What changed in this filing

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Item 1. Financial Statements

2021-05-17 compared with 2020-11-13 · 583 added, 741 removed, 327 unchanged (80% of the section changed)

Financial Statements

TELOS CORPORATION AND SUBSIDIARIES

CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except earnings per share data)

Three Months Ended September 30,

Nine Months Ended September 30,

(amounts in thousands )

Three Months Ended March 31,

Costs and expenses

Cost of sales - Services

Cost of sales - Services (including $737 stock-based compensation expense)

Cost of sales - Products

Selling, general and administrative expenses

Operating income

Sales and marketing (including $1,547 stock-based compensation expense)

Research and development (including $461 stock-based compensation expense)

General and administrative (including $10,925 stock-based compensation expense)

Operating (loss) income

Other income (expense)

Other (expense) income

Interest expense

Income (loss) before income taxes

Loss before income taxes

(Provision for) benefit from income taxes (Note 7)

Net income (loss)

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

Net loss attributable to Telos Corporation

Net loss per share attributale to Telos Corporation, basic

Net loss per share attributale to Telos Corporation, diluted

Weighted-average shares of common stock outstanding, basic

Weighted-average shares of common stock outstanding, diluted

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

TELOS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(amounts in thousands)

Three Months Ended September 30,

Nine Months Ended September 30,

Net income (loss)

Three Months Ended March 31,

Other comprehensive loss, net of tax:

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Comprehensive income attributable to non-controlling interest

Comprehensive (loss) income attributable to Telos Corporation

Comprehensive loss attributable to Telos Corporation

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

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(amounts in thousands)

September 30, 2020

March 31, 2021

December 31, 2020

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net of obsolescence reserve of $ 852 and $ 851 , respectively (Note 1)

Prepaid expenses

Deferred program expenses

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Total current assets

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

equipment, including capitalized software development costs, net of accumulated depreciation of $ 37,948 and $ 36,891 , respectively

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

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(amounts in thousands)

September 30, 2020

March 31, 2021

December 31, 2020

LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS’ DEFICIT

LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current liabilities

Senior term loan, net of unamortized discount and issuance costs – short-term (Note 5)

Accounts payable and other accrued liabilities (Note 5)

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Finance lease obligations – short-term (Note 10)

Other current liabilities (Note 10)

Operating lease obligations – short-term (Note 10)

Other current liabilities

Total current liabilities

Senior term loan, net of unamortized discount and issuance costs (Note 5)

Subordinated debt (Note 5)

Finance lease obligations – long-term (Note 10)

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Deferred income taxes (Note 7)

Public preferred stock (Note 6)

Other liabilities (Note 7)

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Commitments and contingencies (Note 8)

Stockholders’ deficit

Telos stockholders’ deficit

Stockholders’ equity

Additional paid-in capital

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Accumulated deficit

Total Telos stockholders’ deficit

Non-controlling interest in subsidiary (Note 2)

Total stockholders’ deficit

Total liabilities, redeemable preferred stock, and stockholders’ deficit

Total stockholders’ equity

Total liabilities and stockholders’ equity

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

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(amounts in thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Operating activities:

Net income (loss)

Adjustments to reconcile net income (loss) to cash provided by operating activities:

Adjustments to reconcile net loss to cash (used in) provided by operating activities:

Stock-based compensation

Dividends from preferred stock recorded as interest expense

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Amortization of debt issuance costs

Deferred income tax provision (benefit)

Deferred income tax provision

Other noncash items

Changes in other operating assets and liabilities

Cash provided by operating activities

Cash (used in) provided by operating activities

Investing activities:

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Financing activities:

Proceeds from senior term loan

Payments under finance lease obligations

Amendment fee paid to lender

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

Cash (used in) provided by financing activities

Increase in cash and cash equivalents

Cash used in financing activities

Decrease in cash and cash equivalents

Cash and cash equivalents, beginning of period

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Cash paid during the period for:

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.

TELOS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

(amounts in thousands)

Telos Corporation

Additional Paid-in

Other Comprehensive Income

Accumulated Deficit

Non-Controlling Interest

Stockholders’

For the Three Months Ended September 30, 2020

Total Stockholders’

Equity (Deficit)

For the Three Months Ended March 31, 2021

Beginning balance

Net (loss) income

Foreign currency translation loss

Stock-based compensation

Distributions

Ending balance

For the Three Months Ended September 30, 2019

Beginning balance

Foreign currency translation loss

Distributions

Ending balance

For the Nine Months Ended September 30, 2020

For the Three Months Ended March 31, 2020

Beginning balance

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Foreign currency translation loss

Stock-based compensation

Distributions

Ending balance

For the Nine Months Ended September 30, 2019

Beginning balance

Net (loss) income

Distributions

Ending balance

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

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

Ubiquity.com, Inc., Xacta Corporation, Teloworks, Inc.

and Telos APAC, Pte.

Ltd., all of whose issued and outstanding share capital is owned by the Company.

We have also consolidated the results of operations of Telos Identity Management Solutions,

LLC (“Telos ID”) (see Note 2 – Non-controlling Interests).

All intercompany transactions have been eliminated in consolidation.

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.

We own all of the issued and outstanding share capital of Xacta Corporation, a subsidiary that develops, markets and sells

government-validated secure enterprise solutions to government and commercial customers.

We also own all of the issued and outstanding share capital of Ubiquity.com, Inc., a holding company for Xacta Corporation.

We also have a 100% ownership

interest in Telos Identity Management Solutions, LLC (“Telos ID”), Teloworks, Inc.

(“Teloworks”) and Telos APAC Pte.

(“Telos APAC”).

Initial Public Offering of Common Stock

On November 19, 2020, we completed our initial public offering of shares of our common stock.

17.2 million shares of our common stock at a price of $17.00 per share, generating net proceeds of approximately $272.8 million.

We used approximately $108.9 million of the net proceeds in connection with the conversion of our outstanding shares of

Exchangeable Redeemable Preferred Stock into the right to receive cash and shares of our common stock, $30.0 million to fund our acquisition of the outstanding Class B Units of Telos ID, and $21.0 million to repay our outstanding senior term loan and

subordinated debt.

We intend to use the remaining net proceeds for general corporate purposes.

We also may use a portion of the net proceeds to acquire complementary businesses, products, services, or technologies.

The amounts and timing of our

actual use of the net proceeds will vary depending on numerous factors.

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

subsidiaries, including Ubiquity.com, Inc., Xacta Corporation, Telos ID, Teloworks, and Telos APAC, all of whose issued and outstanding share capital is owned by the Company.

Intercompany transactions have been eliminated in consolidation.

The accompanying condensed consolidated financial statements reflect all adjustments (which include normal recurring

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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.

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.

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 leading to a world-wide economic downturn.

COVID-19, together with subsequently reported variants of this strain, have

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 margins.

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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Recent Accounting Pronouncements Adopted

In June 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”)

2016-13, “Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments,” which introduces new guidance for estimating credit losses on certain types of financial instruments based on expected losses and the

timing of the recognition of such losses.

This standard is effective for interim and annual reporting periods beginning after December 15, 2019, which made this standard effective for us on January 1, 2020.

The adoption of this ASU did not have a

material impact on our condensed consolidated financial position, results of operations and cash flows.

In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350):

Simplifying the Test for

Goodwill Impairment," which eliminates Step 2 of the current goodwill impairment test that requires a hypothetical purchase price allocation to measure goodwill impairment.

A goodwill impairment loss instead is measured at the amount by which a

reporting unit's carrying value exceeds its fair value, not to exceed the recorded amount of goodwill.

The provisions of this ASU are effective for years beginning after December 15, 2019, which made this standard effective for us on January 1, 2020.

The adoption of this ASU did not have a material impact on our condensed consolidated financial position, results of operations and cash flows.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820):

Disclosure Framework – Changes to the

Disclosure Requirements for Fair Value Measurement,” which modifies the disclosure requirement for fair value measurement under ASC 820 to improve the effectiveness of such disclosures.

Those modifications include the removal and addition of

disclosure requirements as well as clarifying specific disclosure requirements.

This standard is effective for interim and annual reporting periods beginning after December 15, 2019, which made this standard effective for us on January 1, 2020.

adoption of this ASU did not have a material impact on our condensed consolidated financial position, results of operations and cash flows.

In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract

with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.

This standard is effective for interim and annual reporting periods beginning after December 15, 2019, which made this standard

effective for us on January 1, 2020.

In December 2019, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (‘ASU”) No.

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

This standard is effective for reporting periods beginning after December 15, 2020, which made this standard effective for us on January 1,

The adoption of this ASU did not have a material impact on our condensed consolidated financial position, results of operations and cash flows.

Recent Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU No.

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.

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

We account for revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with

Customers.” The unit of account in ASC 606 is a performance obligation, which is a promise in a contract with a customer to transfer a good or service to the customer.

ASC 606 prescribes a five-step model for recognizing revenue that includes

identifying the contract with the customer, determining the performance obligation(s), determining the transaction price, allocating the transaction price to the performance obligation(s), and recognizing revenue as the performance obligations are

Timing of the satisfaction of performance obligations varies across our businesses due to our diverse product and service mix, customer base, and contractual terms.

Significant judgment can be required in determining certain performance

obligations, and these determinations could change the amount of revenue and profit recorded in a given period.

We account for revenue in accordance with ASC Topic 606, “Revenue from Contracts with Customers.” The

unit of account in ASC 606 is a performance obligation, which is a promise in a contract with a customer to transfer a good or service to the customer.

ASC 606 prescribes a five-step model for recognizing revenue that includes identifying the

contract with the customer, determining the performance obligation(s), determining the transaction price, allocating the transaction price to the performance obligation(s), and recognizing revenue as the performance obligations are satisfied.

of the satisfaction of performance obligations varies across our businesses due to our diverse product and service mix, customer base, and contractual terms.

Significant judgment can be required in determining certain performance obligations, and

these determinations could change the amount of revenue and profit recorded in a given period.

Our contracts may have a single performance obligation or multiple performance obligations.

When there are multiple performance

obligations within a contract, we allocate the transaction price to each performance obligation based on our best estimate of standalone selling price.

The majority of our revenue is recognized over time, as control is transferred continuously to our customers who receive

and consume benefits as we perform, and is classified as services revenue.

All of our business groups earn services revenue under a variety of contract types, including time and materials, firm-fixed price, firm fixed price level of effort, and cost

plus fixed fee contract types, which may include variable consideration as discussed further below.

Revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our

performance obligations.

When there are multiple performance obligations within a

contract, we allocate the transaction price to each performance obligation based on our best estimate of standalone selling price.

The majority of our revenue is recognized over time, as control is transferred continuously to our

customers who receive and consume benefits as we perform, and is classified as services revenue.

All of our business groups earn services revenue under a variety of contract types, including time and materials, firm-fixed price, firm fixed price

level of effort, and cost plus fixed fee contract types, which may include variable consideration as discussed further below.

Revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure

progress toward satisfying our performance obligations.

Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer.

Contract costs include labor, material, subcontractor costs and indirect expenses.

continuous transfer of control to the customer is supported by clauses in our contracts with U.S.

Government customers whereby the customer may terminate a contract for convenience and then pay for costs incurred plus a profit, at which time the

customer would take control of any work in process.

Government contracts where we perform as a subcontractor and our order includes similar Federal Acquisition Regulation (FAR) provisions as the prime contractor’s order from the U.S.

Contract costs include labor, material, subcontractor costs

and indirect expenses.

This continuous transfer of control to the customer is supported by clauses in our contracts with U.S.

Government customers whereby the customer may terminate a contract for convenience and then pay for costs incurred plus a

profit, at which time the customer would take control of any work in process.

Government contracts where we perform as a subcontractor and our order includes similar Federal Acquisition Regulation (the FAR) provisions as the prime

contractor’s order from the U.S.

Government, continuous transfer of control is likewise supported by such provisions.

For other non-U.S.

Government customers, continuous transfer of control to such customers is also supported due to general terms in our contracts and rights to

recover damages which would include, among other potential damages, the right to payment for our work performed to date plus a reasonable profit.

Due to the transfer of control over time, revenue is recognized based on progress towards completion of the performance

Government customers, continuous transfer of control to such customers is also supported due to general terms in

our contracts and rights to recover damages which would include, among other potential damages, the right to payment for our work performed to date plus a reasonable profit.

Due to the transfer of control over time, revenue is recognized based on progress towards completion of

the performance obligation.

The selection of the method to measure progress towards completion requires judgment and is based on the nature of the performance obligations.

We generally use the cost-to-cost measure of progress on a proportional performance basis for

our contracts because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts.

Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of

costs incurred to date to the total estimated costs at completion of the performance obligation.

We generally use the cost-to-cost measure of progress on a proportional

performance basis for our contracts because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts.

Under the cost-to-cost measure of progress, the extent of progress towards completion is measured

based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation.

Revenues are recorded proportionally as costs are incurred.

Due to the nature of the work required to be performed on certain of our performance

obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment.

Contract estimates are based on various assumptions including labor and subcontractor costs, materials and

other direct costs and the complexity of the work to be performed.

Due to the nature of the work required to be performed on certain of

our performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment.

Contract estimates are based on various assumptions including labor and subcontractor costs,

materials and other direct costs and the complexity of the work to be performed.

A significant change in one or more of these estimates could affect the profitability of our contracts.

We review and update our contract-related estimates regularly and recognize

adjustments in estimated profit on contracts on a cumulative catch-up basis, which may result in an adjustment increasing or decreasing revenue to date on a contract in a particular period that the adjustment is identified.

Revenue and profit in

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

We review and update our contract-related estimates regularly and

recognize adjustments in estimated profit on contracts on a cumulative catch-up basis, which may result in an adjustment increasing or decreasing revenue to date on a contract in a particular period that the adjustment is identified.

profit in 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 Information Assurance / Xacta®

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significant reversal of cumulative revenue recognized will not occur when any uncertainty associated with the variable consideration is resolved.

We have revised and re-submitted several years of incurred cost submissions reflecting certain indirect

rate structure changes as a result of regular Defense Contract Audit Agency (“DCAA”) audits of incurred cost submissions.

This resulted in signed final rate agreement letters for fiscal years 2011 to 2013 and conformed incurred cost submissions for

2014 to 2015.

We evaluated the resulting changes to revenue under the applicable cost plus fixed fee contracts for the years 2011 to 2015 as variable consideration, and determined the most likely amount to which we expect to be entitled, to the

extent that no constraint exists that would preclude recognizing this revenue or result in a significant reversal of cumulative revenue recognized.

We included these estimated amounts of variable consideration in the transaction price and as

performance on these contracts is complete, we have recognized revenue of $ 6.0 million during the year ended December 31, 2018 .

Historically, most of our contracts do not include award or incentive fees.

For incentive fees, we would include such fees

in the transaction price to the extent we could reasonably estimate the amount of the fee.

For incentive fees, we would

include such fees in the transaction price to the extent we could reasonably estimate the amount of the fee.

With limited historical experience, we have not included any revenue related to incentive fees in our estimated transaction prices.

We may include in our

contract estimates additional revenue for submitted contract modifications or claims against the customer when we believe we have an enforceable right to the modification or claim, the amount can be estimated reliably and its realization is probable.

We consider the contractual/legal basis for the claim (in particular FAR provisions), the facts and circumstances around any additional costs incurred, the reasonableness of those costs and the objective evidence available to support such claims.

For our contracts that have an original duration of one year or less, we use the practical expedient applicable to such

contracts and do not consider the time value of money.

include in our contract estimates additional revenue for submitted contract modifications or claims against the customer when we believe we have an enforceable right to the modification or claim, the amount can be estimated reliably and its

realization is probable.

support such claims.

For our contracts that have an original duration of one year or less, we use the practical expedient

applicable to such contracts and do not consider the time value of money.

We capitalize sales commissions related to proprietary software and related services that are directly tied to sales.

We do not elect the practical expedient to expense as incurred the

incremental costs of obtaining a contract if the amortization period would have been one year or less.

For the sales commissions that are capitalized, we amortize the asset over the expected customer life, which is based on recent and historical

Contract assets are amounts that are invoiced as work progresses in accordance with agreed-upon contractual terms, either

at periodic intervals or upon achievement of contractual milestones.

We do not elect the practical expedient to expense as

incurred the incremental costs of obtaining a contract if the amortization period would have been one year or less.

For the sales commissions that are capitalized, we amortize the asset over the expected customer life, which is based on recent and

historical data.

Contract assets are amounts that are invoiced as work progresses in accordance with agreed-upon

contractual terms, either at periodic intervals or upon achievement of contractual milestones.

Generally, revenue recognition occurs before billing, resulting in contract assets.

These contract assets are referred to as unbilled receivables and are reported within accounts

receivable, net of reserve on our consolidated balance sheets.

Billed receivables are amounts billed and due from our customers and are reported within accounts receivable, net of

reserve on the consolidated balance sheets.

The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component due to the intent of the retainage being the customer’s protection

with respect to full and final performance under the contract.

Contract liabilities are payments received in advance and milestone payments from our customers on selected contracts that

exceed revenue earned to date, resulting in contract liabilities.

Contract liabilities typically are not considered a significant financing component because they are generally satisfied within one year and are used to meet working capital demands

that can be higher in the early stages of a contract.

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

These contract assets are referred to as unbilled receivables and are

reported within accounts receivable, net of reserve on our condensed consolidated balance sheets.

Billed receivables are amounts billed and due from our customers and are reported within accounts

receivable, net of reserve on the condensed consolidated balance sheets.

The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component due to the intent of the retainage being

the customer’s protection with respect to full and final performance under the contract.

Contract liabilities are payments received in advance and milestone payments from our customers on

selected contracts that exceed revenue earned to date, resulting in contract liabilities.

Contract liabilities typically are not considered a significant financing component because they are generally satisfied within one year and are used to meet

working capital demands that can be higher in the early stages of a contract.

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

We have one reportable segment.

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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.

following tables disclose revenue (in thousands) by customer type and contract type for the three months ended March 31, 2021 and 2020.

Three Months Ended

Nine Months Ended

September 30,

State & Local, and Commercial

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):

September 30, 2020

March 31, 2021

December 31, 2020

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Receivables – net

The following table discloses contract liabilities (in thousands):

September 30, 2020

December 31, 2019

Contract liabilities

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.

As of March 31, 2021 and December 31, 2020, we had $126.8 million and $127.7 million of remaining performance

obligations, respectively, which we also refer to as funded backlog.

We expect to recognize approximately 84.2% of our remaining performance obligations as revenue in 2021, an additional 10.3% in 2022, and the balance thereafter.

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.

Revenue recognized

for the three months ended March 31, 2021 and 2020 that was included in the contract liabilities balance at the beginning of each reporting period was $2.0 million and $2.4 million, respectively.

Contract liabilities were $6.8 million and $5.7

million as of March 31, 2021 and December 31, 2020, respectively.

Accounts Receivable

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against the allowance when management deems the balances uncollectible.

On July 15, 2016, the Company entered into an accounts receivable purchase agreement under which the Company sells certain

accounts receivable to a third party, or the "Factor", without recourse to the Company.

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

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 $ 4.8 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 .

Gross inventory was $ 2.7 million and $ 4.2 million as of March 31, 2021 and December 31, 2020 , respectively.

As of March 31, 2021 , it is management’s judgment that we have fully provided for any potential inventory obsolescence, which was $0.9 million as of March 31, 2021 and December 31, 2020.

Software Development Costs

Our policy on accounting for development costs of software to be sold is in accordance with ASC Topic 985-20, “Software – Costs of Software

to be Sold, Leased, or Marketed” and ASC Topic 350-40 “Internal Use Software”, in so far as our Xacta products being available in various deployment modalities including on premises licenses and cloud-based Software as a Service (“SaaS”) as well as

solutions developed within Telos ID.

Under both standards, software development costs are expensed as incurred until technological feasibility is reached, at which time additional costs are capitalized until the product is available for general

release to customers or is ready for its intended use, as appropriate.

to be Sold, Leased, or Marketed” and ASC Topic 350-40 “Internal Use Software” in so far as our Xacta products being available in various deployment modalities including on premises licenses and cloud-based Software as a Service (“SaaS”).

standards, software development costs are expensed as incurred until technological feasibility is reached, at which time additional costs are capitalized until the product is available for general release to customers or is ready for its intended

use, as appropriate.

Technological feasibility is established when all planning, designing, coding and testing activities have been completed, and all risks have been identified.

Beginning with the

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 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

Software development costs are capitalized and amortized over the

estimated product life of 2 years on a straight-line basis.

As of March 31, 2021 and December 31, 2020, we capitalized $14.4 million and $12.3 million of software development costs, respectively, which are included as a part of property and

Amortization expense was $0.5 million for each of the three months ended March 31, 2021 and 2020.

Accumulated amortization was $5.3 million and $4.8 million as of March 31, 2021 and December 31, 2020, 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.

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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 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 have determined that a full valuation allowance is required as of March 31, 2021 and December 31, 2020.

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 March 31, 2021 and December 31, 2020.

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 March

31, 2021 and December 31, 2020.

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

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If we determine it is more likely than not that a tax position will be sustained based

on its technical merits, we record the impact of the position in our consolidated financial statements at the largest amount that is greater than fifty percent likely of being realized upon ultimate settlement.

These estimates are updated at each

reporting date based on the facts, circumstances and information available.

We are also required to assess at each reporting date whether it is reasonably possible that any significant increases or decreases to our unrecognized tax benefits will

occur during the next 12 months.

on its technical merits, we record the impact of the position in our condensed consolidated financial statements at the largest amount that is greater than fifty percent likely of being realized upon ultimate settlement.

These estimates are updated

at each reporting date based on the facts, circumstances and information available.

We are also required to assess at each reporting date whether it is reasonably possible that any significant increases or decreases to our unrecognized tax benefits

will occur during the next 12 months.

The provision for income taxes in interim periods is computed by applying the estimated annual effective tax rate against

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We complete our

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.

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 (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

The Company’s assessment resulted in a fair value that was greater than the Company’s carrying value, therefore no impairment of goodwill was recorded as of December 31, 2020.

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 condensed consolidated statements of operations.

Goodwill is amortized and

deducted over a 15-year period for tax purposes.

Stock-Based Compensation

Compensation cost is recognized based on the requirements of ASC 718, “Stock Compensation,” for all

share-based awards granted.

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

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.

Under our 2016 Omnibus Long-Term Incentive Plan (the “2016 LTIP”), we have the ability to award

restricted stock units with time-based vesting (“Service-Based RSUs”), and restricted stock units with performance-based vesting (“Performance-Based RSUs”) to senior executives, directors and eligible employees.

Under the 2016 LTIP, our Board of

Directors or the Compensation Committee of our Board of Directors may establish the performance conditions applicable to the Performance-Based RSUs, including the achievement of certain price targets for our common stock.

Upon vesting,

Service-Based RSUs and Performance-Based RSUs will be settled in the Company’s common stock.

Service-Based RSUs granted to senior

executives generally vest in three annual installments from the date of grant, with 30% vesting on the first and second anniversaries and 40% vesting on the third anniversary.

Service-Based RSUs granted to eligible employees as an incentive

generally vest in equal installments over two to three years from the date of grant.

The grant date fair value per share is equal to the closing stock price on the date of grant.

Performance-Based RSUs may vest upon the

achievement of a defined performance target or at the end of the defined performance period from the date of grant, whichever initially occurs.

The grant date fair value per share of these Performance-Based RSUs is equal to the closing stock

price on the date of the grant.

Performance-Based RSUs may vest upon the achievement of certain price targets for the Company’s common stock over anytime over a three-year period from the date of grant.

In order to reflect the substantive

characteristics of these market condition award, the Company employs a Monte Carlo simulation valuation model to calculate the grant date fair value and corresponding service period of the award.

Monte Carlo approaches are a class of

computational algorithms that rely on repeated random sampling to compute their results.

This approach allows the calculation of the value of such awards based on a large number of possible stock price path scenarios.

We recognize these share-based payment transactions when services from the employees are received and recognize a

corresponding increase in additional paid-in capital in our condensed consolidated balance sheets.

The measurement objective for these equity awards is the estimated fair value at the date of grant of the equity instruments that we are obligated to

issue when employees have rendered the requisite service and satisfied any other conditions necessary to earn the right to benefit from the instruments.

The compensation expense for an award is recognized ratably over the requisite service period for

the entire award, which is the period during which an employee is required to provide service in exchange for an award.

Compensation expense for awards with performance conditions is recognized over the requisite service period if it is probable that

the performance condition will be satisfied.

If such performance conditions are not or are no longer considered probable, no compensation expense for these awards is

recognized, and any previously recognized expense is reversed.

Compensation expense for awards with performance conditions capable of being earned for satisfying the performance condition or as a result of completing a service requirement will be

recognized ratably over the requisite service period for the entire award.

If the performance condition is achieved prior to the completion of the requisite service period, any unrecognized compensation expense will be recognized in the period the

performance condition is achieved.

Compensation expense for awards with market conditions is recognized over the derived service period, or sooner, if the market condition is achieved.

Previously recognized expense for awards with market

conditions will never be reversed even if the market conditions is never achieved.

We recognize forfeitures of share-based compensation awards as they occur.

Share-based compensation expense is recognized as part of cost of sales and general and

administrative expenses in our condensed consolidated statements of operations.

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

Basic net earnings (loss) per share is computed by dividing the net earnings (loss) by the

weighted-average number of common shares outstanding for the period, without consideration for potentially dilutive securities.

Diluted net earnings (loss) per share is computed by dividing the net earnings (loss) by the weighted-average number of

shares of common stock and dilutive common stock equivalents outstanding for the period determined using the treasury-stock and if-converted methods.

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

Potentially dilutive securities not included in the calculation of diluted net earnings (loss) per

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

Three Months Ended March 31,

Unvested restricted stock and restricted stock units

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.

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 stock split.

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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Translation gains and losses are included in stockholders’ deficit as a component of accumulated other comprehensive income (loss).

Accumulated other comprehensive income included within stockholders’ deficit consists of the following

(in thousands):

September 30, 2020

Accumulated other comprehensive income included within stockholders’ equity (deficit) consists of the

following (in thousands):

March 31, 2021

December 31, 2020

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Accumulated other comprehensive income

Non-controlling Interests

Purchase of Telos ID/Non-controlling Interests

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

Hoya ID Fund A, LLC (“Hoya”) to purchase all of the Class B Units of Telos ID owned by Hoya (the “Telos ID Purchase”).

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

On November 23, 2020, the Telos ID Purchase

was consummated with the Company transferring $30.0 million in cash and issuing 7,278,040 shares of our common stock at $20.39 per share (which totals approximately $148.4 million);

the total consideration transferred to Hoya was $178.4 million.

part of the common stock issuance, the Company recognized a credit to additional paid-in capital (“APIC”) of $148.4 million.

The Company further recognized a debit to APIC of $173.9 million as part of the elimination of Hoya’s non-controlling

interest in Telos ID.

The net impact to APIC associated with the acquisition of the additional 50% interest in Telos ID was a debit of $25.5 million.

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.

We contributed substantially all of the assets of our Telos ID Enterprise 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.

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.

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

to the ownership interests held by the other party including the following:

Upon the occurrence of a change in control of the Class A member (as defined in the Operating Agreement, a “Change in Control”), the Class A member has

the option to purchase the entire membership interest of the Class B member.

Upon the occurrence of the following events:

(i) the involuntary termination of John B.

Wood as CEO and chairman of the Class A member;

bankruptcy of the Class A member;

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.

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

contract to sell all of the assets or membership interests in Telos ID, or a standstill for due diligence with respect to a sale of Telos ID.

Notwithstanding the foregoing, the Class A member will not be obligated to purchase the interest of

the Class B member if that purchase would constitute a violation of any existing line of credit available to the Company after giving effect to that purchase and the applicable lender refuses to consent to that purchase or to waive such

If either the Class A member or the Class B member elects to sell its interest or buy the other

member’s interest upon the occurrence of any of the foregoing events, the purchase price for the interest will be based on an appraisal of Telos ID prepared by a nationally recognized investment banker.

If the Class A member fails to satisfy its

obligation, subject to the restrictions in the Purchase Agreement, to purchase the interest of the Class B member under the Operating Agreement, the Class B member may require Telos ID to initiate a sales process for the purpose of seeking an offer

from a third party to purchase Telos ID that maximizes the value of Telos ID.

The Telos ID Board must accept any offer from a bona fide third party to purchase Telos ID if that offer is approved by the Class B member, unless the purchase of Telos ID

would violate the terms of any existing line of credit available to the Company and the applicable lender does not consent to that purchase or waive the violation.

The sale process is the sole remedy available to the Class B member if the Class A

member does not purchase its membership interest.

Under such a forced sale scenario, a sales process would result in both members receiving their proportionate membership interest share of the sales proceeds and both members would always be entitled

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, 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.

Distributions are made to the members only when and to the extent determined by Telos ID’s Board of Directors, in

accordance with the Operating Agreement.

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

Distributions

Non-controlling interest, end of period

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.

April 19, 2007, we owned 99.999% of the membership interests of Telos ID and Hoya 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 Hoya in exchange for $ 6 million in cash consideration.

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”), Hoya acquired from the Company an additional ten percent

(10%) membership interest in Telos ID in exchange for $5 million (the “2014 Transaction”).

In connection with the 2014 Transaction, the Company and Hoya 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 was managed by a board of directors comprised of five (5) members (the “Telos ID Board”).

The Company owned 50% of Telos ID,

was entitled to receive 50% of the profits of Telos ID, and could appoint three (3) members of the Telos ID Board.

Hoya owned 50% of Telos ID, was entitled to receive 50% of the profits of Telos ID, and could appoint two (2) members of the Telos ID

As a result of the 2014 Transaction, each of the member owned 50% of Telos ID, as mentioned above, and as such each was

allocated 50% of the profits, which was $784,000 for the three months ended March 31, 2020.

Hoya was the non-controlling interest.

Distributions were made to the members only when and to the extent determined by Telos ID’s Board of

Directors, in accordance with the Operating Agreement.

Hoya received a final distribution of $2.4 million in January 2021, which was accrued and presented in accounts payable and other accrued liabilities in the condensed consolidated balance sheets

as of December 31, 2020.

No distribution was made during the three months ended March 31, 2020.

The goodwill balance was $ 14.9 million as of March 31, 2021 and December 31, 2020 .

Goodwill is subject to annual

impairment tests and in the intereim if triggering events are present before the annual tests, we will assess impairment.

For the three months ended March 31, 2021 and 2020, no impairment charges were taken.

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 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

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;

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

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supported by little or no market activity).

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.

As of March 31, 2021 and December 31,

2020 , 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

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

liabilities, the carrying amount approximates fair value due to the short-term maturities of these instruments.

The estimated fair value of the Credit Agreement (as defined below) and long-term debt is based primarily on borrowing rates currently

available to the Company for similar debt issues.

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

Current Liabilities and Debt Obligations

Accounts Payable and Other 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.

As of March 31, 2021 and December 31,

2020 , the accounts payable and other accrued liabilities consisted of $ 9.8 million and $ 14.7 million, respectively, in trade accounts payable and $ 22.0 million and $ 6.2 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 September 30, 2020 and December 31, 2019 , the contract liabilities primarily related to product support services.

As of March 31, 2021 and

December 31, 2020, 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

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.

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 could 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.

6 unchanged sentences

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.

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

to allow for more time to complete the legal and administrative requirements around such items.

On April 18, 2017, the Credit Agreement was further amended (the “Second Amendment”) to incorporate the parties’ agreement to subordinate certain debt

owed by the Company to the affiliated entities of Mr.

Porter (the “Subordinated Debt”) and to redeem all outstanding shares of the Series A-1 Redeemable Preferred Stock and the Series A-2 Redeemable Preferred Stock, including those owned

Porter and his affiliates, for an aggregate redemption price of $ 2.1 million.

In connection with the Second Amendment and that subordination of debt, on April 18, 2017, we also entered into

Subordination and Intercreditor Agreements (the “Intercreditor Agreements”) with affiliated entities of Mr.

Porter (together referenced as “Porter”), in which Porter agreed that the Subordinated Debt is fully subordinated to the amended

Credit Agreement and related documents, and that required payments, if any, under the Subordinated Debt are permitted only if certain conditions are met.

On March 30, 2018, the Credit Agreement was amended (the “Third Amendment”) to waive any actual or

potential non-compliance with covenants in 2017 and to reset the covenants for 2018 measurement periods to more accurately reflect the Company’s projected performance for the year.

The measurement against the covenants for consolidated leverage ratio

and consolidated fixed charge coverage ratio were agreed to not be measured as of December 31, 2017 and were reset for 2018 measurement periods.

"Warrant") to the Agent and certain of the Lenders representing in the aggregate the right to purchase in accordance with their terms 900,970 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 $1.665 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 were amortized over the life of the Credit Agreement.

On March 30, 2018, the Credit Agreement was amended (the “Third Amendment”) to waive any actual or potential

non-compliance with covenants in 2017 and to reset the covenants for 2018 measurement periods to more accurately reflect the Company’s projected performance for the year.

The measurement against the covenants for consolidated leverage ratio and

consolidated fixed charge coverage ratio were agreed to not be measured as of December 31, 2017 and were reset for 2018 measurement periods.

Additionally, a minimum revenue covenant and a net working capital covenant were added.

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.

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.

Contemporaneously with the Third Amendment, Mr.

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

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

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

2 unchanged sentences

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:

3 unchanged sentences

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

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 Amendment.

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.

The exit fee has been included in the total principal due and treated as an unamortized discount on the debt, which is being amortized over

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 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.

The exit fee had been included in the total principal due and treated as an unamortized discount on the debt, which was amortized over the

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

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.

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

15, 2021, which is within one year from the balance sheet date.

Accordingly, the balance of the EnCap loan has been classified as a current liability.

However, the options to extend the maturity provide the Company with the ability by contractual

right to extend the maturity of the loan, which the Company will consider exercising at the appropriate time.

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

September 30, 2020

December 31, 2019

Senior term loan principal, including exit fee

Unamortized discount, debt issuance costs, and lender fees

Senior term loan, net

We incurred interest expense in the amount of

$ 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

On July 15, 2016, we entered into an Accounts Receivable Purchase Agreement (the “Purchase Agreement”) with Republic Capital Access, LLC

(“RCA” or “Buyer”), pursuant to which we may offer for sale, and RCA, in its sole discretion, may purchase, eligible accounts receivable relating to U.S.

Government prime contracts or subcontracts of the Company (collectively, the “Purchased

Receivables”).

Upon purchase, RCA becomes the absolute owner of any such Purchased Receivables, which are payable directly to RCA, subject to certain repurchase obligations of the Company.

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.

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;

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

(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

the Company is characterized by a court or other governmental authority as a loan rather than a sale, the Company shall be deemed to have granted RCA, effective as of the date of the first purchase under the Purchase Agreement, a security interest in

all of the Company’s right, title and interest in, to and under all of the Purchased Receivables, whether now or hereafter owned, existing or arising.

The Company provides a power of attorney to RCA to take certain actions in the Company’s stead, including (a) to sell,

assign or transfer in whole or in part any of the Purchased Receivables;

(b) to demand, receive and give releases to any account debtor with respect to amounts due under any Purchased Receivables;

Purchased Receivables;

and (d) to take any actions necessary to perfect RCA’s interests in the Purchased Receivables.

The Company is liable to the Buyer for any fraudulent statements and all representations, warranties, covenants, and

indemnities made by the Company pursuant to the terms of the Purchase Agreement.

It is considered an event of default if (a) the Company fails to pay any amounts it owes to RCA when due (subject to a cure period);

(b) the Company has voluntary or

involuntary bankruptcy proceedings commenced by or against it;

(d) any voluntary liens, garnishments, attachments, or the like are issued against or attach

to the Purchased Receivables;

(e) the Company breaches any warranty, representation, or covenant (subject to a cure period);

(f) the Company is not in compliance or has otherwise defaulted under any document or obligation in favor of RCA or an RCA

or (g) the Purchase Agreement or any material provision terminates (other than in accordance with the terms of the Purchase Agreement) or ceases to be effective or to be a binding obligation of the Company.

If any such event of default

occurs, then RCA may take certain actions, including ceasing to buy any eligible receivables, declaring any indebtedness or other obligations immediately due and payable, or terminating the Purchase Agreement.

of the Credit Agreement to establish that the covenants will remain at the December 31, 2020 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.

We incurred interest expense in the amount of $0.8 million for the three months ended March 31, 2020, under the Credit Agreement.

On November 24, 2020, upon the closing of the IPO, the Company paid a total of $17.4 million which paid off the Credit

Agreement in full including an exit fee of $1.2 million, accrued interest of $138,000, and legal fees of $13,000.

On April 19, 2021, we repurchased all the shares and warrants from EnCap for approximately $28.1 million.

Subordinated Debt

2 unchanged sentences

Porter (together referenced as “Porter”).

At the time, Mr.

Porter and Toxford Corporation, of which Mr.

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

Porter controls as the co-trustee of the trust that is the sole stockholder of

Toxford, owned 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.

Telos also entered into Subordination and Intercreditor 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 were met.

According to the original terms of the Porter Notes,

the outstanding principal sum bore 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

The Porter Notes did not call for amortization payments and were unsecured.

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

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

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 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.

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

All other terms remained in full force and

We incurred interest expense in the amount of $80,000 for the three months ended March 31, 2020, on the Porter Notes.

As of March 31, 2020, approximately $1.1 million of accrued interest was payable according to the stated interest

rate of the Porter Notes.

On November 23, 2020, upon the closing of the IPO, the Porter Notes were paid in full.

Exchangeable Redeemable Preferred Stock Conversion

Public Preferred Stock

Upon the closing of the IPO, which constituted a qualified initial public offering for the purposes of the terms of the

Exchangeable Redeemable Preferred Stock (the “Public Preferred Stock”), each issued and outstanding share of Exchangeable Redeemable Preferred Stock automatically was converted (the “ERPS Conversion”) into the right to receive (i) an amount of cash

equal to (I) the ERPS Liquidation Value;

multiplied by (II) 0.90;

multiplied by (III) 0.85 and (ii) that number of shares of common stock (valued at the initial offering price to the public) equal to (I) the ERPS Liquidation Value;

multiplied by (II)

multiplied by (III) 0.15.

No fractional shares of common stock, however, were issued upon the ERPS Conversion but, in lieu thereof, the holder was entitled to receive an amount of cash equal to the fair market value of a share of common stock

(valued at the initial offering price to the public) at the time of the ERPS Conversion multiplied by such fractional amount (rounded to the nearest cent).

“ERPS Liquidation Value” means, per each share of Public Preferred Stock, $10 together with

all accrued and unpaid dividends (whether or not earned or declared) thereon calculated as of the actual date of the ERPS Conversion without interest, which, was approximately $142.3 million as of November 19, 2020.

All shares of common stock issued

upon an ERPS Conversion were validly issued, fully paid and non-assessable.

On November 23, 2020, holders of the Public Preferred Stock received $108.9 million in cash and 1.1 million shares of our common stock at $17 per share for a total value of

$19.2 million in connection with the ERPS Conversion.

The difference in the redemption value of the ERPS and the carrying value has been accounted for as a gain on extinguishment of debt in accordance with ASC 470 and ASC 480.

Approximately $220,000

of costs directly attributable to this redemption were applied against the gain, resulting in a net gain of $14.0 million.

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

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

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.

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.

We declared stock

dividends totaling 736,863 shares in 1990 and 1991.

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

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

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.

Credit Agreement, we agreed that, until full and final payment of the obligations under the Credit Agreement, we would not make any distribution or declare or pay any dividends (other than common stock) on our stock, or purchase, acquire, or redeem

any stock, or exchange any stock for indebtedness, or retire any stock.

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

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 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;

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.

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 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

The total number of shares issued and outstanding at March 31, 2021 and December 31, 2020 was 3,185,586 .

We paid 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 Public Preferred Stock accrued a semi-annual dividend at the annual rate of 12% ($ 1.20 ) per share, based on the liquidation preference of $ 10 per share, and was 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.

We accrued dividends on the Public Preferred Stock of $ 1.0 million for the

three months ended March 31, 2020 , 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

1 unchanged sentence

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.

recorded an approximately $34,000 income tax provision and $146,000 income tax benefit for the three months ended March 31, 2021 and 2020, respectively.

For the three months ended March 31, 2021 and 2020, our estimated annual effective tax rate was

primarily impacted by the overall valuation allowance position which reduced the net tax impact from taxable income or loss for both periods.

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

3 unchanged sentences

qualified improvement property, and alternative minimum tax credit refund.

We are required to establish a valuation allowance for deferred tax assets if, based on the weight of available evidence,

it is more likely than not that some portion or all of the deferred tax assets will not be realized.

We are required to establish a valuation allowance for deferred tax assets if, based on the weight of available

evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Based on available evidence, realization of deferred tax assets is dependent upon the generation of future taxable income.

We considered projected

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 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 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.

We considered

projected 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 March 31, 2021 and December 31, 2020.

a result of a full valuation allowance against our deferred tax assets and liabilities, a deferred tax liability related to goodwill of $661,000 and $652,000 remained on our condensed consolidated balance sheets at March 31, 2021 and December 31,

2020, respectively.

Under the provisions of ASC 740, we determined that there were approximately $835,000 and $763,000 of gross unrecognized tax benefits as of

March 31, 2021 and December 31, 2020, respectively.

Included in the balance of unrecognized tax benefits as of March 31, 2021 and December 31, 2020 were $278,000 of tax benefits that, if recognized, would impact the effective tax rate.

Also included

in the balance of unrecognized tax benefits as of March 31, 2021 and December 31, 2020 were $556,000 and $485,000, respectively, of tax benefits that, if recognized, would not impact the effective tax rate due to the Company’s valuation allowance.

The Company had accrued interest and penalties related to the unrecognized tax benefits of $246,000 and $241,000, which were recorded in other liabilities as of March 31, 2021 and December 31, 2020, 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

As described in Note 5 – Current Liabilities and Debt Obligations, we maintain a

Credit Agreement with EnCap and a Purchase Agreement with RCA.

The willingness of RCA to purchase our accounts receivable under the Purchase Agreement, and our ability to obtain additional financing, may be limited due to various factors, including

the eligibility of our receivables, the status of our business, global credit market conditions, and perceptions of our business or industry by EnCap, RCA, or other potential sources of financing.

If we are unable to maintain the Purchase Agreement,

we would need to obtain additional credit to fund our future operations.

If credit is available in that event, lenders may impose more restrictive terms and higher interest rates that may reduce our borrowing capacity, increase our costs, or reduce

our operating flexibility.

The failure to maintain, extend, renew or replace the Purchase Agreement with a comparable arrangement or arrangements that provide similar amounts of liquidity for the Company would have a material negative impact on our

overall liquidity, financial and operating results.

While a variety of factors related to sources and uses of cash, such as timeliness of accounts receivable collections,

vendor credit terms, or significant collateral requirements, ultimately impact our liquidity, such factors may or may not have a direct impact on our liquidity, based on how the transactions associated with such circumstances impact the availability

under our credit arrangements.

For example, a contractual requirement to post collateral for a duration of several months, depending on the materiality of the amount, could have an immediate negative effect on our liquidity, as such a circumstance

would utilize cash resources without a near-term cash inflow back to us.

Likewise, the release of such collateral could have a corresponding positive effect on our liquidity, as it would represent an addition to our cash resources without any

corresponding near-term cash outflow.

Similarly, a slow-down of payments from a customer, group of customers or government payment office would not have an immediate and direct effect on our availability unless the slowdown was material in amount and

over an extended period of time.

Any of these examples would have an impact on our cash resources, our financing arrangements, and therefore our liquidity:

The Credit Agreement currently matures in January 2021, but we may extend the maturity to

January 2022 at our election in accordance with the Fifth Amendment.

Our ability to renew or refinance the Credit Agreement after January 2022 or to enter into a new credit facility to replace or supplement the Credit Agreement may be limited due to

various factors, including the status of our business, global credit market conditions, and perceptions of our business or industry by sources of financing.

In addition, if credit is available, lenders may seek more restrictive covenants and higher

interest rates that may reduce our borrowing capacity, increase our costs, or reduce our operating flexibility.

The failure to extend, renew or replace the Credit Agreement beyond the current or ultimate maturity date of January 2022 (assuming we

exercise all options to extend as provided by the Fifth Amendment) with a comparable credit facility that provides similar amounts of liquidity for the Company would have a material negative impact on our overall liquidity, financial and operating

Management may determine that, in order to reduce capital and liquidity requirements, planned spending on capital projects

and indirect expense growth may be curtailed, subject to growth in operating results.

Additionally, management may seek to put in place a credit facility with a commercial bank, although no assurance can be given that such a facility could be put in

place under terms acceptable to the Company.

Should management determine that additional capital is required, management would likely look first to the sources of funding discussed above to meet any requirements or may seek to raise additional

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 $ (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.

We intend to consider exercising the option at the appropriate time.

Although no assurances can be given, we expect that our financing arrangements with EnCap and RCA, collectively, and funds generated from

operations are sufficient to maintain the liquidity we require to meet our operating, investing and financing needs for the next 12 months.

Upon the closing of the IPO, we issued 17.2 million shares of our common stock at a price of $17.00 per

share, generating net proceeds of approximately $272.8 million.

We used approximately $108.9 million of the net proceeds in connection with the ERPS Conversion (see Note 6 – Exchangeable Redeemable Preferred Stock Conversion), $30.0 million to fund

our acquisition of the outstanding Class B Units of Telos ID (see Note 2 – Purchase of Telos ID/Non-controlling Interests), $21.0 million to repay our outstanding senior term loan and subordinated debt (see Note 5 – Current Liabilities and Debt

Obligations).

We intend to use the remaining net proceeds for general corporate purposes.

We also may use a portion of the net proceeds to acquire complementary businesses, products, services, or technologies.

The amounts and timing of our actual

use of the net proceeds will vary depending on numerous factors.

Proceeds held by us is invested in short-term investments until needed for the uses described above.

We currently anticipate that we will retain all available funds for use in the

operation and expansion of our business, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future.

Our working capital was $102.2 million and $105.2 million as of March 31, 2021 and December 31, 2020, respectively.

Legal Proceedings

3 unchanged sentences

Hamot (“Hamot”) and Andrew R.

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 (“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 is a Class D Director of the Company and Mr.

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.

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.

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 a Motion for Indemnification of Legal Fees and

Expenses against the Company in the Circuit Court for Baltimore City and a Request for a Hearing and on January 28, 2021, Plaintiffs amended their motion by the filing of a Motion for Leave to File Amended Motion for Indemnification of Legal Fees and

Expenses (“Amended Motion”).

The Amended Motion demanded that the Company indemnify the Plaintiffs for legal fees and expenses incurred in the sum of $2,540,000 plus the costs incurred in obtaining indemnification.

The Company opposed the motions,

and a hearing on the Amended Motion was scheduled for May 18, 2021.

On May 5, 2021, the Company, Plaintiffs and Costa Brava entered into a settlement agreement, which

included a mutual general release, fully and finally settling the indemnification claim in exchange for the payment of a specified amount on or before May 19, 2021.

This settlement concludes all open matters or disputes between the Company and

Hamot (or his estate) and Siegel, as well as Costa Brava.

We recorded an accrual of $1.0 million in other expense on our condensed consolidated statements of operations related to this settlement.

Other Litigation

3 unchanged sentences

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

Subsequent Events

On April 6, 2021, we completed our follow-on offering of 9.1 million shares of our common stock at a

price of $33.00 per share, including a secondary public offering of 7.0 million shares of common stock by certain existing stockholders of Telos.

The offering generated approximately $64.5 million of net proceeds to Telos.

We did not receive any

proceeds from the shares of common stock sold by the selling stockholders.

On April 19, 2021, we used approximately $28.1 million of the net proceeds to repurchase all the shares and warrants owned by EnCap.

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.

The amounts paid to this individual as compensation were $218,000 and $173,000 for the three months ended March 31, 2021 and 2020, respectively.

Additionally, Mr.

Wood owned 682,502 shares of the Company’s common stock as of March 31, 2021 and December 31, 2020 .

On March 31, 2015, the Company entered into the Porter Notes.

Porter and Toxford Corporation, of

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

At that time, Mr.

Porter and Toxford

Corporation, of which Mr.

Porter controls as the co-trustee of the trust that is the sole stockholder of Toxford, owned 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,

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 .

According to the original terms of the Porter Notes, the outstanding principal sum bore 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 did not call for amortization payments and were unsecured.

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

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 .

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

liability on the balance sheet and expands disclosures about leasing arrangements for both lessees and lessors, among other items, for most lease arrangements.

In accordance with the adoption of ASC 842 on January 1, 2019, we recorded operating lease right-of-use (“ROU”) assets, which represent our

right to use an underlying asset for the lease term, and operating lease liabilities which represent our obligation to make lease payments.

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 remained in full force and

We incurred interest expense in the amount of $87,000 for the three months ended March 31, 2020, respectively , on the Porter Notes.

As of March 31, 2020, approximately $1.1 million of accrued interest was payable according to the

stated interest rate of the Porter Notes.

On November 23, 2020, upon the closing of the IPO, the Porter Notes were paid in full.

On February 8, 2021, we hired Ms.

Donna Hill, as Director, Human Resources, reporting directly to Ms.

Nakazawa, CFO of the Company.

Hill is the sister of Mr.

Edward Williams, COO of the Company.

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

lease liability on the balance sheet and expands disclosures about leasing arrangements for both lessees and lessors, among other items, for most lease arrangements.

In accordance with the adoption of ASC 842 on January 1, 2019, we recorded operating lease ROU assets, which

represent our right to use an underlying asset for the lease term, and operating lease liabilities which represent our obligation to make lease payments.

Generally, we enter into operating lease agreements for facilities.

Finance lease assets are recorded within

property and equipment, net of accumulated depreciation.

The amount of operating lease liabilities due within 12 months are recorded in other current liabilities, with the remaining operating lease liabilities recorded as non-current liabilities in

our consolidated balance sheet based on their contractual due dates.

Finance lease assets are

recorded within property and equipment, net of accumulated depreciation.

The amount of operating lease liabilities due within 12 months are recorded in other current liabilities, with the remaining operating lease liabilities recorded as non-current

liabilities in our condensed consolidated balance sheets based on their contractual due dates.

Finance lease liabilities are classified according to contractual due dates.

The operating lease ROU assets and liabilities are recognized as of the lease commencement date at the present value of the lease payments

over the lease term.

The operating lease ROU assets and liabilities are recognized as of the lease commencement date at the present value

of the lease payments over the lease term.

Most of our leases do not provide an implicit rate that can readily be determined.

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 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.

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.

weighted average remaining lease terms and discount rates for our operating leases were approximately 2.3 years and 5.75% and for our finance leases were approximately 8.1 years and 5.04% at March 31, 2021.

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.

We evaluate ROU assets for impairment consistent with our property and equipment policy

disclosure included in our 2019 Form 10-K.

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):

We evaluate ROU assets for impairment consistent with our property and

equipment policy disclosure included in our Annual Report on Form 10‑K for the year ended December 31, 2020.

As of March 31, 2021, operating lease ROU assets were $1.3 million and operating lease liabilities were $1.4 million, of which $0.8 million

were classified as noncurrent.

Future minimum lease commitments at March 31, 2021 were as follows (in thousands):

Year ending December 31,

1 unchanged sentence

Finance Leases

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

2021 (excluding the three months ended March 31, 2021)

Total lease payments

1 unchanged sentence

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Operating lease cost

7 unchanged sentences

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

Nine Months Ended September 30,

Three Months Ended March 31,

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

3 unchanged sentences

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

Note 11 – Stock-Based Compensation

During January 2021, the Company amended the 2016 LTIP increasing the total number of shares available for issuance

to 9,400,000 from 4,500,000 and extended the term to September 30, 2030.

Our 2016 LTIP provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock and dividend equivalent rights

to our senior executives, directors, employees, and other service providers.

Awards granted under the 2016 LTIP vest over the periods determined by the Board of Directors or the Compensation Committee of the Board of Directors, generally two to

three years years and stock options granted under the 2016 LTIP expire no more than ten years after the date of grant.

Approximately 6.2 million shares of our common stock were reserved for

future grants as of March 31, 2021 under the 2016 LTIP.

Restrict Stock Awards and Restricted Stock Unit (collectively “RSU”) Activity

During the first quarter of 2021, a number of RSUs were granted to our senior executives, directors and employees.

Service-Based RSU Awards

A summary of the awards of Service-Based RSUs that vest upon the completion of a service requirement are presented

below (in thousands, except per share amounts and contractual life years):

Average Grant

Unvested Balance - December 31, 2020

Unvested Balance - March 31, 2021

We recognized an expense of $7.7 million related to share-based compensation expense for Service-Based RSUs capable of

being earned for completing a service requirement during the three months ended March 31, 2021.

For comparative period ended March 31, 2020, we recorded immaterial share-based compensation expense.

As of March 31, 2021, there was approximately

$89.9 million of unrecognized stock-based compensation expense related to Service-Based RSUs, and this unrecognized expense is expected to be recognized over a weighted-average period of 1.9 years on a straight-line basis.

Performance-Based RSU Awards

A summary of the awards of Performance-Based RSUs that vest upon the attainment of certain price targets of the

Company’s common stock are presented below (in thousands, except per share amounts and contractual life years):

Average Grant

Unvested Balance - December 31, 2020

Unvested Balance - March 31, 2021

On January 28, 2021 the Company granted certain senior executives awards of Performance-Based RSUs that could settle

in 438,403 shares of our common stock.

The awards will vest only if, during the three-year period from the date of grant, (a) the Company’s common stock, as listed on the Nasdaq Global Market, trades at or above $42.40 per share (the “Target

Price”) for 20 of 30 consecutive trading days or (b) the weighted average of the per share price of the Company’s common stock over any 30 consecutive trading days is at least equal to the Target Price.

Performance-Based RSUs containing market conditions, the conditions are required to be considered when calculating the grant date fair value.

In order to reflect the substantive characteristics of these awards, a Monte Carlo simulation valuation

model was used to calculate the grant date fair value of such awards.

Monte Carlo approaches are a class of computational algorithms that rely on repeated random sampling to compute their results.

This approach allows the calculation of the value

of such Performance-Based RSUs based on a large number of possible stock price path scenarios.

Our key assumptions include a performance period of 2.92 years,

expected volatility of 57.4% , and a risk-free rate of 0.18% .

As the Company

recently completed its IPO in November 2020, expected volatility was based on the average historical stock price volatility of comparable publicly-traded companies over the performance period.

The risk-free rate is based on the U.S.

zero-coupon issues in effect at the time of grant over the performance period.

Expense for these awards is recognized over the derived service period as determined through the Monte Carlo simulation model.

The fair value at grant date and derived

service periods calculated for these market condition Performance-Based RSUs were $ 30.84 and 0.38 years, respectively.

We recognized an expense of $6.0 million related to share-based compensation expense for these awards of

Performance-Based RSUs during the three months ended March 31, 2021.

As of March 31, 2021, there was approximately $7.5 million of unrecognized stock-based compensation expense related to these Performance-Based RSUs, and this unrecognized expense

is expected to be recognized over a weighted-average period of 2.4 months on a straight-line basis.

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