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Item 1. Financial Statements

2020-11-13 compared with 2020-08-13 · 457 added, 399 removed, 611 unchanged (58% of the section changed)

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands)

Three Months Ended June 30,

Six Months Ended June 30,

(amounts in thousands, except earnings per share data)

Three Months Ended September 30,

Nine Months Ended September 30,

Costs and expenses

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Selling, general and administrative expenses

Operating income (loss)

Operating income

Other income (expense)

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Net income (loss)

Net (income) loss attributable to non-controlling interest (Note 2)

Net income (loss) attributable to Telos Corporation

Net income attributable to non-controlling interest (Note 2)

Net (loss) income attributable to Telos Corporation

Net (loss) earnings per share attributable to Telos Corporation, Common A, basic

Net (loss) earnings per share attributable to Telos Corporation, Common B, basic

Net (loss) earnings per share attributable to Telos Corporation, Common A, diluted

Net (loss) earnings per share attributable to Telos Corporation, Common B, diluted

Weighted-average shares of stock outstanding, Common A, basic

Weighted-avearage shares of stock outstanding, Common B, basic

Weighted-average shares of stock outstanding, Common A, diluted

Weighted-average shares of stock outstanding, Common B, diluted

The accompanying notes are an integral part of these condensed consolidated financial statements.

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(amounts in thousands)

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Net income (loss)

Other comprehensive income, net of tax:

Other comprehensive loss, net of tax:

Foreign currency translation adjustments

Comprehensive (income) loss attributable to non-controlling interest

Comprehensive income (loss) attributable to Telos Corporation

Comprehensive income attributable to non-controlling interest

Comprehensive (loss) income attributable to Telos Corporation

The accompanying notes are an integral part of these condensed consolidated financial statements.

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(amounts in thousands)

June 30, 2020

September 30, 2020

December 31, 2019

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Cash and cash equivalents

Accounts receivable, net of reserve of $738 and $720, respectively (Note 1)

Inventories, net of obsolescence reserve of $861 and $860, respectively (Note 1)

receivable, net of reserve of $ 745 and $ 720 , respectively (Note 1)

net of obsolescence reserve of $ 859 and $ 860 , respectively (Note 1)

Deferred program expenses

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Total current assets

Property and equipment, net of accumulated depreciation of $34,673 and $32,470, respectively

equipment, net of accumulated depreciation of $ 35,771 and $ 32,470 , respectively

Operating lease right-of-use assets (Note 10)

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(amounts in thousands)

June 30, 2020

September 30, 2020

December 31, 2019

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Accrued compensation and benefits

Contract liabilities (Note 1 and 5)

Contract liabilities (Notes 1 and 5)

Finance lease obligations – short-term (Note 10)

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The accompanying notes are an integral part of these condensed consolidated financial statements.

TELOS CORPORATION AND SUBSIDIARIES

CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Operating activities:

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Financing activities:

Proceeds from senior term loan

Payments under finance lease obligations

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Distributions to Telos ID Class B member - non-controlling interest

Cash used in financing activities

(Decrease) increase in cash and cash equivalents

Cash (used in) provided by financing activities

Increase in cash and cash equivalents

Cash and cash equivalents, beginning of period

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Dividends from preferred stock recorded as interest expense

Debt issuance costs on senior term loan

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Stockholders’

For the Three Months Ended June 30, 2020

For the Three Months Ended September 30, 2020

Beginning balance

Foreign currency translation gain

Net (loss) income

Foreign currency translation loss

Stock-based compensation

Distributions

Ending balance

For the Three Months Ended June 30, 2019

For the Three Months Ended September 30, 2019

Beginning balance

Foreign currency translation loss

Distributions

Ending balance

For the Six Months Ended June 30, 2020

For the Nine Months Ended September 30, 2020

Beginning balance

Net (loss) income

Foreign currency translation gain

Foreign currency translation loss

Stock-based compensation

Distributions

Ending balance

For the Six Months Ended June 30, 2019

For the Nine Months Ended September 30, 2019

Beginning balance

Net (loss) income

Foreign currency translation gain

Distributions

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Basis of Presentation

Telos Corporation, together with its subsidiaries (the “Company” or “Telos” or “We”), is an information

technology solutions and services company addressing the needs of U.S.

Government and commercial customers worldwide.

General and Basis of Presentation

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.

Our portfolio of security products, services and

expertise empower 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 principal offices are located at 19886 Ashburn Road, Ashburn, Virginia 20147.

The Company was incorporated as a Maryland

corporation in October 1971.

The Company was incorporated as a Maryland corporation in

October 1971.

The accompanying condensed consolidated financial statements include the accounts of Telos and its subsidiaries, including

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in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 .

In March 2020, the coronavirus disease 2019 ("COVID-19") was declared a pandemic by the World Health Organization and a

national emergency by the U.S.

The pandemic has negatively affected the U.S.

and global economy, disrupted global supply chains and financial markets, and resulted in significant travel restrictions, including mandated facility closures

and shelter-in-place orders in numerous jurisdictions around the world.

We are taking prudent measures to protect the health and safety of our employees, such as practicing social distancing and enabling our employees to work from home where

While we have experienced certain internal disruptions in adapting our operations as described above to the changed and evolving conditions, the majority of our program operations have not been adversely impacted, or we have implemented

alternative means to support requirements.

The financial impact of the COVID-19 pandemic cannot be reasonably estimated at this time as its impact depends on future developments, which are highly uncertain and cannot be predicted.

New information may

emerge concerning the scope, severity and duration of the COVID-19 pandemic, actions to contain its spread or treat its impact, and governmental, business and individuals’ actions taken in response to the pandemic (including restrictions and

limitations on travel and transportation) among others.

In December 2019, an outbreak of COVID-19 was reported in Wuhan, China.

On March 11, 2020, the World Health Organization

declared COVID-19 a global pandemic and on March 13, 2020, President Donald J.

Trump declared the virus a national emergency.

This highly contagious disease has spread to most of the countries in the world and throughout the United States, creating a

serious impact on customers, workforces, and suppliers, disrupting economies and financial markets, and potentially leading to a world-wide economic downturn.

It has caused a disruption of the normal operations of many businesses, including the

temporary closure or scale-back of business operations and/or the imposition of either quarantine or remote work or meeting requirements for employees, either by government order or on a voluntary basis.

The pandemic may adversely affect our

customers’ ability to perform their missions and is in many cases disrupting their operations.

It may also impact the ability of our subcontractors, partners, and suppliers to operate and fulfill their contractual obligations, and result in an

increase in their costs and cause delays in performance.

These supply chain effects, and the direct effect of the virus and the disruption on our operations, may negatively impact both our ability to meet customer demand and our revenue and profit

Our employees, in some cases, are working remotely due either to safety concerns or to customer imposed limitations and using various technologies to perform their functions.

We could see delays or changes in customer demand, particularly if

government funding priorities change.

Additionally, the disruption and volatility in the global and domestic capital markets may increase the cost of capital and limit our ability to access capital.

Both the health and economic aspects of COVID-19

are highly fluid and the future course of each is uncertain.

In preparing these condensed consolidated financial statements, we have evaluated subsequent events through the date that

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is available and evaluated regularly by the chief operating decision maker (“CODM”), or decision making group, in deciding how to allocate resources and assess performance.

We currently operate in one operating and reportable business segment for

financial reporting purposes.

We currently operate in one operating and reportable business segment for financial reporting purposes.

Our Chief Executive Officer is the CODM.

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In December 2019, the FASB issued ASU No.

2019-12, “Simplifying the Accounting for Income Taxes (Topic 740)”, which simplifies the accounting for income taxes.

2019-12, “Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 .

The ASU also clarifies and amends existing guidance to improve consistent application.

This standard will be effective for reporting periods beginning after December 15, 2020, with early adoption permitted.

While we are currently assessing the impact of the adoption of this ASU, we do not believe the adoption of this ASU will have a material impact on our

consolidated financial position, results of operations and cash flows.

currently assessing the impact of the adoption of this ASU, we do not believe the adoption of this ASU will have a material impact on our consolidated financial position, results of operations and cash flows.

Revenue Recognition

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future periods of contract performance are recognized using the adjusted estimate.

Revenue that is recognized at a point in time is for the sale of software licenses in our Secure Mobility and Network

Management/Defense Enterprise Solutions (formerly Secure Mobility Solutions in our Cyber Operations and Defense (“CO&D”) reporting unit) and Secure Communications Cyber and Enterprise Solutions (formerly IT & Enterprise Solutions) business groups and for the sale of resold products in Telos ID Enterprise Solutions (formerly Identity Management Solutions) and Cyber & Cloud Solutions (formerly

CO&D’s Cyber Security Solutions), and is classified as product revenue.

Revenue on these contracts is recognized when the customer obtains control of the transferred product or service, which is generally upon delivery of the product to the

customer for their use, due to us maintaining control of the product until that point.

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 using our best

estimate of standalone selling price.

Revenue that is recognized at a point in time is for the sale of software licenses in our Information Assurance / Xacta®

(previously referred to as Cyber & Cloud Solutions) and Secure Communications (previously referred to as Secure Communications Cyber and Enterprise Solutions) business groups and for the sale of resold products in Telos ID (previously referred to

as Telos ID Enterprise Solutions) and Secure Networks (previously referred to as Secure Mobility and Network Management/Defense Enterprise Solutions), and is classified as product revenue.

Revenue on these contracts is recognized when the customer

obtains control of the transferred product or service, which is generally upon delivery of the product to the customer for their use, due to us maintaining control of the product until that point.

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 using our best estimate of standalone selling price.

