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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2024-03-15 compared with 2023-03-16 · 367 added, 511 removed, 707 unchanged (55% of the section changed)

Quantitative and Qualitative Disclosures about Market Risk

In the normal course of business, we are exposed to a variety of financial risks such as interest rate risk, foreign currency translation risk, and counterparty risk, which can affect our operations and profitability.

Our cash and cash equivalents include highly liquid investments that have a maturity of three months or less at the date of purchase, and would not be significantly affected by increases or decreases in interest rates mainly due to the short-term nature of these instruments.

The majority of our business is transacted in U.S.

dollars, and the impact of the foreign currency fluctuation as we report for our foreign subsidiary upon translation of its financials into U.S.

dollars was insignificant.

Further, we do not enter into financial instruments for trading purposes.

Consolidated Financial Statements and Supplementary Data

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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 have audited the accompanying consolidated balance sheets of Telos Corporation (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of operations, comprehensive (loss)/income, changes in stockholders’ equity/(deficit) and cash flows for each of the two years in the period ended December 31, 2023, 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, 2023, 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.

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, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

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.

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 on Internal Control over Financial Reporting.

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.

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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.

Our audits 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 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.

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.

Our audits 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.

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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 testing the effectiveness of controls relating to the revenue recognition process, including controls over the determination of estimated contract revenue and costs.

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.

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

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.

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

TELOS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Year Ended December 31,

2022 2021 2020

(in thousands, except per share amounts)

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Total revenue 145,378 216,887

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

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

Cost of sales – services (excluding depreciation and amortization) 83,159 120,541

Cost of sales – products (excluding depreciation and amortization) 5,733 16,510

Depreciation and amortization 3,544 793

Total cost of sales 92,436 137,844

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Total selling, general and administrative expenses 93,257 132,893

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

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

Operating loss ( 40,315 ) ( 53,850 )

Other income 6,715 1,350

Interest expense ( 786 ) ( 874 )

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

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

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

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

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

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

Net (loss)/earnings per share:

Loss before income taxes ( 34,386 ) ( 53,374 )

Provision for income taxes ( 36 ) ( 54 )

Net loss $ ( 34,422 ) $ ( 53,428 )

Net loss per share:

Basic $ ( 0.50 ) $ ( 0.79 )

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TELOS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

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:

Net loss $ ( 34,422 ) $ ( 53,428 )

Other comprehensive loss, net of tax:

Foreign currency translation adjustments ( 5 ) ( 28 )

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

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

Comprehensive loss $ ( 34,427 ) $ ( 53,456 )

See accompanying notes to consolidated financial statements.

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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:

Net loss $ ( 34,422 ) $ ( 53,428 )

Adjustments to reconcile net loss to cash flows from operations:

Stock-based compensation 24,396 64,660

Depreciation and amortization 9,429 5,890

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

Provision for doubtful non-trade receivables — — 569

Provision for deferred income tax 35 70 31

Provision for doubtful accounts 152 99

Deferred income tax provision 55 35

Loss on disposal of fixed assets 2 4

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Amortization of debt issuance costs 69 —

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

Gain on early extinguishment of other financing obligations ( 1,427 ) —

Changes in other operating assets and liabilities:

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Other current liabilities and other liabilities ( 2,629 ) 2,100

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

Net cash provided by operating activities 1,587 16,508

Cash flows from investing activities:

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Purchases of property and equipment ( 926 ) ( 1,009 )

Cash paid for acquisition — ( 5,925 ) —

Net cash used in investing activities ( 15,478 ) ( 13,717 )

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Payments for debt issuance costs ( 114 ) ( 95 )

Payments of DFT holdback amount ( 564 ) —

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 cash used in financing activities ( 6,151 ) ( 9,915 )

Net change in cash, cash equivalents, and restricted cash ( 20,042 ) ( 7,124 )

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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)

Deficit Non-Controlling Interest Total

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

Common Stock Additional

Paid–in Capital Accumulated Other Comprehensive Loss Accumulated

Deficit Total

Stockholders' Equity

Shares Amount Shares Amount Shares Amount

Shares Amount

(in thousands)

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

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 — — — ( 53,428 ) ( 53,428 )

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

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

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

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

Restricted stock unit award vested, net of shares withheld to cover tax withholding 2,214 2 ( 5,673 ) — — ( 5,671 )

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

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Stock-based compensation — — 22,874 — — 22,874

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 )

Restricted stock unit award vested, net of shares withheld to cover tax withholding 2,032 2 ( 3,743 ) — — ( 3,741 )

Issuance of common stock for 401K match 777 1 1,942 — — 1,943

Balance December 31, 2023 70,240 $ 109 $ 433,781 $ ( 60 ) $ ( 274,827 ) $ 159,003

(1) Accumulated Other Comprehensive Income

See accompanying notes to consolidated financial statements.

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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.

