What changed in this filing

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2023-03-16 compared with 2022-03-28 · 748 added, 882 removed, 470 unchanged (78% of the section changed)

1 unchanged sentence

Consolidated Financial Statements and Supplementary Data

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 (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, 2021, 2020 and 2019

Notes to Consolidated Financial Statements

To the Board of Directors and Stockholders of Telos Corporation

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheet of Telos Corporation (the "Company") as of December 31, 2022, and the related consolidated statements of operations, comprehensive (loss)/income, changes in stockholders' equity/(deficit) and cash flows for the year ended December 31, 2022, including the related notes (collectively referred to as the "consolidated financial statements").

We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO because a material weakness in internal control over financial reporting existed as of that date as the Company did not design and maintain effective controls over the assessment of the accounting for forfeitures of non-standard equity awards.

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 annual or interim financial statements will not be prevented or detected on a timely basis.

The material weakness referred to above is described in Management's Report on Internal Control over Financial Reporting appearing under Item 9A.

We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2022 consolidated financial statements, and our opinion regarding the effectiveness of the Company's internal control over financial reporting does not affect our opinion on those consolidated financial statements.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in management's report referred to above.

Our responsibility is to express opinions on the Company's consolidated financial statements and on the Company's internal control over financial reporting 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.

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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audit of the consolidated financial statements 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.

Our audit 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.

Our audit of internal control over financial reporting 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 audits provide a reasonable basis for our opinions.

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 (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(ii) 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 (iii) 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.

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 (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) 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 a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Revenue Recognition – Estimated Costs to Complete Long-term Contracts

As discussed in Note 3 to the consolidated financial statements, a portion of the Company's revenues of $216.9 million for the year ended December 31, 2022 were generated from long-term contracts.

For the Company's long-term contracts, due to the transfer of control over time, revenue is recognized based on progress towards completion of the performance obligation.

Management generally uses the cost-to-cost measure of progress on a proportional performance basis for its long-term contracts because management believes that measure best depicts the transfer of control to the customer, which occurs as the Company incurs costs on the 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, which includes both the actual costs already incurred and the estimated costs to complete.

Revenues are recorded proportionately as costs are incurred.

Due to the nature of the work required to be performed on certain of the performance obligations, management's estimation of costs 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.

The principal considerations for our determination that performing procedures relating to revenue recognition - estimated costs to complete long-term contracts is a critical audit matter are (i) the significant judgment by management when estimating costs at completion and (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management's significant assumptions related to labor and subcontractor costs and materials and other direct costs.

As previously disclosed by management, a material weakness existed during the year related to this matter.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included, among others, (i) testing management's process for estimating costs at completion for a sample of contracts (ii) evaluating the appropriateness of the cost-to-cost measure of progress, (iii) testing the completeness and accuracy of data used by management, and (iv) evaluating the reasonableness of management's significant assumptions related to labor and subcontractor costs and materials and other direct costs.

Evaluating management's significant assumptions involved assessing whether the assumptions were reasonable by (i) performing a comparison of the originally estimated and actual costs incurred on a sample of similar completed contracts;

(ii) assessing the reasonableness of estimated costs to complete on a sample of in-process contracts, including the timing of costs incurred and the related impacts on revenue;

and (iii) performing retrospective reviews of a sample of contracts to understand and corroborate management's estimation process and budget-to-actual variances, if any.

/s/ PricewaterhouseCoopers LLP

Washington, District of Columbia

March 16, 2023

We have served as the Company's auditor since 2022.

Report of Independent Registered Public Accounting Firm

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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, 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.

We have audited the accompanying consolidated balance sheet of Telos Corporation (the "Company") and subsidiaries as of December 31, 2021, the related consolidated statements of operations, comprehensive income (loss), changes in stockholders' equity (deficit), and cash flows for each of the two 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 the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021 , in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

1 unchanged sentence

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.

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.

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

5 unchanged sentences

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

Critical Audit Matters

(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

We have served as the Company's auditor since 2007.

McLean, Virginia

March 28, 2022

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.

/s/ BDO USA, LLP

We have served as the Company's auditor from 2007 to 2022.

McLean, Virginia

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CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except earnings per share data)

Years Ended December 31,

2021 2020 2019

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

Products 20,885 18,737 15,637

For the Year Ended December 31,

2022 2021 2020

Costs and expenses

(in thousands, except per share amounts)

Revenue – services 192,742 221,548 161,180

Revenue – products 24,145 20,885 18,737

Total revenue 216,887 242,433 179,917

Cost of sales – services 121,334 143,357 106,969

Cost of sales – products 16,510 13,047 10,528

156,404 117,497 106,874

Total cost of sales 137,844 156,404 117,497

Gross profit 79,043 86,029 62,420

Selling, general and administrative expenses:

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General and administrative 99,393 88,742 41,704

127,493 62,123 47,319

Total selling, general and administrative expenses 132,893 127,493 62,123

Operating (loss)/income ( 53,850 ) ( 41,464 ) 297

Other income (expenses)

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

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

Other income/(expense) 1,350 ( 921 ) ( 255 )

Interest expense ( 874 ) ( 777 ) ( 7,259 )

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

(Loss)/income before income taxes ( 53,374 ) ( 43,162 ) 6,795

Benefit from income taxes 28 46 104

(Provision for)/benefit from income taxes ( 54 ) 28 46

Net (loss)/income ( 53,428 ) ( 43,134 ) 6,841

1 unchanged sentence

Net (loss)/income attributable to Telos Corporation $ ( 53,428 ) $ ( 43,134 ) $ 1,687

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

Weighted-average shares of common stock outstanding, diluted 66,374 42,877 37,729

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

Net (loss)/earnings per share:

Basic $ ( 0.79 ) $ ( 0.65 ) $ 0.04

Diluted $ ( 0.79 ) $ ( 0.65 ) $ 0.04

Weighted-average share outstanding:

Basic 67,559 66,374 41,642

Diluted 67,559 66,374 42,877

See accompanying notes to consolidated financial statements.

TELOS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME

(amounts in thousands)

Years Ended December 31,

For the Year Ended December 31,

2022 2021 2020

(in thousands)

Net (loss)/income $ ( 53,428 ) $ ( 43,134 ) $ 6,841

Other comprehensive income (loss), net of tax:

Other comprehensive (loss)/income, net of tax:

Foreign currency translation adjustments ( 28 ) ( 71 ) 38

1 unchanged sentence

Comprehensive (loss)/income attributable to Telos Corporation $ ( 53,456 ) $ ( 43,205 ) $ 1,725

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

See accompanying notes to consolidated financial statements.

TELOS CORPORATION

CONSOLIDATED BALANCE SHEETS

(amounts in thousands)

Current assets

As of December 31,

(in thousands, except per share and share data)

Cash and cash equivalents $ 119,305 $ 126,562

4 unchanged sentences

Total current assets 167,963 191,714

Property and equipment

Furniture and equipment 15,420 13,574

Leasehold improvements 2,994 2,669

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

Property and equipment, net 4,787 6,088

Finance lease right-of-use assets, net 7,832 9,053

Operating lease right-of-use assets 341 852

3 unchanged sentences

Total assets $ 237,397 $ 246,081

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

TELOS CORPORATION

CONSOLIDATED BALANCE SHEETS

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

Liabilities and Stockholders' Equity:

Current liabilities

Accounts payable and other accrued liabilities $ 22,551 $ 34,548

1 unchanged sentence

Contract liabilities 6,444 6,381

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

Operating lease obligations – short-term 564 677

Finance lease obligations – current portion 1,592 1,461

Operating lease obligations – current portion 361 564

Other financing obligations – current portion 1,247 —

Other current liabilities 4,919 1,430

Total current liabilities 45,502 50,941

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

Operating lease obligations - long-term 388 941

Finance lease obligations – non-current portion 11,248 12,840

Operating lease obligations – non-current portion 27 388

Other financing obligations – non-current portion 7,211 —

Deferred income taxes 758 723

1 unchanged sentence

Total liabilities 65,043 65,827

Commitments and contingencies (Note 18)

Commitments and contingencies

Stockholders' equity:

1 unchanged sentence

Additional paid-in capital 412,708 367,153

Accumulated other comprehensive (loss) income ( 27 ) 44

Accumulated other comprehensive loss ( 55 ) ( 27 )

Accumulated deficit ( 240,405 ) ( 186,977 )

1 unchanged sentence

Total liabilities and stockholders' equity $ 237,397 $ 246,081

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

See accompanying notes to consolidated financial statements.