Contracts are routinely and often modified to account for changes in contract requirements, specifications, quantities, or

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We have one reportable segment.

sales to U.S.

We treat sales to U.S.

customers as sales within the U.S.

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customers as revenue derived from international customers is de minimus.

The following tables disclose

revenue (in thousands) by customer type and contract type for the periods presented.

Three Months Ended June 30,

Six Months Ended June 30,

The following tables disclose revenue (in thousands) by customer type and contract type for the periods presented.

Three Months Ended

Nine Months Ended

September 30,

State & Local, and Commercial

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended

Nine Months Ended

September 30,

Firm fixed-price

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The following table discloses accounts receivable and contract assets (in thousands):

June 30, 2020

September 30, 2020

December 31, 2019

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The following table discloses contract liabilities (in thousands):

June 30, 2020

September 30, 2020

December 31, 2019

Contract liabilities

As of June 30, 2020 and December 31, 2019, we had $84.8 million and $112.4 million of remaining performance obligations, respectively,

which we also refer to as funded backlog.

As of September 30, 2020 and December 31, 2019 , we had $ 147.0 million and $ 112.4 million of remaining performance obligations, respectively, which we also refer to as funded backlog.

We expect to recognize approximately 47.1% of our remaining performance obligations as revenue in 2020, an additional 46.6% in 2021, and the balance thereafter.

We recognized revenue of $1.1 million and $3.5

million during the three and six months ended June 30, 2020, respectively, and $1.2 million and $3.1 million during the three and six months ended June 30, 2019, respectively, that was included in the contract liabilities balance at the beginning of

each fiscal year.

We recognized revenue

of $ 1.7 million and $ 5.2 million during the three and nine months ended September 30, 2020 , respectively, and $ 1.0 million and $ 4.1 million during the three and nine months ended September 30, 2019 , respectively, that was included

in the contract liabilities balance at the beginning of each fiscal year.

Accounts Receivable

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The Factor initially pays the Company 90% of U.S.

Federal government receivables or 85% of certain commercial prime contractors.

The remaining payment is deferred

and based on the amount the Factor receives from our customer, less a discount fee and a program access fee that is determined by the amount of time the receivable is outstanding before payment.

The structure of the transaction provides for a true

sale of the receivables transferred.

Accordingly, upon transfer of the receivable to the Factor, the receivable is removed from the Company's condensed consolidated balance sheet, a loss on the sale is recorded and the residual amount remains a

deferred payment as an accounts receivable until payment is received from the Factor.

Federal government

receivables or 85% of certain commercial prime contractors.

The remaining payment is deferred and based on the amount the Factor receives from our customer, less a

discount fee and a program access fee that is determined by the amount of time the receivable is outstanding before payment.

The structure of the transaction provides for a true sale of the receivables transferred.

Accordingly, upon transfer of the

receivable to the Factor, the receivable is removed from the Company's condensed consolidated balance sheet, a loss on the sale is recorded and the residual amount remains a deferred payment as an accounts receivable until payment is received from

The balance of the sold receivables may not exceed $ 10 million.

There were no accounts receivable sold during the three and six months ended June 30, 2020.

the three and six months ended June 30, 2019, the Company sold approximately $4.4 million and $9.4 million of accounts receivable, respectively, and recognized a related loss of approximately $15,000 and $32,000 in selling, general and administrative

expenses, respectively, for the same period.

As of June 30, 2020 and December 31, 2019, there were no outstanding sold accounts receivable.

There were no

accounts receivable sold during the three and nine months ended September 30, 2020 .

During the three and nine months ended September 30, 2019 , the Company sold approximately $ 3.2 million and $ 12.6 million of accounts receivable, respectively, and recognized a related loss of approximately $ 12,000 and $ 45,000 in selling, general and administrative expenses, respectively, for the same period.

As of September 30, 2020 and December 31, 2019 , there were no

outstanding sold accounts receivable.

Inventories are stated at the lower of cost or net realizable value, where cost is determined using the weighted average

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significant additional costs that would be necessary to upgrade to current standards as well as the lack of forecasted sales for such inventory in the near future.

Gross inventory was $4.2 million and $2.8 million as of June 30, 2020 and December 31, 2019 , respectively.

As of June 30, 2020, it is management’s judgment that we have fully provided for any potential inventory obsolescence, which

was $0.9 million as of June 30, 2020 and December 31, 2019.

Gross inventory was $ 4.8 million and $ 2.8 million as of September 30, 2020 and December 31, 2019 , respectively.

As of September 30, 2020 , it is management’s judgment that we have fully provided for any potential inventory

obsolescence, which was $ 0.9 million as of September 30, 2020 and December 31, 2019 .

Software Development Costs

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second quarter of 2017, software development costs are capitalized and amortized over the estimated product life of 2 - 3 years on a straight-line basis.

As of June 30, 2020 and December 31, 2019, we capitalized $8.7 million and $5.6 million of

software development costs, respectively, which are included as a part of property and equipment.

Amortization expense was $0.4 million and $0.9 million for the three and six months ended June 30, 2020, respectively, and $0.5 million and $0.9 million

for the three and six months ended June 30, 2019, respectively.

Accumulated amortization was $4.0 million and $3.1 million as of June 30, 2020 and December 31, 2019, respectively.

The Company analyzes the net realizable value of capitalized software

development costs on at least an annual basis and has determined that there is no indication of impairment of the capitalized software development costs as forecasted future sales are adequate to support amortization costs.

As of September 30, 2020 and December 31, 2019 , we capitalized $ 11.0 million and $ 5.6

million of software development costs, respectively, which are included as a part of property and equipment.

Amortization expense was $ 0.4 million and $ 1.3 million for each of the three and nine months ended September 30, 2020 and 2019 ,

respectively.

Accumulated amortization was $ 4.4 million and $ 3.1 million as of September 30, 2020 and December 31, 2019 , respectively.

The Company analyzes the net

realizable value of capitalized software development costs on at least an annual basis and has determined that there is no indication of impairment of the capitalized software development costs as forecasted future sales are adequate to support

amortization costs.

We account for income taxes in accordance with ASC 740, “Income Taxes.” Under ASC 740, deferred tax assets and liabilities

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We considered projected future taxable income, tax planning strategies, and reversal of taxable temporary differences in making this assessment.

we have determined that a full valuation allowance is required as of June 30, 2020 and December 31, 2019.

As a result of a full valuation allowance against our deferred tax assets, a deferred tax liability related to goodwill remains on our condensed

consolidated balance sheets at June 30, 2020 and December 31, 2019.

Due to the tax reform enacted on December 22, 2017, net operating losses generated in taxable years beginning after December 31, 2017 will have an indefinite carryforward period,

which will be available to offset future taxable income created by the reversal of temporary taxable differences related to goodwill.

As a result, we have adjusted the valuation allowance on our deferred tax assets and liabilities at June 30, 2020

and December 31, 2019.

we have determined that a full valuation allowance is required as of September 30, 2020 and December 31, 2019 .

As a result of a full valuation allowance against our deferred tax assets, a deferred tax liability related to goodwill remains on our condensed consolidated balance sheets at September 30, 2020 and December 31, 2019 .

Due to the tax reform enacted on December 22, 2017, net operating

losses generated in taxable years beginning after December 31, 2017 will have an indefinite carryforward period, which will be available to offset future taxable income created by the reversal of temporary taxable differences related to goodwill.

a result, we have adjusted the valuation allowance on our deferred tax assets and liabilities at September 30, 2020 and December 31, 2019 .

We follow the provisions of ASC 740 related to accounting for uncertainty in income taxes.

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We complete our

goodwill impairment tests as of December 31st each year.

Additionally, we make evaluations between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying

The evaluation is based on the estimation of the fair values of our three reporting units, CO&D, Telos ID Enterprise Solutions, and Secure Communications Cyber and Enterprise Solutions, of which goodwill is housed in the CO&D

reporting unit, in comparison to the reporting unit’s net asset carrying values.

Our discounted cash flows required management’s judgment with respect to forecasted revenue streams and operating margins, capital expenditures and the selection and use

of an appropriate discount rate.

We utilized the weighted average cost of capital as derived by certain assumptions specific to our facts and circumstances as the discount rate.

The net assets attributable to the reporting units are determined based

upon the estimated assets and liabilities attributable to the reporting units in deriving its free cash flows.

In addition, the estimate of the total fair value of our reporting units is compared to the market capitalization of the Company.

Company’s assessment resulted in a fair value that was greater than the Company’s carrying value, therefore the second step of the impairment test, as prescribed by the authoritative literature, was not required to be performed and no impairment of

goodwill was recorded as of December 31, 2019.

Subsequent reviews may result in future periodic impairments that could have a material adverse effect on the results of operations in the period recognized.

Recent operating results have reduced the

projection of future cash flow growth potential, which indicates that certain negative potential events, such as a material loss or losses on contracts, or failure to achieve projected growth could result in impairment in the future.

We estimate fair

value of our reporting unit and compare the valuation with the respective carrying value for the reporting unit to determine whether any goodwill impairment exists.

If we determine through the impairment review process that goodwill is impaired, we

will record an impairment charge in our consolidated statements of operations.

goodwill impairment tests during the quarter.

Additionally, we make evaluations between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

evaluation is based on the estimation of the fair values of our three reporting units, CO&D (comprised of Information Assurance / Xacta and Secure Networks),

Telos ID, and Secure Communications, of which goodwill is housed in the CO&D reporting unit, in comparison to the reporting unit’s net asset carrying values.

Our discounted cash flows required management’s judgment with respect to forecasted

revenue streams and operating margins, capital expenditures and the selection and use of an appropriate discount rate.