We own all of the issued and outstanding share capital of Xacta Corporation and ubIQuity.com, inc., (a holding company for Xacta Corporation), and 100 % ownership interest in Telos Identity Management Solutions, LLC ("Telos ID"), Teloworks, Inc.

("Teloworks") and Telos APAC Pte.

("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.

SIGNIFICANT ACCOUNTING POLICIES

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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.

In the current period, we reclassified and presented depreciation and amortization separately from the cost of sales line items.

The reclassification had no impact on the statement of operations.

Segment Reporting

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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.

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

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

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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.

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 stock-based compensation, valuation of intangible assets and goodwill, restructuring expenses accruals, and contingencies.

Actual results could differ from those estimates.

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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.

Collectability of these amounts are periodically reviewed based upon management's 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.

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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.

Inventories are substantially comprised of finished goods purchased for customers, such as 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.

Property and equipment are recorded at cost less accumulated depreciation and amortization.

Depreciation is recorded over the assets' estimated useful lives using the straight-line method, which is three to five 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.

Upon sale or retirement of property and equipment, the costs and related accumulated depreciation and amortization 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, 2023 and 2022, 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.

Major renewals and improvements are capitalized and depreciated over their estimated useful lives.

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.

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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.

Amortization of a 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.

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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.

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

Software Development Costs

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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.

Under ASC 350-40, we capitalize 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 ceases.

Capitalized software development costs are amortized on a straight-line basis over the estimated economic life of the application, ranging from two to five 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.

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 is 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.

As of December 31, 2023 and 2022, the net carrying value of the capitalized implementation costs related to hosting arrangements that were incurred during the application development stage aggregated to $ 0.2 million and $ 0.3 million, respectively.

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.

The Company begins amortizing the capitalized implementation costs after all substantial testing is 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.

Software held for resale is 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.

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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.

(1) a significant adverse change in legal factors or business climate, (2) a loss of key contracts or customers, or (3) negative operating performance indicators.

The Company performs its goodwill impairment test at the reporting unit level.

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.

If an impairment indicator exists based on the qualitative assessment, we perform the quantitative goodwill impairment test.

When performing a quantitative impairment test, we calculate the estimated fair value of the reporting unit and compare the results with its respective carrying value, including goodwill.

If the estimated fair value is determined to be less than the carrying value, we recognize an impairment loss equal to the difference between the reporting unit's fair value and the reporting unit's carrying value, up to the amount of goodwill associated with the reporting unit.

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 uses industry accepted valuation models and set criteria that are reviewed and approved by management.

The methodology used to assess impairment is a combination of the income approach (i.e.

discounted cash flow ("DCF") method) and the market approach (i.e.

Comparable Public Company ("CPC") method) to determine the fair value.

In the application of the income approach, the estimated fair value of the reporting unit is determined using a DCF analysis, which 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 commensurate with the risk inherent in each of our reporting unit's current business model.

We utilize the weighted average cost of capital ("WACC") as derived by certain assumptions specific to our facts and circumstances as the discount rate.

In the application of the market approach, the CPC method uses value multiples or ratio to the reporting accounting data (such as revenue) in measuring the market's perception of the reporting unit's enterprise value.

Value multiples or ratio reflect the trends in growth and performance, and the comparable public companies provide a reasonable basis for comparison to the relative investment characteristic of the business being valued.

The Company analyzes the relationship between the comparable companies' performance and applies a control premium based on the multiples of comparable companies.

The control premium is management's estimate of how much a market participant would be willing to pay over the fair market value in consideration of benefits that flow from control of the entity.

The results of the income and market approaches are weighted to determine the estimated fair value of the reporting unit.

The weighting is judgmental and is based on the perceived level of appropriateness of the valuation methodology.

Estimating the fair value involves the use of assumptions and significant judgments that are based on a number of factors including actual operating results.

A relatively small change in the underlying assumptions may cause a change in the results of the impairment assessment in future periods and as such, could result in goodwill impairment.

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

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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.

The Company evaluates its long-lived assets, including property and equipment, 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 or its estimated fair value, an impairment loss is recognized to reduce the asset's carrying amount to 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.

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

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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.

Amortization of capitalized software development costs, not charged under cost of sales, are also reported as part of research and development expenses.

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.

Advertising expense was $ 0.8 million and $ 1.3 million for the years ended December 31, 2023 and 2022, respectively.

We account for income taxes in accordance with ASC 740, "Income Taxes." Under ASC 740, deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences and income tax credits.

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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.

The Company grants stock-based compensation awards under the 2016 Omnibus Long-Term Incentive Plan, as amended (the "2016 LTIP").

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.

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 restricted stock units granted are time-based ("Service-Based RSU" or "RSU") and performance-based ("Performance-Based RSU" or "PSU").

The Company issues new shares of common stock upon vesting of the restricted stock units under this plan.

• Service-Based RSUs granted to eligible employees as an incentive generally 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.

• Performance-Based RSUs vest upon the achievement of a defined performance target during a defined performance period from the date of grant.

The 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 vest upon the achievement of certain price targets or market conditions for the Company's common stock anytime or certain operational milestones over a three-year period from the date of grant.

In order to reflect the substantive characteristics of these market condition awards, the Company employs a Monte Carlo simulation valuation model to calculate the grant date fair value and corresponding requisite service period of the award.

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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.

The Company estimates the fair value of stock options on the date of the grant using an option pricing model.

The option pricing model takes into consideration the current share price of the underlying common stock, exercise price of the option, expected term, risk-free interest rate and the volatility of share price.

These considerations directly affect the amount of compensation expense that will ultimately be recognized.

We recognize these stock-based payment transactions when services from the employees, directors and other eligible service providers are received and recognize a corresponding increase in additional paid-in capital in our consolidated balance sheets.

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, directors and other eligible service providers have rendered the requisite service and satisfied any other conditions necessary to earn the right to benefit from the instruments.

The stock-based compensation expense for an award is recognized ratably over the requisite service period, which is generally the vesting period during which an employee is required to provide service in exchange for an award.

Stock-based 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.

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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.

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

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

The stock-based payment transactions are recognized in accordance with ASC 718, "Compensation - Stock Compensation" and ASU 2018-07, "Compensation - Stock Compensation (Topic 718):

Improvements to Non-employee Share-Based Payment Accounting."

Net (Loss)/Earnings per Share

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Other Comprehensive (Loss)/Income

Our functional currency is the U.S.

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

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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.

In the fourth quarter of 2022, the Company committed to a restructuring plan to streamline its workforce and spending to better align its cost structure with its volume of business.

The restructuring plan reduced the Company's workforce, with a majority of the affected employees separating from the business in early 2023.

In connection with this restructuring plan, the Company incurred restructuring-related costs, including employees' severance and related benefit costs.

Employee severance and related benefit costs include cash payments, outplacement services and continuing health insurance coverage.

Severance costs pursuant to ongoing-benefit arrangements are recognized when probable and reasonably estimated.

Other related costs include external consulting and advisory fees related to implementing the restructuring plan.

These costs are recognized at fair value in the period in which the costs are incurred.

In fiscal year 2022, the Company estimated that the expected restructuring expenses were $ 2.8 million.

In fiscal year 2023, the Company updated its total expected restructuring plan costs to $ 3.9 million, based on the Company's review of the restructuring plan for the remainder of the fiscal year.

The restructuring expenses are recorded under "Selling, general and administrative expenses" on the Consolidated Statements of Operations.

At each reporting date, the Company evaluates its restructuring expense accrual to determine if the liabilities reported are still appropriate.

Any changes in the estimated costs of executing the approved restructuring plan are reflected in the Company's Consolidated Statements of Operations.

Summary of Changes in Restructuring Expenses Accrual

Severance and related benefit costs (1)

Other related costs Total

(in thousands)

Balance at December 31, 2022 $ 2,763 $ — $ 2,763

(Adjustments)/charges ( 168 ) 1,300 1,132

Cash payments ( 2,195 ) ( 1,300 ) ( 3,495 )

Balance at December 31, 2023 $ 400 $ — $ 400

(1) Restructuring-related liabilities are reported as part of "Other current liabilities" in the Company's unaudited consolidated balance sheets, see Note 9 - Other Balance Sheet Components for further details.

Recently Accounting Pronouncements - Adopted

In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU No.

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

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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.

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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.

This standard is effective for fiscal years beginning after December 15, 2022, with early adoption permitted.

This ASU is applied prospectively to business combinations occurring on or after the effective date of the amendment.

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

In September 2022, the FASB issued ASU No.

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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.

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

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

Recent Accounting Pronouncements - Not Yet Adopted

In June 2022, the FASB issued ASU No.

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In July 2023, the FASB issued ASU 2023-03, "Presentation of Financial Statements (Topic 205), Income Statement - Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation - Stock Compensation (Topic 718)".

This update requires (1) to disclose and present income or loss related to common stock transactions on the face of the income statement, (2) to modify the existing classification and measurement of redeemable preferred shares and redeemable equity-classified shares, and (3) modify accounting treatment for stock-based compensation.

The FASB has not set an effective date on this ASU and adoption is permitted.

We are currently evaluating the impact of the ASU on our consolidated financial statement disclosures.

In August 2023, the FASB issued ASU No.

2023-05, "Business Combinations - Joint Venture Formations (Subtopic 805-60):

Recognition and Initial Measurement," which requires that a joint venture apply a new basis of accounting upon formation and would initially measure its assets and liabilities at fair value.

Joint ventures should apply the amendments prospectively with the formation date on or after January 1, 2025, with early adoption permitted.

In October 2023, the FASB issued ASU No.

2023-06, "Disclosure Improvements:

Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiatives," which modify the disclosure or presentation requirements of a variety of Topics in the Codification, certain of the amendment represent clarifications to or technical corrections of the current requirements.

The effective dates for each amendment will be the date on which the SEC's removal of that related disclosure requirement from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited.

For all entities within the scope of the affected Codification subtopics, if by June 30, 2027, the SEC has not removed the applicable requirement from Regulation S-X or Regulation S-K, the pending content of the associated amendment will be removed from the Codification and will not become effective for any entities.

In November 2023, the FASB issued ASU No.

2023-07, "Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosure," which requires improvement on reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses.

The standard will be effective for fiscal year beginning after December 15, 2023 and interim periods within fiscal year beginning after December 15, 2024, with early adoption permitted.

We are currently assessing the impact of the adoption of this ASU on our consolidated financial position, results of operations, and cash flows.

In December 2023, the FASB issued ASU No.

2023-09, "Income Taxes (Topic 740):

Improvements to Income Tax Disclosure," which requires public entities, on an annual basis, (1) disclose specific categories in the rate reconciliation, and (2) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5% of the amount computed by multiplying pretax income/(loss) by the applicable statutory income tax rate).

This ASU will be effective, for public entities, for fiscal year beginning after December 15, 2024, with early adoption permitted.

We are currently assessing the impact of the adoption of this ASU on our consolidated financial position, results of operations, and cash flows.

REVENUE RECOGNITION

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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.

Revenue transferred to customers over time accounted for 84 % and 89 % of our revenue for the years ended December 31, 2023 and 2022, respectively.

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.

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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.

This coincides with the point in time the customer obtains control of the transferred 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 16 % and 11 % of our revenue for the years ended December 31, 2023 and 2022, respectively.

Orders for the sale of software licenses may contain multiple performance obligations, such as maintenance, training, or consulting services, which are typically delivered over time, consistent with the transfer of control disclosed above for the provision of services.

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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.

This resulted in signed final rate agreement letters through fiscal year 2022.

We evaluated the resulting changes to revenue under the applicable cost-plus fixed fee contracts, 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 adjusted our revenue by $( 0.1 ) million during the year ended December 31, 2023.

No revenue adjustment was recorded during fiscal year ended December 31, 2022.

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, 2023.

No contract loss was recorded during the year ended December 31, 2022.

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

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For the Year Ended December 31,

2022 2021 2020

Amount % Amount % Amount %

Amount % Amount %

(dollars in thousands)

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For the Year Ended December 31,

2022 2021 2020

Amount % Amount % Amount %

Amount % Amount %

(dollars in thousands)

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For the Year Ended December 31,

2022 2021 2020

Department of Defense ("DoD") 64 % 74 %

Civilian federal agencies 21 % 22 % 30 %

Contract Balances

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(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.

The 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, 2023 and 2022, the amount of revenue recognized during the year that was included in the opening contract liabilities balance was $ 5.4 million and $ 5.2 million, respectively.

As of December 31, 2023, we had approximately $ 52.1 million of remaining performance obligations, which we also refer to as funded backlog.

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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.

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 provides 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 guarantees from our customers.

We maintain allowances for potential losses.

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

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

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

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

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

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Details of Property and Equipment, Net

As of December 31,

As of December 31, 2023 As of December 31, 2022

Gross Carrying Amount Accumulated Depreciation and Amortization Net Carrying Value Gross Carrying Amount Accumulated Depreciation and Amortization Net Carrying Value

(in thousands)

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Leasehold improvement 3,211 ( 2,604 ) 607 $ 3,145 ( 2,491 ) 654

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

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

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

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

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

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

See N ote 10 – Acqu isition for further details.

As a result of the segment reorganization in 2021, as further discussed in Note 2 - Significant Accounting Policies, we reported two operating and reportable segments:

Total $ 19,424 $ ( 15,967 ) $ 3,457 $ 19,178 $ ( 14,391 ) $ 4,787

Depreciation and Amortization Expense

For the year ended December 31,

(in thousands)

Depreciation and amortization $ 2,230 $ 2,367

As 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 goodwill balance was $ 17.9 million as of December 31, 2023 and 2022, of which $ 3.0 million is allocated to the Security Solutions segment and $ 14.9 million is allocated to the Secure Networks segment.

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

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

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

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

For fiscal year 2023, we performed a qualitative assessment on our reporting units and identified that it is "more-likely-than-not" that the estimated fair value of our Security Solutions reporting unit exceeded its carrying value.

In contrast, based on the initial qualitative assessment of our Secure Networks reporting unit, we determined that it is not "more-likely-than-not" that the fair value of this reporting unit exceeds its carrying value, therefore we performed a quantitative impairment test.

Based on the quantitative assessment on our Secure Networks reporting unit as of December 31, 2023, the estimated fair value exceeded its carrying value.

Based on the results of our annual impairment test of goodwill performed, the estimated fair value of our respective reporting units exceeded their respective carrying value, and no impairment charges were taken during the years ended December 31, 2023 and 2022.