TELOS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

Years Ended December 31,

For the Year Ended December 31,

2022 2021 2020

Operating activities:

(in thousands)

Cash flows from operating activities:

Net (loss)/income $ ( 53,428 ) $ ( 43,134 ) $ 6,841

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 — 275 —

Stock-based compensation 64,660 60,231 4

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

Depreciation and amortization 5,890 5,624 5,353

Provision for inventory obsolescence 10 ( 1 ) 376

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

Provision for/(benefit from) doubtful accounts 99 7 ( 412 )

Provision for doubtful non-trade receivables — — 569

Amortization of debt issuance costs — 978 461

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

Provision for deferred income tax 35 70 31

Loss on disposal of fixed assets 4 6 1

Accretion of discount on acquisition holdback 48 19 —

Changes in assets and liabilities:

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

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

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

Increase (decrease) in accounts payable and other accrued payables 16,086 3,413 ( 6,730 )

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

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 ) — —

Amortization of debt issuance costs — — 978

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

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

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

Changes in other operating assets and liabilities:

Accounts receivable 19,675 ( 28,937 ) ( 2,559 )

Inventories ( 1,630 ) 2,064 ( 1,346 )

Intangible assets – software held for resale ( 7,120 ) — —

Prepaid expenses, other current assets and other assets ( 1,249 ) ( 982 ) ( 938 )

Accounts payable and other accrued payables ( 12,322 ) 16,086 3,413

Accrued compensation and benefits ( 317 ) ( 1,917 ) ( 3,713 )

Contract liabilities 63 727 ( 683 )

Other current liabilities and other liabilities 2,100 ( 2,602 ) 710

Net cash provided by/(used in) operating activities 16,508 7,262 ( 2,104 )

Cash flows from investing activities:

Capitalized software development costs ( 12,708 ) ( 9,968 ) ( 6,681 )

Purchases of property and equipment ( 1,009 ) ( 3,201 ) ( 780 )

Cash used in investing activities ( 19,094 ) ( 7,461 ) ( 6,532 )

Financing activities:

Cash paid for acquisition — ( 5,925 ) —

Net cash used in investing activities ( 13,717 ) ( 19,094 ) ( 7,461 )

Cash flows from financing activities:

Payments under finance lease obligations ( 1,461 ) ( 1,339 ) ( 1,225 )

Repurchase of common stock ( 11,145 ) ( 1,251 ) —

Payment of tax withholding related to net share settlement of equity awards ( 5,671 ) — —

Payments for debt issuance costs ( 95 ) — —

Proceeds from other financing obligations 9,092 — —

Payments of other financing obligations ( 635 ) — —

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 )

2 unchanged sentences

Payment of subordinated debt — — ( 3,657 )

Proceeds from senior term loan — — 4,881

Payments under finance lease obligations ( 1,339 ) ( 1,225 ) ( 1,115 )

Amendment fee paid to lender — — ( 100 )

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

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 $ — $ 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 $ —

Debt issuance costs and prepayment of interest on senior term loan $ — $ — $ 119

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

Net cash (used in)/provided by financing activities ( 9,915 ) 32,349 108,859

Net change in cash, cash equivalents, and restricted cash ( 7,124 ) 20,517 99,294

Cash, cash equivalents and restricted cash, beginning of period 126,562 106,045 6,751

Cash, cash equivalents and restricted cash, end of period $ 119,438 $ 126,562 $ 106,045

See accompanying notes to consolidated financial statements.

TELOS CORPORATION

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

(amounts in thousands)

Common Stock Class A Common Stock Class B Common Stock Additional

Paid–in Capital Accumulated

Comprehensive Income Accumulated

Paid–in Capital AOCI (1)

Deficit Non-Controlling Interest Total

1 unchanged sentence

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 )

Net (loss) income — — — — — — — ( 6,401 ) 4,264 ( 2,137 )

Foreign currency translation loss — — — — — — ( 11 ) — — ( 11 )

Distributions — — — — — — — — ( 2,371 ) ( 2,371 )

(in thousands)

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

3 unchanged sentences

Purchase of Telos ID membership interest — — — — — — ( 25,511 ) — — ( 4,489 ) ( 30,000 )

Foreign currency translation gain — — — — — — — 38 — — 38

Foreign currency translation loss — — — — — — 38 — — 38

Stock-based compensation — — — — — — 4 — — — 4

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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.

Net loss — — — — — — — — ( 53,428 ) — ( 53,428 )

Foreign currency translation loss — — — — — — — ( 28 ) — — ( 28 )

Stock-based compensation — — — — — — 62,511 — — — 62,511

Repurchase of common stock ( 1,550 ) ( 1 ) — — — — ( 11,283 ) — — — ( 11,284 )

RSU vested, net of shares withheld to cover tax withholding 2,214 2 — — — — ( 5,673 ) — — — ( 5,671 )

Balance December 31, 2022 67,431 $ 106 — $ — — $ — $ 412,708 $ ( 55 ) $ ( 240,405 ) $ — $ 172,354

(1) Accumulated Other Comprehensive Income

See accompanying notes to consolidated financial statements.

TELOS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

Telos Corporation, together with its subsidiaries, (collectively, the "Company" or "Telos" or "We" or "Our"), 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 hold a 100 % ownership interest in Telos Identity Management Solutions, LLC (“Telos ID”), Teloworks, Inc.

We own the issued and outstanding share capital of ubIQuity.com, inc., a holding company for Xacta Corporation.

We also hold a 100 % ownership interest in Telos Identity Management Solutions, LLC ("Telos ID"), Teloworks, Inc.

("Teloworks") and Telos APAC Pte.

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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.

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

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.

Further, on July 30, 2021, we used approximately $ 5.9 million of the net proceeds to acquire the assets of DFT.

We used the remaining net proceeds for general corporate purposes.

SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principle of Consolidation

The accompanying consolidated financial statements include the accounts of Telos and its subsidiaries (see Note 1 – Organization ), 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.

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S.

GAAP"), and the rules and regulations of the U.S.

Securities and Exchange Commission ("SEC").

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.

Certain reclassifications have been made to the prior year's consolidated financial statements to conform to the current year's presentation.

In the current period, we reclassified and presented the finance leases right-of-use 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 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:

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"), or decision-making group, in deciding how to allocate resources and assess performance.

We operate our business in 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

These segments enable the alignment of our strategies and objectives and provide a framework for the timely and rational allocation of resources within the line of business.

We eliminate any inter-segment revenues and expenses upon consolidation.

See Note 2 1 – Segment Information for further information.

Use of Estimates

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

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.

Preparing consolidated financial statements in conformity with U.S.

GAAP requires management to make estimates and assumptions that affect the reported amounts of revenue, expenses, assets and liabilities, and disclosure of contingent assets and liabilities.

The Company regularly assesses these estimates;

however, actual results could differ from those estimates.

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

Our estimate also considers the potential effect of the COVID-19 pandemic-related government actions, wherein the actual impact of the pandemic on our business could be materially different than our current estimates.

Management evaluates these estimates and assumptions on an ongoing basis, including those relating to revenue recognition on cost estimation on certain contracts, allowance for credit losses, inventory obsolescence, valuation allowance for deferred tax assets, income taxes, certain assumptions related to share-based compensation, valuation of intangible assets and goodwill, and contingencies.

Actual results could differ from those estimates.

Risks and Uncertainties

The impact of changes in estimates is recorded in the period in which they become known.

Concentrations

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.

In consideration that a large amount of our working capital and total assets are held in cash and cash equivalents, we are exposed to credit risk in the event of default by the financial institutions to the extent of the amounts held in excess of federal insurance limits.

Due to the financial strength and high credit quality of the financial institutions where the accounts are held, we do not believe that this credit 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, or from prime contractors to whom 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.

We believe that the credit risk associated with our receivables is limited due to the creditworthiness of our customers.

We maintain an allowance for estimated potential credit losses.

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.

Our cash management program utilizes zero balance accounts.

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

Restricted cash represents funds that are held in our money market account but precluded from use of general business needs through contractual requirements.

We report our restricted cash balance within "Other assets" on the consolidated balance sheets.

Contract Balances

The timing of revenue recognition may differ from the timing of billing and cash receipts from customers.

Amounts are invoiced as work progresses, either at periodic intervals or upon achievement of contractual milestones.

We record a contract asset when revenue is recognized prior to invoicing, or a contract liability when cash is received in advance or when milestone payments from customers exceed revenue earned to date.

A contract asset is a right to consideration that is conditional upon factors other than the passage of time.

Contract liabilities include deferred revenue, customer advances and billings in excess of revenue.

Contract assets and liabilities are recorded net on a contract-by-contract basis and are classified based on the contract's operating cycle at the end of each reporting period.

Accounts Receivable

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

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

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

Accounts receivable includes the following:

Billed Receivables - Billed receivables are balances where an invoice has been prepared and issued and is collectible under standard contract terms.

Where we anticipate that an invoice will be issued within a short period of time and where the funds are considered collectible within standard contract terms, we include this balance as billable accounts receivable.

Unbilled Receivables - Unbilled receivables are balances which have not yet been billed due to timing, most commonly just a month delayed from the timing of revenue recognition and the actual bill being presented to the customer.

The company has fulfilled all requirements in order to bill the customer and collect the funds.

Contract Assets - Contract assets are receivables for which the right to consideration is conditional upon factors other than the passage of time.

The timing of these billings is generally driven by contractual terms, which may have billing milestones that are different from revenue recognition milestones.

Both billed and unbilled balances are recorded at their face amount less an allowance for credit losses over the contractual payment terms of the receivable.

Collectability of these amounts are periodically reviewed based upon managements' knowledge and analysis of available information as of the balance sheet date, including any specific circumstances related to overdue balances, length of time that the receivable has been outstanding, historical bad debts and aging trends, and other general and contract specific factors.

The allowance for credit losses is adjusted based on such evaluation.

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.

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):

Year Additions Charge to

Costs and Expense Recoveries Balance

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

Year Ended December 31, 2020 $ 860 $ ( 1 ) $ ( 8 ) $ 851

Year Ended December 31, 2019 $ 520 $ 376 $ ( 36 ) $ 860

Our contract asset balance is recorded at the net amount expected to be billed for services performed once the objective criteria laid out by the contract has been met.

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

The value of inventory is adjusted for damaged, obsolete, excess and slowing-moving inventory.

Net realizable value of inventory is estimated based on the historical obsolescence experience and planned usage.

Inventories are substantially comprised of finished goods that are purchased customer off-the-shelf hardware and software, and component computer parts used in connection with system integration services that we perform.

Property and Equipment

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.

Depreciation is recorded over the assets' estimated useful lives using the straight-line method, which is 3 - 5 years for furniture and equipment.

Leasehold improvements are amortized over the shorter of their useful life or the remaining terms of the lease.

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, 2022, 2021, and 2020, such amounts are negligible.

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.

Repairs and maintenance costs are expensed as incurred.

We evaluate our long-lived assets, including property and equipment, 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.

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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.

We determine if an arrangement is a lease and we account for leases in accordance with ASC Topic 842, "Leases." We entered into contractual arrangements primarily for the use of real estate facilities, and certain other equipment.

We determine the classification of the lease under these arrangements, if any, at inception based on:

(1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefits from the use of the asset throughout the period, and (3) whether we have a right to direct the use of the asset.

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

Amortization of finance lease ROU asset is computed using the straight-line method over the lesser of the lease term or the useful life of the related asset.

In accordance with ASC 842, 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 operating lease ROU assets and liabilities are recognized as of the lease commencement date at the present value of the lease payments over the lease term.

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

Therefore, we use a discount rate based on our incremental borrowing rate on all operating leases.

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

Operating lease expense is recognized as rent expense on a straight-line basis over the lease term, and recorded within our consolidated statement of operations.

The related lease payments on short-term lease arrangements (leases of 1 year or less) are recognized as expensed on a straight-line basis over the lease term.

ROU assets are assessed for potential impairment whenever there is evidence that events or changes in circumstances indicate that the carrying value of the asset may not be recoverable and the carrying amount of the assets exceeds it estimated fair value.

Software Development Costs

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.

We account for development costs of software in accordance with ASC Topic 985-20 ("ASC 985-20"), "Software – Costs of Software to be Sold, Leased, or Marketed" and ASC Topic 350-40 ("ASC 350-40")"Internal Use Software", depending on the intended use of the software being developed.

Under ASC 985-20, all costs of developing software prior to establishing its technological feasibility are research and development costs and are expensed as incurred.

Once technological feasibility has been established, subsequent costs should be capitalized until the software begins to be marketed or is released to customers after which the capitalized costs should be amortized and reviewed for impairment.

Under ASC 350-40, we capitalized certain software development costs when the preliminary project stage is completed and the software has entered the application development stage.

Once substantial testing is complete and the software is ready to be used, capitalization of costs cease.

Capitalized software development costs are amortized on a straight-line basis over the estimated economic life of the application, ranging from 2 - 5 years, beginning when the asset is ready for its intended use.

ASC 350-40 also requires hosting arrangements that are service contracts to follow the guidance for internal-use software to determine which implementation costs can be capitalized.

In accordance with ASC 350-40, (i) capitalized implementation costs are classified in the same balance sheet line item as the amounts prepaid for the related hosting arrangement, (ii) amortization of capitalized implementation costs are presented in the same income statement line item as the service fees for the related hosting arrangement, and (iii) cash flows related to capitalized implementation costs are presented within the same category of cash flow activity as the cash flow for the related hosting arrangements (i.e.

operating activity).

There are no capitalized implementation costs prior to fiscal year 2022.

As of December 31, 2022, the net carrying value of the capitalized implementation costs related to hosting arrangements that were incurred during the application development stage aggregated to $ 0.3 million, net of amortization expense.

These costs are related primarily to the implementation of a new enterprise resource planning system.

The Company begins amortizing the capitalized implementation costs after all substantial testing was complete and ready for its intended use, and amortized over the expected term of the arrangement on a straight-line basis.

Software costs classified as held for resale are stated at the lower of cost or net realizable value.

Software held for resale are amortized into cost of sales on the consolidated statements of operations.

The Company reported the software held for resale as part of the Intangible Assets on the consolidated balance sheets.

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 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.

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

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

See Note 7 – 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.

Impairment of Long-Lived Assets

The Company evaluates its long-lived assets for potential impairment whenever there is evidence that events or changes in circumstances indicate that the carrying value may not be recoverable.

If such evaluation indicates that the carrying amount of the asset exceeds its estimated future undiscounted cash flows, an impairment loss is recognized to reduce the asset's carrying amount to its estimated fair value.

In addition to the recoverability assessment, the Company routinely reviews the remaining lives of its long-lived assets.

Any reduction in the useful life assumptions will result in increased depreciation or amortization expense in the period when such determinations are made, as well as in subsequent periods.

There are no changes in the estimated useful lives of long-lived assets for the periods presented.

Fair Value Measurements

GAAP 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, 2022 and 2021, 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.

Research and Development

Research and development expenses consist primarily of employee-related expenses (such as salaries, taxes, benefits and stock-based compensation), allocated overhead costs and outside services costs related to the development and improvement of the Company's software.

Research and development costs are generally expensed as incurred, except for costs incurred in connection with the development of software that qualify for the capitalization as described in our software development costs policy.

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.

Advertising costs are expensed and included in sales and marketing expense when incurred.

Advertising expense was $ 1.3 million, $ 1.8 million, and $ 1.0 million for the years ended December 31, 2022, 2021 and 2020, 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.

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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.

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.

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.

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 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.

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

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.

Our 2016 Omnibus Long-Term Incentive Plan, as amended (the "2016 LTIP"), provides for the grant of restricted stock units with time-based vesting ("Service-Based RSU" or "RSU") and restricted stock units with performance-based vesting ("Performance-Based RSU" or "PRSU") to our senior executives, directors, employees and other eligible 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, who has the discretion to establish the terms, conditions and criteria of the various awards, including the weighting 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.

Performance-Based RSUs may vest upon the achievement of certain price targets or market conditions for the Company's common stock anytime or certain operational milestones 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.

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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.

Previously recognized expense for awards with market conditions will never be reversed subsequent to completion of the derived service period 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.

Net (Loss)/Earnings per Share

Basic net (loss)/earnings per share is computed by dividing the net (loss)/earnings by the weighted-average number of common shares outstanding for the period, without consideration for potentially dilutive securities.

Diluted net (loss)/earnings per share is computed by dividing the net (loss)/earnings 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 ), 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,

Unvested restricted stock 520 60

Common stock warrants, exercisable at $ 1.665 /sh.

Total 920 961

Other Comprehensive Income (Loss)

Other Comprehensive (Loss)/Income

Our functional currency is the U.S.

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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.

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.

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 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 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):

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 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):

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.

In December 2019, the FASB issued ASU No.

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

Restructuring Expenses

The determination of when the Company accrues for involuntary termination benefits under restructuring plans depends on whether the termination benefits are provided under an on-going benefit arrangement or under a one-time benefit arrangement.

The Company accounts for on-going benefit arrangements, such as those documented by employment agreements, in accordance with ASC 712 ("ASC 712"), "Compensation – Nonretirement Postemployment Benefits." Under ASC 712, liabilities for postemployment benefits are recorded at the time of obligations are probable of being incurred and can be reasonably estimated.

When applicable, the Company records such costs into operating expenses.

In the fourth quarter of 2022, the Company committed to a restructuring plan resulting in a reduction of the Company's workforce, with a majority of the affected employees separating from the business in early 2023.

As a result of the workforce reduction, the Company accrued for involuntary termination benefits consisting of employee severance-related benefit costs (including outplacement services and continuing health insurance coverage).

During the year ended December 31, 2022, the Company recorded approximately $ 2.8 million in involuntary termination benefits, with no similar costs in prior years, and is recorded under "Selling, general and administrative expenses" on the Consolidated Statements of Operations.

Recently Adopted Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.

2019-12, "Income Taxes (Topic 740):

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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.

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 relationships 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.

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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.