We utilized the weighted average cost of capital as derived by certain assumptions specific to our facts and circumstances as the

discount rate.

The net assets attributable to the reporting units are determined based upon the estimated assets and liabilities attributable to the reporting units in deriving its free cash flows.

In addition, the estimate of the total fair value of

our reporting units is compared to the market capitalization of the Company.

The Company’s assessment resulted in a fair value that was greater than the Company’s carrying value, therefore the second step of the impairment test, as prescribed by the

authoritative literature, was not required to be performed and no impairment of goodwill was recorded as of December 31, 2019 .

Subsequent reviews may result in

future periodic impairments that could have a material adverse effect on the results of operations in the period recognized.

Recent operating results have reduced the projection of future cash flow growth potential, which indicates that certain

negative potential events, such as a material loss or losses on contracts, or failure to achieve projected growth could result in impairment in the future.

We estimate fair value of our reporting unit and compare the valuation with the respective

carrying value for the reporting unit to determine whether any goodwill impairment exists.

If we determine through the impairment review process that goodwill is impaired, we will record an impairment charge in our consolidated statements of

Goodwill is amortized and deducted over a 15 -year period for tax purposes.

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Since June 2008, we have issued restricted stock (Class A common) to our executive officers, directors and employees.

To date, 100,000 shares have been granted in 2020.

Such stock is subject to a vesting schedule as

25% of the restricted stock vests immediately on the date of grant, thereafter, an additional 25% will vest annually on the anniversary of the date of grant subject to continued employment or services.

As of June 30, 2020, there were 75,000

shares of restricted stock that remained subject to vesting.

In the event of death of the employee or a change in control, as defined by the Telos Corporation 2008 Omnibus Long-Term Incentive Plan, the 2013 Omnibus Long-Term Incentive Plan, or the

2016 Omnibus Long-Term Incentive Plan, all unvested shares shall automatically vest in full.

In accordance with ASC 718, we recorded immaterial compensation expense for any of the issuances as the value of our common stock was nominal, based on the

deduction of our outstanding debt, capital lease obligations, and preferred stock from an estimated enterprise value, which was estimated based on discounted cash flow analysis, comparable public company analysis, and comparable transaction

To date, 79,361

shares have been granted in 2020 .

Such stock is subject to a vesting schedule as follows:

25% of the restricted stock vests immediately on the date of grant, thereafter, an additional 25% will vest annually on the anniversary of the date

of grant subject to continued employment or services.

As of September 30, 2020 , there were 59,521 shares of restricted stock that remained subject to vesting.

In the event of death of the employee or a change in control, as defined by the Telos Corporation 2008 Omnibus Long-Term Incentive Plan, the 2013 Omnibus Long-Term

Incentive Plan, or the 2016 Omnibus Long-Term Incentive Plan, all unvested shares shall automatically vest in full.

In accordance with ASC 718, we recorded immaterial compensation expense for any of the issuances as the value of our common stock was

nominal, based on the deduction of our outstanding debt, capital lease obligations, and preferred stock from an estimated enterprise value, which was estimated based on discounted cash flow analysis, comparable public company analysis, and comparable

transaction analysis.

Additionally, we determined that a significant change in the valuation estimate for common stock would not have a significant effect on the condensed consolidated financial statements.

Net Income (Loss) per Share

Basic net loss per share is computed by dividing the net loss by the weighted-average number of common

shares outstanding for the period, without consideration for potentially dilutive securities.

Diluted net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock and dilutive common stock

equivalents outstanding for the period determined using the treasury-stock and if-converted methods.

Dilutive common stock equivalents are comprised of unvested restricted common stock.

For all periods presented, there is no difference in the number

of shares used to calculate basic and diluted shares outstanding as inclusion of the potentially dilutive securities would be antidilutive.

Potentially dilutive securities not included in the calculation of diluted net loss per share because

to do so would be anti-dilutive are as follows (in common stock equivalent shares):

Nine Months Ended September 30,

Unvested restricted stock

Common stock warrants, exercisable at $ 1.665 /sh.

On November 12, 2020, we amended our Articles of Amendment and Restatement to effect an approximate 0.794 -for-1 reverse stock split with respect to our common stock.

The par value and the authorized shares of the common stock were not adjusted as a result of the reverse

The accompanying condensed consolidated financial statements and notes to the condensed consolidated financial statements give retroactive effect to the

reverse stock split for all periods presented.

Other Comprehensive Income (Loss)

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(in thousands):

June 30, 2020

September 30, 2020

December 31, 2019

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Non-controlling Interests

April 11, 2007, Telos ID was formed as a limited liability company under the Delaware Limited Liability Company Act.

We contributed substantially all of the assets of our Identity Management business line and assigned our rights to perform under

Government contract with the Defense Manpower Data Center (“DMDC”) to Telos ID at their stated book values.

On April 11, 2007, Telos

ID was formed as a limited liability company under the Delaware Limited Liability Company Act.

We contributed substantially all of the assets of our Identity Management business line and assigned our rights to perform under our U.S.

contract with the Defense Manpower Data Center (“DMDC”) to Telos ID at their stated book values.

The net book value of assets we contributed totaled $ 17,000 .

Until April 19, 2007, we owned 99.999% of the membership interests of

Telos ID and certain private equity investors (“Investors”) owned 0.001% of the membership interests of Telos ID.

On April 20, 2007, we

sold an additional 39.999% of the membership interests to the Investor in exchange for $6 million in cash consideration.

In accordance with ASC 505, “Equity,” we recognized a gain of $5.8 million.

As a result, we owned 60% of Telos ID, and

therefore continued to account for the investment in Telos ID using the consolidation method.

Until April 19, 2007, we owned 99.999% of the membership interests of Telos ID and certain private equity investors (“Investors”) owned 0.001% of the membership interests of Telos ID.

On April 20, 2007, we sold an additional 39.999% of the membership interests to the Investor in exchange for $ 6 million in cash consideration.

In accordance with ASC 505, “Equity,” we recognized a gain

of $ 5.8 million.

As a result, we owned 60% of Telos ID, and therefore continued to account for the investment in Telos ID using the consolidation method.

On December 24, 2014 (the “Closing Date”), we entered into a Membership Interest Purchase Agreement

(the “Purchase Agreement”) between the Company and the Investors, pursuant to which the Investors acquired from the Company an additional ten percent (10%) membership interest in Telos ID in exchange for $5 million (the “Transaction”).

In connection

with the Transaction, the Company and the Investors entered into the Second Amended and Restated Operating Agreement (the “Operating Agreement”) governing the business, allocation of profits and losses and management of Telos ID.

Under the Operating Agreement, Telos ID is managed by a board of directors comprised of five (5) members (the “Telos ID Board”).

The Operating Agreement provides for two classes of membership units, Class A

(owned by the Company) and Class B (owned by the Investors).

The Class A member (the Company) owns 50% of Telos ID, is entitled to receive 50% of the profits of Telos ID, and may appoint three (3) members of the Telos ID Board.

The Class B member

(the Investors) owns 50% of Telos ID, is entitled to receive 50% of the profits of Telos ID, and may appoint two (2) members of the Telos ID Board.

Despite the post-Transaction ownership of Telos ID being evenly split at 50% by each member, Telos

maintains control of the subsidiary through its holding of three of the five Telos ID Board seats.

(the “Purchase Agreement”) between the Company and the Investors, pursuant to which the Investors acquired from the Company an additional ten percent ( 10% ) membership

interest in Telos ID in exchange for $ 5 million (the “Transaction”).

In connection with the Transaction, the Company and the Investors entered into the Second Amended

and Restated Operating Agreement (the “Operating Agreement”) governing the business, allocation of profits and losses and management of Telos ID.

Under the Operating Agreement, Telos ID is managed by a board

of directors comprised of five (5) members (the “Telos ID Board”).

The Operating Agreement provides for two classes of membership units, Class A (owned by the Company) and Class B (owned by the Investors).

The Class A member (the Company) owns 50%

of Telos ID, is entitled to receive 50% of the profits of Telos ID, and may appoint three

(3) members of the Telos ID Board.

The Class B member (the Investors) owns 50% of Telos ID, is entitled to receive 50% of the profits of Telos ID, and may appoint two (2) members of the Telos ID Board.

Despite the post-Transaction ownership of Telos ID being evenly split at 50% by each member, Telos maintains control of the subsidiary through its holding of three of the five Telos ID Board seats.

Under the Operating Agreement, the Class A and Class B members each have certain options with regard

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or (iii) unless the Class A member exercises its option to acquire the entire membership interest of the Class B member upon a Change in Control of the Class A member, the transfer or issuance of more than

fifty-one percent (51%) of the outstanding voting securities of the Class A member to a third party, the Class B member has the option to purchase the membership interest of the Class A member;

provided, however, that in the event that the

Class B member exercises the foregoing option, the Class A Member may then choose to purchase the entire interest of the Class B member.

In the event that more than fifty percent (50%) of the ownership interests in the Class B member are transferred to persons or individuals (other than

members of the immediate family of the initial owners of the Class B member) without the consent of Telos ID, the Class A member has the option to purchase the entire membership interest of the Class B member.

fifty-one percent ( 51% ) of the outstanding voting securities of the Class A member to a third party, the Class B member has the option to purchase the

membership interest of the Class A member;

provided, however, that in the event that the Class B member exercises the foregoing option, the Class A Member may then choose to purchase the entire interest of the Class B member.

In the event that more than fifty percent ( 50% ) of the ownership

interests in the Class B member are transferred to persons or individuals (other than members of the immediate family of the initial owners of the Class B member) without the consent of Telos ID, the Class A member has the option to purchase

the entire membership interest of the Class B member.

The Class B member has the option to sell its interest to the Class A member at any time if there is not a letter of intent to sell Telos ID, a binding

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to receive the same form of consideration.

As a result of the Transaction, the Class A and Class B members each own 50% of Telos ID, as mentioned above, and as such

each was allocated 50% of the profits (loss), which was $2.8 million and $3.6 million for the three and six months ended June 30, 2020, respectively, and $(0.3) million and $0.2 million for the three and six months ended June 30, 2019, respectively.

As a result of the Transaction, the Class A and Class B members each own 50% of Telos ID, as mentioned above, and as such each was allocated 50% of the profits, which was $ 2.7 million and $ 6.3 million for the three and nine months ended September 30, 2020 , respectively, and $ 1.5 million and $ 1.7 million for the three and nine months ended September 30, 2019 , respectively.

The Class B member is the non-controlling interest.

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accordance with the Operating Agreement.

The Class B member received a total distribution of $1.0 million during the three and six months ended June 30, 2020, and $0.3 million and $1.0 million during the three and six months ended June 30, 2019,

respectively.

The following table details the changes in non-controlling interest for the

three and six months ended June 30, 2020 and 2019 (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

The Class B member received a total distribution of $ 0.3 million and $ 1.3 million during the three and nine months ended September 30, 2020 , respectively, and $ 0.4 million and $ 1.4 million during the three

and nine months ended September 30, 2019 , respectively.

The following table details the changes in

non-controlling interest for the three and nine months ended September 30, 2020 and 2019 (in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

Non-controlling interest, beginning of period

Net income (loss)

Distributions

Non-controlling interest, end of period

balance was $14.9 million as of June 30, 2020 and December 31, 2019.

Goodwill is subject to annual impairment tests and if triggering events are present before the annual tests, we will assess impairment.

As of June 30, 2020 and December

On October 5, 2020, we entered into a Membership Interest Purchase Agreement between the Company and the Investors to

purchase all of the Class B Units of Telos ID (“Telos ID Units”) owned by the Investors (the “Telos ID Purchase”).

Upon the closing of the Telos ID Purchase, Telos ID will become our wholly owned subsidiary.

The successful consummation of an initial

public offering of our common stock is a condition to the closing of the Telos ID Purchase.

If the initial public offering of our common stock is not consummated, the Telos ID Purchase will not occur.

The goodwill balance was $ 14.9 million as of September 30, 2020 and December 31, 2019 .

Goodwill is subject to annual impairment tests and if triggering events are present before the

annual tests, we will assess impairment.

As of September 30, 2020 and December 31, 2019 ,

no impairment charges were taken.

The accounting standard for fair value measurements provides a

framework for measuring fair value and expands disclosures about fair value measurements.

Fair Value Measurements

The accounting standard for fair value measurements provides a framework for measuring fair value and

expands disclosures about fair value measurements.

The framework requires the valuation of financial instruments using a three-tiered approach.

The statement requires fair value measurement to be classified

and disclosed in one of the following categories:

Unadjusted quoted prices in active markets that are

accessible at the measurement date for identical, unrestricted assets and liabilities;

Quoted prices in markets that are not active, or

inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Prices or valuation techniques that require inputs that are both

significant to the fair value measurement and unobservable (i.e.

The statement requires fair value measurement to be classified and disclosed in one of the following

Unadjusted quoted prices in active markets that are accessible at the measurement date for

identical, unrestricted assets and liabilities;

Quoted prices in markets that are not active, or inputs which are observable, either directly

or indirectly, for substantially the full term of the asset or liability;

Prices or valuation techniques that require inputs that are both significant to the fair value measurement and

unobservable (i.e.

supported by little or no market activity).

As of June 30, 2020 and December 31, 2019, we did not have any financial

instruments with significant Level 3 inputs and we did not have any financial instruments that are measured at fair value on a recurring basis.

As of June 30, 2020 and December 31, 2019, the carrying value

of the Company’s 12% Cumulative Exchangeable Redeemable Preferred Stock, par value $.01 per share (the “Public Preferred Stock”) was $141.1 million and $139.2 million, respectively, and the estimated fair market value was $68.5 million and $60.5

million, respectively, based on quoted market prices.

As of September 30, 2020 and December 31, 2019 , we did not have any financial instruments with significant Level 3 inputs

and we did not have any financial instruments that are measured at fair value on a recurring basis.

As of September 30, 2020 and December 31, 2019 , the carrying value of the Company’s 12% Cumulative Exchangeable Redeemable Preferred Stock, par value $ .01 per share (the “Public Preferred Stock”) was $ 142.1 million and $ 139.2 million, respectively, and the estimated fair market value was $ 63.7 million and $ 60.5 million, respectively, based on quoted market prices.

For certain of our non-derivative financial instruments, including receivables, accounts payable and other accrued

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The fair value approximates the carrying value of long-term debt.

Liabilities and Debt Obligations

Current Liabilities and Debt Obligations

Accounts Payable and Other Accrued Liabilities

As of June 30, 2020 and December 31, 2019, the accounts payable and other accrued

liabilities consisted of $14.8 million and $13.5 million, respectively, in trade accounts payable and $4.8 million and $1.5 million, respectively, in accrued liabilities.

As of September 30, 2020 and December 31, 2019 , the accounts payable and other accrued liabilities consisted of $ 11.4 million and $ 13.5 million, respectively, in trade accounts payable and $ 5.5 million and $ 1.5 million, respectively, in accrued liabilities.

Contract Liabilities

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Contract liabilities are reported on our condensed consolidated balance sheets on a net contract basis at the end of each reporting period.

As of June 30, 2020 and December

31, 2019, the contract liabilities primarily related to product support services.

As of September 30, 2020 and December 31, 2019 , the contract liabilities primarily related to product support services.

Enlightenment Capital Credit Agreement

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Capital Solutions Fund II, L.P., as agent (the "Agent") and the lenders party thereto (the "Lenders"), (together referenced as “EnCap”).

The Credit Agreement provides for an $11 million senior term loan (the "Loan") with a maturity date of January

25, 2022, subject to acceleration in the event of customary events of default.

All borrowings under the Credit Agreement accrue interest at the rate of 13.0% per annum (the "Accrual

If, at the request of the Company, the Agent executes an intercreditor agreement with another senior lender under which the Agent and the Lenders subordinate their liens (an "Alternative Interest Rate Event"), the interest rate will increase

to 14.5% per annum.

After the occurrence and during the continuance of any event of default, the interest rate will increase 2.0%.

The Company is obligated to pay accrued interest in cash on a monthly basis at a rate of not less than 10.0% per annum

or, during the continuance of an Alternate Interest Rate Event, 11.5% per annum.

The Company may elect to pay the remaining interest in cash, by payment-in-kind (by addition to the principal amount of the Loan) or by combination of cash and

payment-in-kind.

The Credit Agreement provides for an $ 11 million senior term loan (the "Loan") with a maturity date of January 25, 2022 , subject to acceleration in the event of customary events of

All borrowings under the Credit Agreement accrue interest at the rate of 13.0% per annum (the "Accrual Rate").

If, at the request of the Company, the Agent executes an intercreditor agreement with another senior lender under which the Agent and the Lenders

subordinate their liens (an "Alternative Interest Rate Event"), the interest rate will increase to 14.5% per annum.

After the occurrence and during the continuance

of any event of default, the interest rate will increase 2.0% .

The Company is obligated to pay accrued interest in cash on a monthly basis at a rate of not less than

10.0% per annum or, during the continuance of an Alternate Interest Rate Event, 11.5%

The Company may elect to pay the remaining interest in cash, by payment-in-kind (by addition to the principal amount of the Loan) or by combination of cash and payment-in-kind.

Upon thirty days prior written notice, the Company may prepay any portion or the entire amount of the Loan.

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In connection with the Credit Agreement, on January 25, 2017, the Company issued warrants (each, a

"Warrant") to the Agent and certain of the Lenders representing in the aggregate the right to purchase in accordance with their terms 1,135,284.333 shares of the Class A Common Stock of the Company, no par value per share, which is equivalent to

approximately 2.5% of the common equity interests of the Company on a fully diluted basis.

The exercise price is $1.321 per share and each Warrant expires on January 25, 2027.

The value of the warrants was determined to be de minimis and no value was

allocated to them on a relative fair value basis in accounting for the debt instrument.

The Credit Agreement also included an $825,000

exit fee, which was payable upon any repayment or prepayment of the loan.

This amount had been included in the total principal due and treated as an unamortized discount on the debt, which would be amortized over the term of the loan, using the

effective interest method at a rate of 15.0% at the time of the original loan .

We incurred fees and transaction costs of approximately $374,000

related to the issuance of the Credit Agreement, which are being amortized over the life of the Credit Agreement.

"Warrant") to the Agent and certain of the Lenders representing in the aggregate the right to purchase in accordance with their terms 1,135,284.333 shares of the

Class A Common Stock of the Company, no par value per share, which is equivalent to approximately 2.5% of the common equity interests of the Company on a fully diluted basis.

The exercise price is $ 1.321 per share and each Warrant expires

on January 25, 2027 .

The value of the warrants was determined to be de minimis and no value was allocated to them on a relative fair value basis in accounting for

the debt instrument.

The Credit Agreement also included an $ 825,000 exit fee, which was payable upon any repayment or

prepayment of the loan.

This amount had been included in the total principal due and treated as an unamortized discount on the debt, which would be amortized over the term of the loan, using the effective interest method at a rate of 15.0% at the time of the original loan .

