TELOS CORP 10-K

Item 7A. Quantitative and Qualitative Disclosures about Market Risk None. 39 Table of Contents Item 8. Consolidated Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm 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. 40 Table of Contents 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. 41 Table of Contents Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors Telos Corporation Ashburn, Virginia Opinion on the Consolidated Financial Statements 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 These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ BDO USA, LLP We have served as the Company's auditor from 2007 to 2022. McLean, Virginia March 28, 2022 42 Table of Contents TELOS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS For the Year Ended December 31, 2022 2021 2020 (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 Total cost of sales 137,844 156,404 117,497 Gross profit 79,043 86,029 62,420 Selling, general and administrative expenses: Sales and marketing 16,582 19,655 6,176 Research and development 16,918 19,096 14,243 General and administrative 99,393 88,742 41,704 Total 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 Less: Net income attributable to non-controlling interest — — ( 5,154 ) Net (loss)/income attributable to Telos Corporation $ ( 53,428 ) $ ( 43,134 ) $ 1,687 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. 43 Table of Contents TELOS CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME For the Year Ended December 31, 2022 2021 2020 (in thousands) Net (loss)/income $ ( 53,428 ) $ ( 43,134 ) $ 6,841 Other comprehensive (loss)/income, net of tax: Foreign currency translation adjustments ( 28 ) ( 71 ) 38 Less: Comprehensive income attributable to non-controlling interest — — ( 5,154 ) Comprehensive (loss)/income attributable to Telos Corporation $ ( 53,456 ) $ ( 43,205 ) $ 1,725 See accompanying notes to consolidated financial statements. 44 Table of Contents TELOS CORPORATION CONSOLIDATED BALANCE SHEETS As of December 31, 2022 2021 (in thousands, except per share and share data) Assets: Cash and cash equivalents $ 119,305 $ 126,562 Accounts receivable, net 40,069 59,844 Inventories, net 2,877 1,247 Prepaid expenses 4,819 3,329 Other current assets 893 732 Total current assets 167,963 191,714 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 Goodwill 17,922 17,922 Intangible assets, net 37,415 19,199 Other assets 1,137 1,253 Total assets $ 237,397 $ 246,081 Liabilities and Stockholders' Equity: Liabilities: Accounts payable and other accrued liabilities $ 22,551 $ 34,548 Accrued compensation and benefits 8,388 6,557 Contract liabilities 6,444 6,381 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 – 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 Other liabilities 297 935 Total liabilities 65,043 65,827 Commitments and contingencies Stockholders' equity: Common stock, $ 0.001 par value, 250,000,000 shares authorized, 67,431,632 shares and 66,767,450 shares issued and outstanding as of December 31, 2022 and 2021, respectively 106 105 Additional paid-in capital 412,708 367,153 Accumulated other comprehensive loss ( 55 ) ( 27 ) Accumulated deficit ( 240,405 ) ( 186,977 ) Total stockholders' equity 172,354 180,254 Total liabilities and stockholders' equity $ 237,397 $ 246,081 See accompanying notes to consolidated financial statements. 45 Table of Contents TELOS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the Year Ended December 31, 2022 2021 2020 (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: Stock-based compensation 64,660 60,231 4 Depreciation and amortization 5,890 5,624 5,353 Provision for/(benefit from) doubtful accounts 99 7 ( 412 ) Provision for doubtful non-trade receivables — — 569 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 — 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 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 ) — Redemption of public preferred stock — — ( 108,878 ) Purchase of Telos ID membership interest — — ( 30,000 ) Payment of senior term loan — — ( 17,351 ) Payment of subordinated debt — — ( 3,657 ) Amendment fee paid to lender — — ( 100 ) Distributions to Telos ID Class B member – non-controlling interest — ( 2,436 ) ( 2,743 ) 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. 46 Table of Contents TELOS CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY/(DEFICIT) Common Stock Class A Common Stock Class B Common Stock Additional Paid–in Capital AOCI (1) Accumulated Deficit Non-Controlling Interest Total Stockholders' Equity/ (Deficit) Shares Amount Shares Amount Shares Amount (in thousands) Balance December 31, 2019 — $ — 45,143 $ 65 4,038 $ 13 $ 4,310 $ 6 $ ( 145,530 ) $ 4,514 ( 136,622 ) Net income — — — — — — — 1,687 5,154 6,841 Issuance of common stock upon conversion of Class A and Class B common stock 39,003 78 ( 45,143 ) ( 65 ) ( 4,038 ) ( 13 ) — — — — — Issuance of common stock 25,622 25 — — — — 291,997 — — — 292,022 Purchase of Telos ID membership interest — — — — — — ( 25,511 ) — — ( 4,489 ) ( 30,000 ) Foreign currency translation loss — — — — — — 38 — — 38 Stock-based compensation — — — — — — 4 — — — 4 Distributions — — — — — — — — ( 5,179 ) ( 5,179 ) Balance December 31, 2020 64,625 $ 103 — $ — — $ — $ 270,800 $ 44 $ ( 143,843 ) $ — 127,104 Net loss — — — — — ( 43,134 ) — ( 43,134 ) Issuance of common stock 2,050 2 — — — — 64,267 — — — 64,269 Foreign currency translation loss — — — — — — — ( 71 ) — — ( 71 ) Stock-based compensation 132 — — — — — 60,231 — — — 60,231 Repurchase of outstanding warrants — — — — — — ( 26,894 ) — — — ( 26,894 ) Repurchase of common stock ( 40 ) — — — — — ( 1,251 ) — — — ( 1,251 ) Balance December 31, 2021 66,767 $ 105 — $ — — $ — $ 367,153 $ ( 27 ) $ ( 186,977 ) $ — 180,254 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. 47 Table of Contents TELOS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION 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 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. Ltd. ("Telos APAC"). On November 12, 2020, we amended our charter to effect an approximate 0.794 -for-1 reverse stock split with respect to our common stock. The par value and the authorized shares of the common stock were not adjusted as a result of the reverse stock split. The accompanying consolidated financial statements and notes to the consolidated financial statements give retroactive effect to the reverse stock split for all periods presented. Public Offering of Common Stock On November 19, 2020, we completed our initial public offering of shares of our common stock. We issued 17.2 million shares of our common stock at a price of $ 17.00 per share, generating net proceeds of approximately $ 272.8 million. We used approximately $ 108.9 million of the net proceeds in connection with the conversion of our outstanding shares of Exchangeable Redeemable Preferred Stock into the right to receive cash and shares of our common stock, $ 30.0 million to fund our acquisition of the outstanding Class B Units of Telos ID, and $ 21.0 million to repay our outstanding senior term loan and subordinated debt. On April 6, 2021, we completed our follow-on offering of 9.1 million shares of our common stock at a price of $ 33.00 per share, including 7.0 million shares of common stock held by certain existing stockholders of Telos. The offering generated approximately $ 64.3 million of net proceeds to Telos. We did not receive any proceeds from the shares of common stock sold by the selling stockholders. On April 19, 2021, we used approximately $ 1.3 million of the net proceeds to repurchase 39,682 shares of our common stock and $ 26.9 million to repurchase the warrants to purchase 900,970 shares of our common stock owned by certain affiliates of EnCap. 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. 2. 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. 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 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. 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"), 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. 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. 48 Table of Contents Use of Estimates 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. 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 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 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. 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. 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 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. 49 Table of Contents 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. 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 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 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. 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. Accordingly, actual results could differ from such estimates. No events have been identified that caused an evaluation of the recoverability of long-lived assets. Leases 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. 50 Table of Contents Software Development Costs 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. 51 Table of Contents 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 U.S. 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: • Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets and liabilities; • Level 2: 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; or • Level 3: 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 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. Income Taxes We account for income taxes in accordance with ASC 740, "Income Taxes." Under ASC 740, deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences and income tax credits. Deferred tax assets and liabilities are measured by applying enacted statutory tax rates that are applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized for differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Any change in tax rates on deferred tax assets and liabilities is recognized in net income in the period in which the tax rate change is enacted. We record a valuation allowance that reduces deferred tax assets when it is "more likely than not" that deferred tax assets will not be realized. We follow the provisions of ASC 740 related to accounting for uncertainty in income taxes. The accounting estimates related to liabilities for uncertain tax positions require us to make judgments regarding the sustainability of each uncertain tax position based on its technical merits. If we determine it is more likely than not that a tax position will be sustained based on its technical merits, we record the impact of the position in our consolidated financial statements at the largest amount that is greater than fifty percent likely of being realized upon ultimate settlement. These estimates are updated at each reporting date based on the facts, circumstances and information available. We are also required to assess at each reporting date whether it is reasonably possible that any significant increases or decreases to our unrecognized tax benefits will occur during the next 12 months. Business Combinations Acquisitions were accounted for under U.S. GAAP using the acquisition method in accordance with ASC 805, Business Combinations . The Company allocates the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value of purchase consideration over the values of these identifiable assets and liabilities, if any, is recorded as goodwill. 52 Table of Contents The accounting for business combinations requires management to make judgments and estimates of the fair value of assets acquired, including the identification and valuation of intangible assets, as well as liabilities and contingencies assumed. Such judgments and estimates directly impact the amount of goodwill recognized in connection with an acquisition. Estimating the fair value of acquired assets and assumed liabilities, including intangibles, requires judgment about expected future cash flows, weighted-average cost of capital, discount rates and expected long-term growth rates. Stock-Based Compensation 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. 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 conditions. 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. Monte Carlo approaches are a class of computational algorithms that rely on repeated random sampling to compute their results. This approach allows the calculation of the value of such awards based on a large number of possible stock price path scenarios. We recognize these share-based payment transactions when services from the employees are received and recognize a corresponding increase in additional paid-in capital in our consolidated balance sheets, in accordance with ASC 718, "Compensation - Stock Compensation." The measurement objective for these equity awards is the estimated fair value at the date of grant of the equity instruments that we are obligated to issue when employees have rendered the requisite service and satisfied any other conditions necessary to earn the right to benefit from the instruments. The compensation expense for an award is recognized ratably over the requisite service period for the entire award, which is the period during which an employee is required to provide service in exchange for an award. Compensation expense for awards with performance conditions is recognized over the requisite service period if it is probable that the performance condition will be satisfied. If such performance conditions are not or are no longer considered probable, no compensation expense for these awards is recognized, and any previously recognized expense is reversed. If the performance condition is achieved prior to the completion of the requisite service period, any unrecognized compensation expense will be recognized in the period the performance condition is achieved. Compensation expense for awards with market conditions is recognized over the derived service period, or sooner, if the market condition is achieved. Previously recognized expense for awards with market conditions will never be reversed 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 (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. Other Comprehensive (Loss)/Income Our functional currency is the U.S. Dollar. For one of our wholly-owned subsidiaries, the functional currency is the local currency. For this subsidiary, the translation of its foreign currency into U.S. Dollars is performed for assets and liabilities using current foreign currency exchange rates in effect at the balance sheet date and for revenue and expense accounts using average foreign currency exchange rates during the periods presented. Translation gains and losses are included in stockholders' equity as a component of accumulated other comprehensive (loss)/income. 53 Table of Contents 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): Simplifying the Accounting for Income Taxes," which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The ASU also clarifies and amends existing guidance to improve consistent application. This standard was effective for reporting periods beginning after December 15, 2020, which made this standard effective for us on January 1, 2021. The adoption of this ASU did not have a material impact on our consolidated financial position, results of operations and cash flows. In March 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provides optional expedients and exceptions for a limited period of time to ease the potential burden in accounting for contracts, hedging 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. The adoption of this ASU did not have a material impact on our consolidated financial position, results of operations or cash flows. Recent Accounting Pronouncements Not Yet Adopted In October 2021, the FASB issued ASU No. 2021-08, "Business Combination (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers," which requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The ASU improves comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. Entities should apply the amendments prospectively to business combinations that occur after the effective date. This standard will be effective for reporting periods beginning after December 15, 2022, with early adoption permitted. While we are currently assessing the impact of the adoption of this ASU, we do not believe the adoption of this ASU will have a material impact on our consolidated financial position, results of operations, and cash flows. 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. 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 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. 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. 54 Table of Contents 3. REVENUE RECOGNITION 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. Significant judgment can be required in determining certain performance obligations, and these determinations could change the amount of revenue and profit recorded in a given period. Our contracts may have a single performance obligation or multiple performance obligations. When there are multiple performance obligations within a contract, we allocate the transaction price, net of any discounts, to each performance obligation based on the standalone selling price of the product or service underlying each performance obligation. Our contracts with the U.S. government are generally subject to 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. Government are typically equal to the selling price stated in the contract. For non-U.S. Government contracts with multiple performance obligations, standalone selling price is the observable price of a good or service when Telos sells that good or service separately in similar circumstances and to similar customers. Contracts are routinely and often modified to account for changes in contract requirements, specifications, quantities, or price. Depending on the nature of the modification, we determine whether to account for the modification as an adjustment to the existing contract or as a new contract. Generally, modifications are not distinct from the existing contract due to the significant interrelatedness of the performance obligations and are therefore accounted for as an adjustment to the existing contract, and recognized as a cumulative adjustment to revenue (as either an increase or reduction of revenue) based on the modification's effect on progress toward completion of a performance obligation. The majority of our revenue is recognized over time, as control is transferred continuously to our customers who receive and consume benefits as we perform. 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. Revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, subcontractor costs and indirect expenses. This continuous transfer of control to the customer is supported by clauses in our contracts with U.S. government customers whereby the customer may terminate a contract for convenience and then pay for costs incurred plus a profit, at which time the customer would take control of any work in process. For non-U.S. government contracts where we perform as a subcontractor and our order includes similar FAR provisions as the prime contractor's order from the U.S. government, continuous transfer of control is likewise supported by such provisions. For other non-U.S. government customers, continuous transfer of control to such customers is also supported due to general terms in our contracts and rights to recover damages which would include, among other potential damages, the right to payment for our work performed to date plus a reasonable profit. 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. Orders for the sale of software licenses may contain multiple performance obligations, such as maintenance, training, or consulting services, which are typically delivered over time, consistent with the transfer of control disclosed above for the provision of services. When an order contains multiple performance obligations, we allocate the transaction price to the performance obligations based on the standalone selling price of the product or service underlying each performance obligation. The standalone selling price represents the amount we would sell the product or service to a customer on a standalone basis. For certain performance 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. 55 Table of Contents Contract Estimates Due to the transfer of control over time, revenue is recognized based on progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the performance obligations. We generally use the cost-to-cost measure of progress on a proportional performance basis for our long-term contracts because it best depicts the transfer of control to the customer, which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation, which includes both the actual costs already incurred and the estimated costs to complete. 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 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. A significant change in one or more of these estimates could affect the profitability of our contracts. We review and update our contract-related estimates regularly and recognize adjustments in estimated profit on contracts on a cumulative catch-up basis, which may result in an adjustment increasing or decreasing revenue to date on a contract in a particular period that the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate. Our contracts may include various types of variable consideration, such as claims (for instance, indirect rate or other equitable adjustments) or incentive fees. We include estimated amounts in the transaction price based on all of the information available to us, including historical information and future estimations, and to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when any uncertainty associated with the variable consideration is resolved. We have revised and re-submitted several years of incurred cost submissions reflecting certain indirect rate structure changes as a result of regular 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. We evaluated the resulting changes to revenue under the applicable cost-plus fixed fee contracts for the years 2014 to 2016 as variable consideration, and determined the most likely amount to which we expect to be entitled, to the extent that no constraint exists that would preclude recognizing this revenue or result in a significant reversal of cumulative revenue recognized. We included these estimated amounts of variable consideration in the transaction price and as performance on these contracts is complete, we have recognized revenue of $ 0.2 million during the year ended December 31, 2021. 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. Historically, most of our contracts do not include award or incentive fees. For incentive fees, we would include such fees in the transaction price to the extent we could reasonably estimate the amount of the fee. With limited historical experience, we have not included any revenue related to incentive fees in our estimated transaction prices. We may include in our contract estimates additional revenue for submitted contract modifications or claims against the customer when we believe we have an enforceable right to the modification or claim, the amount can be estimated reliably and its realization is probable. We consider the contractual/legal basis for the claim (in particular FAR provisions), the facts and circumstances around any additional costs incurred, the reasonableness of those costs and the objective evidence available to support such claims. For our contracts that have an original duration of one year or less, we use the practical expedient applicable to such contracts and do not consider the time value of money. We capitalize sales commissions related to proprietary software and related services that are directly tied to sales. We do not elect the practical expedient to expense as incurred the incremental costs of obtaining a contract if the amortization period would have been one year or less. For the sales commissions that are capitalized, we amortize the asset over the expected customer life, which is based on recent and historical data. 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. customers as sales within the U.S. regardless of where the services are performed. Substantially most of our revenues are generated from U.S. customers, while international customers are de minimis, as such the financial information by geographic location is not presented. 56 Table of Contents Table 3.1: 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 Table 3.2: Revenue by Contract Type For the Year Ended December 31, 2022 2021 2020 Amount % Amount % Amount % (dollars in thousands) Firm fixed-price $ 179,803 83 % $ 212,304 88 % $ 151,703 84 % Time-and-materials 12,963 6 % 12,461 5 % 13,455 8 % Cost plus fixed-fee 24,121 11 % 17,668 7 % 14,759 8 % Total revenue $ 216,887 $ 242,433 $ 179,917 Table 3.3: Revenue Concentrations Greater than 10% of Total Revenue For the Year Ended December 31, 2022 2021 2020 U.S. Department of Defense ("DoD") 74 % 74 % 65 % Civilian federal agencies 21 % 22 % 30 % Table 3.4: Contract Balances 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. 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. 57 Table of Contents 4. ACCOUNTS RECEIVABLE, NET Table 4.1: Details of Accounts Receivable, Net As of December 31, 2022 2021 (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. 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. Table 4.2: Allowance for Credit Losses Activities Balance Beginning of Year Bad Debt Expenses (1) Write-Offs / Recoveries (2) Balance End of Year (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 $ 10.0 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. 5. INVENTORIES, NET Table 5.1: Details of Inventories, Net As of December 31, 2022 2021 (in thousands) Gross inventory $ 3,642 $ 2,108 Allowance for inventory obsolescence ( 765 ) ( 861 ) Inventories, net $ 2,877 $ 1,247 58 Table of Contents 6. PROPERTY AND EQUIPMENT, NET Table 6: Details of Property and Equipment, Net As of December 31, 2022 2021 (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. 7. GOODWILL 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 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. In addition, the estimate of the total fair value of our reporting units is compared to the market capitalization of the Company. Goodwill is subject to annual impairment tests and in the interim if triggering events are present before the annual tests, we will assess impairment. At year-end, the Company performed its annual impairment test of goodwill for all of the reporting units, and no impairment charges were taken during the years ended December 31, 2022, 2021 and 2020. 8. INTANGIBLE ASSETS, NET Table 8.1: 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 relationships 3 years 40 ( 19 ) 21 40 ( 5 ) 35 Software development costs 2 - 5 years 35,080 ( 7,793 ) 27,287 22,222 ( 6,432 ) 15,790 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 (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. 59 Table of Contents Table 8.2: 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. 9. OTHER BALANCE SHEET COMPONENTS Table 9.1: Details of Accounts Payable and Other Accrued Liabilities As of December 31, 2022 2021 (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 Table 9.2: Details of Other Current Liabilities As of December 31, 2022 2021 (in thousands) Other accrued expenses 1,530 978 Restructuring expenses accrual 2,763 — Other 626 452 Other current liabilities $ 4,919 $ 1,430 10. ACQUISITION 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. 60 Table of Contents 11. 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. 12. 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. 61 Table of Contents 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 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. The value of the warrants was determined to be de minimis and no value was allocated to them on a relative fair value basis in accounting for the debt instrument. The Credit Agreement also included an $ 825,000 exit fee, which was payable upon any repayment or prepayment of the loan. This 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. 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. Under the Repurchase Agreement, the Company agreed to repurchase the outstanding warrants for $ 26.9 million and common stock for $ 1.3 million. The average price of the warrants and common stock repurchased were $ 29.85 per share and $ 31.51 per share, respectively. Upon settlement, the repurchased warrants were retired. The Company reduced common stock for the $ 0.001 par value of the shares repurchased, with the excess purchase price over par value recorded as a reduction of APIC. As a result of the repurchases, the Company recognized these amounts as a reduction to APIC. 62 Table of Contents Subordinated Debt On March 31, 2015, the Company entered into unsecured Subordinated Loan Agreements and Subordinated Promissory Notes ("Porter Notes") with affiliated entities of Mr. John R. C. Porter (together referenced as "Porter"). Mr. Porter and Toxford Corporation, of which Mr. Porter was the sole shareholder, owned 35.0 % of our Class A Common Stock. Under the terms of the Porter Notes, Porter lent the Company $ 2.5 million, 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 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. 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. 13. EXCHANGEABLE REDEEMABLE PREFERRED STOCK CONVERSION Public Preferred Stock 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, recorded at fair value on the date of original issuance. In November 1998, we retired 410,000 shares of the Public Preferred Stock. 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. 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. 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; multiplied by (II) 0.90 ; multiplied by (III) 0.85 and (ii) that number of shares of common stock (valued at the initial offering price to the public) equal to (I) the ERPS Liquidation Value; multiplied by (II) 0.90 ; multiplied by (III) 0.15 . No fractional shares of common stock, however, were issued upon an ERPS Conversion Event but, in lieu thereof, the holder was entitled to receive an amount of cash equal to the fair market value of a share of common stock (valued at the initial offering price to the public) at the time of such ERPS Conversion Event multiplied by such fractional amount (rounded to the nearest cent). "ERPS Liquidation Value" means, per each share of Exchangeable Redeemable Preferred Stock, $ 10 together with all accrued and unpaid dividends (whether or not earned or declared) thereon calculated as of the actual date of an ERPS Conversion Event without interest, which was approximately $ 142.3 million as of November 19, 2020. All shares of common stock issued upon an ERPS Conversion were validly issued, fully paid and non-assessable. On November 23, 2020, holders of Exchangeable Redeemable Preferred Stock received $ 108.9 million in cash and 1.1 million shares of our common stock at $ 17 per share for a total value of $ 19.2 million in connection with the ERPS Conversion. The difference in the redemption value of the ERPS and the carrying value has been accounted for as a gain on extinguishment of debt in accordance with ASC 470 and ASC 480. Approximately $ 0.2 million of costs directly attributable to this redemption were applied against the gain, resulting in a net gain of $ 14.0 million. 14. STOCKHOLDERS' EQUITY 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. Prior to our Second Amended and Restated Articles of Incorporation, which were effective November 12, 2020, the relative rights, preferences, and limitations of the Class A common stock and the Class B common stock were in all respects identical. The holders of the common stock had one vote for each share of common stock held. Our Second Amended and Restated Articles of Incorporation authorized our Board of Directors to classify or reclassify shares of our stock in one or more classes or series, to cause the issuance of additional shares of our stock, and to amend our charter without stockholder approval to increase or decrease the number of shares of stock that we have authority to issue. 63 Table of Contents On November 12, 2020, we filed Articles of Amendment (the "Articles") with the State Department of Assessments and Taxation of the State of Maryland, effective as of the same date (the "Effective Time"). The Articles amended the Company's charter to effect a reverse stock split such that (1) every 1.259446 shares of Class A Common Stock that were issued and outstanding immediately prior to the Effective Time were changed into one issued and outstanding share of Class A Common Stock, and (2) every 1.259446 shares of Class B Common Stock that were issued and outstanding immediately prior to the Effective Time were changed into one issued and outstanding share of Class B Common Stock. Also on November 12, 2020, we filed the Second Articles of Amendment and Restatement (the "Second Amended Articles") with the State Department of Assessments and Taxation of the State of Maryland, effective as of the same date (the "Effective Time"). The Second Amended Articles amended the Company's charter to effect a conversion of each share of the Class B Common Stock that was issued and outstanding immediately prior to the Effective Time into one fully paid and non-assessable share of Class A Common Stock. From and after the Effective Time, certificates representing the Class B Common Stock now represent the number of shares of Class A Common Stock in which such Class B Common Stock was converted. Also, at the Effective Time, the Class A Common Stock was renamed and re-designated as common stock, par value $ 0.001 per share, of the Corporation. 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. Shares Repurchases 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. Table 14.1: 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 Table 14.2: Components of Accumulated Other Comprehensive Loss As of December 31, 2022 2022 2021 (in thousands) Cumulative foreign currency translation loss $ ( 162 ) $ ( 134 ) Cumulative actuarial gain on pension liability adjustment 107 107 Accumulated other comprehensive loss $ ( 55 ) $ ( 27 ) 15. EMPLOYEE BENEFIT PLAN Telos sponsors a defined contribution employee savings plan (the "Plan") under which substantially all full-time employees are eligible to participate. As of December 31, 2022, the Plan held 876,602 shares of Telos common stock. 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. 64 Table of Contents 16. 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. 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 eligible service providers. 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 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. Table 16.1: 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 $ — Sales and marketing 4,668 7,189 — Research and development 3,806 3,268 — General and administrative 52,689 47,134 4 Total $ 64,660 $ 60,231 $ 4 Table 16.2: 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 Vested ( 3,068,525 ) — ( 3,068,525 ) 21.39 Forfeited ( 379,912 ) ( 155,942 ) ( 535,854 ) 32.95 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. 65 Table of Contents 17. (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. Table 17.1: Potentially Dilutive Securities For the Year Ended December 31, 2022 2021 2020 (in thousands) Unvested restricted stock and restricted stock units 529 520 60 Common stock warrants, exercisable at $ 1.665 /sh. — 400 901 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. 18. INCOME TAXES Table 18.1: Components of Provision for/(Benefit from) Income Taxes For the Year Ended December 31, 2022 2021 2020 (in thousands) Current provision/(benefit) Federal $ — $ — $ — State 19 ( 98 ) ( 77 ) Total current 19 ( 98 ) ( 77 ) Deferred tax expense Federal 37 19 27 State ( 2 ) 51 4 Total deferred 35 70 31 Provision for/(benefit from) income taxes $ 54 $ ( 28 ) $ ( 46 ) Table 18.2: Reconciliation of Statutory Tax Rate to Actual Tax Rate For the Year Ended December 31, 2022 2021 2020 Computed expected income tax provision 21.0 % 21.0 % 21.0 % State income taxes, net of federal income tax benefit 3.6 1.5 1.0 Change in valuation allowance for deferred tax assets ( 3.7 ) ( 7.9 ) 17.0 Cumulative deferred adjustments ( 0.9 ) — 0.7 Provision to return adjustments 0.1 ( 0.4 ) 0.5 Other permanent differences ( 0.1 ) ( 0.2 ) 1.0 Dividend and accretion on preferred stock — — 10.5 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 Uncertain tax positions ( 0.5 ) ( 0.6 ) 0.2 R&D credit 3.0 2.7 ( 12.4 ) Non-controlling interest — — ( 15.9 ) Effective tax rate ( 0.1 %) 0.1 % ( 0.7 %) 66 Table of Contents Table 18.3: Components of Deferred Tax Assets and Liabilities As of December 31, 2022 2021 (in thousands) Deferred tax assets: Accounts receivable, principally due to allowance for doubtful accounts $ 33 $ 29 Allowance for inventory obsolescence and amortization 210 315 Accrued liabilities not currently deductible 1,151 1,713 Stock-based compensation 7,943 7,993 Accrued compensation 915 648 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 tax credit 3,760 2,645 Total gross deferred tax assets 58,921 61,299 Less valuation allowance ( 57,559 ) ( 55,588 ) Total deferred tax assets, net of valuation allowance 1,362 5,711 Deferred tax liabilities: Amortization and depreciation ( 86 ) ( 3,945 ) Right-of-use assets ( 2,034 ) ( 2,489 ) Total deferred tax liabilities ( 2,120 ) ( 6,434 ) Net deferred tax liabilities $ ( 758 ) $ ( 723 ) Table 18.4: 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. The realization of deferred tax assets is dependent upon the generation of future taxable income. We considered projected future taxable income, tax planning strategies, and reversal of taxable temporary differences in making this assessment. Based on available evidence, we have determined that a full valuation allowance is required as of December 31, 2022 and 2021. 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. 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 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. Certain tax attributes of the Company, including net operating losses and credits, would be subject to a limitation should an ownership change as defined under Section 382 of the Internal Revenue Code of 1986, as amended, occur. The limitations resulting from a change in ownership could affect the Company's ability to utilize its tax attributes. A study was completed in 2020 which confirmed that no limitation applies to the Company's tax attributes as of December 31, 2020. We believe that ownership activity since December 31, 2020 would not result in limitation sufficient to result in the expiration of unused attributes. 67 Table of Contents 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, 2022, the Company is not under examination by any federal tax jurisdiction, but is currently under examination by a state tax jurisdiction. Table 18.5: Reconciliation of the Beginning and Ending Amounts of Unrecognized Tax Benefit For the Year Ended December 31, 2022 2021 2020 (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 ) Balance at end of year $ 1,357 $ 1,056 $ 763 19. LEASES 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. 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. Table 19.1: Details of Lease Costs For the Year Ended December 31, 2022 2021 2020 (in thousands) Operating lease cost $ 550 $ 713 $ 724 Short-term lease cost (1) 49 13 93 Finance lease cost Amortization of finance lease assets 1,221 1,221 1,221 Interest on finance lease liabilities 688 758 822 Total finance lease cost 1,909 1,979 2,043 Total lease costs $ 2,508 $ 2,705 $ 2,860 (1) Leases that have terms of 12 months or less. 68 Table of Contents Table 19.2: 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 Less: Imputed interest ( 12 ) ( 2,278 ) Total lease obligations 388 12,840 Less: Current portion of lease obligations ( 361 ) ( 1,592 ) Long-term lease obligations $ 27 $ 11,248 Table 19.3: 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 % Table 19.4: 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: 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 20. RELATED PARTY TRANSACTIONS Emmett J. 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. 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. 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. 69 Table of Contents 21. SEGMENT INFORMATION As noted in Note 2 - Significant Accounting Policies , we conduct our operations through two operating segments: Security Solutions and Secure Networks. 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. 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 primarily reflect increases and decreases in activity levels on individual contracts. Table 21.1: Results of Operations by Business Segment For the Year Ended December 31, 2022 2021 2020 (in thousands) Revenues Security Solutions $ 120,454 $ 123,534 $ 127,667 Secure Networks 96,433 118,899 62,627 Inter-segment elimination — — ( 10,377 ) Total revenue 216,887 242,433 179,917 Gross profit Security Solutions 61,948 64,904 50,458 Secure Networks 17,095 21,125 11,962 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 Less: 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. We account for inter-segment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. Interest income, interest expense, other income and expense items, and income taxes, as reported in the consolidated financial statements, are not part of the segment profitability measure and are primarily recorded at the corporate level. 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. 70 Table of Contents 22. COMMITMENT AND CONTINGENCIES Legal Proceedings 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, 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 As a U.S. government contractor, we are subject to various audits and investigations by the U.S. government to determine whether our operations are being conducted in accordance with applicable regulatory requirements. U.S. government investigations of our operations, whether relating to government contracts or conducted for other reasons, could result in administrative, civil, or criminal liabilities, including repayments, fines or penalties being imposed upon us, suspension, proposed debarment, debarment from eligibility for future U.S. government contracting, or suspension of export privileges. Suspension or debarment could have a material adverse effect on us because of our dependence on contracts with the U.S. government. U.S. government investigations often take years to complete and many result in no adverse action against us. We also provide products and services to customers outside of the United States, which are subject to U.S. and foreign laws and regulations and foreign procurement policies and practices. Our compliance with local regulations or applicable U.S. government regulations also may be audited or investigated. 23. SUPPLEMENTAL CASH FLOW INFORMATION Table 23.1: Details of Cash, Cash Equivalent, and Restricted Cash As of December 31, 2022 2021 (in thousands) Cash and cash equivalents $ 119,305 $ 126,562 Restricted cash (1) 133 — 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. 71 Table of Contents Table 23.2: Supplemental Cash Flow Information For the Year Ended December 31, 2022 2021 2020 (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 — — 24. 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. 72 Table of Contents Table 24.1. Revised Quarterly Financial Data for Fiscal Years 2022 and 2021 For the Three Months Ended Fiscal Year 2022 Fiscal Year 2021 March 31, 2022 June 30 2022 September 30, 2022 December 31, 2022 March 31, 2021 June 30, 2021 September 30, 2021 December 31, 2021 (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 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 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 ) (Provision for)/benefit from income taxes ( 71 ) ( 54 ) ( 8 ) 79 ( 34 ) ( 13 ) 41 34 Net loss (1) $ ( 16,616 ) $ ( 14,159 ) $ ( 8,455 ) $ ( 14,198 ) $ ( 14,778 ) $ ( 17,644 ) $ ( 5,222 ) $ ( 5,490 ) Net loss per share: (2) 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 ) (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. Table 24.2. 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 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 ) Loss before income taxes ( 14,912 ) ( 1,633 ) ( 16,545 ) ( 12,235 ) ( 1,870 ) ( 14,105 ) ( 7,332 ) ( 1,115 ) ( 8,447 ) Net loss ( 14,983 ) ( 1,633 ) ( 16,616 ) ( 12,289 ) ( 1,870 ) ( 14,159 ) ( 7,340 ) ( 1,115 ) ( 8,455 ) 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 ) 73 Table of Contents Table 24.3. 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 ( 14,954 ) ( 1,633 ) ( 16,587 ) ( 12,300 ) ( 1,870 ) ( 14,170 ) ( 7,361 ) ( 1,115 ) ( 8,476 ) Table 24.4. 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 ) Table 24.5. 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 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 ) Accumulated deficit, end ( 201,960 ) ( 1,633 ) ( 203,593 ) ( 214,249 ) ( 3,503 ) ( 217,752 ) ( 221,589 ) ( 4,618 ) ( 226,207 ) 74 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.