In September 2022, the FASB issued ASU No.

2022-04, "Liabilities - Supplier Finance Programs (Subtopic 405-50):

Disclosure of Supplier Finance Program Obligations," which requires a company that uses a supplier finance program in connection with the purchase of goods or services to disclose sufficient information about the program to allow a user of the financial statements to understand the program's nature, activity during the period, changes from period to period, and potential magnitude.

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

In June 2022, the FASB issued ASU No.

2022-03, "Fair Value Measurement (Topic 820):

Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions," which clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.

This standard will be effective for reporting periods beginning December 15, 2023, with early adoption permitted.

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.

We recognize 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.

The Company follows the 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.

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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.

government are generally subject to the 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.

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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.

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.

Revenue transferred to customers over time accounted for 89 %, 91 % and 90 % of our revenue for the years ended December 31, 2022, 2021 and 2020.

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.

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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.

For performance obligations in which control does not continuously transfer to the customer, we recognize revenue at the point in time in which each performance obligation is fully satisfied.

This coincides with the point in time the customer obtains control of the product or service, which typically occurs upon customer acceptance or receipt of the product or service, given that we maintain control of the product or service until that point.

Revenue transferred to customers at a point in time accounted for 11 %, 9 % and 10 % of our revenue for the years ended December 31, 2022, 2021 and 2020.

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.

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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.

For certain performance obligations 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

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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.

We generally use the cost-to-cost measure of progress on a proportional performance basis for our long-term contracts because it best depicts the transfer of control to the customer, which occurs as we incur costs on our contracts.

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.

Due to the nature of the work required to be performed on certain of our performance obligations, the estimation of costs 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.

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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.

We have revised and re-submitted several years of incurred cost submissions reflecting certain indirect rate structure changes as a result of regular Defense Contract Audit Agency 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 2021.

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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.

No revenue adjustment was recorded during the fiscal years ended December 31, 2022 and 2020.

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.

No contract losses were recorded during the years ended December 31, 2022 and 2020.

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

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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.

Disaggregated Revenues

In addition to our segment reporting, as further discussed in Note 2 1 – Segment Information , we disaggregate our revenue by customer and contract types.

We treat sales to U.S.

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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

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

Revenue by Customer Type

For the Year Ended December 31,

2022 2021 2020

Amount % Amount % Amount %

(dollars in thousands)

Federal government $ 205,538 95 % $ 232,876 96 % $ 171,677 95 %

State & local government, and commercial 11,349 5 % 9,557 4 % 8,240 5 %

Total revenue $ 216,887 $ 242,433 $ 179,917

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

Revenue by Contract Type

For the Year Ended December 31,

2022 2021 2020

Secure Networks

Amount % Amount % Amount %

(dollars in thousands)

Firm fixed-price $ 179,803 83 % $ 212,304 88 % $ 151,703 84 %

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Cost plus fixed-fee 24,121 11 % 17,668 7 % 14,759 8 %

118,899 62,605 $ 57,295

Total revenue $ 216,887 $ 242,433 $ 179,917

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

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 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.

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.

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:

Revenue Concentrations Greater than 10% of Total Revenue

For the Year Ended December 31,

2022 2021 2020

Department of Defense 74 % 65 % 65 %

Civilian 22 % 30 % 29 %

Department of Defense ("DoD") 74 % 74 % 65 %

Civilian federal agencies 21 % 22 % 30 %

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

As of December 31,

Balance Sheet Presentation 2022 2021

(in thousands)

Billed account receivables (1)

Accounts receivable, net $ 13,521 $ 18,470

Unbilled account receivables Accounts receivable, net 11,657 7,563

Contract assets Accounts receivable, net 14,891 33,811

Contract liabilities - current Contract liabilities 6,444 6,381

(1) Net of allowance for credit losses

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, 2022, 2021 and 2020, the amount of revenue recognized during the year that was included in the opening contract liabilities balance was $ 5.2 million, $ 4.3 million, and $ 5.3 million, respectively.

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

As of December 31, 2022, we had approximately $ 82.2 million of remaining performance obligations, which we also refer to as funded backlog.

We expect to recognize approximately 93 % of our remaining performance obligations as revenue in 2023, and approximately 4 % by 2024, 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

Unbilled receivables 41,374 19,161

Allowance for doubtful accounts ( 116 ) ( 308 )

ACCOUNTS RECEIVABLE, NET

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

Details of Accounts Receivable, Net

As of December 31,

(in thousands)

Billed accounts receivables $ 13,655 $ 18,586

Unbilled accounts receivable 11,657 7,563

Contract assets 14,891 33,811

Allowance for credit losses ( 134 ) ( 116 )

Accounts receivable, net $ 40,069 $ 59,844

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 92 % of our billed and unbilled accounts receivable, as of December 31, 2022, were directly with U.S.

government customers.

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.

Allowance for Credit Losses Activities

Balance Beginning

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Write-Offs / Recoveries (2)

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

Year Ended December 31, 2020 $ 720 $ ( 412 ) $ — $ 308

Year Ended December 31, 2019 $ 306 $ 414 $ — $ 720

(1) Accounts receivable reserves and reversal of allowance for subsequent collections, net

(in thousands)

For the Year Ended December 31, 2022 $ 116 $ 99 $ ( 81 ) $ 134

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

For the Year Ended December 31, 2020 $ 720 $ ( 412 ) $ — $ 308

(1) Accounts receivable reserves and reversals of allowance for subsequent collections, net

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

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.

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 $ 10.0 million) to a third party, or the "Factor", without recourse to the Company, with an availability period through June 30, 2022, and from year to year thereafter unless terminated in writing by the parties.

There were no accounts receivable sold during 2022 and 2021, respectively.

As of December 31, 2022 and 2021, 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:

INVENTORIES, NET

Details of Inventories, Net

As of December 31,

(in thousands)

Gross inventory $ 3,642 $ 2,108

Allowance for inventory obsolescence ( 765 ) ( 861 )

Inventories, net $ 2,877 $ 1,247

PROPERTY AND EQUIPMENT, NET

Details of Property and Equipment, Net

As of December 31,

(in thousands)

Furniture and equipment $ 16,033 $ 15,420

Leasehold improvement 3,145 2,994

Property and equipment, at cost 19,178 18,414

Accumulated depreciation and amortization ( 14,391 ) ( 12,326 )

Property and equipment, net $ 4,787 $ 6,088

Depreciation and amortization expense was $ 2.4 million, $ 1.8 million, and $ 1.7 million for the years ended December 31, 2022, 2021, and 2020, respectively.

The goodwill balance was $ 17.9 million as of December 31, 2022 and 2021, of which $ 3.0 million is allocated to the Security Solutions segment and $ 14.9 million is allocated to the Secure Networks segment.

During the year ended December 31, 2021, the Company recorded goodwill of $ 3.0 million in connection with the DFT acquisition that was completed in July 2021.

See N ote 10 – Acqu isition for further details.

As a result of the segment reorganization in 2021, as further discussed in Note 2 - Significant Accounting Policies, 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 two operating and reportable segments represent the reporting units for purposes of testing goodwill.

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.

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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

At year-end, the Company performed its annual impairment test of goodwill for all of the reporting units, and no impairment charges were taken during the years ended December 31, 2022, 2021 and 2020.

INTANGIBLE ASSETS, NET

Details of Intangible Assets, Net

Estimated useful life As of December 31, 2022 As of December 31, 2021

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

(in thousands)

Acquired technology 8 years $ 3,630 $ ( 643 ) $ 2,987 $ 3,630 $ ( 256 ) $ 3,374

Customer relationship 3 years

Customer relationships 3 years 40 ( 19 ) 21 40 ( 5 ) 35

Software development costs 2 - 5 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

35,080 ( 7,793 ) 27,287 22,222 ( 6,432 ) 15,790

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

Subtotal 38,750 ( 8,455 ) 30,295 25,892 ( 6,693 ) 19,199

Software held for resale (1)

7,120 — 7,120 — — —

Total $ 45,870 $ ( 8,455 ) $ 37,415 $ 25,892 $ ( 6,693 ) $ 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.

(1) This amount is net of $ 0.7 million charged into cost of sales.

Amortization expense related to capitalized software development costs was $ 1.4 million, $ 1.6 million, and $ 1.7 million for the years ended December 31, 2022, 2021, and 2020, respectively.

Amortization expense related to other intangible assets was $ 0.4 million, and $ 0.3 million for the years ended December 31, 2022, and 2021, respectively.

No other intangible assets reported prior to the acquisition in 2021, see Note 10 – Acquisition for further details.

The Company did not recognize any impairment charges on intangible assets for the periods presented.

Estimated Future Amortization Expense of Intangible Assets, Net

As of December 31, 2022

(in thousands)

Year Ending December 31, 2023 $ 6,046

Year Ending December 31, 2024 7,757

Year Ending December 31, 2025 5,699

Year Ending December 31, 2026 4,699

Year Ending December 31, 2027 3,936

Thereafter 2,158

Total $ 30,295

Actual amortization expense in future periods could differ from these estimates as a result of impairments, timing of completion of in-process software development projects, future releases and other factors.

OTHER BALANCE SHEET COMPONENTS

Details of Accounts Payable and Other Accrued Liabilities

As of December 31,

(in thousands)

Accounts payable $ 12,606 $ 7,869

Accrued payables 9,945 25,300

Others — 1,379

Accounts payable and other accrued liabilities $ 22,551 $ 34,548

Details of Other Current Liabilities

As of December 31,

(in thousands)

Other accrued expenses 1,530 978

Restructuring expenses accrual 2,763 —

Other 626 452

Other current liabilities $ 4,919 $ 1,430

On July 30, 2021, the Company acquired the assets of 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 was 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 the assets 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 the acquisition date.

The Company recognized $ 3.7 million of intangible assets and $ 3.0 million of goodwill, which is housed in 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.

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

PURCHASE OF TELOS ID NON-CONTROLLING INTERESTS

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

Prior to the IPO in November 2020, the Company owned a 50 % interest in Telos ID, with the remaining interest owned by Hoya ID Fund A, LLC ("Hoya") as 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 $ 148.4 million);

the total consideration transferred to Hoya was $ 178.4 million.

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

The Company further recognized a debit to APIC of $ 173.9 million as part of the elimination of Hoya's non-controlling interest in Telos ID.

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

In fiscal year 2020, 50 % of the profit allocated to the Class B member amounted to $ 5.2 million.

During the year ended December 31, 2020, the Class B member received a total of $ 2.8 million of distribution and a final distribution of $ 2.4 million in January 2021.

DEBT AND OTHER OBLIGATIONS

Revolving Credit Facility

On December 30, 2022 (the "Closing Date"), we entered into a Credit Agreement (the "Credit Agreement"), by and among the Company, as borrower, Xacta Corporation, ubIQuity.com.inc, Teloworks, Inc., and Telos Identity Management Solutions, LLC, as guarantors, the lenders party thereto (the "Lenders"), and JPMorgan Chase Bank N.A., as administrative agent for the Lenders (in such capacity, the "Agent").

The Credit Agreement provides for a $ 30.0 million senior secured revolving credit facility with a maturity date of December 30, 2025, with the option of issuing letters of credit thereunder with a sub-limit of $ 5.0 million, and with an uncommitted expansion feature of up to $ 30.0 million of additional revolver capacity (the "Loan").

The Loan is subject to acceleration in the event of customary events of default.

The Company has not drawn any amount under the Loan.

Borrowings under the Credit Agreement will accrue interest, at our option, at one of three variable rates, plus a specified margin.

We can elect to borrow at (i) the Alternative Base Rate, plus 0.9 %;

(ii) Adjusted Daily Simple Secured Overnight Financing Rate ("SOFR"), plus 1.9 %;

and (iii) Adjusted Term SOFR, plus 1.9 %, as such capitalized terms are defined and calculated in the Credit Agreement.

The Company may elect to convert borrowings from one type of borrowing to another type per the terms of the Credit Agreement.

After the occurrence and during the continuance of any event of default, the interest rate may increase by an additional 2.0 %.

We are obligated to pay accrued interest (i) with respect to amounts accruing interest based on the Alternative Base Rate, each calendar quarter and on the maturity date, (ii) with respect to amounts accruing interest based on Adjusted Daily Simple SOFR, on each one month anniversary of the borrowing and on the maturity date, and (iii) with respect to amounts accruing interest based on Adjusted Term SOFR, at the end of the period specified per the Credit Agreement and on the maturity date.

Upon five, three, or one days' prior notice, as applicable, we may prepay any portion or the entire amount of the Loan.

We are also paying costs and customary fees, including a closing fee, commitment fees and letter of credit participation fee, if any, payable to the Agent and Lenders, as applicable, in connection with the Loan.

The Loan under the Credit Agreement is collateralized by substantially all of the Company's assets, including the Company's pledge of its domestic and material foreign subsidiary equity interests.

The Loan has various covenants that may, among other things, affect our ability to create, incur, assume or suffer any indebtedness, merge into or consolidate with another entity, acquire entity interests, sell or transfer certain assets, enter into certain arrangements (such as sale and leaseback and swap agreements) or restrictive agreements, pay dividends and make certain restricted payments, and amend material documents related to any subordinated indebtedness and corporate agreements.

The Credit Agreement also requires certain financial covenants to maintain a Senior Leverage Ratio on the last day of any fiscal quarter, no greater than 3 to 1.

We were in compliance with all covenants as of December 31, 2022.

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.

Other Financing Obligations

We entered into a Master Purchase Agreement ("MPA") with a third-party buyer ("Buyer") for $ 9.1 million ("Assignment Price") relating to software licenses under a specific delivery order ("DO") with our customer resulting in proceeds from other financing obligations of $ 9.1 million in November 2022.

Under the MPA, we sold, assigned and transferred all of our rights, title and interest in (i) the DO payments from the customer and (ii) the underlying licenses.

The DO covers a base period with an option for the customer to exercise three (3) additional 12-month periods through January 2026.

The DO payments assigned to the Buyer are billable to the customer at the beginning of the base period and for each option year exercised.

The underlying licenses were acquired for resale, see Note 8 – Intangible Assets, n et for further details.

On February 9, 2023, the customer notified us that it would not exercise the first option period under the DO.

The MPA provides that, if the customer terminates the DO for non-renewal and the Buyer reasonably concludes that the customer's actions constitute grounds for filing a claim with the customer's contracting officer, Buyer and Telos will cooperate in preparing such a claim, which would be filed in Telos' name.

Buyer has notified Telos of its intent to pursue a claim against the customer.

Senior Term Loan

On January 25, 2017, we entered into a Credit Agreement (the "EnCap 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 EnCap Credit Agreement provided for an $ 11.0 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.

In connection with the EnCap Credit Agreement, 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.

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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 %.

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.

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 (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.

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

• The prepayment price was amended as follows:

(a) from January 26, 2019 through January 25, 2020, the prepayment price 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 .

This has 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 %.

In addition, incurred fees and transaction costs related to the issuance of the EnCap Credit Agreement were amortized over the life of this Agreement.

On July 19, 2019, the EnCap Credit Agreement was amended to, among others, provide an additional $ 5.0 million in principal borrowings, change the maturity date from January 25, 2022 to January 15, 2021 and increase the exit fee to $ 1.2 million.

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.

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.

The EnCap Credit Agreement was further amended on March 26, 2020 to provide for four quarterly maturity date extensions, which would increase the Exit Fee payable under the Credit Agreement by $ 0.3 million for each quarterly maturity date extension elected, for a total of $ 1.0 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 $ 0.1 million and out-of-pocket costs and expenses in consideration for the March 2020 amendment.

On November 24, 2020, upon the closing of the IPO, the Company paid a total of $ 17.4 million which paid off the EnCap Credit Agreement in full, including an exit fee of $ 1.2 million, accrued interest of $ 0.1 million, and legal fees of $ 13,000 .

As a result, we recognized a loss on debt extinguishment of $ 0.1 million presented as a part of the non-operating expense in the consolidated statements of operations.

For the year ended December 31, 2020, we incurred interest expenses amounting to $ 2.7 million.

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.

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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").

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 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 unsecured Subordinated Loan Agreements and Subordinated Promissory Notes ("Porter Notes") with affiliated entities of Mr.

Porter (together referenced as "Porter").

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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.

Under the terms of the Porter Notes, Porter lent the Company $ 2.5 million, with the outstanding principal bearing interest at a fixed rate of twelve percent ( 12 %), payable quarterly starting August 20, 2015.

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.

Telos also entered into Intercreditor Agreements with Porter and EnCap, in which the Porter Notes were fully subordinated to the EnCap 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 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.

We incurred interest expense amounting to $ 0.3 million for fiscal year 2020 on the Porter Notes.

EXCHANGEABLE REDEEMABLE PREFERRED STOCK CONVERSION

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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.

We adjusted our estimate of accrued accretion in the amount of $ 1.5 million in the second quarter of 2006.

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

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

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

We initially issued 2,858,723 shares of the Public Preferred Stock pursuant to the acquisition of the Company during fiscal year 1990, recorded at fair value on the date of original issuance.

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 .

Prior to the IPO, the total number of shares issued and outstanding was 3,185,586 .

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

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

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

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

For the year ended December 31, 2020, we accrued dividends on the Public Preferred Stock amounting to $ 3.4 million, which was recorded as interest expense.

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;

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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.

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

Capital 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.

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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, 2022 and 2021, there were 67,431,632 and 66,767,450 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.

Relative to the Repurchase Agreements, as disclosed under Note 12 – Debt and Other Obligations above, the Company agreed to repurchase the 39,682 outstanding shares held by EnCap for $ 1.3 million on April 19, 2021.