We incurred fees and transaction costs of approximately $ 374,000 related to the issuance of the Credit Agreement, which are being amortized over the life of the Credit Agreement.

Effective February 23, 2017, the Credit Agreement was amended to change the required timing of certain post-closing items

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In consideration

of these amendments, the interest rate on the loan was increased by 1%, which will revert back to the original rate upon achievement of two consecutive quarters of a specified fixed charge coverage ratio as defined in the agreement.

The Company may

elect to pay the increase in interest expense in cash or by payment-in-kind (by addition to the principal amount of the Loan).

The increase in interest expense has been paid in cash.

of these amendments, the interest rate on the loan was increased by 1% , which will revert back to the original rate upon achievement of two consecutive quarters of a

specified fixed charge coverage ratio as defined in the agreement.

The Company may elect to pay the increase in interest expense in cash or by payment-in-kind (by addition to the principal amount of the Loan).

The increase in interest expense has

been paid in cash.

Contemporaneously with the Third Amendment, Mr.

agreed to transfer 50,000 shares of the Company’s Class A Common Stock owned by him to EnCap.

Wood agreed to transfer 50,000 shares of the Company’s Class A Common Stock owned by him

On July 19, 2019, we entered into the Fourth Amendment to Credit Agreement and Waiver;

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As a result of the Fourth Amendment, several terms of the Credit Agreement were amended, including the following:

The Company borrowed an additional $5 million from the Lenders, increasing the total amount of the principal to $16 million.

The Company borrowed an additional $ 5 million from the Lenders, increasing the total

amount of the principal to $ 16 million.

The maturity date of the Credit Agreement was amended from January 25, 2022 to January 15, 2021 .

The prepayment price was amended as follows:

(a) from January 26, 2019 through January 25, 2020, the prepayment price is 102% of the principal amount, (b) from January

26, 2020 through October 14, 2020, the prepayment price is 101% of the principal amount, and (c) from October 15, 2020 to the maturity date, the prepayment price will be at par.

However, the prepayment price for the additional $5 million

loan attributable to the Fourth Amendment will be at par.

(a) from January 26, 2019 through January 25, 2020, the prepayment price is 102% of the principal amount, (b) from January 26, 2020 through October 14, 2020, the prepayment price is 101% of

the principal amount, and (c) from October 15, 2020 to the maturity date, the prepayment price will be at par.

However, the prepayment price for the additional $ 5

million loan attributable to the Fourth Amendment will be at par.

The following financial covenants, as defined in the Credit Agreement, were amended and updated:

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The borrowing under the Credit Agreement continues to be collateralized by substantially all of the Company’s assets including inventory, equipment and accounts

The Company paid the Agent a fee of $110,000 in connection with the Fourth Amendment.

We incurred immaterial third party transation costs which were expensed during the

current period.

The Company paid the Agent a fee of $ 110,000 in connection with the Fourth

We incurred immaterial third party transation costs which were expensed during the current period.

The exit fee was increased from $ 825,000 to $ 1,200,000 .

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the term of the loan using the effective interest method at a rate of 17.3% over the remaining term of the loan.

For the measurement period ended June 30, 2020, we were in compliance with the Credit Agreement’s financial covenants, based on an

agreement between the Company and EnCap on the definition of certain input factors that determine the measurement against the covenants.

For the measurement period ended September 30, 2020 , we were in compliance with the Credit Agreement’s financial covenants, based on an agreement between the Company and EnCap on the definition of

certain input factors that determine the measurement against the covenants.

On March 26, 2020, the Credit Agreement was amended (the “Fifth Amendment”) to modify the financial covenants for 2020 through the maturity

of the Credit Agreement to establish that the covenants will remain at the December 31, 2019 levels and to update the previously agreed-upon definition of certain financial covenants, specifically the amount of Capital Expenditures to be included in

the measurement of the covenants.

The Fifth Amendment also provides for the right for the Company to elect to extend the maturity date of the Credit Agreement which is currently scheduled to mature on January 15, 2021.

The Fifth Amendment provides

for four quarterly maturity date extensions, which would increase the Exit Fee payable under the Credit Agreement by $250,000 for each quarterly maturity date extension elected, for a total of $1 million increase to the Exit Fee were all four of the

maturity date extensions to be elected.

The Company paid EnCap an amendment fee of $100,000 and out-of-pocket costs and expenses in consideration for the Fifth Amendment.

of the Credit Agreement to establish that the covenants will remain at the December 31, 2019 levels and to update the previously agreed-upon definition of certain

financial covenants, specifically the amount of Capital Expenditures to be included in the measurement of the covenants.

The Fifth Amendment also provides for the right for the Company to elect to extend the maturity date of the Credit Agreement

which is currently scheduled to mature on January 15, 2021 .

The Fifth Amendment provides for four quarterly maturity date extensions, which would increase the Exit Fee payable under the Credit Agreement by $ 250,000 for each quarterly maturity

date extension elected, for a total of $ 1 million increase to the Exit Fee were all four

of the maturity date extensions to be elected.

The Company paid EnCap an amendment fee of $ 100,000 and out-of-pocket costs and expenses in consideration for the

Fifth Amendment.

As the Company has not exercised the option(s) to extend the maturity of the Credit Agreement, the current maturity date remains January

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The carrying amount of the Credit Agreement consisted of the following (in thousands):

June 30, 2020

September 30, 2020

December 31, 2019

Senior term loan, including exit fee

Senior term loan principal, including exit fee

Unamortized discount, debt issuance costs, and lender fees

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We incurred interest expense in the amount of

$0.7 million and $1.5 million for the three and six months ended June 30, 2020, respectively, and $0.4 million and $0.8 million for the three and six months ended June 30, 2019, respectively, under the Credit Agreement.

$ 0.8 million and $ 2.3 million for the three and nine months ended September 30, 2020 , respectively, and $ 0.7 million and $ 1.5 million for the three and nine months ended September 30, 2019 , respectively, under the Credit Agreement.

Accounts Receivable Purchase Agreement

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The total amount of Purchased Receivables is subject to a

maximum limit of $10 million of outstanding Purchased Receivables (the “Maximum Amount”) at any given time.

On November 15, 2019, the term of the

Purchase Agreement was extended to June 30, 2022.

The initial purchase price of a Purchased Receivable is equal to 90% of the face value of the receivable if the account

debtor is an agency of the U.S.

Government, and 85% if the account debtor is not an agency of the U.S.

maximum limit of $ 10 million of outstanding Purchased Receivables (the “Maximum

Amount”) at any given time.

On November 15, 2019, the term of the Purchase Agreement was extended to June 30, 2022.

The initial purchase price of a Purchased Receivable is equal to 90% of the face value of the receivable if the account debtor is an agency of the U.S.

Government, and 85% if the account debtor is

not an agency of the U.S.

provided, however, that RCA has the right to adjust these initial purchase price rates in its sole discretion.

After collection by RCA

of the portion of a Purchased Receivable in excess of the initial purchase price, RCA shall pay the Company the residual 10% or 15% of such Purchased Receivable, as appropriate, less (i) a discount factor equal to 0.30%, for federal government prime

contracts (or 0.56% for non-federal government investment grade account obligors or 0.62% for non-federal government non-investment grade account obligors) of the face amounts of Purchased Receivables;

(ii) a program access fee equal to 0.008% of the

daily ending account balance for each day that Purchased Receivables are outstanding;

After collection by RCA of the portion of a Purchased Receivable in excess of the initial purchase

price, RCA shall pay the Company the residual 10% or 15% of such Purchased

Receivable, as appropriate, less (i) a discount factor equal to 0.30% , for federal government prime contracts (or 0.56% for non-federal government investment grade account obligors or 0.62% for non-federal government non-investment grade

account obligors) of the face amounts of Purchased Receivables;

(ii) a program access fee equal to 0.008% of the daily ending account balance for each day that

Purchased Receivables are outstanding;

(iii) a commitment fee equal to 1% per annum of the Maximum Amount minus the amount of Purchased Receivables outstanding;

and (iv) fees, costs and expenses relating

to the preparation, administration and enforcement of the Purchase Agreement and any other related agreements.

(iv) fees, costs and expenses relating to the preparation, administration and enforcement of the Purchase Agreement and any other related agreements.

The Purchase Agreement provides that in the event, but only to the extent, that the conveyance of Purchased Receivables by

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Porter is the sole shareholder, own 35.0% of our Class A Common Stock.

Under the terms of the

Porter Notes, Porter lent the Company $2.5 million on or about March 31, 2015.

Telos also entered into Subordination and Intercreditor Agreements (the “Subordination Agreements”) with Porter and a prior senior lender, in which the Porter Notes were

fully subordinated to the financing provided by that senior lender, and payments under the Porter Notes were permitted only if certain conditions are met.

According to the original terms of the Porter Notes, the outstanding principal sum bears

interest at the fixed rate of twelve percent (12%) per annum which would be payable in arrears in cash on the 20th day of each May, August, November and February, with the first interest payment date due on August 20, 2015.

The Porter Notes do not

call for amortization payments and are unsecured.

Under the terms of the Porter Notes, Porter lent the Company $ 2.5 million on or about March 31,

Telos also entered into Subordination and Intercreditor Agreements (the “Subordination Agreements”) with Porter and a prior senior lender, in which the Porter Notes were fully subordinated to the financing provided by that senior lender, and

payments under the Porter Notes were permitted only if certain conditions are met.

According to the original terms of the Porter Notes, the outstanding principal sum bears interest at the fixed rate of twelve percent ( 12% ) per annum which would be payable in arrears in cash on the 20th day of each May, August, November and February, with the first interest payment date due on August 20, 2015 .

