balance at December 31, 2023 | $ | 400 |
Expenses | 1,437 |
Cash payments | (490) |
Balance at September 30, 2024 | $ | 1,347 |
(1) Restructuring expenses accrual is included within "Other current liabilities" on the Company's unaudited consolidated balance sheets (see Note 9 - Other Balance Sheet Components for further details).
Income Taxes | Income Taxes The period for which tax years are open, 2021 to 2023, has not been extended beyond the applicable statute of limitations. During September 2024, the Company was notified by the Internal Revenue Service that it is examining the Company's 2021 federal income tax return.
Recent Accounting Pronouncements | Recent Accounting Pronouncements In November 2023, the Financial Accounting Standards Board ("FASB") issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures." This standard requires disclosures, on an annual and interim basis, of significant segment expenses that are regularly provided to our chief operating decision maker ("CODM") and the aggregate amount of other segment items included in each reported measure of segment profit or loss. The ASU also requires that a public entity disclose the title and position of the CODM within the Company and an explanation of how the CODM uses the reported measures of segment profit or loss in assessing segment performance and deciding how to allocate resources. ASU 2023-07 will affect how we report segment information, starting with our Form 10-K for the year ended December 31, 2024, and our quarterly reports on Form 10-Q starting with our quarterly report for the quarter ended March 31, 2025. The amendments in this ASU should be applied retrospectively to all prior periods presented in the financial statements. We are evaluating these new segment disclosure requirements and the impact of their adoption on our unaudited consolidated financial statements. In December 2023, the FASB issued ASU No. 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosure," which requires, on an annual basis, greater disaggregation of information about a reporting entity's effective tax rate reconciliation and additional information for reconciling items that meet a quantitative threshold. The ASU also requires information on income taxes paid. This standard applies to all entities subject to income taxes and will be effective for annual periods beginning after December 15, 2024, with early adoption permitted. The ASU should be applied on a prospective basis, although retrospective application is permitted. We are currently assessing the impact of the adoption of this ASU on our unaudited consolidated financial statements. In November 2024, the FASB issued ASU 2024-03, "Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Topic 220): Disaggregation of Income Statement Expenses." This standard requires additional disclosure of certain amounts included in the expense captions presented on the statement of operations, as well as disclosures about selling expenses. The ASU is effective on a prospective basis, with the option for retrospective application, for annual periods beginning after December 15, 2026 and interim reporting periods beginning after December 15, 2027. Early adoption is permitted for annual financial statements that have not yet been issued. We are in the process of assessing the impact the adoption of this ASU on our unaudited consolidated financial statement. In addition, from time to time, new accounting standards are issued by the Financial Accounting Standard Board or other standard-setting bodies and are adopted by the Company as of the specified accounting date. Unless otherwise discussed, the Company believes that issued standards not yet effective will not have a material effect on its financial statements.
Revenue Recognition | We account for revenue in accordance with ASC Topic 606, "Revenue from Contracts with Customers." The unit of account in ASC 606 is a performance obligation, which is a promise in a contract with a customer to transfer a good or service to the customer. The majority of our revenue is recognized over time, as control is transferred continuously to our customers, who receive and consume benefits as we perform. Revenue transferred to customers over time accounted for 78% and 81% of our revenue for the three and nine months ended September 30, 2024, respectively, and 89% of our revenue for the three and nine months ended September 30, 2023, respectively. All of our business groups earn services revenue under a variety of contract types, including time and materials, firm-fixed price, firm-fixed price level of effort, and cost-plus fixed fee contract types, which may include variable consideration. For performance obligations in which control does not continuously transfer to the customer, we recognize revenue at the point in time when each performance obligation is fully satisfied. This coincides with the point in time the customer obtains control of the product or service, which typically occurs upon customer acceptance or receipt of the product or service, given that we maintain control of the product or service until that point. Revenue transferred to customers at a point in time accounted for 22% and 19% of our revenue for the three and nine months ended September 30, 2024, respectively, and 11% of our revenue for the three and nine months ended September 30, 2023, respectively. Orders for the sale of software licenses may contain multiple performance obligations, such as maintenance, training, or consulting services, which are typically delivered over time, consistent with the transfer of control disclosed above for the provision of services. When an order contains multiple performance obligations, we allocate the transaction price to the performance obligations based on the standalone selling price of the product or service underlying each performance obligation. The standalone selling price represents the amount we would sell the product or service to a customer on a standalone basis. For certain performance obligations where we are not primarily responsible for fulfilling the promise to provide the goods or services to the customer, do not have inventory risk and have limited discretion in establishing the price for the goods or services, we recognize revenue on a net basis. Our contracts may include various types of variable considerations and may include estimated amounts in the transaction price, based on all of the information available to us, and to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when any uncertainty associated with the variable consideration is resolved. We evaluate and include these estimated amounts of variable consideration in the transaction price and as performance on these contracts is complete, we adjust our revenue when deemed necessary. No revenue adjustments were recorded during the three and nine months ended September 30, 2024, and 2023. We provide for anticipated losses on contracts during the period when the loss is determined by recording an expense for the total expected costs that exceeds the total estimated revenue for a performance obligation. No contract loss was recorded during the three months ended September 30, 2024. We recorded an immaterial contract loss during the nine months ended September 30, 2024. No contract losses were recorded during the three and nine months ended September 30, 2023.

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