Further, on May 24, 2022, the Company announced that the Board of Directors approved a new share repurchase program ("SRP") authorizing the Company to repurchase up to $ 50.0 million of its common stock.

Pursuant to this authorization, the Company may repurchase shares of its common stock on a discretionary basis from time to time through open market purchases.

The repurchase program has no expiration date and may be modified, suspended, or terminated at any time.

As of December 31, 2022, there was $ 38.7 million of the remaining authorization for future common stock repurchases under the SRP.

Share Repurchase Program Activity

For the Year Ended December 31,

2022 2021 2020

(in thousands, except per share and share data)

Amounts paid for shares repurchased (1)

$ 11,284 $ — $ —

Number of shares repurchased 1,550,162 — —

Average per share price paid (1)

$ 7.28 $ — $ —

(1) Includes commission paid for repurchases on the open market

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,

Components of Accumulated Other Comprehensive Loss

As of December 31, 2022

(in thousands)

Cumulative foreign currency translation loss $ ( 162 ) $ ( 134 )

Cumulative actuarial gain on pension liability adjustment in Teloworks 107 107

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

Cumulative actuarial gain on pension liability adjustment 107 107

Accumulated other comprehensive loss $ ( 55 ) $ ( 27 )

EMPLOYEE BENEFIT PLAN

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As of December 31, 2022, the Plan held 876,602 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.

Prior to March 2022, we matched one-half of employee contribution to the Plan up to a maximum of 2 % of such employee's eligible annual base salary.

In March 2022, we increased the maximum employer match up to 4 % of the 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.

Telos intends to fund the employer matching contribution in Telos stock, but will have the discretion to fund the match in cash or a combination of stock and cash, and are funded in the first quarter of the subsequent year.

Our total contributions to the Plan for 2022, 2021, and 2020 were $ 2.2 million, $ 1.3 million, and $ 1.2 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 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, 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.

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 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 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.

STOCK-BASED COMPENSATION

The Company's stock-based compensation awards are under the 2016 LTIP and issue new shares upon the vesting of stock units under this plan.

In October 2020, the Company amended the 2016 LTIP to increase the total number of shares available for issuance from 4,500,000 to 9,400,000 (equivalent to 7,459,913 shares after the stock split in November 2020) and extended the term to September 30, 2030.

The stock options granted under the 2016 LTIP expire no more than 10 years after the date of grant.

No stock options granted under the 2016 LTIP are outstanding as of December 31, 2022.

Approximately 0.4 million shares of our common stock were reserved for future grants as of December 31, 2022 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.

The Company records stock-based compensation related to accrued compensation in which it intends to settle in shares of the Company's common stock.

However, it is the Company's discretion whether this compensation will ultimately be paid in stock or cash, as it has the right to dictate the form of these payments up until the date they are paid.

In addition, stock-based compensation expense includes an immaterial increase of $ 1.3 million for the year ended December 31, 2022, to correct a prior period error.

There were no income tax benefits recognized on the share-based compensation expense for these periods.

Details of Stock-based Compensation Expense

For the Year Ended December 31,

2022 2021 2020

(in thousands)

Cost of sales - services $ 3,497 $ 2,640 $ —

2 unchanged sentences

General and administrative 52,689 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

Total $ 64,660 $ 60,231 $ 4

Service-Based RSU and Performance-Based RSU Award Activity

Service-Based RSU Performance-Based RSU Total Weighted-Average Grant Date Fair Value

Unvested outstanding units as of December 31, 2021 3,030,608 492,727 3,523,335 $ 34.24

Granted 3,987,911 — 3,987,911 9.89

1 unchanged sentence

Forfeited ( 379,912 ) ( 155,942 ) ( 535,854 ) 32.95

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

Unvested outstanding units as of December 31, 2022 3,570,082 336,785 3,906,867 $ 19.53

Our key assumptions used to calculate the grant date fair value of the PRSU awards in 2021 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 PRSUs were $ 19.12 - $ 30.84 and between 0.38 - 0.76 years, respectively.

As of December 31, 2022, the intrinsic value of the RSU and PRSUs outstanding, exercisable, and vested or expected to vest was $ 19.8 million.

There was $ 26.8 million of total compensation costs related to stock-based awards not yet recognized as of December 31, 2022, which is expected to be recognized on a straight-line basis over a weighted-average remaining vesting period of 0.8 years.

(LOSS)/EARNINGS PER SHARE

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

For the Year Ended December 31,

2022 2021 2020

(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,

Unvested restricted stock and restricted stock units 529 520 60

Common stock warrants, exercisable at $ 1.665 /sh.

Total 529 920 961

Performance-based RSUs of 336,785 have been excluded in the calculation of the potentially dilutive securities above because issuance of such shares are contingent upon the satisfaction of certain conditions which were not satisfied by the end of the period.

Components of Provision for/(Benefit from) Income Taxes

For the Year Ended December 31,

2022 2021 2020

Current (benefit) provision

(in thousands)

Current provision/(benefit)

Federal $ — $ — $ —

1 unchanged sentence

Total current 19 ( 98 ) ( 77 )

Deferred provision (benefit)

Deferred tax expense

Federal 37 19 27

1 unchanged sentence

Total deferred 35 70 31

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,

Provision for/(benefit from) income taxes $ 54 $ ( 28 ) $ ( 46 )

Reconciliation of Statutory Tax Rate to Actual Tax Rate

For the Year Ended December 31,

2022 2021 2020

7 unchanged sentences

Gain on redemption of preferred stock — — ( 43.3 )

Stock-based compensation ( 20.6 ) — —

Section 162(m) limitation - covered employees ( 2.0 ) ( 16.0 ) 14.6

Capitalization of IPO transaction costs — — 4.4

FIN 48 liability ( 0.6 ) 0.2 ( 3.7 )

Uncertain tax positions ( 0.5 ) ( 0.6 ) 0.2

R&D credit 3.0 2.7 ( 12.4 )

Non-controlling interest — — ( 15.9 )

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):

Effective tax rate ( 0.1 %) 0.1 % ( 0.7 %)

Components of Deferred Tax Assets and Liabilities

As of December 31,

(in thousands)

Deferred tax assets:

4 unchanged sentences

Accrued compensation 915 648

Deferred rent 3,813 4,387

Lease liabilities 3,349 3,813

Section 163(j) interest limitation — 54

Goodwill 34,009 37,394

Capitalized research and development costs 362 —

Net operating loss carryforwards - federal 6,034 5,681

Net operating loss carryforwards - state 1,155 1,014

R&D credit 2,645 1,986

R&D tax credit 3,760 2,645

Total gross deferred tax assets 58,921 61,299

3 unchanged sentences

Amortization and depreciation ( 86 ) ( 3,945 )

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

Right-of-use assets ( 2,034 ) ( 2,489 )

Total deferred tax liabilities ( 2,120 ) ( 6,434 )

Net deferred tax liabilities $ ( 758 ) $ ( 723 )

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

Balance Beginning of

Period Additions Recoveries Balance

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

December 31, 2020 $ 7,206 $ 44,992 $ — $ 52,198

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

Valuation Allowance Activity

For the Year Ended December 31,

2022 2021 2020

(in thousands)

Balance at beginning of year $ 55,588 $ 52,198 $ 7,206

Additions 1,971 3,390 44,992

Balance at end of year $ 57,559 $ 55,588 $ 52,198

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.

3 unchanged sentences

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, 2022 and 2021.

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.

On December 31, 2022, for federal income tax purposes, there was approximately a $ 28.7 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.

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

As of December 31, 2022, there was approximately $ 5.0 million of R&D credit carryover which begins to expire in 2033.

3 unchanged sentences

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.

Under the provisions of ASC 740, we determined that there were approximately $ 1.4 million, $ 1.1 million, and $ 0.8 million of unrecognized tax benefits as of December 31, 2022, 2021, and 2020, respectively.

Included in the balance of unrecognized tax benefits as of December 31, 2022, 2021, and 2020 were $ 0.1 million, $ 0.2 million, and $ 0.3 million, 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, 2022, 2021, and 2020 were $ 1.3 million, $ 0.9 million, and $ 0.5 million, 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 $ 0.1 million and $ 0.2 million, which were recorded in other liabilities as of December 31, 2022 and 2021, 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 2022, has not been extended beyond the applicable statute of limitations.

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):

As of December 31, 2022, the Company is not under examination by any federal tax jurisdiction, but is currently under examination by a state tax jurisdiction.

Reconciliation of the Beginning and Ending Amounts of Unrecognized Tax Benefit

For the Year Ended December 31,

2022 2021 2020

Unrecognized tax benefits, beginning of period $ 763 $ 714 $ 649

Increase (decrease) in prior year tax positions 90 ( 104 ) 1

(in thousands)

Balance at beginning of year $ 1,056 $ 763 $ 714

(Decrease)/increase in prior year tax positions ( 5 ) 90 ( 104 )

Increase related to current year tax positions 377 273 213

Decrease related to lapse of statutes ( 71 ) ( 70 ) ( 60 )

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.

Operating Leases

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

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

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

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

Balance at end of year $ 1,357 $ 1,056 $ 763

We lease office space facilities and equipment under non-cancelable operating and finance leases with various expiration dates, some of which contain renewal options.

The Company's lease portfolio is comprised of two major classes.

The lease of the Ashburn facility is accounted for as a finance lease.

The other office spaces and equipment leased are accounted for as operating leases.

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 – 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.

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.

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.

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 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.

In accordance with the 2014 Lease, the basic rent increases by a fixed 2.5 % escalation annually.

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

In May 2014, the Company entered into a new lease arrangement with the new landlord on the Ashburn facility, which expires on May 28, 2029.

In accordance with this lease agreement, the basic rent increases by a fixed 2.5 % escalation annually.

Details of Lease Costs

For the Year Ended December 31,

2022 2021 2020

Total minimum lease payments 1,003 17,267

Less imputed interest ( 51 ) ( 2,966 )

Net present value of minimum lease payments 952 14,301

Less current portion ( 564 ) ( 1,461 )

Long-term lease obligations at December 31, 2021 $ 388 $ 12,840

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

Years Ended December 31,

(in thousands)

Operating lease cost $ 550 $ 713 $ 724

6 unchanged sentences

(1) Leases that have terms of 12 months or less.

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

Years Ended December 31,

Future Minimum Lease Payments

Operating Leases Finance Leases

(in thousands)

Year Ending December 31, 2023 $ 373 $ 2,203

Year Ending December 31, 2024 27 2,258

Year Ending December 31, 2025 — 2,314

Year Ending December 31, 2026 — 2,371

Year Ending December 31, 2027 — 2,431

Thereafter — 3,541

Total minimum lease payments 400 15,118

Imputed interest ( 12 ) ( 2,278 )

Total lease obligations 388 12,840

Current portion of lease obligations ( 361 ) ( 1,592 )

Long-term lease obligations $ 27 $ 11,248

Weighted-Average Remaining Lease Terms and Discount Rates

For the Year Ended December 31,

2022 2021 2020

Weighted average remaining lease term (in years):

Finance leases 6.3 years 7.3 years 8.3 years

Operating leases 1.0 year 1.7 years 2.5 years

Weighted average discount rate:

Finance leases 5.04 % 5.04 % 5.04 %

Operating leases 5.75 % 5.75 % 5.75 %

Supplemental cash flow information related to leases

For the Year Ended December 31,

2022 2021 2020

(in thousands)

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

Cash flows from operating activities - operating leases $ 768 $ 745

Cash flows from operating activities - finance leases $ 758 $ 820

Cash flows from financing activities - finance leases $ 1,339 $ 1,225

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.

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.

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.

Operating cash flows related to operating leases $ 603 $ 768 $ 745

Operating cash flows related to finance leases 688 758 820

Financing cash flows related to finance leases 1,461 1,339 1,225

RELATED PARTY TRANSACTIONS

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

The amounts paid to this individual as compensation for the years ended December 31, 2022, 2021, and 2020 were $ 1.3 million, $ 0.5 million and $ 1.2 million, respectively.

Additionally, Mr.

Wood owned 178,041 and 73,562 shares of the Company's common stock as of December 31, 2022 and 2021, respectively.

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

Porter and Toxford Corporation, of which Mr.

In January 2023, Emmett Wood tendered his resignation as an employee effective February 7, 2023.

On March 31, 2015, the Company entered into an interest-bearing subordinated debt with Mr.

Porter and Toxford Corporation ("Porter Notes") for $ 2.5 million (see Note 12 - Debt and Other O bligations for further information on the Porter Notes).

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.

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.

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 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.

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.

The Porter Notes were paid in full upon the closing of the IPO in 2020.

We incurred $ 0.3 million of interest expense for the year ended December 31, 2020.

One of the Company's directors serves as a consultant to the Company.

In February 2022, the director and the Company amended the consulting agreement to provide that the Company would pay the remainder of the director's consulting fees for 2022 in a fixed price amount in the form of restricted stock units.

The Company granted the director 26,091 restricted stock units on February 1, 2022, which vest quarterly in four equal amounts through the end of the year, subject to the director's continued performance under the consulting agreement.

The cash amount paid for his consultancy services were $ 25,000 , $ 0.3 million and $ 0.3 million for the years ended December 31, 2022, 2021 and 2020, respectively.

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:

As noted in Note 2 - Significant Accounting Policies , we conduct 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.

Our Security Solutions segment is primarily focused on cybersecurity, cloud and identity solutions, and secure messaging through Xacta, Telos Ghost, Telos Advanced Cyber Analytics, Telos AMHS and Telos ID offerings.

We recognize revenue on contracts from providing various system platforms in the cloud, on-premises, and in hybrid cloud environments, as well as 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 and products.

Fluctuation in revenue from period to period is the result of the volume of software sales, and the progress or completion of cloud and/or cybersecurity solutions during the period.

The majority of the operating costs relate 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.

Our 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,

Variances in costs recognized from period to period primarily reflect increases and decreases in activity levels on individual contracts.

Results of Operations by Business Segment

For the Year Ended December 31,

2022 2021 2020

3 unchanged sentences

Inter-segment elimination — — ( 10,377 )

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

Total revenue 216,887 242,433 179,917

Security Solutions 61,948 64,904 50,458

1 unchanged sentence

Total gross profit 79,043 86,029 62,420

Selling, general and administrative expenses 132,893 127,493 62,123

Operating (loss)/income ( 53,850 ) ( 41,464 ) 297

Other income/(expense) 1,350 ( 921 ) ( 255 )

Interest expense ( 874 ) ( 777 ) ( 7,259 )

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

(Loss)/income before income taxes ( 53,374 ) ( 43,162 ) 6,795

(Provision for)/benefit from income taxes ( 54 ) 28 46

Net (loss)/income ( 53,428 ) ( 43,134 ) 6,841

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

Net (loss)/income attributable to Telos Corporation $ ( 53,428 ) $ ( 43,134 ) $ 1,687

We measure each segment's profitability based on gross profit.

1 unchanged sentence

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

COMMITMENT AND CONTINGENCIES

Legal Proceedings

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.

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 ("Court").

In the complaint, the plaintiffs, who purport to represent a class of purchasers of Telos common stock between November 19, 2020, and March 16, 2022, 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 ("TSA") and the Centers for Medicare and Medicaid Services and to take into account those delays when providing a financial forecast for the Company's 2021 performance.

On June 15, 2022, the Plaintiffs filed a consolidated complaint which added claims (i) concerning Telos' disclosure of revenue projections for these contracts, (ii) against the directors of Telos at the time of its initial public offering, and (iii) pursuant to Sections 11 and 15 of the Securities Act of 1933.

On February 1, 2023, the Court dismissed the lawsuit in its entirety for failure to state a claim.

The Court's order of dismissal provided the plaintiff twenty-one days within which to file a motion for leave to file an amended complaint, should they have a good faith basis to do so.

On March 1, 2023, Plaintiffs filed a motion for leave to file an amended complaint, and on March 13, 2023, the Court granted the parties' consent motion permitting the filing of a consolidated amended class action complaint and establishing a briefing schedule for Telos' forthcoming motion to dismiss that amended complaint.

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

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.

Although the outcome of any such matter is inherently uncertain and may be materially adverse, based on current information, management believes that the outcome of such known matters will not have a material adverse effect on the Company's financial condition and results of operations.

As of December 31, 2022, the Company does not believe that there are claims or proceedings that would have a material adverse effect on the business, or the consolidated financial statements of the Company.

Other - Government Contracts

9 unchanged sentences

government regulations also may be audited or investigated.

Subsequent Events

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

SUPPLEMENTAL CASH FLOW INFORMATION

Details of Cash, Cash Equivalent, and Restricted Cash

As of December 31,

(in thousands)

Cash and cash equivalents $ 119,305 $ 126,562

Restricted cash (1)

Cash, cash equivalents, and restricted cash $ 119,438 $ 126,562

(1) Restricted cash consists of a commercial money market account held as a deposit on the Ashburn lease and is recorded under "Other assets" on the Consolidated Balance Sheets.

Supplemental Cash Flow Information

For the Year Ended December 31,

2022 2021 2020

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

(in thousands)

Cash paid during the year for:

Interest $ 803 $ 758 $ 7,259

Income taxes 188 60 64

Non-cash investing and financing activities:

Operating lease ROU assets obtained in exchange for operating lease liabilities 511 638 613

Capital expenditure activity in accounts payable and other accrued liabilities 211 — —

Common stock repurchase under accounts payable and other accrued liabilities 139 — —

Acquisition holdback — 506 —

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

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

Deferred financing costs in accounts payable and other accrued liabilities 114 — —

REVISION OF UNAUDITED QUARTERLY FINANCIAL DATA

Revisions of Previously Issued Quarterly Financial Statements

During the course of preparing the Company's consolidated financial statements for the year ended December 31, 2022, we identified that stock-based compensation expense related to PRSU awards with market conditions was erroneously reversed when those PRSUs were forfeited during each of the quarters ended March 31, 2022, June 30, 2022 and September 30, 2022.

Due to the errors, general and administrative expense was understated by $ 1.6 million in the first quarter of 2022, $ 1.9 million in the second quarter of 2022, and $ 1.1 million in the third quarter of 2022.

Although the Company has determined that these errors did not have a material impact on its previously issued interim consolidated financial statements, it will revise the previously reported interim financial information in conjunction with the issuance of its quarterly filings on Form 10-Q for the quarters ended March 31, 2023, June 30, 2023 and September 30, 2023.

The errors had no net impact on cash flows from operating, investing or financing activities in the consolidated statement of cash flows.

The following tables set forth the effects of the revisions of previously issued unaudited quarterly consolidated financial statements to correct for prior period errors.

Revised Quarterly Financial Data for Fiscal Years 2022 and 2021

For the Three Months Ended

Fiscal Year 2022 Fiscal Year 2021

2022 September 30,

2022 December 31,

2022 March 31,

2021 June 30,

2021 September 30,

2021 December 31,

(in thousands, except per share amounts)

Revenue- services $ 48,108 $ 50,270 $ 55,305 $ 39,059 $ 52,058 $ 49,003 $ 62,955 $ 57,532

Revenue - products 2,052 5,521 8,288 8,284 3,699 4,641 6,026 6,519

Revenue 52,559 1,085 53,644 108,317 1,085 $ 109,402

Total revenue 50,160 55,791 63,593 47,343 55,757 53,644 68,981 64,051

Cost of sales – services 29,731 31,436 36,746 23,421 39,490 28,609 40,137 35,121

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

Cost of sales – products 1,558 3,426 5,902 5,624 1,798 2,501 3,967 4,781

Total cost of sales 31,289 34,862 42,648 29,045 41,288 31,110 44,104 39,902

Gross profit 18,871 20,929 20,945 18,298 14,469 22,534 24,877 24,149

Selling, general and administrative expenses:

Sales and marketing 5,252 4,741 3,042 3,547 3,826 5,043 5,363 5,423

Research and development 5,430 4,489 3,981 3,018 4,061 5,327 4,863 4,845

General and administrative 24,556 25,735 22,706 26,396 20,076 29,635 19,739 19,292

Total selling, general and administrative expenses 35,238 34,965 29,729 32,961 27,963 40,005 29,965 29,560

Operating loss ( 16,367 ) ( 14,036 ) ( 8,784 ) ( 14,663 ) ( 13,494 ) ( 17,471 ) ( 5,088 ) ( 5,411 )

Other income 12 118 518 702 ( 1,054 ) 32 20 81

Interest expense ( 190 ) ( 187 ) ( 181 ) ( 316 ) ( 196 ) ( 192 ) ( 195 ) ( 194 )

Loss before income taxes ( 16,545 ) ( 14,105 ) ( 8,447 ) ( 14,277 ) ( 14,744 ) ( 17,631 ) ( 5,263 ) ( 5,524 )

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

(Provision for)/benefit from income taxes ( 71 ) ( 54 ) ( 8 ) 79 ( 34 ) ( 13 ) 41 34

$ ( 16,616 ) $ ( 14,159 ) $ ( 8,455 ) $ ( 14,198 ) $ ( 14,778 ) $ ( 17,644 ) $ ( 5,222 ) $ ( 5,490 )

Net loss per share:

Basic $ ( 0.25 ) $ ( 0.21 ) $ ( 0.13 ) $ ( 0.21 ) $ ( 0.23 ) $ ( 0.26 ) $ ( 0.08 ) $ ( 0.08 )

Diluted $ ( 0.25 ) $ ( 0.21 ) $ ( 0.13 ) $ ( 0.21 ) $ ( 0.23 ) $ ( 0.26 ) $ ( 0.08 ) $ ( 0.08 )

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

(1) Net loss is equal to Net loss attributable to Telos Corporation.

(2) The sum of the quarterly net loss per share amounts may not equal the full year amount reported since per share amounts are computed independently for each quarter and for the full year based upon the respective weighted-average shares outstanding, basic and diluted.

Consolidated Statement of Operations

Three Months Ended March 31, 2022 Three Months Ended June 30, 2022 Three Months Ended September 30, 2022

As Previously Reported Adjustment As Revised As Previously Reported Adjustment As Revised As Previously Reported Adjustment As Revised

(in thousands, except per share amounts)

General and administrative $ 22,923 $ 1,633 $ 24,556 $ 23,865 $ 1,870 $ 25,735 $ 21,591 $ 1,115 $ 22,706

Selling, general and administrative expenses 31,321 ( 1,356 ) 29,965 98,287 ( 352 ) 97,935

Total selling, general and administrative expenses 33,605 1,633 35,238 33,095 1,870 34,965 28,614 1,115 29,729

Operating loss ( 14,734 ) ( 1,633 ) ( 16,367 ) ( 12,166 ) ( 1,870 ) ( 14,036 ) ( 7,669 ) ( 1,115 ) ( 8,784 )

1 unchanged sentence

Net loss ( 14,983 ) ( 1,633 ) ( 16,616 ) ( 12,289 ) ( 1,870 ) ( 14,159 ) ( 7,340 ) ( 1,115 ) ( 8,455 )

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 per share, basis $ ( 0.22 ) ( 0.03 ) $ ( 0.25 ) $ ( 0.18 ) ( 0.03 ) $ ( 0.21 ) $ ( 0.11 ) ( 0.02 ) $ ( 0.13 )

Net loss per share, diluted ( 0.22 ) ( 0.03 ) ( 0.25 ) ( 0.18 ) ( 0.03 ) ( 0.21 ) ( 0.11 ) ( 0.02 ) ( 0.13 )

Consolidated Statement of Comprehensive Loss

Three Months Ended March 31, 2022 Three Months Ended June 30, 2022 Three Months Ended September 30, 2022

As Previously Reported Adjustment As Revised As Previously Reported Adjustment As Revised As Previously Reported Adjustment As Revised

(in thousands)

Net loss $ ( 14,983 ) $ ( 1,633 ) $ ( 16,616 ) $ ( 12,289 ) $ ( 1,870 ) $ ( 14,159 ) $ ( 7,340 ) $ ( 1,115 ) $ ( 8,455 )

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

Comprehensive loss ( 14,954 ) ( 1,633 ) ( 16,587 ) ( 12,300 ) ( 1,870 ) ( 14,170 ) ( 7,361 ) ( 1,115 ) ( 8,476 )

Consolidated Balance Sheet

As of March 31, 2022 As of June 30, 2022 As of September 30, 2022

As Previously Reported Adjustment As Revised As Previously Reported Adjustment As Revised As Previously Reported Adjustment As Revised

(in thousands)

Additional paid-in capital $ 376,913 $ 1,633 $ 378,546 $ 388,464 $ 3,503 $ 391,967 $ 398,546 $ 4,618 $ 403,164

Accumulated deficit ( 201,960 ) ( 1,633 ) ( 203,593 ) ( 214,249 ) ( 3,503 ) ( 217,752 ) ( 221,589 ) ( 4,618 ) ( 226,207 )

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 )

Consolidated Statement of Changes in Stockholders' Equity

Three Months Ended March 31, 2022 Three Months Ended June 30, 2022 Three Months Ended September 30, 2022

As Previously Reported Adjustment As Revised As Previously Reported Adjustment As Revised As Previously Reported Adjustment As Revised

(in thousands)

Additional paid-in capital, beginning $ 367,153 $ — $ 367,153 $ 376,913 $ 1,633 $ 378,546 $ 388,464 $ 3,503 $ 391,967

Stock-based compensation 12,647 1,633 14,280 14,553 1,870 16,423 15,012 1,115 16,127

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

Additional paid-in capital, end 376,913 1,633 378,546 388,464 3,503 391,967 398,546 4,618 403,164

Accumulated deficit, beginning $ ( 186,977 ) $ — $ ( 186,977 ) $ ( 201,960 ) $ ( 1,633 ) $ ( 203,593 ) $ ( 214,249 ) $ ( 3,503 ) $ ( 217,752 )

Net loss ( 14,983 ) ( 1,633 ) ( 16,616 ) ( 12,289 ) ( 1,870 ) ( 14,159 ) ( 7,340 ) ( 1,115 ) ( 8,455 )

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

Accumulated deficit, end ( 201,960 ) ( 1,633 ) ( 203,593 ) ( 214,249 ) ( 3,503 ) ( 217,752 ) ( 221,589 ) ( 4,618 ) ( 226,207 )

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