The Porter Notes do not call for amortization payments and are unsecured.

The Porter Notes, in whole or in part, may be repaid at any time without premium or penalty.

The unpaid principal, together with interest, was originally due and payable in full on July 1, 2017.

principal, together with interest, was originally due and payable in full on July 1, 2017 .

On April 18, 2017, we amended and restated the

Porter Notes to reduce the interest rate from twelve percent (12%) to six percent (6%) per annum, to be accrued, and extended the maturity date from July 1, 2017 to July 25, 2022.

Telos also entered into Intercreditor Agreements with Porter and

EnCap, in which the Porter Notes are fully subordinated to the Credit Agreement and any subsequent senior lenders, and payments under the Porter Notes are permitted only if certain conditions are met.

All other terms remain in full force and

We incurred interest expense in the amount of $88,000 and $175,000 for the three and six months ended June 30, 2020, respectively, and $82,000 and $162,000 for the three and six months ended June 30, 2019, respectively, on the

Porter Notes.

As of June 30, 2020, approximately $1.2 million of accrued interest was payable according to the stated interest rate of the Porter Notes.

Preferred Stock

6,000,000 shares of the Public Preferred Stock, par value $.01 per share, has been authorized for issuance.

Porter Notes to reduce the interest rate from twelve percent ( 12% ) to six percent ( 6% ) per

annum, to be accrued, and extended the maturity date from July 1, 2017 to July 25, 2022 .

Telos also entered into Intercreditor Agreements with Porter and EnCap, in which the Porter Notes are fully subordinated to the Credit Agreement and any subsequent senior lenders, and payments under the Porter Notes are permitted only if certain

conditions are met.

All other terms remain in full force and effect.

We incurred interest expense in the amount of $ 90,000 and $ 265,000 for the three and nine months ended September 30, 2020 , respectively, and $ 83,000 and $ 245,000 for the three and nine months ended September 30, 2019 , respectively, on the Porter Notes.

As of September 30, 2020 , approximately $ 1.2 million of accrued interest was payable according to the stated interest rate of the Porter Notes.

Redeemable Preferred Stock

A maximum of 6,000,000 shares of the Public Preferred Stock, par value $ .01 per share, has been authorized for issuance.

We initially issued 2,858,723 shares of the Public Preferred Stock pursuant to the acquisition of the Company during fiscal year 1990.

Public Preferred Stock was recorded at fair value on the date of original issue, November 21, 1989, and we made periodic accretions under the interest method of the excess of the redemption value over the recorded value.

We adjusted our estimate of

accrued accretion in the amount of $1.5 million in the second quarter of 2006.

The Public Preferred Stock was fully accreted as of December 2008.

The Public Preferred

Stock was recorded at fair value on the date of original issue, November 21, 1989, and we made periodic accretions under the interest method of the excess of the redemption value over the recorded value.

We adjusted our estimate of accrued

accretion in the amount of $ 1.5 million in the second quarter of 2006.

Public Preferred Stock was fully accreted as of December 2008.

We declared stock dividends totaling 736,863 shares in 1990 and 1991.

Since 1991, no other dividends,

in stock or cash, have been declared.

Since 1991, no other dividends, in stock or cash, have been declared.

In November 1998, we retired 410,000 shares of the Public Preferred Stock.

The total number of shares issued and outstanding at June 30, 2020 and December 31, 2019 was 3,185,586.

The Public Preferred

Stock is quoted as "TLSRP" on the OTCQB marketplace and the OTC Bulletin Board.

Since 1991, no dividends were declared or paid on our Public Preferred Stock, based upon our interpretation of restrictions

in our Articles of Amendment and Restatement, limitations in the terms of the Public Preferred Stock instrument, specific dividend payment restrictions in the various financing documents to which the Public Preferred Stock is subject, other senior

obligations currently or previously in existence, and Maryland law limitations in existence prior to October 1, 2009.

Subsequent to the 2009 Maryland law change, dividend payments have continued to be prohibited except under certain specific

circumstances as set forth in Maryland Code Section 2-311.

Pursuant to the terms of the Articles of Amendment and Restatement, we were scheduled, but not required, to redeem the Public Preferred Stock in five annual tranches during the years 2005

through 2009.

However, due to our substantial senior obligations currently or previously in existence, limitations set forth in the covenants in the various financing documents to which the Public Preferred Stock is subject, foreseeable capital and

operational requirements, and restrictions and prohibitions of our Articles of Amendment and Restatement, we were and remain unable to meet the redemption schedule set forth in the terms of the Public Preferred Stock as of the measurement dates.

Moreover, the Public Preferred Stock is not payable on demand, nor callable, for failure to redeem the Public Preferred Stock in accordance with the redemption schedule set forth in the instrument.

Therefore, we classify these securities as

noncurrent liabilities in the condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019.

The total number of shares issued and outstanding at September 30, 2020 and December 31, 2019 was 3,185,586 .

The Public Preferred Stock is quoted as "TLSRP" on the OTCQB marketplace and the OTC Bulletin Board.

Since 1991, no dividends were declared or paid on our Public Preferred Stock, based upon our interpretation of

restrictions in our Articles of Amendment and Restatement, limitations in the terms of the Public Preferred Stock instrument, specific dividend payment restrictions in the various financing documents to which the Public Preferred Stock is subject,

other senior obligations currently or previously in existence, and Maryland law limitations in existence prior to October 1, 2009.

Subsequent to the 2009 Maryland law change, dividend payments have continued to be prohibited except under certain

specific circumstances as set forth in Maryland Code Section 2-311.

Pursuant to the terms of the Articles of Amendment and Restatement, we were scheduled, but not required, to redeem the Public Preferred Stock in five annual tranches during the years 2005 through 2009.

However, due to our substantial senior obligations currently or previously in existence, limitations set forth in the covenants in the

various financing documents to which the Public Preferred Stock is subject, foreseeable capital and operational requirements, and restrictions and prohibitions of our Articles of Amendment and Restatement, we were and remain unable to meet the

redemption schedule set forth in the terms of the Public Preferred Stock as of the measurement dates.

Moreover, the Public Preferred Stock is not payable on demand, nor callable, for failure to redeem the Public Preferred Stock in accordance with

the redemption schedule set forth in the instrument.

Therefore, we classify these securities as noncurrent liabilities in the condensed consolidated balance sheets as of September

30, 2020 and December 31, 2019 .

On January 25, 2017, we became parties with certain of our subsidiaries to the Credit Agreement with EnCap.

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Additionally, the Porter Notes contain similar prohibitions on dividend payments or stock redemptions.

as stated above, we will continue to classify the entirety of our obligation to redeem the Public Preferred Stock as a long-term obligation.

Accordingly, as stated

above, we will continue to classify the entirety of our obligation to redeem the Public Preferred Stock as a long-term obligation.

V arious financing documents to which the Public Preferred Stock is subject prohibit, among other things, the redemption of any stock, common or preferred, other than as described above.

The Public Preferred Stock by its terms

also cannot be redeemed if doing so would violate the terms of an agreement regarding the borrowing of funds or the extension of credit which is binding upon us or any of our subsidiaries, and it does not include any other provisions that would

otherwise require any acceleration of the redemption of or amortization of payments with respect to the Public Preferred Stock.

Thus, the Public Preferred Stock is not and will not be due on demand, nor callable, within 12 months from June 30,

The Public Preferred Stock by its terms also cannot be redeemed if doing so would

violate the terms of an agreement regarding the borrowing of funds or the extension of credit which is binding upon us or any of our subsidiaries, and it does not include any other provisions that would otherwise require any acceleration of the

redemption of or amortization of payments with respect to the Public Preferred Stock.

Thus, the Public Preferred Stock is not and will not be due on demand, nor callable, within 12 months from September 30, 2020 .

This classification is consistent with ASC 210, “Balance Sheet” and 470, “Debt” and the FASB ASC Master Glossary definition of “Current Liabilities.”

ASC 210 and the FASB ASC Master Glossary define current

liabilities as follows:

The term current liabilities is used principally to designate obligations whose liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets, or the creation of other

current liabilities.

As a balance sheet category, the classification is intended to include obligations for items which have entered into the operating cycle, such as payables incurred in the acquisition of materials and supplies to be used in the

production of goods or in providing services to be offered for sale;

ASC 210 and the FASB ASC Master Glossary define current liabilities as follows:

The term current

liabilities is used principally to designate obligations whose liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets, or the creation of other current liabilities.

As a balance sheet

category, the classification is intended to include obligations for items which have entered into the operating cycle, such as payables incurred in the acquisition of materials and supplies to be used in the production of goods or in providing

services to be offered for sale;

collections received in advance of the delivery of goods or performance of services;

and debts that arise from operations directly related to the operating cycle, such as accruals

for wages, salaries, commissions, rentals, royalties, and income and other taxes.

Other liabilities whose regular and ordinary liquidation is expected to occur within a relatively short period of time, usually twelve months, are also intended for

inclusion, such as short-term debts arising from the acquisition of capital assets, serial maturities of long-term obligations, amounts required to be expended within one year under sinking fund provisions, and agency obligations arising from the

collection or acceptance of cash or other assets for the account of third persons.

and debts that arise from operations directly related to the operating cycle, such as accruals for wages, salaries, commissions,

rentals, royalties, and income and other taxes.

Other liabilities whose regular and ordinary liquidation is expected to occur within a relatively short period of time, usually twelve months, are also intended for inclusion, such as short-term debts

arising from the acquisition of capital assets, serial maturities of long-term obligations, amounts required to be expended within one year under sinking fund provisions, and agency obligations arising from the collection or acceptance of cash or

other assets for the account of third persons.

