Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
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Special Note Regarding Forward-Looking Statements
This annual report contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In addition, in the future the Company, and others on its behalf, may make statements that constitute forward-looking statements. Such forward-looking statements may include, without limitation, statements relating to the Company's plans, objectives or goals; future economic performance or prospects; the potential effect on the Company's future performance of certain contingencies; and assumptions underlying any such statements.
You are cautioned not to place undue reliance on the Company's forward-looking statements.
Words such as "believes," "anticipates," "expects," "intends" and "plans" and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. The forward-looking statements are and will be based upon management's then current views and assumptions regarding future events and operating performance and are only applicable as of the dates of such statements. The Company does not intend to update these forward-looking statements except as may be required by applicable laws.
By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks exist that predictions, forecasts, projections and other outcomes described or implied in forward-looking statements will not be achieved. The Company cautions you that a number ofthese important factors could cause results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements, including without limitation the risks described under the caption "Risk Factors" in this Annual Report on Form 10-K. You
Although we base these forward-looking statements on assumptions that we believe are cautionedreasonable when made, we caution you that forward-looking statements are not guarantees of future performance. Given these risks, uncertainties and other factors, many of which are beyond our control, we caution you not to place undue reliance on the Company'sthese forward-looking statements. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments, or otherwise.
PART I
General Overview
Telos Corporation is a Maryland corporation headquartered in Ashburn, Virginia. Telos Corporation, together with its subsidiaries (the "Company" or "Telos" or "We") is an information technology leader focused on designing and providing, offers technologically advanced, technologies to deliversoftware-based security solutions that empower and protect the world's most demanding enterprises. We empowersecurity-conscious organizations against rapidly evolving, sophisticated and pervasive threats. Our portfolio of security products, services and expertise empowers our customers with secure solutions that leverage mobile communication, cloud technology,capabilities to reach new markets, serve their stakeholders more effectively, and real-time collaboration. We protect vital assets that includesuccessfully defend the critical operationalnation or their enterprise with confidence in their security and tactical systems of our customers so that they can safely conduct their global missions. Our customer base consists primarily of military, intelligence and civilian agencies of the federal government and NATO allies around the world.
We generate approximately 76.0% of our revenues by delivering these solutions at a fixed price to our customers. This focus on fixed price delivery has enabled us to significantly reduce life cycle costs for our customers. We have been able to achieve this by investing in intellectual property development so that we can use automation, when appropriate.
While we were incorporated in 1971, we liquidated and/or sold our original businesses and refocused on delivering secure solutions beginning in 1997. Our Company includes Telos Corporation, Xacta Corporation, Teloworks, Inc., and a 50% interest in Telos Identity Management Solutions, LLC ("Telos ID").
We were incorporated in Maryland, our headquarters are located at 19886 Ashburn Road, Ashburn, VA 20147, and our telephone number is (703) 724-3800. Our website is www.telos.com.
Our Mission
privacy.
Our mission is to protect criticalour customers' people, information, and digital assets with offerings for cybersecurity, cloud security, and enterprise security. In the current global environment, our mission is more critical than ever. The emergence of each new information and communications technology ("ICT") introduces new vulnerabilities, as security is still too often overlooked in solution development. Networks and applications meant to enhance productivity and profitability often jeopardize an organization due to poor planning, misconfiguration, or an unknown gap in security. Ransomware, insider threats, cybercrime, and advanced persistent threats continue to menace public and private enterprises across all industries.
Cybersecurity, cloud security, and enterprise security of the modern organization share much in common, yet also call for a diverse range of skills, capabilities, and experience in order to meet the requirements of security-conscious customers. Decades of experience in developing, orchestrating, and delivering solutions across these three domains give us the vision and the confidence to provide solutions that empower and protect the enterprise at an integrated, holistic level. Our experience in addressing challenges in one area of an enterprise helps us meet requirements in others. We understand that a range of complementary capabilities may be needed to solve a single challenge, and we also recognize when a single solution might address multiple challenges. Our security solutions span these three domains: cybersecurity, cloud security and enterprise security.
Fiscal year 2023 was a transition year for Telos, with a focus on streamlining our operations while rebuilding and growing our revenue base by generating new business wins. Our 2023 business development priorities were to:
•Reorganize internally to consolidate and centralize business development resources;
•Add new talent to drive execution of solution development and new business generation;
•Maximize existing strategic partnerships for market expansion; and
•Increase our opportunity portfolio and quality of contract vehicles.
To improve our path forward, we planned to:
•Optimize our solution portfolio through accelerated plays on various programs and enhance program management;
•Expand our pipeline and strengthen proposals for new businesses; and
•Engage all employees through synergy, setting performance goals, and improving benefits.
Business Segments
We conduct our business through two reportable and operating segments: Security Solutions and Secure Networks. These segments enable the alignment of our strategies and objectives and provide a framework for the timely and rational allocation of resources within the line of business.
Additional information regarding our segments is presented in Note 18– Segment Information to the consolidated financial statements at Item 8 of this Form 10-K.
Security Solutions Segment:
The Security Solutions segment focuses on cybersecurity, cloud, identity solutions, and secure messaging. Cybersecurity solutions help our customers ensure the ongoing security, integrity and compliance of their on-premises and related cloud-based systems by reducing threats and vulnerabilities to foil cyber adversaries before they can attack. Our security engineers and subject matter experts assess our customers' cybersecurity environments and design, engineer, and operate systems needed to strengthen their cybersecurity postures. Our cloud solutions leverage the specialized skills and experience needed to help our customers plan, engineer, execute, and accelerate secure cloud migrations while assuring ongoing management and security of enterprise cloud technology environments. Our identity solutions deliver digital identity, biometric, and nationwide enrollment services and address Know Your Customer and identity management challenges for enterprises working within regulated and critical infrastructure environments. Our secure messaging services are used to securely transmit messages that provide direction and establish a formal position, commitment, or responses requiring the authority of an organization. Security Solutions represented 53.3% and 55.5% of total revenues for fiscal years 2023 and 2022, respectively.
The Security Solutions segment offers the following solutions and services:
•Information Assurance:
◦Xacta®: a premier platform for enterprise cyber risk management and security compliance automation, delivering security awareness for systems in the cloud, on-premises, and in hybrid and multi-cloud environments. Xacta delivers automated cyber risk and compliance management solutions to large commercial and government enterprises. Across the United States ("U.S.") federal government, Xacta is a leading commercial cyber risk and compliance management solution. With use cases including cyber risk management, risk remediation management, security authorization, compliance management, audit management, inventory management, vulnerability management, continuous compliance monitoring, and vendor and supply chain risk management, Xacta administers the key elements of more than 100 leading regulations and policies for IT security compliance, including the National Institute of Standards and Technology ("NIST") Risk Management Framework ("RMF"), RMF for Department of Defense ("DoD") IT, Committee on National Security Systems Instruction No. 1253, NIST Cybersecurity Framework, the Federal Risk and Authorization Management Program and the DoD's Cybersecurity Maturity Model Certification ("CMMC") program.
◦Cybersecurity services: proven solutions and services for cyber security, secure mobility,the full cybersecurity lifecycle, including consulting services, assessment and identity management.
We believecompliance, engineering and evaluation, operations, and penetration testing. With a pedigree in information and cybersecurity that spans three decades, our customer focus is the foundation of our success to date. We also believe that this focus is critical for the creation of long-term value.
How We Provide Value to Our Customers
We serve our customers by developingcertified cybersecurity personnel provide services and solutions that are quicklydeliver continuous security assurance for business, government, and efficiently deployed so that our customers have the assurance that they can safely conduct their vital missions around the world. Some of the key benefits we offer our customers include:critical infrastructure.
•Secure Communications:
Protecting and Securing Assets. Whether we are guarding access to systems, networks, communications, or people, our solutions work to protect what is most important to today's security-conscious enterprises.
Applying Specialized Expertise. Our teams of security professionals, such as those we provide to protect the Pentagon's critical networks, are some of the industry's most experienced in the design and operation of communications systems that must be reliable and secured 24/7.
Achieving Regulatory Compliance. From embedding the latest security standards in our information assurance software, to complying with network security requirements on a particular military base, our solutions give our customers the confidence in their ability to meet established security regulations.
Ensuring the Reliability of Operations. Our testing is comprehensive, assuring our customers of a dependable product when delivered. Our support is worldwide, extending from helpdesk resources for government agencies throughout the country to field support overseas.
Leveraging Customers' Existing Infrastructure. Our pre-deployment assessment of our customers' environments, ranging from secure network site surveys to evaluations of physical security access, assures our customers of the technical and operational compatibility of our solutions.
Selected Examples of How We Accomplish Our Mission
We protect the systems of our customers through the development and delivery of our Xacta IA Manager software ("Xacta"). Xacta is the premier solutions for continuous assessment and authorization, and is used throughout the Department of Defense, intelligence communities and civilian government. We have performed thousands of certifications and our product has been adopted by numerous enterprises as their solutions of choice and ongoing compliance for risk management.
We streamline and automate the process of selecting, applying, and monitoring security controls for cloud-based systems and applications, so that security-conscious organizations can migrate their workloads to the cloud faster and more efficiently. We also deploy, protect and extend the wireless networks of our customers around the world, as well as secure the communications on the network with solutions that disguise the identity and location of network users and assets.
We protect and enhance the communications of our customers through the development and delivery of our ◦Telos Automated Message Handling System ("Telos AMHS"), which has been adopted: web-based organizational message distribution and management for mission-critical communications; the recognized gold standard for organizational messaging in the U.S. government. Telos AMHS™ is used by military field operatives for critical communications on the Department ofbattlefield using the Defense to carry all official message trafficInformation System Agency's Organizational Messaging Service and is implemented throughout all branches of the military, the intelligence community and other critical civilian agencies.its specialized communications protocols. Telos AMHS is also used by the Intelligence Community ("IC") for timely situational awareness and assessment reporting utilizing the Director of National Intelligence's Information Transport Service, Organizational Messaging data standards and computing infrastructure. Because Telos AMHS supports timely and reliable delivery for authoritative communications, its uses include terrorist warnings, "eyes-only" messages, military execution orders, intelligence information, overflight clearances, and Emergency Action Messages for nuclear command and control. Information exchanged at this level and for these purposes requires operational requirements for time-sensitive, guaranteed delivery, precedence, high availability, and reliability.
◦Telos Advanced Cyber Analytics ("Telos ACA"): a solution that is a dynamic, proprietary threat feed source of global Internet Protocol ("IP") addresses known to engage in potentially malicious activity, including mass scanning and generic opportunistic attacks. Telos ACA™ allows security operation centers the advantage of being able to reduce "noisy" IP security threat alerts and thereby increase operational efficiency, the ability to potentially identify forthcoming mass exploitation events, and the ability to improve the focus of ongoing threat hunts.
Telos ACA leverages a sophisticated global sensor network of nodes that run 24/7/365 and analyzes and aggregates anomalous Internet activity in near real time. Telos ACA intelligence is seamlessly and conveniently delivered as an industry-standard Structured Threat Information eXpression/Trusted Automated eXchange of Intelligence Information ("STIX/TAXII") based threat feed. STIX states the "what" of threat intelligence, while TAXII defines "how" that information is relayed. STIX and TAXII are machine-readable and, therefore, easily automated. This allows for easy consumption into third-party security tools, where the threat feed can be used to enrich and provide relevant information related to potential malicious network activity within environments. Telos ACA provides the IP, metadata, and raw data elements to improve threat hunting and eliminate threat noise.
◦Telos Ghost®: a virtual obfuscation network-as-a-service with encryption and managed attribution capabilities to ensure the safety and privacy of people, information, and resources on the network. Telos Ghost seeks to eliminate cyberattack surfaces by obfuscating and encrypting data, masking user identity and location, and hiding network resources. It provides the additional layers of security and privacy needed for intelligence gathering, cyber threat protection, securing critical infrastructure, and protecting communications and applications when a single error in security can jeopardize operations, property, and even lives. Telos Ghost is used for a variety of highly sensitive applications, including cyber threat research, open-source intelligence, supply chain security vulnerability assessment, worldwide investigative and recovery services, and hiding critical assets.
•Digital Identity Solutions:
◦IDTrust360®: an enterprise digital trusted identity risk platform for extending flexible hybrid cloud identity services. This platform is enabled for mobile, enterprise environments and custom digital identity services that mitigate threats by integrating advanced technologies that fuse biometrics, credentials, and other identity-centric data used to continuously monitor trust. IDTrust360 is a commercially owned and operated platform with direct interfaces to the Federal Bureau of Investigation's ("FBI") criminal records, Department of Homeland Security's ("DHS") terrorist watch list service, U.S. Central CommandDepartment of Treasury's pay.gov, other government identity risk management systems, and numerous commercial identity, intelligence, and risk-based data sources. We actively engage with federal customers to integrate vital event records, government identification document records, and other fingerprint-based biometric records hosted across multiple agencies. This enables Telos to offer NIST-compliant digital identity services aligned with federal security mandates.
◦ONYX®: the world's first and most accurate touchless fingerprint biometric solution for mobile devices. Powered by state-of-the-art machine learning, ONYX eases deployment in a variety of industries, including financial services and healthcare, and applications like consumer authentication and physical access and security. Acquired by Telos in 2021, the patented and award-winning ONYX solution delivers touchless fingerprint biometrics that people can submit simply by using their mobile phones. In June 2022, ONYX won first place in the overall competition of the Mobile Fingerprint Information Technology Challenge hosted by the NIST.
We maintain government certifications and designations that distinguish Telos ID, including TSA PreCheck® enrollment provider, Aviation Channeling Services ("ACS") provider, FBI-approved Channeler, and Financial Industry Regulatory Authority Electronic Fingerprint Submission provider.
Secure Networks Segment:
With a focus on enterprise security, the Secure Networks segment provides secure networking architectures and solutions to our customers through secure mobility solutions and network management and defense services. Our net-centric solutions enable collaboration and connectivity to increase efficiency, reduce costs, and improve mission outcomes. Telos provides an extensive range of wired and wireless, fixed and deployable, classified and unclassified voice, data, and video secure network solutions and services to support defense and civilian missions. Capabilities include network design, operations, and sustainment, system integration and engineering, network security and compliance, deployable comms, service desk, defensive cyber operations, and program management. Secure Networks represented 46.7% and 44.5% of total revenues for the years ended December 31, 2023 and 2022, respectively.
These are our solutions and services in our Secure Networks segment:
•Secure Mobility: solutions for business and government that enable remote work and minimize operational and security concerns across and beyond the enterprise. Our secure mobility team brings credentials to every engagement, supplying deep expertise and experience, highly desirable clearances and industry-recognized certifications for network engineering, mobility, and security. We also offer secure mobility professional services, such as consulting and deployment services, to deliver integrated communications solutions that meet even the most complex needs of civilian, defense, and commercial customers.
•Network Management and Defense: services for operating, administrating, and defending complex enterprise networks and services for defensive cyber operations. Our diverse network management and defense capabilities address common and uncommon requirements in many industries and disciplines, from military to government agencies. Telos network engineers, security specialists, and program managers are experienced with advanced DoD and federal networks and are certified in the leading tools, technologies, and best practices for network management and administration. We ensure the consistency and continuity of network management services required in today's mission-critical network environments.
Our Growth Strategies
We are pursuing multiple strategies in order to grow the Company in both our commercial and government business end markets. Our key growth strategies include:
•Broaden reach within the U.S. federal government. We have historically focused on the U.S. federal government and believe we are an established leader in providing security solutions to federal agencies, including DoD and the IC. Nonetheless, we believe the U.S. federal government continues to represent a significant growth opportunity, and we expect to continue to invest in products and solutions to serve additional customers within the U.S. federal government.
For example, Xacta is included on DHS's Continuous Diagnostics and Mitigation Approved Products List to provide federal agencies with innovative security tools, which we believe presents us with an excellent opportunity to pursue contracts with additional federal agencies. In addition, our platform is available for use in the AWS GovCloud (U.S.), Oracle and Azure Government. The Telos ACA offering is positioned to supply unique data sets to government agencies, allowing them to be better informed as they defend and protect their networks and assets. Telos ACA is also positioned to provide government customers with specific, actionable and high-fidelity intelligence about malicious cyber activity targeted at their networks.
•Leverage our diverse security solutions to expand our presence in commercial markets. Our offerings are designed to have broad applications and include security risk and compliance, secure messaging, identity vetting, and managed attribution and obfuscation. We believe that we are well-positioned to sell our capabilities into a dynamic and growing commercial opportunity set and will continue innovating to address emerging and unique requirements.
For example, we have leveraged core Xacta functionality to meet its critical organizationthe needs of large financial services and communications requirements incustomer relationship management firms. We have also leveraged our U.S. federal government identity management qualifications to improve the CENTCOM Theaterspeed and accuracy of Operations including Iraqvetting results for more than 100 airports, air carriers, and Afghanistan.
Through an exclusive subcontractor relationship with Telos ID, we assess, design and deliver identity and access solutions to protect national security assets, people and facilities. Among these programs is the leading designated aviation channeling service for the general aviation industry, serving nearly 60 airports, airlines, and aviation customers across the country. We intend to continue innovating and developing additional offerings for cloud, mobile, and Internet of Things ("IoT") devices.
•Target and replace inefficient legacy products. Recognizing the limitations of their legacy systems, organizations are replacing existing systems and processes with Telos ID also supportssolutions.
For example, Telos AMHS is a web-centric system that replaced legacy capabilities like communications centers for the premierpurpose of executing operational orders (through organizational messaging) across the U.S. federal identity application, whichgovernment and around the world. Xacta has issued almost 40,400,000 smart card based secure credentialsdisrupted the cyber risk and compliance management business across the U.S. federal government, replacing tedious manual activity with automation and delivering that automation to meet our customer's needs on-premises, in hybrid environments, in the cloud, and across multi-cloud infrastructures.
•Pursue strategic acquisition opportunities. We believe that our markets remain fragmented, with many niche players providing limited product solutions targeting narrow customer segments. Given the breadth of our solution set and our customer end markets, we believe that we are well-positioned to opportunistically acquire smaller companies and incorporate their technology or deploy their solutions across a larger customer set. We believe that a targeted and opportunistic acquisition strategy will be a force multiplier for active duty uniformed service personnel, Selected Reserve,our organic growth opportunity.
Customers
Our primary customers include the U.S. federal government, large commercial businesses, state and local governments, and international customers. Our consolidated revenues are largely attributable to prime contracts or to subcontracts with our contractors engaged in work for the U.S. government, with the remaining attributable to state and local governments, and commercial markets.
Our security solutions are the product of the extensive labor investment in developing our intellectual property and highly sophisticated software technology. These investments helped us expand with commercial customers, and win additional contracts within the military, the IC and civilian government agencies. Once our security solutions are embedded in our customers' technology infrastructure, these customer relationships often expand and lead to opportunities to provide additional security solutions.
Our U.S. federal government customers include the DoD, the Central Intelligence Agency, and multiple other agencies within the IC, and multiple civilian agencies, including but not limited to, the DHS, the U.S. Department of Defense ("DoD") civilian employees,State, the FBI, and eligible contractor personnel. Additionally,the Department of Health and Human Services. These customers have a number of subsidiary agencies with separate budgets and procurement functions. Our contracts may be with the highest level of these agencies or with the subsidiary agencies of these customers.
Our commercial customers include leading enterprises such as Amazon.com, Inc., Google, Zscaler, Ernst & Young, Deloitte, Accenture, SAP, Verizon and Oracle.
Sales and Marketing
As part of our sales and marketing investments, we provide near real-time data collection on personnel movementalso make corporate investments in functional areas such as contracts, solution architects, lead generation tools, and location informationoperations to ensure our back-office systems and processes scale for operating forces, government civil servants and government contractors in specified operational theaters. This system has captured over 517,000,000 scans by more than 2,700,000 U.S. Government, U.S. Military and company contractors since its inception.business growth.
Sales
We would not be ableexpanded our sales capability for markets in which we are well known, such as the U.S. government, certain critical infrastructure sectors, and certain commercial verticals such as healthcare and financial services. We added commission incentivized sales personnel aligned to design, deliver, install,market segments focused on the U.S. federal government, the IC and support anythe DoD market areas.
Customer acquisition often involves extensive interaction at all levels of our solutions without our employees. They are a vital element of our success.an organization, from executives, to decision makers, to end users. We provide competitive pay and benefits and a work environment that promotes employee retention.
Solutions For Our Customers
Our solution development philosophy involves respondingseek to proven market demand with rapid development and continuous innovationforge relationships throughout an organization in an effort to meetobtain broad consensus as part of the sales process. We leverage the full power of Telos (executives, sales and anticipateindustry partners) to gain access and build our customers' dynamic and evolving requirements.
brand awareness.
Our sales strategy is to establish a customer foothold with one of our solutions consist ofand work to achieve rapid success. We then leverage this customer relationship to generate interest in other solutions from the following:
● | Cyber Operations and Defense: |
o | Cyber Security – Solutions and services that assure the security of our customers' information, systems, and networks, including the Xacta IA Manager suite for IT governance, risk management, and compliance. Our information and cyber security consulting services include security assessments, digital forensics, and continuous compliance monitoring. |
o | Secure Mobility – Design, engineering and delivery of secure solutions that empower the mobile and deployed workforce in business and government. Our solutions protect sensitive communication while delivering voice, data, and video at the point of work in classified and unclassified environments. |
● | Identity Management – Solutions that establish trusted identities in order to ensure authenticated physical access to offices, workstations, and other facilities; secure digital access to databases, host systems, and other IT resources; and to protect people and organizations against insider threats. |
● | IT and Enterprise Solutions – We have the experience with solution development and global integration to meet the requirements of business and government enterprises with secure IT solutions, from organizational messaging and data visualization to network construction and management. |
The Technology Behind Our Solutions
| ● | Techniques: We employ development and production methodologies such as Agile and ISO 9001 to ensure predictability, repeatability, and quality. Techniques such as continuous integration are employed to accelerate the solution development and testing process while at the same time reducing cost and improving quality. We believe such techniques are critical for providing our customers with a high quality user experience. |
| ● | Architecture: The nature of our customers' missions requires our solutions to be highly secure and scalable. Aside from architecting our solutions with these core objectives in mind, we also employ open standards and technologies that afford a high degree of flexibility and interoperability needed to support web-based and netcentric operations. |
Intellectual Property
We invest in the creation of intellectual property and employ various forms of legal intellectual property protection mechanisms including the use of copyright, trademark, patent, and trade secret laws in North America and other jurisdictions.Telos portfolio. We have intellectual property reviews as an integral parta variety of upsell opportunities that allow us to expand our development process in order to identify intellectual property as early as possible in the development process so the appropriate form of protection can be obtained. We also vigorously control access to intellectual property via physicalpresence within a customer account. For example, various complementary Xacta features build on each other and logical protection mechanisms. All of our employees sign agreements that govern intellectual property ownership and confidentiality. We also enter into intellectual property, confidentiality and non-disclosure agreements with partners and other third parties.are sold separately.
Patents, Trademarks, Trade Secrets and Licenses
We have made it a practice of obtaining patent, copyright and/or trademark protection on our products, processes and marks where possible. We own a number of patents and copyrights, which we believe to be of material importance to the Company. Our patents and copyrights extend for varying periods of time based on the date of application or registration. Generally, registered copyright protection continues for a term of at least 70 years. Trademark and service mark protection for registered marks generally continues for as long as the marks are used.
Telos and Xacta are trademarks of Telos Corporation. Telos ID is a trademark of Telos ID.
Sales and Marketing
We target decision makers in government agencies and departments, and commercial businesses who have a need for secure enterprise solutions. Decisions regarding contract awards by our customers typically are based upon an assessment of the quality of our past performance, responsiveness to proposal requirements, uniqueness of the offering itself, price, and other competitive factors.
Our products and services in many instances combine a wide range of skills drawn from each of our major product and service offerings. Accordingly, we must maintain expert knowledge of federal agency policies, procedures and operations.
We employ marketing and business development professionals who identify, qualify, and sell opportunities for us. Virtually all of our officers and managers, including the chief executive officer, other executive officers, vice presidents, and division managers, actively engage in new business development.
We have strategic business relationships with certain companies in the information technology industry. These strategic partners have business objectives compatible with ours, and offer products and services that complement ours. We intend to continue developing such relationships wherever they support our marketing, growth and solution offering objectives.
The majorityMuch of our business is awarded through the submission of formal competitive bids. Commercial bids are frequently negotiatedbids; however, a portion of our revenue is awarded through limited competition or sole-source contracts.
Partner Organizations
Our sales team works with partner organizations like AWS, Microsoft Azure, and Oracle to pursue mutual customers and leverage their marketplace platforms and marketing programs. In the past years, Telos announced a collaboration with IBM Security as part of IBM's Active Governance Services, which allows enterprises to termsoperationalize and conditionsautomate activities and solve challenges in cybersecurity compliance and regulatory risks. The solution combines IBM's world-class expertise in cyber compliance and governance programs with Telos' Xacta IT risk management platform to automate the time-consuming aspects of compliance and audit activities such as schedule, specifications, deliverycontrol selection, validation, reporting, and payment. However, in government proposals, in most cases, the customer specifies the terms, conditions and form of the contract.monitoring.
Our contracts and subcontracts are generally composed of a wide range of contract types including indefinite delivery/indefinite quantity ("IDIQ") and government-wide acquisition contracts (known as "GWACs") which are generally firm fixed-priced or time-and-materials contracts. For 2016, 2015, and 2014, the Company's revenue derived from firm fixed-price contracts was 76.0%, 77.0%, and 74.9%, respectively, cost plus contracts was 16.4%, 12.0%, and 15.4%, respectively, and time-and-material contracts was 7.6%, 11.0%, and 9.7%, respectively.
We derive substantially all of our revenues from contracts and subcontracts with the U.S. Government. Our revenues are generated from a number of contract vehicles and task orders. Over the past several years we have sought to diversify and improve our operating margins through an evolution of our business from an emphasis on product reselling to that of an advanced solutions and services provider. To that end, although we continue to offer resold products through our contract vehicles, we have focused on selling solutions and services and outsourcing product sales, as well as designing and delivering Telos manufactured technology products. In general, we believe our contract portfolio is characterized as having low to moderate financial risk due to the limited number of long-term fixed price development contracts.
Our IT solutions primarily involve the design and integration of commercial off-the-shelf IT products into integrated solutions deliverables. Such equipment is generally available from several sources, although several factors including technical specifications, proprietary or brand-specific equipment requirements, or contractual channel agreements may limit the availability of sourcing options. We utilize more than 300 vendors as direct materials suppliers, subcontractors, and service providers. The vendors utilized in any given measurement period vary based on the mix and the timing of the solutions delivered, but typically our contracts are a smaller subset that comprises the majority of the direct cost of sales on an annual basis. Therefore, while a smaller subset of suppliers, subcontractors, and service providers may be employed to deliver the majority of the revenue for a particular period, were there to be an unforeseen disruption to one of these vendors, the delay would likely be short-term in nature due to the existence of alternate sourcing options.
We derived substantially all of our revenues from contracts and subcontracts with the U.S. Government. Revenue by customer sector for the last three fiscal years is as follows:
| | | 2016 | | | 2015 | | | 2014 | |
| | | | | | | | | (dollar amounts in thousands) | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Federal | | $ | 130,415 | | | | 96.7 | % | | $ | 117,328 | | | | 97.3 | % | | $ | 122,549 | | | | 96.1 | % |
| State & Local, and Commercial | | | 4,453 | | | | 3.3 | % | | | 3,306 | | | | 2.7 | % | | | 5,013 | | | | 3.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 134,868 | | | | 100.0 | % | | $ | 120,634 | | | | 100.0 | % | | $ | 127,562 | | | | 100.0 | % |
Marketing
We build market awareness of Telos and our solutions through a variety of marketing programs, including regular briefings with industry analysts, public relations activities, government relations initiatives, web seminars, trade show exhibitions, speaking engagements, and web sitedigital marketing. When appropriate, we pursue joint marketingWe will continue investing in these activities and selling effortstargeting additional vertical-specific content creation, targeted advertising and brand awareness campaigns, social media campaigns, and search engine marketing.
Our sales team works hand in hand with our strategic partners.marketing team and various subject matter experts to develop targeted awareness campaigns for our various solutions that generate valuable leads and contacts.
Research and Development
Our PeopleWe developed proprietary software-based solutions in various platforms related to security and Culturecyber risk management. We invest substantial resources in research and development to innovate new solutions, enhance our offerings and grow opportunities by developing new features and modules for our existing platforms. In 2023, we invested in preexisting programs and next generation solutions in secure communications and cybersecurity. Leveraging our agile innovation and development practices, we rapidly establish prototypes that we can fully test for suitability and to pre-establish enterprise risk level across a variety of government networks and clouds. We are committed to and view our continued investment in research and development as a key factor to our long-term business success.
Human Capital Resources
As of December 31, 2016,2023, we employed 502 people, which includes 52 from Teloworks,had 619 employees, of whom approximately 88.7% are located in the United States. Approximately 377 of our U.S.-based employees held U.S. security clearances, and 79 from Telos ID. Of26% self-identify as veterans of U.S. military service. Our employees are not represented by a labor union or covered by a collective bargaining agreement. We have not experienced any work stoppages, and we consider relations with our employees 311 hold security clearances of secret or higher.to be good.
Our people are proficient in many fields such as computer science, information security and vulnerability testing, networking technologies, physics, engineering, operations research, mathematics, economics, and business administration. We placeTelos places a high valuestrong emphasis on supporting our people. As a result, we seek to remain competitive in terms of salary structures, incentive compensation programs, fringe benefits, opportunities for growth, and individual recognition and award programs.
Our management team is committed to maintaining a corporate culture that fosters mutual respect and job satisfaction for our people while delivering innovation and value to customers and shareholders. This commitment is reflected in our core values.values:
Always with integrity, at Telos we:
Build trusted relationships,
Work hard together,
Design and deliver superior solutions, and
Have fun doing it.
These values are woven throughout the fabric of Telos. They are reflected in our hiring practices, reinforced regularly, and reviewed during appraisals. They are written into annual and quarterly objectives for staff and managers alike, as well as department and company business goals. Employees are encouraged to challenge themselves and each other to exhibit the core values in everydayall activities.
Our employees also are given avenues of communication and interaction should they observe activities that are inconsistent with the Company'sour core values. EncouragedWhile employees are encouraged first to speak openly about any issues, a 24/7 hotline provides an opportunity to express concerns anonymously.
We consider the foundational value of integrity to be a non-negotiable requirement of employment, and an expectation of suppliers, partners, and our customers. We guard our reputation and will take aggressivenecessary action to protect it. An essential part of our brand promise is that we always to engage employees, customers, partners, suppliers, and investors with integrity.
As part of our effort to improve our disclosures around human capital issues, in 2023, we provided a public report pursuant to the Sustainability Accounting Standards Board ("SASB") Software & IT Service Standard, which report addresses, in part, metrics relating to recruiting and managing a global, diverse and skilled workforce.
Competition
Talent Acquisition and Retention
We operate in a highlyvery competitive marketplace. Thereenvironment for talent. To ensure we can attract the most well-qualified employees, we employ strategic sourcing methods, innovative recruitment campaigns, and inclusive outreach initiatives to attract a diverse pool of candidates. This involves leveraging various channels, such as job boards, social media platforms, and diversity-focused partnerships, to engage with candidates from different backgrounds and experiences.
During 2023, we made several improvements to our employee value proposition, including enhancements on benefits available to employees, increasing paid time off and parental leave, accelerating the vesting period for stock matched by the Company in employees' 401(k) plans, instituting a new performance management program, and various supplemental programs to support our employees' physical, mental and financial well-being.
In addition, at Telos, we help our employees succeed by providing flexibility in where and how they work. The employees' ability to work remotely or in a hybrid arrangement is a strategy that helps us attract, hire and retain the best people, regardless of their specific location. This strategy increases employee empowerment and satisfaction, drives efficiency, and enables us to hire from a broad and diverse talent pool.
Diversity and Inclusion
We value diversity and inclusion and are other companiescommitted to providing a work environment free of discrimination and harassment, where our employees can do their best work, bring their whole selves to work, feel supported, and in turn, support others. We strive to create a working environment where everyone feels included and respected and has an equal opportunity to contribute. We believe that provide solutions similar to ours. Although these companies provide offeringsdiverse teams maximize their potential and bring with them varied views, experiences, and perspectives. While we believe that overlapour employee population is gender and ethnically diverse for our industry and operating markets, with someapproximately 25% of our solutions, we are not awareglobal population self-identifying as female and approximately 38% self-identifying as underrepresented minorities, our objective is to continue to improve our hiring, development, training, advancement, and retention of any single company that provides competitive solutions in alldiverse talent and to foster an inclusive environment at Telos.
Seasonality
We generally experience seasonality due to our solution areas compete with range from integrators that provide productskey customers' fiscal year ends and services such as Booz Allen Hamilton, General Dynamics, Lockheed Martin, Northrop Grumman, SAIC and Daon, to more software-specific organizations such as Agiliance and RSA Archer.
The majorityprocurement cycles. We derive a substantial portion of our business isrevenue from the U.S. government, whose fiscal year ends on September 30 of each year, which may favorably impact our third fiscal quarter. In addition, our quarterly results may be impacted by the number of working days in responsea given quarter. See "Risk Factors — We are subject to competitive requests from potential and current customers. Decisions regarding contract awards by our customers typically are based upon an assessmentthe seasonality of the quality of our past performance, responsiveness to proposal requirements, uniqueness of the offering itself, price, and other competitive factors.
Aside from other companies that compete in our space, we sometimes face indirect competition from solutions that are developed "in-house" by some of our customers.
U.S. government spending."
Government Contracts and Regulation
Our business is heavily regulated. Weregulated and we must comply with and are affected by laws and regulations relating to the formation, administration and performance of U.S. Governmentgovernment and other contracts. U.S. government contracts generally are subject to the Federal Acquisition Regulation ("FAR"), which sets forth policies, procedures and requirements for acquiring goods and services by the U.S. government, and agency-specific regulations that implement or supplement the FAR. These regulations impose a broad range of requirements, many of which are unique to government contracting, including various procurement, security, contract pricing and cost, contract termination, and adjustments and audit requirements. These laws and regulations, among other things:
•Impose specific and unique cost accounting practices that may differ from Generally Accepted Accounting Principles in the United States of America ("U.S. GAAP" or "GAAP") and therefore require reconciliation;
| ● | impose specific and unique cost accounting practices that may differ from Generally Accepted Accounting Principles ("GAAP") in the United States of America and therefore require reconciliation; |
•Define allowable and unallowable costs and otherwise govern our right to reimbursement under various cost-type U.S. government contracts;
•Require compliance with U.S. government Cost Accounting Standards;
| ● | impose acquisition regulations that define reimbursable and non-reimbursable costs; and |
•Require reviews by the Defense Contract Audit Agency, Defense Contract Management Agency and other U.S. government agencies for compliance with government requirements for a contractor's business system; and
•Restrict the use and dissemination of, and require the protection of, unclassified contract-related information and information classified for national security purposes and the export of certain products and technical data.
| ● | restrict the use and dissemination of information classified for national security purposes and the export of certain products and technical data. |
U.S. government customers employ several contracting methods to purchase services and products. Budgetary pressures and reforms in the procurement process have caused many U.S. government customers to increasingly purchase services and products using contracting methods that allow them to select multiple contract winners or pre-qualify certain contractors to provide services or products on established general terms and conditions rather than through single-award contracts. The predominant contracting methods through which U.S. government agencies procure services and products include definitive award contracts, indefinite delivery / indefinite quantity ("IDIQ") contracts, U.S. General Service Administration ("GSA") schedule contracts and other transactional agreements ("OTA").
Government contracts are subject to congressional funding. Consequently, at the outset of a program, a contract is usually partially funded, and Congress annually determines if additional funds are to be appropriated to the contract. All of our government customers have the right to terminate their contract with us at their convenience or in the event that we default.
Most of our contracts have cancellation terms that permit us to recover all or a portion of our incurred costs and fees for work performed where the U.S. government issues a termination for convenience.
A portion of our business is classified by the U.S. Governmentgovernment and cannot be specifically described. The operating results of these classified programs are included in our consolidated financial statements.
These regulations and risks are described in more detail below under "Risk Factors" in this Annual Report on Form 10-K.
BacklogEnvironmental, Social, and Governance Matters
We strive to operate our business in an environmentally responsible manner and in support of sustainable long-term financial performance. Our Environmental, Social and Governance ("ESG") task force is charged with addressing climate and environmentally-related risks and opportunities, including our publicly-disclosed climate transition plan. The Company publicly reports certain climate change-related information via CDP and provides public sustainability disclosures using the SASB Software & IT Service Standard. By making these disclosures, however, we have not concluded that the information disclosed is material to our business. The Board of Directors authorized the Nominating and Corporate Governance Committee to oversee the Company's ESG efforts, which include climate-related risks and opportunities.
ManySee Item 1A, "Risk Factors," for discussion of risks related to global climate and ESG matters.
Company Website and Available Information
Our corporate headquarters is located at 19886 Ashburn Road, Ashburn, Virginia 20147, and our telephone number is (703) 724-3800. Our website can be accessed at www.telos.com, which contains information about our Company and operations. Through a link on the Investor Relations section of our contractswebsite, copies of each of our filings with the U.S. GovernmentSecurities and Exchange Commission ("SEC") can be viewed and downloaded free of charge as soon as reasonably practicable after the reports and amendments are funded year to year by the procuring U.S. Government agency as determined by the fiscal requirements of the U.S. Government and the respective procuring agency. A number of contracts that we undertake extend beyond one year, and accordingly portions of contracts are carried forward from one yearelectronically filed with or furnished to the next asSEC. The information on our website is not incorporated by reference into and is not part of the backlog. Because many factors affect the schedulingthis Annual Report on Form 10-K.
The SEC also maintains a website (www.sec.gov) that contains reports, proxy and continuation of projects, no assurance can be given as to when revenue will be realized on projects included in our backlog.
Funded backlog as of December 31, 2016information statements, and 2015 was $59.7 million and $59.2 million, respectively.
While backlog remains a measurement consideration, in recent years we, as well as other U.S. Government contractors, experienced a material change in the manner in which the U.S. Government procures equipment and services. These procurement changes include the growth in the use of General Services Administration ("GSA") schedules which authorize agencies of the U.S. Government to purchase significant amounts of equipment and services. The use of the GSA schedules results in a significantly shorter and much more flexible procurement cycle, as well as increased competition with many companies holding such schedules. Alonginformation regarding issuers that file electronically with the GSA schedules, the U.S. Government is awarding a large numberSEC, including Telos.
Seasonality
We derive substantially all of our revenue from U.S. Government contracting, and as such we are annually subject to the seasonality of the U.S. Government purchasing. As the U.S. Government fiscal year ends on September 30, it is not uncommon for U.S. Government agencies to award extra tasks in the weeks immediately prior to the end of its fiscal year in order to avoid the loss of unexpended fiscal year funds. As a result of this cyclicality, we have historically experienced higher revenues in the third and fourth fiscal quarters, ending September 30 and December 31, respectively, with the pace of orders substantially reduced during the first and second fiscal quarters ending March 31 and June 30, respectively.
In addition to other information in this Form 10-K, the following risk factors should be carefully considered in evaluatingyour evaluation of the Company and its businesses because thesebusiness, you should carefully consider the risks and uncertainties as described below, together with the information included elsewhere in this Annual Report on Form 10-K and other documents we file with the SEC. These factors, as well as additional risks and uncertainties not currently known to us or that we currently believe are immaterial, may currently have, or may have, a significant impact on our business, operating results or financial condition. Actual results could differ materially from those projected in the forward-looking statements contained in this Form 10-K as a result of the risk factors discussed below and elsewhere in this Form 10-K.
Business and Operational Risks
Our inabilitybusiness could be negatively affected by cyber or other information security breaches, threats or other disruptions.
We routinely experience cybersecurity threats, threats to maintain sufficientour information technology infrastructure and attempts to gain access to our sensitive information, as do our customers, suppliers, subcontractors and joint venture partners. We may experience similar security threats at customer sites that we operate and manage as a contractual requirement. The threats we face vary from attacks common to most industries to more advanced and persistent, highly organized adversaries who target us because we protect national security information. While we have security measures in place to protect our data, the capital marketsdata of our customers or end-users of our services, our services and underlying infrastructure may in the future be materially breached or compromised as a result of the following:
•Third-party attempts to provide the necessary capitalfraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information to fundgain access to our operations would have a significant impactcustomers' data, our data or our IT systems;
•Efforts by individuals or groups of hackers and sophisticated organizations, including state-sponsored organizations or nation-states;
•Cyberattacks on our business.internally built infrastructure;
Our primary sources•Vulnerabilities resulting from enhancements and updates to our existing solutions;
•Vulnerabilities in the products or components across the broad ecosystem that our services operate in or are dependent on;
•Vulnerabilities existing within newly acquired or integrated technologies and infrastructures;
•Vulnerabilities existing within third-party software or services that we employ;
•Attacks on, or vulnerabilities in, the many different underlying networks and services that power the Internet that our products depend on, most of funds to meetwhich are not under our liquiditycontrol or the control of our vendors, partners, or customers; and capital requirements
•Employee or contractor errors or intentional acts that compromise our security systems.
To the extent possible, these risks are an Accounts Receivable Purchase Agreement (the "Purchase Agreement") with Republic Capital Access, LLC ("RCA") and a Financing and Security Agreement (the "Financing Agreement") with Action Capital Corporation ("Action Capital"). Under the Purchase Agreement, we may offer for sale, and RCA, in its sole discretion may purchase, up to $10 million of eligible accounts receivable relating to U.S. government prime contracts or subcontracts outstanding at any given time. Under the Financing Agreement, Action Capital agreed to provide advances of up to 90% of the net amount of certain acceptable customer accounts. The maximum outstanding principal amount of advances under the Financing Agreement is $5 million. The willingness of RCA to purchase our accounts receivable under the Purchase Agreement and of Action Capital to make advances under the Financing Agreement, andmitigated by our ability to obtainmaintain and improve information security governance policies, enhanced processes and internal security controls, including our ability to escalate and respond to known and potential risks. Although we have developed systems and processes designed to assess, identify, and manage material cybersecurity risks, we can provide no assurances that such systems and processes will provide absolute security. In the normal course of business, we are the target of malicious cyberattack attempts. To date, any such attempts have not been material or significant to us, including to our reputation or business operations, or had a material financial impact, but there can be no assurance that future cyberattacks will not be material or significant.
A security breach or incident could result in unauthorized parties obtaining access to, or the denial of authorized access to, our IT systems or data, or our customers' systems or data, including intellectual property, proprietary, sensitive, or other confidential information. A security breach or incident could result in the unauthorized disclosure of large quantities of our customers' customers' personally identifiable information. A security breach could also result in a loss of confidence in the security of our services, damage our reputation, negatively impact our future sales, disrupt our business and lead to increases in insurance premiums and legal and financial exposure and liability. Finally, the detection, prevention and remediation of known or potential security vulnerabilities, including those arising from third-party hardware or software, may result in additional financing,financial burdens due to additional direct and indirect costs, such as additional infrastructure capacity spending to mitigate any system degradation.
If our customers do not renew their subscriptions or contracts for our solutions and services and expand our relationship with them, our revenue could decline and our results of operations would be adversely impacted.
To continue to maintain and grow our business, it is important that our existing customers renew their subscriptions or contracts for our solutions and services when existing contract terms expire. Our customers have no obligation to renew or extend their subscriptions or contracts for our solutions or services after the expiration of the contractual periods, which vary in length, and in the normal course of business, some customers have elected not to renew or extend. It is difficult to predict attrition rates given the varying needs of our customer base. Our attrition rates may increase or fluctuate as a result of a number of factors, including customer dissatisfaction with our services, customers' spending levels, mix of customer base, decreases in the number of users at our customers, competition, pricing increases or changes, and deteriorating general economic conditions or budgetary constraints.
Our future success also depends in part on our ability to expand our relationships with our current customers by selling additional features and services, more subscriptions or enhanced editions of our services. This may also require increasingly sophisticated and costly sales efforts that are targeted at senior leaders. Similarly, the rate at which our customers purchase new or enhanced services depends on a number of factors, some of which are beyond our control.
If our efforts to maintain and expand our relationships with our existing customers are not successful, our business could be harmed.
U.S. government may terminate, cancel, delay, modify or curtail our contracts at any time prior to completion and, if we do not replace them, this may adversely affect our future revenues and could adversely impact our earnings.
Many of the U.S. government programs in which we participate, both as a contractor or subcontractor, extend for several years and include one or more base years and one or more option years. These programs are typically funded on an annual basis. Under these contracts, the U.S. government generally has the right not to exercise options to extend or expand our contracts and may otherwise terminate, cancel, modify or curtail our contracts at its convenience.
First, the process may be limited due to various factors, includingdelayed or disrupted. Changes in congressional schedules, negotiations for program funding levels or unforeseen world events can interrupt the eligibility of our accounts receivable under those agreements,funding for a program or contract. Second, funds for multi-year contracts can be changed in subsequent years in the status of our business, global credit market conditions, or perceptions of our business or industry by RCA, Action Capital, or other potential sources of financing.appropriations process. In January 2017, we borrowed $11 million under a credit agreement with Enlightenment Capital Solutions Fund II, L.P. to raise additional working capital and retire certain long-term obligations. If we are unable to maintain the Purchase Agreement and the Financing Agreement, we would need to obtain additional credit to fund our future operations. If credit is available in that event, lenders may impose more restrictive terms and higher interest rates that may reduce our borrowing capacity, increase our costs, or reduce our operating flexibility. The failure to maintain, extend, renew or replace our new sources of financing with a comparable arrangement or arrangements that provide similar amounts of liquidity for the Company would have a material negative impact on our overall liquidity, financial and operating results.
We depend onaddition, the U.S. Governmentgovernment has increasingly relied on IDIQ contracts and other procurement vehicles that are subject to a competitive bidding and funding process even after the award of the basic contract, adding an element of uncertainty to future funding levels. Delays in the funding process or changes in funding or funding priorities can impact the timing of available funds or can lead to changes in program content or termination at the government's convenience.
Any decisions by the U.S. government to not exercise contract options or to terminate, cancel, delay, modify or curtail our major programs or contracts would adversely affect our revenues, revenue growth and profitability.
We are dependent on a few key customer contracts for a significant portion of our salesfuture revenue, and a significant declinereduction in U.S. Government defense spendinggoods and services or delay in implementation to one or more of these contracts would reduce or delay our future revenue and could have an adverse impact onmaterially affect our financial condition and results of operations.anticipated operating results.
Our sales are highly concentrated with the U.S. Government. The customer relationship with the U.S. Government involves certain risks that are unique. The programs in which we participate must compete with other programs and policy imperatives during the budget and appropriations process. In each of the past three years, substantially allA small number of our net sales werelarge customer contracts are expected to comprise a significant portion of our future revenue. Our business will likely be harmed if any of our key customer contracts generate less revenue than we forecast, and the U.S. Government, particularly the Departmenttermination or delay of Defense ("DoD"). U.S. defense spending has historically been cyclical. Defense budgets have received their strongest support when perceived threats to national security raise the level of concern over the country's safety. As these threats subside, spending on the military tends to decrease. Rising budget deficits, increasing national debt, the cost of the global war on terrorism, and increasing costs for entitlement programs continue to put pressure on all areas of discretionary spending, which could ultimately impact the defense budget.
In recent years, U.S. government appropriations have been affected by larger U.S. government budgetary issues and related legislation. In 2011, Congress enacted the Budget Control Act of 2011 (the "BCA"), which established specific limits on annual appropriations for fiscal years 2012-2021. The BCA has been amended a number of times, most recently by the Bipartisan Budget Act of 2015 (the "BBA"). As a result, DoD funding levels have fluctuated over this period and have been difficult to predict. For example, the DoD budget was reduced by 7.8% in fiscal year 2013 as compared to fiscal year 2012, but remained essentially flat for fiscal years 2014 and 2015. The BBA raised DoD fiscal year 2016 funding approximately 5% relative to fiscal year 2015, but the ultimate DoD funding for fiscal year 2017 remains uncertain because the DoD is currently operating under a Continuing Resolution for fiscal year 2017. The Continuing Resolution limits funding levels to fiscal year 2016 amounts and does not authorize new spending initiatives, despite renewed support in Washington for increased defense expenditures. Future spending levels are subject to a wide range of outcomes, depending on Congressional action.
In addition, for a number of years the U.S. government has been unable to complete its budget and appropriation process prior to the beginning of the next fiscal year, resulting in both actuallarge contract or threatened governmental shut-downs and repeated use for extended time periods each year of Continuing Resolutions to fund the government. Such Continuing Resolutions, while they remain in effect, generally provide only prior-year funding levels for U.S. government agencies to continue operating, and greatly limit the ability of agencies to enter into new contracts. Additionally, while the BBA suspended the statutory debt limit through March 15, 2017, failure by the U.S. Government to further suspend or raise the limit once the Treasury Department exhausts its legal extraordinary measures to avoid breaching the limit in this and future years could result in the U.S. Government defaulting on its debts, with repercussions for the entire federal budget.
As a result of these and any other possible unforeseen factors, future U.S. Government defense spending levels are difficult to predict. Significant changes in defense spending or changes in U.S. Government priorities, policies and requirementsmultiple contracts could have a material adverse effect on our revenue and profitability. Adverse events affecting the programs subject to these contracts could also negatively affect our ability to process transactions under those contracts, which could adversely affect our revenue and the results of operations.
A failure to attract, train, retain and motivate key and skilled employees, including key members of our management team, would adversely affect our ability to execute our strategy and may disrupt our operations.
Our business relies heavily upon the expertise and services of our employees. Our success depends upon the continued services of our highly qualified and experienced executive officers and other key members of management. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives. Such changes in our executive management team may be disruptive to our business.
We are also substantially dependent on the continued service of our existing highly trained and skilled personnel, particularly our business development and operations financial condition or liquidity.
group, because of the complexity of our services and technologies. The technology industry is subject to substantial and continuous competition for engineers and other subject matter experts with high levels of experience in designing, developing and managing software, cybersecurity, and Internet-related services, as well as competition for sales executives, data scientists and operations personnel. Competition for skilled personnel is intense and many U.S. government programs also require contractors to have security clearances, certain of which can be difficult and time-consuming to obtain.
We may not be successful in attracting and retaining qualified personnel. From time to time, we have experienced, and we expect to continue to experience, difficulty in hiring, developing, integrating and retaining highly skilled employees with appropriate qualifications. These difficulties may be amplified by evolving restrictions on immigration, travel, or the availability of visas for skilled technology workers. These difficulties could be further amplified by the high cost of living in the Washington D.C. metropolitan area, where our headquarters is located. If we fail to attract new personnel or fail to retain and motivate our current key employees or group, our business and future growth prospects could be severely harmed.
Due to the competitive bidding process to obtain U.S. government contracts, are subject to competitive bidding, both upon initial issuance and re-competition. Ifre-competition, and the likelihood of bid protest, we aremay be unable to successfully compete in the bidding processachieve or if we fail to win re-competitions, it could adversely affect our operating performancesustain revenue growth and lead to an unexpected loss of revenue.profitability.
Substantially allMany of our U.S. government contracts are awarded through a competitive bidding process upon initial award and renewal, and we expect that this will continue to be the case.continue. There is often significant competition and pricing pressure as a result of this process. The competitive bidding process presents a number of risks, including the following:
•We may expend substantial funds and time to prepare bids and proposals for contracts that may ultimately be awarded to one of our competitors;
● | we may expend substantial funds and time to prepare bids and proposals for contracts that may ultimately be awarded to one of our competitors; |
•We may be unable to accurately estimate the resources and costs that will be required to perform any contract we are awarded, which could result in substantial cost overruns and decreased margins;● | we may be unable to accurately estimate the resources and costs that will be required to perform any contract we are awarded, which could result in substantial cost overruns; |
•We may encounter expense and delay if our competitors protest or challenge awards of contracts, and any such protest or challenge could result in a requirement to resubmit bids on modified specifications or in the termination, reduction or modification of the awarded contract;● | we may encounter expense and delay if our competitors protest or challenge awards of contracts, and any such protest or challenge could result in a requirement to resubmit bids on modified specifications or in the termination, reduction or modification of the awarded contract. Additionally, the protest of contracts awarded to us may result in the delay of program performance and the generation of revenue while the protest is pending; and |
•The protest of contracts awarded to us may result in the delay of program performance and the generation of revenue while the protest is pending; and● | if we are not given the opportunity to re-compete for U.S. government contracts previously awarded to us, we may incur expenses to protect such decision and ultimately may not succeed in competing for or winning such contract renewal. |
•If we are not given the opportunity to re-compete for U.S. government contracts previously awarded to us, we may incur expenses to protest such a decision and ultimately may not succeed in competing for or winning such contract renewal.
The U.S. government contracts for which we compete typically have multiple option periods, and if we fail to win a contract or a task order, we generally will be unable to compete again for that contract for several years. If we fail to win new contracts or to receive renewal contracts upon re-competition, it may result in additional costs and expenses and possible loss of revenue, and we will not have an opportunity to compete for these contract opportunities again until such contracts expire.
U.S. Government contracts generally are not fully funded at inceptionOur competitive position and are subject to amendment or termination, which places a significant portion of our revenues at risk and could adversely impact our earnings.
Our U.S. Government sales are funded by customer budgets, which operatefuture profitability depend, in part, on an October-to-September fiscal year. In February of each year, the President of the United States presents to the Congress the budget for the upcoming fiscal year. This budget proposes funding levels for every federal agency and is the result of months of policy and program reviews throughout the Executive branch. From February through September of each year, the appropriations and authorization committees of Congress review the President's budget proposals and establish the funding levels for the upcoming fiscal year in appropriations and authorization legislation. Once these levels are enacted into law, the Executive Office of the President administers the funds to the agencies. There are two primary risks associated with this process. First, the process may be delayed or disrupted. Changes in congressional schedules, negotiations for program funding levels or unforeseen world events can interrupt the funding for a program or contract. Second, funds for multi-year contracts can be changed in subsequent years in the appropriations process. In addition, the U.S. Government has increasingly relied on indefinite delivery, indefinite quantity ("IDIQ") contracts and other procurement vehicles that are subject to a competitive bidding and funding process even after the award of the basic contract, adding an additional element of uncertainty to future funding levels. Delays in the funding process or changes in funding can impact the timing of available funds or can lead to changes in program content or termination at the government's convenience. The loss of anticipated funding or the termination of multiple or large programs could have an adverse effect on our future sales and earnings.
We are subject to substantial oversight from federal agencies that have the authority to suspend our ability to biddevelop new technologies.
Our ability to increase revenue from existing customers and attract new customers will depend, in part, on contracts.
As a U.S. Government contractor, we are subjectour ability to oversight by many agenciesanticipate and entitiesrespond effectively to rapid technological changes and market developments. Virtually all of the U.S. Government that may investigateproducts we produce and make inquiriessell are highly engineered and require sophisticated manufacturing and system integration techniques and capabilities. The government market in which we primarily operate is characterized by rapidly changing technologies. The product or program needs of our business practicesgovernment and conduct audits of contractcommercial customers change and evolve regularly. Accordingly, our future performance and cost accounting. Depending on the results of any such audits and investigations, the U.S. Government may make claims against us. Under U.S. Government procurement regulations and practices, an indictment of a U.S. Government contractor could result in that contractor being fined and/or suspended for a period of time from eligibility for bidding on, or for the award of, new U.S. Government contracts. A conviction could result in debarment for a specified period of time. To the best of management's knowledge, there are no pending investigations, inquiries, claims or audits against the Company likely to have a material adverse effectpart depends on our ability to identify emerging technological trends, develop and manufacture competitive products, and bring those products to market quickly at cost-effective prices. If we fail to effectively anticipate, identify and respond to those changes in a timely manner, our business or our consolidated results of operations, cash flows or financial position.
We enter into fixed-price and other contracts that could subject us to losses if we experience cost growth that cannot be billed to customers.
Generally, our customer contracts are either fixed-priced or cost reimbursable contracts. Under fixed-priced contracts, which represented approximately 76.0% of our 2016 revenues, we receive a fixed price irrespective of the actual costs we incur and, consequently, we carry the burden of any cost overruns. Due to their nature, fixed-priced contracts inherently have more risk than cost reimbursable contracts, particularly fixed-price development contracts where the costs to complete the development stage of the program can be highly variable, uncertain and difficult to estimate. Under cost reimbursable contracts, subject to a contract-ceiling amount in certain cases, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance based. If our costs exceed the contract ceiling and are not authorized by the customer or are not allowable under the contract or applicable regulations, we may not be able to obtain reimbursement for all such costs and our fees may be reduced or eliminated. Because many of our contracts involve advanced designs and innovative technologies, we may experience unforeseen technological difficulties and cost overruns. Under both types of contracts,negatively impacted. Likewise, if we are unable to control costsdevelop new products that meet customers' changing needs, future sales and earnings may be adversely affected.
Our financial results may fluctuate due to increasing variability in our security solutions' sales and implementation cycles.
We market the majority of our security solutions directly to U.S. government customers. The sale and implementation of our services to these entities typically involves a lengthy education process and a significant technical evaluation and commitment of capital and other resources, which adds uncertainty to our sales cycle. This process is also subject to the risk of delays associated with customers' internal budgeting and other procedures for approving large capital expenditures, deploying new technologies within their networks and testing and accepting new technologies that affect key operations.
As a result, the sales and implementation cycles associated with certain of our services can be difficult to predict and lengthy. Our quarterly and annual operating results could be materially harmed if orders forecasted for a specific customer for a particular period of time are not realized.
Failure to effectively develop and execute our sales and business development capabilities will harm our ability to grow our business.
Our ability to increase our customer base and achieve broader market acceptance of our solutions and services will depend, to a significant extent, on our ability to perform at a high level in our business development, growth, sales and marketing operations and activities. We believe that selling and marketing our security solutions requires advanced sales skills, customer relationships and technical knowledge to generate interest and effectively communicate our solutions or services to new markets.
We may not achieve anticipated revenue growth from our growth team if we are unable to hire and develop talented business development and sales personnel, if our new business development and sales personnel are unable to achieve desired productivity levels in a reasonable period of time, or if we are unable to retain our initial cost estimates are incorrect, we can lose moneyexisting sales force.
We depend on these contracts. In addition,computing infrastructure operated by third parties to support some of our contracts have provisions relatingsolutions and customers, and to cost controlshelp complete critical business functions. Any errors, disruption, performance problems, or failure in their or our operational infrastructure could adversely affect our business, financial condition, and audit rights, and if we fail to meet the terms specified in those contracts, we may not realize their full benefits. Lower earnings caused by cost overruns and cost controls would have a negative impact on our results of operations.
We rely on the technology, infrastructure, and software applications of certain third parties in order to host or operate some of certain key platform features or functions of our business. Additionally, we rely on third-party computer hardware and cloud capabilities in order to deliver our solutions and services. Our business is dependent on the integrity, security and efficient operation of this technology and infrastructure, and we do not necessarily control the operation or data security of the third-parties we utilize.
If any of these third-party services experience errors, disruptions, security issues, or other performance deficiencies; if they are updated such that our solutions become incompatible; if these services, software, or hardware fails or becomes unavailable due to extended outages, interruptions, defects, or otherwise; or if they are no longer available on commercially reasonable terms or prices (or at all), these issues could result in errors or defects in our solutions, failure of our solutions to perform, decline in our revenue and margins, damage to our reputation and brand, exposure to legal or contractual liability, increase in our expenses, and interruption in our ability to manage our operations. In addition, our processes for managing our sales and servicing our customers could be impaired until equivalent services or technology, if available, are identified, procured, and implemented, all of which may take significant time and resources, increase our costs, and could adversely affect our business. Many of these third-party providers attempt to impose limitations on their liability for such errors, disruptions, defects, performance deficiencies, or failures, and if enforceable, we may have additional liability to our customers or third-party providers.
Furthermore, our solutions are, in many cases, important or essential to our customers' operations, including in some cases, their cybersecurity or oversight and compliance programs, and subject to service level agreements. Any interruption in our service, whether as a result of an internal or third-party issue, could damage our brand and reputation, cause our customers to terminate or not renew their contracts with us or decrease the use of our solutions and services, require us to indemnify our customers against certain losses, result in our issuing credit or paying penalties or fines, subject us to other losses or liabilities, cause our solutions to be perceived as unreliable or unsecure, and prevent us from gaining new or additional business from current or future customers, any of which could harm our business, financial condition, and results of operations.
Moreover, to the extent that we do not effectively address capacity constraints, upgrade our systems as needed, and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business, financial condition, and results of operations could be adversely affected. The provisioning of additional cloud hosting capacity requires lead time. These third parties have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If these third parties increase pricing terms, terminate or seek to terminate our contractual relationship, establish more favorable relationships with our competitors, or change or interpret their terms of service or policies in a manner that is unfavorable with respect to us, we may be required to transfer to other cloud providers or invest in a private cloud. In that case, we could incur significant costs and experience possible service interruption in connection with doing so, or risk loss of customer contracts if they are unwilling to accept such a change.
A failure to maintain our relationships with our third-party providers (or obtain adequate replacements), and to receive services from such providers that do not contain any material errors or defects, could adversely affect our ability to deliver effective products and solutions to our customers and adversely affect our business and results of operations.
We depend on third parties for certain operational services and components of our products in order to fully perform under our contracts, and the failure or disruption of a third party to perform these services could have an adverse impact on our earnings.business.
We rely on subcontractors and other companiessuppliers to provide raw materials, major components and subsystems for our products or to perform a portion of the services that we provide to our customers. Occasionally, we rely on only one or two sources of supply, which, if disrupted, could have an adverse effect on our ability to meet our commitments to customers. We depend on these subcontractors and vendorssuppliers to fulfill their contractual obligations in a timely and satisfactory manner in full compliance with customer requirements. If one or more of our subcontractorssuppliers or supplierssubcontractors is unable to satisfactorily provide on a timely basis the agreed-upon supplies or perform the agreed-upon services per its contractual obligations, our ability to perform our obligations as a prime contractor may be adversely affected.affected, and we may be exposed to liability.
Our systems and the third-party systems upon which we and our customers rely are also vulnerable to damage or interruption from catastrophic occurrences or events outside of our control.
Our future profitability depends,systems and the third-party systems, upon which we and our customers rely, are also vulnerable to damage or interruption from catastrophic occurrences, telecommunication failures, cybersecurity threats, social unrest, geopolitical and similar events, or acts of misconduct. Despite any precautions we may take, the occurrence of a catastrophic disaster or other unanticipated problems at our or our third-party vendors' hosting facilities, or within our systems or the systems of third parties upon which we rely, could result in part, oninterruptions, performance problems, or failure of our infrastructure, technology, or solutions, which may adversely impact our business. In addition, our ability to develop new technologies and maintainconduct normal business operations could be severely affected. In the event of significant physical damage to one of these facilities, it may take a qualified workforcesignificant period of time to meet the needsachieve full resumption of our customers.services, and our disaster recovery planning may not account for all eventualities. In addition, any negative publicity arising from these disruptions could harm our reputation and brand and adversely affect our business.
Virtually allWe may be also be impacted by natural disasters, wars, terrorist attacks, power outages, public health crisis (epidemics or pandemics), or other events outside of our control. If major disasters such as earthquakes, floods, hurricanes, tornadoes, fires, or other events occur, or our information system or communications network breaks down, operates improperly, or is unusable, our headquarters and other facilities may be seriously damaged, or we may have to stop or delay production and delivery of our solutions and services.
In addition, the recent COVID-19 pandemic disrupted the normal operations of many businesses and other organizations, including the temporary closure or scale-back of business operations and the imposition of either quarantine or remote work or meeting requirements for employees, either by government order or on a voluntary basis. The pandemic may adversely affect our customers' ability to perform their missions and is, in many cases disrupting their operations. It may also result in a change in spending priorities on the part of our customers, which could precipitate the cancellation, delay or deferral of programs, contracts or business opportunities. It may also impact the ability of our subcontractors, partners, and suppliers to operate and fulfill their contractual obligations, and result in an increase in their costs and cause delays in performance. These supply chain effects, and the direct effect of the products that we producevirus and sell are highly engineered and require sophisticated manufacturing and system integration techniques and capabilities. The government market in which we primarily operate is characterized by rapidly changing technologies. The product and program needs ofthe disruption on our government and commercial customers change and evolve regularly. Accordingly, our future performance in part depends onoperations, may negatively impact both our ability to identify emerging technological trends, developmeet customer demand and manufacture competitive products,our revenue and bring those productsprofit margins. Our employees, in some cases, are working remotely due either to market quickly at cost-effective prices. In addition, because of the highly specialized naturesafety concerns or to customer-imposed limitations and using various technologies to perform their functions.
Although we maintain crisis management and disaster response plans, such events could make it difficult or impossible for us to deliver our solutions and services to our customers, and could decrease demand for our offerings. We may incur shutdowns, delays, disruptions or expenses relating to such events outside of our control, which could have a material adverse impact on our business, we must be able to hireoperating results and retain the skilled and appropriately qualifiedfinancial condition. Moreover, any significant natural disaster, pandemic, other catastrophic or force majeure events could affect our personnel, necessary to perform the services required by our customers. If we are unable to develop new products that meet customers' changing needssupply chain, or successfully attract and retain qualified personnel, future sales and earnings may be adversely affected.
The business environment in which we operate is highly competitive and may impair ourservice providers' ability to achieve revenue growth.
We operateprovide materials and perform services on a timely basis. Act of terrorism and other geopolitical unrest could also potentially cause disruptions in industry segments that are diverse. Based upon our current market analysis, there is no single companybusiness or small groupthe business of companies inour supply chain, services providers, or the economy as a dominant competitive position. Some large competitors offer capabilities in a number of markets that overlap many of the same areas in which we offer services, while certain companies are focused upon only one or a few of such markets. Some of the firms that compete with us in multiple areas include: Northrop Grumman, Lockheed Martin and General Dynamics. In addition, we compete with smaller specialty companies, including risk and compliance management companies, organizational messaging companies, and security consulting organizations, and companies that provide secure network offerings. Ifwhole. Because we do not compete effectively, we may suffer price reductions, reduced gross margins,carry insurance for all of these possible losses, and loss of market share.
Some ofsignificant recovery time could be required to resume operations, our security solutions have lengthy salesfinancial condition and implementation cycles, which could impact significantly our results of operations if projected orders are not realized.
We market the majority of our security solutions directly to U.S. Government customers. The sale and implementation of our services to these entities typically involves a lengthy education process and a significant technical evaluation and commitment of capital and other resources. This process is also subject to the risk of delays associated with customers' internal budgeting and other procedures for approving large capital expenditures, deploying new technologies within their networks and testing and accepting new technologies that affect key operations. As a result, the sales and implementation cycles associated with certain of our services can be lengthy. Our quarterly and annual operating results could be materially harmed if orders forecasted for a specific customer for a particular quarter are not realized.
Our business could be negativelyadversely affected by cyber or other security threats or other disruptions.
As a U.S. defense contractor, we face cyber threats, threats to the physical securitysuch an event outside of our facilities and employees, and terrorist acts, as well as the potential for business disruptions associated with information technology failures, natural disasters, or public health crises. We routinely experience cyber security threats, threatscontrol.
Failure to our information technology infrastructure and attempts to gain access to our sensitive information, as do our customers, suppliers, subcontractors and joint venture partners. We may experience similar security threats at customer sites that we operate and manage as a contractual requirement. Prior cyber attacks directed at us have not had a material impact on our financial results, and we believe our threat detection and mitigation processes and procedures are adequate. The threats we face vary from attacks common to most industries to more advanced and persistent, highly organized adversaries who target us because we protect national security information. If we are unable to protect sensitive information, our customers or governmental authorities could question the adequacy of our threat mitigation and detection processes and procedures. Due to the evolving nature of these security threats, however, the impact of any future incident cannot be predicted. Occurrence of any of these events could adversely affect our internal operations, the services we provide to our customers, loss of competitive advantages derived from our research and development efforts or other intellectual property, early obsolescence of our products and services, our future financial results, or our reputation.
If we are unable toadequately protect our intellectual property, technologies and proprietary rights could harm our revenues may be impacted adversely by the unauthorized usebusiness, competitive position, financial condition, and results of our products and services.operations.
Our success depends, in part, on our internally developed technologies, patents and other intellectual property. Despite our precautions, it may be possible for a third party to copy or otherwise obtain and use our trade secrets or other forms of intellectual property without authorization. Furthermore, the laws of foreign countries may not protect our proprietary rights in those countries to the same extent U.S. law protects these rights in the United States. In addition, it is possible that others may independently develop substantially equivalent intellectual property. If we do not effectively protect our intellectual property, our business could suffer.
To protect our intellectual property rights, we may be required to spend significant resources to monitor and protect our rights. In the future, we may have to resort to litigation to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others. ThisRegardless of outcome, this type of litigation regardless of its outcome, could result in substantial costs and diversion of management and technical resources. The inability to adequately protect and enforce our intellectual property and other proprietary rights could seriously harm our business, results of operations and financial condition.
Failure to accurately estimate the factors upon which we base our contract pricing could adversely impact our earnings and profitability.
Generally, our customer contracts are either fixed-price or cost-reimbursable. Under fixed-price contracts, which represented approximately 78.5% of our 2023 revenues, we receive a fixed price irrespective of the actual costs we incur and, consequently, we carry the burden of any cost overruns. Due to their nature, fixed-price contracts inherently have more risk than cost-reimbursable contracts, particularly fixed-price development contracts where the costs to complete the development stage of the program can be highly variable, uncertain and difficult to estimate. Under cost-reimbursable contracts, subject to a contract-ceiling amount in certain cases, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance-based. If our costs exceed the contract ceiling and are not authorized by the customer or are not allowable under the contract or applicable regulations, we may not be able to obtain reimbursement for all such costs and our fees may be reduced or eliminated. Because many of our contracts involve advanced designs and innovative technologies, we may experience unforeseen technological difficulties and cost overruns.
Under both types of contracts, we must accurately estimate the likely volume of work that will occur, costs and resource requirements involved, and assess the probability of completing individual transactions or milestones within the contracted time period and amount to maximize or earn profit on these contracts. In addition, some of our contracts have provisions relating to cost controls and audit rights, and if we fail to meet the terms specified in those contracts, we may not realize their full benefits. Cost overruns or poor cost controls could lower earnings, or may incur a net loss on a contract, and cause a negative impact on our results of operations.
We will face risks associated with the growth of our business in new commercial markets and with new customer verticals, and we may not be able to continue our organic growth nor have the necessary resources to dedicate to the overall growth of our business.
To increase our revenue, and achieve and maintain profitability, we plan to expand our operations in new commercial markets, including those where we may have limited operating experience, and may be subject to increased business, technology and economic risks that could affect our financial results. In the future, we may increasingly focus on commercial customers, including in the banking, financial services, healthcare, manufacturing, telecommunication, airlines and aerospace, insurance, retail, transportation, shipping and logistics, and energy industries, as well as other critical infrastructure industries. Entering new verticals and expanding in the verticals in which we are already operating will continue to require significant resources and there is no guarantee that such efforts will be successful or beneficial to us.
Although sales to a new customer have often led to additional sales to the same customer or similarly situated customers, it is uncertain we will achieve the same penetration and organic growth in the future, and our reputation, business, financial condition, and results of operations could be negatively impacted. As we expand into and within new and emerging markets and heavily regulated industry verticals, we will likely face additional regulatory scrutiny, risks, and burdens from the governments and agencies which regulate those markets and industries.
Failure to deliver high-quality technical support services may adversely affect our relationships with our customers and our financial results.
Our customers depend on our support organization to resolve technical issues relating to our solutions and offerings. We may be unable to respond quickly enough to accommodate short-term increases in customer demand for support services. Increased customer demand for these services, without corresponding revenues, could increase costs and adversely affect our operating results. In addition, our sales process is highly dependent on the reputation of our solutions and support and on positive recommendations from our existing customers. Failure to maintain high-quality technical support, or a market perception that we do not maintain high-quality support, could adversely affect our reputation, our ability to sell our offerings to existing and prospective customers, and our business, operating results and financial position.
Our growth depends, in part, on the success of our strategic relationship with our partner organizations.
To grow our business, we will continue to build, grow and maintain relationships with third parties, such as partner organizations, that provide complementary cybersecurity offerings. Identifying partners, and negotiating relationships with them, requires significant time and resources. The relationship we have with our partners, and that our partners have with our customers, provides our customers with enhanced value for our solutions and services.
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Our agreements with our partners are generally non-exclusive; therefore, our partners may offer customer solutions from several companies, including solutions and services that compete with ours. If our partners do not effectively market and sell our solutions or services, or use greater efforts to market and sell their solutions or those of our competitors, or fail to meet the needs of our customers, or if we are unsuccessful in establishing or maintaining our relationships with our partners, our ability to compete in the marketplace or to grow our revenue could be impaired, and our results of operations could be adversely affected.If we are unable to license third-party technology that is used in our products and services to perform key functions, the loss could have an adverse affecteffect on our revenues.
We currently incorporate technology that we license from third-parties, including software, into our solutions. The third-party technology licenses used by us may not continue to be available on commercially reasonable terms or at all. Our business could suffer if we lost the rightsright to use these technologies. Additionally, if we are unable to license technology from third parties, we may be forced to acquire or develop alternative technology, which we may be unable to do in a commercially feasible manner or at all, and may require us to use alternative technology of lower quality or performance standards. As a result, our margins and results of operations could be significantly harmed.
A third-party could claim that the licensed software infringes a patent or other proprietary right. Litigation between the licensor and a third-party or between usa third party and a third-partyus could lead to royalty obligations for which we are not indemnified or for which indemnification is insufficient, or we may not be able to obtain any additional license on commercially reasonable terms or at all. The loss of, or our inability to obtain or maintain, any of these technology licenses could delay the introduction of new products or services until equivalent technology, if available, is identified, licensed and integrated. This
The inability to set optimal pricing structures for our solutions and services could adversely impact our business, financial condition and results of operations.
From time to time, we change our pricing model in response to competition, global economic conditions, and general reductions in our customers' spending levels, pricing studies, or changes in how our solutions are broadly consumed. Similarly, as we introduce new products and services, or as a result of the evolution of our existing solutions and services, we may have difficulty determining the appropriate price structure for our products and services. Further, as new and existing competitors introduce new products or services that compete with ours, or revise their pricing structures, we may be unable to attract new customers at the same price or based on the same pricing model as we have used historically. Moreover, as we continue to target selling our solutions and services to larger organizations, these larger organizations may demand substantial price concessions. We may also need to change pricing policies to accommodate government pricing guidelines for our contracts with federal, state, local, and foreign governments and government agencies.
If we are unable to modify or develop pricing models and strategies that are attractive to existing and prospective customers, while enabling us to significantly grow our sales and revenue relative to our associated costs and expenses in a reasonable period of time, our business, financial condition, and results of operations may be adversely impacted.
Sales to customers outside the United States expose us to risks inherent in international operations.
We sell our services outside the United States and are subject to unique risks and challenges associated with international business. These risks and challenges include, but are not limited to, (a) compliance with governmental laws and regulations, (b) foreign business practices, (c) tax environments, (d) protection of our intellectual property, and (e) regional economic and geopolitical conditions.
Although our international operations have historically generated a small proportion of our revenues, any of these factors could negatively impact our business and results of operations. In addition, these factors may also negatively impact our ability to successfully expand into emerging market countries, where we have little or no operating experience, where it can be costly and challenging to establish and maintain operations, including hiring and managing required personnel, and difficult to promote our brand, and where we may not benefit from any first-to-market advantage or otherwise succeed.
We may be subject to legal proceedings, regulatory disputes and governmental inquiries that could materially harm our business.business, operating results, and financial condition.
We areFrom time to time, in the ordinary course of business, we have been involved in a number of legal proceedings. We cannot predictproceedings and in the outcome of litigationfuture may be subject to lawsuits, claims, government investigations and other contingencies with certainty.
proceedings. These may include lawsuits and claims related to securities compliance, contracts, subcontracts, intellectual property, employment and wage claims, and other matters. Our business may be adversely affected by the outcome of legal proceedings and other contingencies that cannot be predicted with certainty. As required by GAAP, we estimate lossThose contingencies include, but are not limited to, the cost of litigation and establish reserves based on our assessmentunpredictable court decisions. Adverse outcomes with respect to litigation, or a government inquiry, or any of contingencies where liability is deemed probable and reasonably estimable in light of the facts and circumstances known to us at a particular point in time. Subsequent developments inthese legal proceedings may result in significant settlement costs or judgments, penalties and fines, or harm our reputation, all of which could negatively affect our assessmentbusiness, results of operations and estimatesfinancial conditions.
Any potentialPotential future acquisitions, strategic investments, partnerships, divestitures, mergers or joint ventures may subject us to significant risks, any of which could harm our business.
We have in the past acquired, and may in the future seek to acquire or invest in complementary businesses, products or technologies to enhance our technical capabilities or otherwise offer growth opportunities.
Our long-term strategy may include identifying and acquiring, partnering with, investing in or merging with suitable candidates on acceptable terms, or divesting of certain business lines or activities. In particular, over time, we may acquire, make investments in, or merge with providers of product offerings that complement our business or may terminate such activities. Mergers,Partnerships, mergers, joint ventures, acquisitions, and divestitures include a number of risks and present financial, managerial and operational challenges, including but not limited to:
● | diversion of management attention from running our existing business; |
•Diversion of management attention from running our existing business;● | possible material weaknesses in internal control over financial reporting; |
•Possible material weaknesses in internal control over financial reporting;● | increased expenses including legal, administrative and compensation expenses related to newly hired or terminated employees; |
•Increased expenses, including legal, administrative and compensation expenses related to newly hired or terminated employees;● | increased costs to integrate the technology, personnel, customer base and business practices of the acquired company with us; |
•Increased costs to integrate the technology, personnel, customer base and business practices of the acquired company with us;● | potential exposure to material liabilities not discovered in the due diligence process; |
•Potential exposure to material liabilities not discovered in the due diligence process;● | potential adverse effects on reported operating results due to possible write-down of goodwill and other intangible assets associated with acquisitions; and |
•Potential adverse effects on reported operating results due to possible write-down of goodwill and other intangible assets associated with acquisitions; and● | unavailability of acquisition financing or unavailability of such financing on reasonable terms. |
•Unavailability of acquisition financing or unavailability of such financing on reasonable terms.
Any acquired business, technology, service or product could significantly under-performunderperform relative to our expectations and may not achieve the benefits we expect from possible acquisitions. For all these reasons, our pursuit of an acquisition, partnership, investment, divestiture, merger, or joint venture could cause its actual results to differ materially from those anticipated.
Public confidence in, and acceptance of, identity platforms and biometrics generally, and our solutions specifically, will be a key factor in our business’s continued growth.
Our future profitability will depend, in part, on public confidence in and acceptance of identity platforms and biometrics generally. Continued acceptance of identity platforms and biometric information as a secure and reliable method to identify individuals, mitigate risk and minimize fraud is an important factor in our continued growth. While both identity platforms and biometrics have become more widely adopted, they may not achieve universal acceptance. The attractiveness of our solutions to our customers is impacted by a number of factors, including the willingness of individuals to provide their personal information, including biometric information, to private or governmental entities, the level of confidence that such information can be stored safely and securely, and trust that such information will not be misused or breached. Certain individuals may never accept the use of biometrics as being safe. If identity platforms and biometrics do not achieve universal acceptance, or our solutions are not competitive with our industry players, our growth could be limited, which could materially adversely affect our business, results of operations and financial condition.
On the other hand, any negative associations or perceptions with our solutions or biometrics could impede our business growth and could adversely affect our business, results of operations and financial condition. Likewise, any breaches on our information technology systems, particularly on the use and collection of biometric information, may subject us to significant reputational, financial, legal or operational consequences.
Actions that we are taking to restructure our business to improve profitability may not be as effective as anticipated.
During the fourth quarter of fiscal year 2022, we committed to a restructuring plan to streamline our workforce and spending to better align our cost structure with the volume of our business. We began the execution of the restructuring plan early 2023, incurring restructuring-related costs, including employee severance and related benefit costs and external consulting and advisory fees related to the implementation of the restructuring plan. We may be unable to realize the expected improved profitability and efficiency from our restructuring efforts.
Industry, Legal and Regulatory Risks
The business environment in which we operate is highly competitive, and we may not be able to compete successfully against existing or future competitors.
We operate in an intensely competitive market and diverse industry segment, and we expect competition to increase in the future from established businesses and new market entrants. Based on our current market analysis, there is no single company or small group of companies in a dominant competitive position. Some large competitors offer capabilities in a number of markets that overlap many of the same areas in which we offer services, while certain companies are focused upon only one or a few of such markets. Some of the firms that compete with us in multiple areas include large, established defense contractors. In addition, we compete with smaller specialty companies, including risk and compliance management companies, organizational messaging companies, and security consulting organizations, and companies that provide secure network offerings. If we are unable to anticipate or react to these challenges or do not compete effectively, our competitive position could weaken and could result in a decline in revenue or reduced revenue growth, price reductions or reduced gross margins, and loss of market share, all of which could adversely affect our business.
A decline in the federal budget, changes in spending or budgetary priorities of the U.S. government, a prolonged U.S. government shutdown or delays in contract awards may significantly and adversely affect our future revenues, cash flow and financial results.
Our customers are substantially U.S. government agencies. The customer relationship with the U.S. government involves certain unique risks. The programs we participate in must compete with other programs and policy imperatives during the budget and appropriations process.
If government funding relating to our contracts with the U.S. government becomes unavailable, or is reduced or delayed, or planned orders are reduced, our contracts or subcontracts may be terminated or adjusted by the U.S. government or the prime contractor. Our operating results could also be adversely affected by spending caps or changes in the budgetary priorities of the U.S. government, as well as delays in program starts or the award of contracts or task orders under contracts.
In recent years, U.S. government appropriations have been affected by larger U.S. government budgetary issues and related legislation. As a result, DoD funding levels have fluctuated and have been difficult to predict. Future spending levels are subject to a wide range of factors, including Congressional action. In addition, over the last few years, the U.S. government has been unable to complete its budget process before the end of its fiscal year, resulting in both a government shutdown and continuing resolutions to extend sufficient funds only for U.S. government agencies to continue operating. Not long ago, the federal government was shut down due to a lack of funding for over one month between late 2018 and early 2019, and currently a series of continuing resolutions have funded the government at fiscal year 2023 levels, with no new starts. Moreover, the national debt threatened to reach the statutory debt ceiling in 2023, and such an event in future years could result in the U.S. government defaulting on its debts.
As a result, government spending levels are difficult to predict beyond the near term due to numerous factors, including the external threat environment, future government priorities and the state of government finances. Significant changes in government spending or changes in U.S. government priorities, policies and requirements could have a material adverse effect on our results of operations, financial condition or liquidity.
We are subject to the seasonality of U.S. government spending.
We derive a substantial portion of our revenues from U.S. government contracting, and as a result, we are subject to the annual seasonality of U.S. government purchasing. Because the U.S. government fiscal year ends on September 30, it is common for U.S. government agencies to award extra tasks in the weeks immediately prior to the end of its fiscal year in order to avoid the loss of unexpended fiscal year funds. As a result of this seasonality, we have historically experienced higher revenues in our third and fourth fiscal quarters, ending September 30 and December 31, respectively, with the pace of orders typically substantially reduced during our first and second fiscal quarters ending March 31 and June 30, respectively.
We are required to comply with stringent, complex and evolving laws, rules, regulations and standards, as well as contractual obligations relating to privacy, data protection and security, technology protection, and other matters. Any actual or perceived failure to comply with these requirements could have a material effect on our business.
We are subject to a variety of local, state, national, and international laws and directives and regulations in the United States and abroad that involve matters central to our business, including privacy and data protection, data security, data storage, retention, transfer and deletion, technology protection, and personal information. Foreign data protection, data security, privacy, and other laws and regulations can impose different obligations or be more restrictive than those in the United States. These U.S. federal and state and foreign laws and regulations, which, depending on the regime, may be enforced by private parties or government entities, are constantly evolving and can be subject to significant change, and they are likely to remain uncertain for the foreseeable future. In addition, the application, interpretation, and enforcement of these laws and regulations are often uncertain, and may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices. A number of proposals are pending before U.S. federal, state, and foreign legislative and regulatory bodies that could significantly affect our business.
The overarching complexity of privacy and data protection laws and regulations around the world pose a compliance challenge that could manifest in costs, damages, or liability in other forms as a result of failure to implement proper programmatic controls, failure to adhere to those controls, or the malicious or inadvertent breach of applicable privacy and data protection requirements by us, our employees, our business partners, or our customers.
In addition to government regulation, self-regulatory standards and other industry standards may legally or contractually apply to us, be argued to apply to us, or we may elect to comply with such standards or to facilitate our customers' compliance with such standards. Because privacy, data protection, and information security are critical competitive factors in our industry, we may make statements on our website, in marketing materials, or in other settings about our data security measures and our compliance with, or our ability to facilitate our customers' compliance with, these standards.
We also expect that there will continue to be new proposed laws and regulations concerning privacy, data protection, and information security, and we cannot yet determine the impact such future laws, regulations and standards, or amendments to or re-interpretations of existing laws and regulations, industry standards, or other obligations may have on our business. New laws, amendments to or re-interpretations of existing laws and regulations, industry standards, and contractual and other obligations may require us to incur additional costs and restrict our business operations. As these legal regimes relating to privacy, data protection, and information security continue to evolve, they may result in ever-increasing public scrutiny and escalating levels of enforcement and sanctions. Furthermore, because the interpretation and application of laws, standards, contractual obligations and other obligations relating to privacy, data protection, and information security are uncertain, these laws, standards, and contractual and other obligations may be interpreted and applied in a manner that is, or is alleged to be, inconsistent with our data management practices, our policies or procedures, or the features of our solutions. If so, in addition to the possibility of fines, lawsuits, and other claims, we could be required to fundamentally change our business activities and practices or modify our solutions, which could have an adverse effect on our business. We may be unable to make such changes and modifications in a commercially reasonable manner or at all, and our ability to fulfill existing obligations, make enhancements, or develop new solutions and features could be limited. Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations, and policies that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our solutions.
These existing and proposed laws and regulations can be costly to comply with and can make our solutions and services less effective or valuable, delay or impede the development of new products, result in negative publicity, increase our operating costs, require us to modify our data handling practices, limit our operations, impose substantial fines and penalties, require significant management time and attention, or put our data or technology at risk. Any failure or perceived failure by us or our solutions to comply with U.S. or applicable foreign laws, regulations, directives, policies, industry standards, or legal obligations relating to privacy, data protection, or information security, or any security incident that results in loss of or the unauthorized access to, or acquisition, use, release, or transfer of, personal information, personal data, or other customer or sensitive data or information may result in governmental investigations, inquiries, enforcement actions and prosecutions, private claims and litigation, indemnification or other contractual obligations, other remedies, including fines or demands that we modify or cease existing business practices, or adverse publicity, and related costs and liabilities, which could significantly and adversely affect our business and results of operations.
We are subject to substantial oversight from federal agencies that have the authority to suspend our ability to bid on contracts.
As a U.S. government contractor, we are subject to oversight by many agencies and entities of the U.S. government that may investigate and make inquiries about our business practices and conduct audits of contract performance and cost accounting. Depending on the results of any such audits and investigations, the U.S. government may make claims against us. Under U.S. government procurement regulations and practices, an indictment of a U.S. government contractor could result in that contractor being fined and/or suspended for a period of time from eligibility for bidding on, or for the award of, new U.S. government contracts. A conviction could result in debarment for a specified period of time. To the best of management's knowledge, there are no pending government investigations, inquiries, claims or audits against the Company likely to have a material adverse effect on our business or our consolidated results of operations, cash flows or financial position.
We are subject to governmental export and import controls that could impair our ability to compete in international markets and subject us to liability if we are not in full compliance with applicable laws.
Some of our solutions are subject to export and import controls, including, without limitation, the Department of State's Directorate of Defense Trade Controls, the Commerce Department's Export Administration Regulations, U.S. Customs regulations and various economic and trade sanctions regulations established by the Treasury Department's Office of Foreign Assets Control. If we fail to comply with these U.S. export control laws and import laws, we and certain of our employees could be subject to substantial civil or criminal penalties, including the possible loss of export or import privileges; fines, which may be imposed on us and responsible employees or managers; and, in extreme cases, the incarceration of responsible employees or managers. Obtaining the necessary authorizations, including any required license, may be time-consuming, is not guaranteed and may result in the delay or loss of sales opportunities.
Furthermore, the U.S. export control laws and economic sanctions laws prohibit the shipment of certain products and services to U.S. embargoed or sanctioned countries, governments and persons. Even though we take precautions to prevent our solutions from being provisioned or provided to U.S. sanctions targets in violation of applicable regulations, our solutions could be provisioned to those targets despite such precautions. Any such sales could have negative consequences, including government investigations, penalties and reputational harm. Changes in our solutions or changes in export and import regulations may create delays in the introduction, sale and deployment of our solutions in international markets or prevent the export or import of our solutions to certain countries, governments or persons altogether. Any decreased use of our solutions or limitation on our ability to export or sell our solutions may adversely affect our business, financial condition and results of operations.
Risks Related to Our Financial Reporting and Common Stock
We may fail to meet our publicly announced guidance and other expectations about our business and operating results, which may cause our stock price to decline.
From time to time, we may release guidance in our quarterly earnings conference calls, quarterly earnings releases, or otherwise, regarding our future performance that represents our management's estimates as of the date of release. This guidance, which includes forward-looking statements, is based on projections prepared by our management. Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. Our aim is to state possible outcomes as high and low ranges to provide a sensitivity analysis as variables are changed but are not intended to imply that actual results could not fall outside of the suggested ranges. The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. We do not accept any responsibility for any projections or reports published by any such third parties.
Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances beyond our control could result in the actual operating results being different from our guidance, and the differences may be adverse and material. In light of the foregoing, investors are urged not to rely upon our guidance in making an investment decision regarding our common stock.
Furthermore, if we make downward revisions to our previously announced guidance, or if our publicly announced guidance of future operating results fails to meet the expectations of securities analysts, investors or other interested parties, the price of our common stock may decline.
Our quarterly operating results fluctuate and may fall short of prior periods, our projections or the expectations of securities analysts or investors, which could adversely affect the trading price of our stock.
Our operating results have fluctuated from quarter to quarter at points in the past, and they may do so in the future. Therefore, the results of any one quarter may not be a reliable indication of results to be expected for any other quarter or for any year. If we fail to increase our results over prior periods, to achieve our projected results or to meet the expectations of securities analysts or investors, our stock price may decline, and the decrease in the stock price may be disproportionate to the shortfall in our financial performance. Results may be affected by various factors, including those described in these risk factors.
We cannot guarantee that our share repurchase program will be fully implemented or that it will enhance long-term stockholder value.
In May 2022, our Board of Directors approved a share repurchase program ("SRP") for the repurchase of up to $50.0 million of our outstanding shares of our common stock. As of December 31, 2023, approximately $38.7 million remained available under the stock repurchase program. The repurchase program has no termination date and may be suspended for periods, amended or discontinued at any time. We are not obligated to repurchase a specified number or dollar value of shares. Share repurchases under the program will be made from time to time in private transactions or open market purchases, as permitted by securities laws and other legal requirements. There can be no guarantee about the timing of our share repurchases, or that the volume of such repurchases will increase. The stock repurchase program could affect the price of our common stock, increase volatility, diminish our cash reserves, and even if fully implemented may not enhance long-term stockholder value.
If we fail to maintain an effective system of internal control, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.
We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), the rules and regulations of Nasdaq, and other securities rules and regulations that impose various requirements on public companies. Our management and other personnel devote substantial time and resources to comply with these rules and regulations. Such compliance has increased, and will continue to increase, our legal, accounting and financial compliance costs, makes some activities more difficult, time-consuming and costly, and places significant strain on our personnel, systems and resources. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting, and to report any material weaknesses in such internal control.
In fiscal year ended 2022, management identified a material weakness related to ineffective design and maintenance of controls over the assessment of the accounting for forfeitures of non-standard equity awards. While the identified material weakness has been remediated in fiscal year 2023, we cannot provide assurance that we will not identify additional material weaknesses in future periods or that we will be successful in remediating any future significant deficiencies or material weaknesses in internal control over financial reporting.
We are continuing to develop and refine our disclosure controls, internal control over financial reporting and other procedures that are designed to ensure information required to be disclosed by us in our consolidated financial statements and in the reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. Our current controls and any new controls we develop may become inadequate because of changes in conditions in our business. Additionally, to the extent we acquire other businesses, the acquired company may not have a sufficiently robust system of internal controls and we may uncover new deficiencies. Weaknesses in our internal controls may be discovered in the future. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our results of operations, may result in a restatement of our consolidated financial statements for prior periods, could cause us to fail to meet our reporting obligations, and could result in an adverse opinion regarding our internal control over financial reporting from our independent registered public accounting firm, and lead to investigations or sanctions by regulatory authorities. Any failure to maintain effective disclosure controls and internal control over financial reporting could have a material and adverse effect on our business and results of operations and could cause a decline in the price of our stock.
Section 404 of the Sarbanes-Oxley Act requires our management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting. We are also required to have our independent registered public accounting firm attest to, and issue an opinion on, the effectiveness of our internal control over financial reporting. If we are unable to assert that our internal control over financial reporting is effective, or if, when required, our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline.
General Risk Factors
If our judgments or estimates relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our results of operations could be adversely affected.
The preparation of our consolidated financial statements in conformity with U.S. GAAP requires management to make judgments, estimates, and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities, and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our common stock. Significant judgments, estimates, and assumptions used in preparing our consolidated financial statements include, or may in the future include, those related to revenue recognition, goodwill and other long-lived assets, and income taxes.
Weakened global economic conditions may adversely affect our industry, business, operating results and financial condition.
Our overall performance depends in part on worldwide economic and geopolitical conditions. The United States and other key international economies have experienced cyclical downturns from time to time in which economic activity was impacted by falling demand for a variety of goods and services, restricted credit, poor liquidity, reduced corporate profitability, volatility in credit, equity and foreign exchange markets, bankruptcies and overall uncertainty with respect to the economy. These economic conditions can arise suddenly and the full impact of such conditions can remain uncertain at any point in time. In addition, geopolitical developments, such as the invasion of Ukraine by Russia, can increase levels of political and economic unpredictability globally and increase the volatility of global financial markets. Moreover, these conditions can affect the rate of information technology spending and could adversely affect our customers' ability or willingness to purchase our solutions and services, delay prospective customers' purchasing decisions, reduce the value or duration of their subscription contracts, or affect attrition rates, all of which could adversely affect our future sales and operating results.
Increased scrutiny of our environmental, social and governance responsibilities may result in additional costs and risks, and may adversely impact our reputation, employee retention, and willingness of customers and suppliers to do business with us.
Investor advocacy groups, institutional investors, investment funds, proxy advisory services, stockholders, and customers are increasingly focused on companies' ESG practices. Additionally, public interest and legislative pressure related to public companies' ESG practices continue to grow. If our ESG practices fail to meet regulatory requirements or investor or other industry stakeholders' evolving expectations and standards for responsible corporate citizenship in areas including environmental stewardship, support for local communities, Board of Director and employee diversity, human capital management, employee health and safety practices, product quality, supply chain management, corporate governance and transparency and employing ESG strategies in our operations, our brand, reputation and employee retention may be negatively impacted and customers and suppliers may be unwilling to do business with us. In addition, as we work to align our ESG practices with industry standards, we will likely continue to expand our disclosures in these areas and doing so may result in additional costs and require additional resources to monitor, report, and comply with our various ESG practices. If we fail to adopt ESG standards or practices as quickly as stakeholders desire, report on our ESG efforts or practices accurately, or satisfy the expectations of stakeholders, our reputation, business, financial performance and growth may be adversely impacted.
Changes in accounting principles or their application to us could result in unfavorable accounting charges or effects, which could adversely affect our results of operations and growth prospects.
We prepare consolidated financial statements in accordance with U.S. GAAP. In particular, we make certain estimates and assumptions related to the adoption and interpretation of these principles, including the recognition of our revenue and the accounting of our stock-based compensation expense with respect to our consolidated financial statements. If these assumptions turn out to be incorrect, our revenue or our stock-based compensation expense could materially differ from our expectations, which could have a material adverse effect on our financial results. A change in any of these principles or guidance, or in their interpretations or application to us, may have a significant effect on our reported results, as well as our processes and related controls, and may retroactively affect previously reported results or our forecasts, which may negatively impact our financial statements. For example, any recent new standards issued by the Financial Accounting Standards Board could materially impact our consolidated financial statements. The adoption of these new standards may potentially require enhancements or changes in our processes or systems and may require significant time and cost on behalf of our financial management. This may, in turn, adversely affect our results of operations and growth prospects.
Global climate-related risks could negatively affect our business.
There are inherent climate-related risks wherever business is conducted. Access to clean water and reliable energy in the communities where we conduct our business, whether for our offices, vendors, customers or other stakeholders, is a priority. Any of our primary locations may be vulnerable to the adverse effects of climate change. Climate-related events, including the increasing frequency of extreme weather events and their impact on U.S. critical infrastructure, have the potential to disrupt our business, our third-party suppliers, or the operations and business of our customers, and may cause us to experience higher attrition, losses and additional costs to maintain or resume operations.
Increased public awareness and concern regarding global climate change may result in state, federal or international requirements to reduce or mitigate global warming, such as the imposition of carbon pricing mechanisms or stricter limits on greenhouse gas emissions. If environmental or climate-change laws or regulations are adopted or changed that impose significant new costs, operational restrictions or compliance requirements upon our business or our products, they could increase our capital expenditures, reduce our margins and adversely affect our financial position.
In addition, our reputation and client relationships may be damaged as a result of our practices related to climate change, including our involvement, or our clients' involvement, in certain industries or projects associated with causing or exacerbating climate change, as well as any decisions we make to continue to conduct or change our activities in response to considerations relating to climate change.
Item 1B. Unresolved Staff Comments
None.
Item 1C. Cybersecurity
Company’s processes to assess, identify, and manage material cybersecurity risks
We have developed an ISO/IEC 27001-certified Information Security Management System (“ISMS”) designed to enhance our corporate security measures, identify and mitigate information security risks, and protect and preserve the confidentiality, integrity, and continued availability of all information owned by the Company and that of its customers and suppliers in our control. Our ISO certification can be verified on the BSI Group website using certificate number IS 64920.
Our ISMS includes developing, implementing, and continually improving policies and procedures designed to safeguard information and ensure the availability of critical data and systems. These policies cover areas such as requiring secure coding practices and a secure development lifecycle process, monthly information security awareness training for all employees and enhanced training for specialized personnel, review and assessment by external, independent third parties, who certify and report on our weaknesses and internal response preparedness for the entire Company, and the performance of daily vulnerability scanning of our network infrastructure as well as annual third-party penetration testing.
Our cybersecurity risk assessment, identification, and management process consists of a dedicated Governance Risk and Compliance ("GRC") team, within our Information Security organization, that implements a repeatable, ISO/IEC 27001-compliant methodology to asses and track cybersecurity risk. This team, reporting to and working with the Chief Information Security Officer ("CISO"), identifies, tracks, and updates cybersecurity risks that threaten the Company directly and through third parties. The GRC team collaborates closely with risk owners throughout the Company, vendors, and suppliers, working with them in an effort to ensure their risks are identified, documented, and mitigated in a timely fashion.
In addition to our active ISO/IEC 27001 certification, the Company also assesses itself against the National Institute of Standards and Technology Special Publication 800-171 as required by the Defense Federal Acquisition Regulation Supplement. In accordance with our ISMS, we also actively monitor known threats that could affect our products and services and work with our suppliers to provide us with real-time reports of threats or vulnerabilities that may affect our enterprise-wide systems. Our program also includes a cyber incident response plan that provides controls and procedures for timely and accurate reporting of any material cybersecurity incident as well as a business continuity plan that is designed to provide a clear framework for how the Company can continue in the event of any significant disruption in an effort to ensure that we can offer the same level of security, support, and excellence to all our customers. In the normal course, our Security and GRC teams engage assessors, consultants, and other third parties to assist in various cyber-related matters. For example, to maintain our ISO certification, the Company utilizes an external third party to conduct yearly audits of its ISMS. Our Information Security organization also leverages third-party advisors, as appropriate, for various tasks such as conducting annual third-party penetration testing.
In 2023, we conducted an enterprise risk assessment that included an assessment of cybersecurity risk in context with other enterprise-level risks. Furthermore, our CISO and our General Counsel regularly discuss cybersecurity risk mitigation. We carry errors and omissions insurance that provides some protection against the potential losses arising from a cybersecurity incident. For additional information regarding potential cybersecurity risks, see relevant business and operational risks under Item 1A, "Risk Factors", of this Annual Report on Form 10-K. In the last three years, we have not experienced a material information security breach incident or any penalties or settlements related to the same, and the expenses we have incurred from information security breach incidents were immaterial.
Management’s role and expertise in assessing and managing material cybersecurity risks
Our Information Security team is charged with the responsibility for assessing and managing material cybersecurity risks. That team is led by our CISO. Certifications held by the Information Security team include CompTIA A+, Network+, Security+, Project+, & CyberSecurity Analyst+, eLearnSecurity Junior Penetration Tester, EC-Council Certified Ethical Hacker ("CEH"), Certified Encryption Specialist, Certified Security Analyst, & Computer Hacking Forensic Investigator ("CHFI"), CMMC-AB Registered Practitioner ("RP"), and ISC2 Certified Information Systems Security Professional ("CISSP"). Our CISO’s background includes over 17 years of experience in IT and Information Security. His formal education includes a Master’s degree in Cybersecurity and Information Assurance and a Bachelor’s degree in Computer Forensics. Certifications held by the CISO include CompTIA A+, Network+, & Security+, Microsoft Technology Associate ("MTA"), CMMC-AB RP, ISO 27001 Certified Lead Implementer Professional, EC-Council CEH & CHFI, ISACA Certified Data Privacy Solutions Engineer & Certified Information Security Manager, ISC2 CISSP, and Offensive Security Certified Professional. Our CISO reports to our Chief Information Technology Officer ("CITO"), who in turn reports to our Chief Executive Officer ("CEO"). Each of our CITO and our CEO have extensive experience in cybersecurity matters.
Our CISO provides reports to the Audit Committee of our Board of Directors on a standing basis at each Audit Committee meeting, and as otherwise requested by the Chair of the Audit Committee or as determined necessary by the CISO or other members of senior management. The CISO is personally involved in, and responsible for, the risk assessment, identification and management process described above.
Board of Director’s oversight of cybersecurity risks
The Board of Directors has oversight responsibility with respect to risk management and reviews matters with management as part of management’s regular Board reporting. The Board of Directors has delegated responsibility for information security and cybersecurity risk oversight to the Audit Committee. In accordance with its charter, the Audit Committee discharges these responsibilities through various processes, including the option to use third party advisers as and when it deems appropriate, and discusses with management the Company’s major policies with respect to risk assessment and risk management. The Audit Committee regularly reports the results of these discussions to the Board of Directors. As noted above, the CISO reports to the Audit Committee at each regular Audit Committee meeting on the status of cybersecurity risk assessment, identification and management, as well as reporting information security incidents as they occur, if material, and providing periodic briefings about our information security program, our internal response preparedness, and assessments led by outside advisors. The Chair of the Audit Committee, in turn, reports on these topics to the Board of Directors as and when deemed necessary and/or material. Overall, our Board contains two directors with work experience related to cybersecurity issues or oversight.
We lease approximately 191,700 square feet of space for our corporate headquarters, integration facility, and primary service depot in Ashburn, Virginia. The lease expires in May 2029.
We sublease 27,000 square feet of space at the Ashburn, Virginia facility to our affiliate, Telos ID, which space serves as Telos ID's corporate headquarters. This sublease will expire on December 31, 2017.
We leaseleased additional office space in five separate facilities located in California, Colorado, Maryland, New JerseyFlorida and Nevada under various leases expiring through January 2024.
July 2027.
We believe that the current space is substantially adequate to meet our operating requirements.
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity,
and Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the Nasdaq Global Market under the symbol "TLS."
No public market exists for our Class A or Class B Common Stock. As of March 3, 2017,8, 2024, there were 206 recordapproximately 152 holders of our Class A Common Stock and 10 record holdersof Telos common stock, par value $0.001 par value. The number of shareholders of record of our Class B Common Stock. We havecommon stock may not paid dividends on either classbe representative of the number of beneficial owners due to shares that may be held by depositories, brokers or nominees.
Sales of Equity Securities and Use of Proceeds
No publicThere were no sales of unregistered equity securities during the three months ended December 31, 2023, that were not registered under the Securities Act and were not previously disclosed on a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.
Purchases of Equity Securities
On May 24, 2022, the Board of Directors authorized a Share Repurchase Program ("SRP"), pursuant to which the Company can repurchase up to $50.0 million of issued and outstanding common stock. The shares may be repurchased on a discretionary basis from time to time through open market existspurchases. The repurchase program has no expiration date and may be modified, suspended, or terminated at any time.
There were no repurchases of common stock in fiscal year 2023, and approximately $38.7 million remained available for our Series A-1 and Series A-2 Redeemable Preferred Stock ("Senior Redeemable Preferred Stock"). See Note 7 – Redeemable Preferred Stock tofuture common stock repurchases under the Consolidated Financial Statements.
Our 12% Cumulative Exchangeable Redeemable Preferred Stock ("Public Preferred Stock") trades over the OTC Bulletin Board and the OTCQB marketplace. See Note 7 – Redeemable Preferred Stock to the Consolidated Financial Statements.
AsSRP as of December 31, 2016, there were 40,238,461 and 4,037,628 shares issued and outstanding of Class A and Class B Common Stock, respectively.2023.
Item 6.
Selected Financial Data[Reserved]
The following should be read in connection with the accompanying information presented in Item 7 and Item 8 of this Form 10-K.
OPERATING RESULTS
| | | Years Ended December 31, | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
| | | (amounts in thousands) | |
| Sales | | $ | 134,868 | | | $ | 120,634 | | | $ | 127,562 | | | $ | 207,394 | | | $ | 226,096 | |
| Operating income (loss) | | | 2,112 | | | | (3,617 | ) | | | (11,644 | ) | | | 6,111 | | | | 17,700 | |
| (Loss) income before income taxes | | | (3,335 | ) | | | (9,237 | ) | | | (16,600 | ) | | | 867 | | | | 16,725 | |
| Net (loss) income attributable to Telos Corporation | | | (7,175 | ) | | | (15,940 | ) | | | (12,288 | ) | | | (2,618 | ) | | | 7,435 | |
FINANCIAL CONDITION
| | | As of December 31, | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
| | | (amounts in thousands) | |
| Total assets | | $ | 56,799 | | | $ | 59,964 | | | $ | 73,820 | | | $ | 88,609 | | | $ | 79,156 | |
| Senior credit facility, long-term (1) | | | ---- | | | | 7,144 | | | | 8,590 | | | | 19,141 | | | | 18,559 | |
| Subordinated debt, long-term (1) | | | ---- | | | | 2,500 | | | | ---- | | | | ---- | | | | ---- | |
| Capital lease obligations, long-term (2) | | | 18,990 | | | | 19,908 | | | | 20,735 | | | | 14,901 | | | | 3,803 | |
| Deferred income taxes, long-term (3) | | | 3,391 | | | | 3,199 | | | | ---- | | | | ---- | | | | ---- | |
| Senior redeemable preferred stock (4) | | | 1,731 | | | | 2,025 | | | | 1,958 | | | | 1,891 | | | | 4,010 | |
| Public preferred stock (4) | | | 127,742 | | | | 123,919 | | | | 120,097 | | | | 116,274 | | | | 112,451 | |
(1) | See Note 6 to the Consolidated Financial Statements in Item 8 regarding our debt obligations. |
(2) | See Note 10 to the Consolidated Financial Statements in Item 8 regarding our capital lease obligations. |
(3) | See Note 9 to the Consolidated Financial Statements in Item 8 regarding our income taxes. |
(4) | See Note 7 to the Consolidated Financial Statements in Item 8 regarding our redeemable preferred stock. |
None
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
General
Our goal is to deliver superior IT solutions that meet or exceedThe following discussion and analysis of our customers' expectations. We focus on secure enterprise solutions that address the unique requirementsfinancial condition and results of the federal government, the military, and the intelligence community, as well as commercial enterprises that require secure solutions. Our IT solutions consist of the following:
● | Cyber Operations and Defense: |
o | Cyber Security – Solutions and services that assure the security ofoperations should be read in conjunction with our customers' information, systems, and networks, including the Xacta IA Manager suite for IT governance, risk management, and compliance. Our information and cyber security consulting services include security assessments, digital forensics, and continuous compliance monitoring. |
o | Secure Mobility – Design, engineering and delivery of secure solutions that empower the mobile and deployed workforce in business and government. Our solutions protect sensitive communication while delivering voice, data, and video at the point of work in classified and unclassified environments. |
● | Identity Management – Solutions that establish trusted identities in order to ensure authenticated physical access to offices, workstations, and other facilities; secure digital access to databases, host systems, and other IT resources; and protect people and organizations against insider threats. |
● | IT and Enterprise Solutions – We have the experience with solution development and global integration to meet the requirements of business and government enterprises with secure IT solutions, from organizational messaging and data visualization to network construction and management. |
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions used in the preparation of ourrelated notes to consolidated financial statements include revenue recognition, allowance for doubtful accounts receivable, allowance for inventory obsolescence,included in Part II, Item 8 of this Annual Report on Form 10-K ("10-K"). In addition to historical financial information, the valuation allowance for deferred tax assets, income taxes, contingenciesfollowing discussion and litigation, potential impairmentsanalysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of goodwill and intangible assets, estimated pension-related costs for our foreign subsidiaries and accretion of Public Preferred Stock. Actual results couldselected events in future periods may differ materially from those estimates.
The following isanticipated or implied in these forward-looking statements as a
summaryresult of
the most critical accounting policies usedmany factors, including those discussed under Item 1A, "Risk Factors", and elsewhere in the preparation of our consolidated financial statements.
Revenue Recognition
Revenues are recognized in accordance with Financial Accounting Standards Board ("FASB") ASC 605-10-S99. We consider amounts earned upon evidence that an arrangement has been obtained, services are delivered, fees are fixed or determinable, and collectability is reasonably assured. Additionally, revenues on arrangements requiring the delivery of more than one product or service are recognized in accordance with ASC 605-25, "Revenue Arrangements with Multiple Deliverables,this 10-K. See also "
which addresses and requires the separation and allocationSpecial Note Regarding Forward-Looking Statements" at the inceptionbeginning of the arrangementthis 10-K.In this section, we discuss our financial condition, changes in financial condition and results of all deliverables based on their relative selling prices. This determination is made first by employing vendor-specific objective evidence ("VSOE"), to the extent it exists, then third-party evidence ("TPE") of selling price, to the extent that it exists. Given the nature of the deliverables contained in our multi-element arrangements, which often involve the design and/or delivery of complex or technical solutions to the government, we have not obtained TPE of selling prices on multi-element arrangements due to the significant differentiation which makes obtaining comparable pricing of products with similar functionality impractical. Therefore we do not utilize TPE. If VSOE and TPE are not determinable, we use our best estimate of selling price ("ESP") as defined in ASC 605-25, which represents our best estimate of the prices under the terms and conditions of a particular orderoperations for the various elements if they were sold on a stand-alone basis.
We recognize revenues for software arrangements upon persuasive evidence of an arrangement, delivery of the software, and determination that collection of a fixed or determinable license fee is probable. Revenues for software licenses sold on a subscription basis are recognized ratably over the related license period. For arrangements where the sale of software licenses are bundled with other products, including software products, upgrades and enhancements, post-contract customer support ("PCS"), and installation, the relative fair value of each element is determined based on VSOE. VSOE is defined by ASC 985-605, "Software Revenue Recognition," and is limited to the price charged when the element is sold separately or, if the element is not yet sold separately, the price set by management having the relevant authority. When VSOE exists for undelivered elements, the remaining consideration is allocated to delivered elements using the residual method. If VSOE does not exist for the allocation of revenue to the various elements of the arrangement, all revenue from the arrangement is deferred until the earlier of the point at which (1) such VSOE does exist or (2) all elements of the arrangement are delivered. PCS revenues, upon being unbundled from a software license fee, are recognized ratably over the PCS period. Software arrangements requiring significant production, modification, or customization of the software are accounted for in accordance with ASC 605-35 "Construction-Type and Production-Type Contracts."
We may use subcontractors and suppliers in the course of performing contracts and under certain contracts we provide supplier procurement services and materials for our customers. Some of these arrangements may fall within the scope of ASC 605-45, "Reporting Revenue Gross as a Principal versus Net as an Agent." We presume that revenues on our contracts are recognized on a gross basis, as we generally provide significant value-added services, assume credit risk, and reserve the right to select subcontractors and suppliers, but we evaluate the various criteria specified in the guidance in making the determination of whether revenue should be recognized on a gross or net basis.
A description of the business lines, the typical deliverables, and the revenue recognition criteria in general for such deliverables follows:
Cyber Operations and Defense – Our Cyber Operations and Defense business line consists of Cyber Security and Secure Mobility solutions areas.
Regarding our deliverables of Cyber Security (formerly Information Assurance) solutions, we provide Xacta IA Manager software and cybersecurity services to our customers. The software and accompanying services fall within the scope of ASC 985-605, "Software Revenue Recognition," as discussed above. We provide consulting services to our customers under either a FFP or T&M basis. Such contracts fall under the scope of ASC 605-10-S99. Revenue for FFP services is recognized on a proportional performance basis. FFP services may be billed to the customer on a percentage-of-completion basis or based upon milestones as appropriate under a particular contract, which may approximate the proportional performance of the services under the agreements, as specified in such agreements. To the extent that customer billings exceed the performance of the specified services, the revenue would be deferred. Revenue is recognized under T&M contracts based upon specified billing rates and other direct costs as incurred. For cost plus fixed fee ("CPFF") contracts, revenue is recognized in proportion to the allowable costs incurred unless indicated otherwise in the terms of the contract.
Regarding our deliverables of Secure Mobility (formerly Secure Networks) solutions, we provide wireless and wired networking solutions consisting of hardware and services to our customers. The solutions within the Secure Mobility group are generally sold as firm-fixed price ("FFP") bundled solutions. Certain of these networking solutions involve contracts to design, develop, or modify complex electronic equipment configurations to a buyer's specification or to provide network engineering services, and as such fall within the scope of ASC 605-35. Revenue is earned upon percentage of completion based upon proportional performance, such performance generally being defined by performance milestones. Certain other solutions fall within the scope of ASC 605-10-S99, such as resold information technology products, like laptops, printers, networking equipment and peripherals, and ASC 605-25, such as delivery orders for multiple solutions deliverables. For product sales, revenue is recognized upon proof of acceptance by the customer, otherwise it is deferred until such time as the proof of acceptance is obtained. For example, in delivery orders for Department of Defense customers, which comprise the majority of the Company's customers, such acceptance is achieved with a signed Department of Defense Form DD-250 or electronic invoicing system equivalent. Services provided under these contracts are generally provided on a FFP basis, and as such fall within the scope of ASC 605-10-S99. Revenue for services is recognized based on proportional performance, as the work progresses. FFP services may be billed to the customer on a percentage-of-completion basis or based upon milestones, which may approximate the proportional performance of the services under the agreements, as specified in such agreements. To the extent that customer billings exceed the performance of the specified services, the revenue would be deferred. Revenue is recognized under time-and-materials ("T&M") services contracts based upon specified billing rates and other direct costs as incurred.
Identity Management (formerly Telos ID) – We provide our identity assurance and access management solutions and services and sell information technology products, such as computer laptops and specialized printers, and consumables, such as identity cards, to our customers. The solutions are generally sold as FFP bundled solutions, which would typically fall within the scope of ASC 605-25 and ASC 605-10-S99. Revenue for services is recognized based on proportional performance, as the work progresses. FFP services may be billed to the customer on a percentage-of-completion basis or based upon milestones, which may approximate the proportional performance of the services under the agreements, as specified in such agreements. To the extent that customer billings exceed the performance of the specified services, the revenue would be deferred. Revenue is recognized under T&M contracts based upon specified billing rates and other direct costs as incurred.
IT & Enterprise Solutions (formerly Secure Communications) – We provide the Automated Message Handling System ("AMHS") as well as related services to our customers. The system and accompanying services fall within the scope of ASC 985-605, as fully discussed above. Other services fall within the scope of ASC 605-10-S99 for arrangements that include only T&M contracts and ASC 605-25 for contracts with multiple deliverables such as T&M elements and FFP services. Under such arrangements, the T&M elements are established by direct costs. Revenue is recognized on T&M contracts according to specified rates as direct labor and other direct costs are incurred. For cost plus fixed fee ("CPFF") contracts, revenue is recognized in proportion to the allowable costs incurred unless indicated otherwise in the terms of the contract. Revenue for FFP services is recognized on a proportional performance basis. FFP services may be billed to the customer on a percentage-of-completion basis or based upon milestones, which may approximate the proportional performance of the services under the agreements, as specified in such agreements. To the extent that customer billings exceed the performance of the specified services, the revenue would be deferred.
Estimating future costs and, therefore, revenues and profits, is a process requiring a high degree of management judgment. In the event of a change in total estimated contract cost or profit, the cumulative effect of a change is recorded in the period the change in estimate occurs. To the extent contracts are incomplete at the end of an accounting period, revenue is recognized on the percentage-of-completion method, on a proportional performance basis, using costs incurred in relation to total estimated costs, or costs are deferred as appropriate under the terms of a particular contract. In the event cost estimates indicate a loss on a contract, the total amount of such loss, excluding overhead and general and administrative expense, is recorded in the period in which the loss is first estimated.
Inventories
Inventories are stated at the lower of cost or net realizable value, where cost is determined primarily on the weighted average cost method. Inventories consist primarily of purchased customer off-the-shelf hardware and software, and component computer parts used in connection with system integration services that we perform. Inventories also include spare parts utilized to support certain maintenance contracts. Spare parts inventory is amortized on a straight-line basis over two to five years, which represents the shorter of the warranty period or estimated useful life of the asset. An allowance for obsolete, slow-moving or non-salable inventory is provided for all other inventory. This allowance is based on our overall obsolescence experience and our assessment of future inventory requirements.
Goodwill and other intangible assets
We evaluate the impairment of goodwill and other intangible assets in accordance with ASC 350, "Intangibles - Goodwill and Other," which requires goodwill and indefinite-lived intangible assets to be assessed on at least an annual basis for impairment using a fair value basis. Between annual evaluations, if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount, then impairment must be evaluated. Such circumstances could include, but are not limited to: (1) a significant adverse change in legal factors or business climate, or (2) a loss of key contracts or customers.
As the result of an acquisition, we record any excess purchase price over the net tangible and identifiable intangible assets acquired as goodwill. An allocation of the purchase price to tangible and intangible net assets acquired is based upon our valuation of the acquired assets. Goodwill is not amortized, but is subject to annual impairment tests. We complete our goodwill impairment tests as ofyear ended December 31st each year. Additionally, we make evaluations between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The evaluation is based on the estimation of the fair values of our three reporting units, Cyber Operations and Defense ("CO&D"), Identity Management, and IT & Enterprise Solutions, of which goodwill is housed in the CO&D reporting unit, in comparison to the reporting unit's net asset carrying values. Our discounted cash flows required management judgment with respect to forecasted revenue streams and operating margins, capital expenditures and the selection and use of an appropriate discount rate. We utilized the weighted average cost of capital as derived by certain assumptions specific to our facts and circumstances as the discount rate. The 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 is31, 2023, compared to the market capitalization of the Company. The Company's assessment resulted in a fair value that was greater than the Company's carrying value, therefore the second step of the impairment test, as prescribed by the authoritative literature, was not required to be performed and no impairment of goodwill was recorded as ofyear ended December 31, 2016. Subsequent reviews may result in future periodic impairments that could have a material adverse effect on the results of operations in the period recognized. Recent operating results have reduced the projection of future cash flow growth potential, which indicates that certain negative potential events, such as a material loss or losses on contracts, or failure to achieve projected growth could result in impairment in the future. We estimate fair value2022.
Business Overview
For an overview of our reporting unitbusiness, including our business segments and compare the valuation with the respective carrying value for the reporting unit to determine whether any goodwill impairment exists. Ifdiscussion of our products and services we determine through the impairment review process that goodwillprovide, see Item 1, "Business" of this Annual Report on Form 10-K. Additional information regarding our segments is impaired, we will record an impairment chargealso presented in our consolidated statements of operations. Goodwill is amortized and deducted over a 15-year period for tax purposes.
Other intangible assets consist primarily of customer relationship enhancements. Other intangible assets are amortized on a straight-line basis over their estimated useful lives of 5 years. The amortization is based on a forecast of approximately equal annual customer orders over the 5-year period. Other intangible assets are subject to impairment review if there are events or changes in circumstances that indicate that the carrying amount is not recoverable. As of June 30, 2016, the other intangible assets had been fully amortized and no impairment charges had been taken.
Income Taxes
We account for income taxes in accordance with ASC 740-10, "Income Taxes." Under ASC 740-10, deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences and income tax credits. Deferred tax assets and liabilities are measured by applying enacted statutory tax rates that are applicableNote 18– Segment Information to the future years in which deferred tax assets or liabilities are expected to be settled or realized for differences between theconsolidated financial statement carrying amountsstatements at Item 8 of this Form 10-K.Opportunities, Challenges and the tax bases of existing assets and liabilities. Any change in tax rates on deferred tax assets and liabilities is recognized in net income in the period in which the tax rate change is enacted. We recordRisks
As discussed under Item 1A, "Risk Factors", we derive a valuation allowance that reduces deferred tax assets when it is "more likely than not" that deferred tax assets will not be realized. We are required to establish a valuation allowance for deferred tax assets if, based on the weight of available evidence, it is more likely than not that somesubstantial portion or all of the deferred tax assets will not be realized. Based on available evidence, realization of deferred tax assets is dependent upon the generation of future taxable income. We considered projected future taxable income, tax planning strategies, and reversal of taxable temporary differences in making this assessment. As such, we have determined that a full valuation allowance is required as of December 31, 2016 and 2015. We are not able to use temporary taxable differences related to goodwill, as a source of future taxable income. As a result of a full valuation allowance against our deferred tax assets, a deferred tax liability (hanging credit) related to goodwill remains on our consolidated balance sheet at December 31, 2016 and 2015.
Results of Operations
We derive substantially all of our revenues from contracts and subcontracts with the U.S. Government.government. Our revenues are generated from a number of contract vehicles and task orders. The U.S. government has increasingly relied on contracts that are subject to a competitive bidding process (including IDIQ, GSA schedules, OTA, and other multi-award contracts), which has resulted in greater competition and increased pricing pressure. We expect that a majority of the business that we seek in the foreseeable future will be awarded through a competitive bidding process.
Over the past several years we have sought to diversify and improve our operating margins through an evolution of our business from an emphasis on product reselling to that of an advanced solutions technologies provider. To that end, althoughAlthough we continue to offer resold products through our contract vehicles, we have focused on selling solutions and outsourcing product sales, as well as designing and delivering Telos manufactured and branded technologies. We believe our contract portfolio is characterized as having low to moderate financial risk due to the limited number of long-term fixed pricefixed-price development contracts. Our firm fixed-pricefirm-fixed-price activities consist principallyprimarily of contracts for the products and services at established contract prices. Our time-and-material contracts generally allow the pass-through of allowable costs plus a profit margin. For 2016, 2015,2023 and 2014,2022, the Company's revenue derived from firm fixed-pricefirm-fixed-price contracts was 76.0%78.5% and 82.9%, 77.0%respectively; cost-plus contracts revenue was 12.1% and 11.1%, and 74.9%, respectively, cost plus contracts was 16.4%, 12.0%, and 15.4%, respectively,respectively; and time-and-material contracts was 7.6%, 11.0%,9.3% and 9.7%6.0%, respectively.
Our business performance is affected by the overall level of U.S. government spending and the alignment of our offerings and capabilities with the budget priorities of the U.S. government. Adverse changes in fiscal and economic conditions could materially impact our business. Some changes that could adversely impact our business include the implementation of future spending reductions and government shutdown. Despite the budget and competitive pressure affecting the industry, we believe we are well-positioned to expand existing customer relationships and benefit from opportunities that we have not previously pursued.
We provide different
Business Environment
U.S. Budget
Congress has been unable to complete action on all appropriations bills for Fiscal Year ("FY") 2024, which began on October 1, 2023. Instead, Congress has resorted to approving a series of continuing resolutions (“CRs”), which have funded the government at FY2023 levels for over five months with no new program starts. Some appropriations bills were finally approved in early March 2024, but most federal spending remains under a CR.
This means the President’s proposed three percent increase in defense spending, which was also provided for by the spending caps contained in the debt ceiling legislation (the "Fiscal Responsibility Act”) signed into law last June 2023, have so far not been approved. The FY2024 National Defense Authorization Act enacted in December 2023 does not authorize that propose three percent hike in defense spending, but actual appropriated defense spending has remained at FY2023 levels under these CRs, and it will continue to be frozen until a full-year defense appropriations bill can be signed into law.
The President's FY2024 budget also proposed increased investments for cybersecurity within numerous federal civilian departments and agencies. In general, the President's budget reflected the prioritization of accelerated cloud adoption, IT modernization, further private sector collaboration for sector risk management responsibilities, ensuring adequate cyber threat information sharing, and supply chain risk management. These priorities align with the solutions Telos has been developing and bringing to market for the past several years. However, as with defense spending, these proposed increases have remained on hold until Congress can agree on full-year FY2024 appropriation legislation for all department and agencies.
Even if Congress finally reaches agreement on the remaining FY2024 appropriations bills in March 2024, that will leave less than seven months for federal agencies to execute any increased spending levels these measures provide.
Finally, submission to Congress of the Biden Administration's proposed FY2025 budget was delayed until March 11, 2024 – a month later than normal – in large part because lawmakers have been unable to complete work on FY2024 appropriations legislation. Such final bills would normally serve as a detailed baseline from which the White House would develop next year's proposed budget.
This failure to approve the FY2024 appropriations legislation in a timely manner and the resultant uncertainty about actual funding has impacted federal customers' ability to move forward on their planned expenditures in FY2024, and to adequately plan for FY2025.
Cybersecurity Landscape
In recent years, we have seen cybersecurity threats become more complex, with threat actors leveraging a wide variety of tactics to exploit their victims. With this growing threat, below are partysome trends to contractsconsider when looking at the cybersecurity landscape:
Rising Threats, Rising Liability: Ransomware remains arguably the most severe cyber threat to enterprises in the commercial, state, and local government and education sectors. One reason for the rise of varying revenue types underransomware attacks is that it is exceedingly profitable for cybercriminals, and ransomware victims generally settle the NETCENTS (Network-Centric Solutions)ransom rather than restoring the system from backups or dealing with the fallout from a data breach. Aside from the financial costs of paying the ransom and NETCENTS-2 contractsrestoring the system, the consequences of a successful ransomware attack can include damage to the organization's reputation, stolen sensitive data being used for malicious purposes, and loss of business.
The Nation's Critical Systems Are Still at Risk: Critical infrastructure and industrial IoT are among the categories at greatest risk of cyberattacks.
The Challenging Complexity of Regulatory Compliance: Government mandates stronger security in highly regulated industries. These government initiatives and audit fatigue continue to burden highly regulated organizations, with automation solutions being recognized as the most effective remedy for the many repetitive and redundant tasks that security compliance requires.
Additionally, the SEC has finalized and adopted new cybersecurity rules for publicly traded companies, which will require registrants to disclose additional cyber-related information in their regulatory filings. Specifically, they will have to: (1) regularly disclose their governance methods, risk analysis and management processes; (2) meet specific disclosure requirements and deadlines for reporting and describing material cyber incidents; and (3) describe the board's oversight of risks from cybersecurity threats, and management's expertise and role in assessing and managing material risks from cybersecurity threats. The required reporting of this information will lead many companies to proactively establish policies that will improve their cyber risk management posture and enable them to better withstand heightened public and regulatory scrutiny.
Identity Assurance and Privacy Protection are Essential for Today's Enterprises: Identity and access management continues to be a major cybersecurity concern for organizations and individuals that need to ensure their security and protect their privacy. Trusted identities are essential to confidence in IT and physical security strategies and to the success of Zero Trust security models and architectures.
Artificial Intelligence: Cybercriminals are using Artificial Intelligence ("AI") to launch more sophisticated attacks that can quickly adapt to changing environments, making detection harder. To protect against AI-powered cyberattacks, organizations must stay vigilant and adopt advanced cybersecurity tools and techniques that can detect and respond to these threats timely before they can cause damage.
Backlog
Backlog is a useful measure in developing our annual budgeted revenue by estimating for the upcoming year our continuing business from existing customers and active contracts. We consider backlog, both funded and unfunded (as explained below), other expected annual renewals, and expansion planned by our current customers.
Total backlog consists of the aggregate contract revenues remaining to be earned by us at a given time over the life of our contracts, whether funded or unfunded. Funded backlog consists of the aggregate contract revenues remaining to be earned at a given time, which, in the case of U.S. Air Force. NETCENTSgovernment contracts, means that they have been funded by the procuring agency. Unfunded backlog is the difference between total backlog and NETCENTS-2 are indefinite delivery/indefinite quantity ("IDIQ")funded backlog and government-wide acquisitionincludes potential revenues that may be earned if customers exercise delivery orders and/or renewal options to continue these contracts. Based on historical experience, we generally assume option year renewals to be exercised. Most of our customers fund contracts ("GWAC"), therefore any government customer may utilize the NETCENTS and NETCENTS-2 vehicles to meet its purchasing needs. Consequently, revenue earned on the underlying NETCENTSbasis of one year or less, and, NETCENTS-2 delivery orders variesas a result, funded backlog is generally expected to be earned within one year from periodany point in time, whereas unfunded backlog is expected to period according to the customer and solution mix for the products and services delivered duringbe earned over a particular period, unlikelonger period.
| | | | | | | | | | | | | | |
| Table MD&A 1: Backlog by Segment | | | | |
| | As of December 31, |
| | 2023 | | 2022 |
| | | | |
| | (in thousands) |
| Security Solutions | | | | |
| Funded backlog | | $ | 24,538 | | | $ | 33,784 | |
| Unfunded backlog | | 41,398 | | | 47,509 | |
| Total Security Solutions backlog | | 65,936 | | | 81,293 | |
| Secure Networks | | | | |
| Funded backlog | | 27,530 | | | 48,454 | |
| Unfunded backlog | | 24,636 | | | 82,296 | |
| Total Secure Networks backlog | | 52,166 | | | 130,750 | |
| Total | | | | |
| Funded backlog | | 52,068 | | | 82,238 | |
| Unfunded backlog | | 66,034 | | | 129,805 | |
| Total backlog | | $ | 118,102 | | | $ | 212,043 | |
Increases in backlog is a standalone contract with one separately identified customer. The contracts themselves do not fund any orders and they state that the contracts are for an indefinite delivery and indefinite quantity. The majority of our task/delivery orders have periods of performance of less than 12 months, which contributes to the variances between interim and annual reporting periods. The original NETCENTS contract was awarded in 2004 and has been modified 40 times since that time, including numerous modifications to extend the period of performance. The period of performance forresult from the award of new task orderscontracts and the renewal or extension of existing contracts. Reductions in backlog arises from the completion or the early termination of contracts. See the relevant industry, legal and regulatory risks under Item 1A, "Risk Factors", of this Annual Report on Form 10-K. We believe that comparisons of backlog period-to-period are difficult. We also believe that it is difficult to predict future revenue solely based on analysis of backlog. The actual timing of revenue from projects included in backlog will vary.
Financial Highlights
A number of factors have affected our fiscal year 2023 results, the contract endedmost significant of which we have listed below. More details on September 30, 2013. Previously awarded task orders that contain periodsthese changes are presented below within our "Results of performance that extended past September 30, 2013, including exercisable option years under existing task orders, were not affected byOperations" section.
•The successful completion of certain programs, lower revenue on ongoing major programs and the contract expiration. We were selected for an award on the NETCENTS replacement contract, NETCENTS-2 Network Operations and Infrastructure Solutions Small Business Companion, on March 27, 2014. Although no protest was filed over the Telos contract award, protests filed by other biddersloss of a program resulted in a recommendationdecline in fiscal year 2023 compared with 2022 results, partially offset by some new program wins across the Government Accountability Office ("GAO") thatportfolio and the U.S. Air Force re-evaluate proposalsramp of TSA PreCheck.
•TSA announced Telos Corporation as TSA's second official TSA PreCheck enrollment and make a new source selection decision. Asrenewal provider in August 2023.
•Operating costs were lower, in part, as a result of the delaysrestructuring plan announced in the NETCENTS-2 procurement, some government orders that couldfirst quarter of 2023.
•Lower operating costs resulted in an improvement in profitability and earnings per share.
Results of Operations
Consolidated Results
| | | | | | | | | | | |
| Table MD&A 2: Consolidated Financial Results Comparison | | | |
| For the Year Ended December 31, |
| 2023 | | 2022 |
| | | |
| (dollars in thousands) |
| Revenue | $ | 145,378 | | | $ | 216,887 | |
| Cost of sales (excluding depreciation and amortization) | 88,892 | | | 137,051 | |
| Depreciation and amortization | 3,544 | | | 793 | |
| Total cost of sales | 92,436 | | | 137,844 | |
| Gross profit | 52,942 | | | 79,043 | |
| Gross margin | 36.4 | % | | 36.4 | % |
| Selling, general and administrative expenses | 93,257 | | | 132,893 | |
| Selling, general and administrative expense as percentage of revenue | 64.1 | % | | 61.3 | % |
| Operating loss | (40,315) | | | (53,850) | |
| Other income | 6,715 | | | 1,350 | |
| Interest expense | (786) | | | (874) | |
| Loss before income taxes | (34,386) | | | (53,374) | |
| Provision for income taxes | (36) | | | (54) | |
| Net loss | $ | (34,422) | | | $ | (53,428) | |
Our business segments have been issued through NETCENTS-2 have been issued through other contract vehicles, under which we were not prime contract awardees. This contributed to declines in revenuesdifferent factors driving revenue fluctuations and margins below historical performance levels for 2014 and 2015. Subsequent to the Air Force's reevaluationprofitability. The discussion of the NETCENTS-2 procurement relatedchanges in our net revenue and profitability are covered in greater detail under the section that follows: "Segment Results." We generate revenue from the delivery of products and services to the protests, we were selectedour customers. Cost of sales, for both products and services, consists of labor, materials, subcontracting costs and an award on April 3, 2015allocation of indirect costs.
Selling, general, and the contract was opened for issuanceadministrative ("SG&A"). SG&A expenses decreased by $39.6 million, or 29.8%, in 2023 compared to 2022. Sales and marketing expenses decreased by $9.5 million primarily due to lower compensation-related expenses. Research and development expenses decreased by $4.7 million primarily due to lower compensation-related expenses and increased capitalization of new orderssoftware development by $1.9 million. General and administrative expenses also decreased by $25.5 million mostly due to lower compensation-related expenses.
Other income. Other income increased by $5.4 million in May 2015. A significant amount of the2023, compared to 2022, primarily due to an increase in revenue for 2016 is attributable to increased sales under NETCENTS-2. We have also been awarded other IDIQ/GWACs, including the Departmentdividend income from money market placements of Homeland Security's EAGLE II and blanket purchase agreements under our GSA schedule. However, we have not been awarded significant delivery orders under EAGLE II due in part to government funding issues for the Department of Homeland Security.
On August 31, 2015, we were notified that we were not awarded the re-compete of a contract within our IT & Enterprise Solutions (formerly Secure Communications) area for a government agency. The contract had a total funded value of over $45$3.9 million, over the prior three years and accounted for approximately 11% of revenue for 2016. We filed a protest of the award with the Court of Federal Claims, which entered a final order denying the protest on February 29, 2016. On March 4, 2016, we filed an appeal with the United States Court of Appeals for the Federal Circuit, appealing the decision of the Court of Federal Claims, and the appellate court affirmed the judgement of the lower court on December 13, 2016. We continued to perform under the contract through the period of performance, which ended on May 22, 2016.
On October 13, 2016, we were notified that we were not awarded the re-compete of a contract within our Cyber Operations & Defense area for a government agency that we had bid as part of a joint venture. The contract had a total funded value of over $22 million over the prior three years and accounted for approximately 6% of revenue for 2016. The joint venture filed a protest of the award to another bidder with the GAO on October 24, 2016, which denied the protest on February 2, 2017. The joint venture then filed a claim with United States Court of Federal Claims ("COFC") on February 10, 2017, together with a motion seeking to stay and enjoin the transition of the contract. The COFC denied the requests for injunctive relief on February 14, 2017, but initiated a one-month extension on the current contract so as to allow the Court to address the joint venture's protest, hold a hearing and issue a decision in advance of any final contract transition. The final hearing before the COFC is currently scheduled for April 13, 2017 and a decision fromgain on early extinguishment of other financing obligation of $1.4 million in 2023, without a similar gain in 2022.
Interest expense. There was no significant change in interest expense between comparable periods.
Provision for income taxes. There was no significant change in the COFC is anticipated on or before May 2, 2017. Absent an earlier ruling fromprovision for income taxes in 2023, compared to 2022.
Segment Results
The accounting policies of each business segment are the Court, we anticipate continuing to perform under the contract at least through the extended period of performance, which now is scheduled to end on May 2, 2017.
In recent years, U.S. government appropriations have been affected by larger U.S. government budgetary issues and related legislation. In 2011, Congress enacted the Budget Control Act of 2011 (the "BCA"), which established specific limits on annual appropriations for fiscal years 2012-2021. The BCA has been amended a number of times, most recentlysame as those followed by the Bipartisan Budget ActCompany as a whole. Management evaluates business segment performance based on gross profit.
| | | | | | | | | | | |
| Table MD&A 3: Security Solutions Segment - Financial Results Comparison |
| For the Year Ended December 31, |
| 2023 | | 2022 |
| | | |
| (dollars in thousands) |
| Revenues | $ | 77,416 | | | $ | 120,454 | |
| Cost of sales (excluding depreciation and amortization) | 34,270 | | | 57,743 | |
| Depreciation and amortization | 3,532 | | | 763 | |
| Total cost of sales | 37,802 | | | 58,506 | |
| Gross profit | $ | 39,614 | | | $ | 61,948 | |
| Gross margin | 51.2 | % | | 51.4 | % |
Our Security Solutions segment revenue decreased by 7.8%$43.0 million or 35.7% in fiscal year 2013 as2023, compared to fiscal year 2012, but remained essentially flat for fiscal years 2014 and 2015. The BBA raised DoD fiscal year 2016 funding approximately 5% relative to fiscal year 2015, but the ultimate DoD funding for fiscal year 2017 remains uncertain because the DoD is currently operating under a Continuing Resolution for fiscal year 2017. The Continuing Resolution limits funding levels to fiscal year 2016 amounts and does not authorize new spending initiatives, despite renewed support in Washington for increased defense expenditures. Future spending levels are subject to a wide range of outcomes, depending on Congressional action.
Statement of Operations Data
The following table sets forth certain consolidated financial data and related percentages for the periods indicated:
| | | Years Ended December 31, | |
| | | 2016 | | | 2015 | | | 2014 | |
| | | (dollar amounts in thousands) | |
| | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 134,868 | | | | 100.0 | % | | $ | 120,634 | | | | 100.0 | % | | $ | 127,562 | | | | 100.0 | % |
| Cost of sales | | | 91,422 | | | | 67.8 | | | | 89,961 | | | | 74.6 | | | | 102,609 | | | | 80.4 | |
| Selling, general and administrative expenses | | | 41,334 | | | | 30.6 | | | | 34,290 | | | | 28.4 | | | | 36,597 | | | | 28.7 | |
Operating income (loss) | | | 2,112 | | | | 1.6 | | | | (3,617 | ) | | | (3.0 | ) | | | (11,644 | ) | | | (9.1 | ) |
| Other income (expenses): | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-operating income | | | 18 | | | | ---- | | | | 19 | | | | ---- | | | | 414 | | | | 0.3 | |
| Interest expense | | | (5,465 | ) | | | (4.1 | ) | | | (5,639 | ) | | | (4.6 | ) | | | (5,370 | ) | | | (4.2 | ) |
Loss before income taxes | | | (3,335 | ) | | | (2.5 | ) | | | (9,237 | ) | | | (7.6 | ) | | | (16,600 | ) | | | (13.0 | ) |
| (Provision) benefit for income taxes | | | (334 | ) | | | (0.2 | ) | | | (4,265 | ) | | | (3.5 | ) | | | 5,988 | | | | 4.7 | |
| Net loss | | | (3,669 | ) | | | (2.7 | ) | | | (13,502 | ) | | | (11.1 | ) | | | (10,612 | ) | | | (8.3 | ) |
Less: Net income attributable to non-controlling interest | | | (3,506 | ) | | | (2.6 | ) | | | (2,438 | ) | | | (2.0 | ) | | | (1,676 | ) | | | (1.3 | ) |
Net loss attributable to Telos Corporation | | $ | (7,175 | ) | | | (5.3 | )% | | $ | (15,940 | ) | | | (13.1 | )% | | $ | (12,288 | ) | | | (9.6 | )% |
Years ended December 31, 2016, 2015, and 2014
Revenue. Revenue increased by 11.8% to $134.9 million for 2016 from $120.6 million for 2015. Such increase2022, primarily consists of an increase in sales from the U.S. Air Force NETCENTS-2 contract. As discussed above, NETCENTS-2 is an IDIQ contract utilized by multiple government customers and sales under NETCENTS-2 varied from period to period according to the solution mix and timing of deliverables for a particular period. Services revenue increased by 15.6% to $112.9 million for 2016 from $97.7 million for 2015, primarily attributable to increases in sales of $11.7 million of Cyber Operations and Defense in Cyber Security solutions, $9.2 million of Cyber Operations and Defense in Secure Mobility solutions under several NETCENTS delivery orders for Telos-installed solutions, and $2.8 million of Identity Management solutions, offset by a decrease in sales of $8.5 million of IT & Enterprise solutions due to lower revenues on ongoing programs and the loss of a contract as discussed above. The change in product and services revenue varies from period to period depending on the mix of solutions soldprogram, partially offset by some new program wins and the natureinitial ramp of such solutions, as well as the timingTSA PreCheck program.
Likewise, the segment gross profit decreased by $22.3 million or 36.1% in 2023, compared to 2022, primarily due to the decrease in revenue. Segment gross margin slightly decreased from 51.4% in 2022 to 51.2% in 2023 primarily due to higher amortization of deliverables. Productsoftware development costs, offset by high margin new program wins, mix within the portfolio and lower stock-based compensation.
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| Table MD&A 4: Secure Networks Segment - Financial Results Comparison |
| For the Year Ended December 31, |
| 2023 | | 2022 |
| | | |
| (dollars in thousands) |
| Revenues | $ | 67,962 | | | $ | 96,433 | |
| Cost of sales (excluding depreciation and amortization) | 54,622 | | | 79,308 | |
| Depreciation and amortization | 12 | | | 30 | |
| Total cost of sales | 54,634 | | | 79,338 | |
| Gross profit | $ | 13,328 | | | $ | 17,095 | |
| Gross margin | 19.6 | % | | 17.7 | % |
Our Secure Networks segment revenue decreased by 4.3%$28.5 million, or 29.5%, in 2023, compared to $22.0 million for 2016 from $23.0 million for 2015,2022, primarily attributabledue to a decrease in salesthe successful completion of $2.3 million of Cyber Operationscertain programs and Defense in Secure Mobility solutions in resold products and $0.4 million of IT & Enterprise solutions and,lower revenues on ongoing programs as expected, partially offset by increases in sales of $1.2 million of Identity Management solutions, and $0.5 million of proprietary software sales in Cyber Operations and Defense in Cyber Security solutions.new program wins.
RevenueSegment gross profit decreased by 5.4%$3.8 million or 22.0% in 2023, compared to $120.6 million for 2015 from $127.6 million for 2014. Such decrease2022, primarily consists of a decrease in sales from the U.S. Air Force NETCENTS contract as we have continueddue to fulfill orders on the contract however, as discussed above, no new orders were issued between September 2013 and May 2015. We were selected for an award on the NETCENTS replacement contract, NETCENTS-2 Network Operations and Infrastructure Solutions Small Business Companion, on April 3, 2015, but the contract was not opened for issuance of new orders until May 2015, so 2015 operating results do not include a full year of fulfillment of orders under the new contract. Serviceslower revenue, decreased by 5.3% to $97.7 million for 2015 from $103.1 million for 2014, primarily attributable to decreases in sales of $6.1 million of Cyber Operations and Defense in Secure Mobility solutions under several NETCENTS delivery orders for Telos-installed solutions, $2.2 million of IT & Enterprise solutions,partially offset by an increasehigher gross margins. Segment gross margin increased from 17.7% in sales2022 to 19.6% in 2023 primarily due to strong program and cost management across several key programs.
Key Performance Measures
The primary financial performance measures we use to manage our business and monitor results of $1.9 millionoperations are revenue, gross profit, and Adjusted EBITDA. We evaluate our results of Cyber Operationsoperations by considering the drivers causing changes in these measures. We evaluate significant trends and Defensefluctuations in Cyber Security solutionsour contract portfolio over time due to contract awards and $1.0 millioncompletions, changes in customer requirements and changes in the volume of Identity Management solutions. The change in product and servicessoftware sales.
Changes in costs of revenue varies from period to period depending on the mix of solutions sold and the nature of such solutions, as well as the timing of deliverables. Product revenue decreased by 6.2% to $23.0 million for 2015 from $24.5 million for 2014, primarily attributable to a decrease in sales of $3.9 million of Secure Mobility solutions in resold products and $0.5 million of proprietary software sales in Cyber Operations and Defense in Cyber Security solutions, offset by increases in sales of $2.6 million of Identity Management solutions, and $0.3 million of IT & Enterprise solutions.
Cost of sales. Cost of sales increased by 1.6% to $91.4 million for 2016 from $90.0 million for 2015 as a result of increases in revenue. Cost of sales for services increased by $4.5 million, and as a percentage of services revenue decreasedother than from revenue volume or cost mix are driven by 6.1%,changes in compensation expense and other allocated costs and/or cumulative revenue adjustments due to a changechanges in estimates. Changes in operating cash flows are driven by changes in cash generated through delivery of products and services, fluctuations in current assets and liabilities and the impact of changes in the mixtiming of cash receipts or disbursements.
Non-GAAP Measures
In addition to our results determined in accordance with U.S. GAAP, we believe the non-GAAP financial measures of EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin, Adjusted Net (Loss)/Income, Adjusted Earnings Per Share ("EPS"), Cash Gross Profit, Cash Gross Margin and natureFree Cash Flow are useful in evaluating our operating performance. We believe that this non-GAAP financial information, when taken collectively with our GAAP results, may be helpful to readers of our financial statements because it provides consistency and comparability with past financial performance and assists in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their GAAP results. The non-GAAP financial information is presented for supplemental informational purposes only, should not be considered a substitute for financial information presented in accordance with GAAP, and may be different from similarly-titled non-GAAP measures used by other companies. A reconciliation is provided below for each of these non-GAAP financial measures to the programs includingmost directly comparable financial measure stated in accordance with GAAP.
We believe these non-GAAP financial measures facilitate comparison of our operating performance on a consistent basis between periods by excluding certain items that may, or could, have a disproportionately positive or negative impact on our results of operations in any particular period. When viewed in combination with our results prepared in accordance with GAAP, these non-GAAP financial measures help provide a broader picture of factors and trends affecting our results of operations.
EBITDA, Adjusted EBITDA, EBITDA Margin and Adjusted EBITDA Margin
EBITDA, Adjusted EBITDA, EBITDA Margin and Adjusted EBITDA Margin are supplemental measures of operating performance that are not made under GAAP and do not represent, and should not be considered as, an increase in sales of certain Telos-installed solutions in Cyber Operationsalternative to net loss as determined by GAAP. We define EBITDA as net (loss)/income, adjusted for non-operating (income)/expense, interest expense, provision for/(benefit from) income taxes, and Defense in Secure Mobility solutions under NETCENTS-2depreciation and other contracts,amortization. We define Adjusted EBITDA as wellEBITDA, adjusted for stock-based compensation expense and restructuring expenses. We define EBITDA Margin as the loss of a contract in IT & Enterprise Solutions as discussed above. Cost of sales for product decreased by $3.0 million, primarily due to decreases in product revenue for resold product, andEBITDA as a percentage of product revenue decreased by 10.5%, primarily due to improved resold product margins primarily in Telos ID. The increase in cost of sales is not necessarily indicative of a trendtotal revenue. We define Adjusted EBITDA Margin as the mix of solutions sold and the nature of such solutions can vary from period to period, and further can be affected by the timing of deliverables.
Cost of sales decreased by 12.3% to $90.0 million for 2015 from $102.6 million for 2014 as a result of decreases in revenue. Cost of sales for services decreased by $9.4 million, andAdjusted EBITDA as a percentage of services revenue decreasedtotal revenue.
We believe that EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin provide the Board, management and investors with clear representation of our core operating performance and trends, provide greater visibility into the long-term financial performance of the Company, and eliminate the impact of items that do not relate to the ongoing operating performance of the business. Further, Adjusted EBITDA is used by 5.2%the Board and management to prepare and approve our annual budget, and to evaluate the performance of certain management personnel when determining incentive compensation.
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| Table MD&A 5: Reconciliation of Net Loss to EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin |
| For the Year Ended December 31, |
| 2023 | | 2022 |
| Amount | | Margin | | Amount | | Margin |
| | | | | | | |
| (dollars in thousands) |
| Net loss | $ | (34,422) | | | (23.7) | % | | $ | (53,428) | | | (24.6) | % |
| Other income | (6,715) | | | (4.6) | % | | (1,350) | | | (0.6) | % |
| Interest expense | 786 | | | 0.5 | % | | 874 | | | 0.4 | % |
| Provision for income taxes | 36 | | | — | % | | 54 | | | — | % |
| Depreciation and amortization | 9,429 | | | 6.5 | % | | 5,890 | | | 2.7 | % |
| EBITDA (Non-GAAP) | (30,886) | | | (21.3) | % | | (47,960) | | | (22.1) | % |
Stock-based compensation expense (1) | 24,396 | | | 16.8 | % | | 64,660 | | | 29.8 | % |
Restructuring expenses (2) | 1,132 | | | 0.8 | % | | 2,767 | | | 1.3 | % |
| Adjusted EBITDA (Non-GAAP) | $ | (5,358) | | | (3.7) | % | | $ | 19,467 | | | 9.0 | % |
(1) The stock-based compensation adjustment to EBITDA is made up of stock-based compensation expense for the awarded service-based restricted stock units ("RSUs"), dueperformance-based restricted stock units ("PSUs"), stock options, and other sources. Stock-based compensation expense for the awarded RSUs, PSUs and stock options was $22.9 million and $62.5 million for fiscal year 2023 and 2022, respectively. Stock-based compensation expense from other sources was $1.5 million and $2.1 million for the fiscal year 2023 and 2022, respectively. The other source of stock-based compensation consists of accrued compensation, which the Company 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. The Company has the right to dictate the form of these payments up until the date at which they are paid. Any change to the expected payment form would result in a change in estimate that would add back to Adjusted EBITDA.
(2) The restructuring expenses include severance and other related benefit costs (including outplacement services and continuing health insurance coverage), external consulting and advisory fees related to implementing the mixrestructuring plan.
Adjusted Net (Loss)/Income and natureAdjusted EPS
Adjusted Net (Loss)/Income and Adjusted EPS are supplemental measures of operating performance that are not made under GAAP and do not represent, and should not be considered as, alternatives to net (loss)/income as determined by GAAP. We define Adjusted Net (Loss)/Income as net loss, adjusted for non-operating (income)/expense, stock-based compensation expense and restructuring expense. We define Adjusted EPS as Adjusted Net (Loss)/Income divided by the weighted-average number of common shares outstanding for the period.
Adjusted Net (Loss)/Income and Adjusted EPS provide the Board, management and investors with clear representation of our core operating performance and trends, provide greater visibility into the long-term financial performance of the programs including an increaseCompany, and eliminate the impact of items that do not relate to the ongoing operating performance of the business.
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| Table MD&A 6: Reconciliation of Net Loss and GAAP EPS to Non-GAAP Adjusted Net Income and Adjusted EPS |
| For the Year Ended December 31, |
| 2023 | | 2022 |
| Adjusted Net Income/(Loss) | | Adjusted Earnings Per Share | | Adjusted Net Income/(Loss) | | Adjusted Earnings Per Share |
| | | | | | | |
| (in thousands, except per share data) |
| Net loss | $ | (34,422) | | | $ | (0.50) | | | $ | (53,428) | | | $ | (0.79) | |
| Adjustments: | | | | | | | |
| Other income | (6,715) | | | (0.10) | | | (1,350) | | | (0.02) | |
Stock-based compensation expense (1) | 24,396 | | | 0.35 | | | 64,660 | | | 0.96 | |
Restructuring expenses (2) | 1,132 | | | 0.02 | | | 2,767 | | | 0.04 | |
| Adjusted net (loss)/income (Non-GAAP) | $ | (15,609) | | | $ | (0.23) | | | $ | 12,649 | | | $ | 0.19 | |
| Weighted-average shares of common stock outstanding, basic | 69,256 | | | | | 67,559 | | | |
(1) The stock-based compensation adjustment to EBITDA is made up of stock-based compensation expense for the awarded service-based restricted stock units ("RSUs"), performance-based restricted stock units ("PSUs"), stock options, and other sources. Stock-based compensation expense for the awarded RSUs, PSUs and stock options was $22.9 million and $62.5 million for fiscal year 2023 and 2022, respectively. Stock-based compensation expense from other sources was $1.5 million and $2.1 million for the fiscal year 2023 and 2022, respectively. The other source of stock-based compensation consists of accrued compensation, which the Company intends to settle in salesshares of certain Telos-installed solutionsthe Company's common stock. However, it is the Company's discretion whether this compensation will ultimately be paid in Cyber Operationsstock or cash. The Company has the right to dictate the form of these payments up until the date at which they are paid. Any change to the expected payment form would result in a change in estimate that would add back to Adjusted Net (Loss)/Income.
(2) The restructuring expenses include severance and Defense in Secure Mobility solutionsother related benefit costs (including outplacement services and continuing health insurance coverage), external consulting and advisory fees related to implementing the restructuring plan.
Cash Gross Profit and Cash Gross Margin
Cash Gross Profit and Cash Gross Margin are supplemental measures of operating performance that are not made under NETCENTS. CostGAAP and do not represent, and should not be considered as, alternatives to gross profit and gross margin as determined by GAAP. We define Cash Gross Profit as gross profit, plus noncash charges for stock-based compensation expense, depreciation and amortization, as well as non-recurring items (such as restructuring expenses) charged under cost of sales for product decreased by $3.2 million, primarily due to decreases in product revenue for resold product, andsales. We define Cash Gross Margin as Cash Gross Profit as a percentage of product revenue decreased by 8.7%, primarily duetotal revenue.
Cash Gross Profit and Cash Gross Margin provide management and investors a clear representation of the core economics of gross profit and gross margin without the impact of non-cash expenses and sunk costs expended.
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| Table MD&A 6: Reconciliation of Gross Profit to Cash Gross Profit; Gross Margin to Cash Gross Margin |
| For the Year Ended December 31, |
| 2023 | | 2022 |
| Amount | | Margin | | Amount | | Margin |
| | | | | | | |
| (dollars in thousands) |
| Gross profit | $ | 52,942 | | | 36.4 % | | $ | 79,043 | | | 36.4 % |
| Adjustments: | | | | | | | |
| Stock-based compensation expense — cost of sales | 900 | | | 0.6 % | | 3,497 | | | 1.6 % |
| Depreciation and amortization — cost of sales | 3,544 | | | 2.5 % | | 793 | | | 0.4 % |
| Restructuring expenses — cost of sales | — | | | —% | | 578 | | | 0.3% |
| Cash gross profit (Non-GAAP) | $ | 57,386 | | | 39.5% | | $ | 83,911 | | | 38.7 % |
Free Cash Flow
Free cash flow, as reconciled in the table below, is a non-GAAP financial measure defined as net cash provided by/(used in) operating activities, less purchases of property and equipment, and capitalized software development costs. This non-GAAP financial measure may be a useful measure for investors and other users of our financial statements as a supplemental measure of our cash performance and to improved resold product margins. The decreaseassess the quality of our earnings as a key performance measure in costevaluating management.
We use Free Cash Flow to understand the cash flows that directly correspond with our operations and the investments we must make in those operations, using a methodology that combines operating cash flows and capital expenditures. Further, Free Cash Flow may be useful to management and investors in evaluating the Company's operating performance and liquidity.
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| Table MD&A 7: Free Cash Flow |
| For the Year Ended December 31, |
| 2023 | | 2022 |
| | | |
| (in thousands) |
| Net cash flows provided by operating activities | $ | 1,587 | | | $ | 16,508 | |
| Adjustments: | | | |
| Purchases of property and equipment | (926) | | | (1,009) | |
| Capitalized software development costs | (14,552) | | | (12,708) | |
| Net cash proceeds from resale of software | — | | | 8,457 | |
| Free cash flow (Non-GAAP) | $ | (13,891) | | | $ | 11,248 | |
Each of EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin, Adjusted Net (Loss)/Income, Adjusted EPS, Cash Gross Profit, Cash Gross Margin and Free Cash Flow has limitations as an analytical tool, and you should not necessarilyconsider any of them in isolation, or as a substitute for analysis of our results as reported under GAAP. Among other limitations, each of EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin, Adjusted Net (Loss)/Income, Adjusted EPS, Cash Gross Profit, Cash Gross Margin and Free Cash Flow does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments, does not reflect the impact of certain cash and non-cash charges resulting from matters we consider not to be indicative of a trend as the mix of solutions soldour ongoing operations, and the nature of such solutions can vary from period to period, and further can be affected by the timing of deliverables.
Gross profit. Gross profit increased by 41.6% to $43.4 million for 2016 from $30.7 million for 2015. Gross margin increased to 32.2% for 2016 from 25.4% for 2015, due to various changes in the mix of contracts in all business lines, primarily increases in sales of Cyber Operations and Defense in Cyber Security solutions.
Gross profit increased by 22.9% to $30.7 million for 2015 from $25.0 million for 2014. Gross margin increased to 25.4% for 2015 from 19.6% for 2014, due to various changes in the mix of contracts in all business lines, primarily increases in sales of Cyber Operations and Defense in Cyber Security solutions.
Selling, general, and administrative expenses. Selling, general, and administrative expenses increased 20.5% to $41.3 million for 2016 from $34.3 million for 2015. Such increase is primarily attributable to increases in bonuses of $4.1 million, labor costs of $2.6 million, and outside services of $1.5 million, offset by a decrease in amortization of other intangible assets of $1.1 million.
Selling, general, and administrative expenses decreased 6.3% to $34.3 million for 2015 from $36.6 million for 2014. Such decrease is primarily attributable to decreases in bonuses of $2.9 million, legal costs of $0.4 million, and travel costs of $0.2 million, offset by an increase in labor costs of $1.4 million.
Interest expense. Interest expenses decreased 3.1% to $5.5 million for 2016 from $5.6 million for 2015, primarily due to a decrease in interest on senior credit facilities (as defined below).
Interest expenses increased 5.0% to $5.6 million for 2015 from $5.4 million for 2014, primarily due to increases in interest on the Ashburn lease and Porter Notes (as defined below), offset by a decrease in interest on the Facility (as defined below).
Components of interest expense are as follows:
| | | December 31, | |
| | | 2016 | | | 2015 | | | 2014 | |
| | | (amounts in thousands) | |
| Commercial and subordinated note interest incurred | | $ | 1,575 | | | $ | 1,750 | | | $ | 1,481 | |
| Preferred stock interest accrued | | | 3,890 | | | | 3,889 | | | | 3,889 | |
Total | | $ | 5,465 | | | $ | 5,639 | | | $ | 5,370 | |
Provision for income taxes. Income tax provision was $0.3 million for 2016, compared to $4.3 million for 2015, primarily due to pretax loss of $3.3 million for 2016, compared to $9.2 million for 2015. Income tax provision was $4.3 million for 2015, compared todoes not reflect income tax benefitexpense or benefit. Other companies in our industry may calculate Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net (Loss)/Income, Adjusted EPS, Cash Gross Profit, Cash Gross Margin and Free Cash Flow differently than we do, which limits their usefulness as comparative measures. Because of $6.0 millionthese limitations, neither EBITDA, Adjusted EBITDA, EBITDA Margin, Adjusted EBITDA Margin, Adjusted Net (Loss)/Income, Adjusted EPS, Cash Gross Profit, Cash Gross Margin nor Free Cash Flow should be considered as a replacement for 2014,gross profit, gross margin, net (loss)/income, earnings per share or net cash flows (used in)/provided by operating activities, as determined by GAAP, or as a measure of our profitability. We compensate for these limitations by relying primarily due to pretax loss of $9.2 millionon our GAAP results and using non-GAAP measures only for 2015, compared to $16.6 million for 2014, and an increase in valuation allowance of $7.2 million.supplemental purposes.
Liquidity and Capital Resources
As described in more detail below, we maintained aOur primary sources of liquidity are cash on hand, future operating cash flows, and if needed, borrowings under our $30.0 million senior secured revolving credit facility, (the "Facility") with Wells Fargo Capital Finance, Inc. ("Wells Fargo") until July 15, 2016. Borrowings under the Facility were collateralized by substantially all of our assets including inventory, equipment, and accounts receivable. The amount of available borrowings fluctuated based on the underlying asset-borrowing base, in general 85% of our trade accounts receivable, as adjusted by certain reserves (as further defined in the Facility agreement). The Facility provided us with virtually all of the liquidity we required to meet our operating, investing and financing needs prior to July 15, 2016.
On July 15, 2016, the outstanding balance under the Facility was paid in full. On July 15, 2016, we entered into an Accounts Receivable Purchase Agreement (the "Purchase Agreement") with Republic Capital Access, LLC ("RCA" or "Buyer"), pursuant to which we may offer for sale, and RCA, in its sole discretion, may purchase, eligible accounts receivable relating to U.S. government prime contracts or subcontracts of the Company (collectively, the "Purchased Receivables"). Additionally, on July 15, 2016, we entered into a Financing and Security Agreement (the "Financing Agreement") with Action Capital Corporation ("Action Capital"), pursuant to which Action Capital agreed to provide the Company with advancesexpansion feature of up to 90% of the net amount of certain acceptable customer accounts of the Company that have been assigned as collateral to Action Capital (the "Acceptable Accounts"). The willingness of RCA to purchase our accounts receivable under the Purchase Agreement and of Action Capital to make advances under the Financing Agreement, and our ability to obtain additional financing, may be limited due to various factors, including the eligibility of our receivables, the status of our business, global credit market conditions, and perceptions of our business or industry by RCA, Action Capital, or other potential sources of financing. If we are unable to maintain the new financing arrangements, we would need to obtain additional credit to fund our future operations. If credit is available in that event, lenders may impose more restrictive terms and higher interest rates that may reduce our borrowing capacity, increase our costs, or reduce our operating flexibility. The failure to maintain, extend, renew or replace our new sources of financing with a comparable arrangement or arrangements that provide similar amounts of liquidity for the Company would have a material negative impact on our overall liquidity, financial and operating results.
RCA initially pays the Company 90% of U.S. Federal government receivables or 85% of certain commercial prime contractors. The remaining payment is deferred and based on the amount RCA receives from our customer, less a discount fee and a program access fee that is determined by the amount of time the receivable is outstanding before payment. The structure of the transaction provides for a true sale of the receivables transferred. Accordingly, upon transfer of the receivable to RCA, the receivable is removed from the Company's consolidated balance sheet, a loss on the sale is recorded and the residual amount remains a deferred payment as an account receivable until payment is received from RCA. The balance of the sold receivables may not exceed $10 million. During the year ended December 31, 2016, the Company sold approximately $35.3$30.0 million of receivables, and recognized a related loss of approximately $0.2 million in selling, general and administrative expenses for the same period. As of December 31, 2016, the balance of the sold receivables was approximately $1.0 million, and the related deferred price was approximately $0.1 million.
On July 15, 2016, Telos repaid the entire balance of the Facility utilizing proceeds generated through new financing arrangements with RCA and Action Capital, entered into concurrently with the payoff of the Facility, and terminated the Facility. At the time of the Facility repayment, the outstanding loan balance, including accrued interest and fees, was $5.4 million. Additionally, Wells Fargo required the Company to collateralize, by cash deposit, $0.3 million for an outstanding letter of credit and as general returned item collateral. Under the terms of the payoff letter for the Facility, RCA paid $5.7 million directly to Wells Fargo with the Company receiving the residual amount from the sale of $7.4 million of Purchased Receivables to RCA.
Additionally, at the time of the Facility repayment, approximately $2.5 million of receivables were eligible to be financed through the Action Capital credit facility at the time of closing. The Company elected not to use this credit facility to effect the payoff, instead electing to finance the payoff through the RCA facility. Since receivables under the RCA facility are sold to RCA, current assets were utilized to pay off the Facility.
The Company utilizes the RCA and Action Capital facilities in concert to meet its operating, investing and financing cash flow requirements. The Company utilized the Action Capital facility shortly after the close of the financing transactions described above.
While the Company's decision to pay off a current liability (which was a noncurrent liability in the previous period) utilizing current assets (even though it had a noncurrent financing option for a substantial amount of the payoff available to it) had a negative effect on working capital at that time, the effect was mitigated through earnings from operations. The proceeds of the January 2017 financing discussed in Note 13 – Commitments, Contingencies, and Subsequent Events will be utilized to address working capital requirements and retire certain long-term obligations.
additional revolver capacity. While a variety of factors related to sources and uses of cash, such as timeliness of accounts receivable collections, vendor credit terms, or significant collateral requirements, ultimately impact our liquidity, such factors may or may not have a direct impact on our liquidity based on how the transactions associated with such circumstances impact our availability under our credit arrangements. For example, a contractual requirement to post collateral for a durationliquidity.
As of several months, depending on the materialityDecember 31, 2023, we had cash and cash equivalents of the amount, could have an immediate negative effect on our liquidity, as such a circumstance would utilize cash resources without a near-term cash inflow back to us. Likewise, the release of such collateral could have a corresponding positive effect on our liquidity, as it would represent an addition to our cash resources without any corresponding near-term cash outflow. Similarly, a slow-down of payments from a customer, group of customers or government payment office would not have an immediate and direct effect on our availability unless the slowdown was material in amount and over an extended period of time. Any of these examples would have an impact on our cash resources, our financing arrangements, and therefore our liquidity.
Additionally, as a result of operations for 2014 and 2015, and the continued impact of contract delays as well as other government budgetary funding issues, management determined the need to raise additional working capital. Accordingly, in December 2014, we sold 10% of the membership interests in Telos ID to the Telos ID Class B member for $5$99.3 million and in March 2015, we issued subordinated notes in the amount of $2.5 million to affiliated entities of John R.C. Porter ("Porter Notes"), a holder of Telos Class A Common Stock and Senior Redeemable Preferred Stock. As discussed in detail in Note 13 – Commitments, Contingencies and Subsequent Events, in January 2017, we borrowed $11 million under a credit agreement with Enlightenment Capital Solutions Fund II, L.P. to raise additional working capital and retire certain long-term obligations. Management currently believes that the Company's existing borrowing capacity is sufficient to fund our capital and liquidity needs for the next 12 months.
Management may determine that, in order to reduce capital and liquidity requirements, planned spending on capital projects and indirect expense growth may be curtailed, subject to growth in operating results. Additionally, management may seek to put in place a credit facility with a commercial bank, although no assurance can be given that such a facility could be put in place under terms acceptable to the Company. Should management determine that additional capital is required, management would likely look first to the sources of funding discussed above to meet any requirements, although no assurances can be given that these investors would be able to invest or that the Company and the investors would agree upon terms for such investments.
Our working capital was $(8.6) million and $1.1 million as of December 31, 2016 and 2015, respectively. See discussion above regarding$100.8 million.
We place a strong emphasis on liquidity management. This focus gives us the effect on workingflexibility for capital as of thedeployment while preserving a strong balance sheet date of the subsequent origination of the RCAto position us for future opportunities. We believe we have adequate funds on hand to execute our financial and Action Capital facilitiesoperating strategy. Our overall financial position and payoff of the Wells Fargo Facility.liquidity are strong. Although no assurances can be given, we expect thatbelieve the available cash balances and access to our financing arrangements with RCA and Action Capital, collectively, as well as the proceeds of the January 2017 financing discussed further in Note 13 – Commitments, Contingencies and Subsequent Events,revolving credit facility are sufficient to maintain the liquidity we require to meet our operating, investing and financing needs for the next 12 months.
Cash provided by operating activities was $13.9 million for the year ended December 31, 2016, compared to | | | | | | | | | | | |
| Table MD&A 8: Cash Flows Information | | | |
| For the Year Ended December 31, |
| 2023 | | 2022 |
| | | |
| (in thousands) |
| Net cash provided by operating activities | $ | 1,587 | | | $ | 16,508 | |
| Net cash used in investing activities | (15,478) | | | (13,717) | |
| Net cash used in financing activities | (6,151) | | | (9,915) | |
| Net change in cash, cash equivalents, and restricted cash | $ | (20,042) | | | $ | (7,124) | |
Net cash provided by operating activities of $2.7 million for the yearyears ended December 31, 2015,2023 and 2022 was $1.6 million and $16.5 million, respectively, a decrease in cash provided by operating activitiesinflow of $6.2$14.9 million for 2014. Cash provided bycompared with prior year. The cash flow from operating activities is primarily driven by ourthe Company's operating income,losses, the timing of receiptreceipts of customer payments, the timing of payments to vendors and employees, and the timing of inventory turnover, adjusted for certain non cashnon-cash items that do not impact cash flows from operating activities. In 2016, net loss was $3.7 million, which included $0.3 million of income tax provision and $1.1 million of amortization of intangible assets resulting from the ITL acquisition. In 2015, net loss was $13.5 million, which included $4.3 million of income tax provision and $2.3 million of amortization of intangible assets resulting from the ITL acquisition. In 2014, net loss was $10.6 million, which included $6.0 million of income tax benefit and $2.3 million of amortization of intangible assets resulting from the ITL acquisition.
CashNet cash used in investing activities for the yearyears ended December 31, 2016, 2015, and 2014 was $0.62023, increased by $1.8 million $0.4in cash outflow compared to the same period in 2022, primarily due to higher investments in software development costs of $14.6 million and $0.7 million, respectively, which consisted of the purchases of property and equipment.
Cash used in financing activities for year ended December 31, 2016 was $12.6 million, compared to $2.3 million for 2015, and $5.6 million for 2014. The financing activities in 2016 consisted primarily of net repayments of $6.7 million of the facilities, repayments of $3.2 million of a term loan, repayments of $0.8 million under capital leases, and distributions of $1.9 million to the Class B Member of Telos ID. The financing activities in 2015 consisted primarily of net repayments of $1.3 million from the Facility, repayments of $2.3 million of a term loan, proceeds of $2.5 million from subordinated debt, repayments of $0.8 million under capital leases, proceeds of $2.0 million from sale of 10% of Telos ID membership interest, distributions of $2.4 million to the Class B Member of Telos ID. The financing activities in 2014 consisted primarily of net repayments of $7.2 million from the Facility, repayments of $0.8 million under capital leases, repayments of a $0.7 million of a term loan, distributions of $1.5 million to the Class B Member of Telos ID, proceeds of $1.7 million from the assignment of the purchase option under our 2013 lease on our Ashburn headquarters, and proceeds of $3.0 million from sale of 10% of Telos ID membership interest.
Additionally, our capital structure consists of redeemable preferred stock and common stock. The capital structure is complex and requires an understanding of the terms of the instruments, certain restrictions on scheduled payments and redemptions of the various instruments, and the interrelationship of the instruments especially as it relates to the subordination hierarchy. Therefore a thorough understanding of how our capital structure impacts our liquidity is necessary and accordingly we have disclosed the relevant information about each instrument as follows:
Accounts Receivable Purchase Agreement
On July 15, 2016, we entered into an Accounts Receivable Purchase Agreement (the "Purchase Agreement") with Republic Capital Access, LLC ("RCA" or "Buyer"), pursuant to which we may offer for sale, and RCA, in its sole discretion, may purchase, eligible accounts receivable relating to U.S. government prime contracts or subcontracts of the Company (collectively, the "Purchased Receivables"). Upon purchase, RCA becomes the absolute owner of any such Purchased Receivables, which are payable directly to RCA, subject to certain repurchase obligations of the Company. The total amount of Purchased Receivables is subject to a maximum limit of $10 million of outstanding Purchased Receivables (the "Maximum Amount") at any given time. The Purchase Agreement has an initial term expiring on June 30, 2018 and automatically renews for successive 12-month renewal periods unless terminated in writing by either the Company or RCA.
The initial purchase price of a Purchased Receivable is equal to 90% of the face value of the receivable if the account debtor is an agency of the U.S. government, and 85% if the account debtor is not an agency of the U.S. government; provided, however, that RCA has the right to adjust these initial purchase price rates in its sole discretion. After collection by RCA of the portion of a Purchased Receivable in excess of the initial purchase price, RCA shall pay the Company the residual 10% or 15% of such Purchased Receivable, as appropriate, less (i) a discount factor equal to 0.30%, for federal government prime contracts (or 0.56% for non-federal government investment grade account obligors or 0.62% for non-federal government non-investment grade account obligors) of the face amounts of Purchased Receivables; (ii) a program access fee equal to 0.008% of the daily ending account balance for each day that the Purchased Receivable is outstanding; (iii) a commitment fee equal to 1% per annum of Maximum Amount minus the amount of Purchased Receivables outstanding; and (iv) fees, costs and expenses relating to the preparation, administration and enforcement of the Purchase Agreement and any other related agreements. At the time the Purchase Agreement was signed, the Company received proceeds in an amount equal to $6.3 million, net of an initial enrollment fee equal to $25,000. Those proceeds were used to repay the outstanding amount under the Facility to Wells Fargo.
The Purchase Agreement provides that in the event, but only to the extent, that the conveyance of Purchased Receivables by the Company is characterized by a court or other governmental authority as a loan rather than a sale, the Company shall be deemed to have granted RCA, effective as of the date of the first purchase under the Purchase Agreement, a security interest in all of the Company's right, title and interest in, to and under all of the Purchased Receivables, whether now or hereafter owned, existing or arising.
The Company provides a power of attorney to RCA to take certain actions in the Company's stead, including (a) to sell, assign or transfer in whole or in part any of the Purchased Receivables; (b) to demand, receive and give releases to any account debtor with respect to amounts due under any Purchased Receivables; (c) to notify all account debtors with respect to the Purchased Receivables; and (d) to take any actions necessary to perfect RCA's interests in the Purchased Receivables.
The Company is liable to Buyer for any fraudulent statements and all representations, warranties, covenants, and indemnities made by the Company pursuant to the terms of the Purchase Agreement. It is considered an event of default if (a) the Company fails to pay any amounts it owes to RCA when due (subject to a cure period); (b) the Company has voluntary or involuntary bankruptcy proceedings commenced by or against it; (c) the Company is no longer solvent or is generally not paying its debts as they become due; (d) any voluntary liens, garnishments, attachments, or the like are issued against or attach to the Purchased Receivables; (e) the Company breaches any warranty, representation, or covenant (subject to a cure period); (f) the Company is not in compliance or has otherwise defaulted under any document or obligation in favor of RCA or an RCA affiliate; or (g) the Purchase Agreement or any material provision terminates (other than in accordance with the terms of the Purchase Agreement) or ceases to be effective or to be a binding obligation of the Company. If any such event of default occurs, then RCA may take certain actions, including ceasing to buy any eligible receivables, declaring any indebtedness or other obligations immediately due and payable, or terminating the Purchase Agreement.
Financing and Security Agreement
On July 15, 2016, we entered into a Financing and Security Agreement (the "Financing Agreement") with Action Capital Corporation ("Action Capital"), pursuant to which Action Capital agreed to provide the Company with advances of up to 90% of the net amount of certain acceptable customer accounts of the Company that have been assigned as collateral to Action Capital (the "Acceptable Accounts"). The maximum outstanding principal amount of advances under the Financing Agreement was $2.5 million, which was subsequently increased to $5 million on September 6, 2016. The Financing Agreement has a term of two years, provided that the Company may terminate it at any time without penalty upon written notice. At the time the Financing Agreement was signed, the Company did not borrow any amounts under the Financing Agreement.
The Company shall pay Action Capital interest on the advances outstanding under the Financing Agreement at a rate equal to the prime rate of Wells Fargo Bank, N.A. in effect on the last business day of the prior month plus 2%, and a monthly fee equal to 0.50%. All interest calculations are based on a year of 360 days. The Company's obligations under the Financing Agreement are secured by certain assets of the Company pertaining to the Acceptable Accounts, including all accounts, accounts receivable, earned and unbilled revenue, contract rights, chattel paper, documents, instruments, general intangibles, reserves, reserve accounts, rebates, books and records, and all proceeds of the foregoing.
Pursuant to the terms of the Financing Agreement, Action Capital shall have full recourse against the Company when an Acceptable Account is not paid in full by the respective customer within 90 days of the date of purchase or if for any reason it ceases to be an Acceptable Account, including the right to charge-back any such Acceptable Account. It is considered an event of default if the Company breaches any covenant or warranty, knowingly provides false or incorrect material information to Action Capital, or otherwise defaults on any of its material obligations under the Financing Agreement or any other material agreements with Action Capital (subject to a cure period). If any such events of default occur, then Action Capital may take certain actions, including declaring any indebtedness immediately due and payable, requiring any customers with Acceptable Accounts to make payments directly to Action Capital, exercising its power of attorney from the Company to take actions in the Company's stead with respect to any of Company's Acceptable Accounts, or terminating the Financing Agreement.
As of December 31, 2016, there were no outstanding borrowings under the Financing Agreement.
In connection with the Purchase Agreement and the Financing Agreement, we terminated the Facility with Wells Fargo, effective as of July 15, 2016, prior to its maturity date of April 1, 2017, and repaid all amounts outstanding under the Facility; other than (1) the obligations of the Company under the Facility and related loan documents with respect to letters of credits and fees, charges, costs and expenses related thereto, (2) the obligations of the Company under the Facility and related loan documents to reimburse Wells Fargo for costs and expenses that may become due and payable after the date of the termination of the Facility, and (3) any customary contingent indemnification obligations. The Company paid an early termination fee of $100,000, and no other early termination fees or prepayment penalties were incurred by the Company in connection with the termination of the Facility.
Senior Revolving Credit Facility
On August 12, 2015, we amended our revolving credit facility (the "Facility") with Wells Fargo Capital Finance, LLC ("Wells Fargo") to extend the maturity date to July 1, 2016. On November 17, 2015, the Facility was further amended to extend the maturity date to October 1, 2016. As of December 31, 2015, we were in compliance with the Facility's financial covenants, including EBITDA covenants.
As of December 31, 2015, the interest rate on the Facility was 5.75%. We incurred interest expense in the amount of $0.2 million, $0.6 million, and $0.7$12.7 million for the years ended December 31, 2016, 2015,2023 and 2014, respectively,2022, respectively.
For the year ended December 31, 2023, net cash used in financing activities was $6.2 million compared to $9.9 million in 2022. The decrease in cash outflow from financing activities is primarily attributable to decreases in payments of tax withholding related to the net share settlement of equity awards of $3.7 million in 2023, compared with $5.7 million in 2022. In addition, the 2023 cash outflow related to the repurchase of common stock under the Share Repurchase Program is comprised only of unpaid purchases in 2022 paid-off in 2023, amounting to $0.1 million, compared with $11.1 million in 2022. This is partially offset by the payments of the DFT holdback of $0.6 million in February 2023. By contrast, in 2022, there was a cash inflow from the other financing obligations of $9.1 million.
Commitments from Contractual Obligations
The Company does not have any other material cash requirements from contractual obligations at December 31, 2023, except for the commitments on the Facility.existing lease obligations on various office space and equipment under non-cancelable operating and finance leases. We reported current and long-term lease liabilities.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Table MD&A 9: Contractual Obligations |
| | | Payments due by Period |
| | Total | | 2024 | | 2025 - 2027 | | 2028 - 2030 | | Thereafter |
| | | | | | | | | |
| (in thousands) |
Finance lease obligations (1) | 12,915 | | | 2,258 | | | 7,116 | | | 3,541 | | | — | |
Operating lease obligations (1) (2) | 241 | | | 105 | | | 111 | | | 25 | | | — | |
| Total contract obligations | $ | 13,156 | | | $ | 2,363 | | | $ | 7,227 | | | $ | 3,566 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) Includes interest expense. | $ | 1,688 | | | $ | 536 | | | $ | 1,022 | | | $ | 130 | | | $ | — | |
(2) Includes operating lease right-of-use obligations and short-term leases with terms of 12 months or less. We have various lease agreements pursuant to ASC 842, "Leases" that require us to record the present value of the minimum lease payments for such lease properties. |
In addition, there were no outstanding commitments that were considered material for capital expenditures on December 31, 2023.
Revolving Credit Facility
On MarchDecember 30, 20162022, we entered into a senior secured credit facility with JPMorgan Chase Bank, N.A. ("Credit Agreement") that provides for a $30.0 million senior secured revolving credit facility, with the Facility wasoption of issuing letters of credits thereunder and with an uncommitted expansion feature of up to $30.0 million of additional revolver capacity, maturing on December 30, 2025. On April 12, 2023, we amended ("the Seventeenth Amendment") to extend the maturity date to January 1, 2017. The Seventeenth Amendment also amendedour Credit Agreement and revised certain provision on the terms of the Facility, reducingcovered collateral. See Note 10 - Debt and Other Obligations to the total credit available from $20 million to $10 million effective asconsolidated financial statements contained within this Annual Report for additional information. The Credit Agreement contains customary terms and conditions, including certain covenant requirements. As of the date of the amendment, which more appropriately reflected the Company's projected utilization of the Facility. The Seventeenth Amendment fixed the interest rate at the higher of the Wells Fargo Bank "prime rate" plus 2.25%, the Federal Funds rate plus 2.75%, or the 3-month LIBOR rate plus 3.25%. The Seventeenth Amendment also increased the minimum excess availability requirementDecember 31, 2023, there were no outstanding balances under the revolving componentcredit facility and we were in compliance with all covenants contained in the Credit Agreement.
Other Financing Obligations
In November 2022, we entered into a Master Purchase Agreement with a third-party for $9.1 million relating to software licenses under a specific delivery order with a customer resulting in proceeds from $1.25 millionother financing obligation. On February 9, 2023, when the third-party buyer notified us that it would not exercise the option period, we transferred all the rights, title and interest in the underlying licenses in exchange for the extinguishment of the outstanding financing obligations. The extinguishment of the other financing obligations resulted to $2.0 million, effectivea gain of $1.4 million. See Note 10 – Debt and Other Obligations to the consolidated financial statements for a detailed discussion of our debt financing arrangements. Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality. Management evaluates these estimates and assumptions on an ongoing basis. Our estimates and assumptions have been prepared on the basis of the most current reasonably available information, and may change in the future as more current information is available.
Management believes that our critical accounting policies are those that are both material to the presentation of our financial condition and results of operations and require management's most difficult, subjective and complex judgments. Typically, the circumstances that make these judgments difficult, subjective and complex have to do with making estimates about the effect of matters that are inherently uncertain; as a result, actual results could differ from those estimates.
The critical accounting policies requiring estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated financial statements in fiscal year 2023 are described below. This is not intended to be a comprehensive list of all significant accounting policies that are more fully described in the notes to consolidated financial statements contained within this report.
Revenue Recognition
Although most of our revenue is recognized concurrently with billing or with the passage of time, some of our revenue requires us to make estimates. The timing of the satisfaction of performance obligations varies across our businesses due to our diverse product and service mix, customer base, and contractual terms. Significant judgment can be required in determining certain performance obligations, and these determinations could change the amount of revenue and profit recorded in a given period. Our contracts may have a single performance obligation or multiple performance obligations. When there are multiple performance obligations within a contract, we allocate the transaction price, net of any discounts, to each performance obligation based on the standalone selling price of the product or service underlying each performance obligation. The standalone selling price is either based on estimated or actual costs plus a reasonable profit margin or the observable price of a good or service when Telos sells that good or service separately in similar circumstances and to similar customers. The transaction price for our contracts represents our best estimate of the consideration we will receive and includes assumptions regarding variable consideration, as applicable. The transaction price is allocated to each distinct performance obligation within the contract and recognized as revenue when, or as, the performance obligation is satisfied.
Our contracts may also include various types of variable considerations such as claims (i.e., indirect rate or other equitable adjustments) or incentive fees and we include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur. The estimated amounts are based on an assessment of our anticipated performance and all other information that is reasonably available to us.
For contracts where revenue is recognized over time, we recognize revenue based on progress towards completion of the performance obligation, using costs incurred to date relative to total estimated cost at completion to measure progress on a proportional performance basis for our contracts. Due to the nature of the work required to be performed on certain contracts, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment. Contract estimates are based on various assumptions, including labor and subcontractor costs, materials and other direct costs and the complexity of the work to be performed. A significant change in one or more of these estimates could affect the profitability of our contracts. We review and update our contract-related estimates regularly and recognize adjustments in estimated profit on contracts on a cumulative catch-up basis, which may result in an adjustment increasing or decreasing revenue to date on a contract in a particular period that the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate. During the year ended December 31, 2023, there is an immaterial catch-up revenue adjustment as a result of the changes in contract estimates noted.
Goodwill and Other Long-Lived Assets
We evaluate the impairment of goodwill and other long-lived assets in accordance with Accounting Standards Codification ("ASC") 350, "Intangibles – Goodwill and Other." Management annually reviews goodwill and other long-lived assets for impairment or whenever events or changes in circumstances indicate the carrying amount may not be recoverable. If we determine that the carrying value of the goodwill and other long-lived assets may not be recoverable, we will record an impairment charge for the amount by which the carrying value of the goodwill and other long-lived assets exceeds its fair value.
Goodwill is not amortized, but rather tested for potential impairment as of December 31 each year. The goodwill impairment test is performed at the datereporting unit level. Accounting requirements provide that a reporting entity may perform an optional qualitative assessment on an annual basis to determine whether events occurred or circumstances changed that would more likely than not reduce the fair value of a reporting unit below its carrying amount. If an initial qualitative assessment identifies that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or the optional qualitative assessment is not performed, a quantitative analysis is performed.
In testing goodwill for impairment, we first assess the qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value. If after the assessment, we determine that an impairment indicator exists, we perform the quantitative goodwill impairment test. The Company performs the quantitative goodwill impairment test by calculating the fair value of the amendment,reporting unit and increasedcomparing it to its respective carrying value including goodwill. If the requirementfair value is less than the carrying value, the amount of impairment expense is equal to $2.5 million, effective July 1, 2016,the difference between the reporting unit's fair value and $3.0 million, effective November 1, 2016,the reporting unit's carrying value.
Determining the fair value of a reporting unit requires management's judgment and involves the use of significant estimates and assumptions, including forecasted revenue, operating margins, capital expenditures, and selection and use of an appropriate discount rate commensurate with the risk inherent in each of our reporting units' current business models. We utilize the weighted average cost of capital as derived by certain assumptions specific to our facts and circumstances as the discount rate. Our estimate of cash flows and discount rate are subject to change due to the economic environment. A relatively small change in the underlying assumptions, including if the Company did not receive $5 million of equity or subordinated debt investment by June 1, 2016. If such capital investment was not received by June 1, 2016, we would pay a fee of $100,000 to Wells Fargo, which was paid in June 2016. In consideration for the closingfinancial performance of the Seventeenth Amendment,reporting unit does not meet expectations in future years, may cause a change in the results of the impairment assessment in future periods and, as such, could result in goodwill impairment.
For fiscal year 2023, we paid Wells Fargoperformed a feequalitative assessment on our reporting units and determined that it is "more-likely-than-not" that the estimated fair value of $100,000, plus expenses relatedour Security Solutions reporting unit exceeded its carrying value. On the other hand, based on the initial qualitative assessment of our Secure Networks reporting unit, we concluded that it is not "more-likely-than-not" that the fair value of this reporting unit exceeds its carrying value; as such, we performed a quantitative analysis. Based on the quantitative analysis on our Secure Networks reporting unit, its estimated fair value exceeded its carrying value and we concluded that there was no impairment.
Due to the closing.nature of our business and other factors described in Item 1A,"Risk Factors", of this Annual Report on Form 10-K, the profitability of our individual reporting units may periodically be affected by downturns in customer demand, operational challenges, and other factors. If material adverse conditions occur that impact one or all of our reporting units, our determination of future fair value might not support the carrying amount of our reporting units, and the related goodwill may be impaired. We will continue to monitor any changes to our assumptions and will evaluate goodwill as deemed warranted during future periods.
We amortize intangible assets over their respective estimated useful lives, and review them for impairment whenever events or changes in business circumstances indicate the carrying value may not be recoverable.
On May 16, 2016,Likewise, we evaluated our intangible assets for potential impairment. As a result of the Facility was amended to extend the maturity date to April 1, 2017.
At December 31, 2015,assessment, we had outstanding borrowingsidentified conditions demonstrating an impairment of $8.5 million on the Facility, which included the $3.2 million term loan,certain software development costs. An impairment charge of which $1.4$0.5 million was short-term. At December 31, 2015, we had unused borrowing availability onrecorded in the Facilityconsolidated statements of $5.8 million. The effective weighted average interest rate on the outstanding borrowings under the Facility was 6.7%operations for the year ended December 31, 2015.2023.
On July 15, 2016, the outstanding balance under the Facility was paid in full.
Subordinated Debt
On March 31, 2015, the Company entered into Subordinated Loan Agreements and Subordinated Promissory Notes ("Porter Notes") with affiliated entities of Mr. John R. C. Porter (together referenced as "Porter"). Mr. Porter and Toxford Corporation, of which Mr. Porter is the sole shareholder, own 39.3% of our Class A Common Stock. Under the termsFor further discussion of the Porter Notes, Porter lentmethods used and factors considered in our estimates as part of the Company $2.5 millionimpairment testing for goodwill and intangible assets, see Note 2 - Significant Accounting Policies on or about March 31, 2015. Telos also entered into SubordinationGoodwill and Intercreditor Agreements (the "Subordination Agreements") with PorterIntangible Assets, Note 7 - Goodwill and Wells Fargo, in which the Porter Notes are fully subordinatedNote 8 - Intangible Assets, Net to the Facility and any subsequent senior lenders (including Action Capital), and payments under the Porter Notes are permitted only if certain conditions are met. According to the terms of the Porter Notes, the outstanding principal sum bears interest at the fixed rate of twelve percent (12%) per annum which would be payable in arrears in cash on the 20th day of each May, August, November and February, with the first interest payment date due on August 20, 2015. The Porter Notes do not call for amortization payments and are unsecured. The unpaid principal, together with interest, is due and payable in full on July 1, 2017. The Porter Notes, in whole or in part, may be repaid at any time without premium or penalty. We incurred interest expense in the amount of $300,000 and $229,000 for the years ended December 31, 2016 and 2015, respectively, on the Porter Notes. In accordance with the terms of the Porter Notes, interest has been accrued but was not paid due to restrictions on the payment of interest in the Subordination Agreements.consolidated financial statements.
Redeemable Preferred StockIncome Taxes
We currently have two primary classes of redeemable preferred stock - Senior Redeemable Preferred Stock and Public Preferred Stock. These classes of stock carry cumulative dividend rates of 14.125% and 12%, respectively. We accrue dividends on both classes of redeemable preferred stock and provideaccount for accretion related to the Public Preferred Stock. As of December 31, 2008, the Public Preferred Stock has been fully accreted. The total carrying amount of redeemable preferred stock, including accumulated and unpaid dividends was $129.8 million and $125.9 million at December 31, 2016 and 2015, respectively. We recorded dividends of $3.9 million each for the years ended December 31, 2016, 2015, and 2014, on the two classes of redeemable preferred stock, and such amounts have been included in interest expense.
Senior Redeemable Preferred Stock
The Senior Redeemable Preferred Stock is senior to all other outstanding equity of the Company, including the Public Preferred Stock. The Series A-1 ranks on a parity with the Series A-2. The components of the authorized Senior Redeemable Preferred Stock are 1,250 shares of Series A-1 and 1,750 shares of Series A-2 Senior Redeemable Preferred Stock, each with $.01 par value. The Senior Redeemable Preferred Stock carries a cumulative per annum dividend rate of 14.125% of its liquidation value of $1,000 per share. The dividends are payable semiannually on June 30 and December 31 of each year. We have not declared dividends on our Senior Redeemable Preferred Stock since its issuance, other than in connection with the redemptions from 2010 to 2013. The liquidation preference of the Senior Redeemable Preferred Stock is the face amount of the Series A-1 and A-2 ($1,000 per share), plus all accrued and unpaid dividends.
Due to the terms of the Facility, the Porter Notes, other senior obligations currently or previously in existence, the Senior Redeemable Preferred Stock and applicable provisions of Maryland law governing the payment of distributions, we have been precluded from redeeming the Senior Redeemable Preferred Stock and paying any accrued and unpaid dividends on the Senior Redeemable Preferred Stock, other than the redemptions that occurred from 2010 to 2013. Certain holders of the Senior Redeemable Preferred Stock have entered into standby agreements whereby, among other things, those holders will not demand any payments in respect of dividends or redemptions of their instruments and the maturity dates of the instruments have been extended. As a result of such standby agreements, as of December 31, 2016, instruments held by Toxford Corporation ("Toxford"), the holder of 76.4% of the Senior Redeemable Preferred Stock, will mature on May 31, 2018.
At December 31, 2016 and 2015, the total number of shares of Senior Redeemable Preferred Stock issued and outstanding was 197 shares and 276 shares for Series A-1 and Series A-2, respectively. Due to the limitations, contractual restrictions, and agreements described above, the Senior Redeemable Preferred Stock is classified as noncurrent as of December 31, 2016.
At December 31, 2016 and 2015, cumulative undeclared, unpaid dividends relating to Senior Redeemable Preferred stock totaled $1.6 million. We accrued dividends on the Senior Redeemable Preferred Stock of $67,000 for each of the years ended December 31, 2016, 2015, and 2014, which were reported as interest expense. Prior to the effective date of ASC 480-10, "Distinguishing Liabilities from Equity," on July 1, 2003, such dividends were charged to stockholders' deficit.
Public Preferred Stock
A maximum of 6,000,000 shares of the Public Preferred Stock, par value $.01 per share, has been authorized for issuance. We initially issued 2,858,723 shares of the Public Preferred Stock pursuant to the acquisition of the Company during fiscal year 1990. The Public Preferred Stock was recorded at fair value on the date of original issue, November 21, 1989, and we made periodic accretions under the interest method of the excess of the redemption value over the recorded value. We adjusted our estimate of accrued accretion in the amount of $1.5 million in the second quarter of 2006. The Public Preferred Stock was fully accreted as of December 2008. We declared stock dividends totaling 736,863 shares in 1990 and 1991. Since 1991, no other dividends, in stock or cash, have been declared. In November 1998, we retired 410,000 shares of the Public Preferred Stock. The total number of shares issued and outstanding at December 31, 2016 and 2015, was 3,185,586. The Public Preferred Stock is quoted as TLSRP on the OTCQB marketplace and the OTC Bulletin Board.
Since 1991, no dividends were declared or paid on our Public Preferred Stock, based upon our interpretation of restrictions in our Articles of Amendment and Restatement, limitations in the terms of the Public Preferred Stock instrument, specific dividend payment restrictions in the Facility and the Porter Notes to which the Public Preferred Stock is subject, other senior obligations currently or previously in existence, and Maryland law limitations in existence prior to October 1, 2009. Subsequent to the 2009 Maryland law change, dividend payments continue to be prohibited except under certain specific circumstances as set forth in Maryland Code Section 2-311, which the Company did not satisfy as of the measurement dates. Pursuant to the terms of the Articles of Amendment and Restatement, we were scheduled, but not required, to redeem the Public Preferred Stock in five annual tranches during the period 2005 through 2009. However, due to our substantial senior obligations currently or previously in existence, limitations set forth in the covenants in the Facility and the Porter Notes, foreseeable capital and operational requirements, and restrictions and prohibitions of our Articles of Amendment and Restatement, we were and remain unable to meet the redemption schedule set forth in the terms of the Public Preferred Stock as of the measurement dates. Moreover, the Public Preferred Stock is not payable on demand, nor callable, for failure to redeem the Public Preferred Stockincome taxes in accordance with the redemption schedule set forth in the instrument. Therefore, we classify these securities as noncurrentASC 740, "Income Taxes." Our income tax expense, deferred tax assets and liabilities, in the consolidated balance sheets asand liabilities for unrecognized tax benefits reflect our best estimate of December 31, 2016current and 2015.
Until July 15, 2016, we were parties with certain of our subsidiariesfuture taxes to be paid. We record net deferred assets to the Facility agreement with Wells Fargo. Under the Facility,extent we agreed that, so long as any credit under the Facilitybelieve these assets will more likely than not be realized. The realizability of net deferred tax assets is based on all available evidence, including future taxable income projections, tax planning strategies, and until fullreversal of taxable temporary differences. We regularly review our deferred tax assets for recoverability and final payment of the obligations under the Facility, we wouldestablish a valuation allowance when management believes it is more likely than not make any distribution or declare or pay any dividends (other than common stock) on our stock, or purchase, acquire, or redeem any stock, or exchange any stock for indebtedness, or retire any stock. Additionally, the Porter Notes contain similar prohibitions on dividend payments or stock redemptions.
Accordingly, as stated above, we will continue to classify the entirety of our obligation to redeem the Public Preferred Stock as a long-term obligation. The Porter Notes and the Senior Redeemable Preferred Stock prohibit, among other things, the redemption of any stock, common or preferred, other than as described above. The Public Preferred Stock by its terms also cannot be redeemed if doing so would violate the terms of an agreement regarding the borrowing of funds or the extension of credit which is binding upon us or any of our subsidiaries, and it does not include any other provisions that would otherwise require any acceleration of the redemption of or amortization payments with respect to the Public Preferred Stock. Thus, the Public Preferred Stock is not andsuch asset will not be due on demand, nor callable, within 12 months from December 31, 2016. This classification is consistent with ASC 210-10, "Balance Sheet" and 470-10, "Debt"recovered, taking into consideration historical operating results, expectations of future earnings, tax planning strategies and the FASB ASC Master Glossary definitionexpected timing of "Current Liabilities."
ASC 210-10 and the FASB ASC Master Glossary define current liabilities as follows: The term current liabilities is used principally to designate obligations whose liquidation is reasonably expected to require the usereversals of existing resources properly classifiable as current assets, or the creation of other current liabilities. As a balance sheet category, the classification is intended to include obligations for items which have entered into the operating cycle, such as payables incurred in the acquisition of materials and supplies to be used in the production of goods or in providing services to be offered for sale; collections received in advance of the delivery of goods or performance of services; and debts that arise from operations directly related to the operating cycle, such as accruals for wages, salaries, commissions, rentals, royalties, and income and other taxes. Other liabilities whose regular and ordinary liquidation is expected to occur within a relatively short period of time, usually twelve months, are also intended for inclusion, such as short-term debts arising from the acquisition of capital assets, serial maturities of long-term obligations, amounts required to be expended within one year under sinking fund provisions, and agency obligations arising from the collection or acceptance of cash or other assets for the account of third persons.temporary differences.
ASC 470-10 provides the following: The current liability classification is also intended to include obligations that, by their terms, are due on demand or will be due on demand within one year (or operating cycle, if longer) from the balance sheet date, even though liquidation may not be expected within that period. It is also intended to include long-term obligations that are or will be callable by the creditor either because the debtor's violation of a provision of the debt agreement at the balance sheet date makes the obligation callable or because the violation, if not cured within a specified grace period, will make the obligation callable.
If, pursuant to the terms of the Public Preferred Stock, we do not redeem the Public Preferred Stock in accordance with the scheduled redemptions described above, the terms of the Public Preferred Stock require us to discharge our obligation to redeem the Public Preferred Stock as soon as we are financially capable and legally permitted to do so. Therefore, by its very terms, the Public Preferred Stock is not due on demand or callable for failure to make a scheduled payment pursuant to its redemption provisions and is properly classified as a noncurrent liability.
We pay dividends on the Public Preferred Stock when and if declared by the Board of Directors. The Public Preferred Stock accrues a semi-annual dividend at the annual rate of 12% ($1.20) per share, based on the liquidation preference of $10 per share and is fully cumulative. Dividends in additional shares of the Public Preferred Stock for 1990 and 1991 were paid at the rate of 6% of a share for each $.60 of such dividends not paid in cash. For the cash dividends payable since December 1, 1995, we have accrued $95.9 million and $92.1 million as of December 31, 2016 and 2015, respectively. We accrued dividends on the Public Preferred Stock of $3.8 million for each of the years ended December 31, 2016, 2015, and 2014, which was recorded as interest expense. Prior to the effective date of ASC 480-10 on July 1, 2003, such dividends were charged to stockholders' accumulated deficit.
Contractual Obligations
The following summarizes our contractual obligations and our redeemable preferred stock at December 31, 2016 (in thousands):
| | | | | | Payments due by Period | |
| | | Total | | | 2017 | | | | 2018 - 2020 | | | | 2021 - 2023 | | | 2024 and later | |
| | | | | | | | | | | | | | | | | | |
| Capital lease obligations (1) | | $ | 27,251 | | | $ | 1,900 | | | $ | 5,987 | | | $ | 6,448 | | | $ | 12,916 | |
| Subordinated debt (2) | | | 3,029 | | | | 3,029 | | | | ---- | | | | ---- | | | | ---- | |
| Operating lease obligations | | | 3,268 | | | | 560 | | | | 1,487 | | | | 1,193 | | | | 28 | |
| | | $ | 33,548 | | | $ | 5,489 | | | $ | 7,474 | | | $ | 7,641 | | | $ | 12,944 | |
| | | | | | | | | | | | | | | | | | | | | |
| Senior preferred stock (3) | | $ | 2,092 | | | | | | | | | | | | | | | | | |
| Public preferred stock (4) | | | 127,742 | | | | | | | | | | | | | | | | | |
| | | $ | 129,834 | | | | | | | | | | | | | | | | | |
| Total | | $ | 163,382 | | | | | | | | | | | | | | | | | |
(1) Includes interest expense: | | $ | 7,343 | | | $ | 982 | | | $ | 2,637 | | | $ | 2,057 | | | $ | 1,667 | |
(2) Amount represents the carrying value as of December 31, 2016, includes interest accrual of $0.5 million, is due and payable in full on July 1, 2017.
(3) In accordance with ASC 480, the senior preferred stock was reclassified from equity to liability in July 2003. Amount represents the carrying value as of December 31, 2016, and includes accrual of accumulated dividends of $1.6 million. Payment of such amount presumes conditions precedent being satisfied (See Note 7 – Redeemable Preferred Stock) and as such, redemption date is unknown and accordingly payment is not reflected in a particular period. Amount does not reflect additional dividends through the redemption date as such date is unknown. Such additional dividends accrue annually in the amount of $67,000.
(4) In accordance with ASC 480, the public preferred stock was reclassified from equity to liability in July 2003. Amount represents the carrying value as of December 31, 2016, and includes accrual of accumulated dividends and accretion of $121.4 million. Payment of such amount presumes conditions precedent being satisfied (See Note 7 – Redeemable Preferred Stock) and as such, redemption date is unknown and accordingly payment is not reflected in a particular period. Amount does not reflect additional dividends and accretion through the redemption date as such date is unknown. Such additional dividends accrue annually in the amount of $3.8 million. Such accretion has been fully accreted as of December 31, 2008.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements (as defined in Item 303, paragraph (a)(4)(ii) of Regulation S-K) that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity, capital expenditures or capital resources.
Capital Expenditures
Capital expenditures for property and equipment were $0.6 million, $0.4 million, and $0.7 million for 2016, 2015, and 2014, respectively. We presently anticipate capital expenditures of approximately $2.0 million in 2017; however, there can be no assurance that this level of capital expenditures will occur. We believe that available cash and borrowings under the Purchase Agreement and Financing Agreement will be sufficient to generate adequate amounts of cash to fund our projected capital expenditures for 2017.
Capital Leases and Related Obligations
We have various lease agreements for property and equipment that, pursuant to ASC 840, require us to record the present value of the minimum lease payments for such equipment and property as an asset in our consolidated financial statements. Such assets are amortized on a straight-line basis over the term of the related lease or their useful life, whichever is shorter.
Inflation
The rate of inflation has been moderate over the past five years and, accordingly, has not had a significant impact on the Company. We have generally been able to pass through any increased costs to customers through higher prices to the extent permitted by competitive pressures.
Recent Accounting Pronouncements
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Until July 15, 2016,In the normal course of business, we wereare exposed to a variety of financial risks such as interest rate volatility with regardrisk, 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 variable rate debt obligations underbusiness is transacted in U.S. dollars, and the Facility. The effective weighted average interest rate onimpact of the outstanding borrowings under the Facilityforeign currency fluctuation as we report for our foreign subsidiary upon translation of its financials into U.S. dollars was 6.7%insignificant. Further, we do not enter into financial instruments for the year ended December 31, 2015.
trading purposes.
Item 8. Consolidated Financial Statements and Supplementary Data
TELOS CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| Page |
Report of Independent Registered Public Accounting Firm | 27 |
| |
Consolidated Statements of Operations for the Years Ended December 31, 2016, 2015 and 2014 | 28 |
| |
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2016, 2015 and 2014 | 29 |
| |
Consolidated Balance Sheets as of December 31, 2016 and 2015 | 30 - 31 |
| |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015, and 2014 | 32 - 33 |
| |
Consolidated Statements of Changes in Stockholders' Deficit for the Years Ended December 31, 2016, 2015, and 2014 | 34 |
| |
Notes to Consolidated Financial Statements | 35 – 56 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of Telos Corporation
Ashburn, VirginiaOpinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Telos Corporation and Subsidiaries(the "Company"“Company”)as of December 31, 2016 2023and 20152022, and the related consolidated statements of operations, comprehensive loss,(loss)/income, changes in stockholders' deficit,stockholders’ equity/(deficit) and cash flows for each of the threetwo years in the period endedDecember 31, 2016. These2023, including the related notes (collectively referred to as the “consolidated financial statements arestatements”).We also have audited the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration ofCompany’s internal control over financial reporting as a basis for designing audit procedures that are appropriateof December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013)issued by the circumstances, but not for the purposeCommittee of expressing an opinion on the effectivenessSponsoring Organizations of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Telos Corporation and Subsidiaries atthe Company as of December 31, 20162023 and 2015,2022, and the results of theirits operations and theirits cash flows for each of the threetwo years in the period ended December 31, 2016,2023in 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 consolidatedfinancial 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. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our 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 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 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.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition – Estimated Costs to Complete Long-term Contracts
As discussed in Note 3 to the consolidated financial statements, a portion of the Company’s revenues of $145.4 million for the year ended December 31, 2023 were generated from long-term contracts. For the Company’s long-term contracts, due to the transfer of control over time, revenue is recognized based on progress towards completion of the performance obligation. Management generally uses the cost-to-cost measure of progress on a proportional performance basis for its long-term contracts because management believes that measure best depicts the transfer of control to the customer, which occurs as the Company incurs costs on the contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation, which includes both the actual costs already incurred and the estimated costs to complete. Revenues are recorded proportionately as costs are incurred. Due to the nature of the work required to be performed on certain of the performance obligations, management’s estimation of costs at completion is complex, subject to many variables and requires significant judgment. Contract estimates are based on various assumptions, including labor and subcontractor costs, materials and other direct costs, and the complexity of the work to be performed.
The principal considerations for our determination that performing procedures relating to revenue recognition - estimated costs to complete long-term contracts is a critical audit matter are (i) the significant judgment by management when estimating costs at completion and (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant assumptions related to labor and subcontractor costs and materials and other direct costs.
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. Evaluating management’s significant assumptions involved assessing whether the assumptions were reasonable by (i) performing a comparison of the originally estimated and actual costs incurred on a sample of similar completed contracts; (ii) assessing the reasonableness of estimated costs to complete on a sample of in-process contracts, including the timing of costs incurred and the related impacts on revenue; and (iii) performing retrospective reviews of a sample of contracts to understand and corroborate management’s estimation process and budget-to-actual variances, if any.
/s/ BDO USA,PricewaterhouseCoopers LLP
McLean, VirginiaWashington, District of Columbia
March 30, 201715, 2024
We have served as the Company's auditor since 2022.
27
We consider all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Our
Buildings | 20 Years |
Machinery and equipment | 3-5 Years |
Office furniture and fixtures | 5 Years |
Leasehold improvements | Lesser of life of lease or useful life of asset |
Leased property meeting certain criteria is capitalized at the present value of the related minimum lease payments. Amortization of property and equipment under capital leases is computed on the straight-line method over the lesser of the term of the related lease and the useful life of the related asset.
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, 2016, 2015,2023 and 2014,2022, such amounts are negligible. Expenditures for repairs
Repairs and maintenance costs are charged to operationsexpensed as incurred. Major renewals and improvements are capitalized and depreciated over their estimated useful lives.
Leases
Long-livedWe determine if an arrangement is a lease and we account for leases in accordance with ASC Topic 842, "Leases." We entered into contractual arrangements primarily for the use of real estate facilities, and certain other equipment. We determine the classification of the lease under these arrangements, if any, at inception based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefits from the use of the asset throughout the period, and (3) whether we have a right to direct the use of the asset.
Leased property meeting certain criteria is capitalized at the present value of the related minimum lease payments. Amortization of 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, suchwhich represent our right to use an underlying asset for the lease term, and operating lease liabilities which represent our obligation to make lease payments. Generally, we enter into operating lease agreements for facilities. The amount of operating lease liabilities due within 12 months are recorded in other current liabilities, with the remaining operating lease liabilities recorded as fixednon-current liabilities in our consolidated balance sheets based on their contractual due dates. The operating lease ROU assets and liabilities are recognized as of the lease commencement date at the present value of the lease payments over the lease term. Most of our leases do not provide an implicit rate that can readily be determined. Therefore, we use a discount rate based on our incremental borrowing rate on all operating leases. Some of our operating leases contain lease and non-lease components, which we account for as a single component. Operating lease expense is recognized as rent expense on a straight-line basis over the lease term, and recorded within our consolidated statement of operations.
The related lease payments on short-term lease arrangements (leases of one year or less) are recognized as expense 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 its estimated fair value.
Software Development Costs
We account for development costs of software in accordance with ASC Topic 985-20 ("ASC 985-20"), "Software – Costs of Software to be Sold, Leased, or Marketed" and ASC Topic 350-40 ("ASC 350-40") "Internal Use Software", depending on the intended use of the software being developed. Under ASC 985-20, all costs of developing software prior to establishing its technological feasibility are research and development costs and are expensed as incurred. Once technological feasibility has been established, subsequent costs should be capitalized until the software begins to be marketed or is released to customers after which the capitalized costs should be amortized and reviewed for impairment. Under ASC 350-40, we 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 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). 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 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 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.
Goodwill and Intangible Assets
Goodwill is recorded for the difference between the aggregate consideration paid for an acquisition and the fair value of net tangible and intangible assets acquired and liabilities assumed. Goodwill is not amortized, but rather tested for potential impairment. We evaluate the impairment of goodwill in accordance with ASC 350, which requires goodwill to be assessed on at least an annual basis, as of December 31 each year, for impairment using a fair value basis. Between annual evaluations, if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount, then impairment must be evaluated. Such circumstances could include, but are not limited to: (1) a significant adverse change in legal factors or business climate, (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. 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. See Note 7 – Goodwill for additional information. Intangible assets with finite lives are carried at cost, less accumulated amortization. Amortization is computed using the method that best reflects how their economic benefits are utilized or, if a pattern of economic benefits cannot be reliably determined, on a straight-line basis over their estimated useful lives.
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets, 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.
Our policy on internal use software isIn addition to the recoverability assessment, the Company routinely reviews the remaining lives of its long-lived assets. Any reduction in accordance with ASC 350, "Intangibles- Goodwillthe useful life assumptions will result in increased depreciation or amortization expense in the period when such determinations are made, as well as in subsequent periods. There are no changes in the estimated useful lives of long-lived assets for the periods presented.
Fair Value Measurements
U.S. GAAP provides a framework for measuring fair value and Other." This standardexpands disclosures about fair value measurements. The framework requires companiesthe valuation of investments using a three-tiered approach. The statement requires fair value measurement to capitalize qualifying computer software costsbe classified and disclosed in one of the following categories:
•Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets and liabilities;
•Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; or
•Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).
As of December 31, 2023 and 2022, we did not have any financial instruments with significant Level 3 inputs and we did not have any financial instruments that are measured at fair value on a recurring basis.
For certain of our non-derivative financial instruments, including receivables, accounts payable and other accrued liabilities, the carrying amount approximates fair value due to the short-term maturities of these instruments.
Research and Development
Research and development expenses consist primarily of employee-related expenses (such as salaries, taxes, benefits and stock-based compensation), allocated overhead costs and outside services costs related to the development and improvement of the Company's software. Research and development costs are generally expensed as incurred, duringexcept for costs incurred in connection with the application development stage and amortize them overof software that qualify for the software's estimated useful life. We expensed all suchcapitalization 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 2016, 2015,sales and 2014, as we believe that such amounts are immaterial.
Depreciation and amortizationmarketing expense related to property and equipment, including property and equipment under capital leaseswhen incurred. Advertising expense was $1.8 million, $2.0$0.8 million and $2.0$1.3 million for the years ended December 31, 2016, 2015,2023 and 2014.
2022, respectively.
Income Taxes
We account for income taxes in accordance with ASC 740-10,740, "Income Taxes." Under ASC 740-10,740, deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences and income tax credits. Deferred tax assets and liabilities are measured by applying enacted statutory tax rates that are applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized for differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Any change in tax rates on deferred tax assets and liabilities is recognized in net income in the period in which the tax rate change is enacted. We record a valuation allowance that reduces deferred tax assets when it is "more likely than not" that deferred tax assets will not be realized. We are required to establish a valuation allowance for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on available evidence, realization of deferred tax assets is dependent upon the generation of future taxable income. We considered projected future taxable income, tax planning strategies, and reversal of taxable temporary differences in making this assessment. As such, we have determined that a full valuation allowance is required as of December 31, 2016 and 2015. We are not able to use temporary taxable differences related to goodwill, as a source of future taxable income. As a result of a full valuation allowance against our deferred tax assets, a deferred tax liability ("hanging credit") related to goodwill remains on our consolidated balance sheet at December 31, 2016 and 2015.
We follow the provisions of ASC 74-10740 related to accounting for uncertainty in income taxes. The accounting estimates related to liabilities for uncertain tax positions require us to make judgments regarding the sustainability of each uncertain tax position based on its technical merits. If we determine it is more likely than not that a tax position will be sustained based on its technical merits, we record the impact of the position in our consolidated financial statements at the largest amount that is greater than fifty percent likely of being realized upon ultimate settlement. These estimates are updated at each reporting date based on the facts, circumstances and information available. We are also required to assess at each reporting date whether it is reasonably possible that any significant increases or decreases to our unrecognized tax benefits will occur during the next 12 months.
Business Combinations
Goodwill and other intangible assets
We evaluateAcquisitions were accounted for under U.S. GAAP using the impairment of goodwill and other intangible assetsacquisition method in accordance with ASC 350, "Intangibles - Goodwill805, Business Combinations. The Company allocates the fair value of purchase consideration to the tangible and Other," which requires goodwill and indefinite-lived intangible assets to be assessedacquired and liabilities assumed based on at least an annual basis for impairment using atheir estimated fair values. The excess of the fair value basis. Between annual evaluations,of purchase consideration over the values of these identifiable assets and liabilities, if events occurany, is recorded as goodwill.
The accounting for business combinations requires management to make judgments and estimates of the fair value of assets acquired, including the identification and valuation of intangible assets, as well as liabilities and contingencies assumed. Such judgments and estimates directly impact the amount of goodwill recognized in connection with an acquisition. Estimating the fair value of acquired assets and assumed liabilities, including intangibles, requires judgment about expected future cash flows, weighted-average cost of capital, discount rates and expected long-term growth rates.
Stock-Based Compensation
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 circumstances change that would more likely than not reducethe 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.
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 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 reporting unit below its carrying amount, then impairment must be evaluated. Such circumstances could include, but are not limited to: (1)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 significant adverse change in legal factors or business climate, or (2)three-year period from the date of grant. In order to reflect the substantive characteristics of these market condition awards, the Company employs a loss of key contracts or customers.
AsMonte Carlo simulation valuation model to calculate the result of an acquisition, we record any excess purchase price over the net tangiblegrant date fair value and identifiable intangible assets acquired as goodwill. An allocationcorresponding requisite service period of the purchase priceaward. Monte Carlo approaches are a class of computational algorithms that rely on repeated random sampling to tangible and intangible net assets acquired is based upon our valuationcompute their results. This approach allows the calculation of the acquired assets. Goodwill is not amortized, but is subject to annual impairment tests. We complete our goodwill impairment tests asvalue of December 31st each year. Additionally, we make evaluations between annual tests if events occur or circumstances change that would more likely than not reducesuch awards based on a large number of possible stock price path scenarios.
The Company estimates the fair value of a reporting unit below its carrying amount. The evaluation is basedstock options on the estimationdate 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 valuesvalue at the date of our three reporting units, Cyber Operationsgrant of the equity instruments that we are obligated to issue when employees, directors and Defense ("CO&D"), Identity Management,other eligible service providers have rendered the requisite service and IT & Enterprise Solutions, ofsatisfied 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 goodwill is housedgenerally 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 CO&D reporting unit, in comparisonrequisite service period if it is probable that the performance condition will be satisfied. If such performance conditions are not or are no longer considered probable, no compensation expense for these awards is recognized, and any previously recognized expense is reversed. If the performance condition is achieved prior to the reporting unit's net asset carrying values. Our discounted cash flows required management judgment with respect to forecasted revenue streams and operating margins, capital expenditures and the selection and use of an appropriate discount rate. We utilized the weighted average cost of capital as derived by certain assumptions specific to our facts and circumstances as the discount rate. The 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 estimatecompletion of the total fair value of our reporting units is compared to the market capitalization of the Company. The Company's assessment resulted in a fair value that was greater than the Company's carrying value, therefore the second step of the impairment test, as prescribed by the authoritative literature, was not required torequisite service period, any unrecognized compensation expense will be performed and no impairment of goodwill was recorded as of December 31, 2016. Subsequent reviews may result in future periodic impairments that could have a material adverse effect on the results of operationsrecognized in the period recognized. Recent operating results have reduced the projectionperformance condition is achieved. Compensation expense for awards with market conditions is recognized over the derived service period, or sooner, if the market condition is achieved. Previously recognized expense for awards with market conditions will never be reversed subsequent to completion of future cash flow growth potential, which indicates that certain negative potential events, suchthe derived service period even if the market conditions are never achieved. We recognize forfeitures of stock-based compensation awards as a material loss or losses on contracts, or failure to achieve projected growth could result in impairment inthey occur. Stock-based compensation expense is recognized as part of the future. We estimate fair valuecost of our reporting unitsales and compare the valuation with the respective carrying value for the reporting unit to determine whether any goodwill impairment exists. If we determine through the impairment review process that goodwill is impaired, we will record an impairment chargeselling, general and administrative expenses in our consolidated statements of operations. Goodwill is amortized and deducted over a 15-year period for tax purposes.
Other intangible assets consist primarily of customer relationship enhancements. Other intangible assetsThe stock-based payment transactions are amortized on a straight-line basis over their estimated useful lives of 5 years. The amortization is based on a forecast of approximately equal annual customer orders over the 5-year period. Other intangible assets are subject to impairment review if there are events or changesrecognized in circumstances that indicate that the carrying amount is not recoverable. As of December 31, 2016, no impairment charges were taken.
Stock-Based Compensation
Compensation cost is recognized based on the requirements of ASC 718, "Stock Compensation," for all share-based awards granted. Since June 2008, we have issued restricted stock (Class A common) to our executive officers, directors and employees. There were no grants issued in 2016. As of December 31, 2016, there were 19,047,259 shares of restricted stock outstanding. Such stock is subject to a vesting schedule as follows: 25% of the restricted stock vests immediately on the date of grant, thereafter, an additional 25% will vest annually on the anniversary of the date of grant subject to continued employment or services. In the event of death of the employee or a change in control, as defined by the Telos Corporation 2008 Omnibus Long-Term Incentive Plan or the 2013 Omnibus Long-Term Incentive Plan, all unvested shares shall automatically vest in full. In accordance with ASC 718, we"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
Basic net (loss)/earnings per share is computed by dividing the net (loss)/earnings by the weighted-average number of common shares outstanding for the period, without consideration for potentially dilutive securities. Diluted net (loss)/earnings per share is computed by dividing the net (loss)/earnings by the weighted-average number of shares of common stock and dilutive common stock equivalents outstanding for the period determined using the treasury-stock and if-converted methods. Dilutive common stock equivalents are comprised of unvested restricted common stock and warrants.
Other Comprehensive (Loss)/Income
For one of our wholly-owned subsidiaries, the functional currency is the local currency. For this subsidiary, the translation of its foreign currency into U.S. dollars is performed for assets and liabilities using current foreign currency exchange rates in effect at the balance sheet date and for revenue and expense accounts using average foreign currency exchange rates during the periods presented. Translation gains and losses are included in stockholders' equity as a component of accumulated other comprehensive (loss)/income.
Restructuring Expenses
The determination of when the Company accrues for involuntary termination benefits under restructuring plans depends on whether the termination benefits are provided under an on-going benefit arrangement or under a one-time benefit arrangement. The Company accounts for on-going benefit arrangements, such as those documented by employment agreements, in accordance with ASC 712 ("ASC 712"), "Compensation – Nonretirement Postemployment Benefits." Under ASC 712, liabilities for postemployment benefits are recorded immaterial compensation expense for anyat the time of obligations are probable of being incurred and can be reasonably estimated. When applicable, the Company records such costs into operating expenses.
In the fourth quarter of 2022, the Company committed to a restructuring plan 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 issuances asaffected 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 ofin the common stock was nominal,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 deductionCompany's review of our outstanding debt, capital lease obligations,the restructuring plan for the remainder of the fiscal year. The restructuring expenses are recorded under "Selling, general and preferred stock from an estimated enterprise value, which was estimated basedadministrative expenses" on discounted cash flow analysis, comparable public company analysis, and comparable transaction analysis. Additionally, we determined that a significant changethe 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 valuation estimate for common stock would not have a significant effect onestimated costs of executing the consolidated financial statements.approved restructuring plan are reflected in the Company's Consolidated Statements of Operations.
| | | | | | | | | | | | | | | | | |
| Table 1: 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 | |
Research and Development
For all years presented, we charge all research and development costs to expense as incurred. For research and development costs for software to be sold, leased or otherwise marketed, such costs(1) Restructuring-related liabilities are capitalized once technological feasibility is reached. Technological feasibility is established when all planning, designing, coding and testing activities have been completed, and all risks have been identified. To date, no such costs have been capitalized, as costs incurred after reaching technological feasibility have been insignificant. During 2016, 2015, and 2014, we incurred salary costs for research and development of approximately $2.6 million, $2.1 million, and $2.2 million, respectively, which are includedreported as part of the selling, general and administrative expense"Other current liabilities" in the Company's unaudited consolidated statements of operations.balance sheets, see Note 9 - Other Balance Sheet Components for further details.
Earnings (Loss) per Share
As we do not have publicly held common stock or potential common stock, no earnings per share data is reported for any of the years presented.
Comprehensive Income
Comprehensive income includes changes in equity (net assets) during a period from non-owner sources. Our accumulated other comprehensive income was comprised of a loss from foreign currency translation of $82,000 and $70,000 as of December 31, 2016 and 2015, respectively; and actuarial gain on pension liability adjustments in Teloworks of $107,000 as of December 31, 2016 and 2015.
Financial Instruments
We use various methods and assumptions to estimate the fair value of our financial instruments. Due to their short-term nature, the carrying value of cash and cash equivalents, accounts receivable and accounts payable approximates fair value. The fair value of long-term debt is based on the discounted cash flows for similar term borrowings based on market prices for the same or similar issues. See Note 4 – Fair Value Measurements for fair value disclosures of the senior redeemable preferred stock.
Fair value estimates are made at a specific point in time, based on relevant market information. These estimates are subjective in nature and involve matters of judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
RecentRecently Accounting Pronouncements - Adopted
In May 2014,March 2020, the Financial Accounting Standards Board ("FASB") issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provides optional expedients and exceptions for a limited period of time to ease the potential burden in accounting for contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This amendment is effective for all entities as of March 12, 2020 through December 31, 2022. The adoption of this ASU did not have a material impact on our consolidated financial position, results of operations or cash flows.
In October 2021, the FASB issued ASU No. 2021-08, "Business Combination (Topic 805): Accounting Standards Update ("ASU") No. 2014-09, "Revenuefor Contract Assets and Contract Liabilities from Contracts with Customers," which requires an entityentities to apply Topic 606 to recognize revenues when promised goods or services are transferredand measure contract assets and contract liabilities in a business combination. The ASU improves comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. Entities should apply the amendments prospectively to customers in an amountbusiness combinations that reflects the consideration to which an entity expects to be entitled for those goods or services. In July 2015, the FASB finalized the delay ofoccur after the effective date by one year, making the newdate. This standard is effective for interim periods and annual periodfiscal years beginning after December 15, 2017. 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 April 2016,September 2022, the FASB issued ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606)2022-04, "Liabilities - Identifying Performance Obligations and Licensing," which further clarifies the implementation guidance relating to identifying performance obligations and the licensing implementation guidance. These standards can be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of the change recognized at the date of the initial application. We are in the initial stages of this assessment and continue to evaluate the available transition method.
In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going ConcernSupplier Finance Programs (Subtopic 205-40)405-50): Disclosure of UncertaintiesSupplier 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 an Entity's Abilitythe program to Continue asallow a Going Concern." The new standard addresses management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. Management's evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date thatuser of the financial statements are issued. The newto understand the program's nature, activity during the period, changes from period to period, and potential magnitude. This standard will beis effective for the first interim period within annual reporting periods beginning after December 15, 2016. Early2022, with early adoption is permitted. The adoption of this update willASU does not have a material impact on our consolidated financial position, results of operations, and cash flows.
Recent Accounting Pronouncements - Not Yet Adopted
In July 2015,June 2022, the FASB issued ASU 2015-11, "Simplifying theNo. 2022-03, "Fair Value Measurement (Topic 820): Fair Value Measurement of Inventory,Equity Securities Subject to Contractual Sale Restrictions," which requiresclarifies that a contractual restriction on the sale of an entity to measure inventory at the lower of cost and net realizable value. The provisionsequity security is not considered part of the ASU areunit of account of the equity security and, therefore, is not considered in measuring fair value. This standard will be effective for reporting periods beginning after December 15, 2016. The2023, 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 not have a material impact on our consolidated financial position, results of operations, and cash flows.
In February 2016,July 2023, the FASB issued ASU 2016-02, "Leases2023-03, "Presentation of Financial Statements (Topic 842)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," The guidance in this update supersedes the requirements in ASC Topic 840, Leases. The update will require business entities to recognize leasewhich 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 the balance sheet and to disclose key information about leasing arrangements. A lessee would recognize a liability to make lease payments and a right-of-use asset representing its right to use the leased asset for the lease term. For public companies, this update will be effective for interim and annual periods beginningor after December 15, 2018, and is to be applied on a modified retrospective basis. WeJanuary 1, 2025, 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 on our consolidated financial position, results of operations and cash flows.
In March 2016, the FASB issued ASU 2016-08, "Revenues from Contract with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)." The amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations by amending certain existing illustrative examples and adding additional illustrative examples to assist in the application of the guidance. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017. We are currently assessing the impact the adoption of this ASU will have on our consolidated financial position, results of operations and cash flows.
In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," which involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new standard will be effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The adoption of this update will not have a material impact on our consolidated financial position, results of operations, and cash flows.
In June 2016,October 2023, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,No. 2023-06, "Disclosure Improvements: Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiatives," which introduces new guidance for estimating credit losses onmodify the disclosure or presentation requirements of a variety of Topics in the Codification, certain types of financial instruments based on expected losses and the timing of the recognitionamendment represent clarifications to or technical corrections of such losses.the current requirements. The new standardeffective 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, for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted.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. While we are currently assessing the impact of the adoption of this ASU, will have on our consolidated financial position, results of operations and cash flows, we do not believe the adoption of this ASU will have a material impact on our consolidated financial statements.
position, results of operations, and cash flows.
In August 2016,November 2023, the FASB issued ASU No. 2016-15, "Statement of Cash Flows2023-07, "Segment Reporting (Topic 230)280): Classification of certain cash receipts and cash payments,Improvements to Reportable Segment Disclosure," which intends to reduce the diversity in practice in how certain transactions are classifiedrequires improvement on the statement of cash flows. This newreportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The standard will be effective retrospectively for interim and annual reporting periodsfiscal year beginning after December 31, 2017,15, 2023 and interim periods within fiscal year beginning after December 15, 2024, with early adoption is permitted. TheWe are currently assessing the impact of the adoption of this ASU will not have a material impact on our consolidated financial position, results of operations, and cash flows.
Note 2. Non-controlling Interests
On April 11, 2007, Telos ID was formed asIn 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 limited liability company underquantitative threshold (if the Delaware Limited Liability Company Act. We contributed substantially alleffect of those reconciling items is equal to or greater than 5% of the assetsamount 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 Identity Management business lineconsolidated financial position, results of operations, and assigned our rightscash flows.
3. REVENUE RECOGNITION
We recognize revenue in accordance with ASC Topic 606, "Revenue from Contracts with Customers." The unit of account in ASC 606 is a performance obligation, which is a promise in a contract with a customer to perform under our U.S. Governmenttransfer a good or service to the customer.
The Company follows the five-step model for recognizing revenue that includes identifying the contract with the Defense Manpower Data Center ("DMDC")customer, determining the performance obligation(s), determining the transaction price, allocating the transaction price to Telos ID at their stated book values. The net book value of assets we contributed totaled $17,000. Until April 19, 2007, we owned 99.999%the performance obligation(s), and recognizing revenue as the performance obligations are satisfied. Timing of the membership interestssatisfaction of Telos IDperformance obligations varies across our businesses due to our diverse product and service mix, customer base, and contractual terms. Significant judgment can be required in determining certain private equity investors ("Investors") owned 0.001%performance obligations, and these determinations could change the amount of revenue and profit recorded in a given period. Our contracts may have a single performance obligation or multiple performance obligations. When there are multiple performance obligations within a contract, we allocate the transaction price, net of any discounts, to each performance obligation based on the standalone selling price of the membership interestsproduct or service underlying each performance obligation.
Our contracts with the U.S. government are generally subject to the Federal Acquisition Regulation ("FAR") and the price is typically based on estimated or actual costs plus a reasonable profit margin. As such, the standalone selling price of products or services in our contracts with the U.S. government are typically equal to the selling price stated in the contract. For non-U.S. government contracts with multiple performance obligations, standalone selling price is the observable price of a good or service when Telos ID. On April 20, 2007, we sold an additional 39.999%sells that good or service separately in similar circumstances and to similar customers.
Contracts are routinely and often modified to account for changes in contract requirements, specifications, quantities, or price. Depending on the nature of the membership interests to the Investors in exchange for $6 million in cash consideration. In accordance with ASC 505-10, "Equity-Overall,"modification, we recognized a gain of $5.8 million. As a result, we owned 60% of Telos ID, and therefore continuedetermine whether to account for the investment in Telos ID usingmodification as an adjustment to the consolidation method.
On December 24, 2014 (the "Closing Date"), we entered intoexisting contract or as a Membership Interest Purchase Agreement (the "Purchase Agreement"), between the Company and the Investors, pursuant to which the Investors acquirednew contract. Generally, modifications are not distinct from the Company an additional ten percent (10 %) membership interest in Telos ID in exchange for $5 million (the "Transaction"). In connection withexisting contract due to the Transaction, the Company and the Investors entered into the Second Amended and Restated Operating Agreement (the "Operating Agreement") governing the business, allocation of profits and losses and management of Telos ID. Under the Operating Agreement, Telos ID is managed by a board of directors comprised of five (5) members (the "Telos ID Board"). The Operating Agreement provides for two classes of membership units, Class A (owned by the Company) and Class B (owned by the Investors). The Class A member (the Company) owns 50% of Telos ID, is entitled to receive 50%significant interrelatedness of the profits of Telos ID,performance obligations and may appoint three (3) members of the Telos ID Board. The Class B member (the Investors) owns 50% of Telos ID, is entitled to receive 50% of the profits of Telos ID, and may appoint two (2) members of the Telos ID Board. Notwithstanding the foregoing, the allocations of profits and losses and distributions (including any distributions that relateare therefore accounted for as an adjustment to the year ending December 31, 2014, that are paid inexisting contract, and recognized as a subsequent year) from the Closing Date through and including December 31, 2014, continuedcumulative adjustment to be governed by the operating agreementrevenue (as either an increase or reduction of Telos ID in effect prior to the Closing Date and allocatedrevenue) based on the percentagesmodification's effect on progress toward completion of ownership prior to the Closing Date.
As of December 31, 2014, we had received $3 million of the $5 million of consideration for the sale. The remaining $2 million was recorded as a receivable and received in January 2015. Despite the post-Transaction ownership of Telos ID being evenly split at 50% by each member, Telos maintains control of the subsidiary through its holding of three of the five Telos ID board of director seats.
Under the Operating Agreement, the Class A and Class B members each have certain options with regard to the ownership interests held by the other party including the following:
● | Upon the occurrence of a change in control of the Class A member (as defined in the Operating Agreement, a "Change in Control"), the Class A member has the option to purchase the entire membership interest of the Class B member. |
● | Upon the occurrence of the following events: (i) the involuntary termination of John B. Wood as CEO and chairman of the Class A member; (ii) the bankruptcy of the Class A member; or (iii) unless the Class A member exercises its option to acquire the entire membership interest of the Class B member upon a Change in Control of the Class A member, the transfer or issuance of more than fifty-one percent (51%) of the outstanding voting securities of the Class A member to a third party, the Class B member has the option to purchase the membership interest of the Class A member; provided, however, that in the event that the Class B member exercises the foregoing option, the Class A Member may then choose to purchase the entire interest of the Class B member. |
● | In the event that more than fifty percent (50%) of the ownership interests in the Class B member are transferred to persons or individuals (other than members of the immediate family of the initial owners of the Class B member) without the consent of Telos ID, the Class A member has the option to purchase the entire membership interest of the Class B member. |
● | The Class B member has the option to sell its interest to the Class A member at any time if there is not a letter of intent to sell Telos ID, a binding contract to sell all of the assets or membership interests in Telos ID, or a standstill for due diligence with respect to a sale of Telos ID. Notwithstanding the foregoing, the Class A member will not be obligated to purchase the interest of the Class B member if that purchase would constitute a violation of any existing line of credit available to the Company after giving effect to that purchase and the applicable lender refuses to consent to that purchase or to waive such violation. |
If either the Class A member or the Class B member elects to sell its interest or buy the other member's interest upon the occurrence of any of the foregoing events, the purchase price for the interest will be based on an appraisal of Telos ID prepared by a nationally recognized investment banker. If the Class A member fails to satisfy its obligation, subject to the restrictions in the Purchase Agreement, to purchase the interest of the Class B member under the Operating Agreement, the Class B member may require Telos ID to initiate a sales process for the purpose of seeking an offer from a third party to purchase Telos ID that maximizes the value of Telos ID. The Telos ID Board must accept any offer from a bona fide third party to purchase Telos ID if that offer is approved by the Class B member, unless the purchase of Telos ID would violate the terms of any existing line of credit available to the Company and the applicable lender does not consent to that purchase or waive the violation. The sale process is the sole remedy available to the Class B member if the Class A member does not purchase its membership interest. Under such a forced sale scenario, a sales process would result in both members receiving their proportionate membership interest share of the sales proceeds and both members would always be entitled to receive the same form of consideration.
Pursuant to the Transaction, the Class A and Class B members each owns 50% of Telos ID, as mentioned above, and as such was allocated 50% of the profits, which was $3.5 million and $2.4 million for 2016 and 2015, respectively. Prior to the Transaction, the Class A member owned 60% of Telos ID, as mentioned above, and as such was allocated 60% of the profits, which was $2.5 million for 2014. The Class B member owned 40% of Telos ID prior to the Transaction, and as such was allocated 40% of the profits, which was $1.7 million for 2014. The Class B member was the non-controlling interest.
Distributions are made to the members only when and to the extent determined by the Telos ID's Board of Directors, in accordance with the Operating Agreement. During the year ended December 31, 2016, 2015, and 2014, the Class B member received a total of $1.9 million, $2.4 million and $1.5 million, respectively, of such distributions.
performance obligation.
The following table details the changes in non-controlling interestmajority 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 84% and 89% of our revenue for the years ended December 31, 2016, 2015,2023 and 20142022, 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.
Revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, subcontractor costs and indirect expenses. This continuous transfer of control to the customer is supported by clauses in our contracts with U.S. government customers whereby the customer may terminate a contract for convenience and then pay for costs incurred plus a profit, at which time the customer would take control of any work in process. For non-U.S. government contracts where we perform as a subcontractor and our order includes similar FAR provisions as the prime contractor's order from the U.S. government, continuous transfer of control is likewise supported by such provisions. For other non-U.S. government customers, continuous transfer of control to such customers is also supported due to general terms in our contracts and rights to recover damages which would include, among other potential damages, the right to payment for our work performed to date plus a reasonable profit.
For performance obligations in which control does not continuously transfer to the customer, we recognize revenue at the point in time in which each performance obligation is fully satisfied. This coincides with the point in time the customer obtains control of the 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. When an order contains multiple performance obligations, we allocate the transaction price to the performance obligations based on the standalone selling price of the product or service underlying each performance obligation. The standalone selling price represents the amount we would sell the product or service to a customer on a standalone basis.
For certain performance obligations where we are not primarily responsible for fulfilling the promise to provide the goods or services to the customer, do not have inventory risk and have limited discretion in establishing the price for the goods or services, we recognize revenue on a net basis.
Contract Estimates
Due to the transfer of control over time, revenue is recognized based on progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the performance obligations. We generally use the cost-to-cost measure of progress on a proportional performance basis for our long-term contracts because it best depicts the transfer of control to the customer, which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation, which includes both the actual costs already incurred and the estimated costs to complete. Revenues are recorded proportionally as costs are incurred. Due to the nature of the work required to be performed on certain of our performance obligations, the estimation of costs at completion is complex, subject to many variables and requires significant judgment. Contract estimates are based on various assumptions, including labor and subcontractor costs, materials and other direct costs and the complexity of the work to be performed. A significant change in one or more of these estimates could affect the profitability of our contracts. We review and update our contract-related estimates regularly and recognize adjustments in estimated profit on contracts on a cumulative catch-up basis, which may result in an adjustment increasing or decreasing revenue to date on a contract in a particular period that the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate.
Our contracts may include various types of variable consideration, such as claims (for instance, indirect rate or other equitable adjustments) or incentive fees. We include estimated amounts in the transaction price based on all of the information available to us, including historical information and future estimations, and to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when any uncertainty associated with the variable consideration is resolved. We have revised and re-submitted several years of incurred cost submissions reflecting certain indirect rate structure changes as a result of regular Defense Contract Audit Agency audits of incurred cost submissions. This resulted in signed final rate agreement letters 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. 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. For incentive fees, we would include such fees in the transaction price to the extent we could reasonably estimate the amount of the fee. With limited historical experience, we have not included any revenue related to incentive fees in our estimated transaction prices. We may include in our contract estimates additional revenue for submitted contract modifications or claims against the customer when we believe we have an enforceable right to the modification or claim, the amount can be estimated reliably and its realization is probable. We consider the contractual/legal basis for the claim (in thousands):particular FAR provisions), the facts and circumstances around any additional costs incurred, the reasonableness of those costs and the objective evidence available to support such claims.
| | | 2016 | | | 2015 | | | 2014 | |
Non-controlling interest, beginning of period | | | 635 | | | $ | 584 | | | $ | 454 | |
| Net income | | | 3,506 | | | | 2,438 | | | | 1,676 | |
| Distributions | | | (1,912 | ) | | | (2,387 | ) | | | (1,548 | ) |
| Purchase of 10% membership interest | | | -- | | | | -- | | | | 2 | |
Non-controlling interest, end of period | | $ | 2,229 | | | $ | 635 | | | $ | 584 | |
For our contracts that have an original duration of one year or less, we use the practical expedient applicable to such contracts and do not consider the time value of money. We capitalize sales commissions related to proprietary software and related services that are directly tied to sales. We do not elect the practical expedient to expense as incurred the incremental costs of obtaining a contract if the amortization period would have been one year or less. For the sales commissions that are capitalized, we amortize the asset over the expected customer life, which is based on recent and historical data.
Disaggregated Revenues
In addition to our segment reporting, as further discussed in Note 3. Goodwill18 – Segment Information, we disaggregate our revenue by customer and Other Intangible Assetscontract types. We treat sales to U.S. customers as sales within the U.S. regardless of where the services are performed. Substantially most of our revenues are generated from U.S. customers, while international customers are de minimis, as such the financial information by geographic location is not presented. | | | | | | | | | | | | | | | | | | | | | | | |
| Table 3.1: Revenue by Customer Type |
| For the Year Ended December 31, |
| 2023 | | 2022 |
| Amount | | % | | Amount | | % |
| | | | | | | |
| (dollars in thousands) |
| Federal government | $ | 131,143 | | | 90% | | $ | 205,538 | | | 95% |
| State & local government, and commercial | 14,235 | | | 10% | | 11,349 | | | 5% |
| Total revenue | $ | 145,378 | | | | | $ | 216,887 | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Table 3.2: Revenue by Contract Type |
| For the Year Ended December 31, |
| 2023 | | 2022 |
| Amount | | % | | Amount | | % |
| | | | | | | |
| (dollars in thousands) |
| Firm fixed-price | $ | 114,188 | | | 79% | | $ | 179,803 | | | 83% |
| Time-and-materials | 13,535 | | | 9% | | 12,963 | | | 6% |
| Cost plus fixed-fee | 17,655 | | | 12% | | 24,121 | | | 11% |
| Total revenue | $ | 145,378 | | | | | $ | 216,887 | | | |
| | | | | | | | | | | |
| Table 3.3: Revenue Concentrations Greater than 10% of Total Revenue |
| For the Year Ended December 31, |
| 2023 | | 2022 |
| U.S. Department of Defense ("DoD") | 64 % | | 74 % |
| | | | | | | | | | | | | | | | | |
| Table 3.4: Contract Balances |
| | | As of December 31, |
| Balance Sheet Presentation | | 2023 | | 2022 |
| | | | | |
| | | (in thousands) |
Billed account receivables (1) | Accounts receivable, net | | $ | 17,818 | | | $ | 13,521 | |
| Unbilled account receivables | Accounts receivable, net | | 8,022 | | | 11,657 | |
| Contract assets | Accounts receivable, net | | 4,584 | | | 14,891 | |
| Contract liabilities - current | Contract liabilities | | 6,728 | | | 6,444 | |
(1) Net of allowance for credit losses
The goodwillchanges 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 $14.9 million as of December 31, 2016 and 2015. Goodwill is subject to annual impairment tests and if triggering events are present before the annual tests, we will assess impairment. As of December 31, 2016, no impairment charges were taken.
Other intangible assets consist primarily of customer relationship enhancements. Other intangible assets were amortized on a straight-line basis over their estimated useful lives of 5 years. The amortization was based on a forecast of approximately equal annual customer orders over the 5-year period. Amortization expense for 2016, 2015 and 2014 was $1.1 million, $2.3$5.4 million and $2.3$5.2 million, respectively. The other intangible assets were fully amortized as of June 30, 2016.
Other intangible assets consist of the following:
| | | December 31, 2016 | | | December 31, 2015 | |
| | | Cost | | | Accumulated Amortization | | | Cost | | | Accumulated Amortization | |
| Other intangible assets | | $ | 11,286 | | | $ | 11,286 | | | $ | 11,286 | | | $ | 10,157 | |
| | | $ | 11,286 | | | $ | 11,286 | | | $ | 11,286 | | | $ | 10,157 | |
Note 4. Fair Value Measurements
The accounting standard for fair value measurements provides a framework for measuring fair value and expands disclosures about fair value measurements. The framework requires the valuation of investments using a three-tiered approach. The statement requires fair value measurement to be classified and disclosed in one of the following categories:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets and liabilities;
Level 2: Quoted prices in the markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; or
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).
As of December 31, 20162023, we had approximately $52.1 million of remaining performance obligations, which we also refer to as funded backlog. We expect to recognize approximately 90% of our remaining performance obligations as revenue in 2024, and 2015, we did not have any financial instruments with significant Level 3 inputs and we did not have any financial instruments that are measured at fair value on a recurring basis. Due to the liquid and short-term nature of cash, accounts receivable, and accounts payable, fair value is assumed to approximate book value. We believe the fair value of other debt approximates book value.
As of December 31, 2016 and 2015, the carrying value of the Senior Redeemable Preferred Stock was $2.1 million and $2.0 million, respectively. Since there have been no material modifications to the financial instruments, the estimated fair value of the Senior Redeemable Preferred Stock remains consistent with amounts recorded as of December 31, 2016.
As of December 31, 2016 and 2015, the carrying value of the Company's 12% Cumulative Exchangeable Redeemable Preferred Stock, par value $.01 per share (the "Public Preferred Stock") was $127.7 million and $123.9 million, respectively, and the estimated fair market value was $31.9 million and $32.3 million, respectively, based on quoted market prices.
Note 5. Revenue and Accounts Receivable
Revenue resulting from contracts and subcontractsapproximately 3% by 2025, with the U.S. Government accounted for 96.7%, 97.3%, and 96.1%remainder recognized thereafter.
4. ACCOUNTS RECEIVABLE, NET
| | | | | | | | | | | |
| Table 4.1: Details of Accounts Receivable, Net |
| As of December 31, |
| 2023 | | 2022 |
| | | |
| (in thousands) |
| Billed accounts receivables | $ | 18,101 | | | $ | 13,655 | |
| Unbilled accounts receivable | 8,022 | | | 11,657 | |
| Contract assets | 4,584 | | | 14,891 | |
| Allowance for credit losses | (283) | | | (134) | |
| Accounts receivable, net | $ | 30,424 | | | $ | 40,069 | |
As our primary customer base includes agencies of the U.S. Government,government, we have a concentration of credit risk associated with our accounts receivable, as 98.0%91% of our billed and unbilled accounts receivable, as of December 31, 2023, were directly with U.S. Governmentgovernment 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 provideprovides 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 guaranteeguarantees from our customers. We maintain allowances for potential losses.
| | | | | | | | | | | | | | | | | | | | | | | |
| Table 4.2: Allowance for Credit Losses Activities |
| Balance Beginning
of Year | | Bad Debt Expenses (1) | | Write-Offs / Recoveries (2) | | Balance
End
of Year |
| | | | | | | |
| (in thousands) |
| For the Year Ended December 31, 2023 | $ | 134 | | | $ | 152 | | | $ | (3) | | | $ | 283 | |
| For the Year Ended December 31, 2022 | 116 | | | 99 | | | (81) | | | 134 | |
42
On July 15, 2016, the Company entered into an accounts receivable purchase agreement under which the Company sellscould sell certain accounts receivable (balance not to exceed $10.0 million) to a third party, or the "Factor""Factor", without recourse to the Company. The Factor initially pays the Company, 90% of U.S. Federal government receivables or 85% of certain commercial prime contractors. The remaining payment is deferred and based on the amount the Factor receives from our customer, less a discount fee and a program access fee that is determined by the amount of time the receivable is outstanding before payment. The structure of the transaction provides for a true sale of the receivables transferred. Accordingly, upon transfer of the receivable to the Factor, the receivable is removed from the Company's consolidated balance sheet, a loss on the sale is recorded and the residual amounts remains a deferred payment aswith an accounts receivable until payment is received from the Factor. The balance of the sold receivables may not exceed $10 million. During the year ended December 31, 2016, the Company sold approximately $35.3 million of receivables, and recognized a related loss of approximately $0.2 million in selling, general and administrative expenses for the same period. As of December 31, 2016, the balance of the sold receivables was approximately $1.0 million, and the related deferred price was approximately $0.1 million.
The components of accounts receivable are as follows (in thousands):
| | | December 31, | |
| | | 2016 | | | 2015 | |
| Billed accounts receivable | | $ | 13,164 | | | $ | 15,340 | |
| Unbilled receivables | | | 6,352 | | | | 4,190 | |
| Allowance for doubtful accounts | | | (429 | ) | | | (485 | ) |
| | | $ | 19,087 | | | $ | 19,045 | |
The activities in the allowance for doubtful accounts are set forth below (in thousands):
| | | Balance Beginning of Year | | | Bad Debt Expenses (1) | | | Recoveries (2) | | | Balance End of Year | |
| | | | | | | | | | | | | |
| Year Ended December 31, 2016 | | $ | 485 | | | $ | (56 | ) | | $ | -- | | | $ | 429 | |
| Year Ended December 31, 2015 | | $ | 372 | | | $ | 113 | | | $ | -- | | | $ | 485 | |
| Year Ended December 31, 2014 | | $ | 321 | | | $ | 51 | | | $ | -- | | | $ | 372 | |
(1)Accounts receivable reserves and reversal of allowance for subsequent collections, net
(2)Accounts receivable written-off and subsequent recoveries, net
Revenue by Major Market and Significant Customers
We derived substantially all of our revenues from contracts and subcontracts with the U.S. Government. Revenue by customer sector for the last three fiscal years is as follows:
| | | 2016 | | | 2015 | | | 2014 | |
| | | | | | | | | (dollar amounts in thousands) | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Federal | | $ | 130,415 | | | | 96.7 | % | | $ | 117,328 | | | | 97.3 | % | | $ | 122,549 | | | | 96.1 | % |
| State & Local, and Commercial | | | 4,453 | | | | 3.3 | % | | | 3,306 | | | | 2.7 | % | | | 5,013 | | | | 3.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 134,868 | | | | 100.0 | % | | $ | 120,634 | | | | 100.0 | % | | $ | 127,562 | | | | 100.0 | % |
Note 6. Current Liabilities and Debt Obligations
Accounts Payable and Other Accrued Payables
As of December 31, 2016 and 2015, the accounts payable and other accrued payables consisted of $12.1 million and $9.3 million, respectively, in trade account payables and $3.2 million and $3.4 million, respectively, in accrued payables.
Accounts Receivable Purchase Agreement
On July 15, 2016, we entered into an Accounts Receivable Purchase Agreement (the "Purchase Agreement") with Republic Capital Access, LLC ("RCA" or "Buyer"), pursuant to which we may offer for sale, and RCA, in its sole discretion, may purchase, eligible accounts receivable relating to U.S. government prime contracts or subcontracts of the Company (collectively, the "Purchased Receivables"). Upon purchase, RCA becomes the absolute owner of any such Purchased Receivables, which are payable directly to RCA, subject to certain repurchase obligations of the Company. The total amount of Purchased Receivables is subject to a maximum limit of $10 million of outstanding Purchased Receivables (the "Maximum Amount") at any given time. The Purchase Agreement has an initial term expiring onavailability period through June 30, 20182022, and automatically renews for successive 12-month renewal periodsfrom year to year thereafter unless terminated in writing by either the Company or RCA.
The initial purchase price of a Purchased Receivable is equal to 90% of the face value of the receivable if the account debtor is an agency of the U.S. government, and 85% if the account debtor is not an agency of the U.S. government; provided, however, that RCA has the right to adjust these initial purchase price rates in its sole discretion. After collection by RCA of the portion of a Purchased Receivable in excess of the initial purchase price, RCA shall pay the Company the residual 10% or 15% of such Purchased Receivable, as appropriate, less (i) a discount factor equal to 0.30%, for federal government prime contracts (or 0.56% for non-federal government investment grade account obligors or 0.62% for non-federal government non-investment grade account obligors) of the face amounts of Purchased Receivables; (ii) a program access fee equal to 0.008% of the daily ending account balance for each day that Purchased Receivable are outstanding; (iii) a commitment fee equal to 1% per annum of Maximum Amount minus the amount of Purchased Receivables outstanding; and (iv) fees, costs and expenses relating to the preparation, administration and enforcement of the Purchase Agreement and any other related agreements. At the time the Purchase Agreement was signed, the Company received proceeds in an amount equal to $6.3 million, net of an initial enrollment fee equal to $25,000. Those proceedsparties. There were used to repay the outstanding amount under the Facility to Wells Fargo as described below.
The Purchase Agreement provides that in the event, but only to the extent, that the conveyance of Purchased Receivables by the Company is characterized by a court or other governmental authority as a loan rather than a sale, the Company shall be deemed to have granted RCA, effective as of the date of the first purchase under the Purchase Agreement, a security interest in all of the Company's right, title and interest in, to and under all of the Purchased Receivables, whether now or hereafter owned, existing or arising.
The Company provides a power of attorney to RCA to take certain actions in the Company's stead, including (a) to sell, assign or transfer in whole or in part any of the Purchased Receivables; (b) to demand, receive and give releases to any account debtor with respect to amounts due under any Purchased Receivables; (c) to notify all account debtors with respect to the Purchased Receivables; and (d) to take any actions necessary to perfect RCA's interests in the Purchased Receivables.
The Company is liable to Buyer for any fraudulent statements and all representations, warranties, covenants, and indemnities made by the Company pursuant to the terms of the Purchase Agreement. It is considered an event of default if (a) the Company fails to pay any amounts it owes to RCA when due (subject to a cure period); (b) the Company has voluntary or involuntary bankruptcy proceedings commenced by or against it; (c) the Company is no longer solvent or is generally not paying its debts as they become due; (d) any voluntary liens, garnishments, attachments, or the like are issued against or attach to the Purchased Receivables; (e) the Company breaches any warranty, representation, or covenant (subject to a cure period); (f) the Company is not in compliance or has otherwise defaulted under any document or obligation in favor of RCA or an RCA affiliate; or (g) the Purchase Agreement or any material provision terminates (other than in accordance with the terms of the Purchase Agreement) or ceases to be effective or to be a binding obligation of the Company. If any such event of default occurs, then RCA may take certain actions, including ceasing to buy any eligible receivables, declaring any indebtedness or other obligations immediately due and payable, or terminating the Purchase Agreement.
Financing and Security Agreement
On July 15, 2016, we entered into a Financing and Security Agreement (the "Financing Agreement") with Action Capital Corporation ("Action Capital"), pursuant to which Action Capital agreed to provide the Company with advances of up to 90% of the net amount of certain acceptable customer accounts of the Company that have been assigned as collateral to Action Capital (the "Acceptable Accounts"). The maximum outstanding principal amount of advances under the Financing Agreement was $2.5 million, which was subsequently increased to $5 million on September 6, 2016. The Financing Agreement has a term of two years, provided that the Company may terminate it at any time without penalty upon written notice. At the time the Financing Agreement was signed, the Company did not borrow any amounts under the Financing Agreement.
The Company shall pay Action Capital interest on the advances outstanding under the Financing Agreement at a rate equal to the prime rate of Wells Fargo Bank, N.A. in effect on the last business day of the prior month plus 2%, and a monthly fee equal to 0.50%. All interest calculations are based on a year of 360 days. The Company's obligations under the Financing Agreement are secured by certain assets of the Company pertaining to the Acceptable Accounts, including all accounts, accounts receivable earnedsold during 2023 and unbilled revenue, contract rights, chattel paper, documents, instruments, general intangibles, reserves, reserve accounts, rebates, books and records, and all proceeds of the foregoing.
Pursuant to the terms of the Financing Agreement, Action Capital shall have full recourse against the Company when an Acceptable Account is not paid in full by the respective customer within 90 days of the date of purchase or if for any reason it ceases to be an Acceptable Account, including the right to charge-back any such Acceptable Account. It is considered an event of default if the Company breaches any covenant or warranty, knowingly provides false or incorrect material information to Action Capital, or otherwise defaults on any of its material obligations under the Financing Agreement or any other material agreements with Action Capital (subject to a cure period). If any such events of default occur, then Action Capital may take certain actions, including declaring any indebtedness immediately due and payable, requiring any customers with Acceptable Accounts to make payments directly to Action Capital, exercising its power of attorney from the Company to take actions in the Company's stead with respect to any of Company's Acceptable Accounts, or terminating the Financing Agreement.
2022, respectively. As of December 31, 2016,2023 and 2022, there were no outstanding borrowings undersold accounts receivable.
5. INVENTORIES, NET
| | | | | | | | | | | |
| Table 5.1: Details of Inventories, Net |
| As of December 31, |
| 2023 | | 2022 |
| | | |
| (in thousands) |
| Gross inventory | $ | 2,179 | | | $ | 3,642 | |
| Allowance for inventory obsolescence | (759) | | | (765) | |
| Inventories, net | $ | 1,420 | | | $ | 2,877 | |
6. PROPERTY AND EQUIPMENT, NET
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Table 6.1: Details of Property and Equipment, Net |
| 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) |
| Furniture and equipment | $ | 16,213 | | | $ | (13,363) | | | $ | 2,850 | | | $ | 16,033 | | | $ | (11,900) | | | $ | 4,133 | |
| Leasehold improvement | 3,211 | | | (2,604) | | | 607 | | | $ | 3,145 | | | (2,491) | | | 654 | |
| Total | $ | 19,424 | | | $ | (15,967) | | | $ | 3,457 | | | $ | 19,178 | | | $ | (14,391) | | | $ | 4,787 | |
| | | | | | | | | | | |
| Table 6.2: Depreciation and Amortization Expense |
| For the year ended December 31, |
| 2023 | | 2022 |
| | | |
| (in thousands) |
| Depreciation and amortization | $ | 2,230 | | | $ | 2,367 | |
7. GOODWILL
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 Financing Agreement.reporting units for purposes of testing goodwill.
In connection with the Purchase Agreement and the Financing Agreement, we terminated our revolving credit facility (the "Facility") with Wells Fargo Capital Finance, LLC ("Wells Fargo"), effectiveThe goodwill balance was $17.9 million as of July 15, 2016, prior to its maturity date of April 1, 2017, and repaid all amounts outstanding under the Facility; other than (1) the obligations of the Company under the Facility and related loan documents with respect to letters of credits and fees, charges, costs and expenses related thereto, (2) the obligations of the Company under the Facility and related loan documents to reimburse Wells Fargo for costs and expenses that may become due and payable after the date of the termination of the Facility, and (3) any customary contingent indemnification obligations. The Company paid an early termination fee of $100,000, and no other early termination fees or prepayment penalties were incurred by the Company in connection with the termination of the Facility.
Senior Revolving Credit Facility
On August 12, 2015, we amended our revolving credit facility (the "Facility") with Wells Fargo Capital Finance, LLC ("Wells Fargo") to extend the maturity date to July 1, 2016. On November 17, 2015, the Facility was further amended to extend the maturity date to October 1, 2016. As of December 31, 2015,2023 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.
For fiscal year 2023, we were in compliance withperformed a qualitative assessment on our reporting units and identified that it is "more-likely-than-not" that the Facility's financial covenants, including EBITDA covenants.
Asestimated 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, 2015,2023, the interest rateestimated fair value exceeded its carrying value.
Based on the Facility was 5.75%. We incurred interest expense inresults of our annual impairment test of goodwill performed, the amountestimated fair value of $0.2 million, $0.6 million,our respective reporting units exceeded their respective carrying value, and $0.7 million forno impairment charges were taken during the years ended December 31, 2016, 2015,2023 and 2014, respectively, on the Facility.2022.
On March 30, 2016 the Facility was amended ("the Seventeenth Amendment") to extend the maturity date to January 1, 2017. The Seventeenth Amendment also amended the terms of the Facility, reducing the total credit available from $20 million to $10 million effective as of the date of the amendment, which more appropriately reflected the Company's projected utilization of the Facility. The Seventeenth Amendment fixed the interest rate at the higher of the Wells Fargo Bank "prime rate" plus 2.25%, the Federal Funds rate plus 2.75%, or the 3-month LIBOR rate plus 3.25%. The Seventeenth Amendment also increased the minimum excess availability requirement under the revolving component from $1.25 million to $2.0 million, effective as of the date of the amendment, and increased the requirement to $2.5 million, effective July 1, 2016, and $3.0 million, effective November 1, 2016, if the Company did not receive $5 million of equity or subordinated debt investment by June 1, 2016. If such capital investment was not received by June 1, 2016, we would pay a fee of $100,000 to Wells Fargo, which was paid in June 2016. In consideration for the closing of the Seventeenth Amendment, we paid Wells Fargo a fee of $100,000, plus expenses related to the closing.
On May 16, 2016, the Facility was amended to extend the maturity date to April 1, 2017.
At December 31, 2015, we had outstanding borrowings of $8.5 million on the Facility, which included the $3.2 million of term loan, of which $1.4 million was short-term. At December 31, 2015, we had unused borrowing availability on the Facility of $5.8 million. The effective weighted average interest rates on the outstanding borrowings under the Facility was 6.7% for the year ended December 31, 2015.
On July 15, 2016, the outstanding balance under the Facility was paid in full.
Subordinated Debt
On March 31, 2015, the Company entered into Subordinated Loan Agreements and Subordinated Promissory Notes ("Porter Notes") with affiliated entities of Mr. John R. C. Porter (together referenced as "Porter"). Mr. Porter and Toxford Corporation, of which Mr. Porter is the sole shareholder, own 39.3% of our Class A Common Stock. Under the terms of the Porter Notes, Porter lent the Company $2.5 million on or about March 31, 2015. Telos also entered into Subordination and Intercreditor Agreements (the "Subordination Agreements") with Porter and Wells Fargo, in which the Porter Notes are fully subordinated to the Facility and any subsequent senior lenders (including Action Capital), and payments under the Porter Notes are permitted only if certain conditions specified by Wells Fargo are met. According to the terms of the Porter Notes, the outstanding principal sum bears interest at the fixed rate of twelve percent (12%) per annum which would be payable in arrears in cash on the 20th day of each May, August, November and February, with the first interest payment date due on August 20, 2015. The Porter Notes do not call for amortization payments and are unsecured. The unpaid principal, together with interest, is due and payable in full on July 1, 2017. The Porter Notes, in whole or in part, may be repaid at any time without premium or penalty. We incurred interest expense in the amount of $300,000 and $229,000 for 2016 and 2015, respectively, on the Porter Notes. In accordance with the terms of the Porter Notes, interest has been accrued but was not paid due to restrictions on the payment of interest in the Subordination Agreements.
458. INTANGIBLE ASSETS, NET
Note 7. Redeemable Preferred Stock
Senior Redeemable Preferred Stock
The Senior Redeemable Preferred Stock is senior to all other outstanding equity of the Company, including the Public Preferred Stock. The Series A-1 ranks on a parity with the Series A-2. The components of the authorized Senior Redeemable Preferred Stock are 1,250 shares of Series A-1 and 1,750 shares of Series A-2 Senior Redeemable Preferred Stock, each with $.01 par value. The Senior Redeemable Preferred Stock carries a cumulative per annum dividend rate of 14.125% of its liquidation value of $1,000 per share. The dividends are payable semiannually on June 30 and December 31 of each year. We have not declared dividends on our Senior Redeemable Preferred Stock since its issuance, other than in connection with the redemptions from 2010 to 2013. The liquidation preference of the Senior Redeemable Preferred Stock is the face amount of the Series A-1 and A-2 ($1,000 per share), plus all accrued and unpaid dividends.
Due to the terms of the Facility, the Porter Notes, other senior obligations currently or previously in existence, the Senior Redeemable Preferred Stock and applicable provisions of Maryland law governing the payment of distributions, we have been precluded from redeeming the Senior Redeemable Preferred Stock and paying any accrued and unpaid dividends on the Senior Redeemable Preferred Stock, other than the redemptions that occurred from 2010 to 2013. In addition, certain holders of the Senior Redeemable Preferred Stock have entered into standby agreements whereby, among other things, those holders will not demand any payments in respect of dividends or redemptions of their instruments and the maturity dates of the instruments have been extended. As a result of such standby agreements, as of December 31, 2016, instruments held by Toxford Corporation ("Toxford"), the holder of 76.4% of the Senior Redeemable Preferred Stock, will mature on May 31, 2018.
At December 31, 2016 and 2015, the total number of shares of Senior Redeemable Preferred Stock issued and outstanding was 197 shares and 276 shares for Series A-1 and Series A-2, respectively. Due to the limitations, contractual restrictions, and agreements described above, the Senior Redeemable Preferred Stock is classified as noncurrent as of December 31, 2016.
At December 31, 2016 and 2015, cumulative undeclared, unpaid dividends relating to Senior Redeemable Preferred stock totaled $1.6 million. We accrued dividends on the Senior Redeemable Preferred Stock of $67,000 for the years ended December 31, 2016, 2015, and 2014, respectively, which were reported as interest expense. Prior to the effective date of ASC 480-10, "Distinguishing Liabilities from Equity," on July 1, 2003, such dividends were charged to stockholders' deficit.
Public Preferred Stock
A maximum of 6,000,000 shares of the Public Preferred Stock, par value $.01 per share, has been authorized for issuance. We initially issued 2,858,723 shares of the Public Preferred Stock pursuant to the acquisition of the Company during fiscal year 1990. The Public Preferred Stock was recorded at fair value on the date of original issue, November 21, 1989, and we made periodic accretions under the interest method of the excess of the redemption value over the recorded value. We adjusted our estimate of accrued accretion in the amount of $1.5 million in the second quarter of 2006. The Public Preferred Stock was fully accreted as of December 2008. We declared stock dividends totaling 736,863 shares in 1990 and 1991. Since 1991, no other dividends, in stock or cash, have been declared. In November 1998, we retired 410,000 shares of the Public Preferred Stock. The total number of shares issued and outstanding at December 31, 2016 and 2015, was 3,185,586. The Public Preferred Stock is quoted as TLSRP on the OTCQB marketplace and the OTC Bulletin Board.
Since 1991, no dividends were declared or paid on our Public Preferred Stock, based upon our interpretation of restrictions in our Articles of Amendment and Restatement, limitations in the terms of the Public Preferred Stock instrument, specific dividend payment restrictions in the Facility and the Porter Notes to which the Public Preferred Stock is subject, other senior obligations currently or previously in existence, and Maryland law limitations in existence prior to October 1, 2009. Subsequent to the 2009 Maryland law change, dividend payments continue to be prohibited except under certain specific circumstances as set forth in Maryland Code Section 2-311, which the Company did not satisfy as of the measurement dates. Pursuant to the terms of the Articles of Amendment and Restatement, we were scheduled, but not required, to redeem the Public Preferred Stock in five annual tranches during the period 2005 through 2009. However, due to our substantial senior obligations currently or previously in existence, limitations set forth in the covenants in the Facility and the Porter Notes, foreseeable capital and operational requirements, and restrictions and prohibitions of our Articles of Amendment and Restatement, we were and remain unable to meet the redemption schedule set forth in the terms of the Public Preferred Stock as of the measurement dates. Moreover, the Public Preferred Stock is not payable on demand, nor callable, for failure to redeem the Public Preferred Stock in accordance with the redemption schedule set forth in the instrument. Therefore, we classify these securities as noncurrent liabilities in the consolidated balance sheets as of December 31, 2016 and 2015.
Until July 15, 2016, we were parties with certain of our subsidiaries to the Facility agreement with Wells Fargo. Under the Facility, we agreed that, so long as any credit under the Facility is available and until full and final payment of the obligations under the Facility, we would not make any distribution or declare or pay any dividends (other than common stock) on our stock, or purchase, acquire, or redeem any stock, or exchange any stock for indebtedness, or retire any stock. Additionally, the Porter Notes contain similar prohibitions on dividend payments or stock redemptions.
Accordingly, as stated above, we will continue to classify the entirety of our obligation to redeem the Public Preferred Stock as a long-term obligation. The Porter Notes and the Senior Redeemable Preferred Stock prohibit, among other things, the redemption of any stock, common or preferred, other than as described above. The Public Preferred Stock by its terms cannot be redeemed if doing so would violate the terms of an agreement regarding the borrowing of funds or the extension of credit which is binding upon us or any of our subsidiaries, and it does not include any other provisions that would otherwise require any acceleration of the redemption of or amortization payments with respect to the Public Preferred Stock. Thus, the Public Preferred Stock is not and will not be due on demand, nor callable, within 12 months from December 31, 2016. This classification is consistent with ASC 210-10, "Balance Sheet" and 470-10, "Debt" and the FASB ASC Master Glossary definition of "Current Liabilities."
ASC 210-10 and the FASB ASC Master Glossary define current liabilities as follows: The term current liabilities is used principally to designate obligations whose liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets, or the creation of other current liabilities. As a balance sheet category, the classification is intended to include obligations for items which have entered into the operating cycle, such as payables incurred in the acquisition of materials and supplies to be used in the production of goods or in providing services to be offered for sale; collections received in advance of the delivery of goods or performance of services; and debts that arise from operations directly related to the operating cycle, such as accruals for wages, salaries, commissions, rentals, royalties, and income and other taxes. Other liabilities whose regular and ordinary liquidation is expected to occur within a relatively short period of time, usually twelve months, are also intended for inclusion, such as short-term debts arising from the acquisition of capital assets, serial maturities of long-term obligations, amounts required to be expended within one year under sinking fund provisions, and agency obligations arising from the collection or acceptance of cash or other assets for the account of third persons.
ASC 470-10 provides the following: The current liability classification is also intended to include obligations that, by their terms, are due on demand or will be due on demand within one year (or operating cycle, if longer) from the balance sheet date, even though liquidation may not be expected within that period. It is also intended to include long-term obligations that are or will be callable by the creditor either because the debtor's violation of a provision of the debt agreement at the balance sheet date makes the obligation callable or because the violation, if not cured within a specified grace period, will make the obligation callable.
If, pursuant to the terms of the Public Preferred Stock, we do not redeem the Public Preferred Stock in accordance with the scheduled redemptions described above, the terms of the Public Preferred Stock require us to discharge our obligation to redeem the Public Preferred Stock as soon as we are financially capable and legally permitted to do so. Therefore, by its very terms, the Public Preferred Stock is not due on demand or callable for failure to make a scheduled payment pursuant to its redemption provisions and is properly classified as a noncurrent liability.
We pay dividends on the Public Preferred Stock when and if declared by the Board of Directors. The Public Preferred Stock accrues a semi-annual dividend at the annual rate of 12% ($1.20) per share, based on the liquidation preference of $10 per share and is fully cumulative. Dividends in additional shares of the Public Preferred Stock for 1990 and 1991 were paid at the rate of 6% of a share for each $.60 of such dividends not paid in cash. For the cash dividends payable since December 1, 1995, we have accrued $95.9 million and $92.1 million as of December 31, 2016 and 2015, respectively. We accrued dividends on the Public Preferred Stock of $3.8 million for the years ended December 31, 2016, 2015, and 2014, which was recorded as interest expense. Prior to the effective date of ASC 480-10 on July 1, 2003, such dividends were charged to stockholders' accumulated deficit.
Note 8. Stockholders' Deficit, Option Plans, and Employee Benefit Plan
Common Stock
The relative rights, preferences, and limitations of the Class A common stock and the Class B common stock are in all respects identical. The holders of the common stock have one vote for each share of common stock held. Subject to the priority rights of the Public Preferred Stock and any series of the Senior Preferred Stock, holders of Class A and Class B common stock are entitled to receive such dividends as may be declared.
Restricted Stock Grants
Since June 2008, we have issued restricted stock (Class A common) to our executive officers, directors and employees. There were no grants issued in 2016. As of December 31, 2016, there were 19,047,259 shares of restricted stock outstanding. Such stock is subject to a vesting schedule as follows: 25% of the restricted stock vests immediately on the date of grant, thereafter, an additional 25% will vest annually on the anniversary of the date of grant subject to continued employment or services. In the event of death of the employee or a change in control, as defined by the Telos Corporation 2008 Omnibus Long-Term Incentive Plan or the 2013 Omnibus Long-Term Incentive Plan, all unvested shares shall automatically vest in full. In accordance with ASC 718, we recorded immaterial compensation expense for any of the issuances as the value of the common stock was nominal, based on the deduction of our outstanding debt, capital lease obligations, and preferred stock from an estimated enterprise value, which was estimated based on discounted cash flow analysis, comparable public company analysis, and comparable transaction analysis. Additionally, we determined that a significant change in the valuation estimate for common stock would not have a significant effect on the consolidated financial statements.
Stock Options
In 1996, the Board of Directors approved and the shareholders ratified the 1996 Stock Option Plan ("1996 Stock Option Plan"). As determined by the members of the Compensation Committee, we generally grant options under our respective plans at the estimated fair value at the date of grant, based upon all information available to it at the time.
1996 Stock Option Plan
The 1996 Stock Option Plan allowed for the award of options to purchase up to 6,644,974 shares of Class A common stock at an exercise price of not lower than the estimated fair value at the date of grant. Vesting of the stock options for key employees was based both upon the passage of time, generally four years, and certain key events occurring including an initial public offering or a change in control. The stock options may be exercised over a ten-year period subject to the vesting requirements. Effective May 10, 2004, the 1996 Stock Option Plan was amended by the Board of Directors to increase the total amount of authorized shares of Class A common stock to 7,345,433, an increase of 700,459 shares, to reflect those options granted to Mr. Wood that were not exercised under the 1993 Stock Option Plan. The 1996 Stock Option Plan expired in March 2006, with its remaining 516,000 unissued options canceled. A total of 20,000 options were exercised in 2014. A total of 2,463,500 options were exchanged for restricted stock in June 2008.
A summary of the status of our stock options for the year ended December 31, 2014 is as follows:
| | | Number of Shares (000's) | | | Weighted Average Exercise Price | |
2014 Stock Option Activity | | | | | | |
Outstanding at beginning of year | | | 20 | | | $ | 0.62 | |
| Granted | | | -- | | | | -- | |
| Exercised | | | (20 | ) | | | 0.62 | |
| Canceled | | | -- | | | | -- | |
| Outstanding at end of year | | | -- | | | | -- | |
| Exercisable at end of year | | | -- | | | | -- | |
There were no options outstanding and exercisable at December 31, 2016 and 2015.
Telos Shared Savings Plan
We sponsor a defined contribution employee savings plan (the "Plan") under which substantially all full-time employees are eligible to participate. The Plan holds 3,658,536 shares of Telos Class A common stock. Since no public market exists for Telos Class A common stock, the Trustees of the Plan and their professional advisors undertake an annual evaluation, based upon the most recent audited financial statements. To date, the Plan's trustees have priced the stock at the exact midpoint of the evaluated range of the value of the stock. We match one-half of employee contributions to the Plan up to a maximum of 2% of such employee's eligible annual base salary. Participant contributions vest immediately, and Company contributions vest at the rate of 20% for each year, with full vesting occurring after completion of five years of service. The Company's matching contributions to the Plan were suspended for 2015. Our total contributions to this Plan for 2016, 2015, and 2014 were $575,000, $0, and $624,000, respectively.
Additionally, effective September 1, 2007, Telos ID sponsors a defined contribution savings plan (the "Telos ID Plan") under which substantially all full-time employees are eligible to participate. Telos ID matches one-half of employee contributions to the Plan up to a maximum of 2% of such employee's eligible annual base salary. Telos ID's matching contributions to the Telos ID Plan were suspended for 2015. The total 2016, 2015, and 2014 Telos ID contributions to this plan were $96,000, $0, and $83,000, respectively.
Note 9. Income Taxes
The provision (benefit) for income taxes attributable to income from operations includes the following (in thousands):
| | | For the Years Ended December 31, | |
| | | 2016 | | | 2015 | | | 2014 | |
| Current provision (benefit) | | | | | | | | | |
| Federal | | $ | 114 | | | $ | (902 | ) | | $ | (1,759 | ) |
| State | | | 28 | | | | 54 | | | | (194 | ) |
| Total current | | | 142 | | | | (848 | ) | | | (1,953 | ) |
| | | | | | | | | | | | | |
| Deferred provision (benefit) | | | | | | | | | | | | |
| Federal | | | 155 | | | | 4,333 | | | | (3,820 | ) |
| State | | | 37 | | | | 780 | | | | (215 | ) |
| Total deferred | | | 192 | | | | 5,113 | | | | (4,035 | ) |
| Total provision (benefit) | | $ | 334 | | | $ | 4,265 | | | $ | (5,988 | ) |
The provision for income taxes related to operations varies from the amount determined by applying the federal income tax statutory rate to the income or loss before income taxes, exclusive of net income attributable to non-controlling interest. The reconciliation of these differences is as follows:
| | For the Years Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Computed expected income tax provision | 34.0% | | 34.0% | | 35.0% |
| State income taxes, net of federal income tax benefit | 0.8 | | 2.1 | | 2.5 |
| Change in valuation allowance for deferred tax assets | (21.5) | | (61.3) | | 0.1 |
| Cumulative deferred adjustments | (0.3) | | (0.1) | | (0.3) |
| Provision to return adjustments | (0.4) | | 1.3 | | 1.1 |
| Other permanent differences | (1.8) | | (1.1) | | (0.5) |
| Dividend and accretion on preferred stock | (19.3) | | (11.3) | | (7.5) |
| FIN 48 liability | 0.7 | | (0.8) | | (0.6) |
| R&D credit | 3.3 | | 1.6 | | 3.0 |
| Other | (0.4) | | (0.9) | | -- |
| | (4.9)% | | (36.5)% | | 32.8% |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2016 and 2015 are as follows (in thousands):
| | | December 31, | |
| | | 2016 | | | 2015 | |
| Deferred tax assets: | | | | | | |
| Accounts receivable, principally due to allowance for doubtful accounts | | $ | 161 | | | $ | 176 | |
| Allowance for inventory obsolescence and amortization | | | 778 | | | | 623 | |
| Accrued liabilities not currently deductible | | | 2,234 | | | | 2,218 | |
| Accrued compensation | | | 1,006 | | | | 840 | |
| Deferred rent | | | 7,682 | | | | 8,008 | |
| Net operating loss carryforwards - federal | | | 1,301 | | | | 524 | |
| Net operating loss carryforwards - state | | | 405 | | | | 344 | |
| Federal tax credit | | | 533 | | | | 202 | |
| Total gross deferred tax assets | | | 14,100 | | | | 12,935 | |
| Less valuation allowance | | | (10,499 | ) | | | (9,027 | ) |
| Total deferred tax assets, net of valuation allowance | | | 3,601 | | | | 3,908 | |
| Deferred tax liabilities: | | | | | | | | |
| Amortization and depreciation | | | (2,696 | ) | | | (3,307 | ) |
| Unbilled accounts receivable, deferred for tax purposes | | | (787 | ) | | | (589 | ) |
| Goodwill basis adjustment and amortization | | | (3,451 | ) | | | (3,199 | ) |
| Telos ID basis difference | | | (58 | ) | | | (12 | ) |
| Total deferred tax liabilities | | | (6,992 | ) | | | (7,107 | ) |
| | | | | | | | | |
| Net deferred tax liabilities | | $ | (3,391 | ) | | $ | (3,199 | ) |
The components of the valuation allowance are as follows (in thousands):
| | | Balance Beginning of Period | | | Additions | | | Recoveries | | | Balance End of Period | |
| | | | | | | | | | | | | |
| December 31, 2016 | | $ | 9,027 | | | $ | 1,472 | | | $ | -- | | | $ | 10,499 | |
| December 31, 2015 | | $ | 1,868 | | | $ | 7,159 | | | $ | -- | | | $ | 9,027 | |
| December 31, 2014 | | $ | 1,901 | | | $ | -- | | | $ | (33 | ) | | $ | 1,868 | |
We are required to establish a valuation allowance for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on available evidence, realization of deferred tax assets is dependent upon the generation of future taxable income. We considered projected future taxable income, tax planning strategies, and reversal of taxable temporary differences in making this assessment. As such, we have determined that a full valuation allowance is required as of December 31, 2016 and 2015. We are not able to use temporary taxable differences related to goodwill, as a source of future taxable income. As a result of a full valuation allowance against our deferred tax assets, a deferred tax liability (hanging credit) related to goodwill remains on our consolidated balance sheet at December 31, 2016 and 2015.
At December 31, 2016, for federal income tax purposes there was approximately $3.8 million net operating loss available to be carried forward to offset future taxable income. These net operating loss carryforwards expire in 2036. Additionally, approximately $3.8 million of alternative minimum tax net operating loss carryforwards are available to offset future alternative minimum taxable income. These alternative minimum tax net operating loss carryforwards also expire in 2036. In addition, there was approximately $60,000 of alternative minimum tax credit available to be carried forward indefinitely to reduce future regular tax liabilities.
Under the provisions of ASC 740-10, we determined that there were approximately $762,000 and $803,000 of unrecognized tax benefits, including $233,000 and $210,000 of related interest and penalties, required to be recorded in other liabilities as of December 31, 2016 and 2015, respectively. We believe that the total amounts of unrecognized tax benefits will not significantly increase or decrease within the next 12 months. The period for which tax years are open, 2013 to 2016, has not been extended beyond the applicable statute of limitations.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
| | | 2016 | | | 2015 | | | 2014 | |
| Unrecognized tax benefits, beginning of period | | $ | 803 | | | $ | 708 | | | $ | 607 | |
| Gross (decreases) increases—tax positions in prior period | | | (66 | ) | | | 92 | | | | 105 | |
| Gross increases—tax positions in current period | | | 46 | | | | 38 | | | | 47 | |
| Settlements | | | (21 | ) | | | (35 | ) | | | (51 | ) |
| Unrecognized tax benefits, end of period | | $ | 762 | | | $ | 803 | | | $ | 708 | |
Note 10. Commitments
Leases
We lease office space and equipment under noncancelable operating and capital leases with various expiration dates, some of which contain renewal options.
On March 1, 1996, we entered into a 20-year capital lease for a building in Ashburn, Virginia, that serves as our corporate headquarters. We had accounted for this transaction as a capital lease and had accordingly recorded assets and a corresponding liability of approximately $12.3 million. Effective November 1, 2013, this lease was terminated and we entered into a 13-year lease ("the 2013 lease") that would have expired in October 31, 2026. The 2013 lease was treated as a modification in accordance with ASC 840, "Leases". As a result of the 2013 lease, the corresponding capital asset and liability increased by $11.7 million, resulting in a net book value of the capital asset of $13.1 million, and capital obligation of $15.5 million. The 2013 lease included an option to purchase, assign to, or designate a purchaser on June 1, 2014, which required notice of intent to exercise the option by not later than March 31, 2014.
On March 28, 2014, we entered into a definitive agreement with an unrelated third party to assign the purchase option to that third party in return for cash consideration of $1.7 million, payable upon the closing of the purchase transaction, and certain obligations under the agreement, including entering into a new 15-year lease with the third party upon the third party's exercise of the purchase option and purchase of the building from the prior landlord. On March 28, 2014, we provided the prior landlord notice of our assignment and exercise of the purchase option. On May 28, 2014 the third party completed the purchase transaction and the 2013 lease was terminated, with no ongoing obligations, by mutual agreement between us and the prior landlord. On the same day we entered into a new lease ("the 2014 lease") with the third party that expires on May 31, 2029. The 2014 lease was treated as a modification of the prior lease on the property in accordance with ASC 840, and determined to be a capital lease. As a result of the new lease, the corresponding capital asset increased by $5.7 million, resulting in a net book value of the capital asset of $18.3 million and the liability increased by $6.7 million, resulting in a capital obligation of $22.0 million. As part of this treatment, the net cash consideration received in connection with the definitive agreement was treated as a lease incentive that will be amortized over the life of the lease.
The following is a schedule by years of future minimum payments under capital leases together with the present value of the net minimum lease payments as of December 31, 2016 (in thousands):
| | | Property | | | Equipment | | | Total | |
| 2017 | | $ | 1,899 | | | $ | 1 | | | $ | 1,900 | |
| 2018 | | | 1,947 | | | | -- | | | | 1,947 | |
| 2019 | | | 1,995 | | | | -- | | | | 1,995 | |
| 2020 | | | 2,045 | | | | -- | | | | 2,045 | |
| 2021 | | | 2,096 | | | | -- | | | | 2,096 | |
| Remainder | | | 17,268 | | | | -- | | | | 17,268 | |
| | | | | | | | | | | | | |
| Total minimum obligations | | | 27,250 | | | | 1 | | | | 27,251 | |
| Less amounts representing interest (ranging from 5.0% to 18.8%) | | | (7,343 | ) | | | -- | | | | (7,343 | ) |
| | | | | | | | | | | | | |
| Net present value of minimum obligations | | | 19,907 | | | | 1 | | | | 19,908 | |
| Less current portion | | | (917 | ) | | | (1 | ) | | | (918 | ) |
| | | | | | | | | | | | | |
| Long-term capital lease obligations at December 31, 2016 | | $ | 18,990 | | | $ | -- | | | $ | 18,990 | |
Future minimum lease payments for all noncancelable operating leases at December 31, 2016 are as follows (in thousands):
| 2017 | | $ | 560 | |
| 2018 | | | 491 | |
| 2019 | | | 491 | |
| 2020 | | | 505 | |
| 2021 | | | 502 | |
| Remainder | | | 719 | |
Total minimum lease payments | | $ | 3,268 | |
In accordance with the 2014 Lease, the basic rent increases by a fixed 2.5% escalation annually. Rent expense charged to operations totaled $1.7 million, $1.8 million, and $1.1 million for 2016, 2015, and 2014, respectively.
Accumulated amortization for property and equipment under capital leases at December 31, 2016 and 2015 is $15.7 million and $14.5 million, respectively.
Warranties
We provide product warranties for products sold through certain U.S. Government contract vehicles. We accrue a warranty liability at the time that we recognize revenue for the estimated costs that may be incurred in connection with providing warranty coverage. Warranties are valued using historical warranty usage trends; however, if actual product failure rates or service delivery costs differ from estimates, revisions to the estimated warranty liability may be required. Accrued warranties are reported as other current liabilities on the consolidated balance sheets.
| | | Balance Beginning of Year | | | Accruals | | | Warranty Expenses | | | Balance End of Year | |
| | | (amount in thousands) | |
| | | | | | | | | | | | | |
| Year Ended December 31, 2016 | | $ | 133 | | | $ | 279 | | | $ | (361 | ) | | $ | 51 | |
| Year Ended December 31, 2015 | | $ | 189 | | | $ | 125 | | | $ | (181 | ) | | $ | 133 | |
| Year Ended December 31, 2014 | | $ | 113 | | | $ | 140 | | | $ | (64 | ) | | $ | 189 | |
Note 11. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions between us and certain of our current shareholders and former officers is set forth below.
The brother of our Chairman and CEO, Emmett J. Wood, has been an employee of ours since 1996. The amounts paid to this individual as compensation for 2016, 2015, and 2014 were $401,000, $305,000, and $446,000, respectively. Additionally, Mr. Wood owned 650,000 shares and 50,000 shares of the Company's Class A and Class B Common Stock, respectively, as of December 31, 2016 and 2015.
On March 31, 2015, the Company entered into the Porter Notes. Mr. Porter and Toxford Corporation, of which Mr. Porter is the sole shareholder, own 39.3% of our Class A Common Stock. Under the terms of the Porter Notes, Porter lent the Company $2.5 million on or about March 31, 2015. According to the terms of the Porter Notes, the outstanding principal sum bears interest at the fixed rate of twelve percent (12%) per annum which would be payable in arrears in cash on the 20th day of each May, August, November and February, with the first interest payment date due on August 20, 2015. The Porter Notes do not call for amortization payments and are unsecured. The unpaid principal, together with interest, is due and payable in full on July 1, 2017. The Porter Notes, in whole or in part, may be repaid at any time without premium or penalty. We incurred interest expense in the amount of $300,000 and $229,000 on the Porter Notes for the years ended December 31, 2016 and 2015, respectively. In accordance with the terms of the Porter Notes, interest has been accrued but was not paid due to restrictions on the payment of interest in the Subordination Agreements.
Note 12. Summary of Selected Quarterly Financial Data (Unaudited)
The following is a summary of selected quarterly financial data for the previous two fiscal years (in thousands):
| | | Quarters Ended | |
| | | March 31 | | | June 30 | | | Sept. 30 | | | Dec. 31 | |
| 2016 | | | | | | | | | | | | |
| Revenue | | $ | 27,078 | | | $ | 26,798 | | | $ | 54,940 | | | $ | 26,052 | |
| Gross profit | | | 10,582 | | | | 9,452 | | | | 14,538 | | | | 8,874 | |
| (Loss) income before income taxes and non-controlling interest | | | (149 | ) | | | (1,323 | ) | | | 1,503 | | | | (3,366 | ) |
| Net loss attributable to Telos Corporation (1) | | | (867 | ) | | | (1,912 | ) | | | (91 | ) | | | (4,305 | ) |
| | | | | | | | | | | | | | | | | |
| 2015 | | | | | | | | | | | | | | | | |
| Revenue | | $ | 28,019 | | | $ | 32,028 | | | $ | 33,662 | | | $ | 26,925 | |
| Gross profit | | | 6,778 | | | | 7,170 | | | | 8,674 | | | | 8,051 | |
| Loss before income taxes and non-controlling interest | | | (3,030 | ) | | | (2,564 | ) | | | (959 | ) | | | (2,684 | ) |
| Net loss attributable to Telos Corporation (1)(2) | | | (2,746 | ) | | | (2,408 | ) | | | (1,406 | ) | | | (9,380 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Table 8.1: Details of Intangible Assets, Net |
| Estimated useful life | As of December 31, 2023 | | As of December 31, 2022 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value |
| | | | | | | | | | | | |
| | (in thousands) |
| Acquired technology | 8 years | $ | 3,630 | | | $ | (1,097) | | | $ | 2,533 | | | $ | 3,630 | | | $ | (643) | | | $ | 2,987 | |
| Customer relationships | 3 years | 40 | | | (32) | | | 8 | | | 40 | | | (19) | | | 21 | |
| Software development costs | 2 - 5 years | 35,312 | | | (12,256) | | | 23,056 | | | 26,956 | | | (7,793) | | | 19,163 | |
| 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) | | — | | | — | | | — | | | 7,120 | | | — | | | 7,120 | |
| Total | | $ | 53,001 | | | $ | (13,385) | | | $ | 39,616 | | | $ | 45,870 | | | $ | (8,455) | | | $ | 37,415 | |
| | |
(1) | Changes in net income In-process software development costs are the resultcosts for software that is not yet available for its intended use or general release to customers as of several factors, including seasonalitybalance sheet date, thus not yet amortized. |
(2) An impairment charge of the government year-end buying season, as well as the nature and timing of other deliverables. |
(2) | A full valuation allowance$0.5 million was recorded against software development costs in fiscal year 2023 related to the Company's deferred tax assetswrite-off of certain software projects. |
(3) This amount is net of $0.7 million charged into cost of sales in the fourth quarter of 2015.fiscal year 2022. |
Note 13. Commitments, Contingencies and Subsequent Events
Financial Condition and Liquidity
As described in Note 6 – Current Liabilities and Debt Obligations, we maintain a Purchase Agreement with RCA and a Financing Agreement with Action Capital. The willingness of RCA to purchase our accounts receivable under the Purchase Agreement and of Action Capital to make advances under the Financing Agreement, and our ability to obtain additional financing, may be limited due to various factors, including the eligibility of our receivables, the status of our business, global credit market conditions, and perceptions of our business or industry by RCA, Action Capital, or other potential sources of financing. If we are unable to maintain the new financing arrangements, we would need to obtain additional credit to fund our future operations. If credit is available in that event, lenders may impose more restrictive terms and higher interest rates that may reduce our borrowing capacity, increase our costs, or reduce our operating flexibility. The failure to maintain, extend, renew or replace our new sources of financing with a comparable arrangement or arrangements that provide similar amounts of liquidity for the Company would have a material negative impact on our overall liquidity, financial and operating results.
While a variety of factors related to sources and uses of cash, such as timeliness of accounts receivable collections, vendor credit terms, or significant collateral requirements, ultimately impact our liquidity, such factors may or may not have a direct impact on our liquidity, based on how the transactions associated with such circumstances impact our availability under our credit arrangements. For example, a contractual requirement to post collateral for a duration of several months, depending on the materiality of the amount, could have an immediate negative effect on our liquidity, as such a circumstance would utilize cash resources without a near-term cash inflow back to us. Likewise, the release of such collateral could have a corresponding positive effect on our liquidity, as it would represent an addition to our cash resources without any corresponding near-term cash outflow. Similarly, a slow-down of payments from a customer, group of customers or government payment office would not have an immediate and direct effect on our availability unless the slowdown was material in amount and over an extended period of time. Any of these examples would have an impact on our cash resources, our financing arrangements, and therefore our liquidity.
Additionally, as a result of operations for 2014 and 2015, and the continued impact of contract delays as well as other government budgetary funding issues, management determined the need to raise additional working capital. Accordingly, in December 2014, we sold 10% of the membership interests in Telos ID to the Telos ID Class B member for $5 million, and, in March 2015, we issued the Porter Notes. As discussed in detail below in Subsequent Events, in January 2017, we borrowed $11 million under a credit agreement with Enlightenment Capital Solutions Fund II, L.P. to raise additional working capital and retire certain long-term obligations. Management currently believes that the Company's existing borrowing capacity under the Purchase Agreement and the Financing Agreement discussed above as well as the proceeds of the January 2017 financing, are sufficient to fund our capital and liquidity needs for the next 12 months.
Management may determine that, in order to reduce capital and liquidity requirements, planned spending on capital projects and indirect expense growth may be curtailed, subject to growth in operating results. Additionally, management may seek to put in place a credit facility with a commercial bank, although no assurance can be given that such a facility could be put in place under terms acceptable to the Company. Should management determine that additional capital is required, management would likely look first to the sources of funding discussed above to meet any requirements, although no assurances can be given that these investors would be able to invest or that the Company and the investors would agree upon terms for such investments.
Our working capital was $(8.6) million and $1.1 million as of December 31, 2016 and 2015, respectively. Although no assurances can be given, we expect that our financing arrangements with RCA and Action Capital, collectively, as well as the proceeds of the January 2017 financing discussed further in Subsequent Events below, are sufficient to maintain the liquidity we require to meet our operating, investing and financing needs for the next 12 months.
Legal Proceedings
Costa Brava Partnership III, L.P.
As previously reported, on October 17, 2005, Costa Brava Partnership III, L.P. ("Costa Brava"), a holder of Public Preferred Stock, instituted litigation against the Company and certain past and present directors and officers in the Circuit Court for Baltimore City, Maryland (the "Circuit Court"). A second holder of the Company's Public Preferred Stock, Wynnefield Small Cap Value, L.P. ("Wynnefield"), subsequently intervened as a co-Plaintiff (Costa Brava and Wynnefield are hereinafter referred to as "Plaintiffs"). On February 27, 2007, Plaintiffs added, as an additional defendant, Mr. John R. C. Porter, a holder of the Company's Common Stock and Senior Redeemable Preferred Stock.
In the litigation, Plaintiffs allege, among other things, that the Company and its officers and directors engaged in tactics to avoid paying dividends on the Public Preferred Stock, that the Company made improper bonus payments or awards to officers and directors, that certain former and present officers and directors breached legal duties or the standard of care that they owed the Company, that the Company improperly paid consulting fees to and engaged in loan transactions with Mr. Porter, that the Company failed to improve on the Company's purported insolvency, that the Company failed to redeem the Public Preferred Stock as alledgedly required by the Company's charter, and shareholder oppression against Mr. Porter.
On December 22, 2005, the Company's Board of Directors established a special litigation committee ("Special Litigation Committee"), composed of certain independent directors, to review and evaluate the matters raised in the litigation. On July 20, 2007, the Special Litigation Committee, in its final report, concluded that the available evidence did not support Plaintiffs' derivative claims and that it was not in the best interests of the Company to pursue such claims in the litigation. On August 24, 2007, the Company moved to dismiss Plaintiffs' derivative claims based upon the report and to dismiss all remaining claims for failure to state a claim. Following an evidentiary hearing, the Circuit Court dismissed all derivative claims based upon the recommendation of the Special Litigation Committee on January 7, 2008.
On February 12, 2008, the Plaintiffs filed a Third Amended Complaint that included both new counts and previously dismissed counts. The Company moved to dismiss or strike the Third Amended Complaint and, on April 15, 2008, the Circuit Court issued an order dismissing with prejudice all counts in the Third Amended Complaint that were not previously disposed of by motion or stipulation. On December 2, 2008, the Company filed a motion for voluntary dismissal of its counterclaim against Plaintiffs (for their interference with the Company's relationship with Wells Fargo) without prejudice. The Circuit Court granted that motion, over Plaintiffs' opposition, on January 23, 2009.
Following Plaintiffs' appeal of the dismissal of their derivative claims and shareholder oppression claim, on September 7, 2012, the Court of Special Appeals of Maryland ruled that the Circuit Court applied an incorrect standard of review to evaluate the conclusions of the Special Litigation Committee. The Court of Special Appeals held that the Circuit Court's dismissal of a shareholder oppression claim (asserted against Mr. Porter) raised an issue of first impression under Maryland law and required further briefing in the Circuit Court. The Court of Special Appeals vacated the decision of the Circuit Court that had been appealed and remanded the case for further consideration and proceedings.
On October 24, 2012, the Company filed a petition for writ of certiorari in the Court of Appeals of Maryland, which was denied on January 22, 2013.
On remand, the Circuit Court held a status and scheduling conference on July 26, 2013, as a result of which the Circuit Court issued a memorandum to counsel setting a briefing schedule to address the motion filed by the Company and other defendants to dismiss or otherwise dispose of the derivative claims2023, as a result of the findings of the Special Litigation Committee in its final report of July 20, 2007. On November 1, 2013, the Defendants filed a Motion to Dismiss the derivative claims under the standard of review dictated by the opinion of the Court of Special Appeals. Plaintiffs filed their Opposition to the Motion on December 23, 2013, and Defendants filed their Reply on January 23, 2014. A hearing on the Motion to Dismiss was held on April 24, 2014. No decision has been rendered on the Company's motion to dismiss or otherwise dispose of the derivative claims, and the matter remains pending.
On September 17, 2013, the Plaintiffs filed a request for an entry of an order for default as to Mr. Porter, which was denied by the Circuit Court on November 8, 2013. Mr. Porter ultimately filed a motion to dismiss the claim against him on May 13, 2014, raising multiple grounds. No decision has been rendered on Mr. Porter's motion to dismiss, and the matter remains pending.
As of December 31, 2016, Costa Brava and Wynnefield own 12.7% and 17.3%, respectively, of the outstanding Public Preferred Stock.
No material developments occurred in this litigation in 2016.
At this stage of the litigation, it is impossible to reasonably determine the degree of probability related to Plaintiffs' success in relation to any of their assertions in the litigation. Although there can be no assurance as to the ultimate outcome of the case,impairment assessment, the Company and its present and former officers and directors strenuously deny Plaintiffs' allegations and continue to vigorously defend the matter and oppose all relief sought by Plaintiffs.
Hamot et al. v. Telos Corporation
As previously reported, since August 2, 2007, Messrs. Seth W. Hamot and Andrew R. Siegel, principalsidentified conditions demonstrating impairment of Costa Brava Partnership III L.P. ("Costa Brava") and Class D Directors of the Company ("Class D Directors"), have been involved in litigation against the Company in the Circuit Court for Baltimore City, Maryland (the "Circuit Court"). The Class D Directors initially alleged that certain documents and records had not been promptly provided to them and were necessary to fulfill their duties as directors of the Company. Subsequently, the Class D Directors further alleged that the Company had failed to follow certain provisions concerning the noticing of Board committee meetings and the recording of Board meeting minutes and, additionally, that Mr. Wood's service as both CEO and Chairman of the Board was improper and impermissible under the Company's Bylaws.
By way of preliminary injunctions entered on August 28, 2007 and September 24, 2007, the Circuit Court ordered that the Class D Directors are entitled to documents in response to reasonable requests for information pertinent and necessary to perform their duties as members of the Board but, in light of the Costa Brava shareholder litigation, the Company is entitled to designated certain documents as "confidential" or "highly confidential" and to withhold certain documents from the Class D Directors based upon the attorney work product doctrine or attorney-client privilege. Pursuant to the preliminary injunctions, the Class D Directors are also entitled to receive written responses to requests for Board of Directors or Board committee minutes within seven days of any such requests and copies of such minutes within fifteen days of any such requests, as well as written responses to all other requests for information and/or documents related to their duties as directors within seven days of such requests, and all Board of Directors appropriate information and/or documents within thirty days of any such requests.
On April 23, 2008, the Company filed a counterclaim against the Class D Directors for money damages and preliminary and injunctive relief based upon the Class D Directors' interference with, and improper influence of, the Company's independent auditors regarding, among other things, a specific accounting treatment. On June 27, 2008, the Circuit Court granted the Company's motion for preliminary injunction and enjoined the Class D Directors from contacting the Company's auditors until the completion of the Company's Form 10-K for the preceding year. This preliminary injunction expired by its own termssoftware development costs and an appeal from that orderedimpairment charge of $0.5 million was held to be moot by the Court of Special Appeals of Maryland.
On April 12, 2010, the Class D Directors filed a motion for the advancement of legal feesrecorded under "Research and Development" expenses incurred in defense of the Company's counterclaim. On November 3, 2011, the Circuit Court denied the Plaintiffs' motion, as well as the Plaintiffs' motion for partial summary judgment and request for attorneys' fees. On May 21, 2012, the Circuit Court denied Plaintiffs' motion for reconsideration of the same.
Trial on both the Class D Directors' books and records claims and the Company's counterclaims realated to the auditor interference commenced on July 5, 2013, and continued on several days in July 2013. The evidentiary portion of the trial concluded on August 1, 2013, and post-trial briefing concluded on September 16, 2013. The court decision on this matter is still pending and no material developments occurred in this litigation during 2016.
At this stage of the litigation it is impossible to reasonably determine the degree of probability related to the Class D Directors' success in any of their assertions and claims, or whether such success would entitle them to monetary relief. Although there can be no assurance as to the ultimate outcome of these proceedings, the Company and its officers and directors strenuously deny the Class D Directors' claims, and will vigorously defend the matter, and continue to oppose the relief sought.
Other Litigation
In addition, the Company is a party to litigation arising in the ordinary course of business. In the opinion of management, while the results of such litigation cannot be predicted with any reasonable degree of certainty, the final outcome of such known matters will not, based upon all available information, have a material adverse effect on the Company's consolidated financial position, resultsstatements of operationsoperations. 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.
| | | | | | | | | | | |
| Table 8.2: Amortization Expense | | | |
| For the year ended December 31, |
| 2023 | | 2022 |
| | | |
| (in thousands) |
| Amortization expense related to: | | | |
Software development costs - cost of sales (1) | $ | 2,840 | | | $ | — | |
| 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 cash flows.otherwise marketed are charged under cost of sales on the Consolidated Statements of Operations.
| | | | | | | | |
| Table 8.3: Estimated Future Amortization Expense of Intangible Assets, Net |
| | As of December 31, 2023 |
| | (in thousands) |
| Year Ending December 31, 2024 | | $ | 8,037 | |
| Year Ending December 31, 2025 | | 7,270 | |
| Year Ending December 31, 2026 | | 4,864 | |
| Year Ending December 31, 2027 | | 3,520 | |
| Year Ending December 31, 2028 | | 1,642 | |
| Thereafter | | 264 | |
Total (1) | | $ | 25,597 | |
(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.
9. OTHER BALANCE SHEET COMPONENTS
| | | | | | | | | | | |
| Table 9.1: Details of Accounts Payable and Other Accrued Liabilities |
| As of December 31, |
| 2023 | | 2022 |
| | | |
| (in thousands) |
| Accounts payable | $ | 8,307 | | | $ | 12,606 | |
| Accrued payables | 5,443 | | | 9,945 | |
| Accounts payable and other accrued liabilities | $ | 13,750 | | | $ | 22,551 | |
| | | | | | | | | | | |
| Table 9.2: Details of Other Current Liabilities |
| As of December 31, |
| 2023 | | 2022 |
| | | |
| (in thousands) |
| Other accrued liabilities | 1,427 | | | 1,530 | |
| Restructuring expenses accrual | 400 | | | 2,763 | |
| Other | 497 | | | 626 | |
| Other current liabilities | $ | 2,324 | | | $ | 4,919 | |
Subsequent Events
10. DEBT AND OTHER OBLIGATIONS
Revolving Credit Facility
On January 25, 2017,December 30, 2022 (the "Closing Date"), we entered into a Credit Agreement (the "Credit Agreement"), by and among the Company, as borrower, Xacta Corporation, ubIQuity.com,inc, Teloworks, Inc., and Teloworks, Inc.,Telos Identity Management Solutions, LLC, as guarantors, (together, the "Guarantors"), Enlightenment Capital Solutions Fund II, L.P., as agent (the "Agent"), and the lenders party thereto (the "Lenders"), and JPMorgan Chase Bank N.A., as administrative agent for the Lenders (in such capacity, the "Agent"). The Credit Agreement provides for an $11,000,000a $30.0 million senior term loan (the "Loan")secured revolving credit facility with a maturity date of January 25, 2022,December 30, 2025, with the option of issuing letters of credit thereunder with a sub-limit of $5.0 million, and with an uncommitted expansion feature of up to $30.0 million of additional revolver capacity (the "Loan"). The Loan is subject to acceleration in the event of customary events of default. The Company has not drawn any amount under the Loan.
All borrowingsBorrowings under the Credit Agreement will accrue interest, at our option, at one of three variable rates, plus a specified margin. We can elect to borrow at (i) the AccrualAlternative Base Rate, plus 0.9%; (ii) Adjusted Daily Simple Secured Overnight Financing Rate ("SOFR"), plus 1.9%; and (iii) Adjusted Term SOFR, plus 1.9%, as such capitalized terms are defined and calculated in the Credit Agreement. The Company may elect to convert borrowings from one type of 13.0%borrowing to another type per annum. If, at the requestterms of the Company, the Agent executes an intercreditor agreement with another senior lender under which the Agent and the Lenders subordinate their liens on the Company's and the Guarantor's collateral (an "Alternative Interest Rate Event"), the interest rate will increase to 14.5% per annum.Credit Agreement. After the occurrence and during the continuance of any event of default, the interest rate willmay increase by an additional 2.0%. The Company isWe are obligated to pay accrued interest in cash(i) with respect to amounts accruing interest based on a monthly basis at a rate of not less than 10.0% per annum or, during the continuance of an Alternate InterestAlternative Base Rate, Event, 11.5% per annum. The Company may electeach calendar quarter and on the maturity date, (ii) with respect to pay the remainingamounts accruing interest in cash, by payment-in-kind (by addition to the principal amountbased on Adjusted Daily Simple SOFR, on each one month anniversary of the Loan)borrowing and on the maturity date, and (iii) with respect to amounts accruing interest based on Adjusted Term SOFR, at the end of the period specified per the Credit Agreement and on the maturity date. Upon five, three, or by combination of cash and payment-in-kind. Upon thirty daysone days' prior written notice, the Companyas applicable, we may prepay any portion or the entire amount of the Loan.
The amount We paid and could pay costs and customary fees, including a closing fee, commitment fees and letter of $1,112,222.22 was netted from the proceeds on the Loan as a prepayment of all interest due and payable at the Accrual Rate during the period from January 25, 2017 to October 31, 2017. A separatecredit participation fee, letter executed by the Company and the Agent, dated January 25, 2017, sets forth the feesif any, payable to the Agent and Lenders, as applicable, in connection with the Loan.
The Loan under the Credit Agreement.Agreement is collateralized by substantially all of the Company's assets, including the Company's pledge of its domestic and material foreign subsidiary equity interests.
The Loan has various covenants that may, among other things, affect our ability to create, incur, assume or suffer any indebtedness, merge into or consolidate with another entity, acquire entity interests, sell or transfer certain assets, enter into certain arrangements (such as sale and leaseback and swap agreements) or restrictive agreements, pay dividends and make certain restricted payments, and amend material documents related to any subordinated indebtedness and corporate agreements. The Credit Agreement contains representations, warranties,also requires certain financial covenants terms and conditions customary for transactionsto maintain a Senior Leverage Ratio on the last day of this type. In connectionany fiscal quarter, no greater than 3 to 1. We were in compliance with the Credit Agreement, the Agent has been granted, for the benefitall covenants as of the Lenders, a security interest in and general lien upon various property of the Company and the Guarantors, subject to certain permitted liens and any intercreditor agreement. December 31, 2023.
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 or as a secured party under the UCC, in addition to all other rights and remedies available to them.Agreement.
In connection with the Credit Agreement, on January 25, 2017, the Company issued warrants (each, a "Warrant") to Agent and certain of the Lenders representing in the aggregate the right to purchase in accordance with their terms 1,135,284.333 shares of the Class A Common Stock of the Company, no par value per share, which is equivalent to approximately 2.5% of the common equity interests of the Company on a fully diluted basis. The exercise price is $1.321 per share and each Warrant expires on January 25, 2027. The issuance of the Warrants was made pursuant to the exemptions from the registration requirements of the Securities Act of 1933, as amended, provided by Section 4(a)(2) thereof. Each Warrant contains appropriate transfer restriction legends.
Effective February 23, 2017,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
We entered into a Master Purchase Agreement ("MPA") with a third-party buyer ("Buyer") for $9.1 million ("Assignment Price") relating to software licenses under a specific delivery order ("DO") with our customer resulting in proceeds from other financing obligations of $9.1 million in November 2022. Under the MPA, we sold, assigned and transferred all of our rights, title and interest in (i) the DO payments from the customer and (ii) the underlying licenses. The DO covers a base period with an option for the customer to exercise three (3) additional 12-month periods through January 2026. The DO payments assigned to the Buyer are billable to the customer at the beginning of the base period and for each option year exercised. The underlying licenses were acquired for resale, see Note 8 – Intangible Assets, net for further details. On February 9, 2023, the customer notified us that it would not exercise the first option period under the DO. The MPA provides that, if the customer terminates the DO for non-renewal and the Buyer reasonably concludes that the customer's actions constitute grounds for filing a claim with the customer's contracting officer, Buyer and Telos will cooperate in preparing such a claim, which would be filed in Telos' name. Buyer has notified Telos of its intent to pursue a claim against the customer.
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.
11. STOCKHOLDERS' EQUITY
Capital Stock
Our authorized capital stock consists of 250,000,000 shares of common stock, $0.001 par value per share, and 10,000,000 shares of preferred stock, $0.01 par value per share.
As of December 31, 2023 and 2022, there were 70,239,890 and 67,431,632 shares of common stock issued and outstanding, respectively. There were no shares of preferred stock issued and outstanding on either date.
Shares Repurchases
On May 24, 2022, the Company announced that the Board of Directors approved a new share repurchase program ("SRP") authorizing the Company to repurchase up to $50.0 million of its common stock. Pursuant to this authorization, the Company may repurchase shares of its common stock on a discretionary basis from time to time through open market purchases. The repurchase program has no expiration date and may be modified, suspended, or terminated at any time. As of December 31, 2023, there was $38.7 million of the remaining authorization for future common stock repurchases under the SRP.
| | | | | | | | | | | |
| Table 11.1: Share Repurchase Program Activity |
| For the Year Ended December 31, |
| 2023 | | 2022 |
| | | |
| (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. |
(2) Includes $0.1 million of unpaid common stock repurchased paid in fiscal year 2023. |
Accumulated Other Comprehensive Loss
| | | | | | | | | | | | | | | | | |
| Table 11.2: 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) | |
12. STOCK-BASED COMPENSATION
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. 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 stock-based compensation expense for these periods.
| | | | | | | | | | | |
| Table 12.1: Details of Stock-based Compensation Expense |
| For the Year Ended December 31, |
| 2023 | | 2022 |
| | | |
| (in thousands) |
| Cost of sales - services | $ | 900 | | | $ | 3,497 | |
| Sales and marketing | 188 | | | 4,668 | |
| Research and development | 1,989 | | | 3,806 | |
General and administrative (1) | 21,319 | | | 52,689 | |
| Total | $ | 24,396 | | | $ | 64,660 | |
(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
| | | | | | | | | | | | | | | | | | | | | | | |
| Table 12.2: Restricted Stock Unit Activity |
| Service-Based RSU | | Performance-Based RSU | | Total | | Weighted-Average Grant Date Fair Value |
| Unvested outstanding units as of December 31, 2022 | 3,570,082 | | | 336,785 | | | 3,906,867 | | | $ | 19.53 | |
| Granted | 1,888,689 | | | — | | | 1,888,689 | | | 2.17 | |
| Vested | (2,910,645) | | | — | | | (2,910,645) | | | 19.04 | |
| Forfeited | (415,513) | | | (292,985) | | | (708,498) | | | 19.11 | |
| 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 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.
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.
| | | | | | | | | | | |
| Table 12.3: Stock Options Fair Value and Weighted-Average Assumptions |
| For the Year Ended December 31, |
| 2023 | | 2022 |
| Weighted-average fair value of underlying stock options | $1.06 | | $— |
| Expected term (in years) | 5.5 - 10 | | 0 |
| Risk-free interest rate | 3.5% | | —% |
| Expected volatility | 30.7% - 35.1% | | —% |
| Expected dividend yield | —% | | —% |
| | | | | | | | | | | | | | | | | | | | | | | |
| Table 12.4: 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.
13. LEASES
We lease office space facilities and equipment under non-cancelable operating and finance leases with various expiration dates, some of which contain renewal options. The Company's lease portfolio is comprised of two major classes. The lease of the Ashburn facility is accounted for as a finance lease. The other office spaces and equipment leased are accounted for as operating leases. We have included options to extend in the operating lease ROU assets and liabilities when we are reasonably certain that we will exercise such options.
In May 2014, the Company entered into a new lease arrangement with the new landlord on the Ashburn facility, which expires on May 28, 2029. In accordance with this lease agreement, the basic rent increases by a fixed 2.5% escalation annually.
| | | | | | | | | | | |
| Table 13.1: Details of Lease Costs |
| For the Year Ended December 31, |
| 2023 | | 2022 |
| | | |
| (in thousands) |
| Operating lease cost | $ | 541 | | | $ | 550 | |
Short-term lease cost (1) | 55 | | | 49 | |
| 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.
| | | | | | | | | | | |
| Table 13.2: 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 | |
| Less: Imputed interest | (21) | | | (1,667) | |
| Total lease obligations | 220 | | | 11,248 | |
| Less: Current portion of lease obligations | (97) | | | (1,730) | |
| Long-term lease obligations | $ | 123 | | | $ | 9,518 | |
| | | | | | | | | | | |
| Table 13.3: Weighted-Average Remaining Lease Terms and Discount Rates |
| For the Year Ended December 31, |
| 2023 | | 2022 |
| 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% |
| | | | | | | | | | | |
| Table 13.4: Supplemental Cash Flow Information Related to Leases |
| For the Year Ended December 31, |
| 2023 | | 2022 |
| | | |
| (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 | |
14. 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.
15. INCOME TAXES
| | | | | | | | | | | |
| Table 15.1: Components of Provision for/(Benefit from) Income Taxes |
| For the Year Ended December 31, |
| 2023 | | 2022 |
| | | |
| (in thousands) |
| Current provision | | | |
| Federal | $ | — | | | $ | — | |
| State | (19) | | | 19 | |
| Total current | (19) | | | 19 | |
| Deferred tax expense | | | |
| Federal | 32 | | | 37 | |
| State | 23 | | | (2) | |
| Total deferred | 55 | | | 35 | |
| Provision for income taxes | $ | 36 | | | $ | 54 | |
| | | | | | | | | | | |
| Table 15.2: Reconciliation of Statutory Tax Rate to Actual Tax Rate |
| For the Year Ended December 31, |
| 2023 | | 2022 |
| Computed expected income tax provision | 21.0 | % | | 21.0 | % |
| State income taxes, net of federal income tax benefit | 3.6 | | | 3.6 | |
| Change in valuation allowance for deferred tax assets | 7.5 | | | (3.7) | |
| Cumulative deferred adjustments | — | | | (0.9) | |
| Provision to return adjustments | (0.1) | | | 0.1 | |
| Other permanent differences | (0.2) | | | (0.1) | |
| Stock-based compensation | (41.2) | | | (20.6) | |
| Section 162(m) limitation - covered employees | 9.5 | | | (2.0) | |
| Uncertain tax positions | 0.5 | | | (0.5) | |
| R&D credit | (0.7) | | | 3.0 | |
| Effective tax rate | (0.1 | %) | | (0.1 | %) |
| | | | | | | | | | | |
| Table 15.3: Components of Deferred Tax Assets and Liabilities | | | |
| As of December 31, |
| 2023 | | 2022 |
| | | |
| (in thousands) |
| Deferred tax assets: | | | |
| Accounts receivable, principally due to allowance for doubtful accounts | $ | 70 | | | $ | 33 | |
| Allowance for inventory obsolescence and amortization | 203 | | | 210 | |
| Accrued liabilities not currently deductible | 1,133 | | | 1,151 | |
| Stock-based compensation | 1,352 | | | 7,943 | |
| Accrued compensation | 2,457 | | | 915 | |
| Lease liabilities | 2,906 | | | 3,349 | |
| Goodwill | 30,947 | | | 34,009 | |
| Capitalized research and development costs | 2,992 | | | 362 | |
| Net operating loss carryforwards - federal | 8,402 | | | 6,034 | |
| Net operating loss carryforwards - state | 1,522 | | | 1,155 | |
| R&D tax credit | 3,647 | | | 3,760 | |
| Amortization and depreciation | 252 | | | — | |
| Total gross deferred tax assets | 55,883 | | | 58,921 | |
| Less valuation allowance | (54,999) | | | (57,559) | |
| Total deferred tax assets, net of valuation allowance | 884 | | | 1,362 | |
| Deferred tax liabilities: | | | |
| Right-of-use assets | (1,697) | | | (2,034) | |
| Amortization and depreciation | — | | | (86) | |
| Total deferred tax liabilities | (1,697) | | | (2,120) | |
| Net deferred tax liabilities | $ | (813) | | | $ | (758) | |
| | | | | | | | | | | |
| Table 15.4: Valuation Allowance Activity |
| For the Year Ended December 31, |
| 2023 | | 2022 |
| | | |
| (in thousands) |
| Balance at beginning of year | $ | 57,559 | | | $ | 55,588 | |
| (Reductions)/additions | (2,560) | | | 1,971 | |
| Balance at end of year | $ | 54,999 | | | $ | 57,559 | |
We establish a valuation allowance for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The realization of deferred tax assets is dependent upon the generation of future taxable income. We considered projected future taxable income, tax planning strategies, and reversal of taxable temporary differences in making this assessment. Based on available evidence, we have determined that a full valuation allowance is required as of December 31, 2023 and 2022. As a result of a full valuation allowance against our deferred tax assets and liabilities, a deferred tax liability related to indefinite-lived goodwill remains on our consolidated balance sheets on December 31, 2023 and 2022.
On December 31, 2023, for federal income tax purposes, there was approximately a $40.0 million net operating loss available to be carried forward to offset future taxable income. Approximately $10.6 million of these net operating loss carryforwards expire in 2037, the remaining will be carried forward indefinitely. As of December 31, 2023, there was approximately $4.9 million of R&D credit carryover which begins to expire in 2033. Certain tax attributes of the Company, including net operating losses and credits, would be subject to a limitation should an ownership change as defined under Section 382 of the required timingInternal Revenue Code of 1986, as amended, occur. The limitations resulting from a change in ownership could affect the Company's ability to utilize its tax attributes. A study was completed in 2020 which confirmed that no limitation applies to the Company's tax attributes as of December 31, 2020. We believe that ownership activity since December 31, 2020 would not result in limitation sufficient to result in the expiration of unused attributes.
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.
We believe that the total amounts of unrecognized tax benefits will not significantly increase or decrease within the next 12 months. The period for which tax years are open, 2013 to 2023, has not been extended beyond the applicable statute of limitations. As of December 31, 2023, the Company is not under examination by any federal tax jurisdiction, but is currently under examination by a state tax jurisdiction.
| | | | | | | | | | | |
| Table 15.5: Reconciliation of the Beginning and Ending Amounts of Unrecognized Tax Benefit |
| For the Year Ended December 31, |
| 2023 | | 2022 |
| | | |
| (in thousands) |
| Balance at beginning of year | $ | 1,357 | | | $ | 1,056 | |
| Decrease in prior year tax positions | (169) | | | (5) | |
| Increase related to current year tax positions | 131 | | | 377 | |
| Decrease related to lapse of statutes | (91) | | | (71) | |
| Balance at end of year | $ | 1,228 | | | $ | 1,357 | |
16. (LOSS)/EARNINGS PER SHARE
For the period of net loss, potentially dilutive securities are not included in the calculation of diluted net (loss)/earnings per share because to do so would be anti-dilutive.
| | | | | | | | | | | |
| Table 16.1: Potentially Dilutive Securities | | | |
| For the Year Ended December 31, |
| 2023 | | 2022 |
| | | |
| (in thousands) |
| 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 post-closingconditions which were not satisfied by the end of the reporting period.
17. RELATED PARTY TRANSACTIONS
Emmett J. Wood, the brother of our Chairman and CEO, has been an employee of ours since 1996. 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 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.
18. SEGMENT INFORMATION
•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. Revenue associated with the segment's custom solutions is recognized as work progresses or upon delivery of services and products. Fluctuation in revenue from period to period is the result of the volume of software sales, and the progress or completion of cloud and/or cybersecurity solutions during the period. The majority of the operating costs relate to labor, material, and overhead costs. Software sales have immaterial operation costs associated with them, thus yielding higher margins. Gross profit and margin are a function of operational efficiency on security solutions and changes in the volume of software sales.
•Our Secure Networks segment provides secure networking architectures and solutions to our customers through secure mobility solutions, and network management and defense services. Revenue is recognized over time as the work progresses on contracts related to managing network services and information delivery. Contract costs include labor, material, and overhead costs. Variances in costs recognized from period to period primarily reflect increases and decreases in activity levels on individual contracts.
| | | | | | | | | | | |
| Table 18.1: Results of Operations by Business Segment |
| For the Year Ended December 31, |
| 2023 | | 2022 |
| | | |
| (in thousands) |
| Revenues | | | |
| Security Solutions | $ | 77,416 | | | $ | 120,454 | |
| Secure Networks | 67,962 | | | 96,433 | |
| Total revenue | 145,378 | | | 216,887 | |
| Gross profit | | | |
| Security Solutions | 39,614 | | | 61,948 | |
| Secure Networks | 13,328 | | | 17,095 | |
| Total gross profit | 52,942 | | | 79,043 | |
| Selling, general and administrative expenses | 93,257 | | | 132,893 | |
| Operating loss | (40,315) | | | (53,850) | |
| Other income | 6,715 | | | 1,350 | |
| Interest expense | (786) | | | (874) | |
| 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. We account for inter-segment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. Interest income, interest expense, other income and expense items, and income taxes, as reported in the consolidated financial statements, are not part of the segment profitability measure and are primarily recorded at the corporate level.
Management does not utilize total assets by segment to allow for moreevaluate segment performance or allocate resources. As a result, assets are not tracked by segment, and therefore, total assets by segment are not disclosed.
19. COMMITMENT AND CONTINGENCIES
Legal Proceedings
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.
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
As a U.S. government contractor, we are subject to various audits and investigations by the U.S. government to determine whether our operations are being conducted in accordance with applicable regulatory requirements. U.S. government investigations of our operations, whether relating to government contracts or conducted for other reasons, could result in administrative, civil, or criminal liabilities, including repayments, fines or penalties being imposed upon us, suspension, proposed debarment, debarment from eligibility for future U.S. government contracting, or suspension of export privileges. Suspension or debarment could have a material adverse effect on us because of our dependence on contracts with the U.S. government. U.S. government investigations often take years to complete and many result in no adverse action against us. We also provide products and services to customers outside of the legalUnited States, which are subject to U.S. and administrative requirements around such items.foreign laws and regulations and foreign procurement policies and practices. Our compliance with local regulations or applicable U.S. government regulations also may be audited or investigated.
20. SUPPLEMENTAL CASH FLOW INFORMATION
| | | | | | | | | | | |
| Table 20.1: Details of Cash, Cash Equivalent, and Restricted Cash |
| As of December 31, |
| 2023 | | 2022 |
| | | |
| (in thousands) |
| Cash and cash equivalents | $ | 99,260 | | | $ | 119,305 | |
Restricted cash (1) | 136 | | | 133 | |
| Cash, cash equivalents, and restricted cash | $ | 99,396 | | | $ | 119,438 | |
(1)Restricted cash consists of a commercial money market account held as a deposit on the Ashburn lease and is recorded under "Other assets" on the Consolidated Balance Sheets.
| | | | | | | | | | | |
| Table 20.2: Supplemental Cash Flow Information |
| For the Year Ended December 31, |
| 2023 | | 2022 |
| | | |
| (in thousands) |
| Cash paid during the year for: | | | |
| Interest | $ | 693 | | | $ | 803 | |
| Income taxes | 147 | | | 188 | |
| Non-cash investing and financing activities: | | | |
| Operating lease ROU assets obtained in exchange for operating lease liabilities | $ | 125 | | | $ | 511 | |
| 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 | |
| Deferred financing costs in accounts payable and other accrued liabilities | — | | | 114 | |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
N/A.
Item 9A. Controls and Procedures
Inherent Limitations on the Effectiveness of Controls
Our management, including the Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are effective at the reasonable assurance level. However, management does not expect that such disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Evaluation of Disclosure Controls and Procedures
AsOur management, with the participation of December 31, 2016, an evaluation ofour principal executive officer (our Chairman and Chief Executive Officer) and principal financial officer (our Executive Vice President and Chief Financial Officer), has evaluated the effectiveness of our disclosure controls and procedures (as defined in RuleRules 13a-15(e) andor 15d-15(e) promulgated under the Securities Exchange Act), was performed under the supervision and with the participationAct of our management, including the Chief Executive Officer and Chief Financial Officer.1934) as of December 31, 2023. Based onupon that evaluation, our Chief Executive Officerprincipal executive officer and Chief Financial Officerprincipal financial officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by the Companyus in itsthe reports that it fileswe file or submitssubmit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms of the SEC. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Companyus in the reports the Company filesthat we file or submitssubmit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our Chief Executive Officerprincipal executive officer and Chief Financial Officer,our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management's Annual Report on Internal Control Overover Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, the Company's principal executive and principal financial officers and effected by the company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. InternalGAAP.
Our internal control over financial reporting includes those policies and procedures that:
(1) a.Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;our assets;
(2) b.Provide reasonable assurance that transactions are recorded as necessaryproperly to permitallow for the preparation of financial statements in accordance with U.S. generally accepted accounting principles,GAAP and that our receipts and expenditures of the company are being made only in accordance with authorizations of our management and directors of the company;directors; and
(3) c.Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'sour assets that could have a material effect on the consolidated financial statements.
Internal control over financial reporting includes the controls themselves, monitoring and internal auditing practices and actions taken to correct deficiencies as identified.
BecauseOur management, with the participation of its inherent limitations,the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our internal control over financial reporting mayas of December 31, 2023, based on the framework established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our management has assessed in its evaluation the effectiveness of our internal control over financial reporting as of December 31, 2023, and has concluded that our internal control over financial reporting was effective.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, audited our consolidated financial statements and our internal control over financial reporting, and the firm’s report on our internal control over financial reporting are included in Item 8 of this Annual Report on Form 10-K. Although our management, including the Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, because of inherent limitations, our management does not expect that our internal controls over financial reporting will prevent or detect misstatements.all errors and all fraud. Also, projections of any evaluation of effectiveness in such assessment to future periods are subject to the risk that controls may becomebe inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
OurRemediation of Previously Disclosed Material Weakness in Internal Control over Financial Reporting
As previously disclosed in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2022, management assessedidentified a material weakness as of that date. The material weakness identified as of December 31, 2022 was related to ineffective design and maintenance of controls over the effectivenessassessment of the accounting for forfeiture of non-standard equity awards. In response to the material weakness, we implemented changes to our internal control over financial reporting, aswhich consisted primarily of December 31, 2016enhancement of existing processes and controls over the accounting for the forfeiture of non-standard equity awards. We have completed documentation of these corrective actions and, based on the criteria set forth byevidence obtained in validating the Committee of Sponsoring Organizationsdesign and operating effectiveness of the Treadway Commission, known as COSO, in Internal Control — Integrated Framework (2013). Based on that assessment, the Chief Executive Officer and Chief Financial Officerimplemented control, we have concluded that our internal control over financial reporting was effectivethe previously disclosed material weakness has been remediated as of DecemberMarch 31, 2016.
2023.
Changes in Internal Control Overover Financial Reporting
There has beenwere no changechanges in our internal control over financial reporting that occurred during the quarter ended December 31, 20162023, that hashave materially affected, or isare reasonably likely to materially affect,effect, our internal control over financial reporting.
Item 9B. Other Information
(a) None.
(b) During the three months ended December 31, 2023, no director or officer of the Company adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as each term is defined in Item 408(a) of Regulation S-K.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
57
PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K since we intend to file our definitive proxy statement for our 2016 annual meeting2024 Annual Meeting of stockholders,Stockholders, or the Proxy Statement, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K,10‑K, and certain information to be included in the Proxy Statement is incorporated herein by reference.
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this item regarding executive officers, directors and nominees for directors, including information with respect to our audit committee and audit committee financial expert, and the compliance of certain reporting persons with Section 16(a) of the Securities Exchange Act of 1934, as amended, will be included under Election of Directors, Biographical Information Concerning the Company's Executive Officers, Section 16(a) Beneficial Ownership Reporting Compliance, Corporate Governance, Independence of Directors, Board of Directors Nomination Process, Role in Risk Oversight, Meetings of the Board of Directors and Committees of the Board of Directors, as well as Audit Committee, Management Development and Compensation Committee, and Nominating and Corporate Governance Committee, in the Proxy Statement and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item will be included in our Proxy Statement under Compensation of Executive Officers and Directors and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth as of December 31, 2023, information with respect to (a) number of securities to be issued upon exercise of outstanding options, warrants, and rights, (b) the weighted average exercise price of outstanding options, warrants, and rights and (c) the number of securities remaining available for future issuance under our existing equity incentive plan. All shares under our existing equity incentive plan may be issued in the form of restricted stock, performance shares, stock appreciation rights, stock units, or other stock-based awards.
| | | | | | | | | | | | | | | | | |
| (a) | | (b) | | (c) |
| Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| | | | | |
Equity compensation plans approved by security holders (1) | 2,176,413 | | | $ | 5.07 | | | 4,831,794 | |
| Equity compensation plans not approved by security holders | — | | | — | | | — | |
| Total | 2,176,413 | | | $ | 5.07 | | | 4,831,794 | |
(1) Consists of the Company's 2016 Omnibus Long-Term Incentive Plan, as amended.
All other information required by this item will be included in ouris herein incorporated by reference to the Proxy Statement under Security Ownershiprelating to the 2024 Annual Meeting of Certain Beneficial Owners and Management and is incorporated herein by reference.Stockholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be included in our Proxy Statement under Certain Relationships and Related Transactions, and Independence of Directors and is incorporated herein by reference.
Item 14. Principal
AccountantAccounting Fees and Services
The information required by this item will be included in our Proxy Statement under Independent Registered Public Accounting Firm and is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
Documents filed as part of this report are as follows:
1.Financial Statements
As listedStatements. The Company's consolidated financial statements are included in the Index toItem 8. Financial Statements and Supplementary Data on page 26.Data.
2.Financial Statement Schedules
Schedules. All schedules are omitted as the required information is not applicable or the information is presented in the consolidated financial statements or related notes.Consolidated Financial Statements.
3. Exhibits:
Exhibits. The exhibit listed in the Exhibit Number | Description
|
3.1 | Articles of Amendment and Restatement of C3, Inc. (Incorporated by reference to the Company's Registration Statement No. 2-84171 filed June 2, 1983) |
3.2 | Articles of Amendment of C3, Inc. dated August 31, 1981 (Incorporated by reference to the Company's Registration Statement No. 2-84171 filed June 2, 1983) |
3.3 | Articles supplementary of C3, Inc. dated May 31, 1984 (Incorporated by reference to the Company's Form 10-K report for the fiscal year ended March 31, 1987) |
3.4 | Articles of Amendment of C3, Inc. dated August 18, 1988 (Incorporated by reference to the Company's Form 10-K report for the fiscal year ended March 31, 1989) |
3.5 | Articles of Amendment and Restatement Supplementary to the Articles of Incorporation dated August 3, 1990. (Incorporated by reference to C3, Inc. 10-Q for the quarter ended June 30, 1990) |
3.6 | Articles of Amendment of C3, Inc. dated April 13, 1995 (Incorporated by reference to Exhibit 3.7 filed with the Company's Form 10-K report for the year ended December 31, 1995) |
3.7 | Amended and Restated Bylaws of the Company, as amended on October 3, 2007 (Incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed on October 5, 2007)
|
4.1 | Credit Agreement, dated January 25, 2017, among Telos Corporation, Xacta Corporation, ubIQuity.com, Inc., Teloworks, Inc., Enlightenment Capital Solutions Fund II, L.P., and the lenders party thereto (Incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed on January 31, 2017) |
4.2+ | First Amendment to Credit Agreement, effective as of February 23, 2017, among Telos Corporation, Xacta Corporation, ubIQuity.com, Inc., Teloworks, Inc., Enlightenment Capital Solutions Fund II, L.P., and the lenders party thereto |
10.1*
| 1996 Stock Option Plan (Incorporated by reference to Exhibit 10.74 filed with the Company's Form 10-Q report for the quarter ended March 31, 1996) |
10.2*
| Telos Corporation 2008 Omnibus Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.21 filed with the Company's Form 10-K report for the year ended December 31, 2007)
|
10.3 | Preferred Stockholders Standby Agreement between Wells Fargo Foothill, Inc. and North Atlantic Smaller Companies Investment Trust PLC, dated April 14, 2008 (Incorporated by reference to Exhibit 10.15 filed with the Company's Form 10-K report for the year ended December 31, 2008)
|
10.4 | Series A-1 and Series A-2 Redeemable Preferred Stock Extension of Redemption Date – North Atlantic Smaller Companies Investment Trust PLC, dated April 6, 2008 (Incorporated by reference to Exhibit 10.17 filed with the Company's Form 10-K report for the year ended December 31, 2008)
|
10.5 | Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, Inc. dated May 17, 2010 (Incorporated by reference to Exhibit 99.1 filed with the Company's Form 8-K report on May 21, 2010)
|
10.6 | Preferred Stockholders Standby Agreement between Wells Fargo Foothill, Inc. and Toxford Corporation, dated May 17, 2010 (Incorporated by reference to Exhibit 99.2 filed with the Company's Form 8- K report on May 21, 2010)
|
10.7 | First Amendment of Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, Inc. dated September 27, 2010 (Incorporated by reference to Exhibit 10.28 filed with the Company's Form 10-Q report for the quarter ended September 30, 2010)
|
10.8 | Second Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, Inc. dated May 11, 2012 (Incorporated by reference to Exhibit 10 filed with the Company's Form 10-Q report for the quarter ended June 30, 2012)
|
10.9*
| Second Amended Employment Agreement, dated as of November 12, 2012, between the Company and John B. Wood (Incorporated by reference to Exhibit 10.1 filed with the Company's Form 10-Q report for the quarter ended September 30, 2012)
|
10.10*
| Second Amended Employment Agreement, dated as of November 12, 2012, between the Company and Edward L. Williams (Incorporated by reference to Exhibit 10.2 filed with the Company's Form 10-Q report for the quarter ended September 30, 2012)
|
10.11*
| Second Amended Employment Agreement, dated as of November 12, 2012, between the Company and Michele Nakazawa (Incorporated by reference to Exhibit 10.3 filed with the Company's Form 10-Q report for the quarter ended September 30, 2012)
|
10.12*
| Amendment to Employment Agreement, dated as of November 12, 2012, between the Company and Brendan D. Malloy (Incorporated by reference to Exhibit 10.4 filed with the Company's Form 10-Q report for the quarter ended September 30, 2012)
|
10.13*
| Form of Employment Agreement between the Company and six of its executive officers (Incorporated by reference to Exhibit 10.5 filed with the Company's Form 10-Q report for the quarter ended September 30, 2012)
|
10.14* | Telos Corporation 2013 Omnibus Long-Term Incentive Plan (Incorporated by reference to Appendix A filed with the Company's Definitive Proxy Statement on Schedule 14A on April 16, 2013)
|
10.15* | Form Restricted Stock Agreement (Incorporated by reference to Exhibit 99.2 filed with the Company's Current Report on Form 8-K on May 15, 2013)
|
10.16 | Third Amendment to Second Amended and Restated Loan and Security Agreement and First Amendment to Amended and Restated General Continuing Guaranty between the Company and Wells Fargo Capital Finance, LLC dated June 11, 2013 (Incorporated by reference to Exhibit 10.3 filed with the Company's Form 10-Q report for the quarter ended June 30, 2013)
|
10.17 | Fourth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, LLC dated July 31, 2013 (Incorporated by reference to Exhibit 99.1 filed with the Company's Current Report on Form 8-K on August 6, 2013)
|
10.18* | Telos Corporation Senior Officer Incentive Program (Incorporated by reference to Exhibit 10.27 filed with the Company's Form 10-K report for the year ended December 31, 2013)
|
10.19 | Waiver and Fifth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, Inc. dated March 27, 2014 (Incorporated by reference to Exhibit 10.28 filed with the Company's Form 10-K report for the year ended December 31, 2013)
|
10.20* | Employment Agreement, dated as of January 4th, between the Company and Jefferson V. Wright (Incorporated by reference to Exhibit 10.29 filed with the Company's Form 10-K report for the year ended December 31, 2013)
|
10.21 | Sixth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, LLC dated May 13, 2014 (Incorporated by reference to Exhibit 10.1 filed with the Company's Form 10-Q report for the quarter ended March 31, 2014)
|
10.22 | Seventh Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, LLC dated June 26, 2014 (Incorporated by reference to Exhibit 10.1 filed with the Company's Form 10-Q report for the quarter ended June 30, 2014)
|
10.23 | Eighth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, LLC dated November 13, 2014 (Incorporated by reference to Exhibit 10.1 filed with the Company's Form 10-Q report for the quarter ended September 30, 2014)
|
10.24 | Membership Interest Purchase Agreement, dated as of December 24, 2014, by and among Telos Corporation and Hoya ID Fund A, LLC (Incorporated by reference to Exhibit 99.1 filed with the Company's Current Report on Form 8-K on December 31, 2014)
|
10.25 | Second Amended and Restated Operating Agreement of Telos Identity Management Solutions , LLC, dated December 24, 2014 (Incorporated by reference to Exhibit 99.2 filed with the Company's Current Report on Form 8-K on December 31, 2014)
|
10.26 | Consent and Ninth Amendment to Second Amended and Restated Loan and Security Agreement, by and among Telos Corporation, XACTA Corporation, UBIQUITY.COM, Inc., Teloworks, Inc. and Wells Fargo Capital Finance, LLC, dated December 24, 2014 (Incorporated by reference to Exhibit 99.3 filed with the Company's Current Report on Form 8-K on December 31, 2014)
|
10.27 | Tenth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, LLC dated February 27, 2015 (Incorporated by reference to Exhibit 10.34 filed with the Company's Form 10-K/A report for the year ended December 31, 2014)
|
10.28 | Eleventh Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, LLC dated March 19, 2015 (Incorporated by reference to Exhibit 10.35 filed with the Company's Form 10-K/A report for the year ended December 31, 2014)
|
10.29 | Waiver and Twelfth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, LLC dated March 31, 2015 (Incorporated by reference to Exhibit 10.36 filed with the Company's Form 10-K/A report for the year ended December 31, 2014)
|
10.30 | Subordinated Loan Agreement between the Company and Porter Foundation Switzerland dated March 31, 2015 (Incorporated by reference to Exhibit 10.37 filed with the Company's Form 10-K/A report for the year ended December 31, 2014)
|
10.31 | Subordinated Promissory Note between the Company and Porter Foundation Switzerland dated March 31, 2015 (Incorporated by reference to Exhibit 10.38 filed with the Company's Form 10-K/A report for the year ended December 31, 2014)
|
10.32 | Subordinated Loan Agreement between the Company and JP Charitable Foundation Switzerland dated March 31, 2015 (Incorporated by reference to Exhibit 10.39 filed with the Company's Form 10-K/A report for the year ended December 31, 2014)
|
10.33 | Subordinated Promissory Note between the Company and JP Charitable Foundation Switzerland dated March 31, 2015 (Incorporated by reference to Exhibit 10.40 filed with the Company's Form 10-K/A report for the year ended December 31, 2014)
|
10.34 | Subordination and Intercreditor Agreement by and among the Company, Porter Foundation Switzerland, and Wells Fargo Capital Finance, LLC dated March 31, 2015 (Incorporated by reference to Exhibit 10.41 filed with the Company's Form 10-K/A report for the year ended December 31, 2014)
|
10.35 | Subordination and Intercreditor Agreement by and among the Company, JP Charitable Foundation Switzerland, and Wells Fargo Capital Finance, LLC dated March 31, 2015 (Incorporated by reference to Exhibit 10.42 filed with the Company's Form 10-K/A report for the year ended December 31, 2014)
|
10.36 | Thirteenth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, LLC dated April 23, 2015 (Incorporated by reference to Exhibit 10.36 filed with the Company's Form 10-K report for the year ended December 31, 2015)
|
10.37 | Fourteenth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, LLC dated August 12, 2015 (Incorporated by reference to Exhibit 10.1 filed with the Company's Form 10-Q report for the quarter ended June 30, 2015)
|
10.38 | Fifteenth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, LLC dated November 17, 2015 (Incorporated by reference to Exhibit 10.1 filed with the Company's Form 10-Q report for the quarter ended September 30, 2015)
|
10.39 | Sixteenth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, LLC dated February 19, 2016 (Incorporated by reference to Exhibit 10.39 filed with the Company's Form 10-K report for the year ended December 31, 2015)
|
10.40 | Seventeenth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, LLC dated March 30, 2016 (Incorporated by reference to Exhibit 10.41 filed with the Company's Form 10-K report for the year ended December 31, 2015)
|
10.41 | Series A-1 and Series A-2 Redeemable Preferred Stock Extension of Redemption Date – Toxford Corporation, dated March 17, 2016 (Incorporated by reference to Exhibit 10.1 filed with the Company's Form 10-Q report for the quarter ended March 31, 2016)
|
10.42 | Eighteenth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, LLC dated May 16, 2016 (Incorporated by reference to Exhibit 10.2 filed with the Company's Form 10-Q report for the quarter ended March 31, 2016)
|
10.43 | Accounts Receivable Purchase Agreement between Telos Corporation and Republic Capital Access, LLC dated July 15, 2016 (Incorporated by reference to Exhibit 99.1 filed with the Company's Current Report on Form 8-K on July 21, 2016)
|
10.44 | Financing and Security Agreement between Telos Corporation and Action Capital Corporation, dated July 15, 2016 (Incorporated by reference to Exhibit 99.2 filed with the Company's Current Report on Form 8-K on July 21, 2016)
|
10.45* | Telos Corporation 2016 Omnibus Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.3 filed with the Company's Form 10-Q report for the quarter ended June 30, 2016)
|
10.46* | Notice of Grant of Restricted Stock (Incorporated by reference to Exhibit 10.4 filed with the Company's Form 10-Q report for the quarter ended June 30, 2016)
|
10.47 | Amendment to Financing and Security Agreement Between the Company and Action Capital Corporation dated September 6, 2016 (Incorporated by reference to Exhibit 99.1 filed with the Company's Current Report on Form 8-K on September 9, 2016)
|
10.48*+ | Telos ID Sale Bonus Plan |
21+
| List of subsidiaries of Telos Corporation |
31.1+
| Certification pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934. |
31.2+
| Certification pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934. |
32+
| Certification pursuant to 18 USC Section 1350. |
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101.CAL^ | XBRL Taxonomy Extension Calculation Linkbase |
101.DEF^ | XBRL Taxonomy Extension Definition Linkbase |
101.LAB^ | XBRL Taxonomy Extension Label Linkbase |
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* constitutes a management contract or compensatory plan or arrangement
+ immediately below are filed herewith
^ in accordance with Regulation S-T, the XBRL-related information in Exhibit 101 toas part of this Annual Report on Form 10-K, shall be deemed to be "furnished" and not "filed"
or are incorporated by reference herein.
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| | | | Incorporated by Reference Herein |
| Exhibit Number | | Description of Exhibit | | Form/ Schedule | | Date Filed | | Exhibit Number |
| | | | 8-K | | November 16, 2020 | | 3.2 |
| | | | 8-K | | November 9, 2023 | | 3.1 |
| | | | 10-K | | March 28, 2022 | | 4.13 |
| * | | | 10-Q | | May 17, 2021 | | 10.1 |
| * | | | 10-K | | April 1, 2013 | | 10.23 |
| * | | | 10-Q | | November 14, 2012 | | 10.1 |
| * | | | 10-Q | | August 16, 2021 | | 10.1 |
| * | | | 10-K | | March 16, 2023 | | 10.5 |
| * | | | 8-K | | February 28, 2022 | | 99.1 |
| * | | | 8-K | | September 20, 2023 | | 99.1 |
| * | | | 10-Q | | August 15, 2016 | | 10.3 |
| * | | | S-8 | | January 25, 2021 | | 4.4 |
| * | | | DEF 14A | | March 28, 2023 | | A |
| * | | | 10-Q | | August 15, 2016 | | 10.4 |
| * | | | 8-K | | February 3, 2021 | | 99.1 |
| * | | | 8-K | | February 3, 2021 | | 99.2 |
| * | | | 10-Q | | August 9, 2023 | | 10.1 |
| * | | | 10-Q | | August 9, 2023 | | 10.2 |
| | | | 8-K | | January 5, 2023 | | 99.1 |
| | | | 10-Q | | May 10, 2023 | | 10.1 |
| | | | | | | | |
| * | | constitutes a management contract or compensatory plan or arrangement |
| + | | filed herewith |
| ^ | | furnished herewith |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference Herein |
| Exhibit Number | | Description of Exhibit | | Form/ Schedule | | Date Filed | | Exhibit Number |
| + | | | | | | | |
| + | | | | | | | |
| + | | | | | | | |
| + | | | | | | | |
| ^ | | | | | | | |
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| 101.INS | + | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | | | | | |
| 101.SCH | + | XBRL Taxonomy Extension Schema | | | | | | |
| 101.CAL | + | XBRL Taxonomy Extension Calculation Linkbase | | | | | | |
| 101.DEF | + | XBRL Taxonomy Extension Definition Linkbase | | | | | | |
| 101.LAB | + | XBRL Taxonomy Extension Label Linkbase | | | | | | |
| 101.PRE | + | XBRL Taxonomy Extension Presentation Linkbase | | | | | | |
| 104 | | Cover Page Interactive Data File - the cover page iXBRL tags are embedded within the Inline XBRL document contained in Exhibit 101 | | | | | | |
| | | | | | | | |
| * | | constitutes a management contract or compensatory plan or arrangement |
| + | | filed herewith |
| ^ | | furnished herewith |
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Telos Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
| TELOS CORPORATION |
| | By:
| |
| /s/ John B. Wood | | March 15, 2024 |
| By: | | John B. Wood | | |
| Chief Executive Officer and Chairman of the Board (Principal | | |
| (Principal Executive Officer) | | |
