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Item 1. Financial Statements

2021-08-16 compared with 2021-05-17 · 466 added, 662 removed, 248 unchanged (82% of the section changed)

Financial Statements

CORPORATION AND SUBSIDIARIES

TELOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands )

Three Months Ended March 31,

(amounts in thousands, except per share data)

Three Months Ended June 30, Six Months Ended June 30,

2021 2020 2021 2020

Services $ 47,618 $ 45,486 $ 99,676 $ 80,044

Products 4,941 3,124 8,641 7,545

52,559 48,610 108,317 87,589

Costs and expenses

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

Cost of sales - Services 29,501 29,378 69,103 54,243

Cost of sales - Products 2,501 1,659 4,299 3,531

32,002 31,037 73,402 57,774

Selling, general and administrative expenses

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)

Sales and marketing 5,043 1,473 8,869 3,065

Research and development 5,327 3,815 9,388 7,472

General and administrative 28,743 7,219 48,708 13,809

39,113 12,507 66,965 24,346

Operating (loss) income ( 18,556 ) 5,066 ( 32,050 ) 5,469

Other income (expense)

Other (expense) income

Other income (expense) 32 4 ( 1,022 ) 12

Interest expense ( 192 ) ( 1,996 ) ( 388 ) ( 4,013 )

Loss before income taxes

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

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

Net loss attributable to Telos Corporation

Net loss per share attributale to Telos Corporation, basic

Net loss per share attributale to Telos Corporation, diluted

(Loss) income before income taxes ( 18,716 ) 3,074 ( 33,460 ) 1,468

(Provision for) benefit from income taxes ( 13 ) ( 2 ) ( 47 ) 144

Net (loss) income ( 18,729 ) 3,072 ( 33,507 ) 1,612

Net income attributable to non-controlling interest — ( 2,806 ) — ( 3,590 )

Net (loss) income attributable to Telos Corporation $ ( 18,729 ) $ 266 $ ( 33,507 ) $ ( 1,978 )

Net (loss) income per share attributable to Telos Corporation, basic $ ( 0.28 ) $ 0.01 $ ( 0.51 ) $ ( 0.05 )

Net (loss) income per share attributable to Telos Corporation, diluted $ ( 0.28 ) $ 0.01 $ ( 0.51 ) $ ( 0.05 )

Weighted-average shares of common stock outstanding, basic 66,616 38,583 65,621 38,328

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

TELOS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

TELOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(amounts in thousands)

Three Months Ended March 31,

Other comprehensive loss, net of tax:

Three Months Ended June 30, Six Months Ended June 30,

2021 2020 2021 2020

Net (loss) income $ ( 18,729 ) $ 3,072 $ ( 33,507 ) $ 1,612

Other comprehensive income (loss), net of tax:

Foreign currency translation adjustments 5 2 ( 27 ) 1

Comprehensive income attributable to non-controlling interest — ( 2,806 ) — ( 3,590 )

Comprehensive loss attributable to Telos Corporation

Comprehensive (loss) income attributable to Telos Corporation $ ( 18,724 ) $ 268 $ ( 33,534 ) $ ( 1,977 )

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

TELOS CORPORATION AND SUBSIDIARIES

TELOS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands)

March 31, 2021

December 31, 2020

June 30, 2021 December 31, 2020

Current assets

Cash and cash equivalents $ 130,996 $ 106,045

receivable, net of reserve of $ 313 and $ 308 , respectively (Note 1)

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

Accounts receivable, net of reserve of $ 122 and $ 308 , respectively

39,412 30,913

Inventories, net of obsolescence reserve of $ 865 and $ 851 , respectively

Prepaid expenses 5,451 3,059

Deferred program expenses

Other current assets 760 786

Total current assets 178,403 144,114

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)

Goodwill (Note 3)

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

TELOS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands)

March 31, 2021

December 31, 2020

LIABILITIES AND STOCKHOLDERS’ DEFICIT

Property and equipment, including capitalized software development costs, net of accumulated depreciation and amortization of $ 38,867 and $ 36,891 , respectively

24,725 22,397

Operating lease right-of-use assets 1,168 1,464

Goodwill 14,916 14,916

Other assets 882 926

Total assets $ 220,094 $ 183,817

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities

Accounts payable and other accrued liabilities (Note 5)

Accounts payable and other accrued liabilities $ 21,036 $ 20,899

Accrued compensation and benefits 7,811 8,474

Contract liabilities (Notes 1 and 5)

Finance lease obligations – short-term (Note 10)

Operating lease obligations – short-term (Note 10)

Contract liabilities 5,925 5,654

Finance lease obligations – short-term 1,399 1,339

Operating lease obligations – short-term 656 677

Other current liabilities 1,831 1,903

Total current liabilities 38,658 38,946

Finance lease obligations – long-term (Note 10)

Operating lease liabilities – long-term (Note 10)

Deferred income taxes (Note 7)

Other liabilities (Note 7)

Finance lease obligations – long-term 13,591 14,301

Operating lease liabilities – long-term 642 941

Deferred income taxes 670 652

Other liabilities 1,833 1,873

Total liabilities 55,394 56,713

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Stockholders’ equity

Common stock, $ 0.001 par value, 250,000,000 shares authorized, 66,755,230 shares and 64,625,071 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively

Additional paid-in capital 341,928 270,800

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

CORPORATION AND SUBSIDIARIES

TELOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

Three Months Ended March 31,

Six Months Ended June 30,

Operating activities:

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

Net (loss) income $ ( 33,507 ) $ 1,612

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

Stock-based compensation 35,006 —

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Deferred income tax provision 18 19

Loss on disposal of fixed assets 5 —

Other noncash items ( 2 ) ( 17 )

6 unchanged sentences

Financing activities:

Proceeds from issuance of common stock, net of issuance costs 64,269 —

Repurchase of outstanding warrants ( 26,894 ) —

Repurchase of common stock ( 1,251 ) —

Payments under finance lease obligations ( 650 ) ( 594 )

Amendment fee paid to lender — ( 100 )

Cash used in financing activities

Decrease in cash and cash equivalents

Distributions to Telos ID Class B member - non-controlling interest — ( 1,000 )

Cash provided by (used in) financing activities 35,474 ( 1,694 )

Increase (decrease) in cash and cash equivalents 24,951 ( 4,346 )

Cash and cash equivalents, beginning of period 106,045 6,751

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Cash paid during the period for:

Interest $ 388 $ 1,474

Income taxes $ 54 $ 50

Dividends from preferred stock recorded as interest expense $ — $ 1,911

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

TELOS CORPORATION AND SUBSIDIARIES

TELOS CORPORATION

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

(amounts in thousands)

Additional Paid-in

Other Comprehensive Income

Accumulated Deficit

Non-Controlling Interest

Total Stockholders’

Common Stock Additional Paid-in

Capital Accumulated

Other Comprehensive Income Accumulated Deficit Non-Controlling Interest Total Stockholders’

Equity (Deficit)

For the Three Months Ended March 31, 2021

For the Three Months Ended June 30, 2021

Beginning balance $ 103 $ 284,470 $ 12 $ ( 158,621 ) $ — $ 125,964

Net loss — — — ( 18,729 ) — ( 18,729 )

Issuance of common stock 2 64,267 — — — 64,269

Foreign currency translation gain — — 5 — — 5

Stock-based compensation — 21,336 — — — 21,336

Repurchase of outstanding warrants — ( 26,894 ) — — — ( 26,894 )

Repurchase of common stock — ( 1,251 ) — — — ( 1,251 )

Ending balance $ 105 $ 341,928 $ 17 $ ( 177,350 ) $ — $ 164,700

For the Three Months Ended June 30, 2020

Beginning balance $ 78 $ 4,310 $ 5 $ ( 147,774 ) $ 5,298 $ ( 138,083 )

Net income — — — 266 2,806 3,072

Foreign currency translation gain — — 2 — — 2

Distributions — — — — ( 1,000 ) ( 1,000 )

Ending balance $ 78 $ 4,310 $ 7 $ ( 147,508 ) $ 7,104 $ ( 136,009 )

For the Six Months Ended June 30, 2021

Beginning balance $ 103 $ 270,800 $ 44 $ ( 143,843 ) $ — $ 127,104

Net loss — — — ( 33,507 ) — ( 33,507 )

Issuance of common stock 2 64,267 — — — 64,269

Foreign currency translation loss — — ( 27 ) — — ( 27 )

Stock-based compensation — 35,006 — — — 35,006

Repurchase of outstanding warrants — ( 26,894 ) — — — ( 26,894 )

Repurchase of common stock — ( 1,251 ) — — — ( 1,251 )

Ending balance $ 105 $ 341,928 $ 17 $ ( 177,350 ) $ — $ 164,700

For the Three Months Ended March 31, 2020

For the Six Months Ended June 30, 2020

Beginning balance $ 78 $ 4,310 $ 6 $ ( 145,530 ) $ 4,514 $ ( 136,622 )

Net (loss) income — — — ( 1,978 ) 3,590 1,612

Foreign currency translation loss

Foreign currency translation gain — — 1 — — 1

Distributions — — — — ( 1,000 ) ( 1,000 )

Ending balance $ 78 $ 4,310 $ 7 $ ( 147,508 ) $ 7,104 $ ( 136,009 )

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

TELOS CORPORATION AND SUBSIDIARIES

TELOS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

General and Basis of Presentation

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

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

Government and commercial customers worldwide.

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.

Telos Corporation, together with its subsidiaries (collectively, the "Company", "we", "our" or "Telos"), a Maryland corporation, is a leading provider of cyber, cloud and enterprise security solutions for the world's most security-conscious organization.

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.

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

adjustments) and reclassifications necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to rules and regulations of the Securities and Exchange

Commission (“SEC”).

The presented interim results are not necessarily indicative of fiscal year performance for a variety of reasons including, but not limited to, the impact of seasonal and short-term variations.

We have continued to follow the

accounting policies (including the critical accounting policies) set forth in the consolidated financial statements included in our 2020 Annual Report on Form 10-K filed with the SEC.

These condensed consolidated financial statements should be read

in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

On November 12, 2020, we amended our charter 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.

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 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.

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.

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.

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

these condensed consolidated financial statements were issued.

Public Offerings of Common Stock

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

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 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.

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 7.0 million shares of common stock held by certain existing stockholders of Telos.

The offering generated approximately $ 64.3 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 $ 1.3 million of the net proceeds to repurchase 39,682 shares of our common stock and $ 26.9 million for the warrants to purchase 900,970 shares of our common stock owned by certain affiliates of Enlightenment Capital Solutions ("EnCap").

We intend to use the remaining net proceeds for general corporate purposes, including working capital, sales and marketing activities, research and development, general and administrative matters and capital expenditures.

Principles of Consolidation and Reporting

The accompanying condensed consolidated financial statements include the accounts of Telos and its wholly-owned subsidiaries.

All intercompany transactions have been eliminated in consolidation.

The accompanying condensed consolidated financial statements for the three and six months ended June 30, 2021 and 2020 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”).

The presented interim results are not necessarily indicative of fiscal year performance for a variety of reasons including, but not limited to, the impact of seasonal and short-term variations.

We have continued to follow the accounting policies (including the critical accounting policies) set forth in the consolidated financial statements included in our 2020 Annual Report on Form 10-K filed with the SEC.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

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

Segment Reporting

Operating segments are defined as components of an enterprise for which separate financial information

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.

Operating segments are defined as components of an enterprise for which separate financial information 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.

Our Chief Executive Officer is the CODM.

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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.

2019-12, “Simplifying the Accounting for Income Taxes (Topic 740)”, 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 is effective for reporting periods beginning after December 15, 2020, which made this standard effective for us on January 1, 2021.

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Revenue Recognition

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

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

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.

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.

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.

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.

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 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 obligation.

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.

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®

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

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

Revenue on these contracts is recognized when the customer

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

Orders for the sale of software licenses may contain

multiple performance obligations, such as maintenance, training, or consulting services, which are typically delivered over time, consistent with the transfer of control disclosed above for the provision of services.

When an order contains multiple

performance obligations, we allocate the transaction price to the performance obligations using our best estimate of standalone selling price.

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

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.

Revenue that is recognized at a point in time is for the sale of software licenses in our Information Assurance / Xacta® (previously referred to as Cyber & Cloud Solutions) and Secure Communications (previously referred to as Secure Communications Cyber and Enterprise Solutions) business groups and for the sale of resold products in Telos ID (previously referred to as Telos ID Enterprise Solutions) and Secure Networks (previously referred to as Secure Mobility and Network Management/Defense Enterprise Solutions), and is classified as product revenue.

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

Orders for the sale of software licenses may contain multiple performance obligations, such as maintenance, training, or consulting services, which are typically delivered over time, consistent with the transfer of control disclosed above for the provision of services.

When an order contains multiple performance obligations, we allocate the transaction price to the performance obligations using our best estimate of standalone selling price.

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

Depending on the nature of the modification, we determine whether to account for the modification as an adjustment to the existing contract or as a new contract.

Generally, modifications are not distinct from the existing contract due to the

significant interrelatedness of the performance obligations and are therefore accounted for as an adjustment to the existing contract, and recognized as a cumulative adjustment to revenue (as either an increase or reduction of revenue) based on the

modification’s effect on progress toward completion of a performance obligation.

Our contracts may include various types of variable consideration, such as claims (for instance, indirect rate or other

equitable adjustments) or incentive fees.

We include estimated amounts in the transaction price based on all of the information available to us, including historical information and future estimations, and to the extent it is probable that a

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

Generally, modifications are not distinct from the existing contract due to the significant interrelatedness of the performance obligations and are therefore accounted for as an adjustment to the existing contract, and recognized as a cumulative adjustment to revenue (as either an increase or reduction of revenue) based on the modification’s effect on progress toward completion of a performance obligation.

Our contracts may include various types of variable consideration, such as claims (for instance, indirect rate or other equitable adjustments) or incentive fees.

We include estimated amounts in the transaction price based on all of the information available to us, including historical information and future estimations, and to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when any uncertainty associated with the variable consideration is resolved.

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.

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.

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.

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 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.

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 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.

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.

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Substantially all of our revenues are from U.S.

customers as revenue derived from international customers is de minimus.

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

customers as revenue derived from international customers is not currently meaningful.

The following tables disclose revenue (in thousands) by customer type and contract type for the three and six months ended June 30, 2021 and 2020.

Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

Federal $ 50,047 $ 46,877 $ 103,395 $ 82,968

State & Local, and Commercial 2,512 1,733 4,922 4,621

Total $ 52,559 $ 48,610 $ 108,317 $ 87,589

Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

Firm fixed-price $ 45,257 $ 41,935 $ 94,398 $ 73,596

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Cost plus fixed fee 4,243 3,038 7,830 6,531

Total $ 52,559 $ 48,610 $ 108,317 $ 87,589

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

March 31, 2021

December 31, 2020

June 30, 2021 December 31, 2020

Billed accounts receivable $ 12,088 $ 12,060

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Receivables – net $ 39,412 $ 30,913

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.

As of June 30, 2021 and December 31, 2020, we had $ 152.7 million and $ 127.7 million of remaining performance obligations, respectively, which we also refer to as funded backlog.

We expect to recognize approximately 68.9 % of our remaining performance obligations as revenue in 2021, an additional 26.6 % in 2022, and the balance thereafter.

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.

Revenue recognized for the three and six months ended June 30, 2021 that was included in the contract liabilities balance at the beginning of each reporting period was $ 1.2 million and $ 3.2 million, respectively.

Revenue recognized for the three and six months ended June 30, 2020 that was included in the contract liabilities balance at the beginning of each reporting period was $ 1.1 million and $ 3.5 million, respectively.

Contract liabilities were $ 5.9 million and $ 5.7 million as of June 30, 2021 and December 31, 2020, respectively.

Accounts Receivable

Accounts receivable are stated at the invoiced amount, less an allowance for doubtful accounts.

Collectability of accounts

receivable is regularly reviewed based upon management’s knowledge of the specific circumstances related to overdue balances.

Collectability of accounts receivable is regularly reviewed based upon management’s knowledge of the specific circumstances related to overdue balances.

The allowance for doubtful accounts is adjusted based on such evaluation.

Accounts receivable balances are written off

against the allowance when management deems the balances uncollectible.

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

Accounts receivable balances are written off against the allowance when management deems the balances uncollectible.

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

Substantially all inventories consist of purchased off-the-shelf hardware and software, and component computer parts used in connection with system integration services that we perform.

An allowance for obsolete, slow-moving or nonsalable

inventory is provided for all other inventory.

An allowance for obsolete, slow-moving or nonsaleable inventory is provided for all other inventories.

This allowance is based on our overall obsolescence experience and our assessment of future inventory requirements.

This charge is taken primarily due to the age of the specific inventory and the

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 $ 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.

This charge is taken primarily due to the age of the specific inventory and the 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 $ 2.6 million and $ 4.2 million as of June 30, 2021 and December 31, 2020, respectively.

As of June 30, 2021, it is management’s judgment that we have fully provided for any potential inventory obsolescence, which was $ 0.9 million as of June 30, 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”).

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.

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”).

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.

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

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.

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

are recognized for the estimated future tax consequences of temporary differences and income tax credits.

Deferred tax assets and liabilities are measured by applying enacted statutory tax rates that are applicable to the future years in which

deferred tax assets or liabilities are expected to be settled or realized for differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities.

Any change in tax rates on deferred tax assets and

liabilities is recognized in net income in the period in which the tax rate change is enacted.

Software development costs are capitalized and amortized over the estimated product life of 2 years on a straight-line basis.

As of June 30, 2021 and December 31, 2020, we capitalized $ 16.0 million and $ 12.3 million of software development costs, respectively, which are included as a part of property and equipment.

Amortization expense was $ 0.5 million and $ 0.9 million for the three and six months ended June 30, 2021, respectively, and $ 0.4 million and $ 0.9 million for the three and six months ended June 30, 2020, respectively.

Accumulated amortization was $ 5.7 million and $ 4.8 million as of June 30, 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 the carrying values.

We account for income taxes in accordance with ASC 740, “Income Taxes”.

Under ASC 740, deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences and income tax credits.

Deferred tax assets and liabilities are measured by applying enacted statutory tax rates that are applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized for differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities.

Any change in tax rates on deferred tax assets and liabilities is recognized in net income in the period in which the tax rate change is enacted.

We record a valuation allowance that reduces deferred tax assets when it is "more likely than not" that deferred tax assets will not be realized.

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 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.

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.

The accounting estimates related

to liabilities for uncertain tax positions require us to make judgments regarding the sustainability of each uncertain tax position based on its technical merits.

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 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

earnings before income tax expense for the period.

The accounting estimates related to liabilities for uncertain tax positions require us to make judgments regarding the sustainability of each uncertain tax position based on its technical merits.

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 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 earnings before income tax expense for the period.

In addition, non-recurring or discrete items are recorded during the period in which they occur.

We evaluate the impairment of goodwill in accordance with ASC 350, “Intangibles - Goodwill and Other,” which requires

goodwill and indefinite-lived intangible assets to be assessed on at least an annual basis for impairment using a fair value basis.

Between annual evaluations, if events occur or circumstances change that would more likely than not reduce the fair

value of the reporting unit below its carrying amount, then impairment must be evaluated.

We evaluate the impairment of goodwill in accordance with ASC 350, “Intangibles - Goodwill and Other,” which requires goodwill and indefinite-lived intangible assets to be assessed on at least an annual basis for impairment using a fair value basis.

Between annual evaluations, if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount, then impairment must be evaluated.

Such circumstances could include, but are not limited to:

(1) a significant adverse change in legal factors or business climate, or (2) a loss of key contracts

or customers.

As the result of an acquisition, we record any excess purchase price over the net tangible and identifiable intangible

assets acquired as goodwill.

(1) a significant adverse change in legal factors or business climate, or (2) a loss of key contracts or customers.

As the result of an acquisition, we record any excess purchase price over the net tangible and identifiable intangible assets acquired as goodwill.

An allocation of the purchase price to tangible and intangible net assets acquired is based upon our valuation of the acquired assets.

Goodwill is not amortized, but is subject to annual impairment tests.

We complete our

goodwill impairment tests as of December 31st each year.

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

The evaluation is based on the estimation of the fair values of our three reporting units, CO&D (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.

We complete our goodwill impairment test 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 amount.

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

Stock-Based Compensation

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.

Under our 2016 Omnibus Long-Term Incentive Plan, as amended (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, employees and other eligible service providers.

Under the 2016 LTIP, our Board of Directors or, by designation of authority, the Compensation Committee of our Board of Directors has the discretion to establish the terms, conditions and criteria of the various awards, including the weighing and vesting schedule of Service-Based RSU and the performance conditions applicable to the Performance-Based RSUs, including the achievement of certain financial performance criteria or 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 eligible employees as an incentive generally vest in equal installments over two to three years from the date of grant.

Service-Based RSUs granted to senior executives in 2021 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.

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.

• 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 anytime over a three-year period from the date of grant.

In order to reflect the substantive characteristics of these market condition awards, the Company employs a Monte Carlo simulation valuation model to calculate the grant date fair value and corresponding requisite 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.

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.

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.

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 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,

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, restricted common stock units and common stock warrants.

For the period of net loss, potentially dilutive securities are not included in the calculation of diluted net earnings (loss) per share because to do so would be anti-dilutive.

Potentially dilutive securities are as follows (in common stock equivalent shares, in thousands):

Three Months Ended June 30, Six Months Ended June 30,

2021 2020 2021 2020

Unvested restricted stock and restricted stock units 1,030 60 239 60

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 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.

856 901 857 901

Total 1,886 961 1,096 961

Other Comprehensive Income (Loss)

Our functional currency is the U.S.

For one of our wholly owned subsidiaries, the functional currency is the local

For one of our wholly owned subsidiaries, the functional currency is the local currency.

For this subsidiary, the translation of its foreign currency into U.S.

Dollars is performed for assets and liabilities using current foreign currency exchange rates in effect at the balance sheet date and for revenue and expense accounts

using average foreign currency exchange rates during the period.

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’ equity (deficit) consists of the

following (in thousands):

March 31, 2021

December 31, 2020

Dollars is performed for assets and liabilities using current foreign currency exchange rates in effect at the balance sheet date and for revenue and expense accounts using average foreign currency exchange rates during the periods presented.

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

Accumulated other comprehensive income included within stockholders’ equity (deficit) consists of the following (in thousands):

June 30, 2021 December 31, 2020

Cumulative foreign currency translation loss $ ( 90 ) $ ( 63 )

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Accumulated other comprehensive income $ 17 $ 44

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.

Non-controlling Interests / Purchase of Telos ID

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 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.

Government 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 .

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.

Until April 19, 2007, we owned 99.999 % of the membership interests of Telos ID and Hoya ID Funds A, LLC ("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.

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, 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.

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 Board.

As a result of the 2014 Transaction, each of the members owned 50 % of Telos ID, as mentioned above, and as such each was allocated 50 % of the profits, which was $ 2.8 million and $ 3.6 million for the three and six months ended June 30, 2020, respectively.

Hoya held the non-controlling interest.

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

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

The Company further recognized a reduction 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 reduction of $ 25.5 million.

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.

Hoya received a total distribution of $ 1.0 million during the three and six months ended June 30, 2020.

The goodwill balance was $ 14.9 million as of June 30, 2021 and December 31, 2020.

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

For the three and six months ended June 30, 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 categories:

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

unrestricted assets and liabilities;

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

substantially the full term of the asset or liability;

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

unobservable (i.e.

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets and liabilities;

Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e.

supported by little or no market activity).

As of 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.

As of June 30, 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 basis.

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.

Current Liabilities and Debt Obligations

Accounts Payable and Other 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.

Accounts payable and other accrued liabilities consisted of trade accounts payable and accrued liabilities.

As of June 30, 2021 and December 31, 2020, the trade accounts payable were $ 17.8 million and $ 14.7 million, respectively;

while accrued liabilities were $ 3.2 million and $ 6.2 million, respectively.

Contract Liabilities

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

As of March 31, 2021 and

December 31, 2020, the contract liabilities primarily related to product support services.

As of June 30, 2021 and December 31, 2020, the contract liabilities primarily related to product support services.

Enlightenment Capital Credit Agreement

On January 25, 2017, we entered into a Credit Agreement (the "Credit Agreement") with Enlightenment

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

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

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

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

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

to 14.5% per annum.

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

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

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

The Company 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.

The Credit Agreement contains representations, warranties, covenants, terms and conditions customary

for transactions of this type.

In connection with the Credit Agreement, the Agent has been granted, for the benefit of the Lenders, a security interest in and general lien upon various property of the Company, subject to certain permitted liens and

any intercreditor agreement.

The occurrence of an event of default under the Credit Agreement could result in the Loan and other obligations becoming immediately due and payable and allow the Lenders to exercise all rights and remedies available to

them under the Credit Agreement or as a secured party under the UCC, in addition to all other rights and remedies available to them.

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 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).

On January 25, 2017, we entered into a Credit Agreement (the "Credit Agreement") with Enlightenment Capital Solutions Fund II, L.P., as agent (the "Agent") and the lenders party thereto (the "Lenders"), (together referenced as “EnCap”).

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

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

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 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 on the date of grant.

The exercise price was $ 1.665 per share.

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 add 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 increase in interest expense has been paid in cash.

Contemporaneously with the Third Amendment, Mr.

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

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

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

First Amendment to Fee Letter (“Fourth Amendment”)

to amend the Credit Agreement.

First Amendment to Fee Letter (“Fourth Amendment”) to amend the Credit Agreement.

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

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• 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:

Consolidated Leverage Ratio, Consolidated Senior Leverage Ratio,

Consolidated Capital Expenditures, Minimum Fixed Charge Coverage Ratio, and Minimum Consolidated Net Working Capital.

Consolidated Leverage Ratio, Consolidated Senior Leverage Ratio, Consolidated Capital Expenditures, Minimum Fixed Charge Coverage Ratio, and Minimum Consolidated Net Working Capital.

• Any actual or potential non-compliance with the applicable provisions of the Credit Agreement were waived.

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

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

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

current period.

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

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

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, 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 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, 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 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.

We incurred interest expense in the amount of $ 0.7 million and $ 1.5 million for the three and six months ended June 30, 2020, respectively, under the Credit Agreement.

On November 24, 2020, upon the closing of the IPO, the Company paid a total of $ 17.4 million to satisfy its obligations under 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, the Company entered into multiple Redemption Agreements and Warrant Redemption and Cancellation Agreements (collectively the "Repurchase Agreement") with EnCap and certain related funds that held the warrants to purchase 900,970 shares of the Company's common stock in addition to 39,682 shares of the Company's common stock.

Under the Repurchase Agreement, the Company agreed to repurchase the outstanding warrants for $ 26.9 million and common stock for $ 1.3 million;

The average price of the warrants and common stock repurchased were $ 29.85 per share and $ 31.51 per share, respectively.

Upon settlement, the repurchased warrants were retired.

The Company reduced common stock for the $ 0.001 par value of the shares repurchased, with the excess purchase price over par value recorded as a reduction of additional paid-in-capital ("APIC").

As a result of the repurchases, the Company recognized these amounts as a reduction to APIC.

Subordinated Debt

On March 31, 2015, the Company entered into Subordinated Loan Agreements and Subordinated Promissory

Notes (“Porter Notes”) with affiliated entities of Mr.

On March 31, 2015, the Company entered into Subordinated Loan Agreements and Subordinated Promissory Notes (“Porter Notes”) with affiliated entities of Mr.

Porter (together referenced as “Porter”).

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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.

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 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

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 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.

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 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.

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 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 effect.

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

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

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

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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.

(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

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

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

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 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.

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 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.

We paid dividends on the Public Preferred Stock when and if declared by the Board of Directors.

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

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

We accrued dividends on the Public Preferred Stock of $ 1.0 million and $ 1.9 million for the three and six months ended June 30, 2020, 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.

Upon the closing of the IPO, which constituted a qualified initial public offering for the purposes of the terms of the Public Preferred Stock, each issued and outstanding share of Public 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) 0.90 ;

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 $ 0.2 million of costs directly attributable to this redemption were applied against the gain, resulting in a net gain of $ 14.0 million.

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

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

recorded an approximately $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.

The CARES Act, among other

things, includes certain changes to U.S.

tax law that impact the Company, including deferment of employer social security payments, modifications to interest deduction limitation rules, a technical correction to tax depreciation methods for certain

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.

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 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

For the three months ended June 30, 2021 and 2020, we recorded an income tax provision of $ 13,000 and $ 2,000 respectively.

For the six months ended June 30, 2021 and 2020, we recorded an income tax provision of $ 47,000 and income tax benefit of $ 144,000 , respectively.

For the three and six months ended June 30, 2021 and 2020, our estimated effective rate was primarily impacted by the overall valuation allowance position which reduced the net tax impact from taxable income or loss for all periods.

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

There has been no change in the established valuation allowance as of June 30, 2021.

As of June 30, 2021 and December 31, 2020, we have recorded a net deferred tax liability of approximately $ 670,000 and $ 652,000 , respectively.

Under the provisions of ASC 740, we determined that there were approximately $ 869,000 and $ 763,000 of gross unrecognized tax benefits as of June 30, 2021 and December 31, 2020, respectively.

Included in the balance of unrecognized tax benefits as of June 30, 2021 and December 31, 2020 were $ 241,000 and $ 278,000 , respectively, of tax benefits that, if recognized, would impact the effective tax rate.

Also included in the balance of unrecognized tax benefits as of June 30, 2021 and December 31, 2020 were $ 628,000 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 $ 233,000 and $ 241,000 , which were recorded in other liabilities as of June 30, 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, Contingencies and Subsequent Events

Financial Condition and Liquidity

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.

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

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 7.0 million shares of common stock by certain existing stockholders of Telos.

The offering generated approximately $ 64.3 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 $ 1.3 million of the net proceeds to repurchase 39,682 shares of our common stock and $ 26.9 million for the warrants to purchase 900,970 shares our common stock owned by affiliated funds of Enlightenment Capital Solutions (see Note 5 - Current Liabilities and Debt Obligations).

We intend to use the remaining net proceeds of the IPO and the follow-on offering 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 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.

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 $ 139.7 million and $ 105.2 million as of June 30, 2021 and December 31, 2020, respectively.

Legal Proceedings

Telos Corporation

As previously disclosed in Note 13 of the Consolidated Financial Statements contained in our Annual Report on Form 10-K for

the year ended December 31, 2020, beginning on August 2, 2007, Messrs.

As previously reported in Note 8 of the Form 10-Q for the quarter ended March 31, 2021 filed on May 17, 2021, beginning on August 2, 2007, Messrs.

Hamot (“Hamot”) and Andrew R.

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

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

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

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

(“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 was a Class D Director of the Company until the closing of the IPO on November 23, 2020, and Mr.

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

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

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

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

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

Company’s Bylaws.

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

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

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

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

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

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

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 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 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 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.

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 a $ 1.0 million payment on or before May 19, 2021.

The $ 1.0 million was paid on May 12, 2021.

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

Hamot (or his estate) and Siegel, as well as the previously disposed of claims of Costa Brava.

Other Litigation

In addition, the Company is a party to litigation arising in the ordinary course of business.

In the opinion of

management, while the results of such litigation cannot be predicted with any reasonable degree of certainty, the final outcome of such known matters will not, based upon all available information, have a material adverse effect on the Company's

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

In addition, the Company may be a party to litigation arising in the ordinary course of business.

In the opinion of management, while the results of such litigation cannot be predicted with any reasonable degree of certainty, the final outcome of such known matters will not, based upon all available information, have a material adverse effect on the Company's 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.

On July 30, 2021, the Company acquired the assets of Diamond Fortress Technologies ("DFT"), including all patents and digital intellectual property for an undisclosed amount of cash consideration.

The acquisition adds several new patents to the Company’s library of biometric and digital identity intellectual property.

Simultaneously with closing, the Company hired seven current DFT employees to maintain and expand the acquired technology.

The addition of contactless biometrics technology will enable the Company to better serve the needs of organizations in existing and new markets.

We are currently in the process of finalizing the accounting for this transaction and expect it to be complete by the end of the third quarter of 2021.

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 $218,000 and $173,000 for the three months ended March 31, 2021 and 2020, respectively.

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

The amounts paid to this individual as compensation were $ 83,000 and $ 301,000 for the three and six months ended June 30, 2021, respectively, and $ 151,000 and $ 324,000 for the three and six months ended June 30, 2020, respectively.

Additionally, Mr.

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

Wood owned 682,502 shares of the Company’s common stock as of June 30, 2021 and December 31, 2020.

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

At that time, Mr.

Porter and Toxford

Corporation, of which 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, 2015.

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.

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.

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

All other terms remained in full force and effect.

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

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

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

1 unchanged sentence

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

Nakazawa, CFO of the Company.

Nakazawa, EVP 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.

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 condensed consolidated balance sheets 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.

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

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.

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.

The weighted average remaining lease terms and discount rates for our operating leases were approximately 2.1 years and 5.75 % and for our finance leases were approximately 7.8 years and 5.04 % at June 30, 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 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,

Operating Leases

Finance Leases

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

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.

Future minimum lease commitments at June 30, 2021 were as follows (in thousands):

Year Ending December 31, Operating Leases Finance Leases

2021 (excluding the six months ended June 30, 2021) $ 379 $ 1,059

2022 603 2,149

2023 373 2,202

2024 27 2,258

After 2025 — 8,344

Total lease payments 1,382 18,326

Less imputed interest ( 84 ) ( 3,336 )

Total 1,298 14,990

Short-term portion 656 1,399

Total, net of short-term portion $ 642 $ 13,591

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

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2021 2020 2021 2020

Operating lease cost $ 182 $ 182 $ 364 $ 360

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

Three Months Ended March 31,

Six Months Ended June 30,

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

4 unchanged sentences

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 October 2020, 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 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 June 30, 2021 under the 2016 LTIP.

The following are the stock-based compensation expense incurred for the three and six months ended June 30, 2021 (in thousands).

We recorded immaterial share-based compensation expense for the comparative periods ended June 30, 2020.

Three Months Ended June 30, 2021 Six Months Ended June 30, 2021

Cost of sales - services $ 795 $ 1,532

Sales and marketing 2,233 3,780

Research and development 648 1,109

General and administrative 17,660 28,585

Total $ 21,336 $ 35,006

Restricted 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):

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

Shares Weighted-

Average Grant

(per share) Weighted-

Life (years) Aggregate

(in thousands)

Unvested Balance - December 31, 2020 59,521 $ 0.18 2.4 $ 2,000

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.

Granted 2,731,963 36.52 — —

Vested ( 119,800 ) 36.17 — —

Forfeited ( 74,776 ) 36.63 — —

Unvested Balance - June 30, 2021 2,596,908 $ 35.97 1.7 $ 88,300

We recognized an expense of $ 14.3 million and $ 22.0 million related to share-based compensation expense for Service-Based RSUs capable of being earned for completing a service requirement during the three and six months ended June 30, 2021, respectively.

As of June 30, 2021, there was approximately $ 75.0 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 1.7 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):

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:

Shares Weighted-

Average Grant

(per share) Weighted-

Life (years) Aggregate

(in thousands)

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.

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.

Granted 438,403 30.84 — —

Vested — — — —

Forfeited ( 16,176 ) 30.84 — —

Unvested Balance - June 30, 2021 422,227 $ 30.84 2.6 $ 14,400

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.

For these 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.

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.

treasury 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.

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 $ 7.0 million and $ 13.0 million related to share-based compensation expense for these awards of Performance-Based RSUs during the three and six months ended June 30, 2021, respectively.

As of June 30, 2021, all of the stock-based compensation expense related to these Performance-Based RSUs was recognized.

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