ASC 470 provides the following:

The current liability

classification is also intended to include obligations that, by their terms, are due on demand or will be due on demand within one year (or operating cycle, if longer) from the balance sheet date, even though liquidation may not be expected within

It is also intended to include long-term obligations that are or will be callable by the creditor either because the debtor’s violation of a provision of the debt agreement at the balance sheet date makes the obligation callable or

because the violation, if not cured within a specified grace period, will make the obligation callable.

If, pursuant to the terms of the Public Preferred Stock, we do

not redeem the Public Preferred Stock in accordance with the scheduled redemptions described above, the terms of the Public Preferred Stock require us to discharge our obligation to redeem the Public Preferred Stock as soon as we are financially

capable and legally permitted to do so.

Therefore, by its very terms, the Public Preferred Stock is not due on demand or callable for failure to make a scheduled payment pursuant to its redemption provisions and is properly classified as a

noncurrent liability.

We pay dividends on the Public Preferred Stock when and if

declared by the Board of Directors.

The Public Preferred Stock accrues a semi-annual dividend at the annual rate of 12% ($1.20) per share, based on the liquidation preference of $10 per share, and is fully cumulative.

Dividends in additional shares

of the Public Preferred Stock for 1990 and 1991 were paid at the rate of 6% per share for each $.60 of such dividends not paid in cash.

For the cash dividends payable since December 1, 1995, we have accrued $109.3 million and $107.4 million as of

June 30, 2020 and December 31, 2019, respectively.

We accrued dividends on the Public Preferred Stock of $1.0 million and $1.9 million for each of the three and six months ended June 30, 2020 and 2019, respectively, which was recorded as interest

Prior to the effective date of ASC 480 on July 1, 2003, such dividends were charged to stockholders’ accumulated deficit.

The income tax

provision for interim periods is determined using an estimated annual effective tax rate adjusted for discrete items, if any, which are taken into account in the quarterly period in which they occur.

We review and update our estimated annual

effective tax rate each quarter.

W e recorded an approximately $2,000 income tax provision and $144,000 income tax benefit for the three and six months ended June 30, 2020, respectively, and a $20,000 income tax provision and $177,000 income

tax benefit for the three and six months ended June 30, 2019, respectively.

For the three and six months ended June 30, 2020 and 2019, our estimated annual effective tax rate was primarily impacted by the overall valuation allowance position which

reduced the net tax impact from taxable loss for all periods.

The current liability classification is also intended to include

obligations that, by their terms, are due on demand or will be due on demand within one year (or operating cycle, if longer) from the balance sheet date, even though liquidation may not be expected within that period.

It is also intended to

include long-term obligations that are or will be callable by the creditor either because the debtor’s violation of a provision of the debt agreement at the balance sheet date makes the obligation callable or because the violation, if not cured

within a specified grace period, will make the obligation callable.

If, pursuant to the terms of the Public Preferred Stock, we do not redeem the Public Preferred Stock

in accordance with the scheduled redemptions described above, the terms of the Public Preferred Stock require us to discharge our obligation to redeem the Public Preferred Stock as soon as we are financially capable and legally permitted to do so.

Therefore, by its very terms, the Public Preferred Stock is not due on demand or callable for failure to make a scheduled payment pursuant to its redemption provisions and is properly classified as a noncurrent liability.

We pay dividends on the

Public Preferred Stock when and if declared by the Board of Directors.

The Public Preferred Stock accrues a semi-annual dividend at the annual rate of 12% ($ 1.20 )

per share, based on the liquidation preference of $ 10 per share, and is fully

Dividends in additional shares of the Public Preferred Stock for 1990 and 1991 were paid at the rate of 6% per share for each $ .60 of

such dividends not paid in cash.

For the cash dividends payable since December 1, 1995, we have accrued $ 110.2 million and $ 107.4 million as of September 30, 2020 and December 31, 2019 , respectively.

We accrued dividends on the Public

Preferred Stock of $ 1.0 million and $ 2.9 million for each of the three

and nine months ended September 30, 2020 and 2019 , respectively, which was recorded as interest expense.

Prior to the effective date of ASC 480 on July 1, 2003,

such dividends were charged to stockholders’ accumulated deficit.

The income tax provision for interim periods

is determined using an estimated annual effective tax rate adjusted for discrete items, if any, which are taken into account in the quarterly period in which they occur.

We review and update our estimated annual effective tax rate each quarter.

recorded an approximately $ 8,000 income tax provision and $ 136,000 income tax

benefit for the three and nine months ended September 30, 2020 , respectively, and a $ 10,000

and $ 187,000 income tax benefit for the three and nine months ended September 30, 2019 ,

respectively.

For the three and nine months ended September 30, 2020 and 2019 , our estimated annual effective tax rate was primarily impacted by the overall

valuation allowance position which reduced the net tax impact from taxable income for all periods.

In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted.

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future taxable income, tax planning strategies, and reversal of taxable temporary differences in making this assessment.

As such, we have determined that a full valuation allowance is required as of June 30, 2020 and December 31, 2019.

Under the Tax

Cuts and Jobs Act of 2017 (“Tax Act”), we will be able to use our hanging credit deferred tax liabilities as a source of taxable income to support the indefinite-lived net operating losses created by the future reversal of our temporary differences.

Accordingly, we have re-measured our existing deferred tax assets and liabilities using the enacted tax rate, and adjusted the valuation allowance on our deferred taxes.

As a result, a deferred tax liability related to goodwill of $640,000 and

$621,000 remains on our condensed consolidated balance sheets at June 30, 2020 and December 31, 2019, respectively.

The income tax benefit recorded for the six months ended June 30, 2020 is primarily related to this change in deferred tax liability

and is due to the release of FIN 48 liability on state nexus.

As such, we have determined that a full valuation allowance is required as of September 30, 2020 and December 31, 2019 .

Under the Tax Cuts and Jobs Act of 2017 (“Tax Act”), we will be able to use our hanging credit deferred tax liabilities as a source of taxable income to support the

indefinite-lived net operating losses created by the future reversal of our temporary differences.

Accordingly, we have re-measured our existing deferred tax assets and liabilities using the enacted tax rate, and adjusted the valuation allowance on

our deferred taxes.

As a result, a deferred tax liability related to goodwill of $ 649,000 and $ 621,000 remains on our condensed consolidated balance sheets at September 30, 2020 and December 31, 2019 , respectively.

The income tax benefit

recorded for the nine months ended September 30, 2020 is primarily related to this change in deferred tax liability and is due to the release of FIN 48 liability on

As a result of the Tax Act, we are subject to several provisions of the Tax Act including computations under Section 162(m) executive

compensation limitation and Section 163(j) interest limitation rule.

We have considered the impact of each of these provisions in our computation of income tax expense for the three and six months ended June 30, 2020 and 2019.

Under the provisions of ASC 740, we determined that there were approximately $508,000 and $673,000 of unrecognized tax benefits, including $229,000 and $304,000 of related interest and penalties, required to be recorded in other liabilities in the condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019, respectively.

We believe that the total amounts of unrecognized tax benefits will not significantly increase or decrease within the next 12 months.

Commitments and

Contingencies

We have considered the impact of each of these provisions in our computation of income tax expense for the three and nine months ended September 30, 2020 and 2019 .

Under the provisions of ASC 740, we determined that there were approximately $ 514,000 and $ 673,000 of unrecognized tax benefits, including $ 235,000 and $ 304,000 of related interest and penalties,

required to be recorded in other liabilities in the condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019 , respectively.

We believe that the total amounts of unrecognized tax benefits will not

significantly increase or decrease within the next 12 months.

Commitments and Contingencies

Financial Condition and Liquidity

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capital by selling equity, although no assurances can be given that these investors would be able to invest or that the Company and the investors would agree upon terms for such investments.

Our working capital was $(12.8) million and $2.9 million as of June 30, 2020 and December 31, 2019, respectively.

current working capital deficit is due to the classification of the EnCap Credit Agreement as a current liability as discussed in Note 5 to the financial statements, although the Fifth Amendment to the Credit Agreement provides us the option to

Our working capital was $ (11.3) million

and $ 2.9 million as of September 30, 2020 and December 31, 2019 , respectively.

Our current working capital deficit is due to the classification of the EnCap Credit Agreement as a current liability as discussed in Note 5 to the financial statements, although the Fifth Amendment to the Credit Agreement provides us the option to

extend the maturity of the agreement.

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Hamot (“Hamot”) and Andrew R.

Siegel (“Siegel”), principals of Costa Brava Partnership III, L.P.

(“Costa Brava”), were involved in litigation against the Company as

Plaintiffs and Counter-defendants in the Circuit Court for Baltimore City, Maryland (the “Circuit Court”).

Siegel (“Siegel”), principals of Costa Brava Partnership

(“Costa Brava”), were involved in litigation against the Company as Plaintiffs and Counter-defendants in the Circuit Court for Baltimore City, Maryland (the “Circuit Court”).

Siegel is a Class D Director of the Company and Mr.

Hamot was a Class D Director of the Company until his resignation on March 9, 2018.

Plaintiffs initially alleged that certain documents and records had not been provided to them promptly and were necessary to fulfill their duties as directors of the Company.

Subsequently, Hamot and Siegel further alleged that the Company had failed

to follow certain provisions concerning the noticing of Board committee meetings and the recording of Board meeting minutes and, additionally, that Mr.

John Wood’s service as both CEO and Chairman of the Board was improper and impermissible under the

Company’s Bylaws.

On April 23, 2008, the Company filed a counterclaim against Hamot and Siegel for money damages and preliminary and injunctive relief based upon Hamot and Siegel’s interference with, and improper influence of, the Company’s

independent auditors regarding, among other things, a specific accounting treatment.

On June 27, 2008, the Circuit Court granted the Company’s motion for preliminary injunction and enjoined Hamot and Siegel from contacting the Company’s auditors

until the completion of the Company’s Form 10-K for the preceding year, which injunction later expired by its own terms.

As previously disclosed, trial on Hamot and Siegel’s claims and the Company’s counterclaims took place in July through September

2013, and the Court subsequently issued decisions on the various claims by way of memorandum opinions and orders dated September 11, 2017.

The Company’s subsequent appeal of the amount of damages awarded to it for Hamot and Siegel’s intentional

interference with the relationships with its former auditor was ultimately dismissed by way of the Mandate issued by the Court of Appeals of Maryland on October 11, 2019.

Hamot (and later, his Estate) and Siegel at various times in this litigation have sought to be indemnified or to be awarded

advancement of various attorney’s fees and expenses incurred by them in this litigation.

No claim for indemnification is pending as of the reporting date.

There have been no material developments in connection with this litigation during the three months ended June 30, 2020.

At this stage of the litigation, it is

impossible to reasonably determine the degree of probability related to the Company’s success in relation to any possible further claim by Hamot’s Estate and Siegel for indemnification for certain attorney’s fees and expenses incurred in this

The Company intends to vigorously defend the matter and oppose any claim for indemnification were it to be pursued.

a Class D Director of the Company until his resignation on March 9, 2018.

The Plaintiffs initially alleged that certain documents and records had not been provided to them promptly and were necessary to fulfill their duties as directors of the

Subsequently, Hamot and Siegel further alleged that the Company had failed to follow certain provisions concerning the noticing of Board committee meetings and the recording of Board meeting minutes and, additionally, that Mr.

service as both CEO and Chairman of the Board was improper and impermissible under the Company’s Bylaws.

On April 23, 2008, the Company filed a counterclaim against Hamot and Siegel for money damages and preliminary and injunctive relief based upon

Hamot and Siegel’s interference with, and improper influence of, the Company’s independent auditors regarding, among other things, a specific accounting treatment.

On June 27, 2008, the Circuit Court granted the Company’s motion for preliminary

injunction and enjoined Hamot and Siegel from contacting the Company’s auditors until the completion of the Company’s Form 10-K for the preceding year, which injunction later expired by its own terms.

As previously disclosed, trial on Hamot and

Siegel’s claims and the Company’s counterclaims took place in July through September 2013, and the Court subsequently issued decisions on the various claims by way of memorandum opinions and orders dated September 11, 2017.

Among other rulings, the

Court found Hamot and Siegel liable for the intentional tort of tortious interference with the Company’s contractual relationship with one of its auditors and entered a monetary judgment in favor of the Company and against Hamot and Siegel for

approximately $ 278,000 .

The Company’s subsequent appeal of the amount of damages awarded to it for Hamot and Siegel’s intentional interference was ultimately

dismissed by way of the Mandate issued by the Court of Appeals of Maryland on October 11, 2019.

Hamot (and later, his Estate) and Siegel on multiple occasions during this litigation have sought to be indemnified or to

be awarded advancement of various attorney’s fees and expenses incurred by them in this litigation.

On October 20, 2020, Hamot’s Estate and Siegel (together the “Plaintiffs”) filed their latest Motion for Indemnification of Legal Fees and Expenses

against the Company in the Circuit Court for Baltimore City and a Request for a Hearing.

The Motion demands that the Company indemnify the Plaintiffs for legal fees and expenses incurred in the sum of $ 2,540,000 .

The Company filed an Opposition to the Motion on November 4, 2020.

The Company denies that it has any liability for indemnification to the Plaintiffs and intends to vigorously defend the matter

through an opposition to the Motion and further proceedings.

At this stage of the litigation, it is impossible to reasonably determine the degree of probability related to the

Company’s success in relation to this claim by Hamot’s Estate and Siegel for indemnification for certain attorney’s fees and expenses incurred in this litigation.

The Company intends to vigorously defend the matter.

Other Litigation

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condensed consolidated financial position, results of operations or cash flows.

Related Party

Wood, the brother of our Chairman and CEO, has been an employee of the Company since 1996.

The amounts paid to this individual as compensation were $151,000 and $324,000 for the three and six months ended June 30, 2020, respectively, and

$76,000 and $234,000 for the three and six months ended June 30, 2019, respectively.

Additionally, as of June 30, 2020 and December 31,

Related Party Transactions

brother of our Chairman and CEO, has been an employee of the Company since 1996.

The amounts paid to this individual as compensation were $ 193,000 and $ 517,000 for the three and nine months ended September 30, 2020 , respectively, and $ 110,000 and $ 344,000 for the three and nine months ended September 30, 2019 , respectively.

Additionally, as of September 30, 2020 and December 31, 2019 , Mr.

Wood owned 810,000 shares of the Company’s Class A Common Stock and 50,000 shares of the Company’s Class B Common Stock.

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Under the terms of the Porter Notes, Porter lent the Company $ 2.5 million on or about March 31, 2015.

According to the original terms of the Porter Notes, the

outstanding principal sum bears interest at the fixed rate of twelve percent (12%) per annum which would be payable in arrears in cash on the 20th day of each May, August, November and February, with the first interest payment date due on August 20,

According to the original terms of the Porter Notes, the outstanding principal sum bears interest at the fixed rate of twelve

percent ( 12% ) per annum which would be payable in arrears in cash on the 20th day of each May, August, November and February, with the first interest payment date due

on August 20, 2015 .

The Porter Notes do not call for amortization payments and are unsecured.

The Porter Notes, in whole or in part, may be repaid at any time without premium or penalty.

The unpaid principal, together with interest, was originally due and payable

in full on July 1, 2017.

The Porter Notes, in whole or in part, may be repaid at any time

without premium or penalty.

The unpaid principal, together with interest, was originally due and payable in full on July 1, 2017 .

On April 18, 2017, we amended and restated the

Porter Notes to reduce the interest rate from twelve percent (12%) to six percent (6%) per annum, to be accrued, and extended the maturity date from July 1, 2017 to July 25, 2022.

Telos also entered into Intercreditor Agreements with Porter and

All other terms remain in full force and

We incurred interest expense in the amount of $88,000 and $175,000 for the three and six months ended June 30, 2020, respectively , and $82,000 and $162,000 for the three and six months ended June 30, 2019, respectively, on the Porter

As of June 30, 2020, approximately $1.2 million of accrued interest was payable according to the stated interest rate of the Porter Notes.

Note 10 – Leases

Porter Notes to reduce the interest rate from twelve percent ( 12% ) to six percent ( 6% ) per

annum, to be accrued, and extended the maturity date from July 1, 2017 to July 25, 2022 .

conditions are met.

All other terms remain in full force and effect.

We incurred interest expense in the amount of $ 90,000 and $ 265,000 for the three and nine months ended September 30, 2020 , respectively , and $ 83,000 and $ 245,000 for the three and nine months ended September 30, 2019 , respectively, on the Porter Notes.

As of September 30, 2020 , approximately $ 1.2 million of accrued interest was payable

according to the stated interest rate of the Porter Notes.

We account for leases in accordance with ASC Topic 842, “Leases,” which requires lessees to recognize a right-of-use asset and lease

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Therefore, we use a discount rate based on our incremental borrowing rate which was 5.75% for all operating leases.

Our operating lease agreements

may include options to extend the lease term or terminate it early.

We have included options to extend in the operating lease ROU assets and liabilities when we are reasonably certain that we will exercise such options.

The weighted average remaining

lease terms and discount rates for our operating leases were approximately 3.0 years and 5.75% and for our finance leases were approximately 8.8 years and 5.04% at June 30, 2020.

Operating lease expense is recognized as rent expense on a

straight-line basis over the lease term.

Our operating lease agreements may include options to extend the lease term or terminate it early.

We have included options to extend in the operating lease ROU assets and liabilities when we

are reasonably certain that we will exercise such options.

The weighted average remaining lease terms and discount rates for our operating leases were approximately 2.8

years and 5.75% and for our finance leases were approximately 8.6 years and 5.04% at September 30, 2020 .

Operating lease expense is recognized as rent expense on

a straight-line basis over the lease term.

Some of our operating leases contain lease and non-lease components, which we account for as a single component.

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disclosure included in our 2019 Form 10-K.

As of June 30, 2020, operating lease ROU assets were $1.8 million and operating lease liabilities were $1.9 million, of which $1.3 million

were classified as noncurrent.

Future minimum lease commitments at June 30, 2020 were as follows (in thousands):

As of September 30, 2020 , operating lease ROU assets

were $ 1.6 million and operating lease liabilities were $ 1.8 million, of which $ 1.1 million were classified as noncurrent.

Future minimum lease commitments at September 30, 2020

were as follows (in thousands):

Year ending December 31,

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Finance Leases

2020 (excluding the six months ended June 30, 2020)

2020 (excluding the nine months ended September 30, 2020)

Total lease payments

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The components of lease expense were as follows (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Operating lease cost

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Supplemental cash flow information related to leases was as follows (in thousands):

Six Months Ended June 30,

Nine Months Ended September 30,

Cash paid for amounts included in the measurement of lease liabilities:

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Cash flows from operating activities - finance leases

Cash flows from financing activities - finance leases

Operating lease right-of-use assets obtained in exchange for lease obligations

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements