TELOS CORP 10-Q

Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures The Company has established disclosure controls and procedures to ensure that information required to be disclosed in this quarterly report on Form 10-Q was properly recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. The Company's controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is accumulated and communicated to the Company's management, including its principal executive and principal financial officer to allow timely decisions regarding required disclosure. We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) at June 30, 2022, based on the evaluation of these controls and procedures required by paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Exchange Act. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer. Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, on June 30, 2022, our disclosure controls and procedures were not effective as a result of the previously identified material weaknesses disclosed below. Internal Control over Financial Reporting In connection with its evaluation of the internal control over financial reporting for the year ended December 31, 2021, management identified the following material weaknesses in our internal control over financial reporting: a. Management did not maintain appropriately designed entity-level controls impacting the control environment and monitoring activities to prevent or detect material misstatements to the consolidated financial statements. Specifically, the Company did not have sufficient qualified resources to effectively design, operate and oversee internal control over financial reporting, which contributed to the failure in the effectiveness of certain controls. b. Management did not maintain appropriately designed information technology general controls in the areas of user access, change management, and segregation of duties, including controls over the recording of journal entries and safeguarding of assets, related to certain information technology systems that support the Company’s financial reporting process. c. Management did not maintain appropriately designed and implemented controls over the following: i. Recording of revenue in accordance with ASC Topic 606, "Revenue from Contracts with Customers.” ii. 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.” iii. Review of completeness and accuracy of award stock-based compensation expense, and review of the key inputs and assumptions utilized in third-party valuations. iv. Preparation and review of projected financial information utilized in the valuation of the business combination. v. 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. vi. Coding of transactions within the purchase to disbursement cycle. 28 Tab l e of Contents These material weaknesses were partially related to employee turnover, resulting in a temporary shortage of qualified personnel to effectively perform the internal controls referenced above. The Company is working to remediate the material weaknesses in internal control over financial reporting and is taking steps to improve the internal control environment. Specifically, the Company is: a. Hiring additional accounting personnel and implementing training of new and existing personnel on proper execution of designed control procedures; b. Enhancing processes, and designing and implementing internal controls around revenue recognition, software development costs, stock-based compensation, business combination, and financial close and reporting; and, c. Enhancing user access provisioning and monitoring controls to enforce appropriate system access and segregation of duties. The material weaknesses will be considered remediated when management concludes that, through testing, the applicable remedial controls are designed and implemented effectively. We are still assessing the design and operating effectiveness of these measures and, as such, the identified material weaknesses have not been fully remediated as of June 30, 2022. We will continue to monitor the effectiveness of these remediation measures and will make any changes and take other actions that we deem appropriate. Changes in Internal Control over Financial Reporting Other than the ongoing remediation activities listed above, there has been no change in our internal control over financial reporting during the quarter ended June 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 29 Tab l e of Contents PART II—OTHER INFORMATION Item 1. Legal Proceedings Information regarding legal proceedings may be found in Note 1 9 – Commitments and Contingencies to the unaudited consolidated financial statements. Item 1A. Risk Factors There were no material changes in the period ended June 30, 2022, in our risk factors as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.