What changed in this filing

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2022-03-28 compared with 2021-03-25 · 1045 added, 975 removed, 307 unchanged (87% of the section changed)

Quantitative and Qualitative Disclosures about

Quantitative and Qualitative Disclosures about Market Risk

Consolidated Financial Statements and Supplementary Data

TELOS CORPORATION AND SUBSIDIARIES

TELOS CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm ( BDO USA, LLP ;

PCAOB ID# 243 )

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Operations for the Years Ended December 31, 2021, 2020 and 2019

Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2020, 2019 and

Consolidated Statements of Comprehensive (Loss) Income for the Years Ended December 31, 2021, 2020 and 2019

Consolidated Balance Sheets as of December 31, 2021 and 2020

Consolidated Statements of Cash Flows for the Years Ended December 31, 2021, 2020 and 2019

Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the Years Ended December 31, 2020,

2019, and 2018

Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the Years Ended December 31, 2021, 2020 and 2019

Notes to Consolidated Financial Statements

4 unchanged sentences

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Telos Corporation (the “Company”) and subsidiaries as of

December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2020, and the related

notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2020

and 2019, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2020 , in conformity

with accounting principles generally accepted in the United States of America.

We have audited the accompanying consolidated balance sheets of Telos Corporation (the “Company”) and subsidiaries as of December 31, 2021, and 2020, the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 , in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 28, 2022 expressed an adverse opinion thereon.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to

express an opinion on the Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with

respect to the Company in accordance with the U.S.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform

the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its

internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal

control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial

statements, whether due to error or fraud, and performing procedures that respond to those risks.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate.

Revenue Recognition – Estimated Costs to Complete

As described in Note 2 to the consolidated financial statements, the Company recognizes certain revenue attributable to fixed-price contracts over time.

For these revenue contracts, revenue is recognized based on the extent of progress towards completion of the performance obligation.

The Company generally accounts for these revenue contracts using the cost-to-cost measure of progress.

Under the cost-to-cost measure of progress, the estimation of progress toward completion is subject to many variables and requires significant judgment.

The revisions in contract estimates can materially affect the Company’s operating results.

We identified estimated costs to complete revenue contracts as a critical audit matter.

Auditing the Company’s estimate of total contract costs at completion is especially challenging due to the judgmental and subjective nature of the estimation of remaining costs to complete, including material, labor and subcontracting costs.

Auditing these elements involved especially subjective auditor judgment due to the nature and extent of audit effort required to address these matters.

The primary procedures we performed to address this critical audit matter included:

Evaluating the reasonableness of a sample of project budgets for projects completed during the year through a retrospective review against actual performance at project completion.

Assessing the reasonableness of the estimated costs to complete for a sample of open projects through:

(i) evaluating the reasonableness of project budgets and the nature of costs required to complete open projects, (ii) assessing the status of completion of respective projects through testing of a sample of project costs incurred to date, (iii) evaluating the reasonableness of project status by performing inquiries of project managers and assessing the nature of activities required to complete open projects, and (iv) performing retrospective review for open projects and investigating budget to actual variances (if any).

Assessing the reasonableness of changes in estimated costs to complete at year end and investigating reasons for changes in expected costs and project margins.

/s/ BDO USA, LLP

2 unchanged sentences

March 28, 2022

TELOS CORPORATION AND SUBSIDIARIES

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors

Telos Corporation

Ashburn, Virginia

Opinion on Internal Control over Financial Reporting

We have audited Telos Corporation’s (the “Company’s”) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”).

In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.

We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the Company after the date of management’s assessment.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as “the consolidated financial statements”)” and our report dated March 28, 2022 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting.

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audit also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Several material weaknesses regarding management’s failure to design and maintain controls have been identified and described in management’s assessment.

The material weaknesses related to:

1) the control environment, a) not maintaining an appropriate control environment, inclusive of structure and responsibility, and monitoring activities by appropriately qualified resources with the knowledge, experience, and training important to the Company’s financial reporting to ensure compliance with generally accepted accounting principles requirements, and b) inadequate mechanisms and oversight to ensure accountability for the performance of controls;

2) inappropriately designed information technology general controls (“ITGCs”) in the areas of user access, change management, safe guarding of assets, and segregation of duties, including controls over the recording of journal entries, related to certain information technology systems that support the Company’s financial reporting process.

3) control activities a) recording of revenue in accordance with ASC Topic 606, “Revenue from Contracts with Customers.” b) accounting for software development costs 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.” c) review of completeness and accuracy of stock based award compensation expense, and review of the key inputs and assumptions utilized in third-party valuations, d) preparation and review of projected financial information utilized in the valuation of the business combination, e) financial statement close process to ensure the consistent execution, accuracy, and timely review of account reconciliations, as well as review of the statement of cash flows, and f) coding of transactions within the purchase to disbursement business process.

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2021 financial statements, and this report does not affect our report dated March 28, 2022 on those consolidated financial statements.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ BDO USA, LLP

McLean, Virginia

March 28, 2022

TELOS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

in thousands , except earnings per share data)

(amounts in thousands, except earnings per share data)

Years Ended December 31,

Revenue (Note 5)

2021 2020 2019

Services $ 221,548 $ 161,180 $ 143,581

Products 20,885 18,737 15,637

242,433 179,917 159,218

Costs and expenses

1 unchanged sentence

Cost of sales – Products 13,047 10,528 8,102

156,404 117,497 106,874

Selling, general and administrative expenses

2 unchanged sentences

General and administrative 88,742 41,704 30,721

Operating income

127,493 62,123 47,319

Operating (loss) income ( 41,464 ) 297 5,025

Other income (expenses)

Gain on redemption of public preferred stock (Note 7)

Gain on redemption of public preferred stock — 14,012 —

Non-operating (expense) income ( 921 ) ( 255 ) 201

Interest expense ( 777 ) ( 7,259 ) ( 7,467 )

Income (loss) before income taxes

Benefit from (provision for) income taxes (Note 9)

Net income (loss)

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

Net income (loss) attributable to Telos Corporation

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

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

(Loss) income before income taxes ( 43,162 ) 6,795 ( 2,241 )

Benefit from income taxes 28 46 104

Net (loss) income ( 43,134 ) 6,841 ( 2,137 )

Net income attributable to non-controlling interest — ( 5,154 ) ( 4,264 )

Net (loss) income attributable to Telos Corporation $ ( 43,134 ) $ 1,687 $ ( 6,401 )

Net (loss) earnings per share attributable to Telos Corporation, basic $ ( 0.65 ) $ 0.04 $ ( 0.17 )

Net (loss) earnings per share attributable to Telos Corporation, diluted $ ( 0.65 ) $ 0.04 $ ( 0.17 )

Weighted-average shares of common stock outstanding, basic 66,374 41,642 37,729

1 unchanged sentence

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

TELOS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

TELOS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(amounts in thousands)

Years Ended December 31,

Net income (loss)

2021 2020 2019

Net (loss) income $ ( 43,134 ) $ 6,841 $ ( 2,137 )

Other comprehensive income (loss), net of tax:

1 unchanged sentence

Comprehensive income attributable to non-controlling interest — ( 5,154 ) ( 4,264 )

Comprehensive income (loss) attributable to Telos Corporation

Comprehensive (loss) income attributable to Telos Corporation $ ( 43,205 ) $ 1,725 $ ( 6,412 )

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

TELOS CORPORATION AND SUBSIDIARIES

TELOS CORPORATION

CONSOLIDATED BALANCE SHEETS

2 unchanged sentences

Cash and cash equivalents $ 126,562 $ 106,045

Accounts receivable, net of reserve

of $308 and $720 , respectively (Note 5)

Inventories, net of obsolescence

reserve of $851 and $860 , respectively (Note 1)

Accounts receivable, net 59,844 30,913

Inventories, net 1,247 3,311

Prepaid expenses 3,329 3,059

Deferred program expenses

Other current assets 732 786

Total current assets 191,714 144,114

Property and equipment (Note 1)

Furniture, equipment, and capitalized software development costs

Property and equipment

Furniture and equipment 15,420 13,574

Leasehold improvements 2,994 2,669

Property and equipment under finance leases

Finance leases right-of-use assets 30,784 30,791

49,198 47,034

Accumulated depreciation and amortization ( 34,057 ) ( 32,057 )

Net property and equipment 15,141 14,977

Operating lease right-of-use assets 852 1,464

Goodwill (Note 3)

Goodwill 17,922 14,916

Intangible assets, net 19,199 7,420

Other assets 1,253 926

Total assets $ 246,081 $ 183,817

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

TELOS CORPORATION AND SUBSIDIARIES

TELOS CORPORATION

CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

(amounts in thousands, except share and par value data)

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

Accounts payable and other accrued liabilities (Note 6)

Accounts payable and other accrued liabilities $ 34,548 $ 20,899

Accrued compensation and benefits 6,557 8,474

Contract liabilities (Notes 1 and 6)

Finance lease obligations – short-term (Note 10)

Operating lease obligations – short-term (Note 10)

Contract liabilities 6,381 5,654

Finance lease obligations – short-term 1,461 1,339

Operating lease obligations – short-term 564 677

Other current liabilities 1,430 1,903

Total current liabilities 50,941 38,946

Senior term loan, net of unamortized discount and issuance costs (Note 6)

Subordinated debt (Note 6)

Finance lease obligations - long-term (Note 10)

Operating lease obligations - long-term (Note 10)

Deferred income taxes (Note 9)

Public preferred stock (Note 7)

Other liabilities (Note 9)

Finance lease obligations - long-term 12,840 14,301

Operating lease obligations - long-term 388 941

Deferred income taxes 723 652

Other liabilities 935 1,873

Total liabilities 65,827 56,713

Commitments and contingencies (Notes 10 and 13)

Stockholders’ equity (deficit) (Note 8)

Telos stockholders’ equity (deficit)

Common stock, $0.001 par value, 250,000,000 shares authorized, 64,625,071 shares issued and outstanding as of December 31, 2020

Class A common stock, no par value, 50,000,000 shares authorized, 35,826,200 shares issued and outstanding as of December 31, 2019

Class B common stock, no par value, 5,000,000 shares authorized, 3,204,293 shares issued and outstanding as of December 31, 2019

Commitments and contingencies (Note 18)

Stockholders’ equity

Common stock, $ 0.001 par value, 250,000,000 shares authorized, 66,767,450 shares and 64,625,071 shares issued and outstanding as of December 31, 2021 and 2020, respectively

Additional paid-in capital 367,153 270,800

Accumulated other comprehensive income

Accumulated other comprehensive (loss) income ( 27 ) 44

Accumulated deficit ( 186,977 ) ( 143,843 )

Total Telos stockholders’ equity (deficit)

Non-controlling interest in subsidiary (Note 2)

Total stockholders’ equity (deficit)

Total liabilities and stockholders’ equity (deficit)

Total stockholders’ equity 180,254 127,104

Total liabilities and stockholders' equity $ 246,081 $ 183,817

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

TELOS CORPORATION AND SUBSIDIARIES

TELOS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

1 unchanged sentence

Years Ended December 31,

2021 2020 2019

Operating activities:

Net income (loss)

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

Net (loss) income $ ( 43,134 ) $ 6,841 $ ( 2,137 )

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

Gain on redemption of public preferred stock — ( 14,012 ) —

Net loss on early extinguishment of

debt and other transactions

Net loss on early extinguishment of debt and other transactions — 275 —

Stock-based compensation 60,231 4 —

2 unchanged sentences

Provision for inventory obsolescence 10 ( 1 ) 376

(Benefit) provision for doubtful accounts receivable

Provision for (benefit from) doubtful accounts receivable 7 ( 412 ) 414

Provision for doubtful non-trade receivables — 569 —

Amortization of debt issuance costs — 978 461

Deferred income tax provision (benefit)

Provision for (benefit from) deferred income tax 70 31 ( 197 )

Loss on disposal of fixed assets 6 1 15

Accretion of discount on acquisition holdback 19 — —

Changes in assets and liabilities:

(Increase) decrease in accounts receivable ( 28,937 ) ( 2,559 ) 6,186

(Increase) decrease in inventories

Decrease (increase) in deferred program expenses

Decrease (increase) in inventories 2,054 ( 1,345 ) 2,048

Increase in prepaid expenses, other current assets and other assets ( 982 ) ( 938 ) ( 4,005 )

1 unchanged sentence

(Decrease) increase in accrued compensation and benefits ( 1,917 ) ( 3,713 ) 3,105

(Decrease) increase in contract liabilities

Increase in other current liabilities and other liabilities

Cash (used in) provided by operating activities

Increase (decrease) in contract liabilities 727 ( 683 ) 1,106

(Decrease) increase in other current liabilities and other liabilities ( 2,602 ) 710 2,379

Cash provided by (used in) operating activities 7,262 ( 2,104 ) 11,816

Investing activities:

Cash paid for acquisition ( 5,925 ) — —

Capitalized software development costs ( 9,968 ) ( 6,681 ) ( 2,442 )

2 unchanged sentences

Financing activities:

Proceeds from initial public offering

Proceeds from issuance of common stock, net of issuance costs 64,269 272,813 —

Repurchase of outstanding warrants ( 26,894 ) — —

Repurchase of common stock ( 1,251 ) — —

Redemption of public preferred stock — ( 108,878 ) —

6 unchanged sentences

Distributions to Telos ID Class B member – non-controlling interest ( 2,436 ) ( 2,743 ) ( 2,371 )

Cash provided by (used in) financing activities

Increase (decrease) in cash and cash equivalents

Cash provided by financing activities 32,349 108,859 1,395

Increase in cash and cash equivalents 20,517 99,294 6,679

Cash and cash equivalents, beginning of the year 106,045 6,751 72

Cash and cash equivalents, end of year $ 126,562 $ 106,045 $ 6,751

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

TELOS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

Years Ended December 31,

2021 2020 2019

Supplemental disclosures of cash flow information:

Cash paid during the year for:

Interest $ 758 $ 7,259 $ 3,299

Income taxes $ 60 $ 64 $ 40

Supplemental disclosures of non-cash investing and financing activities:

Acquisition holdback $ 506 $ — $ —

Operating lease ROU assets obtained in exchange for operating lease liabilities $ 638 $ 613 $ 488

Dividends from preferred stock recorded as interest expense $ — $ 3,384 $ 3,823

Common stock issued on redemption of public preferred stock (Note 7)

Common stock issued on purchase of Telos ID membership interest (Note 2)

Common stock issued on redemption of public preferred stock $ — $ 19,213 $ —

Common stock issued on purchase of Telos ID membership interest $ — $ 148,399 $ —

Distributions to Telos ID Class B member – non-controlling interest $ — $ 2,436 $ —

1 unchanged sentence

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

TELOS CORPORATION AND SUBSIDIARIES

TELOS CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

(amounts in thousands)

Class A Common

Paid–in Capital

Comprehensive Income

Non-Controlling Interest

Common Stock Class A Common Stock Class B Common Stock Additional

Paid–in Capital Accumulated

Comprehensive Income Accumulated

Deficit Non-Controlling Interest Total

Stockholders’ Equity

Balance December 31, 2017

Net (loss) income

Cumulative effect adjustment due to change in accounting policy

Foreign currency translation loss

Distributions

Shares Amount Shares Amount Shares Amount

Balance December 31, 2018 — $ — 45,143 $ 65 $ 4,038 $ 13 $ 4,310 $ 17 $ ( 139,129 ) $ 2,621 $ ( 132,103 )

3 unchanged sentences

Balance December 31, 2019 — $ — 45,143 $ 65 4,038 $ 13 $ 4,310 $ 6 $ ( 145,530 ) $ 4,514 ( 136,622 )

Net income — — — — — 1,687 5,154 6,841

Issuance of common stock upon conversion of Class A and Class B common stock 39,003 78 ( 45,143 ) ( 65 ) ( 4,038 ) ( 13 ) — — — — —

Issuance of common stock 25,622 25 — — — — 291,997 — — — 292,022

4 unchanged sentences

Balance December 31, 2020 64,625 $ 103 — $ — — $ — $ 270,800 $ 44 $ ( 143,843 ) $ — $ 127,104

Net loss — — — — — — — — ( 43,134 ) — ( 43,134 )

Issuance of common stock 2,050 2 — — — — 64,267 — — — 64,269

Foreign currency translation loss — — — — — — — ( 71 ) — — ( 71 )

Stock-based compensation 132 — — — — — 60,231 — — — 60,231

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

Repurchase of common stock ( 40 ) — — — — — ( 1,251 ) — — — ( 1,251 )

Balance December 31, 2021 66,767 $ 105 — $ — — $ — $ 367,153 $ ( 27 ) $ ( 186,977 ) $ — $ 180,254

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

TELOS CORPORATION AND SUBSIDIARIES

TELOS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summary of Significant Accounting Policies

Business and Organization

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.

Overview and Summary of Significant Accounting Policies

Overview of Business

Telos Corporation, together with its subsidiaries, (the “Company” or “Telos” or “We”), a Maryland corporation, is a leading provider of cyber, cloud and enterprise security solutions for the world's most security-conscious organizations.

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 hold 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 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 consolidated financial statements and notes to the consolidated financial statements give retroactive effect to the reverse stock split for all periods presented.

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 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.

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 to repurchase the warrants to purchase 900,970 shares of our common stock owned by certain affiliates of EnCap.

We have used and intend to continue using 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.

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

We do not, however, have

agreements, commitments, or plans for any specific acquisitions at this time.

The amounts and timing of our actual use of the net proceeds will vary depending on numerous factors.

Principles of Consolidation and Basis of Presentation

The accompanying 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.

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

On March 11, 2020, the World Health Organization

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

Trump declared the virus a national emergency.

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

serious impact on customers, workforces, and suppliers, disrupting economies and financial markets, and 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

The pandemic may adversely affect our customers’ ability to perform their missions and is in many cases disrupting their operations.

It may also impact the ability of our subcontractors, partners, and suppliers to operate and fulfill their

contractual obligations, and result in an increase in their costs and cause delays in performance.

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

customer demand and our revenue and profit margins.

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

We could see delays or

changes in customer demand, particularly if government funding priorities change.

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

the health and economic aspects of COVID-19 are highly fluid and the future course of each is uncertain.

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

date that these consolidated financial statements were issued.

Principles of Consolidation and Reporting

The accompanying 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 wholly-owned directly and indirectly by the Telos Corporation.

All intercompany transactions have been eliminated in consolidation.

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

Basis of Comparison

Certain prior-period amounts have been reclassified to conform to the current period presentation.

In the current period, we have reclassified and presented intangible assets separately from our property and equipment line item.

The reclassification had no impact on our total assets or liabilities nor on our net (loss) income or stockholders' equity.

Revision of Prior Quarterly 2021 Financial Statements

In connection with the preparation of the consolidated financial statements, the Company recorded certain revisions related to previously issued unaudited condensed consolidated financial statements.

The Company considered the errors identified in accordance with the SEC's Staff Accounting Bulletin No.

99 and determined the impact was immaterial to the previously issued consolidated interim financial statements.

Nonetheless, the Company has revised the previously reported interim financial information for the quarterly periods ended March 31, 2021, June 30, 2021, and September 30, 2021.

There is no cumulative impact to the Company’s full-year 2021 financial statements as a result of these revisions.

Revisions to amounts in previously filed quarterly financial statements are reflected in Note 20 - Revision of Interim Financial Statements.

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.

Our Chief Executive Officer is the CODM.

The CODM only evaluates profitability based on consolidated results.

Operating segments are defined as components of an enterprise for which separate discrete financial information is available and evaluated regularly by the chief operating decision maker (“CODM”), who the Company has identified is the Chief Executive Officer, in deciding how to allocate resources and assess performance.

During the fourth quarter of 2021, we reorganized our internal management reporting structure and the financial results evaluated by our CODM;

therefore, we changed our operating segments to align with how our CODM currently oversees the business, allocates resources and evaluates operating performance.

As a result of the segment reorganization, we reported two reportable and operating segments:

Security Solutions and Secure Networks.

Our Security Solutions segment focuses on the Company's cybersecurity, cloud and identity solutions.

Our Secure Networks segment provides offerings for enterprise security.

Prior period segment information has been recast to reflect the change (see Note 1 7 - Segment Information for further information).

The segment reorganization had no impact on previously reported consolidated financial results.

Summary of Significant Accounting Policies

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S.

Generally Accepted

Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements,

and the reported amounts of revenues and expenses during the reporting period.

Significant estimates and assumptions used in the preparation of our consolidated financial statements include revenue recognition, allowance for doubtful accounts

receivable, allowance for inventory obsolescence, the valuation allowance for deferred tax assets, income taxes, contingencies and litigation, potential impairments of goodwill and estimated pension-related costs for our foreign subsidiaries.

results could differ from those estimates.

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.

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.

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.

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

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

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

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

contractor’s order from the U.S.

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

For other non-U.S.

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

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

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

the performance 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.

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.

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 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.

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

rate structure changes as a result of regular DCAA audits of incurred cost submissions.

This resulted in signed final rate agreement letters for fiscal years 2011 to 2013 and conformed incurred cost submissions for 2014 to 2015.

We evaluated the

resulting changes to revenue under the applicable cost plus fixed fee contracts for the years 2011 to 2015 as variable consideration, and determined the most likely amount to which we expect to be entitled, to the extent that no constraint exists

that would preclude recognizing this revenue or result in a significant reversal of cumulative revenue recognized.

We included these estimated amounts of variable consideration in the transaction price and as performance on these contracts is

complete, we have recognized revenue of $6.0 million during the year ended December 31, 2018.

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

For incentive fees, we would

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

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 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.

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

These contract assets are referred to as unbilled receivables and are

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

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

receivable, net of reserve on the consolidated balance sheets.

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

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

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

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

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

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

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

We have one reportable segment.

We treat sales to U.S.

customers as sales within the U.S.

regardless of

where the services are performed.

Substantially all of our revenues are from U.S.

customers as revenue derived from international customers is de minimus.

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

years ended December 31, 2020, 2019, and 2018.

Prior period amounts have not been adjusted under the modified retrospective method.

State & Local, and Commercial

Firm fixed-price

Time-and-materials

Cost plus fixed fee

As of December 31, 2020 and 2019, we had $127.7 million and $112.4 million of remaining performance

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

We expect to recognize approximately 92.4% of our remaining performance obligations as revenue in 2021, an additional 2.5% by 2022 and the balance thereafter.

For the years ended

December 31, 2020, 2019 and 2018, the amount of revenue recognized during the year that was included in the opening contract liabilities balance was $5.3 million, $4.2 million, and $5.5 million, respectively.

Contract liabilities were $5.7 million

and $6.3 million as of December 31, 2020 and 2019, respectively.

GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period.

We base our estimates on historical experience, current available information and various other assumptions that we believe are reasonable under the circumstances.

Significant estimates and assumptions used in the preparation of our consolidated financial statements include revenue recognition, allowance for doubtful accounts, allowance for inventory obsolescence, the valuation allowance for deferred tax assets, income taxes, contingencies and litigation, potential impairments of goodwill and estimated pension-related costs for our foreign subsidiaries.

Actual results could differ from those estimates.

Risks and Uncertainties

Financial instruments that subject us to concentrations of credit risk consist primarily of cash and cash equivalents, and accounts receivable.

In accordance with ASC 275-10-50-16, in consideration that such a large amount of our working capital and total assets are held in cash and cash equivalents, we have considered that the balances held in our various treasury accounts may exceed federally insured limits as of the date of the financial statements.

Due to the financial strength of the financial institution where the accounts are held, we do not believe that this concentration risk makes it reasonably possible that a near-term severe impact risk of loss will occur.

The Company's receivables are primarily due from the U.S.

government, or from prime contractors on which we are subcontractors and the end customer is the U.S.

government, and are generally considered collectable from the perspective of the customer's ability to pay.

The Company does not have a material credit risk exposure.

We maintain an allowance for doubtful accounts for estimated potential credit losses.

The COVID-19 pandemic has caused significant disruption to national and global economies and government activities.

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, workforce, 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 COVID-19 pandemic has impacted our estimates and assumptions and will continue to do so.

The pandemic may adversely affect our customers’ ability to perform their missions and is in many cases disrupting their operations.

Given the uncertainties around the pandemic, including its duration and potential future disruptions to our supply chain or workforce, it is reasonably possible that the actual impact of the pandemic on our contract costs could be materially different than our current estimates.

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 relying on various technologies to perform their functions.

We could see delays or changes in customer demand, particularly if government funding priorities change.

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

Both the health and economic aspects of COVID-19 are highly fluid and the future course of each is uncertain.

Cash and Cash Equivalents

We consider all highly liquid investments with an original maturity of three months or less at the date of purchase to be

cash equivalents.

We consider all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents.

Our cash management program utilizes zero balance accounts.

Accordingly, all book overdraft balances have been reclassified to accounts payable and other accrued liabilities.

In accordance with ASC 275-10-50-16, in consideration that such a large amount of our working capital

and total assets are held in cash and cash equivalents, we have considered that the balances held in our various treasury accounts may exceed federally insured limits as of the date of the financial statements.

Due to the financial strength of the

financial institution where the accounts are held, we do not believe that this concentration risk makes it reasonably possible that a near-term severe impact risk of loss will occur.

Accounts Receivable

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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 method.

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

Receivables include billed and unbilled receivables.

Unbilled receivables, substantially all of which are expected to be billed and collected within one year, are stated at their estimated realization value and consist of costs and fees billable on contract completion or the occurrence of a specific event, other than the passage of time.

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 customer 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.

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 $4.2 million and $2.8 million at

December 31, 2020 and 2019, respectively.

Provisions have been made to reduce all obsolete, slow-moving or unsaleable inventories to their net realizable values.

This provision 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 $ 2.1 million and $ 4.2 million at December 31, 2021 and 2020, respectively.

As of December 31, 2021, it is management’s judgment that we have fully provided for any potential inventory obsolescence.

The components of the allowance for inventory obsolescence are set forth below (in thousands):

Additions Charge to Costs and Expense

Year Additions Charge to

Costs and Expense Recoveries Balance

Year Ended December 31, 2021 $ 851 $ 10 $ — $ 861

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Property and Equipment

Property and equipment is recorded at cost.

Depreciation is provided using the straight-line method at rates based on the

estimated useful lives of the individual assets or classes of assets as follows:

Furniture and equipment

Leasehold improvements

Lesser of life of lease or useful life of asset

Property and equipment under finance leases

Lesser of life of lease or useful life of asset

Leased property meeting certain criteria is capitalized at the present value of the related

minimum lease payments.

Property and equipment are recorded at cost.

Depreciation is provided using the straight-line method at rates based on the estimated useful lives of the individual assets or classes of assets as follows:

Furniture and equipment 3 - 5 Years

Leasehold improvements Lesser of life of lease or useful life of asset

Property and equipment under finance leases Lesser of life of lease or useful life of asset

Leased property meeting certain criteria is capitalized at the present value of the related minimum lease payments.

Amortization of property and equipment under finance leases is computed using the straight-line method over the lesser of the term of the related lease and the useful life of the related asset.

Upon sale or retirement of property and equipment, the costs and related accumulated depreciation are

eliminated from the accounts and any gain or loss on such disposition is reflected in the consolidated statements of operations.

Upon sale or retirement of property and equipment, the costs and related accumulated depreciation are eliminated from the accounts and any gain or loss on such disposition is reflected in the consolidated statements of operations.

For the years ended December 31, 2021, 2020, and 2019, such amounts are negligible.

Expenditures for repairs and

maintenance are charged to operations as incurred.

Long-lived assets, such as fixed assets, are reviewed for impairment whenever circumstances indicate

that the carrying amount of the asset exceeds its estimated fair value.

Expenditures for repairs and maintenance are charged to operations as incurred.