INTANGIBLE ASSETS, NET

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Subtotal 38,982 ( 13,385 ) 25,597 30,626 ( 8,455 ) 22,171

In-process software development costs (1) (2)

14,019 — 14,019 8,124 — 8,124

Software held for resale (3)

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Total $ 53,001 $ ( 13,385 ) $ 39,616 $ 45,870 $ ( 8,455 ) $ 37,415

(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.

(1) In-process software development costs are costs for software that is not yet available for its intended use or general release to customers as of balance sheet date, thus not yet amortized.

(2) An impairment charge of $ 0.5 million was recorded against software development costs in fiscal year 2023 related to the write-off of certain software projects.

(3) This amount is net of $ 0.7 million charged into cost of sales in fiscal year 2022.

In 2023, as a result of the impairment assessment, the Company identified conditions demonstrating impairment of certain software development costs and an impairment charge of $ 0.5 million was recorded under " Research and Development " expenses in the Company's consolidated statements of operations.

No similar impairment charge was recorded on software development costs during the fiscal year ended December 31, 2022.

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

Amortization Expense

For the year ended December 31,

(in thousands)

Amortization expense related to:

Software development costs - cost of sales (1)

Software development costs - research and development 1,623 1,362

Other intangible assets - general and administrative 467 401

Total $ 4,930 $ 1,763

(1) Amortization expense for software development costs related to assets to be sold, leased, or otherwise marketed are charged under cost of sales on the Consolidated Statements of Operations.

Estimated Future Amortization Expense of Intangible Assets, Net

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Thereafter 264

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.

(1) This does not include amortization of in-process software development costs, as estimation of the timing of future amortization expenses would be impractical.

Actual amortization expense in future periods could differ from these estimates as a result of impairments, future releases, future acquisitions, divestitures, and other factors.

OTHER BALANCE SHEET COMPONENTS

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Accrued payables 5,443 9,945

Others — 1,379

Accounts payable and other accrued liabilities $ 13,750 $ 22,551

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(in thousands)

Other accrued expenses 1,530 978

Other accrued liabilities 1,427 1,530

Restructuring expenses accrual 400 2,763

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Other current liabilities $ 2,324 $ 4,919

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

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

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

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

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

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

GAAP using the acquisition method of accounting.

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

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

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

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

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

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

PURCHASE OF TELOS ID NON-CONTROLLING INTERESTS

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

Prior to the IPO in November 2020, the Company owned a 50 % interest in Telos ID, with the remaining interest owned by Hoya ID Fund A, LLC ("Hoya") as the non-controlling interest.

On October 5, 2020, we entered into a Membership Interest Purchase Agreement between the Company and Hoya to purchase all of the Class B Units of Telos ID ("Telos ID Units") owned by Hoya (the "Telos ID Purchase").

Upon the closing of the Telos ID Purchase, Telos ID became our wholly-owned subsidiary.

On November 23, 2020, the Telos ID Purchase was consummated with the Company transferring $ 30.0 million in cash and issuing 7.3 million shares of our common stock at $ 20.39 per share (which totals approximately $ 148.4 million);

the total consideration transferred to Hoya was $ 178.4 million.

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

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

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

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

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

DEBT AND OTHER OBLIGATIONS

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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.

We paid and could pay 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.

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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.

On April 12, 2023, the Credit Agreement was amended to exclude from collateral the (i) amount collectible from a third party related to an Accounts Receivable Purchase Agreement and (ii) receivables generated by the Company from the sale of goods supplied to this third party in an amount not to exceed $ 25.0 million.

Other Financing Obligations

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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.

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

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

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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.

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.

Porter (together referenced as "Porter").

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.

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.

Concurrently, the Company transferred all the rights, title and interest in the underlying licenses in exchange for the extinguishment of the outstanding financing obligations.

The Company evaluated the transfer of the underlying licenses as consideration paid for the outstanding financing obligations under ASC 470-10, Debt , and the provisions of the MPA, and concluded that the transaction resulted in an extinguishment of debt.

The Company recorded the difference between the carrying value of the Company's debt instrument and the underlying licenses as a gain on early extinguishment of other financing obligations.

The Company reported a gain of $ 1.4 million, which was recorded as "Other income" in the Consolidated Statements of Operations during the year ended December 31, 2023.

No gain was reported for the fiscal year ended December 31, 2022.

STOCKHOLDERS' EQUITY

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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.

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, 2023 and 2022, there were 70,239,890 and 67,431,632 shares of common stock issued and outstanding, respectively.

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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.

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.

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For the Year Ended December 31,

2022 2021 2020

(in thousands, except per share and share data)

Amounts paid for shares repurchased (1) (2)

$ 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

Components of Accumulated Other Comprehensive Loss

As of December 31, 2022

(in thousands)

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

Cumulative actuarial gain on pension liability adjustment 107 107

(2) Includes $ 0.1 million of unpaid common stock repurchased paid in fiscal year 2023.

Accumulated Other Comprehensive Loss

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.

Details of Changes in Accumulated Other Comprehensive Loss by Category

Foreign currency translation adjustment Actuarial gain on pension liability adjustment Total

(in thousands)

Balance as of December 31, 2021 $ ( 134 ) $ 107 $ ( 27 )

Other comprehensive loss before reclassification ( 28 ) — ( 28 )

Balance as of December 31, 2022 ( 162 ) 107 ( 55 )

Other comprehensive loss before reclassification ( 5 ) — ( 5 )

Balance as of December 31, 2023 $ ( 167 ) $ 107 $ ( 60 )

STOCK-BASED COMPENSATION

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

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

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

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

Approximately 0.4 million shares of our common stock were reserved for future grants as of December 31, 2022 under the 2016 LTIP.

On May 8, 2023, the Company further amended the 2016 LTIP with an additional 6,000,000 shares available for issuance, increasing the total number of shares available to 13,459,913 .

As of December 31, 2023, approximately 4.8 million shares of our common stock were reserved for future grants under the 2016 LTIP, as amended.

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.

Stock-based compensation expense recognized for restricted stock units and stock options granted to employees and non-employees is included in the Consolidated Statements of Operations.

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.

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

Details of Stock-based Compensation Expense

For the Year Ended December 31,

2022 2021 2020

(in thousands)

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General and administrative (1)

21,319 52,689

Total $ 24,396 $ 64,660

Service-Based RSU and Performance-Based RSU Award Activity

(1) Stock-based compensation expense related to stock options was $ 0.3 million for the year ended December 31, 2023.

There was no similar stock-based compensation expense on stock options in fiscal year 2022.

Restricted Stock

Restricted Stock Unit Activity

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

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Unvested outstanding units as of December 31, 2023 2,132,613 43,800 2,176,413 $ 5.07

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.

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

As of December 31, 2023, the intrinsic value of the RSUs and PSUs outstanding, exercisable, and vested or expected to vest was $ 7.9 million.

There was $ 3.5 million of total compensation costs related to stock-based awards not yet recognized as of December 31, 2023, which is expected to be recognized on a straight-line basis over a weighted-average remaining vesting period of 0.5 years.

(LOSS)/EARNINGS PER SHARE

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

Potentially Dilutive Securities

Stock Options

The Company uses the Black-Scholes option pricing model to calculate the estimated fair value of stock options on the date of grant.

Option awards are generally granted with an exercise price equal to the market price of the Company's stock at the date of grant.

The following weighted-average assumptions are used in the Black-Scholes valuation model to estimate the fair value of stock option awards, as granted.

• Expected term of the option – For options granted to employees and directors, the Company estimates the term over which option holders are expected to hold their stock option by using the "simplified method" in accordance with Staff Accounting Bulletin ("SAB") No.

107, Share-Based Payments , and SAB No.

110, Simplified Method for Plain Vanilla Share Options , to calculate the expected term of stock options determined to be "plain vanilla." The Company's stock option exercise history does not provide a reasonable basis to compute the expected term for stock options.

Under this approach, the expected term is presumed to be a midpoint between the vesting date and the contractual end of the stock option grant.

For options granted to non-employees, the Company elected to use the contractual term as the expected term.

• Risk-free interest rate – Based on the daily yield curve rates for U.S.

Treasury obligations with terms that approximate the expected term of the stock options.

• Expected volatility – Due to the absence of the Company's historical price volatility for the expected contractual term of the stock options, the Company utilized the historical price volatility of a peer group.

• Expected dividend yield – The Company has not declared dividends, nor does it expect to in the foreseeable future.

Therefore, a zero value was assumed for the expected dividend yield.

Stock Options Fair Value and Weighted-Average Assumptions

For the Year Ended December 31,

2022 2021 2020

Weighted-average fair value of underlying stock options $ 1.06 $ —

Expected term (in years) 5.5 - 10

Risk-free interest rate 3.5 % — %

Expected volatility 30.7 % - 35.1 %

Expected dividend yield — % — %

Stock Option Activity

Stock Options Outstanding Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term

(in years) Aggregate Intrinsic Value

Outstanding option balance as of December 31, 2022 — $ — 0.0 $ —

Granted 400,000 1.80

Exercised — —

Forfeited, cancelled, or expired — —

Outstanding option balance as of December 31, 2023 400,000 $ 1.80 9.4 $ 740,000

Exercisable stock option as of December 31, 2023 — $ — 0.0 $ —

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the quoted closing price of the Company's common stock as of December 31, 2023.

The fair value of the stock options is expensed on a straight-line basis over the vesting period of one year , including the stock options granted to directors, as the next annual stockholders meeting is expected to occur at the same approximate time each year.

As of December 31, 2023, there were approximately $ 0.1 million of unrecognized compensation costs related to non-vested stock options.

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.

Details of Lease Costs

For the Year Ended December 31,

(in thousands)

Unvested restricted stock and restricted stock units 529 520 60

Common stock warrants, exercisable at $ 1.665 /sh.

Total 529 920 961

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

Operating lease cost $ 541 $ 550

Short-term lease cost (1)

Finance lease cost

Amortization of finance lease assets 1,221 1,221

Interest on finance lease liabilities 611 688

Total finance lease cost 1,832 1,909

Total lease costs $ 2,428 $ 2,508

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

Future Minimum Lease Payments

Operating Leases Finance Leases

(in thousands)

Year Ending December 31, 2024 $ 105 $ 2,258

Year Ending December 31, 2025 37 2,314

Year Ending December 31, 2026 37 2,371

Year Ending December 31, 2027 37 2,431

Year Ending December 31, 2028 25 2,492

Thereafter — 1,049

Total minimum lease payments 241 12,915

Imputed interest ( 21 ) ( 1,667 )

Total lease obligations 220 11,248

Current portion of lease obligations ( 97 ) ( 1,730 )

Long-term lease obligations $ 123 $ 9,518

Weighted-Average Remaining Lease Terms and Discount Rates

For the Year Ended December 31,

Weighted average remaining lease term (in years):

Finance leases 5.3 years 6.3 years

Operating leases 3.4 years 1.0 year

Weighted average discount rate:

Finance leases 5.04 % 5.04 %

Operating leases 5.75 % 5.75 %

Supplemental Cash Flow Information Related to Leases

For the Year Ended December 31,

(in thousands)

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

Operating cash flows related to operating leases $ 585 $ 603

Operating cash flows related to finance leases 611 688

Financing cash flows related to finance leases 1,592 1,461

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, 2023, the Plan held 1,434,464 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 are always fully vested immediately at the time of contribution.

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

Effective September 1, 2023, we changed our Telos-contributed matching funds to a two -year vesting schedule:

20 % vesting after one year of service, and fully vesting after the completion of two 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.

The Telos employer matching contribution is funded in the first quarter of the subsequent year.

Our total contributions to the Plan for 2023 and 2022 were $ 2.1 million and $ 2.2 million, respectively.

Components of Provision for/(Benefit from) Income Taxes

For the Year Ended December 31,

2022 2021 2020

(in thousands)

Current provision/(benefit)

Current provision

Federal $ — $ —

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Total deferred 55 35

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

Provision for income taxes $ 36 $ 54

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 %

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Other permanent differences ( 0.2 ) ( 0.1 )

Dividend and accretion on preferred stock — — 10.5

Gain on redemption of preferred stock — — ( 43.3 )

Stock-based compensation ( 41.2 ) ( 20.6 )

Section 162(m) limitation - covered employees 9.5 ( 2.0 )

Capitalization of IPO transaction costs — — 4.4

Uncertain tax positions 0.5 ( 0.5 )

R&D credit ( 0.7 ) 3.0

Non-controlling interest — — ( 15.9 )

Effective tax rate ( 0.1 %) ( 0.1 %)

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Lease liabilities 2,906 3,349

Section 163(j) interest limitation — 54

Goodwill 30,947 34,009

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R&D tax credit 3,647 3,760

Amortization and depreciation 252 —

Total gross deferred tax assets 55,883 58,921

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Deferred tax liabilities:

Amortization and depreciation ( 86 ) ( 3,945 )

Right-of-use assets ( 1,697 ) ( 2,034 )

Amortization and depreciation — ( 86 )

Total deferred tax liabilities ( 1,697 ) ( 2,120 )

2 unchanged sentences

For the Year Ended December 31,

2022 2021 2020

(in thousands)

Balance at beginning of year $ 57,559 $ 55,588

Additions 1,971 3,390 44,992

(Reductions)/additions ( 2,560 ) 1,971

Balance at end of year $ 54,999 $ 57,559

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We believe that ownership activity since December 31, 2020 would not result in limitation sufficient to result in the expiration of unused attributes.

Under the provisions of ASC 740, we determined that there were approximately $ 1.4 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.

Under the provisions of ASC 740, we determined that there were approximately $ 1.2 million and $ 1.4 million of unrecognized tax benefits as of December 31, 2023 and 2022, respectively.

Included in the balance of unrecognized tax benefits as of December 31, 2023 and 2022 were $ 0.01 million and $ 0.10 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, 2023 and 2022 were $ 1.2 million and $ 1.3 million, respectively, of tax benefits that, if recognized, would not impact the effective tax rate due to the Company's valuation allowance.

We report interest and penalties as a component of income tax expense.

The Company had accrued interest and penalties related to the unrecognized tax benefits of $ 0.01 million and $ 0.10 million, which were recorded in other liabilities as of December 31, 2023 and 2022, respectively.

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For the Year Ended December 31,

2022 2021 2020

(in thousands)

Balance at beginning of year $ 1,357 $ 1,056

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

Decrease in prior year tax positions ( 169 ) ( 5 )

Increase related to current year tax positions 131 377

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Balance at end of year $ 1,228 $ 1,357

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.

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)

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.

Future Minimum Lease Payments

Operating Leases Finance Leases

(in thousands)

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

Year Ending December 31, 2024 27 2,258

Year Ending December 31, 2025 — 2,314

Year Ending December 31, 2026 — 2,371

Year Ending December 31, 2027 — 2,431

Thereafter — 3,541

Total minimum lease payments 400 15,118

Imputed interest ( 12 ) ( 2,278 )

Total lease obligations 388 12,840

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

Long-term lease obligations $ 27 $ 11,248

Weighted-Average Remaining Lease Terms and Discount Rates

For the Year Ended December 31,

2022 2021 2020

Weighted average remaining lease term (in years):

Finance leases 6.3 years 7.3 years 8.3 years

Operating leases 1.0 year 1.7 years 2.5 years

Weighted average discount rate:

Finance leases 5.04 % 5.04 % 5.04 %

Operating leases 5.75 % 5.75 % 5.75 %

Supplemental cash flow information related to leases

(LOSS)/EARNINGS PER SHARE

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

Potentially Dilutive Securities

For the Year Ended December 31,

2022 2021 2020

(in thousands)

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

Unvested restricted stock and restricted stock units 687 529

Total 687 529

As of December 31, 2023 and 2022, performance-based RSUs of 43,800 and 336,785 , respectively, 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 reporting period.

RELATED PARTY TRANSACTIONS

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

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

Additionally, Mr.

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

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.

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

The amounts paid to him as compensation for his remaining tenure in 2023 was $ 0.2 million, while the amount paid for the year ended December 31, 2022, was $ 1.3 million.

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

On January 1, 2023, the director and the Company amended the consulting agreement under which he provides services ("2023 consulting agreement"), extending his services through June 30, 2023.

The Company, at its election, would pay the director's 2023 consultancy fees in a fixed amount, in the form of restricted stock units.

Consequently, on January 3, 2023, the Company granted the director 16,859 RSUs, one-half of which vested on March 3, 2023, and the other half vested on May 18, 2023, as compensation for his consultancy services through June 30, 2023.

In July 2023, the director and the Company amended the 2023 consulting agreement, extending his services through December 31, 2023.

The amended 2023 consulting agreement stipulates a firm-fixed monthly retainer fee, plus additional fees and contingent bonus payments upon achievement of certain contract goals, payable in cash.

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 Company granted the director 26,091 RSUs on February 1, 2022, which vested quarterly in four equal amounts through the end of the fiscal year 2022, subject to the director's continued performance under the consulting agreement.

The cash amount paid for his consultancy services were $ 0.09 million and $ 0.03 million for the years ended December 31, 2023, and 2022, respectively.

2 unchanged sentences

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.

• 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 ACA"), Telos Automated Message Handling System ("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.

10 unchanged sentences

For the Year Ended December 31,

2022 2021 2020

(in thousands)

1 unchanged sentence

Secure Networks 67,962 96,433

Inter-segment elimination — — ( 10,377 )

Total revenue 145,378 216,887

3 unchanged sentences

Selling, general and administrative expenses 93,257 132,893

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

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

Operating loss ( 40,315 ) ( 53,850 )

Other income 6,715 1,350

Interest expense ( 786 ) ( 874 )

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

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

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

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

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

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

Loss before income taxes ( 34,386 ) ( 53,374 )

Provision for income taxes ( 36 ) ( 54 )

Net loss $ ( 34,422 ) $ ( 53,428 )

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

5 unchanged sentences

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.

From time to time, the Company may be a party to litigation or claims arising in the ordinary course of business, including those relating to employment matters, relationship with clients and contractors, intellectual property disputes, and other business matters.

These legal proceedings seek various remedies, including claims for monetary damages in varying amounts, none of which are considered material, or are unspecified as to amount.

Although the outcome of any such matter is inherently uncertain and may be materially adverse, based on current information, 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.

Management does not believe that there are any litigation or claims that would have a material adverse effect on the business, or the consolidated financial statements of the Company as of December 31, 2023.

Other - Government Contracts

19 unchanged sentences

For the Year Ended December 31,

2022 2021 2020

(in thousands)

5 unchanged sentences

Capital expenditure activity in accounts payable and other accrued liabilities 341 211

Issuance of common stock for 401K match 1,943 —

Intangible assets transferred to extinguish other financing obligations 7,089 —

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

Acquisition holdback — 506 —

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

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

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

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

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

REVISION OF UNAUDITED QUARTERLY FINANCIAL DATA

Revisions of Previously Issued Quarterly Financial Statements

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

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

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

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

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

Revised Quarterly Financial Data for Fiscal Years 2022 and 2021

For the Three Months Ended

Fiscal Year 2022 Fiscal Year 2021

2022 September 30,

2022 December 31,

2022 March 31,

2021 June 30,

2021 September 30,

2021 December 31,

(in thousands, except per share amounts)

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

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

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

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

Net loss per share:

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

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

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

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

Consolidated Statement of Operations

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

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

(in thousands, except per share amounts)

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

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 )

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 )

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 )

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 )

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk