Item 9A. Controls and Procedures
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our Company's reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were ineffective as of December 31, 2022 due to a material weakness identified and described below.
In light of the material weakness described below, management performed additional analysis and other procedures to ensure that our interim and annual consolidated financial statements were prepared in accordance with U.S. GAAP. Accordingly, management believes that the consolidated financial statements included in this Annual Report on Form 10-K fairly present, in all material respects, our financial position, results of operations, and cash flows as of and for the periods presented, in accordance with U.S. GAAP.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting includes policies and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that:
a. Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
b. Provide reasonable assurance that transactions are recorded properly to allow for the preparation of financial statements in accordance with U.S. GAAP and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
c. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the consolidated 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.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2022 based on the guidelines established in the "Internal Control—Integrated Framework" (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its assessment, management concluded that the Company's internal control over financial reporting was ineffective as of December 31, 2022 due to a material weakness in our internal control over financial reporting. 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 our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. The Company did not design and maintain effective controls over the assessment of the accounting for forfeitures of non-standard equity awards. This material weakness resulted in immaterial errors to stock compensation expense for the interim periods ended March 31, 2022, June 30, 2022, and September 30, 2022. These immaterial errors also resulted in a revision to previously issued quarterly financial statements for each of these periods. Additionally, this material weakness could result in misstatements of the aforementioned account balances or disclosures that would result in a material misstatement to the Company's annual or interim consolidated financial statements that would not be prevented or detected.
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PricewaterhouseCoopers LLP, our independent registered public accounting firm, which has audited our consolidated financial statements, has also audited the effectiveness of our internal control over financial reporting as of December 31, 2022, and has issued an adverse opinion on the effectiveness of our internal control over financial reporting, as stated in their report, which is included in Item 8 of this Annual Report on Form 10-K.
Remediation of Material Weakness existing as of December 31, 2022
Our management has executed a plan to remediate the material weakness described above. This plan includes the enhancement of existing processes and controls over the accounting for the forfeiture of non-standard equity awards.
The material weakness will be considered remediated when management concludes that, through testing, the applicable remedial controls are operating effectively.
Remediation of Previously Disclosed Material Weakness
We previously identified and disclosed in our 2021 Annual Report, as well as in our Quarterly Report on Form 10-Q filed for the quarters ended March 31, 2022, June 30, 2022, and September 30, 2022 certain material weaknesses in our control environment whereby the Company did not have adequate controls to sufficiently mitigate risks of material misstatement associated with the control environment and monitoring activities to prevent or detect material misstatements to the consolidated financial statements, information technology general controls, and certain business processes. As of December 31, 2022, management has completed our remediation efforts of these material weaknesses. Our remediation efforts included the following:
a. The Company hired additional experienced accounting personnel and implemented training of new and existing personnel on proper execution of designed control procedures;
b. The Company has enhanced processes, and designed and implemented internal controls around revenue recognition, software development costs, stock-based compensation, business combination, and financial close and reporting; and,
c. The Company has enhanced user access provisioning and monitoring controls to enforce appropriate system access and segregation of duties.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially effect, our internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
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PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K since we intend to file our definitive proxy statement for our 2023 Annual Meeting of Stockholders, or the Proxy Statement, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10 ‑ K, and certain information to be included in the Proxy Statement is incorporated herein by reference.
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this item regarding executive officers, directors and nominees for directors, including information with respect to our audit committee and audit committee financial expert, and the compliance of certain reporting persons with Section 16(a) of the Securities Exchange Act of 1934, as amended, will be included under Election of Directors, Biographical Information Concerning the Company's Executive Officers, Section 16(a) Beneficial Ownership Reporting Compliance, Corporate Governance, Independence of Directors, Board of Directors Nomination Process, Role in Risk Oversight, Meetings of the Board of Directors and Committees of the Board of Directors, as well as Audit Committee, Management Development and Compensation Committee, and Nominating and Corporate Governance Committee, in the Proxy Statement and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item will be included in our Proxy Statement under Compensation of Executive Officers and Directors and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth as of December 31, 2022, information with respect to (a) number of securities to be issued upon exercise of outstanding options, warrants, and rights, (b) the weighted average exercise price of outstanding options, warrants, and rights and (c) the number of securities remaining available for future issuance under our existing equity incentive plan. All shares under our existing equity incentive plan may be issued in the form of restricted stock, performance shares, stock appreciation rights, stock units, or other stock-based awards.
(a) (b) (c)
Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders (1)
3,906,867 $ 19.53 412,022
Equity compensation plans not approved by security holders — — —
Total 3,906,867 $ 19.53 412,022
(1) Consists of the Company's 2016 Omnibus Long-Term Incentive Plan, as amended.
All other information required by this item is herein incorporated by reference to the Proxy Statement relating to the 2023 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be included in our Proxy Statement under Certain Relationships and Related Transactions, and Independence of Directors and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information required by this item will be included in our Proxy Statement under Independent Registered Public Accounting Firm and is incorporated herein by reference.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
Documents filed as part of this report are as follows:
1. Financial Statements. The Company's consolidated financial statements are included in Item 8. Financial Statements and Supplementary Data.
2. Financial Statement Schedules. All schedules are omitted as the required information is not applicable or the information is presented in the Consolidated Financial Statements.
3. Exhibits. The exhibit listed in the Exhibit Index immediately below are filed as part of this Annual Report on Form 10-K, or are incorporated by reference herein.
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Exhibit Number Description of Exhibit
3.1
Second Articles of Amendment and Restatement of Telos Corporation dated November 12, 2020 (Incorporated by reference to Exhibit 3. 2 filed with the Company ' s Current Report on Form 8-K report on November 16, 2020)
3.2
Third Amended and Restated Bylaws of Telos Corporation, effective as of March 23, 2021 (Incorporated by reference to Exhibit 3.2 filed with the Company's Annual R eport on Form 10-K for the year ended December 31, 2020)
4.1
Description of our Capital Stock (Incorporated by reference to Exhibit 4.13 filed with the Company's Annual Report on Form 10-K for the year ended December 31, 2021)
4. 2
# Credit Agreement, dated January 25, 2017, among Telos Corporation, Xacta Corporation, ubIQuity.com, i nc., Teloworks, Inc., Enlightenment Capital Solutions Fund II, L.P., and the lenders party thereto (Incorporated by reference to Exhibit 4.1 to the Company ' s Current Report on Form 8-K filed on January 31, 2017)
4. 3
# First Amendment to Credit Agreement, effective as of February 23, 2017, among Telos Corporation, Xacta Corporation, ubIQuity.com, i nc., Teloworks, Inc., Enlightenment Capital Solutions Fund II, L.P., and the lenders party thereto (Incorporated by reference to Exhibit 4.2 filed with the Company ' s Form 10-K report for the year ended December 31, 2016)
4. 4
# Second Amendment to Credit Agreement, dated April 18, 2017, among Telos Corporation, Xacta Corporation, ubIQuity.com, i nc., Teloworks, Inc., Enlightenment Capital Solutions Fund II, L.P., and the lenders party thereto (Incorporated by reference to Exhibit 4.1 filed with the Company ' s Current Report on Form 8-K on April 24, 2017)
4. 5
# Third Amendment to Credit Agreement and Waiver, dated March 30, 2018, among Telos Corporation, Xacta Corporation, ubIQuity.com, Inc., Teloworks, Inc., Enlightenment Capital Solutions Fund II, L.P., and the lenders party thereto (Incorporated by reference to Exhibit 4.10 filed with the Company ' s Form 10-K report for the year ended December 31, 2017)
4. 6
# Fourth Amendment to Credit Agreement and Waiver; First Amendment to Fee Letter between Telos Corporation and Enlightenment Capital Solutions Fund II, L.P. dated July 19, 2019 (Incorporated by reference to Exhibit 99.1 filed with the Company ' s Current Report on Form 8-K on July 23, 2019)
4.7
# Fifth Amendment to Credit Agreement and Second Amendment to Fee Letter between Telos Corporation and Enlightenment Capital Solutions Fund II, L.P. dated March 26, 2020 (Incorporated by reference to Exhibit 99.1 filed with the Company ' s Current Report on Form 8-K on March 30, 2020)
10.1
* Forms of Indemnification Agreement between the Company and 16 of its directors and executive officers (Incorporated by reference to Exhibit 10.1 filed with the Company's Form 10-Q for the quarter ended March 31, 2021)
10.2
* Form of Employment Agreement between the Company and two of its executive officers (Incorporated by reference to Exhibit 10.5 filed with the Company ' s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012)
10. 3
* Second Amended Employment Agreement, dated as of November 12, 2012, between the Company and John B. Wood (Incorporated by reference to Exhibit 10.1 filed with the Company ' s Quarterly Report on Form 10- Q for the quarter ended September 30, 2012)
10. 4
* Executive Employment Agreement between Mark Bendza and the Company, dated as of July 19, 2021 (Incorporated by reference to Exhibit 10.1 filed with the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2021)
10. 5
*+ Executive Employment Agreement between E. Hutchinson Robbins, Jr. and the Company, dated as of February 1, 2022
10. 6
* Amendment to Employment Agreement, dated as of November 12, 2012, between the Company and Brendan D. Malloy (Incorporated by reference to Exhibit 10.4 filed with the Company ' s Form 10-Q report for the quarter ended September 30, 2012)
10. 7
* Annual Incentive Plan for 2022 (Incorporated by reference to Exhibit 99.1 filed with the Company's Current Report on Form 8-K on February 28, 2022)
10. 8
* Telos Corporation 2016 Omnibus Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.3 filed with the Company ' s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016)
10. 9
* Amendment No. 1 to the 2016 Omnibus Long-Term Incentive Plan (Incorporated by reference to Exhibit 4.4 filed with the Company ' s Form S-8 on January 25, 2021)
10.1 0
* Notice of Grant of Restricted Stock (Incorporated by reference to Exhibit 10.4 filed with the Company ' s Form 10-Q report for the quarter ended June 30, 2016)
10.1 1
* The Company’s Annual Cash Incentive Plan for 2021 (Incorporated by reference to Exhibit 99.2 filed with the Company ' s Current Report on Form 8-K on November 12, 2020)
10.1 2
* Form of Restricted Share Unit Award Notice and Restricted Share or Restricted Share Unit Agreement (Time-Based) (Incorporated by reference to Exhibit 99.1 filed with the Company ' s Current Report on Form 8-K on February 3, 2021)
10.1 3
* Form of Restricted Share Unit Award Notice and Restricted Share or Restricted Share Unit Agreement (Performance-Based) (Incorporated by reference to Exhibit 99.2 filed with the Company ' s Current Report on Form 8-K on February 3, 2021)
10. 1 4
Credit Agreement between, among others, Telos Corporation and JP Morgan Chase Bank (Incorporated by reference to Exhibit 99.1 filed with the Company's Current Report on Form 8-K on January 5, 2023
10. 1 5
# Membership Interest Purchase Agreement, dated October 5, 2020 (Incorporated by reference to Exhibit 99.1 filed with the Company ' s Current Report on Form 8-K on October 6, 2020)
21.1
+ List of subsidiaries of Telos Corporation
23.1
+ Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm
23.2
+ Consent of BDO USA LLP, Independent Registered Public Accounting Firm
24
+ Power of Attorney
31.1
+ Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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31.2
+ Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
^ Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS + XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH + XBRL Taxonomy Extension Schema
101.CAL + XBRL Taxonomy Extension Calculation Linkbase
101.DEF + XBRL Taxonomy Extension Definition Linkbase
101.LAB + XBRL Taxonomy Extension Label Linkbase
101.PRE + XBRL Taxonomy Extension Presentation Linkbase
104 Cover Page Interactive Data File - the cover page iXBRL tags are embedded within the Inline XBRL document contained in Exhibit 101
* constitutes a management contract or compensatory plan or arrangement.
# Schedules and similar attachments omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company agrees to furnish a copy of any omitted schedules to the Securities and Exchange Commission upon request.
+ filed herewith.
^ furnished herewith.
Item 16. Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Telos Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TELOS CORPORATION
/s/ John B. Wood March 16, 2023
By: John B. Wood
Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of Telos Corporation and in the capacities and on the dates indicated.
Signature Title Date
/s/ John B. Wood March 16, 2023
John B. Wood Chief Executive Officer (Principal Executive Officer)
Chairman of the Board and Director
/s/ Mark Bendza March 16, 2023
Mark Bendza Chief Financial Officer (Principal Financial Officer)
/s/ Victoria Harding March 16, 2023
Victoria Harding Controller and Chief Accounting Officer (Principal Accounting Officer)
/s/ David Borland * March 16, 2023
David Borland Director
/s/ Bonnie L. Carroll * March 16, 2023
Bonnie L. Carroll Director
/s/ Fredrick D. Shaufeld * March 16, 2023
Fredrick D. Shaufeld Director
/s/ John W. Maluda * March 16, 2023
John W. Maluda, Major Gen., USAF (Ret) Director
/s/ Bradley W. Jacobs * March 16, 2023
Bradley W. Jacobs Director
/s/ Derrick Dockery * March 16, 2023
Derrick Dockery Director
* The above-named directors of the Registrant sign this Annual Report on Form 10-K by John B. Wood, their attorney-in-fact, pursuant to Powers of Attorney signed by the above-named directors, which Powers of Attorney are filed with this Annual Report on Form 10-K in Exhibit 24, in the capacities indicated and on the 16th day of March, 2023.
By: /s/ John B Wood
John B. Wood
Attorney-in-Fact
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