Long-lived assets, including property and equipment, are reviewed for impairment whenever circumstances indicate that the carrying amount of the asset exceeds its estimated fair value.

Considerable management judgment is necessary to estimate its fair value.

Accordingly, actual results could differ from such estimates.

No events have been identified that caused

an evaluation of the recoverability of long-lived assets.

Depreciation and amortization expense related to property and equipment, including property and

equipment under finance leases was $5.4 million, $5.0 million, and $3.0 million for the years ended December 31, 2020, 2019, and 2018, respectively.

No events have been identified that caused an evaluation of the recoverability of long-lived assets.

Depreciation and amortization expenses related to property and equipment, including property and equipment under finance leases was $ 3.1 million, $ 2.9 million, and $ 2.5 million for the years ended December 31, 2021, 2020, and 2019, respectively.

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

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.

Beginning with the second quarter of 2017, software

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

As of December 31, 2020 and 2019, we capitalized $12.3 million and $5.6 million of software development costs, respectively, which

are included as a part of property and equipment.

Amortization expense was $1.7 million, $1.8 million, and $1.1 million for the years ended December 31, 2020, 2019, and 2018, respectively.

Accumulated amortization was $4.8 million and $3.1 million as

of December 31, 2020 and 2019, respectively.

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.

We account for development costs of software 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”, depending on the intended use of the software being developed.

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

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.

Advertising Costs

Advertising costs, which are expensed and included in sales and marketing expense when incurred , were $ 1.8 million, $ 1.0 million, and $ 0.4 million for the years ended December 31, 2021, 2020 and 2019, respectively.

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 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 December 31, 2020 and 2019.

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

balance sheets at December 31, 2020 and 2019.

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

to offset future taxable income created by the reversal of temporary taxable differences related to goodwill.

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

additional information on tax reform and its impact on our income taxes in Note 9 – Income Taxes.

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

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 consolidated financial statements at the largest amount that is greater than fifty percent likely of being realized upon ultimate settlement.

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.

We evaluate the impairment of goodwill in accordance with ASC 350, 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.

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 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.

Business Combinations

Acquisitions were accounted for under U.S.

GAAP using the acquisition method in accordance with ASC 805, Business Combinations .

The Company allocates the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values.

The excess of the fair value of purchase consideration over the values of these identifiable assets and liabilities, if any, is recorded as goodwill.

The accounting for business combinations requires management to make judgments and estimates of the fair value of assets acquired, including the identification and valuation of intangible assets, as well as liabilities and contingencies assumed.

Such judgments and estimates directly impact the amount of goodwill recognized in connection with an acquisition.

Estimating the fair value of acquired assets and assumed liabilities, including intangibles, requires judgment about expected future cash flows, weighted-average cost of capital, discount rates and expected long-term growth rates.

Goodwill and Intangible Assets

Goodwill is recorded for the difference between the aggregate consideration paid for an acquisition and the fair value of net tangible and intangible assets acquired and liabilities assumed.

Goodwill is not amortized, but rather tested for potential impairment.

We evaluate the impairment of goodwill in accordance with ASC 350, which requires goodwill and indefinite-lived intangible assets to be assessed on at least an annual basis, as of December 31 each year, 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.

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 may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying value, and if so, we perform a quantitative test.

We compare the carrying value of each reporting unit to its estimated fair value, and if the fair value is determined to be less than the carrying value, we recognize an impairment loss for the difference.

The evaluation is based on the estimation of the fair values at the reporting unit level 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 consolidated statements of operations.

Goodwill is amortized and

deducted over a 15-year period for tax purposes.

The Company's goodwill is amortized and deducted over a 15-year period for tax purposes.

We completed the required annual impairment test of goodwill for all reporting units as of December 31, 2021, resulting in no impairments.

The fair value of our reporting units exceeded their carrying value.

See Note 5 - Goodwill for additional information.

Intangible assets with finite lives are carried at cost, less accumulated amortization.

Amortization is computed using the method that best reflects how their economic benefits are utilized or, if a pattern of economic benefits cannot be reliably determined, on a straight-line basis over their estimated useful lives.

Intangible assets with finite lives are assessed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Stock-Based Compensation

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

Since June 2008, we have issued restricted stock to our executive officers, directors and employees.

79,361 shares were granted in 2020.

Such stock is subject to a vesting schedule as follows:

25% of the restricted stock vests

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

As of December 31, 2020, there were 59,521 shares of restricted stock that

remained subject to vesting.

In the event of death of the employee or a change in control, as defined by the Telos Corporation 2008 Omnibus Long-Term Incentive Plan, the 2013 Omnibus Long-Term Incentive Plan, or the 2016 Omnibus Long-Term Incentive

Plan, all unvested shares shall automatically vest in full.

In accordance with ASC 718, we recorded immaterial compensation expense for any of the issuances as the value of the common stock was nominal prior to the initial public offering of our

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

comparable transaction analysis.

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

Earnings (Loss) per Share

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

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

Diluted net 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.

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 Management Development and 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 RSUs 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 may vest in installments over a period of up 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 or the fair value of the award on the grant date as determined through an independent valuation for Performance-Based RSUs with market condition.

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 consolidated balance sheets, in accordance with ASC 718, "Compensation - Stock Compensation." 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.

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 are never achieved.

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

Share-based compensation expense is recognized as part of the cost of sales and selling, general and administrative expenses in our consolidated statements of operations.

Net Earnings (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.

For the year ended December 31, 2019, the Class A common basic and diluted net loss per share was

$(0.17), and the Class A common basic and diluted weighted-average shares were 34,525, the Class B common basic and diluted net loss per share was $(0.17), and the Class B common basic and diluted weighted-average shares were 3,204.

For the year ended December 31, 2018, the Class A common basic and diluted net loss per share was

$(0.04), and the Class A common basic and diluted weighted-average shares were 33,558, the Class B common basic and diluted net loss per share was $(0.04), and the Class B common basic and diluted weighted-average shares were 3,204.

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):

For the year ended December 31, 2019, the Class A common basic and diluted net loss per share was $( 0.17 ), the Class A common basic and diluted weighted-average shares were 34,525 , the Class B common basic and diluted net loss per share was $( 0.17 ), and the Class B common basic and diluted weighted-average shares were 3,204 .

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

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

Year Ended December 31,

1 unchanged sentence

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 consolidated financial statements

and notes to the consolidated financial statements give retroactive effect to the reverse stock split for all periods presented.

Comprehensive Income (Loss)

Comprehensive income (loss) includes changes in equity (net assets) during a period from non-owner sources.

Our accumulated

other comprehensive income (loss) was comprised of a loss from foreign currency translation of $63,000 and $101,000 as of December 31, 2020 and 2019, respectively;

and actuarial gain on pension liability adjustments in Teloworks of $107,000 as of

December 31, 2020 and 2019.

Total 920 961

Other Comprehensive Income (Loss)

Our functional currency is the U.S.

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

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

Financial Instruments

We use various methods and assumptions to estimate the fair value of our financial instruments.

their short-term nature, the carrying value of cash and cash equivalents, accounts receivable and accounts payable approximates fair value.

The fair value of long-term debt is based on the discounted cash flows for similar term borrowings based on

market prices for the same or similar issues.

Due to their short-term nature, the carrying value of cash and cash equivalents, accounts receivable and accounts payable approximates fair value.

The fair value of long-term debt is based on the discounted cash flows for similar term borrowings based on market prices for the same or similar issues.

Fair value estimates are made at a specific point in time, based on relevant market information.

estimates are subjective in nature and involve matters of judgment and therefore cannot be determined with precision.

These estimates are subjective in nature and involve matters of judgment and therefore cannot be determined with precision.

Changes in assumptions could significantly affect the estimates.

Recent Accounting Pronouncements Adopted

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326):

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, “Financial Instruments - Credit Losses (Topic 326):

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

This standard is

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

The adoption of this ASU did not have a material impact on our consolidated financial position,

results of operations and cash flows.

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

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

In January 2017, the FASB issued ASU 2017-4, "Intangibles - Goodwill and Other (Topic 350):

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

A goodwill impairment loss instead is measured at the amount by

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

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

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

A goodwill impairment loss instead is measured at the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the recorded amount of goodwill.

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

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

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

Disclosure Framework –

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

Those modifications include the removal and

addition of disclosure requirements as well as clarifying specific disclosure requirements.

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

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

Those modifications include the removal and addition of disclosure requirements as well as clarifying specific disclosure requirements.

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

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

In August 2018, the FASB issued ASU 2018‑15, “Intangibles - Goodwill and Other - Internal-Use Software

(Subtopic 350-40):

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

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

this standard effective for us on January 1, 2020.

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

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.

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

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

Recent Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU No.

2019-12, “Income Taxes (Topic 740):

Simplifying the Accounting

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

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

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

This standard will be

effective for reporting periods beginning after December 15, 2020, with early adoption permitted.

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

consolidated financial position, results of operations and cash flows.

Purchase of Telos ID/Non-Controlling

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 (“Telos ID Units”) 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 a credit to 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

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.

contributed substantially all of the assets of our Telos ID Enterprise business line and assigned our rights to perform under our U.S.

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

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

Until April 19, 2007, we owned 99.999% of the membership interests of Telos ID and 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.

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

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

Telos ID using the consolidation method.

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

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

In connection with the

Transaction, the Company and 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 Operating Agreement provided for two classes of membership units, Class A (owned by the Company) and Class B (owned

The Class A member (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.

The Class B member (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, the Class A and Class B members each owned 50% of Telos ID, as

mentioned above, and as such each was allocated 50% of the profits, which was $5.2 million, $4.3 million, and $3.4 million for 2020, 2019, and 2018, respectively.

The Class B member 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.

During the years ended December 31, 2020, 2019, and 2018, the Class B member received a total of $2.8 million, $2.4 million, and $1.7 million, respectively, of such distributions.

The Class B member also 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 consolidated balance sheets as of December 31, 2020.

The following table details the changes in non-controlling interest for the years ended December 31, 2020, 2019, and 2018

(in thousands):

Non-controlling interest, beginning of period

Distributions

Sale of 50% membership interest

Non-controlling interest, end of period

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

Goodwill is subject to

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

For the years ended December 31, 2020, 2019 and 2018, 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 framework requires the valuation of investments 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.

supported by little or no market activity).

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

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

As of December 31, 2019, the carrying value of the Company’s 12% Cumulative Exchangeable Redeemable Preferred Stock, par

value $.01 per share (the “Public Preferred Stock”) was $139.2 million, and the estimated fair market value was $60.5 million, based on quoted market prices.

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.

Revenue and Accounts Receivable

This standard was effective for reporting periods beginning after December 15, 2020, which made this standard effective for us on January 1, 2021.

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

In March 2020, the FASB issued ASU No.

2020-04, “Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which provides optional expedients and exceptions for a limited period of time to ease the potential burden in accounting for contracts, hedging relationship and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.

This amendment is effective for all entities as of March 12, 2020 through December 31, 2022.

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

Recent Accounting Pronouncements Not Yet Adopted

In October 2021, the FASB issued ASU No.

2021-08, “Business Combination (Topic 805):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,” which requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination.

The ASU improves comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination.

Entities should apply the amendments prospectively to business combinations that occur after the effective date.

This standard will be effective for reporting periods beginning after December 15, 2022, with early adoption permitted.

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

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.

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, net of any discounts, to each performance obligation based on the standalone selling price of the product or service underlying each performance obligation.

Our contracts with the U.S.

Government are generally subject to Federal Acquisition Regulation ("FAR") and the price is typically based on estimated or actual costs plus a reasonable profit margin.

As such, the standalone selling price of products or services in our contracts with the U.S.

Government are typically equal to the selling price stated in the contract.

Government contracts with multiple performance obligations, standalone selling price is the observable price of a good or service when Telos sells that good or service separately in similar circumstances and to similar customers.

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.

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.

Revenue transferred to customers over time accounted for 91 %, 90 % and 90 % of our revenue for the years ended December 31, 2021, 2020 and 2019.

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.

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 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.

Revenue that is recognized at a point in time is for the sale of software licenses in our Information Assurance / Xacta and Secure Communications business groups and for the sale of resold products in Telos ID and Secure Networks, and is classified as product revenue.

Revenue transferred to customers at a point in time accounted for 9 %, 10 % and 10 % of our revenue for the years ended December 31, 2021, 2020 and 2019.

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 based on the standalone selling price of the product or service underlying each performance obligation.

The standalone selling price represents the amount we would sell the product or service to a customer on a standalone basis.

For certain performance obligation where we are not primarily responsible for fulfilling the promise to provide the goods or services to the customer, do not have inventory risk and have limited discretion in establishing the price for the goods or services, we recognize revenue on a net basis.

Contract Estimates

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.

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.

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

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

Revenue and profit in future periods of contract performance are recognized using the adjusted estimate.

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.

We have revised and re-submitted several years of incurred cost submissions reflecting certain indirect rate structure changes as a result of regular DCAA audits of incurred cost submissions.

This resulted in signed final rate agreement letters for fiscal years 2014 to 2016 and conformed incurred cost submissions for 2017 to 2020.

We evaluated the resulting changes to revenue under the applicable cost-plus fixed fee contracts for the years 2014 to 2016 as variable consideration, and determined the most likely amount to which we expect to be entitled, to the extent that no constraint exists that would preclude recognizing this revenue or result in a significant reversal of cumulative revenue recognized.

We included these estimated amounts of variable consideration in the transaction price and as performance on these contracts is complete, we have recognized revenue of $ 0.2 million during the year ended December 31, 2021.

We provide for anticipated losses on contracts during the period when the loss is determined by recording an expense for the total expected costs that exceeds the total estimated revenue for a performance obligation.

We recorded an immaterial contract loss during the year ended December 31, 2021.

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.

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

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

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.

As discussed above, we have identified two (2) reportable segments.

We treat sales to U.S.

customers as sales within the U.S.

regardless of where the services are performed.

Substantially most of our revenues are generated from U.S.

customers, while international customers are de minimus, as such the financial information by geographic location is not presented.

The following tables disclose revenue disaggregated by several categories for the years ended December 31, 2021, 2020, and 2019 (in thousands).

Revenue Type 2021 2020 2019

Security Solutions

Services $ 102,649 $ 100,422 $ 86,286

Products 20,885 16,890 15,637

123,534 117,312 101,923

Secure Networks

Services 118,899 60,758 57,295

Products — 1,847 —

118,899 62,605 57,295

Total revenue $ 242,433 $ 179,917 $ 159,218

Customer Type 2021 2020 2019

Security Solutions

Federal $ 114,159 $ 109,410 $ 92,336

State & Local, and Commercial 9,375 7,902 9,587

123,534 117,312 101,923

Secure Networks

Federal 118,717 62,267 56,921

State & Local, and Commercial 182 338 374

118,899 62,605 57,295

Total revenue $ 242,433 $ 179,917 $ 159,218

Contract Type 2021 2020 2019

Security Solutions

Firm fixed-price $ 104,534 $ 98,379 $ 80,316

Time-and-materials 12,433 12,617 14,100

Cost plus fixed fee 6,567 6,316 7,507

123,534 117,312 $ 101,923

Secure Networks

Firm fixed-price 107,770 53,324 51,313

Time-and-materials 28 838 469

Cost plus fixed fee 11,101 8,443 5,513

118,899 62,605 $ 57,295

Total revenue $ 242,433 $ 179,917 $ 159,218

Revenue resulting from contracts and subcontracts with the U.S.

Government accounted for 95.4%, 93.7%,

and 93.7% of consolidated revenue in 2020, 2019, and 2018, respectively.

government accounted for 96.1 %, 95.4 %, and 93.7 % of consolidated revenue in 2021, 2020, and 2019, respectively.

As our primary customer base includes agencies of the U.S.

Government, we have a concentration of credit risk associated with our accounts receivable, as 96.1% of our billed

accounts receivable were directly with U.S.

government, we have a concentration of credit risk associated with our accounts receivable, as 97.3 % of our billed accounts receivable were directly with U.S.

government customers.

While we acknowledge the potentially material and adverse risk of such a significant concentration of credit risk, our past experience of collecting substantially all of such

receivables provide us with an informed basis that such risk, if any, is manageable.

While we acknowledge the potentially material and adverse risk of such a significant concentration of credit risk, our past experience of collecting substantially all of such receivables provide us with an informed basis that such risk, if any, is manageable.

We perform ongoing credit evaluations of all of our customers and generally do not require collateral or other guarantee from our customers.

We maintain allowances

for potential losses.

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

Company could sell certain accounts receivable to a third party, or the “ Factor ” ,

without recourse to the Company.

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

Federal government receivables or 85% of certain commercial prime contractors’ receivables that were sold under the agreement.

The remaining payment was deferred and

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

The structure of the transaction provided for a true sale

of the receivables transferred.

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

as an accounts receivable until payment was received from the Factor.

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

There were no accounts receivable sold during 2020.

During the year ended December 31, 2019, the Company sold

approximately $12.6 million of accounts receivable, and recognized a related loss of approximately $0.1 million in selling, general and administrative expenses for the same period.

As of December 31, 2020 and 2019, there were no outstanding sold

accounts receivable.

The components of accounts receivable and contract assets are as follows (in thousands):

We maintain allowances for potential losses.

The percentage of total revenue for the U.S.

government, its agencies and other customers comprising more than 10% of total revenue is as follows:

2021 2020 2019

Department of Defense 74 % 65 % 65 %

Civilian 22 % 30 % 29 %

Contract Balances

Performance obligations are satisfied either over time or at a point in time and are typically invoiced to the customers as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones.

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

These contract assets are referred to as unbilled receivables and are reported within accounts receivable, net of reserve on our consolidated balance sheets.

Contract liabilities are payments received in advance and milestone payments from our customers on selected contracts that exceed revenue earned to date, resulting in contract liabilities.

Contract liabilities typically are not considered a significant financing component because they are generally satisfied within one year and are used to meet working capital demands that can be higher in the early stages of a contract.

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

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

Contract balances for the periods presented are as follow (in thousands):

2021 2020 2019

Contract assets (unbilled receivables) $ 41,374 $ 19,161 $ 16,745

Contract liabilities $ 6,381 $ 5,654 $ 6,337

The significant changes in the Company's contract assets and contract liabilities during the current period were primarily the result of the timing differences between the Company's performance, invoicing and customer payments.

For the years ended December 31, 2021, 2020 and 2019, the amount of revenue recognized during the year that was included in the opening contract liabilities balance was $ 4.3 million, $ 5.3 million, and $ 4.2 million, respectively.

Remaining performance obligation (funded backlog) $ 123,479 $ 127,735

We expect to recognize approximately 85.8 % of our remaining performance obligations as revenue in 2022, and approximately 14.1 % by 2023, with the remainder recognized thereafter.

Accounts Receivables

Billed receivables are amounts billed and due from our customers and are reported within accounts receivable, net of reserve on the consolidated balance sheets.

The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component due to the intent of the retainage being the customer’s protection with respect to full and final performance under the contract.

The components of accounts receivable, net consisted of the following (in thousands):

Billed accounts receivable $ 18,586 $ 12,060

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Allowance for doubtful accounts ( 116 ) ( 308 )

Accounts receivable, net $ 59,844 $ 30,913

The activities in the allowance for doubtful accounts are set forth below (in thousands):

Balance Beginning

Recoveries (2)

of Year Bad Debt

Write-offs / Recoveries (2)

Year Ended December 31, 2021 $ 308 $ 7 $ ( 199 ) $ 116

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(2) Accounts receivable written-off and subsequent recoveries, net

Revenue by Major Market and Significant Customers

We derived a substantial portion of our revenues from contracts and subcontracts with the U.S.

customer sector for the last three fiscal years is as follows:

(dollar amounts in thousands)

State & Local, and Commercial

Current Liabilities and Debt Obligations

Accounts Payable and Other Accrued Liabilities

As of December 31, 2020 and 2019, the accounts payable and other accrued payables consisted of

$14.7 million and $13.6 million, respectively, in trade account payables and $6.2 million and $1.5 million, respectively, in accrued liabilities.

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

As of December 31, 2020 and 2019, the

contract liabilities primarily related to product support services.

On July 15, 2016, the Company entered into an accounts receivable purchase agreement under which the Company could sell certain accounts receivable (balance not to exceed $ 10 million) to a third party, or the “Factor”, without recourse to the Company, with an availability period through June 30, 2022.

There were no accounts receivable sold during 2021 and 2020, respectively.

As of December 31, 2021 and 2020, there were no outstanding sold accounts receivable.

On July 30, 2021, the Company acquired the assets of Diamond Fortress Technologies ("DFT") and wholly-owned subsidiaries for a total purchase consideration of $ 6.7 million, inclusive of $ 0.3 million related to a pre-existing contractual arrangement with DFT.

Upon closing, $ 5.9 million of cash was paid with an additional $ 0.6 million payable to DFT 18 months after the close date (the "holdback").

The holdback amount has been discounted to its present value of $ 0.5 million using a discount rate relevant to the acquisition.

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

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

The acquisition of DFT has been accounted for under U.S.

GAAP using the acquisition method of accounting.

The total purchase consideration of $ 6.7 million has been allocated among the assets acquired at their fair value at acquisition date.

The Company recognized $ 3.7 million of intangible assets and $ 3.0 million of goodwill, which is housed in the Telos ID reporting unit, part of the Security Solutions operating segment.

Goodwill is primarily attributable to excess of the purchase price over the acquired identifiable net tangible and intangible assets.

The acquired intangible assets will be amortized on a straight-line basis over 3 - 8 years.

The acquisition was considered an asset purchase for tax purposes and the recognized goodwill is deductible for tax purposes.

The results of DFT operations have been included in our consolidated statements of operations from the acquisition date, and are not material for the year ended December 31, 2021.

Acquisition-related costs were immaterial and have been expensed as incurred.

The pro-forma financial information has not been presented for this acquisition as the impact to our consolidated financial statements is not material.

The carrying value of the goodwill is as follows:

Security Solutions Secure Networks Total

Balance at December 31, 2020 $ — $ 14,916 $ 14,916

Acquired goodwill 3,006 — 3,006

Balance at December 31, 2021 $ 3,006 $ 14,916 $ 17,922

As discussed in Note 1 - Overview and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements, we reorganized our segment reporting in the fourth quarter of 2021 to align with how our CODM currently oversees the business, allocates resources and evaluates operating performance.

As a result of the segment reorganization, we reported two operating and reportable segments:

Security Solutions and Secure Networks.

The Security Solution segment consists of three reporting units:

Secure Communications, Information Assurance / Xacta and Telos ID;

while the Secure Networks segment also became its own reporting unit for purposes of testing goodwill.

The existing goodwill reported from prior years was previously identified under the Cyber Operations and Defense reporting unit, which was comprised of Information Assurance / Xacta and Secure Networks.

We determined that the goodwill balance was specifically related to an acquisition associated within the Secure Networks reporting unit;

therefore, the previous goodwill balance was allocated entirely under our updated reporting unit structure to Secure Networks.

Our goodwill from the recent DFT acquisition is housed within the Telos ID reporting unit, which is part of the Security Solutions operating segment.

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

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

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

At year-end, the Company performed its annual impairment test of goodwill for all of the reporting units.

Based on our qualitative assessment, we concluded that it was more-likely-than-not that the estimated fair value of the reporting units exceeded its carrying value.

For the years ended December 31, 2021, 2020 and 2019, no impairment charges were taken.

Intangible Assets

Intangible assets with finite lives are amortized over the following estimated useful lives:

Estimated Useful Life

Acquired technology 8 years

Customer relationship 3 years

Software development costs 2 years

Intangible assets, all of which are finite-lived, consists of the following (in thousands):

December 31, 2021 December 31, 2020

Gross Carrying Amount Accumulated Amortization Net Carrying Value Gross Carrying Amount Accumulated Amortization Net Carrying Value

Acquired technology $ 3,630 $ ( 256 ) $ 3,374 $ — $ — $ —

Customer relationships 40 ( 5 ) 35 — — —

Software development costs 22,222 ( 6,432 ) 15,790 12,253 ( 4,833 ) 7,420

$ 25,892 $ ( 6,693 ) $ 19,199 $ 12,253 $ ( 4,833 ) $ 7,420

Amortization expense was $ 1.9 million, $ 1.7 million, and $ 1.8 million for the years ended December 31, 2021, 2020, and 2019, respectively.

The expected future annual amortization expense of intangible assets as of December 31, 2021 is presented below (in thousands):

Years Ending December 31, Amount

2027 and thereafter 1,105

Total $ 19,199

Debt Obligations

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 provided 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 accrued interest at the rate of 13.0% per annum (the

“Accrual Rate”).

If, at the request of the Company, the Agent executed 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 would

increase to 14.5% per annum.

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

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

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

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

payment-in-kind.

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

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

for transactions of this type.

In connection with the Credit Agreement, the Agent had 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 was equivalent to

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

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 provided 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 accrued interest at the rate of 13.0 % per annum.

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

The exercise price as $ 1.665 per share and each Warrant would expire 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.

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 %.

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

On March 30, 2018, the Credit Agreement was further amended (the “Third Amendment”) to waive certain

covenant defaults 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 would 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).

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

On March 30, 2018, the Credit Agreement was further amended (the “Third Amendment”) to add a minimum revenue covenant and a net working capital covenant.

In consideration of these amendments, the interest rate on the loan was increased by 1 %, which would 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 had been paid in cash.

Contemporaneously with the Third Amendment, Mr.

Wood agreed to transfer

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

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

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 (but not limited to) the following:

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

1 unchanged sentence

• The prepayment price was amended as follows:

(a) from January 26, 2019 through January 25, 2020, the prepayment price was 102% of the

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

However, the prepayment

price for the additional $5 million loan attributable to the Fourth Amendment would 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.

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

The borrowing under the Credit Agreement continued to be collateralized by substantially all of the Company’s assets including

inventory, equipment and accounts receivable.

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

We incurred immaterial third party transaction

costs which were expensed in the current period.

(a) from January 26, 2019 through January 25, 2020, the prepayment price was 102 % of the principal amount, (b) from January 26, 2020 through October 14, 2020, the prepayment price was 101 % of the principal amount, and (c) from October 15, 2020 to the maturity date, the prepayment price would be at par.

However, the prepayment price for the additional $ 5 million loan attributable to the Fourth Amendment would be at par.

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

• The Company paid the Agent a fee of $ 110,000 in connection with the Fourth Amendment and incurred immaterial third-party transaction costs which were expensed during the 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 would remain at the December 31, 2019 levels and to update the previously agreed-upon definition of certain financial covenants, specifically the amount of Capital

Expenditures to be included in the measurement of the covenants.

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

Fifth Amendment provided 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 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 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 provided 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 $2.7 million, $2.2 million and $1.7 million for the years ended December

31, 2020, 2019 and 2018, respectively, 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.

As a result, we recognized a loss on debt extinguishment of $138,000 presented as a part of the non-operating expense in the

consolidated statements of operations.

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 .

As a result, we recognized a loss on debt extinguishment of $ 138,000 presented as a part of the non-operating expense in the consolidated statements of operations.

We incurred interest expenses in the amount of $ 2.7 million and $ 2.2 million for the years ended December 31, 2020 and 2019, respectively, under the Credit Agreement.

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”).

Porter and Toxford Corporation, of which Mr.

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

Under the terms of the Porter Notes,

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

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

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

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

Porter was the sole shareholder, owned 35.0 % of our Class A Common Stock.

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

Telos also entered into Subordination and Intercreditor Agreements (the “Subordination Agreements”) with Porter and a prior senior lender, in which the Porter Notes were fully subordinated to the financing provided by that senior lender, and payments under the Porter Notes were permitted only if certain conditions 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, were permitted to 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.

As a result of the amendment and restatement of the Porter Notes, we recorded a gain on extinguishment of debt of

approximately $1 million, which consisted of the remeasurement of the debt at fair value.

As the extinguishment was with a related party, the transaction was deemed to be a capital transaction and the gain was recorded in the Company’s stockholders’

deficit as of December 31, 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 $319,000, $330,000, and $308,000

for 2020, 2019, and 2018, respectively, on the Porter Notes.

We incurred interest expense in the amount of $ 319,000 and $ 330,000 for 2020 and 2019, respectively, on the Porter Notes.

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

Redeemable Preferred Stock Conversion

Exchangeable Redeemable Preferred Stock Conversion

Public Preferred Stock

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

Exchangeable Redeemable Preferred Stock, 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) 0.90;

multiplied by

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

“ERPS Liquidation Value” means, per each share of Exchangeable Redeemable Preferred Stock, $10

together with all accrued and unpaid dividends (whether or not earned or declared) thereon calculated as of the actual date of an ERPS Conversion Event 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 Exchangeable Redeemable 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

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 $0.01 per share, had been

authorized for issuance.

A maximum of 6,000,000 shares of the Public Preferred Stock, par value $ 0.01 per share, had 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.

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.

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.

1 unchanged sentence

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

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

In November 1998, we retired 410,000

shares of the Public Preferred Stock.

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

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

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

The Public Preferred Stock was quoted as “TLSRP” on the OTCQB marketplace and the OTC Bulletin Board.

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

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

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

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

as set forth in Maryland Code Section 2-311, which the Company did not satisfy as of the measurement dates.

Pursuant to the terms of the Articles of Amendment and Restatement, we were scheduled, but not required, to redeem the Public Preferred Stock

in five annual tranches during the period 2005 through 2009.

However, due to our substantial senior obligations currently or previously in existence, limitations set forth in the covenants in the Credit Agreement and the Porter Notes, foreseeable

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

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

Therefore, we classified these securities as

noncurrent liabilities in the consolidated balance sheets as of December 31, 2019.

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

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.

For the cash dividends payable since December 1, 1995, we had accrued $107.4 million as of December 31, 2019.

We accrued dividends on the Public

Preferred Stock of $3.4 million $3.8 million and $3.8 million for the years ended December 31, 2020, 2019, and 2018, 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.

Senior Redeemable Preferred Stock

The Senior Redeemable Preferred Stock was senior to all other outstanding equity of the Company,

including the Public Preferred Stock.

The Series A-1 ranked on a parity with the Series A-2.

The components of the authorized Senior Redeemable Preferred Stock were 1,250 shares of Series A-1 and 1,750 shares of Series A-2 Senior Redeemable Preferred

Stock, each with $.01 par value.

The Senior Redeemable Preferred Stock carried a cumulative per annum dividend rate of 14.125% of its liquidation value of $1,000 per share.

The dividends were payable semiannually on June 30 and December 31 of each

We had not declared dividends on our Senior Redeemable Preferred Stock since its issuance, other than in connection with the redemptions from 2010 to 2013.

The liquidation preference of the Senior Redeemable Preferred Stock was the face amount

of the Series A-1 and A-2 ($1,000 per share), plus all accrued and unpaid dividends.

Due to the terms of the Credit Agreement, the Porter Notes, other senior obligations currently or previously in existence,

the Senior Redeemable Preferred Stock and applicable provisions of Maryland law governing the payment of distributions, we had been precluded from redeeming the Senior Redeemable Preferred Stock and paying any accrued and unpaid dividends on the

Senior Redeemable Preferred Stock, other than the redemptions that occurred from 2010 to 2013.

In addition, certain holders of the Senior Redeemable Preferred Stock had entered into standby agreements whereby, among other things, those holders would

not demand any payments in respect of dividends or redemptions of their instruments and the maturity dates of the instruments have been extended.

In accordance with the requirements of the Second Amendment to the EnCap Credit Agreement, we redeemed all outstanding

shares of the Senior Redeemable Preferred Stock on April 18, 2017 for $2.1 million.

Stockholders' Deficit and Employee Benefit Plan

Our authorized capital stock consists of 250,000,000 shares of common stock, $0.001 par value per share,

and 10,000,000 shares of preferred stock, $0.01 par value per share.

Prior to our Second Amended and Restated Articles of Incorporation, which were effective November 12, 2020, the relative rights, preferences, and limitations of the Class A common

stock and the Class B common stock were in all respects identical.

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 $ 0.60 of such dividends not paid in cash.

We accrued dividends on the Public Preferred Stock of $ 3.4 million and $ 3.8 million for the years ended December 31, 2020, and 2019, respectively, which was recorded as interest expense.

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

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, 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) 0.90 ;

multiplied by (III) 0.15 .

No fractional shares of common stock, however, were issued upon an ERPS Conversion Event 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 such ERPS Conversion Event multiplied by such fractional amount (rounded to the nearest cent).

“ERPS Liquidation Value” means, per each share of Exchangeable Redeemable Preferred Stock, $ 10 together with all accrued and unpaid dividends (whether or not earned or declared) thereon calculated as of the actual date of an ERPS Conversion Event 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 Exchangeable Redeemable 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.

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.

government contract with the Defense Manpower Data Center to Telos ID at their stated book values.

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

Until April 19, 2007, we owned 99.999 % of the membership interests of Telos ID and Hoya ID Fund 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 $ 6.0 million in cash consideration.

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

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

On December 24, 2014, Hoya acquired from the Company an additional ten percent ( 10 %) membership interest in Telos ID in exchange for $ 5.0 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 members (the “Telos ID Board”).

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

The Class A member (the Company) owned 50 % of Telos ID, was entitled to receive 50 % of the profits of Telos ID, and could appoint three members of the Telos ID Board.

The Class B member (Hoya) owned 50 % of Telos ID, was entitled to receive 50 % of the profits of Telos ID, and could appoint two members of the Telos ID Board.

The 2014 Transaction continued to be accounted for using the consolidation method and the Class B member was 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 (“Telos ID Units”) 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 7.3 million shares of our common stock at $ 20.39 per share (which totals approximately $ 148.40 million);

the total consideration transferred to Hoya was $ 178.40 million.

As part of the common stock issuance, the Company recognized a credit to APIC of $ 148.40 million.

The Company further recognized a debit to APIC of $ 173.90 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 $ 25.50 million.

As a result of the 2014 Transaction, the Class A and Class B members each owned 50 % of Telos ID, as mentioned above, and as such, each was allocated 50 % of the profits, which was $ 5.2 million, and $ 4.3 million for 2020, and 2019, respectively.

The Class B member 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.

During the years ended December 31, 2020, and 2019, the Class B member received a total of $ 2.8 million, and $ 2.4 million, respectively, of such distributions.

The Class B member also 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 consolidated balance sheets as of December 31, 2020.

The following table details the changes in non-controlling interest for the years ended December 31, 2020, and 2019 (in thousands):

Non-controlling interest, beginning of period $ 4,514 $ 2,621

Net income 5,154 4,264

Distributions ( 5,179 ) ( 2,371 )

Sale of 50% membership interest ( 4,489 ) —

Non-controlling interest, end of period $ — $ 4,514

Stockholders' Equity

Authorized Stock

Our authorized capital stock consists of 250,000,000 shares of common stock, $ 0.001 par value per share, and 10,000,000 shares of preferred stock, $ 0.01 par value per share.

Prior to our Second Amended and Restated Articles of Incorporation, which were effective November 12, 2020, the relative rights, preferences, and limitations of the Class A common stock and the Class B common stock were in all respects identical.

The holders of the common stock had one vote for each share of common stock held.

Our Second Amended and Restated Articles of Incorporation authorize our Board of Directors to

classify or reclassify shares of our stock in one or more classes or series, to cause the issuance of additional shares of our stock, and to amend our charter without stockholder approval to increase or decrease the number of shares of stock that we

have authority to issue.

Our Second Amended and Restated Articles of Incorporation authorized our Board of Directors to classify or reclassify shares of our stock in one or more classes or series, to cause the issuance of additional shares of our stock, and to amend our charter without stockholder approval to increase or decrease the number of shares of stock that we have authority to issue.

On November 12, 2020, we filed Articles of Amendment (the “Articles”) with the State Department of Assessments and Taxation of the State of Maryland, effective as of the same date (the “Effective Time”).

The Articles amend

the Company’s charter to effect a reverse stock split such that (1) every 1.259446 shares of Class A Common Stock that were issued and outstanding immediately prior to the Effective Time were changed into one issued and outstanding share of Class A

Common Stock, and (2) every 1.259446 shares of Class B Common Stock that were issued and outstanding immediately prior to the Effective Time were changed into one issued and outstanding share of Class B Common Stock.

Also on November 12, 2020, we

filed the Second Articles of Amendment and Restatement (the “Second Amended Articles”) with the State Department of Assessments and Taxation of the State of Maryland, effective as of the same date (the “Effective Time”).

The Second Amended Articles

amend the Company’s charter to effect a conversion of each share of the Class B Common Stock that were issued and outstanding immediately prior to the Effective Time into one fully paid and nonassessable share of Class A Common Stock.

From and after

the Effective Time, certificates representing the Class B Common Stock now represent the number of shares of Class A Common Stock in which such Class B Common Stock was converted.

Also at the Effective Time, the Class A Common Stock was renamed and

redesignated as common stock, par value $0.001 per share, of the Corporation.

As of December 31, 2020, there were 64,625,071 shares of common stock outstanding and no shares of

preferred stock outstanding.

Restricted Stock Grants

Since June 2008, we have issued restricted stock to our executive officers, directors and employees.

Such stock is subject to a vesting schedule as follows:

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

shares shall automatically vest in full.

obligations, and preferred stock from an estimated enterprise value, which was estimated based on discounted cash flow analysis, comparable public company analysis, and comparable transaction analysis.

Additionally, we determined that a significant

change in the valuation estimate for common stock would not have a significant effect on the consolidated financial statements.

The Articles amended the Company’s charter to effect a reverse stock split such that (1) every 1.259446 shares of Class A Common Stock that were issued and outstanding immediately prior to the Effective Time were changed into one issued and outstanding share of Class A Common Stock, and (2) every 1.259446 shares of Class B Common Stock that were issued and outstanding immediately prior to the Effective Time were changed into one issued and outstanding share of Class B Common Stock.

Also on November 12, 2020, we filed the Second Articles of Amendment and Restatement (the “Second Amended Articles”) with the State Department of Assessments and Taxation of the State of Maryland, effective as of the same date (the “Effective Time”).

The Second Amended Articles amended the Company’s charter to effect a conversion of each share of the Class B Common Stock that was issued and outstanding immediately prior to the Effective Time into one fully paid and non-assessable share of Class A Common Stock.

From and after the Effective Time, certificates representing the Class B Common Stock now represent the number of shares of Class A Common Stock in which such Class B Common Stock was converted.

Also, at the Effective Time, the Class A Common Stock was renamed and re-designated as common stock, par value $ 0.001 per share, of the Corporation.

Shares Issued and Outstanding

As of December 31, 2021 and 2020, there were 66,767,450 and 64,625,071 shares of common stock issued and outstanding, respectively.

There were no shares of preferred stock issued and outstanding on either date.

The changes in our shares outstanding during 2021 and 2020 resulted from shares issued during the follow-on offering and repurchased shares held by EnCap.

Shares Repurchases

Relative to the Repurchase Agreements, as disclosed under Note 7 - Debt Obligations above, the Company agreed to repurchase the 39,682 outstanding shares held by EnCap for $ 1.3 million on April 19, 2021.

Other Comprehensive (Loss) Income

Comprehensive (loss) income includes changes in equity during a period from non-owner sources.

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

Year Ended December 31,

Cumulative foreign currency translation loss $ ( 134 ) $ ( 63 )

Cumulative actuarial gain on pension liability adjustment in Teloworks 107 107

Accumulated other comprehensive (loss) income $ ( 27 ) $ 44

Employee Benefit Plan

Telos sponsors a defined contribution employee savings plan (the “Plan”) under which substantially all full-time employees are eligible to participate.

As of December 31, 2021, the Plan held 1,031,718 shares of Telos common stock.

We match one-half of employee contributions to the Plan up to a maximum of 2 % of such employee’s eligible annual base salary.

Participant contributions vest immediately, and Telos contributions vest at the rate of 20 % each year, with full vesting occurring after completion of five years of service.

Our total contributions to the Plan for 2021, 2020, and 2019 were $ 1.1 million, $ 1.0 million, and $ 0.9 million, respectively.

Additionally, Telos ID sponsors a defined contribution savings plan (the “Telos ID Plan”) under which substantially all full-time employees are eligible to participate.

Telos ID matches one-half of employee contributions to the Telos ID Plan up to a maximum of 2 % of such employee’s eligible annual base salary.

The total 2021, 2020, and 2019 Telos ID contributions to this plan were $ 0.2 million, $ 0.2 million, and $ 0.2 million, respectively.

Note 12 – Stock-Based Compensation

Since June 2008, we have issued restricted stock to our senior executives, directors, employees and other service providers.

Such stock typically was subject to a vesting schedule as follows:

25 % of the restricted stock vests immediately on the date of grant;

thereafter, an additional 25 % will vest on each succeeding year on the anniversary of the date of grant subject to continued employment or services.

In accordance with ASC 718, we recorded immaterial compensation expense for any of the issuances as the value of the common stock was nominal, based on the deduction of our outstanding debt, capital lease obligations, and preferred stock from an estimated enterprise value, which was estimated based on discounted cash flow analysis, comparable public company analysis, and comparable transaction analysis.

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

In May 2017, we issued grants of 3,972,007 shares to our executive officers and employees.

shares vest according to the schedule set forth above.

The shares vest according to the schedule set forth above.

There were 3,948,199 shares outstanding at the beginning of 2018, and 43,649 shares were forfeited during 2018.

There were no new grants in 2018.

There were 3,904,550 shares outstanding at the

beginning of 2019, and 11,904 shares were forfeited during 2019.

There were 3,904,550 shares outstanding at the beginning of 2019, and 11,904 shares were forfeited during 2019.

There were no new grants in 2019.

At the beginning of 2020 there were 3,892,646 shares outstanding and 47,616 were forfeited prior to May 2020, when the remaining 3,845,030 shares

became fully vested.

Upon vesting there were no remaining restrictions on these shares and they are able to be sold or disposed of, subject to any lock-up agreements subsequently entered into by certain holders of the shares in connection with the

IPO of the Company’s common stock in November 2020.

In May 2020, 79,361 shares were granted.

As of December 31, 2020, there were 59,521 shares of

restricted stock that remained subject to vesting.

Telos Shared Savings Plan

We sponsor a defined contribution employee savings plan (the “Plan”) under which substantially all

full-time employees are eligible to participate.

As of December 31, 2020, the Plan held 2,391,552 shares of Telos common stock.

We match one-half of employee contributions to the Plan up to a maximum of 2% of such employee’s eligible annual base

Participant contributions vest immediately, and Company contributions vest at the rate of 20% each year, with full vesting occurring after completion of five years of service.

Our total contributions to the Plan for 2020, 2019, and 2018 were

$998,000, $861,000, and $721,000, respectively.

Additionally, Telos ID sponsors a defined contribution savings plan (the “Telos ID Plan”) under which

substantially all full-time employees are eligible to participate.

Telos ID matches one-half of employee contributions to the Telos ID Plan up to a maximum of 2% of such employee’s eligible annual base salary.

The total 2020, 2019, and 2018 Telos ID

contributions to this plan were $179,000, $151,000, and $125,000, respectively.

The provision (benefit) for income taxes attributable to income from operations includes the following

At the beginning of 2020 there were 3,892,646 shares outstanding and 47,616 were forfeited prior to May 2020, when the remaining 3,845,030 shares became fully vested.

In May 31, 2020, 79,361 shares were granted, with a weighted-average fair value of $ 14,000 at grant date.

As of December 31, 2020, there were 59,521 shares of restricted stock that remained subject to vesting.

In October 2020, the Company amended the 2016 LTIP to increase the total number of shares available for issuance to 9,400,000 from 4,500,000 and extend 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 up to two to three years , and stock options granted under the 2016 LTIP expire no more than ten years after the date of grant.

Approximately 5.6 million shares of our common stock were reserved for future grants as of December 31, 2021 under the 2016 LTIP.

The following are the stock-based compensation expense incurred for the years ended December 31, 2021 and 2020 (in thousands).

We do not have any stock compensation expense reported for the comparative period ended December 31, 2019.

Cost of sales - services $ 2,640 $ —

Sales and marketing 7,189 —

Research and development 3,268 —

General and administrative 47,134 4

Total stock-based compensation expense $ 60,231 $ 4

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

The Company grants RSUs to our senior executives, directors, employees and service providers.

Service-Based RSU Awards

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

Granted 3,206,283 34.92 — —

Vested ( 132,020 ) 33.99 — —

Forfeited ( 103,176 ) 35.45 — —

Unvested Balance - December 31, 2021 3,030,608 $ 34.94 1.3 $ 46,700

We recognized an expense of $ 46.8 million related to share-based compensation expense for Service-Based RSUs capable of being earned for completing a service requirement during the years ended December 31, 2021.

We recorded immaterial share-based compensation expense for the comparable year ended December 31, 2020 and 2019.

As of December 31, 2021, there was approximately $ 61.5 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 1.3 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 is presented below:

Shares Weighted-

Average Grant

(per share) Weighted-

Life (years) Aggregate

(in thousands)

Unvested Balance - December 31, 2020 — $ — — $ —

Granted 508,903 30.09 — —

Vested — — — —

Forfeited ( 16,176 ) 30.84 — —

Unvested Balance - December 31, 2021 492,727 $ 30.07 2.2 $ 7,600

In 2021 the Company granted certain senior executives awards of Performance-Based RSUs that could settle into 458,903 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 $ 42.50 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 days consecutive trading days is at least equal to the Target Price.

Further, the Company granted 50,000 shares of Performance-Based RSUs to certain employees that will fully vest upon the achievement of certain operational milestones during a three-year period from the grant date.

For the 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.

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.

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

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

Our key assumptions include a performance period ranging from 2.45 to 2.92 years, expected volatility between 57.4 % - 58.8 %, and a risk-free rate of 0.18 %- 0.29 %.

The fair value at the grant date and derived service periods calculated for these market condition Performance-Based RSUs were $ 19.12 - $ 30.84 and between 0.38 - 0.76 years, respectively.

We recognized an expense of $ 13.5 million related to share-based compensation expense for these awards of Performance-Based RSUs during the years ended December 31, 2021.

As of December 31, 2021, there was approximately $ 1.4 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 0.3 years on a straight-line basis.

The benefit for income taxes attributable to income from operations includes the following (in thousands):

For the Years Ended December 31,

2021 2020 2019

Current (benefit) provision

Federal $ — $ — $ 25

State ( 98 ) ( 77 ) 68

Total current ( 98 ) ( 77 ) 93

Deferred provision (benefit)

Federal 19 27 88

State 51 4 ( 285 )

Total deferred 70 31 ( 197 )

Total (benefit) provision

The provision for income taxes related to operations varies from the amount determined by applying the

federal income tax statutory rate to the income or loss before income taxes.

Total benefit $ ( 28 ) $ ( 46 ) $ ( 104 )

The provision for income taxes related to operations varies from the amount determined by applying the federal income tax statutory rate to the income or loss before income taxes.

The reconciliation of these differences is as follows:

For the Years Ended December 31,

2021 2020 2019

Computed expected income tax provision 21.0 % 21.0 % 21.0 %

9 unchanged sentences

FIN 48 liability ( 0.6 ) 0.2 ( 3.7 )

R&D credit 2.7 ( 12.4 ) 19.0

Non-controlling interest — ( 15.9 ) 40.0

Impact of Tax Act

The tax effects of temporary differences that give rise to significant portions of the deferred tax

assets and deferred tax liabilities at December 31, 2020 and 2019 are as follows (in thousands):

0.1 % ( 0.7 %) 4.6 %

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities on December 31, 2021 and 2020 are as follows (in thousands):

Deferred tax assets:

2 unchanged sentences

Accrued liabilities not currently deductible 1,713 2,204

Stock-based compensation 7,993 —

Accrued compensation 648 1,161

1 unchanged sentence

Section 163(j) interest limitation 54 306

Goodwill 37,394 41,534

Net operating loss carryforwards - federal 5,681 3,814

Net operating loss carryforwards - state 1,014 1,002

Federal tax credit

R&D credit 2,645 1,986

Total gross deferred tax assets 61,299 56,870

4 unchanged sentences

Unbilled accounts receivable, deferred for tax purposes — ( 853 )

Goodwill basis adjustment and amortization

Telos ID basis difference

Total deferred tax liabilities ( 6,434 ) ( 5,324 )

1 unchanged sentence

The components of the valuation allowance are as follows (in thousands):

Balance Beginning of Period

Balance Beginning of

Period Additions Recoveries Balance

December 31, 2021 $ 52,198 $ 3,390 $ — $ 55,588

1 unchanged sentence

December 31, 2019 $ 6,652 $ 554 $ — $ 7,206

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

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.

Beginning January 1, 2018, we are subject to several provisions of the Tax Act including computations under Section 162(m)

executive compensation limitation and Section 163(j) interest limitation rules and we have considered the impact of each of these provisions as well as those under the CARES Act in our consolidated financial statements for the years ended December

31, 2020 and 2019.

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.

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 December 31, 2020 and 2019.

a result of a full valuation allowance against our deferred tax assets and liabilities, a deferred tax liability related to goodwill remained on our consolidated balance sheets at December 31, 2020 and 2019.

We recorded deferred tax assets and liabilities related to the purchase of an additional 50% interest in

the partnership Telos ID, including a deferred tax asset of $44.9 million for tax-deductible goodwill generated in the transaction.

We 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.

The 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.

Based on available evidence, we have determined that a full valuation allowance is required as of December 31, 2021 and 2020.

As a result of a full valuation allowance against our deferred tax assets and liabilities, a deferred tax liability related to indefinite-lived goodwill remains on our consolidated balance sheets on December 31, 2021 and 2020.

In 2020, we recorded deferred tax assets and liabilities related to the purchase of an additional 50 % interest in Telos ID, including a deferred tax asset of $ 43.8 million for tax-deductible goodwill generated in the transaction.

We also recorded a corresponding valuation allowance against the additional deferred taxes.

At December 31, 2020, for federal income tax purposes there was approximately a $18.2 million net

operating loss available to be carried forward to offset future taxable income.

On December 31, 2021, for federal income tax purposes there was approximately a $ 27.1 million net operating loss available to be carried forward to offset future taxable income.

Approximately $ 10.6 million of these net operating loss carryforwards expire between 2035 and 2037, the remaining will be carried forward indefinitely.

As of December 31,

2020, there was approximately $2.5 million of research and development credit carryover which begins to expire in 2033.

Certain tax attributes of the Company, including net operating losses and credits, would be subject to a limitation should an

ownership change as defined under Section 382 of the Internal Revenue Code of 1986, as amended, occur.

As of December 31, 2021, there was approximately $ 3.5 million of R&D credit carryover which begins to expire in 2033.

Certain tax attributes of the Company, including net operating losses and credits, would be subject to a limitation should an ownership change as defined under Section 382 of the Internal Revenue Code of 1986, as amended, occur.

The limitations resulting from a change in ownership could affect the Company’s ability to utilize its tax attributes.

A study was completed in

2020 which confirmed that no limitation applies to the Company's tax attributes as of December 31, 2020.

Under the provisions of ASC 740, we determined that there were approximately $763,000, $714,000, and

$649,000 of unrecognized tax benefits as of December 31, 2020, 2019, and 2018, respectively.

Included in the balance of unrecognized tax benefits as of December 31, 2020, 2019, and 2018 were $278,000, $369,000, and $369,000, respectively, of tax

benefits that, if recognized, would impact the effective tax rate.

Also included in the balance of unrecognized tax benefits as of December 31, 2020, 2019, and 2018 were $485,000, $345,000, and $280,000, 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 $241,000 and $304,000, which were recorded in other liabilities

as of December 31, 2020 and 2019, respectively.

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

decrease within the next 12 months.

A study was completed in 2020 which confirmed that no limitation applies to the Company's tax attributes as of December 31, 2020.

We believe that ownership activity since December 31, 2020 would not result in limitation sufficient to result in the expiration of unused attributes.

Under the provisions of ASC 740, we determined that there were approximately $ 1,056,000 , $ 763,000 , and $ 714,000 of unrecognized tax benefits as of December 31, 2021, 2020, and 2019, respectively.

Included in the balance of unrecognized tax benefits as of December 31, 2021, 2020, and 2019 were $ 174,000 , $ 278,000 , and $ 369,000 , respectively, of tax benefits that, if recognized, would impact the effective tax rate.

Also included in the balance of unrecognized tax benefits as of December 31, 2021, 2020, and 2019 were $ 882,000 , $ 485,000 , and $ 345,000 , 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 $ 170,000 and $ 241,000 , which were recorded in other liabilities as of December 31, 2021 and 2020, respectively.

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

The period for which tax years are open, 2013 to 2021, has not been extended beyond the applicable statute of limitations.

As of December 31, 2020, the Company is not under examination by any federal or state tax

jurisdiction.

As of December 31, 2021, the Company is not under examination by any federal or state tax jurisdiction.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):

2021 2020 2019

Unrecognized tax benefits, beginning of period $ 763 $ 714 $ 649

(Decrease) increase in prior year tax positions

Increase (decrease) in prior year tax positions 90 ( 104 ) 1

Increase related to current year tax positions 273 213 101

1 unchanged sentence

Unrecognized tax benefits, end of period $ 1,056 $ 763 $ 714

We lease office space and equipment under noncancelable operating and finance leases with various

expiration dates, some of which contain renewal options.

We lease office space and equipment under noncancelable operating and finance leases with various expiration dates, some of which contain renewal options.

Operating Leases

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 consolidated balance sheets 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 determine if an arrangement is a lease and 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 consolidated balance sheets 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.

The amount of

operating lease liabilities due within 12 months are recorded in other current liabilities, with the remaining operating lease liabilities recorded as non-current liabilities in our consolidated balance sheets based on their contractual due dates.

The amount of operating lease liabilities due within 12 months are recorded in other current liabilities, with the remaining operating lease liabilities recorded as non-current liabilities in our consolidated balance sheets based on their 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.

2 unchanged sentences

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

We have included options to extend

in the operating lease ROU assets and liabilities when we are reasonably certain that we will exercise such options.

The weighted average remaining lease terms for our operating leases were approximately 2.5 years and 3.5 years at December 31, 2020

and 2019, respectively.

The discount rates for our operating leases were 5.75% at December 31, 2020 and 2019.

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.

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 Note 1 – Summary of Significant Accounting Policies.

As of December 31, 2020, operating lease ROU assets were $1.5 million and operating lease liabilities

were $1.6 million, of which $0.9 million were classified as noncurrent.

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 Note 1 – Overview and Summary of Significant Accounting Policies.

Finance Leases

On March 1, 1996, we entered into a 20-year capital lease for a building in Ashburn, Virginia that

serves as our corporate headquarters.

On March 1, 1996, we entered into a 20 -year capital lease for a building in Ashburn, Virginia that serves as our corporate headquarters.

We had accounted for this transaction as a capital lease and had accordingly recorded assets and a corresponding liability of approximately $ 12.3 million.

Effective November 1, 2013, this lease was terminated and

we entered into a 13-year lease (the “2013 lease”) that would have expired in October 31, 2026.

Effective November 1, 2013, this lease was terminated and we entered into a 13 -year lease (the “2013 lease”) that would have expired in October 31, 2026.

The 2013 lease was treated as a modification in accordance with ASC 840, “Leases”.

As a result of the 2013 lease, the corresponding capital asset and

liability increased by $11.7 million, resulting in a net book value of the capital asset of $13.1 million, and capital obligation of $15.5 million.

The 2013 lease included an option to purchase, assign to, or designate a purchaser on June 1, 2014,

which required notice of intent to exercise the option by not later than March 31, 2014.

On March 28, 2014, we entered into a definitive agreement with an unrelated third party to assign the purchase option to

that third party in return for cash consideration of $1.7 million, payable upon the closing of the purchase transaction, and certain obligations under the agreement, including entering into a new 15-year lease with the third party upon the third

party’s exercise of the purchase option and purchase of the building from the prior landlord.

As a result of the 2013 lease, the corresponding capital asset and liability increased by $ 11.7 million, resulting in a net book value of the capital asset of $ 13.1 million, and capital obligation of $ 15.5 million.

The 2013 lease included an option to purchase, assign to, or designate a purchaser on June 1, 2014, which required notice of intent to exercise the option by not later than March 31, 2014.

On March 28, 2014, we entered into a definitive agreement with an unrelated third party to assign the purchase option to that third party in return for cash consideration of $ 1.7 million, payable upon the closing of the purchase transaction, and certain obligations under the agreement, including entering into a new 15 -year lease with the third party upon the third party’s exercise of the purchase option and purchase of the building from the prior landlord.

On March 28, 2014, we provided the prior landlord notice of our assignment and exercise of the purchase option.

On May 28, 2014, the third party completed

the purchase transaction and the 2013 lease was terminated, with no ongoing obligations, by mutual agreement between us and the prior landlord.

On May 28, 2014, the third party completed the purchase transaction and the 2013 lease was terminated, with no ongoing obligations, by mutual agreement between the prior landlord and the Company.

On the same day we entered into a new lease (the “2014 lease”) with the third party that expires on May 31, 2029.

The 2014 lease was treated as a modification of the prior lease on the property in accordance with ASC 840, and determined to be a capital lease.

As a result of the 2014 lease, the corresponding capital asset increased by $5.7 million,

resulting in a net book value of the capital asset of $18.3 million and the liability increased by $6.7 million, resulting in a capital obligation of $22.0 million.

The weighted average remaining lease terms for finance leases were approximately 8.3

years and 9.3 years at December 31, 2020 and 2019, respectively.

The discount rates for our finance leases were 5.04% at December 31, 2020 and 2019.

As a result of the 2014 lease, the corresponding capital asset increased by $ 5.7 million, resulting in a net book value of the capital asset of $ 18.3 million and the liability increased by $ 6.7 million, resulting in a capital obligation of $ 22.0 million.

In accordance with the 2014 Lease, the basic rent increases by a fixed 2.5 % escalation annually.

Future minimum lease commitments at December 31, 2020 were as follows (in thousands):

Operating Leases

The adoption of ASC 842 on January 1, 2019 did not have a material impact on the existing finance leases.

The weighted average remaining lease terms and discount rates were as follows:

Years Ended December 31,

Weighted average remaining lease term (in years):

Finance leases 7.3 years 8.3 years

Operating leases 1.7 years 2.5 years

Weighted average discount rate:

Finance leases 5.04 % 5.04 %

Operating leases 5.75 % 5.75 %

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

Operating Leases Finance Leases

2022 $ 602 $ 2,149

2023 373 2,202

2024 28 2,258

Total minimum lease payments 1,003 17,267

4 unchanged sentences

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

Year Ended December 31,

Years Ended December 31,

Operating lease cost $ 713 $ 724

7 unchanged sentences

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

Year Ended December 31,

Years Ended December 31,

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

2 unchanged sentences

Cash flows from financing activities - finance leases $ 1,339 $ 1,225

Operating lease ROU assets obtained in exchange for operating lease liabilities

Rent expense charged to operations totaled $1.1 million, $1.2 million, and $1.6 million for 2020, 2019, and 2018,

respectively.

We provide product warranties for products sold through certain U.S.

Government contract vehicles.

accrue a warranty liability at the time that we recognize revenue for the estimated costs that may be incurred in connection with providing warranty coverage.

Warranties are valued using historical warranty usage trends;

however, if actual product

failure rates or service delivery costs differ from estimates, revisions to the estimated warranty liability may be required.

Accrued warranties were $30,000 as of December 31, 2020 and 2019, and are reported as other current liabilities in the

consolidated balance sheets.

There were no activities in accrued warranties for years ended December 31, 2020, 2019, and 2018.

Rent expense charged to operations totaled $ 0.8 million, $ 1.9 million, and $ 1.8 million for 2021, 2020, and 2019, respectively.

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 investments 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.

supported by little or no market activity).

As of December 31, 2021 and 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.

Certain Relationships and Related Transactions

Information concerning certain relationships and related party transactions between us and certain of

our current shareholders and officers is set forth below.

The brother of our Chairman and CEO, Emmett J.

Wood, has been an employee of ours since 1996.

amounts paid to this individual as compensation for 2020, 2019, and 2018 were $1,238,000, $529,000, and $552,000, respectively.

Information concerning certain relationships and related party transactions between us and certain of our current shareholders and officers is set forth below.

Wood, the brother of our Chairman and CEO, has been an employee of ours since 1996 and currently serves as executive officer.

The amounts paid to this individual as compensation for 2021, 2020, and 2019 were $ 492,000 , $ 1,238,000 , and $ 529,000 , respectively.

Additionally, Mr.

Wood owned 682,502 shares of the Company’s common stock as of December 31, 2020 and 2019.

Wood owned 73,562 and 682,502 shares of the Company’s common stock as of December 31, 2021 and 2020, respectively.

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

Porter and Toxford Corporation, of

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

Porter and Toxford Corporation, of which Mr.

Porter was the sole shareholder, 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 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.

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

According to the 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 (including Action Capital), and payments under the Porter Notes were permitted only if certain conditions were met.

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

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 (including Action Capital), 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 $319,000, $330,000, and $308,000 for the years ended December 31, 2020, 2019, and 2018, respectively, on the Porter Notes.

We incurred interest expense in the amount of $ 319,000 and $ 330,000 for the years ended December 31, 2020 and 2019, respectively, on the Porter Notes.

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

Summary of Selected Quarterly Financial Data (Unaudited)

The following is a summary of selected quarterly financial data for the previous two fiscal years (in thousands):

Quarters Ended

(Loss) income before income taxes and non-controlling interest

Net (loss) income attributable to Telos Corporation (1)(2)

Weighted-average common shares outstanding, basic

Weighted-average common shares outstanding, diluted

Basic net (loss) earnings per share

Diluted net (loss) earnings per share

(Loss) income before income taxes and non-controlling interest

Net (loss) income attributable to Telos Corporation (1)(3)

Weighted-average common shares outstanding, basic

Weighted-average common shares outstanding, diluted

Basic net (loss) earnings per share

Diluted net (loss) earnings per share

Changes in net income are the result of several factors, including seasonality of the government year-end buying season, as well as the nature and

timing of other deliverables.

Net income for the second quarter of 2020 is attributable to a change in the mix and timing of Telos ID deliverables.

Net income for the third quarter of 2019 is attributable to $2.6

million in proprietary software sales which carry lower cost of sales.

One of the Company's directors serves as a consultant.

The amount paid for his consultancy services were $ 282,000 , $ 270,000 and $ 270,000 for 2021, 2020 and 2019, respectively.

On February 8, 2021, we hired Ms.

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

Nakazawa, EVP of the Company.

Hill is the sister of Mr.

Edward Williams, former COO of the Company.

Segment Information

During the fourth quarter of 2021, as a result of the segment reorganization, our CODM began evaluating, overseeing and managing the financial performance of our operations through two operating segments:

Security Solutions and Secure Networks.

The segments enable the alignment of our strategies and objectives and provide a framework for timely and rational allocation of resources within the lines of business.

We eliminate any inter-segment revenues and expenses upon consolidation.

The Security Solutions segment is primarily focused on cybersecurity, cloud and identity solutions through Xacta, Telos Ghost, AMHS and Telos ID offerings.

We recognize revenue on contracts from providing various system platforms in cloud, on-premise and/or in hybrid cloud environment, and software sales or software-as-a-service.

Revenue associated with the segment's custom solutions is recognized as work progresses or upon delivery of services.

Fluctuation in revenue from period-to-period results from the volume of software sales, and progress or completion of cloud and/or cyber security solutions during the period.

The majority of the operating costs relates to labor, material, and overhead costs.

Software sales have immaterial operation costs associated with them, thus yielding higher margins.

Gross profit and margin are a function of operational efficiency on security solutions and changes in the volume of software sales.

The Secure Networks segment provides secure networking architectures and solutions to our customers through secure mobility solutions and network management and defense services.

Revenue is recognized over time as the work progresses on contracts related to managing network services and information delivery.

Contract costs include labor, material and overhead costs.

Variances in costs recognized from period to period reflect primarily increases and decreases in activity level on individual contracts.

The following table summarizes business segment information for the periods presented, and a reconciliation of those results to the statement of operations for the relevant periods.

Prior period segment information was recast to conform to the current year's presentation.

Years Ended December 31,

2021 2020 2019

(in thousands)

Security Solutions $ 123,534 $ 127,667 $ 111,843

Secure Networks 118,899 62,627 57,295

Inter-segment elimination — ( 10,377 ) ( 9,920 )

Consolidated revenue $ 242,433 $ 179,917 $ 159,218

Security Solutions $ 64,904 $ 50,458 $ 42,056

Secure Networks 21,125 11,962 10,288

Total gross profit $ 86,029 $ 62,420 $ 52,344

We measure each segment's profitability based on gross profit.

We account for inter-segment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices.

Interest income, interest expense, other income and expense items and income taxes, as reported in the consolidated financial statements, are not part of the segment profitability measure, and are primarily recorded at the corporate level.

government Cost Accounting Standards, indirect costs including depreciation and amortization expense are collected in numerous indirect cost pools which are then collectively allocated out to the Company’s reportable segments based on a representative causal or beneficial relationship of the costs in the pool to the costs in the base.

While depreciation and amortization expense is a component of the allocated costs, the allocation process precludes depreciation and amortization expense from being specifically identified by the Company’s individual reportable and operating segments.

For this reason, the non-cash items by reportable and operating segment have not been reported above.

Management does not utilize total assets by segment to evaluate segment performance or allocate resources.

As a result, assets are not tracked by segment and therefore, total assets by segment are not disclosed.

Commitments, Contingencies, and Subsequent Events

Financial Condition and Liquidity

While a variety of factors related to sources and uses of cash,

such as timeliness of accounts receivable collections, vendor credit terms, or significant collateral requirements, ultimately impact our liquidity, such factors may or may not have a direct impact on our liquidity, based on how the transactions

associated with such circumstances impact our availability under our credit arrangements.

For example, a contractual requirement to post collateral for a duration of several months, depending on the materiality of the amount, could have an immediate

negative effect on our liquidity, as such a circumstance would utilize cash resources without a near-term cash inflow back to us.

Likewise, the release of such collateral could have a corresponding positive effect on our liquidity, as it would

represent an addition to our cash resources without any corresponding near-term cash outflow.

Similarly, a slow-down of payments from a customer, group of customers or government payment office would not have an immediate and direct effect on our

availability unless the slowdown was material in amount and over an extended period of time.

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

Upon the closing of our initial public offering, 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 7 – 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 6 – Debt

Obligations).

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

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

However, we do not have agreements,

commitments, or plans for any specific acquisitions at this time.

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 $105.2 million and $2.9 million as of December 31, 2020 and 2019,

respectively.

Legal Proceedings

Telos Corporation

As previously reported, 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 was a Class D Director of the Company and Mr.

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

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 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

As previously disclosed, trial on Hamot and Siegel’s claims and the Company’s counterclaims took place in July through September 2013, and the Court subsequently issued decisions on the various claims by way of memorandum opinions and

orders dated September 11, 2017.

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

favor of the Company and against Hamot and Siegel for approximately $278,000.

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

by the Court of Appeals of Maryland on October 11, 2019.

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

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

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

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

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

The Company filed

an Opposition to the Motion on November 4, 2020.

On January 28, 2021, Plaintiffs filed a Motion for Leave to File Amended Motion for Indemnification of Legal Fees and Expenses, which the Company opposed, and which was granted by the Court on February

23, 2021, and briefing of the Amended Motion for Indemnification of Legal Fees and Expenses (“Amended Motion”) continues.

A hearing is scheduled before the Court on Plaintiffs’ Amended Motion for Indemnification of Legal Fees and Expenses for May 18,

The Company denies that it has any liability for indemnification to the Plaintiffs and intends to vigorously defend the matter through its opposition to the Amended Motion and further proceedings.

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

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

The Company intends to vigorously defend the matter.

Other Litigation

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

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.

We are involved in legal proceedings and investigations arising in the ordinary course of business, including those relating to employment matters, relationships with clients and contractors, intellectual property disputes, and other business matters.

These legal proceedings seek various remedies, including claims for monetary damages in varying amounts, none of which are considered material, or are unspecified as to amount.

Although the outcome of any such matter is inherently uncertain and may be materially adverse, based on current information, we do not expect any of the currently ongoing audits, reviews, investigations, or litigation to have a material adverse effect on our financial condition and results of operations.

As of December 31, 2021, there were no material amounts accrued in the consolidated financial statements related to these proceedings.

Other - Government Contracts

government contractor, we are subject to various audits and investigations by the U.S.

government to determine whether our operations are being conducted in accordance with applicable regulatory requirements.

government investigations of our operations, whether relating to government contracts or conducted for other reasons, could result in administrative, civil, or criminal liabilities, including repayments, fines or penalties being imposed upon us, suspension, proposed debarment, debarment from eligibility for future U.S.

government contracting, or suspension of export privileges.

Suspension or debarment could have a material adverse effect on us because of our dependence on contracts with the U.S.

government investigations often take years to complete and many result in no adverse action against us.

We also provide products and services to customers outside of the United States, which are subject to U.S.

and foreign laws and regulations and foreign procurement policies and practices.

Our compliance with local regulations or applicable U.S.

government regulations also may be audited or investigated.

Subsequent Events

On January 25, 2021, we filed Form S-8 to register a total of 7,459,913 shares of common stock, par

value $0.001 per share, to be issued under the terms and conditions of the 2016 Omnibus Long-Term Incentive Plan approved by the stockholders at a meeting held on October 26, 2020.

Changes in and Disagreements with Accountants on Accounting and Financial

On February 7, 2022, Telos and certain of its current and former officers were named as defendants in a lawsuit filed in the United States District Court for the Eastern District of Virginia.

In the complaint, the plaintiffs, who purport to represent a class of purchasers of Telos common stock between November 19, 2020 and November 12, 2021, allege that the defendants violated securities laws by failing to disclose delays relating to the launch of certain contracts between Telos and the Transportation Security Administration and the Centers for Medicare and Medicaid Services and to take into account those delays when providing a financial outlook of the Company’s 2021 performance.

The complaint seeks monetary damages in an unspecified amount.

We dispute the claims described in the complaint and intend to defend the lawsuit vigorously.

Composition of Certain Financial Statement Captions

Balance Sheets

Accounts payable and other accrued liabilities

Accounts payable $ 9,248 $ 14,662

Accrued liabilities 25,300 6,237

$ 34,548 $ 20,899

Revision of Interim Financial Statements

As noted in Note 1 - Overview and Summary of Significant Accounting Policies, the Company recorded certain revisions related to previously issued unaudited condensed consolidated financial statements.

The Company considered the errors identified in accordance with the SEC's Staff Accounting Bulletin No.

99 and determined the impact was immaterial to the previously issued consolidated interim financial statements.

Nonetheless, the Company has revised the previously reported interim financial information for the quarterly periods ended March 31, 2021, June 30, 2021, and September 30, 2021.

There is no cumulative impact to the Company’s full-year 2021 financial statements as a result of these revisions.

The following is a comprehensive list of those errors which have all been recast to the correct periods in the table below:

Classification of Expense

During the third quarter of 2021, the Company identified that stock compensation for a single individual was incorrectly charged to cost of sales instead of general and administrative expense.

The total amount of stock compensation incorrectly charged to cost of sales was $ 0.3 million, of which $ 0.1 million related to the first quarter of 2021 and $ 0.2 million related to the second quarter of 2021.

The Company initially corrected the error during the third quarter of 2021.

During the third quarter of 2021, the Company identified that the allocation of stock compensation for two of the Company’s overhead cost pools were incorrectly charged to cost of sales instead of general and administrative expense during the second quarter of 2021.

The total amount of stock compensation incorrectly charged to cost of sales was $ 0.7 million which the Company initially corrected during the third quarter of 2021.

Revenue Recognition

In the third quarter of 2021, the Company identified $ 1.1 million in revenue related to the stub period of a newly awarded contract that should have been recognized as income during the second quarter of 2021.

The Company initially corrected the error during the third quarter of 2021.

Additionally, and related to this contract, in the fourth quarter of 2021 the Company identified $ 0.3 million of products revenue for the second quarter of 2021 and $ 0.4 million of products revenue for the third quarter of 2021 that should be classified in the Consolidated Statements of Operations as services revenue.

The table below reflects the correction of the classification error previously reported during the second and third quarters of 2021.

In the third quarter of fiscal year 2021, the Company erroneously recorded an $ 0.9 million expense related to a contract that had not yet begun.

In the fourth quarter of 2021 the Company reversed the expense previously recorded and does not plan to record the expense until the start of the period of performance.

Software Capitalization

In the third quarter of fiscal year 2021, the Company erroneously recorded a $ 0.5 million expense related to a software project whose development milestones were achieved and therefore costs associated with the software should have been capitalized.

The table below reflects the correction of the error previously reported during Q3 2021.

In the first three quarters of fiscal year 2021, the Company erroneously presented the $ 2.4 million payment to fully acquire all membership interest of Telos ID as an operating activity on the statement of cash flow.

In the fourth quarter of 2021 the Company corrected the presentation to properly reflect the payment within financing activities on the statement of cash flows.

Stock Compensation

In the fourth quarter of fiscal year 2021, the Company identified that a third quarter RSU was awarded to an individual, but that award was erroneously excluded from its calculation of compensation expense causing compensation expense to be understated by $ 0.2 million in the third quarter of 2021.

The table below reflects the correction of the error previously reported during Q3 2021.

Valuation of Acquired Assets

In the fourth quarter of fiscal year 2021, the Company identified a necessary update to a previously established assumption related to the valuation of its 2021 acquisition.

The change in assumption resulted in additional goodwill of $ 1.3 million and a reduction of the intangible asset for the same amount that should have been reported during Q3 2021.

The impact of the correction on the Company's previously issued quarterly consolidated financial statements was as follows (in thousands, except per share data):

Adjustments to the period ended March 31, 2021

Three Months Ended March 31, 2021

Previously Reported Error Correction As Adjusted

Condensed Consolidated Statement of Operations

Cost of sales - Services 39,602 ( 112 ) 39,490

Costs and expenses 41,400 ( 112 ) 41,288

General and administrative 19,964 112 20,076

Selling, general and administrative expenses 27,851 112 27,963

Condensed Consolidated Statement of Cash Flows

Changes in other operating assets and liabilities $ ( 9,584 ) $ 2,436 $ ( 7,148 )

Cash used in operating activities ( 9,318 ) 2,436 ( 6,882 )

Distribution to Telos ID Class B member - non-controlling interest — ( 2,436 ) ( 2,436 )

Cash used in financing activities ( 321 ) ( 2,436 ) ( 2,757 )

Adjustments to the period ended June 30, 2021

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

Previously Reported Error Correction As Adjusted Previously Reported Error Correction As Adjusted

Condensed Consolidated Statement of Operations

Revenue - Services $ 47,618 $ 1,385 $ 49,003 $ 99,676 $ 1,385 $ 101,061

Revenue - Products 4,941 ( 300 ) 4,641 8,641 ( 300 ) $ 8,341

Revenue 52,559 1,085 53,644 108,317 1,085 $ 109,402

Cost of sales - Services 29,501 ( 892 ) 28,609 69,103 ( 1,004 ) $ 68,099

Costs and expenses 32,002 ( 892 ) 31,110 73,402 ( 1,004 ) $ 72,398

General and administrative 28,743 892 29,635 48,708 1,004 $ 49,712

Selling, general and administrative expenses 39,113 892 40,005 66,965 1,004 $ 67,969

Operating loss ( 18,556 ) 1,085 ( 17,471 ) ( 32,050 ) 1,085 $ ( 30,965 )

Loss before income taxes ( 18,716 ) 1,085 ( 17,631 ) ( 33,460 ) 1,085 $ ( 32,375 )

Net loss ( 18,729 ) 1,085 ( 17,644 ) ( 33,507 ) 1,085 $ ( 32,422 )

Net loss attributable to Telos Corporation ( 18,729 ) 1,085 ( 17,644 ) ( 33,507 ) 1,085 $ ( 32,422 )

Net loss per share attributable to Telos Corporation

Basic $ ( 0.28 ) $ 0.02 $ ( 0.26 ) $ ( 0.51 ) $ 0.02 $ ( 0.49 )

Diluted $ ( 0.28 ) $ 0.02 $ ( 0.26 ) $ ( 0.51 ) $ 0.02 $ ( 0.49 )

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

Previously Reported Error Correction As Adjusted Previously Reported Error Correction As Adjusted

Condensed Consolidated Statement of Comprehensive Loss

Net loss $ ( 18,729 ) $ 1,085 $ ( 17,644 ) $ ( 33,507 ) $ 1,085 $ ( 32,422 )

Comprehensive loss attributable to Telos Corporation ( 18,724 ) 1,085 ( 17,639 ) ( 33,534 ) 1,085 ( 32,449 )

June 30, 2021

Previously Reported Error Correction As Adjusted

Condensed Consolidated Balance Sheet

Accounts receivable, net of reserve $ 39,412 $ 1,085 $ 40,497

Total current assets 178,403 1,085 179,488

Total assets 220,094 1,085 221,179

Accumulated deficit ( 177,350 ) 1,085 ( 176,265 )

Total stockholders' equity 164,700 1,085 165,785

Total liabilities and stockholders' equity 220,094 1,085 221,179

Six Months Ended June 30, 2021

Previously Reported Error Correction As Adjusted

Condensed Consolidated Statement of Cash Flows

Net loss $ ( 33,507 ) $ 1,085 ( 32,422 )

Changes in other operating assets and liabilities ( 10,074 ) 1,351 ( 8,723 )

Cash used in operating activities ( 5,790 ) 2,436 ( 3,354 )

Distribution to Telos ID Class B member - non-controlling interest — ( 2,436 ) ( 2,436 )

Cash provided by financing activities 35,474 ( 2,436 ) 33,038

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

Previously Reported Error Correction As Adjusted Previously Reported Error Correction As Adjusted

Condensed Consolidated Statement of Changes in Stockholders' Equity

Net loss $ ( 18,729 ) $ 1,085 $ ( 17,644 ) $ ( 33,507 ) $ 1,085 $ ( 32,422 )

Accumulated deficit ( 177,350 ) 1,085 ( 176,265 ) ( 177,350 ) 1,085 ( 176,265 )

Total Stockholders' equity 164,700 1,085 165,785 164,700 1,085 165,785

Adjustments to the period ended September 30, 2021

Three Months Ended September 30, 2021 Nine Months Ended September 30, 2021

Previously Reported Error Correction As Adjusted Previously Reported Error Correction As Adjusted

Condensed Consolidated Statement of Operations

Revenue - Services 63,690 ( 735 ) 62,955 $ 163,366 $ 650 $ 164,016

Revenue - Products 6,376 ( 350 ) 6,026 15,017 ( 650 ) 14,367

Revenue 70,066 ( 1,085 ) 68,981 178,383 — 178,383

Cost of sales - Services 40,031 106 40,137 109,134 ( 898 ) 108,236

Costs and expenses 43,998 106 44,104 117,400 ( 898 ) 116,502

Research and development 5,396 ( 533 ) 4,863 14,783 ( 533 ) 14,250

General and administrative 20,562 ( 823 ) 19,739 69,271 181 69,452

Selling, general and administrative expenses 31,321 ( 1,356 ) 29,965 98,287 ( 352 ) 97,935

Operating loss ( 5,253 ) 165 ( 5,088 ) ( 37,304 ) 1,250 ( 36,054 )

Loss before income taxes ( 5,428 ) 165 ( 5,263 ) ( 38,888 ) 1,250 ( 37,638 )

Net loss ( 5,387 ) 165 ( 5,222 ) ( 38,894 ) 1,250 ( 37,644 )

Net loss attributable to Telos Corporation ( 5,387 ) 165 ( 5,222 ) ( 38,894 ) 1,250 ( 37,644 )

Net loss per share attributable to Telos Corporation

Basic $ ( 0.08 ) — $ ( 0.08 ) $ ( 0.59 ) $ 0.02 $ ( 0.57 )

Diluted $ ( 0.08 ) — $ ( 0.08 ) $ ( 0.59 ) $ 0.02 $ ( 0.57 )

Three Months Ended September 30, 2021 Nine Months Ended September 30, 2021

Previously Reported Error Correction As Adjusted Previously Reported Error Correction As Adjusted

Condensed Consolidated Statement of Comprehensive Loss

Net loss $ ( 5,387 ) $ 165 $ ( 5,222 ) $ ( 38,894 ) $ 1,250 $ ( 37,644 )

Comprehensive loss attributable to Telos Corporation ( 5,400 ) 165 ( 5,235 ) ( 38,934 ) 1,250 ( 37,684 )

September 30, 2021

Previously Reported Error Correction As Adjusted

Condensed Consolidated Balance Sheet

Accounts receivable, net of reserve $ 49,759 $ ( 1,085 ) $ 48,674

Total current assets 192,300 ( 1,085 ) 191,215

Goodwill 16,642 1,280 17,922

Intangible assets, net 17,102 ( 747 ) 16,355

Total assets 242,667 ( 552 ) 242,115

Accounts payable and other accrued liabilities 35,102 ( 898 ) 34,204

Total current liabilities 54,410 ( 898 ) 53,512

Total liabilities 71,176 ( 898 ) 70,278

Additional paid-in capital 354,119 181 354,300

Accumulated deficit ( 182,737 ) 165 ( 182,572 )

Total stockholders' equity 171,491 346 171,837

Total liabilities and stockholders' equity 242,667 ( 552 ) 242,115

Nine Months Ended September 30, 2021

Previously Reported Error Correction As Adjusted

Condensed Consolidated Statement of Cash Flows

Net loss $ ( 38,894 ) $ 1,250 $ ( 37,644 )

Stock-based compensation 47,197 181 47,378

Changes in other operating assets and liabilities ( 5,900 ) 1,538 ( 4,362 )

Cash used in operating activities 6,668 2,969 9,637

Capitalized software development costs ( 6,139 ) ( 533 ) ( 6,672 )

Cash used in investing activities ( 13,709 ) ( 533 ) ( 14,242 )

Distribution to Telos ID Class B member - non-controlling interest — ( 2,436 ) ( 2,436 )

Cash provided by financing activities 35,131 ( 2,436 ) 32,695

Three Months Ended September 30, 2021 Nine Months Ended September 30, 2021

Previously Reported Error Correction As Adjusted Previously Reported Error Correction As Adjusted

Condensed Consolidated Statement of Changes in Stockholders' Equity

Net loss $ ( 5,387 ) $ 165 $ ( 5,222 ) $ ( 38,894 ) $ 1,250 $ ( 37,644 )

Additional paid-in capital 354,119 181 354,300 354,119 181 354,300

Accumulated deficit - beginning balance ( 177,350 ) 1,085 ( 176,265 ) ( 143,843 ) — ( 143,843 )

Accumulated deficit - ending balance ( 182,737 ) 165 ( 182,572 ) ( 182,737 ) 165 ( 182,572 )

Total Stockholders' Equity 171,491 346 171,837 171,491 346 171,837

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk