•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 ~~complement~~be a force multiplier for our ~~significant~~ 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.

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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 State, the FBI, and 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 also make corporate investments in functional areas such as contracts, solution architects, lead generation tools, and operations to ensure our back-office systems and processes scale for business growth.

Sales

We ~~typically focus~~expanded 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 market segments focused on ~~large~~the U.S. federal government, the IC and ~~commercial organizations that have demanding security requirements and/or complex cyber security risk and compliance management objectives.~~

the DoD market areas.

Customer acquisition often involves extensive interaction at all levels of ~~the organizations~~an organization, from ~~users~~executives, to ~~executives and~~ decision ~~makers.~~makers, to end users. We seek to forge relationships throughout an organization in an effort to obtain broad consensus as part of the sales process. ~~Currently,~~We leverage the ~~customer acquisition process is largely driven by direct sales activity.~~

~~As a result~~full power of ~~the long tenure of many of our employees, many of our~~Telos (executives, sales and business development executives have trusted relationships that have developed over many years. We augment these trusted relationships with senior leaders who have retired from the military, civil service,industry partners) to gain access and ~~various related industries. Many of these individuals are~~build our ~~employees. These leaders provide our sales team with access to high level contacts that would be difficult to achieve otherwise.~~

Our sales executives are supported by an inside sales team that works with the Telos marketing team on various awareness campaigns where sales leads are obtained, vetted, and pursued via proactive outreach (calls, email, etc.).

Metrics are tracked using a formal CRM process and used to equip the sales executives with useful sales data. Our sales team works hand in hand with our marketing team and various subject matter experts to develop target awareness campaigns for our various solutions that generate valuable leads and contacts.

brand awareness.

Our sales strategy is to establish a customer foothold with one of our solutions and work to achieve rapid success. We then leverage this customer relationship to ~~expand usage of~~generate interest in other solutions from the Telos ~~solutions.~~portfolio. We have a variety of upsell opportunities that allow us to expand our presence within a customer account. For example, ~~there are~~ various complementary Xacta features ~~that~~ build on each other and are sold separately. ~~Additionally,~~

Much of our ~~sales team~~business is ~~responsible for selling all Telos solutions. This allows~~awarded through the submission of formal competitive bids; however, a ~~sales executive to quickly identify demand for other Telos solutions in existing accounts.~~portion of our revenue is awarded through limited competition or sole-source contracts.

Partner Organizations

Our sales team ~~also~~ works with partner organizations like AWS, Microsoft Azure, and ~~Rackspace Technology, Inc.~~Oracle to pursue mutual ~~customers. These relationships represent our current channel sales strategy that we are~~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 operationalize and automate 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 ~~process~~time-consuming aspects of ~~expanding. We are also actively working with Singapore Technologies Engineering, Limited, which is helping us gain access to the Asian market for cyber security solutions.~~

~~We plan to expand our direct sales capability for markets in which we are well-known,~~compliance and audit activities such as ~~the U.S. government, certain critical infrastructure sectors,~~control selection, validation, reporting, and ~~certain commercial verticals like healthcare and financial services. We also plan to expand our channel sales capability to gain rapid access to other commercial verticals and international markets.~~monitoring.

We will be increasing our investment in sales and marketing with the goal of increasing sales of our security solutions and acquiring customers in a variety of verticals. In 2021, we are planning on implementing an approximate 300% increase from our 2020 sales and marketing investment. We currently have less than 10 salespeople at Telos who carry quotas that they are expected to meet. We plan on adding direct, quota-driven, in-house sales assets to focus on commercial accounts. We will focus Xacta and Telos Ghost sales efforts in the banking/financial services and insurance sector, healthcare, energy, and other critical infrastructure protection markets. We will also be investing in additional lead generation tools, financial incentives and marketing programs.

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Our partner program will include a variety of channels, including resellers, technical/integrators, and consulting partners to help us accelerate access and implementations in new markets, particularly commercial and international. Currently, we participate in Microsoft and AWS partner programs, which incentivize their respective sellers to promote Telos security solutions (e.g., Xacta and Telos Ghost).

~~As part of the sales and channel program investment, we are also making corporate investments in functional areas such as contracts, solution architects and operations.~~

~~Much of our business is awarded through submission of formal competitive bids, though about 50% is awarded through limited competition or sole source contracts.~~

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 site~~digital marketing. We will ~~be making additional investments~~continue investing in these ~~types of~~ activities and targeting additional ~~vertical specific~~vertical-specific content creation, targeted advertising and brand awareness campaigns, social media campaigns, and search engine marketing. ~~When appropriate, we will engage~~

Our sales team works hand in ~~joint marketing activities~~hand with our ~~channel, technology~~marketing team and ~~consulting partners.~~various subject matter experts to develop targeted awareness campaigns for our various solutions that generate valuable leads and contacts.

~~Competition~~

Research and Development

We operate in a highly competitive marketplace. There are other companies that provide solutions similar to ours. Although these companies provide offerings that overlap with some of our solutions, we are not aware of any single company that provides competitivedeveloped proprietary software-based solutions in ~~all~~various platforms related to security and cyber 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 ~~the areas where we compete. The primary companies with which~~government networks and clouds. We are committed to and view our ~~solutions compete range from security solutions~~continued investment in research and ~~software organizations such~~development as ~~CLEAR (operated by Alclear, LLC), Cutting Edge, IDEMIA, MetricStream Inc., Palantir Technologies Inc., RSA Archer, ServiceNow, Inc., and Unisys Corporation,~~a key factor to more traditional government services integrators that provide products and services such as Booz Allen Hamilton Inc., General Dynamics Corporation, Lockheed Martin Corporation, Northrop Grumman Corporation, and Science Applications International Corporation.our long-term business success.

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The majority of our business is in response to competitive requests from potential and current customers. 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.

~~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.~~

~~Our People and Culture~~

Human Capital Resources

As of December 31, ~~2020,~~2023, we had ~~785~~619 employees, of ~~which~~whom approximately ~~60%~~88.7% are located in the United States. Approximately 377 of our U.S.-based employees held U.S. security ~~clearances.~~clearances, and 26% 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 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 value~~strong 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 ~~everyday~~all activities.

Our employees ~~also~~ are given avenues of communication and interaction should they observe activities ~~that are~~ inconsistent with our core values. ~~Encouraged~~While 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 ~~aggressive~~necessary 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.

Talent Acquisition and Retention

We operate in a very competitive environment 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 committed 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 diverse teams maximize their potential and bring with them varied views, experiences, and perspectives. While we believe that our employee population is gender and ethnically diverse for our industry and operating markets, with approximately 25% of our global 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 diverse talent and to foster an inclusive environment at Telos.

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Seasonality

We generally experience seasonality due to our key customers' fiscal year ends and procurement cycles. We derive a substantial portion of our revenue 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 a given quarter. See "Risk Factors — We are subject to the seasonality of U.S. government spending."

Government Contracts and Regulation

Our business is heavily ~~regulated. We~~regulated and we must comply with and are affected by laws and regulations relating to the formation, administration and performance of U.S. ~~Government~~government 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~~•Impose specific and unique cost accounting practices that may differ from Generally Accepted Accounting Principles ~~(“GAAP”)~~ in the United States of America ("U.S. GAAP" or "GAAP") and therefore require reconciliation;

•Define allowable and unallowable costs and otherwise govern our right to reimbursement under various cost-type U.S. government contracts;

~~impose acquisition regulations that define reimbursable~~•Require compliance with U.S. government Cost Accounting Standards;

•Require reviews by the Defense Contract Audit Agency, Defense Contract Management Agency and ~~non-reimbursable costs;~~other U.S. government agencies for compliance with government requirements for a contractor's business system; and

~~restrict~~•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.

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. ~~Government~~government 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.

~~Backlog~~

Environmental, Social, and Governance Matters

We ~~develop~~strive to operate our ~~annual budgeted revenue by estimating~~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.

See Item 1A, "Risk Factors," for ~~the upcoming year our continuing business from existing customers~~discussion of risks related to global climate and active contracts. We consider backlog, both funded and unfunded (as explained below), other expected annual renewals, and expansion planned by our current customers. In the context of our current customer portfolio, we view “recurring revenue” as revenue that occurs often and repeatedly. In each of the last three years, recurring revenue has exceeded 85% of our annual revenue. Our total budgeted revenue is the combination of recurring revenue and a forecast of new business.

Total backlog, a component of recurring revenue, 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. government contracts, means that they have been funded by the procuring agency. Unfunded backlog is the difference between total backlog and funded backlog and includes 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 on a basis of one year or less and, as a result, funded backlog is generally expected to be earned within one year from any point in time, whereas unfunded backlog is expected to be earned over a longer period.

ESG matters.

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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 website, copies of each of our filings with the U.S. Securities and Exchange Commission ("SEC") can be viewed and downloaded free of charge as soon as reasonably practicable after the reports and amendments are electronically filed with or furnished to the SEC. The information on our website is not incorporated by reference into and is not part of this Annual Report on Form 10-K.

The SEC also maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including Telos.

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Item 1A. Risk Factors

In ~~addition to other information in this Form 10-K, the following risk factors should be carefully considered in evaluating~~your evaluation of the Company and ~~its businesses because these~~business, 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 business could be negatively affected by cyber or other information security breaches, threats or other disruptions.

We routinely experience cybersecurity threats, threats 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. 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 data 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 fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information to gain access to our customers' 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 internally built infrastructure;

•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 which are not under our control or the control of our vendors, partners, or customers; and

•Employee or contractor errors or intentional acts that compromise our security systems.

To the extent possible, these risks are mitigated by our ability to maintain 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 financial burdens due to additional direct and indirect costs, such as additional infrastructure capacity spending to mitigate any system degradation.

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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~~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 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 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 ~~sales~~future revenue, and a significant ~~decline~~reduction in ~~U.S. Government defense~~goods and ~~intelligence community spending,~~services or delay in implementation to one or more of these contracts would reduce or delay our future revenue and could materially affect our anticipated operating results.

A small number of our large customer contracts are expected to comprise a ~~reallocation of spending to other priorities, could have an adverse impact on our financial condition and results of operations~~.

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, a substantialsignificant portion of our ~~net sales were~~future revenue. Our business will likely be harmed if any of our key customer contracts generate less revenue than we forecast, and the termination or delay of a large contract or multiple contracts could have a material adverse effect on our revenue and profitability. Adverse events affecting the programs subject to ~~the U.S. Government, particularly the DoD. U.S. defense spending has historically been cyclical. Defense budgets have received their strongest support when perceived threats~~these contracts could also negatively affect our ability 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, increasing costs for entitlement programs, and potentially the large costs of combating the Coronavirus pandemic and addressing the health concerns and economic dislocation caused by COVID-19, continue to put pressure on all areas of discretionary spending,process transactions under those contracts, which could ~~ultimately impact~~adversely affect our revenue and the ~~defense budget~~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 ~~aspects~~key members of ~~federal discretionary spending.~~

~~U.S. Government appropriations have been and continue~~management. From time to time, there may be ~~affected by larger U.S. Government budgetary issues and related legislation. In 2011, Congress enacted~~changes in our executive management team resulting from the ~~Budget Control Act~~hiring or departure of 2011 (the “BCA”), which established specific limits on annual appropriations for fiscal years 2012-2021. These limits were subsequently amended several times. With the expiration of the BCA at the end of FY 2021, there are no statutory limitsexecutives. Such changes in ~~place for FY 2022.~~

~~According~~our executive management team may be disruptive to the non-partisan Congressional Budget Office (CBO), since enactment of the BCA, federal outlays devoted to defense programs fell from 4.5 percent as a share of Gross Domestic Product (GDP) to as low as 3.1 percent of GDP in each of fiscal years 2016-18, before rising slightly the past two years to a level of 3.4 percent in FY 2020. Moreover, CBO reports that, as a result of the spending caps imposed by the BCA, non-adjusted defense outlays subsequently shrank from $699.4 billion in FY 2011 to as low as $583.4 billion in FY 2016, and did not again exceed their FY 2011 level until FY 2020, when outlays were $713.8 billion, two percent above the FY 2011 level.

In FYs 2020 and 2021, the COVID-19 pandemic and associated economic dislocation in the United States has resulted in an overwhelming federal response, including enactment of several massive and comprehensive emergency appropriations and economic stimulus measures. These were in addition to annual appropriations legislation for FY 2021, which was not enacted into law until late December 2020, nearly three months after the beginning of the fiscal year, during which time the government once again operated under a series of Continuing Resolutions which strictly limited new spending initiatives. These enormous emergency spending packages and their resulting increases in the budget deficit will necessarily factor into future spending decisions to an unknown degree. Further, as the outgoing Trump Administration did not complete its work on a proposed FY 2022 budget prior to leaving office on January 20, 2021, and the incoming Biden Administration has been delayed in submitting a proposed budget to Congress, the proposed spending levels for FY 2022 cannot be predicted. Finally, the near- and long-term impacts of the COVID-19 health and associated economic crisis on federal budget planning and the government contracts that we hold, and on the federal procurements that we would otherwise compete for, cannot be known.

Should Congress and the White House be unable to make sufficient progress on the FY 2022 budget and enact appropriations legislation prior to the beginning of the new fiscal year on October 1, 2021, the Department of Defense and other federal departments and agencies will likely again be funded for an unknown period of time under a Continuing Resolution, which would restrict new spending initiatives.

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 group, because of the complexity of our services and technologies. The technology industry is subject to ~~the seasonality~~substantial and continuous competition for engineers and other subject matter experts with high levels of ~~the~~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 ~~spending.~~

~~We derive a substantial portion~~programs also require contractors to have security clearances, certain of ~~our revenues from U.S. government contracting,~~which can be difficult and ~~as a result, we are subject~~time-consuming to the annual seasonality of the U.S. government purchasing. Because 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 seasonality, 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 typically substantially reduced during the first and second fiscal quarters ending March 31 and June 30, respectively.

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~~Our pricing structures for our solutions and services may change from time to time.~~

We ~~expect that we~~ may ~~change our pricing model from~~not be successful in attracting and retaining qualified personnel. From time to time, ~~including as a result~~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 ~~competition, global economic conditions,~~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 ~~general reductions in~~motivate our ~~customers’ spending levels, pricing studies,~~current key employees or ~~changes in how~~group, our ~~solutions are broadly consumed. Similarly, as we introduce new products~~business and ~~services, or as a result~~future growth prospects could be severely harmed.

Due to the competitive bidding process to obtain U.S. government contracts, both upon initial issuance and re-competition, and the likelihood of the evolution of our existing solutions and services, we may have difficulty determining the appropriate price structure for our products and services. In addition, as new and existing competitors introduce new products or services that compete with ours, or revise their pricing structures,bid protest, we may be unable to achieve or sustain revenue growth and profitability.

Many of our U.S. government contracts are awarded through a competitive bidding process upon initial award and renewal, and we expect this will 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 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 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;

•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 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.

Our competitive position and future profitability depend, in part, on our ability to develop new technologies.

Our ability to increase revenue from existing customers and attract new customers will depend, in part, on our ability to anticipate and respond effectively to rapid technological changes and market developments. Virtually all of the products we produce 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 or program needs of our government and commercial customers change and evolve regularly. Accordingly, our future performance in part 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 could be negatively impacted. Likewise, if we are unable to develop 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 ~~same price or based on~~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 ~~same pricing model as we have used historically. Moreover, as we continue~~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 ~~target selling~~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.

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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 ~~larger organizations, these larger organizations~~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 ~~demand substantial price concessions. In addition, we may need to change pricing policies to accommodate government pricing guidelines for~~not achieve anticipated revenue growth from our ~~contracts with federal, state, local, and foreign governments and government agencies. If~~growth team if we are unable to ~~modify or~~hire and develop ~~pricing models~~talented business development and ~~strategies that~~sales personnel, if our new business development and sales personnel are ~~attractive~~unable to ~~existing and prospective customers, while enabling us to significantly grow our sales and revenue relative to our associated costs and expenses~~achieve desired productivity levels in a reasonable period of time, or if we are unable to retain our ~~business, financial condition, and results of operations may be adversely impacted.~~

existing sales force.

We depend on computing infrastructure operated by ~~Amazon Web Services (“AWS”), Microsoft, and other~~ third parties to support some of our solutions and customers, and ~~any~~to help 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 results of operations.

We rely on the technology, infrastructure, and software applications of certain third parties ~~such as AWS and Microsoft Azure,~~ 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 ~~purchased~~ in order to deliver our solutions and services. WeOur business is dependent on the integrity, security and efficient operation of this technology and infrastructure, and we do not ~~have~~necessarily control ~~over~~ the ~~operations~~operation or data security of the ~~facilities of the third parties that~~third-parties we ~~use.~~ utilize.

If any of these third-party services experience errors, disruptions, security issues, or other performance ~~deficiencies,~~deficiencies; if they are updated such that our solutions become ~~incompatible,~~incompatible; if these services, software, or hardware ~~fail~~fails or ~~become~~becomes unavailable due to extended outages, interruptions, defects, or ~~otherwise,~~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, ~~cause~~failure of our solutions to ~~fail,~~perform, decline in our revenue and margins, ~~could decline, or~~damage to our reputation and brand, ~~to be damaged, we could be exposed~~exposure to legal or contractual liability, increase in our expenses, ~~could increase,~~and interruption in our ability to manage our ~~operations could be interrupted, and~~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.

~~We have experienced, and may in~~Moreover, to the future experience, disruptions, failures, data loss, outages, and other performance problems with our infrastructure and cloud-based offerings due to a variety of factors, including infrastructure changes, introductions of new functionality, human or software errors, employee misconduct,extent that we do not effectively address capacity constraints, ~~denial of service attacks, phishing attacks, computer viruses, malicious or destructive code, or other security-related incidents,~~upgrade our systems as needed, and continually develop our ~~disaster recovery planning may not be sufficient for all situations. If we experience disruptions, failures, data loss, outages, or other performance problems,~~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.

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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 business.

We rely on subcontractors and other suppliers to provide 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 suppliers to fulfill their contractual obligations in a timely and satisfactory manner in full compliance with customer requirements. If one or more of our suppliers or subcontractors 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, 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 ~~such as earthquakes, floods, fires, power loss,~~or events outside of our control.

Our 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, ~~terrorist attacks, natural disasters, public health crises such as the COVID-19 pandemic,~~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’~~vendors' hosting facilities, or within our systems or the systems of third parties upon which we rely, could result in interruptions, performance problems, or failure of our infrastructure, technology, or solutions, which may adversely impact our business. In addition, our ability to conduct normal business operations could be severely affected. In the event of significant physical damage to one of these facilities, it may take a significant period of time to achieve full resumption of our 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.

~~Furthermore,~~We 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 ~~solutions are in many cases important~~control. If major disasters such as earthquakes, floods, hurricanes, tornadoes, fires, or ~~essential~~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 ~~our customers’ operations, including in some cases, their cybersecurity~~stop or ~~oversight~~delay production and compliance programs, and subject to service level agreements (“SLAs”). 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 usedelivery of our solutions and ~~services, require~~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 virus and the disruption on our operations, may negatively impact both our ability to meet customer demand and our revenue and profit margins. Our employees, in some cases, are working remotely due either to safety concerns or to customer-imposed limitations and 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 ~~indemnify~~deliver our solutions and services to our customers, ~~against certain losses, result~~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, operating results and financial condition. Moreover, any significant natural disaster, pandemic, other catastrophic or force majeure events could affect our personnel, supply chain, or service providers' ability to provide materials and perform services on a timely basis. Act of terrorism and other geopolitical unrest could also potentially cause disruptions in our ~~issuing credit~~business or ~~paying penalties~~the business of our supply chain, services providers, or ~~fines, subject us~~the economy as a whole. Because we do not carry insurance for all of these possible losses, and significant recovery time could be required to ~~other losses or liabilities, cause~~resume operations, our ~~solutions~~financial condition and operating results could be materially adversely affected by such an event outside of our control.

Failure to ~~be perceived as unreliable or unsecure,~~adequately protect our intellectual property, technologies and ~~prevent us from gaining new or additional business from current or future customers, any of which~~proprietary rights could harm our business, competitive position, financial condition, and results of operations.

~~Moreover,~~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 ~~address capacity constraints, upgrade~~protect our ~~systems as needed, and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology,~~intellectual property, our business ~~financial condition, and results~~could suffer.

Table of operations could be adversely affected. The provisioning of additional cloud hosting capacity requires lead time. AWS, Microsoft Azure, and other third parties have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If AWS, Microsoft Azure, or other third parties increase pricing terms, terminate or seek to terminateContents

To protect 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,~~intellectual property rights, we may be required to ~~transfer~~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, protect our trade secrets, or determine the validity and scope of the proprietary rights of others. Regardless of outcome, this type of litigation could result in substantial costs and diversion of management and technical resources. The inability to adequately protect and enforce our intellectual property and other ~~cloud providers~~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 ~~invest~~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 ~~a private cloud. If~~certain cases, we are ~~required to transfer to other cloud providers or invest in a private cloud, we could incur significant~~reimbursed for allowable costs and ~~experience possible service interruption in connection with doing so,~~paid a fee, which may be fixed or ~~risk loss of~~performance-based. If our costs exceed the contract ceiling and are not authorized by the customer ~~contracts if they~~or are ~~unwilling~~not allowable under the contract or applicable regulations, we may not be able to ~~accept~~obtain reimbursement for all such ~~a change.~~

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~~A failure to maintain~~costs and 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~~fees may be reduced 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 are dependent on a few key customer contracts for a significant portion~~eliminated. Because many of our ~~future revenue,~~contracts involve advanced designs and ~~a significant reduction in services to one or more of these contracts would reduce our future revenue and harm our anticipated operating results.~~

A small number of our large customer contracts, including the TSA PreCheck™ enrollment program and our program with CMS, are expected to comprise a significant portion of our future revenue. Our business will likely be harmed if any of our key customer contracts do not generate as much revenue as we forecast, and the termination or delay of a large contract or of multiple 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 results of operations. For example, the COVID-19 pandemic may adversely affect or disrupt the TSA PreCheck™ enrollment program, which could lead to delays in the implementation of that program and changes in demand for that program. In addition, if the COVID-19 pandemic and associated protective or preventative measures expand,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 ~~material adverse effect~~net loss on a contract, and cause a negative impact on our ~~business operations, revenues, financial condition, and ability to execute on business or contract opportunities; however, the ultimate impact is highly uncertain and subject to change.~~

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 ~~neither~~not be able to continue our organic growth nor have the necessary resources to dedicate to the overall growth of our business.

WeTo 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 ~~recent periods, we have increased our focus on commercial customers. In~~ the future, we may increasingly focus on ~~such~~commercial customers, including in the banking, financial services, healthcare, ~~pharmaceutical,~~ 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. ~~Historically,~~

Although sales to a new customer have often led to additional sales to the same customer or similarly situated ~~customers.~~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. ~~While this approach~~

Failure to ~~expansion within new commercial markets~~deliver high-quality technical support services may adversely affect our relationships with our customers and ~~verticals has proven successful~~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 ~~past, it~~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 ~~uncertain~~used in our products and services to perform key functions, the loss could have an adverse effect on our revenues.

We currently incorporate technology that we ~~will achieve~~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 right 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 a third party and us 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.

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 ~~penetration~~price or based on the same pricing model as we have used historically. Moreover, as we continue to target selling our solutions and ~~organic growth~~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 ~~the future and~~a reasonable period of time, our ~~reputation,~~ business, financial condition, and results of operations ~~could~~may be ~~negatively~~adversely impacted.

InSales to customers outside the ~~future, we may seek to enter into other credit facilities to help fund our working capital needs. These credit facilities may~~United States expose us to ~~additional~~ risks inherent in international operations.

We sell our services outside the United States and are subject to unique risks and challenges associated with ~~leverage~~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 ~~inhibit~~also negatively impact our ability to successfully expand into emerging market countries, where we have little or no operating ~~flexibility.~~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, operating results, and financial condition.

From time to time, in the ordinary course of business, we have been involved in legal proceedings and in the future may be subject to lawsuits, claims, government investigations and other 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. Those contingencies include, but are not limited to, the cost of litigation and unpredictable court decisions. Adverse outcomes with respect to litigation, or a government inquiry, or any of these legal proceedings may result in significant settlement costs or judgments, penalties and fines, or harm our reputation, all of which could negatively affect our business, results of operations and financial conditions.

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Potential 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 ~~enter into other credit facilities~~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, ~~third-party lenders to help fund our business. Such credit facilities will likely require us to pay a commitment fee~~investing in or merging with suitable candidates on ~~the undrawn amount~~acceptable terms, or divesting of certain business lines or activities. Partnerships, mergers, joint ventures, acquisitions, and ~~will likely contain~~divestitures include a number of ~~affirmative~~risks and ~~restrictive covenants.~~present financial, managerial and operational challenges, including but not limited to:

•Diversion of management attention from running our existing business;

•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 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 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.

Any acquired business, technology, service or product could significantly underperform 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 ~~violate any such covenants,~~are taking to restructure our ~~lenders could accelerate~~business to improve profitability may not be as effective as anticipated.

During the ~~maturity~~fourth quarter of ~~any debt outstanding~~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.

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Industry, Legal and Regulatory Risks

The business environment in which we operate is highly competitive, and we may not be ~~prohibited from making any distributions~~able to ~~our stockholders. Such debt may be secured by our assets, including the stock~~compete successfully against existing or future competitors.

We operate in an intensely competitive market and diverse industry segment, and we ~~may own in subsidiaries and the rights we have under intercompany loan agreements that we may enter into~~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 ~~businesses.~~ 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 ~~ability~~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 ~~meet~~ our ~~debt service obligations~~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 ~~events~~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 ~~our control~~the near term due to numerous factors, including the external threat environment, future government priorities and ~~will depend primarily upon cash produced by our business. Any failure to comply with~~ the ~~terms~~state of ~~our indebtedness may~~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.~~condition or liquidity.

We are subject to the seasonality of U.S. government spending.

~~In addition, we expect that such credit facilities will bear interest at floating rates which will generally change~~We derive a substantial portion of our revenues from U.S. government contracting, and as ~~interest rates change. We will bear the risk that the rates that~~a result, we are ~~charged by our lenders will increase faster than~~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 ~~can grow the cash flow from our businesses, which could reduce profitability, materially adversely affect our ability to service our debt and cause us to breach covenants contained~~have historically experienced higher revenues in our ~~third-party credit facilities.~~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.

~~Our business is subject~~We are required to comply with stringent, complex and evolving ~~U.S.~~laws, rules, regulations and ~~non-U.S. laws and regulations regarding~~standards, as well as contractual obligations relating to privacy, data protection and security, technology protection, and other matters. ~~Many of~~Any actual or perceived failure to comply with these ~~laws and regulations are subject to change and uncertain interpretation, and~~requirements could ~~result in claims, changes to our business practices, monetary penalties, increased cost of operations, or otherwise harm~~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.

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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.

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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’~~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’~~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~~ 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.

~~Changes in accounting principles or their application~~As a U.S. government contractor, we are subject to usoversight 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 ~~unfavorable accounting charges~~ that contractor being fined and/or ~~effects, which~~suspended for a period of time from eligibility for bidding on, or for the award of, new U.S. government contracts. A conviction could ~~adversely affect our results~~result in debarment for a specified period 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~~time. To the best of management's knowledge, there are no pending government investigations, inquiries, claims or audits against the Company likely 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 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.

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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. ~~A change in~~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 ~~these principles~~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 ~~their interpretations~~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 ~~application~~for any year. If we fail to ~~us,~~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 ~~have~~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.

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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 ~~effect~~strain on our ~~reported results, as well as our processes~~personnel, systems and ~~related~~resources. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and ~~may retroactively affect previously reported results~~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 ~~forecasts, which may negatively impact our~~disclosure controls, internal control over financial ~~statements. For example, recent new standards issued~~reporting and other procedures that are designed to ensure information required to be disclosed by ~~the Financial Accounting Standards Board could materially impact~~us in our consolidated financial statements. ~~The adoption~~ 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 ~~these new standards may potentially require enhancements or~~ changes in conditions in our ~~processes~~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 ~~systems and may require significant time and cost on behalf of our financial management. This may~~maintain effective controls, or any difficulties encountered in ~~turn adversely affect~~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 ~~growth prospects.~~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 ~~fall below expectations of securities analysts and investors, resulting in a decline in our stock price.~~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, ~~stock-based compensation, common stock valuations,~~goodwill and other long-lived assets, and income taxes.

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A novel strain of coronavirus, COVID-19, as well as variants of this strain, may adversely affect our future business operations, financial condition and our ability to execute on business or contract opportunities.

In December 2019, an outbreak of COVID-19 was reported in Wuhan, China. On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and on March 13, 2020, President Donald J. Trump declared the virus a national emergency. This highly contagious disease has spread to most of the countries in the world and throughout the United States, creating a serious impact on customers, workforces, and suppliers, disrupting economies and financial markets, and potentially leading to a world-wide economic downturn. COVID-19, as well as subsequently reported variants of this strain, have caused a disruption of the normal operations of many businesses, including the temporary closure or scale-back of business operations and/or the imposition of either quarantine or remote work or meeting requirements for employees, either by government order or on a voluntary basis. The pandemic may adversely affect our customers’ ability to perform their missions and is in many cases disrupting their operations. It may also impact the ability of our subcontractors, partners, and suppliers to operate and fulfill their contractual obligations, and result in an increase in their costs and cause delays in performance. These supply chain effects, and the direct effect of the virus and the disruption on our operations, may negatively impact both our ability to meet customer demand and our revenue and profit margins. Our employees, in some cases, are working remotely due either to safety concerns or to customer imposed limitations and using various technologies to perform their functions. We could see delays or changes in customer demand, particularly if government funding priorities change. Additionally, the disruption and volatility in the global and domestic capital markets may increase the cost of capital and limit our ability to access capital. Both the health and economic aspects of COVID-19 are highly fluid and the future course of each is uncertain. For these reasons and other reasons that may come to light if the coronavirus pandemic and associated protective or preventative measures expand, we may experience a material adverse effect on our business operations, revenues and financial condition, and our ability to execute on business or contract opportunities, including the TSA PreCheck^TM ~~enrollment program; however, its ultimate impact is highly uncertain and subject to change.~~

~~Our facilities or operations could be adversely affected by events outside of our control, such as natural disasters, wars or health epidemics.~~

We may be impacted by natural disasters, wars, power outages, health 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. 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, operating results and financial condition. Because we do not carry insurance for all of these possible losses, and significant recovery time could be required to resume operations, our financial condition and operating results could be materially adversely affected by such an event outside of our control.

Our U.S. Government contracts are subject to competitive bidding, both upon initial issuance and re-competition. If we are unable to successfully compete in the bidding process or if we fail to win re-competitions, it could adversely affect our operating performance and lead to an unexpected loss of revenue.

Substantially all 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. 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 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. 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

•	~~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.~~

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.

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U.S. Government contracts generally are not fully funded at inception 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 operate 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 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 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. The loss of anticipated funding or the termination of multiple or large programs could have an adverse effect on our future sales and earnings. The health and economic crisis created by the Coronavirus pandemic, and the substantial increase in federal spending devoted to addressing multiple aspects of the crisis, might cause changes in federal or agency spending priorities that might impact our customer’s willingness or ability to continue or extend our contracts or procure contracts which we otherwise, in the absence of the crisis, might have secured.

~~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 of 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 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 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 84.3% of our 2020 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, if we are unable to control costs or if our initial cost estimates are incorrect, we can lose money 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. Lower earnings caused by cost overruns and cost controls would have a negative impact on our results of operations.

~~We depend on third parties in order to fully perform under our contracts and the failure of a third party to perform could have an adverse impact on our earnings.~~

We rely on subcontractors and other companies 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 vendors to fulfill their contractual obligations in a timely and satisfactory manner in full compliance with customer requirements. If one or more of our subcontractors or suppliers is unable to satisfactorily provide on a timely basis the agreed-upon supplies or perform the agreed-upon services, our ability to perform our obligations as a prime contractor may be adversely affected.

~~Our future profitability depends, in part, on our ability to develop new technologies and maintain a qualified workforce to meet the needs of our customers~~.

Virtually all of the products that we produce 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 of our government and commercial customers change and evolve regularly. Accordingly, our future performance in part 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. In addition, because of the highly specialized nature of our business, we must be able to hire and retain the skilled and appropriately qualified personnel necessary to perform the services required by our customers. If we are unable to develop new products that meet customers’ changing needs or successfully attract and retain qualified personnel, future sales and earnings may be adversely affected.

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~~The business environment in which we operate is highly competitive and may impair our ability to achieve revenue growth.~~

We operate in industry segments that are diverse. Based upon 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: 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. If we do not compete effectively, we may suffer price reductions, reduced gross margins, and loss of market share.

~~Some of our security solutions have lengthy sales and implementation cycles, which could significantly impact 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 negatively affected by cyber or other security threats or other disruptions.~~

As a cybersecurity company and a U.S. defense contractor, we face cyber threats, threats to the physical security of our facilities and employees, and terrorist acts. We also are exposed to the potential for business disruptions associated with information technology failures, natural disasters, or public health or economic crises, such as that created by the Coronavirus pandemic. We routinely experience cyber security threats, threats 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 to protect our intellectual property, our revenues may be impacted adversely by the unauthorized use of our products and services.~~

Our success depends 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. 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. This type of litigation, regardless of its outcome, could result in substantial costs and diversion of management and technical resources.

~~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 effect on our revenues.~~

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 rights to use these technologies. 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 us and a third-party 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 could harm our business.

~~We are involved in a number of legal proceedings. We cannot predict the outcome of litigation and other contingencies with certainty.~~

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 loss contingencies and establish reserves based on our assessment of contingencies where liability is deemed probable and the amount of loss is reasonably estimable in light of the facts and circumstances known to us at a particular point in time. Subsequent developments in legal proceedings may affect our assessment of the potential for liability and our estimates of the loss contingency recorded as a liability or as a reserve against assets in our financial statements. For a description of our current legal proceedings, see Note 13 – Commitments, Contingencies and Subsequent Events to the consolidated financial statements.

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~~Any potential future acquisitions, strategic investments, divestitures, mergers or joint ventures may subject us to significant risks, any of which could harm our business.~~

Our long-term strategy may include identifying and acquiring, 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, 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;~~

~~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 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 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.~~

Any acquired business, technology, service or product could significantly under-perform relative to our expectations, and may not achieve the benefits we expect from possible acquisitions. For all these reasons, our pursuit of an acquisition, investment, divestiture, merger, or joint venture could cause its actual results to differ materially from those anticipated.

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 ~~potential trade wars,~~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’~~customers' ability or willingness to purchase our solutions and services, delay prospective ~~customers’~~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.

~~Clim~~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 ate 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 ~~long-term impact~~significant effect on our ~~business.~~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.

~~While we seek to mitigate~~Global climate-related risks could negatively affect our ~~business risks associated with climate change by establishing robust environmental programs, we recognize that there~~business.

There are inherent ~~climate related~~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~~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~~third-party suppliers, or the operations ~~and/or~~and business of our customers, and may cause us to experience higher attrition, losses and additional costs to maintain or resume operations.

~~Any failure~~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 ~~delivery of high-quality technical support services may adversely affect~~business or our ~~relationships with our customers and our financial results.~~

In addition, our ~~sales process is highly dependent on our solutions and business~~ reputation and on positive recommendations from our existing customers. Any 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.

~~We may lose key members of our management team, development and operations personnel, or subject matter experts, and~~client relationships may be ~~unable to attract and retain employees we need to support our operations and growth.~~

Our success depends substantially upon the continued services of our executive officers and other key members of management, particularly our chief executive officer. 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 development and operations personnel and subject matter experts because of the complexity of our services and technologies. The loss of one or more of our key employees or groups could seriously harm our business.

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. We may not be successful in attracting and retaining qualified personnel. We have from time to time 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 availability of visas for skilled technology workers. These difficulties may potentially be further amplified by the high cost of living in Washington D.C. metropolitan area, where our headquarters and one of our other offices are located. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.

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~~If our customers do not renew their subscriptions or contracts for our solutions and services, our revenue could decline and our business may suffer.~~

Our customers have no obligation to renew or extend their subscriptions or contracts for our solutions or services after the expiration of the contractual period, 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 fluctuatedamaged as a result of ~~a number of factors,~~our practices related to climate change, 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 sell additional features and services, more subscriptions or enhanced editions of our services to our current customers. 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 customers do not renew or extend their subscriptions or contracts, do not purchase additional features or enhanced solutions, or if attrition rates increase, our business could be harmed.~~

If our security measures or those of our third-party data center hosting facilities, cloud computing platform providers or third-party service partners, or the underlying infrastructure of the internet are breached, and unauthorized access is obtained to a customer’s data, our datainvolvement, or our ~~IT systems,~~clients' involvement, in certain industries or ~~authorized access is blocked~~projects associated with causing or disabled, our services may be perceived as not being secure, customers may curtail or stop using our services, and we may incur significant reputational harm, legal exposure and liabilities, or a negative financial impact.

Our services sometimes involve the storage and transmission of our customers’ and our customers' customers' proprietary and other sensitive data, including financial information and personally identifiable information. While we have security measures in place to protect our customers and our customers’ customers' data, our services and underlying infrastructure may in the future be materially breached or compromised as a result of the following:

third party attempts to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information to gain access to our customers’ data, our data or our IT systems;

~~efforts by individuals or groups of hackers and sophisticated organizations, including state-sponsored organizations or nation-states;~~

~~cyber-attacks on our internally built infrastructure;~~

~~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;~~

attacks on, or vulnerabilities in, the many different underlying networks and services that power the internet that our products depend on, most of which are not under our control or the control of our vendors, partners, or customers; and

~~employee or contractor errors or intentional acts that compromise our security systems.~~

These risks are mitigated, to the extent possible, by our ability to maintain and improve business and data 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 protect our customers’ and our customers’ customers’ sensitive data,exacerbating climate change, as well as any decisions we make to continue to conduct or change our data, we can provide no assurances that such measures will provide absolute security. In the normal course of business, we are the target of malicious cyber-attack attempts. To date, any such attempts have not been material or significantactivities in response to ~~us, including~~considerations relating 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 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 financial burdens due to additional direct and indirect costs, such as additional infrastructure capacity spending to mitigate any system degradation.

~~Our ability to deliver our services is dependent on the development and maintenance of the infrastructure of the Internet by third parties.~~

The Internet’s infrastructure is comprised of many different networks and services that are highly fragmented and distributed by design. This infrastructure is run by a series of independent third-party organizations that work together to provide the infrastructure and supporting services of the Internet under the governance of the Internet Corporation for Assigned Numbers and Names (ICANN) and the Internet Assigned Numbers Authority (IANA), now under the stewardship of ICANN.

The Internet has experienced a variety of outages and other delays as a result of damages to portions of its infrastructure, denial-of-service attacks or related cyber incidents, and it could face outages and delays in the future. These outages and delays could reduce the level of Internet usage or result in fragmentation of the Internet, resulting in multiple separate Internets. These scenarios are not under our control and could reduce the availability of the Internet to us or our customers for delivery of our Internet-related services. Any resulting interruptions in our services or the ability of our customers to access our services could result in a loss of potential or existing customers and harm our business.

climate change.

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~~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 risks and challenges associated with international business. We intend to continue to expand our international sales efforts. The risks and challenges associated with sales to customers outside the United States or those that can affect international operations generally, include:

~~localization of our services, including translation into foreign languages and associated expenses;~~

~~regulatory frameworks or business practices favoring local competitors;~~

~~pressure on the creditworthiness of sovereign nations;~~

~~evolving domestic and international tax environments;~~

liquidity issues or political actions by sovereign nations, including nations with a controlled currency environment, which could result in decreased values of these balances or potential difficulties protecting our foreign assets or satisfying local obligations;

~~foreign currency fluctuations and controls, which may make our services more expensive for international customers and could add volatility to our operating results;~~

compliance with multiple, conflicting, ambiguous or evolving governmental laws and regulations, including employment, tax, privacy, anti-corruption, import/export, antitrust, data transfer, storage and protection, and industry-specific laws and regulations, including rules related to compliance by our third-party resellers and our ability to identify and respond timely to compliance issues when they occur;

~~vetting and monitoring our third-party resellers in new and evolving markets to confirm they maintain standards consistent with our brand and reputation;~~

uncertainty regarding regulation, currency, tax, and operations resulting from the Brexit vote that could disrupt trade, the sale of our services and commerce, and movement of our people between the United Kingdom, European Union, and locations;

~~changes in the public perception of governments in the regions where we operate or plan to operate;~~

~~regional data privacy laws and other regulatory requirements;~~

treatment of revenue from international sources, intellectual property considerations and changes to tax codes, including being subject to foreign tax laws and being liable for paying withholding income or other taxes in foreign jurisdictions;

~~different pricing environments;~~

~~difficulties in staffing and managing foreign operations;~~

~~different or lesser protection of our intellectual property;~~

~~longer accounts receivable payment cycles and other collection difficulties;~~

~~natural disasters, acts of war, terrorism, pandemics or security breaches; and~~

~~regional economic and political conditions.~~

Any of these factors could negatively impact our business and results of operations. The above 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.

Some of our solutions are subject to export and import controls, including 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.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K ("10-K"). In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events in future periods may differ materially from those anticipated or implied in these forward-looking statements as a result of many factors, including those discussed under Item 1A, "Risk Factors", and elsewhere in this 10-K. See also "Special Note Regarding Forward-Looking Statements" at the beginning of this 10-K.

~~General~~In this section, we discuss our financial condition, changes in financial condition and results of operations for the year ended December 31, 2023, compared to the year ended December 31, 2022.

Business Overview

For an overview of our business, including our business segments and discussion of our products and services we provide, see Item 1, "Business" of this Annual Report on Form 10-K. Additional information regarding our segments is also presented in Note 1 8 – Segment Information to the consolidated financial statements at Item 8 of this Form 10-K.

Opportunities, Challenges and Risks

As discussed under Item 1A, "Risk Factor s", we derive a substantial portion 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. 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 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. Although we continue to offer ~~technologically advanced, software-based~~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-price development contracts. Our firm-fixed-price activities consist primarily of contracts for 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 2023 and 2022, the Company's revenue derived from firm-fixed-price contracts was 78.5% and 82.9%, respectively; cost-plus contracts revenue was 12.1% and 11.1%, respectively; and time-and-material contracts was 9.3% and 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.

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.

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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 some trends to consider 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 ransomware attacks is that it is exceedingly profitable for cybercriminals, and ransomware victims generally settle the 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 restoring 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 ~~empower~~security compliance requires.

Additionally, the SEC has finalized and ~~protect~~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 ~~world’s most security-conscious~~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 ~~against rapidly evolving, sophisticated~~ and ~~pervasive threats. Our portfolio of security products, services and expertise empower our customers with capabilities~~individuals that need to reach new markets, serve their stakeholders more effectively, and successfully defend the nation or their enterprise. We protect our customers’ people, information, and digital assets so they can pursue their corporate goals and conduct their global missions with confidence inensure 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.

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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. government contracts, means that they have been funded by the procuring agency. Unfunded backlog is the difference between total backlog and funded backlog and includes 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 on the basis of one year or less, and, as a result, funded backlog is generally expected to be earned within one year from any point in time, whereas unfunded backlog is expected to be earned over a longer 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 result from the award of new contracts 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 most significant of which we have listed below. More details on these changes are presented below within our "Results of Operations" section.

•The successful completion of certain programs, lower revenue on ongoing major programs and the loss of a program resulted in a decline in fiscal year 2023 compared with 2022 results, partially offset by some new program wins across the portfolio and the ramp of TSA PreCheck.

•TSA announced Telos Corporation as TSA's second official TSA PreCheck enrollment and renewal provider in August 2023.

•Operating costs were lower, in part, as a result of the restructuring plan announced in the first quarter of 2023.

•Lower operating costs resulted in an improvement in profitability and earnings per share.

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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 ~~mission is~~business segments have different factors driving revenue fluctuations and profitability. The discussion of the changes 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 ~~protect~~ our ~~customers’ people, systems,~~customers. Cost of sales, for both products and ~~vital information assets with offerings~~services, consists of labor, materials, subcontracting costs and an allocation of indirect costs.

Selling, general, and administrative ("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 software 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 2023, compared to 2022, primarily due to an increase in dividend income from money market placements of $3.9 million, and a gain 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 ~~cybersecurity, cloud security, and enterprise security. In~~income taxes. There was no significant change in the ~~current global environment, our mission is more critical than ever.~~ provision for income taxes in 2023, compared to 2022.

Segment Results

The ~~emergence~~accounting policies of each ~~new ICT introduces new vulnerabilities,~~business segment are the same as ~~security is still too often overlooked~~those followed by the Company 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		%

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Our Security Solutions segment revenue decreased by $43.0 million or 35.7% in ~~solution development. Networks and applications meant~~fiscal year 2023, compared to ~~enhance productivity and profitability often jeopardize an organization~~fiscal year 2022, primarily due to ~~poor planning, misconfiguration, or an unknown gap in security. Ransomware, insider threats, cybercrime,~~lower revenues on ongoing programs and ~~advanced persistent threats continue to menace public~~the loss of a program, partially offset by some new program wins and ~~private enterprises across all industries.~~

~~Cybersecurity, cloud security, and enterprise security~~the initial ramp of the ~~modern organization~~TSA 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 software development costs, offset by high margin new program wins, mix within the portfolio and lower stock-based compensation.


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 $28.5 million, or 29.5%, in 2023, compared to 2022, primarily due to the successful completion of certain programs and lower revenues on ongoing programs as expected, partially offset by new program wins.

Segment gross profit decreased by $3.8 million or 22.0% in 2023, compared to 2022, primarily due to lower revenue, partially offset by higher gross margins. Segment gross margin increased from 17.7% in 2022 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 operations are revenue, gross profit, and Adjusted EBITDA. We evaluate our results of operations by considering the drivers causing changes in these measures. We evaluate significant trends and fluctuations in our contract portfolio over time due to contract awards and completions, changes in customer requirements and changes in the volume of product and software sales.

Changes in costs of revenue as a percentage of revenue other than from revenue volume or cost mix are driven by changes in compensation expense and other allocated costs and/or cumulative revenue adjustments due to changes 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 timing 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 Free 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 most 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.

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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 alternative 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 depreciation and amortization. We define Adjusted EBITDA as EBITDA, adjusted for stock-based compensation expense and restructuring expenses. We define EBITDA Margin as EBITDA as a percentage of total revenue. We define Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of total 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 the Board and management to prepare and approve our annual budget, and to evaluate the performance of certain management personnel when determining incentive compensation.


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"), 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 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 restructuring plan.

Adjusted Net (Loss)/Income and Adjusted 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 Company, 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

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 GAAP 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. We define Cash Gross Margin as Cash Gross Profit as a percentage of total 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.


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 assess the quality of our earnings as a key performance measure in evaluating 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 consider 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 our ongoing operations, and does not reflect income tax expense 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 these 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 gross profit, gross margin, net (loss)/income, earnings per share ~~much in common, yet also call~~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 on our GAAP results and using non-GAAP measures only for supplemental purposes.

Liquidity and Capital Resources

Our 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, with an expansion feature of up to $30.0 million of additional revolver capacity. While a ~~diverse range~~variety of ~~skills, capabilities,~~factors related to sources and ~~experience in order to meet the~~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.

As of ~~security-conscious customers. Decades~~December 31, 2023, we had cash and cash equivalents of ~~experience in developing, orchestrating,~~$99.3 million and ~~delivering solutions across these three domains~~our working capital was $100.8 million.

We place a strong emphasis on liquidity management. This focus gives us the ~~vision~~flexibility for capital deployment while preserving a strong balance sheet to position us for future opportunities. We believe we have adequate funds on hand to execute our financial and operating strategy. Our overall financial position and liquidity are strong. Although no assurances can be given, we believe the available cash balances and access to our revolving credit facility are sufficient to maintain the liquidity we require to meet our operating, investing and financing needs for the next 12 months.


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 for the years ended December 31, 2023 and 2022 was $1.6 million and $16.5 million, respectively, a decrease in cash inflow of $14.9 million compared with prior year. The cash flow from operating activities is primarily driven by the Company's operating losses, the timing of receipts of customer payments, the timing of payments to vendors and employees, and the ~~confidence~~timing of inventory turnover, adjusted for certain non-cash items that do not impact cash flows from operating activities.

Net cash used in investing activities for the years ended December 31, 2023, increased by $1.8 million in cash outflow compared to ~~provide solutions that empower~~the same period in 2022, primarily due to higher investments in software development costs of $14.6 million and ~~protect~~$12.7 million for 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,years ended December 31, 2023 and ~~we also recognize when a single solution might address multiple challenges.~~

~~Our security solutions span across the following domains:~~

•	~~Cybersecurity~~ – We help our customers ensure the ongoing security, integrity, and compliance of their on-premises and related cloud-based systems, reducing threats and vulnerabilities in order to foil cyber adversaries before they can attack. Our consultants assess our customers’ security environments and then design, engineer, and operate the systems they need to strengthen their cybersecurity posture.
•		~~Cloud Security~~ – The cloud as an organizational resource is more than two decades old, yet the needs of cloud users are constantly changing. We offer the specialized skills and experience needed to help our customers plan, engineer, and execute secure cloud migration strategies and then ensure ongoing management and security in keeping with the leading standards for cloud-based systems and workloads.
•		~~Enterprise Security~~ – Securing the enterprise means protecting the essential and timeless elements common to every organization: its people and processes, its supply chain and inventories, its finances and facilities, and its information and communications. As ICT and OT have become part of the organizational make-up, we have offered solutions that ensure personnel can work securely and productively across and beyond the enterprise.

We refer to our cyber and cloud applications as Security Solutions, which includes Information Assurance / Xacta® (previously referred to as Cyber & Cloud Solutions), Secure Communications (previously referred to as Secure Communications Cyber and Enterprise Solutions), and Telos ID (previously referred to as Telos ID Enterprise Solutions). We refer to our offerings for enterprise security as Secure Networks (previously referred to as Secure Mobility and Network Management/Defense Enterprise Solutions).

2022, respectively.

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~~Security Solutions~~

•	~~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 U.S. federal government, Xacta is the de facto commercial cyber risk and compliance management solution.
•	~~Secure Communications:~~
	○	~~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 cyber-attack 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 operations, property, and even lives can be jeopardized by a single error in security.
	○	~~Telos Automated Message Handling System (“AMHS”):~~ 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 battlefield and is the only web-based solution for assured messaging and directory services using the DISA Organizational Messaging Service and its specialized communications protocols.
•	~~Telos ID:~~ ~~offering Identity Trust and Digital Services through IDTrust360~~^® – an enterprise-class digital identity risk platform for extending SaaS and custom digital identity services that mitigate threats through the integration of advanced technologies that fuse biometrics, credentials, and other identity-centric data used to continuously monitor trust. We maintain government certifications and designations that distinguish Telos ID, including TSA PreCheck^® enrollment provider, Designated Aviation Channeling provider, FBI-approved Channeler, and FINRA Electronic Fingerprint Submission provider. We are the only commercial entity in our industry designated as a Secure Flight Services provider for terrorist watchlist checks.

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.

~~Secure Networks~~

•

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 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.

See Note 19 - Commitment and Contingencies, to the consolidated financial statements within this Annual Report for further discussion of other commitment and contingencies.

Revolving Credit Facility

On December 30, 2022, 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 option 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 our Credit Agreement and revised certain provision on the terms of the covered collateral. See Note 1 0 - Debt and Other Obligatio ns to the consolidated financial statements contained within this Annual Report for additional information.

The Credit Agreement contains customary terms and conditions, including certain covenant requirements. As of December 31, 2023, there were no outstanding balances under the revolving credit 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 other 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 a gain of $1.4 million. See Not e 1 0 – Debt and Other Ob ligations to the consolidated financial statements for a detailed discussion of our debt financing arrangements.

~~Secure Mobility:~~ solutions for business and government that enable remote work and minimize concern across and beyond the enterprise. Our secure mobility team brings credentials to every engagement, supplying deep expertise and experience as well as highly desirable clearances and industry recognized certifications for network engineering, mobility, and security.

•

~~Network Management and Defense:~~ services for operating, administrating, and defending complex enterprise networks and defensive cyber operations. Our diverse portfolio of capabilities addresses common and uncommon requirements in many industries and disciplines, ranging from the military and government agencies to Fortune 500 companies.

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 ~~reported~~ amounts reported. In preparing these financial statements, management has made its best estimates and judgments of ~~assets and liabilities and disclosure of contingent assets and liabilities at the date of~~certain amounts included in the consolidated financial statements, ~~and the reported amounts of revenues and expenses during the reporting period. Significant~~giving due consideration to materiality. Management evaluates these estimates and assumptions ~~used~~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 ~~preparation~~future as more current information is available.

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Management believes that our critical accounting policies are those that are both material to the presentation of our ~~consolidated~~ financial ~~statements include revenue recognition, allowance for doubtful accounts receivable, allowance for inventory obsolescence,~~condition and results of operations and require management's most difficult, subjective and complex judgments. Typically, the ~~valuation allowance for deferred tax assets, income taxes, contingencies~~circumstances that make these judgments difficult, subjective and ~~litigation, potential impairments~~complex have to do with making estimates about the effect of ~~goodwill and intangible assets, estimated pension-related costs for our foreign subsidiaries and accretion of public preferred stock. Actual~~matters that are inherently uncertain; as a result, actual results could differ from those estimates.

The ~~following is a summary of the most~~ critical accounting policies ~~used in~~requiring estimates, assumptions, and judgments that we believe have the ~~preparation of~~most significant impact on our consolidated financial ~~statements.~~

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

~~We account for~~Although most of our revenue ~~in accordance~~is recognized concurrently with Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers.” The unit of account in ASC 606 is a performance obligation, which is a promise in a contract with a customer to transfer a goodbilling or ~~service to the customer. ASC 606 prescribes a five-step model for recognizing revenue that includes identifying the contract~~ with the ~~customer, determining the performance obligation(s), determining the transaction price, allocating the transaction price~~passage of time, some of our revenue requires us to ~~the performance obligation(s), and recognizing revenue as the performance obligations are satisfied. Timing~~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 ~~standalone selling price.~~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.

~~Table~~Our contracts may also include various types of ~~Contents~~

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 ~~majority~~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, ~~as control is transferred continuously to our customers who receive and consume benefits as~~ we ~~perform, and is classified as services revenue. All~~recognize revenue based on progress towards completion of our business groups earn services revenue under a variety of contract types, including time and materials, firm-fixed price, firm-fixed price level of effort, and cost plus fixed fee contract types, which may include variable consideration as discussed further below. Revenue is recognized over timethe performance obligation, using costs incurred to date relative to total estimated ~~costs~~cost 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 Federal Acquisition Regulation (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.

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 ~~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. 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,~~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.

~~Revenue that is recognized at a point in time is for the sale of software licenses in our Information Assurance / Xacta~~^® and Secure Communications business groups and for the sale of resold products in Telos ID and Secure Networks, and is classified as product revenue. Revenue on these contracts is recognized when the customer obtains control of the transferred product or service, which is generally upon delivery of the product to the customer for their use, due to us maintaining control of the product until that point. Orders for the sale of software licenses may contain multiple performance obligations, such as maintenance, training, or consulting services, which are typically delivered over time, consistent with the transfer of control disclosed above for the provision of services. When an order contains multiple performance obligations, we allocate the transaction price to the performance obligations using our best estimate of standalone selling price.

Contracts are routinely and often modified to account for changes in contract requirements, specifications, quantities, or price. Depending on the nature of the modification, we determine whether to account for the modification as an adjustment to the existing contract or as a new contract. Generally, modifications are not distinct from the existing contract due to the significant interrelatedness of the performance obligations and are therefore accounted for as an adjustment to the existing contract, and recognized as a cumulative adjustment to revenue (as either an increase or reduction of revenue) based on the modification’s effect on progress toward completion of a performance obligation.

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 (“DCAA”) audits of incurred cost submissions. This resulted in signed final rate agreement letters for fiscal years 2011 to 2013 and conformed incurred cost submissions for 2014 to 2015. We evaluated the resulting changes to revenue under the applicable cost plus fixed fee contracts for the years 2011 to 2015 as variable consideration, and determined the most likely amount to which we expect to be entitled, to the extent that no constraint exists that would preclude recognizing this revenue or result in a significant reversal of cumulative revenue recognized. We included these estimated amounts of variable consideration in the transaction price and as performance on these contracts is complete, we have recognized revenue of $6.0 million during During the year ended December 31, ~~2018.~~

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 any2023, there is an immaterial catch-up revenue related to incentive fees in our estimated transaction prices. We may include in our contract estimates additional revenue for submitted contract modifications or claims against the customer when we believe we have an enforceable right to the modification or claim, the amount can be estimated reliably and its realization is probable. We consider the contractual/legal basis for the claim (in particular FAR provisions), the facts and circumstances around any additional costs incurred, the reasonableness of those costs and the objective evidence available to support such claims.

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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.

Contract assets are amounts that are invoiced as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Generally, revenue recognition occurs before billing, resulting in contract assets. These contract assets are referred to as unbilled receivables and are reported within accounts receivable, net of reserve on our consolidated balance sheets.

Billed receivables are amounts billed and due from our customers and are reported within accounts receivable, net of reserve on the consolidated balance sheets. The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component due to the intent of the retainage being the customer’s protection with respect to full and final performance under the contract.

Contract liabilities are payments received in advance and milestone payments from our customers on selected contracts that exceed revenue earned to date, resulting in contract liabilities. Contract liabilities typically are not considered a significant financing component because they are generally satisfied within one year and are used to meet working capital demands that can be higher in the early stages of a contract. Contract liabilities are reported on our consolidated balance sheets on a net contract basis at the end of each reporting period.

We have one reportable segment. We treat sales to U.S. customers as sales within the U.S. regardless of where the services are performed. Substantially all of our revenues are from U.S. customers as revenue derived from international customers is de minimus. The following tables disclose revenue (in thousands) by customer type and contract type for the periods presented. Prior period amounts have not been adjusted under the modified retrospective method.

2020

2019

2018

Federal
$ 171,677 $ 149,257 $ 129,279
State & Local, and Commercial 8,240 9,961 8,737
Total $ 179,917 $ 159,218 $ 138,016

2019

2019

2018

Firm fixed-price
$ 151,703 $ 131,629 $ 103,454
Time-and-materials 13,455 14,569 16,795
Cost plus fixed fee 14,759 13,020 17,767
Total $ 179,917 $ 159,218 $ 138,016

~~The following table discloses accounts receivable and contract assets (in thousands):~~

December 31,
2020 2019
Billed accounts receivable $ 12,060 $ 11,917
Unbilled receivables 19,161 16,745
Allowance for doubtful accounts (308 ) (720 )
Receivables – net $ 30,913 $ 27,942

As of December 31, 2020 and 2019, we had $127.7 million and $112.4 million of remaining performance obligations, respectively, which we also refer to as funded backlog. We expect to recognize approximately 92.4% of our remaining performance obligations as revenue in 2021, an additional 2.5% by 2022 and the balance thereafter. For the years ended December 31, 2020, 2019, and 2018, the amount of revenue recognized during the year that was included in the opening contract liabilities balance was $5.3 million, $4.2 million, and $5.5 million, respectively. Contract liabilities were $5.7 million and $6.3 million as of December 31, 2020 and 2019, respectively.

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We develop 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. In the context of our current customer portfolio, we view “recurring revenue” as revenue that occurs often and repeatedly. In each of the last three years, recurring revenue has exceeded 85% of our annual revenue. Our total budgeted revenue is the combination of recurring revenue and a forecast of new business.

Total backlog, a component of recurring revenue, 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. government contracts, means that they have been funded by the procuring agency. Unfunded backlog is the difference between total backlog and funded backlog and includes 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 on a basis of one year or less and,adjustment as a result ~~funded backlog is generally expected to be earned within one year from any point in time, whereas unfunded backlog is expected to be earned over a longer period.~~

~~Inventories~~

Inventories are stated at the lower of cost or net realizable value, where cost is determined primarily using the weighted average cost method. Inventories consist primarily of purchased 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 experiencechanges in contract estimates noted.

Goodwill and ~~our assessment of future inventory requirements.~~

~~Goodwill~~Other Long-Lived Assets

We evaluate the impairment of goodwill and other long-lived assets in accordance with ~~ASC~~Accounting Standards Codification ("ASC") 350, ~~“Intangibles~~"Intangibles – Goodwill and ~~Other,” which requires~~Other." Management annually reviews goodwill and ~~indefinite-lived intangible~~other long-lived assets ~~to be assessed on at least an annual basis~~ for impairment ~~using a fair value basis. Between annual evaluations, if~~or whenever events ~~occur~~ or changes in circumstances ~~change~~indicate the carrying amount may not be recoverable. If we determine that ~~would more likely than not reduce~~ the ~~fair~~carrying value of the ~~reporting unit below its~~goodwill and other long-lived assets may not be recoverable, we will record an impairment charge for the amount by which the 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~~value of the ~~purchase price to tangible~~goodwill and ~~intangible net~~other long-lived assets ~~acquired is based upon our valuation of the acquired assets.~~ exceeds its fair value.

Goodwill is not amortized, but ~~is subject to annual~~rather tested for potential impairment ~~tests. We complete our goodwill impairment tests~~ as of December ~~31st~~31 each year. ~~Additionally, we make evaluations between~~The goodwill impairment test is performed at the reporting unit level. Accounting requirements provide that a reporting entity may perform an optional qualitative assessment on an annual ~~tests if~~basis to determine whether events ~~occur~~occurred or circumstances ~~change~~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 ~~evaluation is based on~~Company performs the ~~estimation~~quantitative goodwill impairment test by calculating the fair value of the ~~fair values of our three reporting units, CO&D (comprised of Information Assurance / Xacta and Secure Networks), Telos ID, and Secure Communications, of which goodwill is housed in the CO&D~~ reporting unit ~~in comparison~~and comparing it to its respective carrying value including goodwill. If the fair value is less than the carrying value, the amount of impairment expense is equal to the difference between the reporting ~~unit’s net asset~~unit's fair value and the reporting unit's carrying ~~values. Our discounted cash flows required management’s~~value.

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Determining the fair value of a reporting unit requires management's judgment ~~with respect to~~and involves the use of significant estimates and assumptions, including forecasted revenue, ~~streams and~~ operating margins, capital expenditures, and ~~the~~ selection and use of an appropriate discount ~~rate.~~rate commensurate with the risk inherent in each of our reporting units' current business models. We ~~utilized~~utilize 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~~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 financial performance of the 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 performed a qualitative assessment on our reporting units ~~are~~and determined ~~based upon~~that it is "more-likely-than-not" that 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 Security Solutions reporting ~~units is compared to~~unit exceeded its carrying value. On 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 of December 31, 2020. Subsequent reviews may result in future periodic impairments that could have a material adverse effectother hand, based on the ~~results~~initial qualitative assessment of ~~operations in the period recognized. Recent operating results have reduced the projection of future cash flow growth potential, which indicates~~our Secure Networks reporting unit, we concluded 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~~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 nature of our business and other factors described in Item 1A ,"R isk 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 ~~unit~~units, our determination of future fair value might not support the carrying amount of our reporting units, and ~~compare~~ the ~~valuation with~~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 ~~respective~~ carrying value may not be recoverable.

Likewise, we evaluated our intangible assets for potential impairment. As a result of the ~~reporting unit to determine whether any goodwill impairment exists. If~~assessment, we ~~determine through the impairment review process that goodwill is impaired, we will record~~identified conditions demonstrating an impairment of certain software development costs. An impairment charge of $0.5 million was recorded in ~~our~~the consolidated statements of ~~operations.~~operations for the year ended December 31, 2023.

For further discussion of the methods used and factors considered in our estimates as part of the impairment testing for goodwill and intangible assets, see Note 2 - Significant Accounting Policies on Goodwill ~~is amortized~~ and ~~deducted over a 15-year period for tax purposes.~~

Intangible Assets, Note 7 - Goodwill and Note 8 - Intangible Assets, Net to the consolidated financial statements.

Income Taxes

We account for income taxes in accordance with ASC 740, ~~“Income~~"Income Taxes.~~” Under ASC 740,~~" Our income tax expense, 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~~for unrecognized tax ~~rates that are applicable~~benefits reflect our best estimate of current and future taxes to be paid. We record net deferred assets to the ~~future years in which deferred tax~~extent we believe these 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~~The realizability of net deferred tax assets is ~~dependent upon the generation of~~based on all available evidence, including future taxable ~~income. We considered projected future taxable~~ income projections, 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, 2020 and 2019. As a result of a full valuation allowance against~~differences. We regularly review our deferred tax assets ~~a deferred tax liability related to goodwill remained on our consolidated balance sheet at December 31, 2020~~for recoverability and 2019. Due to the tax reform enacted on December 22, 2017, net operating losses generated in taxable years beginning after December 31, 2017 will have an indefinite carryforward period, which will be available to offset future taxable income created by the reversal of temporary taxable differences related to goodwill. Asestablish a ~~result, we have adjusted the~~ valuation allowance ~~on our deferred~~when management believes it is more likely than not such asset will not be recovered, taking into consideration historical operating results, expectations of future earnings, tax ~~assets and liabilities at December 31, 2020 and 2019. See additional information on tax reform and its impact on our income taxes in Note 9 – Income Taxes.~~

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~~Results of Operations~~

We derive a substantial portion 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 technologies provider. To that end, although 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 price development contracts. Our firm fixed-price activities consist principally 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 2020, 2019, and 2018, the Company’s revenue derived from firm fixed-price contracts was 84.3%, 82.7%, and 74.9%, respectively, cost-plus contracts was 8.2%, 8.2%, and 12.9%, respectively, and time-and-material contracts was 7.5%, 9.1%, and 12.2%, respectively.

We provide different solutions and are party to contracts of varying revenue types under the NETCENTS (Network-Centric Solutions) and NETCENTS-2 contracts to the U.S. Air Force. NETCENTS and NETCENTS-2 are IDIQ and GWAC, therefore any government customer may utilize the NETCENTS and NETCENTS-2 vehicles to meet its purchasing needs. Consequently, revenue earned on the underlying NETCENTS and NETCENTS-2 delivery orders varies from period to period according to the customer and solution mix for the products and services delivered during a particular period, unlike 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. We have also been awarded other IDIQ/GWACs, including the Department of Homeland Security’s EAGLE II, GSA Alliant 2, and blanket purchase agreements under our GSA schedule.

We refer to our cyber and cloud applications as Security Solutions, which includes Information Assurance /Xacta® (previously referred to as Cyber & Cloud Solutions), Secure Communications (previously referred to as Secure Communications Cyber and Enterprise Solutions), and Telos ID (previously referred to as Telos ID Enterprise Solutions). We refer to our offerings for enterprise security as Secure Networks (previously referred to as Secure Mobility and Network Management/Defense Enterprise Solutions).

U.S. Government appropriations have been and continue to be 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. These limits were subsequently amended several times. With the expiration of the BCA at the end of FY 2021, there are no statutory limits in place for FY 2022.

According to the non-partisan Congressional Budget Office (CBO), since enactment of the BCA, federal outlays devoted to defense programs fell from 4.5 percent as a share of Gross Domestic Product (GDP) to as low as 3.1 percent of GDP in each of FYs 2016-18, before rising slightly the past two years to a level of 3.4 percent in FY 2020. Moreover, CBO reports that, as a result of the spending caps imposed by the BCA, non-adjusted defense outlays subsequently shrank from $699.4 billion in FY 2011 to as low as $583.4 billion in FY 2016, and did not again exceed their FY 2011 level until FY 2020, when outlays were $713.8 billion, two percent above the FY 2011 level.

In Fiscal Years 2020 and 2021, the COVID-19 pandemic and associated economic dislocation in the United States has resulted in an overwhelming federal response, including enactment of several massive and comprehensive emergency appropriations and economic stimulus measures. These were in addition to annual appropriations legislation for FY 2021, which was not enacted into law until late December, 2020, nearly three months after the beginning of the fiscal year, during which time the government once again operated under a series of Continuing Resolutions which strictly limited new spending initiatives. These enormous emergency spending packages and their resulting increases in the budget deficit will necessarily factor into future spending decisions to an unknown degree. Further, as the outgoing Trump Administration did not complete its work on a proposed FY 2022 budget prior to leaving office on January 20, 2021,planning strategies and the incoming Biden Administration has been delayed in submitting a proposed budget to Congress, the proposed spending levels for FY 2022 cannot be predicted. Finally, the near- and long-term impacts of the COVID-19 health and associated economic crisis on federal budget planning and the government contracts that we hold, and on the federal procurements that we would otherwise compete for, cannot be known.

Despite the pandemic’s resultant shift to teleworking by federal employees and contractors, the government has successfully maintained continuity of services as has Telos Corporation. With much of the business of government continuing to be conducted remotely through use of information technology systems, we believe there will continue to be a need on the part of the government for the types of solutions and services provided by Telos.

~~For more information on the risks and uncertainties related to U.S. Government contracts, see Part I – Item 1A Risk Factors in this Annual Report on the Form 10-K.~~

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~~Statement of Operations Data~~

~~The following table sets forth certain consolidated financial data and related percentages for the periods indicated:~~

Years Ended December 31,
2020 2019 2018
(dollar amounts in thousands)

Revenue $ 179,917 100.0 % $ 159,218 100.0 % $ 138,016 100.0 %
Cost of sales 117,497 65.3 106,874 67.1 84,954 61.6
Selling, general and administrative expenses 62,123 34.5 47,319 29.7 44,048 31.9
Operating income 297 0.2 5,025 3.2 9,014 6.5
Other income (expenses):
Gain on redemption of public preferred stock 14,012 7.8 ---- ---- ---- ----
Non-operating (expense) income (255 ) (0.2 ) 201 0.1 12 ----
Interest expense (7,259 ) (4.0 ) (7,467 ) (4.7 ) (7,258 ) (5.2 )
Income (loss) income before income taxes 6,795 3.8 (2,241 ) (1.4 ) 1,768 1.3
Benefit from (provision for) income taxes 46 ---- 104 0.1 (31 ) ----
Net income (loss) 6,841 3.8 (2,137 ) (1.3 ) 1,737 1.3
Less: Net income attributable to non-controlling interest (5,154 ) (2.9 ) (4,264 ) (2.7 ) (3,377 ) (2.4 )
Net income (loss) attributable to Telos Corporation $ 1,687 0.9 % $ (6,401 ) (4.0 )% $ (1,640 ) (1.1 )%

~~Years ended December 31, 2020, 2019, and 2018~~

~~Revenue.~~ Revenue increased by 13.0% to $179.9 million for 2020 from $159.2 million for 2019. Security Solutions revenue was $117.3 million and $101.9 million for 2020 and 2019, respectively. This increase in 2020 of approximately 15% was driven primarily by an increase of $8.1 million in sales of offerings in Telos ID on the contract with the U.S. Census Bureau and $7.3 million in sales of offerings related to the contract with a U.S. government agency for our Telos Ghost managed intelligence support solution in Secure Communications. Secure Networks revenue was $62.6 million and $57.3 million for 2020 and 2019, respectively. This increase in 2020 of approximately 9% resulted from various DoD contracts, in both our Secure Mobility and Network Management/Defense Enterprise Solutions offerings. Due to the various solutions offerings and within the business groups, sales may vary from period to period according to the solution mix and timing of deliverables for a particular period.

Revenue increased by 15.4% to $159.2 million for 2019 from $138.0 million for 2018. Such increase 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 vary from period to period according to the solution mix and timing of deliverables for a particular period. Security Solutions revenue was $101.9 million and $86.6 million in 2019 and 2018, respectively. This increase in 2019 of approximately 18% is primarily attributable to a $10.1 million increase in sales of offerings in Telos ID on a contract with the U.S. Census Bureau and a $6.3 million increase in sales of offerings related to a contract with a U.S. government agency for our Telos Ghost managed intelligence support solution in Secure Communications. Secure Networks revenue was $57.3 million in 2019 and $51.4 million in 2018. The sales increase in 2019 is the result of various DoD contracts around our Secure Mobility as well as our Network Management and Defense offerings.

~~Cost of sales.~~ Cost of sales increased by 9.9% to $117.5 million for 2020 from $106.9 million for 2019 as a result of increases in revenue. Cost of sales for Security Solutions increased to $66.9 million in 2020 from $59.9 million in 2019 which translates as a decrease in the cost of sales as a percentage of revenue to 57.0% from 58.7%. due to a change in the mix and nature of the programs. Cost of sales for Secure Networks increased to $50.6 million in 2020 from $47.0 million in 2019 which translates as a decrease in the cost of sales as a percentage of revenue to 80.9% from 82.0%.

Cost of sales increased by 25.8% to $106.9 million for 2019 from $85.0 million for 2018 as a result of increases in revenue. Cost of sales for Security Solutions increased to $59.9 million in 2019 from $48.2 million in 2018 which translates as a increase in the cost of sales as a percentage of revenue to 58.7% from 55.7%. due to a change in the mix and nature of the programs. Cost of sales for Secure Networks increased to $47.0 million in 2019 from $36.7 million in 2018 which translates as an increase in the cost of sales as a percentage of revenue to 82.0% from 71.5% due primarily to the effect of revenue accruals in 2018 for multiple contracts as a result of several years of cumulative indirect rate adjustments, which did not include direct costs.

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~~Gross profit~~. Gross profit increased by 19.2% to $62.4 million for 2020 from $52.3 million for 2019. Gross profit for Security Solutions increased to $50.5 million in 2020 from $42.1 million in 2019. Gross profit for Secure Networks increased to $12.0 million in 2020 from $10.3 million in 2019. Gross margin increased to 34.7% for 2020 from 32.9% for 2019, due to various changes in the mix of contracts in all business lines as discussed above. Gross margin for Security Solutions increased to 43.0% in 2020 from 41.3% in 2019. Gross margin for Secure Networks increased to 19.1% in 2020 from 18% in 2019.

Gross profit decreased by 1.4% to $52.3 million for 2019 from $53.1 million for 2018. Gross profit for Security Solutions increased to $42.1 million in 2019 from $38.4 million in 2018. Gross profit for Secure Networks decreased to $10.3 million in 2019 from $14.6 million in 2018, due primarily to the effect of revenue accruals in 2018 for multiple contracts as a result of several years of cumulative indirect rate adjustments, which did not include direct costs. Gross margin decreased to 32.9% for 2019 from 38.4% for 2018, due to various changes in the mix of contracts in all business lines, primarily decreases in proprietary software sales. Gross margin for Security Solutions decreased to 41.3% in 2019 from 44.3% in 2018. Gross margin for Secure Networks decreased to 18% in 2019 from 28.5% in 2018.

~~Selling, general, and administrative expenses~~. Selling, general, and administrative expenses increased by 31.3% to $62.1 million for 2020 from $47.3 million for 2019. Such increase is primarily attributable to increases in bonuses of $6.3 million, outside services of $5.9 million, labor costs of $5.9 million, and $0.6 million in legal fees, offset by capitalization of research and development costs of $4.2 million.

Selling, general, and administrative expenses increased by 7.4% to $47.3 million for 2019 from $44.0 million for 2018. Such increase is primarily attributable to increases in labor costs of $1.9 million, bonuses of $0.5 million, bad debt expenses of $0.5 million, and outside services of $0.4 million.

~~Interest expense.~~ Interest expense decreased by 2.8% to $7.3 million for 2020 from $7.5 million for 2019, primarily due to decreases in public preferred stock interest as a result of such stock redemption, and interest on an equipment purchase arrangement, offset by an increase in interest on the senior term loan with EnCap (as defined below).

Interest expense increased by 2.9% to $7.5 million for 2019 from $7.3 million for 2018, primarily due to an increase in interest on the EnCap senior term loan, offset by a decrease in interest on an equipment purchase arrangement.

~~Components of interest expense are as follows:~~

December 31,

2020

2019

2018

(amounts in thousands)
Commercial and subordinated note interest incurred $ 3,875 $ 3,644 $ 3,436
Preferred stock interest accrued 3,384 3,823 3,822
Total $ 7,259 $ 7,467 $ 7,258

~~Provision for income taxes. Income tax benefit was $46,000 for 2020, compared to an income tax provision of $104,000 for 2019, primarily attributable to administrative practice release of certain FIN48 liability.~~

~~Income tax benefit was $104,000 for 2019, compared to an income tax provision of $31,000 for 2018, primarily attributable to the decrease in deferred tax liability due to the~~expected timing of the ~~state conformity to the indefinite-lived net operating loss provision~~reversals of ~~the Tax Act (as described below).~~existing temporary differences.

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~~Non-GAAP Financial Measures~~

In addition to our results determined in accordance with GAAP, we believe the non-GAAP financial measures of Non-GAAP Operating Income, Enterprise EBITDA and Adjusted EBITDA 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 most directly comparable financial measure stated in accordance with GAAP.

We use the following non-GAAP financial measures to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget, to develop short-term and long-term operating plans, and to evaluate the performance of certain management personnel when determining incentive compensation. 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 disproportionate 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.

~~Enterprise EBITDA and Adjusted EBITDA~~

Both Enterprise EBITDA and Adjusted EBITDA are supplemental measures of operating performance that are not made under GAAP and that does not represent, and should not be considered as, an alternative to net income (loss) as determined by GAAP. We define Enterprise EBITDA as net income (loss) attributable to Telos Corporation, adjusted for net income attributable to non-controlling interest, non-operating income, interest expense, (benefit) provision for income taxes, and depreciation and amortization. We define Adjusted EBITDA as Enterprise EBITDA, adjusted for stock-based compensation expense, the gain realized on redemption of the public preferred stock upon the closing of our initial public offering, the losses realized on the extinguishment of senior term loan and subordinated debt upon the closing of our initial public offering, bonuses paid as a result of the closing of our initial public offering, and other expenses related to our initial public offering.

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~~A reconciliation of Enterprise EBITDA and Adjusted EBITDA to net income (loss) attributable to Telos Corporation, the most directly comparable GAAP measure, is as follows:~~

Years Ended December 31,
2020 2019 2018
(amount in thousands)
Net income (loss) attributable to Telos Corporation $ 1,687 $ (6,401 ) $ (1,640 )
Net income attributable to non-controlling interest 5,154 4,264 3,377
Non-operating income (20 ) (201 ) (12 )
Interest expense 7,259 7,467 7,258
(Benefit) provision for income taxes (46 ) (104 ) 31
Depreciation and amortization 5,353 4,972 3,028
Enterprise EBITDA 19,387 9,997 12,042
Transaction related gains/losses/expenses:
Transaction related legal and accounting 1,914 ---- ----
Transaction related bonus 3,816 ---- ----
Gain on redemption of public preferred stock (14,012 ) ---- ----
Transaction related non-operating income (274 ) ---- ----
Loss on extinguishment of senior term loan 138 ---- ----
Loss on extinguishment of subordinated debt 411 ---- ----
Stock-based compensation expense ---- ---- ----
Total transaction related gains/losses/expenses (8,007 ) ---- ----
Stock-based compensation expense 4 ---- ----
Adjusted EBITDA $ 11,384 $ 9,997 $ 12,042

Each of Enterprise EBITDA and Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Among other limitations, each of Enterprise EBITDA and Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments, does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations, and does not reflect income tax expense or benefit. Other companies in our industry may calculate Adjusted EBITDA differently than we do, which limits its usefulness as a comparative measure. Because of these limitations, neither Enterprise EBITDA nor Adjusted EBITDA should be considered as a replacement for net income (loss), as determined by GAAP, or as a measure of our profitability. We compensate for these limitations by relying primarily on our GAAP results and using non-GAAP measures only for supplemental purposes.

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~~Liquidity and Capital Resources~~

Upon the closing of our initial public offering, we issued 17.2 million shares of our common stock at a price of $17.00 per share, generating net proceeds of approximately $272.8 million. We used approximately $108.9 million of the net proceeds in connection with the ERPS Conversion (see Note 7 – Exchangeable Redeemable Preferred Stock Conversion), $30.0 million to fund our acquisition of the outstanding Class B Units of Telos ID (see Note 2 – Purchase of Telos ID/Non-controlling Interests), $21.0 million to repay our outstanding senior term loan and subordinated debt (see Note 6 – Debt Obligations). We intend to use the remaining net proceeds for general corporate purposes. We also may use a portion of the net proceeds to acquire complementary businesses, products, services, or technologies. However, we do not have agreements, commitments, or plans for any specific acquisitions at this time. The amounts and timing of our actual use of the net proceeds will vary depending on numerous factors. Proceeds held by us are invested in short-term investments until needed for the uses described above. We currently anticipate that we will retain all available funds for use in the operation and expansion of our business, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future.

Our working capital was $105.2 million and $2.9 million as of December 31, 2020 and 2019, respectively. Although no assurances can be given, we expect that funds generated from operations are sufficient to maintain the liquidity we require to meet our operating, investing and financing needs for the next 12 months.

Cash used in operating activities was $2.1 million for the year ended December 31, 2020, compared to cash provided by operating activities of $11.8 million and $6.3 million, for the years ended December 31, 2019 and 2018, respectively. Cash provided by operating activities is primarily driven by our operating income, the timing of receipt of customer payments, the timing of payments to vendors and employees, and the timing of inventory turnover, adjusted for certain non-cash items that do not impact cash flows from operating activities. Additionally, cash used in operating activities also includes dividends from preferred stock recorded as interest expense of $3.4 million, $3.8 million, and $3.8 million for 2020, 2019, and 2018, respectively. In 2020, net income was $6.8 million, $14.0 million of gain related to the redemption of public preferred stock, and $5.4 million of depreciation and amortization, $1.7 million of which was amortization of capitalized software development costs. In 2019, net loss was $2.1 million, which included $5.0 million of depreciation and amortization, $1.8 million of which was amortization of capitalized software development costs. In 2018, net income was $1.7 million, which included $3.0 million of depreciation and amortization, $1.1 million of which was amortization of capitalized software development costs.

Cash used in investing activities for the years ended December 31, 2020, 2019, and 2018 was $7.5 million, $6.5 million, and $4.1 million, respectively, which, for the year ended December 31, 2020, 2019 and 2018, consisted of the capitalization of software development costs of $6.7 million, $2.4 million and $1.6 million, respectively, and the purchases of property and equipment of $0.8 million, $4.1 million and $2.5 million, respectively.

Cash provided by financing activities for the years ended December 31, 2020 and 2019 was $108.9 million and $1.4 million, respectively, compared to cash used in financing activities $2.7 million for 2018. The financing activities in 2020 consisted of net proceeds of $272.8 million from the initial public offering, offset by $108.9 million redemption of the public preferred stock, $17.4 million payoff of senior term loan, $30.0 million purchase of Telos ID membership interest, distributions of $2.7 million to the Class B Member of Telos ID, $3.7 million payoff of subordinated debt, and repayments of $1.2 million under finance leases. The financing activities in 2019 consisted of net proceeds of $4.9 million from the EnCap senior term loan, distributions of $2.4 million to the Class B Member of Telos ID, and repayments of $1.1 million under finance leases. The financing activities in 2018 consisted of distributions of $1.7 million to the Class B Member of Telos ID and repayments of $1.0 million under finance leases.

~~Table of Contents~~

~~Contractual Obligations~~

~~The following summarizes our contractual obligations and our redeemable preferred stock at December 31, 2020 (in thousands):~~

Payments due by Period

Total

2021
2022 - 2024 2025 - 2027 2028 and later

Finance lease obligations (1) $ 19,364 $ 2,097 $ 6,609 $ 7,117 $ 3,541
Operating lease obligations (2) 1,744 752 992 ---- ----
$ 21,108 $ 2,849 $ 7,601 $ 7,117 $ 3,541

(1) Includes interest expense:
$ 3,724 $ 758 $ 1 ,826 $ 1,009 $ 131

~~(2) Includes operating lease right-of-use obligations and short-term leases with terms of 12 months or less.~~

~~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 $0.8 million, $4.1 million, and $2.5 million for 2020, 2019, and 2018, respectively. We presently anticipate capital expenditures of approximately $5.2 million in 2021; 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 will be sufficient to generate adequate amounts of cash to fund our projected capital expenditures for 2021.

~~Leases and Related Obligations~~

We have various lease agreements for property and equipment that, pursuant to ASC 840, “Leases,” 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.

We adopted ASU 2016-02 effective January 1, 2019 and recorded right-of-use assets and liabilities in our consolidated balance sheets and expanded disclosures about leasing arrangements, among other items, for most lease ~~arrangements.~~

~~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

See Note ~~1 – Summary of~~2 - Significant Accounting Policies of the Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.

Revenue Recognition – Estimated Costs to Complete Long-term Contracts

~~We account for revenue~~As discussed in accordance with ASC Topic 606, “Revenue from Contracts with Customers.” The unit of account in ASC 606 is a performance obligation, which is a promise in a contract with a customer to transfer a good or serviceNote 3 to the ~~customer. ASC 606 prescribes~~consolidated financial statements, a five-step model for recognizing revenue that includes identifying the contract with the customer, determining the performance obligation(s), determining the transaction price, allocating the transaction price to the performance obligation(s), and recognizing revenue as the performance obligations are satisfied. Timingportion of the ~~satisfaction~~Company’s revenues of ~~performance obligations varies across our businesses~~$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 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 to each performance obligation based on our best estimate of standalone selling price.

The majority of our revenue is recognized over time, as control is transferred continuously to our customers who receive and consume benefits as we perform, and is classified as services revenue. All of our business groups earn services revenue under a variety of contract types, including time and materials, firm-fixed price, firm fixed price level of effort, and cost plus fixed fee contract types, which may include variable consideration as discussed further below. Revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. 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 Federal Acquisition Regulation (the 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.

~~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~~Management generally ~~use~~uses the cost-to-cost measure of progress on a proportional performance basis for ~~our~~its long-term contracts because itmanagement believes that measure best depicts the transfer of control to the customer, which occurs as ~~we incur~~the Company incurs costs on ~~our~~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.~~obligation, which includes both the actual costs already incurred and the estimated costs to complete. Revenues are recorded ~~proportionally~~proportionately as costs are incurred. Due to the nature of the work required to be performed on certain of ~~our~~the performance obligations, ~~the~~management’s estimation of ~~total revenue and cost~~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

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 ~~change~~judgment by management when estimating costs at completion and (ii) a high degree of auditor judgment, subjectivity and effort in ~~one~~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/ PricewaterhouseCoopers LLP

Washington, District of Columbia

March 15, 2024

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

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TELOS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS


	For the Year Ended December 31,
	2023		2022

	(in thousands, except per share amounts)
Revenue – services	$	135,175	$	192,742
Revenue – products	10,203		24,145
Total revenue	145,378		216,887
Cost of sales – services (excluding depreciation and amortization)	83,159		120,541
Cost of sales – products (excluding depreciation and amortization)	5,733		16,510
Depreciation and amortization	3,544		793
Total cost of sales	92,436		137,844
Gross profit	52,942		79,043
Selling, general and administrative expenses:
Sales and marketing	7,122		16,582
Research and development	12,247		16,918
General and administrative	73,888		99,393
Total 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)

Net loss per share:
Basic	$	(0.50)	$	(0.79)
Diluted	$	(0.50)	$	(0.79)

Weighted-average share outstanding:
Basic	69,256		67,559
Diluted	69,256		67,559

See accompanying notes to consolidated financial statements.

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TELOS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS


	For the Year Ended December 31,
	2023		2022

	(in thousands)
Net loss	$	(34,422)	$	(53,428)
Other comprehensive loss, net of tax:
Foreign currency translation adjustments	(5)		(28)
Comprehensive loss	$	(34,427)	$	(53,456)

See accompanying notes to consolidated financial statements.

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TELOS CORPORATION

CONSOLIDATED BALANCE SHEETS


	As of December 31, 2023
	2023		2022

	(in thousands, except per share and share data)
Assets:
Cash and cash equivalents	$	99,260	$	119,305
Accounts receivable, net	30,424		40,069
Inventories, net	1,420		2,877
Prepaid expenses	7,520		4,819
Other current assets	1,367		893
Total current assets	139,991		167,963
Property and equipment, net	3,457		4,787
Finance lease right-of-use assets, net	6,612		7,832
Operating lease right-of-use assets	216		341
Goodwill	17,922		17,922
Intangible assets, net	39,616		37,415
Other assets	885		1,137
Total assets	$	208,699	$	237,397
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and other accrued liabilities	$	13,750	$	22,551
Accrued compensation and benefits	14,569		8,388
Contract liabilities	6,728		6,444
Finance lease obligations – current portion	1,730		1,592
Operating lease obligations – current portion	97		361
Other financing obligations – current portion	—		1,247
Other current liabilities	2,324		4,919
Total current liabilities	39,198		45,502
Finance lease obligations – non-current portion	9,518		11,248
Operating lease obligations – non-current portion	123		27
Other financing obligations – non-current portion	—		7,211
Deferred income taxes	813		758
Other liabilities	44		297
Total liabilities	49,696		65,043
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value, 250,000,000 shares authorized, 70,239,890 shares and 67,431,632 shares issued and outstanding as of December 31, 2023 and 2022, respectively	109		106
Additional paid-in capital	433,781		412,708
Accumulated other comprehensive loss	(60)		(55)
Accumulated deficit	(274,827)		(240,405)
Total stockholders' equity	159,003		172,354
Total liabilities and stockholders' equity	$	208,699	$	237,397

See accompanying notes to consolidated financial statements.

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TELOS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS


	For the Year Ended December 31,
	2023		2022

	(in thousands)
Cash flows from operating activities:
Net loss	$	(34,422)	$	(53,428)
Adjustments to reconcile net loss to cash flows from operations:
Stock-based compensation	24,396		64,660
Depreciation and amortization	9,429		5,890
Provision for doubtful accounts	152		99
Deferred income tax provision	55		35
Loss on disposal of fixed assets	2		4
Accretion of discount on acquisition holdback	2		48
Amortization of debt issuance costs	69		—
Gain on early extinguishment of other financing obligations	(1,427)		—
Changes in other operating assets and liabilities:
Accounts receivable	9,493		19,675
Inventories	1,457		(1,630)
Intangible assets – software held for resale	—		(7,120)
Prepaid expenses, other current assets and other assets	(3,058)		(1,249)
Accounts payable and other accrued payables	(8,817)		(12,322)
Accrued compensation and benefits	6,602		(317)
Contract liabilities	283		63
Other current liabilities and other liabilities	(2,629)		2,100
Net cash provided by operating activities	1,587		16,508
Cash flows from investing activities:
Capitalized software development costs	(14,552)		(12,708)
Purchases of property and equipment	(926)		(1,009)
Net cash used in investing activities	(15,478)		(13,717)
Cash flows from financing activities:
Payments under finance lease obligations	(1,592)		(1,461)
Repurchase of common stock	(139)		(11,145)
Payment of tax withholding related to net share settlement of equity awards	(3,742)		(5,671)
Payments for debt issuance costs	(114)		(95)
Payments of DFT holdback amount	(564)		—
Proceeds from other financing obligations	—		9,092
Payments of other financing obligations	—		(635)
Net cash used in financing activities	(6,151)		(9,915)
Net change in cash, cash equivalents, and restricted cash	(20,042)		(7,124)
Cash, cash equivalents and restricted cash, beginning of period	119,438		126,562
Cash, cash equivalents and restricted cash, end of period	$	99,396	$	119,438

See accompanying notes to consolidated financial statements.

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TELOS CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY


	Common Stock			Additional Paid–in Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders' Equity
	Shares	Amount

	(in thousands)
Balance December 31, 2021	66,767	$	105	$	367,153	$	(27)	$	(186,977)	$	180,254
Net loss		—		—		—		(53,428)		(53,428)
Foreign currency translation loss	—	—		—		(28)		—		(28)
Stock-based compensation	—	—		62,511		—		—		62,511
Restricted stock unit award vested, net of shares withheld to cover tax withholding	2,214	2		(5,673)		—		—		(5,671)
Repurchase of common stock	(1,550)	(1)		(11,283)		—		—		(11,284)
Balance December 31, 2022	67,431	106		412,708		(55)		(240,405)		172,354
Net loss	—	—		—		—		(34,422)		(34,422)
Foreign currency translation loss	—	—		—		(5)		—		(5)
Stock-based compensation	—	—		22,874		—		—		22,874
Restricted stock unit award vested, net of shares withheld to cover tax withholding	2,032	2		(3,743)		—		—		(3,741)
Issuance of common stock for 401K match	777	1		1,942		—		—		1,943
Balance December 31, 2023	70,240	$	109	$	433,781	$	(60)	$	(274,827)	$	159,003

See accompanying notes to consolidated financial statements.

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TELOS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

Telos Corporation, together with its subsidiaries, (collectively, the "Company" or ~~more~~"Telos" or "We" or "Our"), a Maryland corporation, is a leading provider of cyber, cloud and enterprise security solutions for the world's most security-conscious organizations. We own all of the issued and outstanding share capital of Xacta Corporation and ubIQuity.com, inc., (a holding company for Xacta Corporation), and 100% ownership interest in Telos Identity Management Solutions, LLC ("Telos ID"), Teloworks, Inc. ("Teloworks") and Telos APAC Pte. Ltd.

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principle of Consolidation

The accompanying consolidated financial statements include the accounts of Telos and its subsidiaries (see Note 1 – Organization), all of whose issued and outstanding share capital is wholly-owned directly and indirectly by the Telos Corporation. All intercompany transactions have been eliminated in consolidation.

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"), and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC").

Basis of Comparison

Certain reclassifications have been made to the prior year's consolidated financial statements to conform to the current year's presentation. In the current period, we reclassified and presented depreciation and amortization separately from the cost of sales line items. The reclassification had no impact on the statement of operations.

Segment Reporting

Operating segments are defined as components of an enterprise for which separate discrete financial information is available and evaluated regularly by the chief operating decision maker ("CODM"), or decision-making group, in deciding how to allocate resources and assess performance. We operate our business in two reportable and operating segments: Security Solutions and Secure Networks. These segments enable the alignment of our strategies and objectives and provide a framework for the timely and rational allocation of resources within business lines. We eliminate any inter-segment revenues and expenses upon consolidation. See Note 1 8 – Segment Information for further information.

Use of Estimates

Preparing consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of revenue, expenses, assets and liabilities, and disclosure of contingent assets and liabilities. The Company regularly assesses these estimates; however, actual results could differ from those estimates. We base our estimates on historical experience, currently available information, and various other assumptions that we believe are reasonable under the circumstances.

Management evaluates these estimates and assumptions on an ongoing basis, including those relating to revenue recognition on cost estimation on certain contracts, allowance for credit losses, inventory obsolescence, valuation allowance for deferred tax assets, income taxes, certain assumptions related to stock-based compensation, valuation of intangible assets and goodwill, restructuring expenses accruals, and contingencies. Actual results could ~~affect~~differ from those estimates. The impact of changes in estimates is recorded in the ~~profitability~~period in which they become known.

Concentrations

Financial instruments that subject us to concentrations of credit risk consist primarily of cash and cash equivalents, and accounts receivable.

In consideration that a large amount of our ~~contracts.~~working capital and total assets are held in cash and cash equivalents, we are exposed to credit risk in the event of default by the financial institutions to the extent of the amounts held in excess of federal insurance limits. Due to the financial strength and high credit quality of the financial institutions where the accounts are held, we do not believe that this credit risk makes it reasonably possible that a near-term severe impact risk of loss will occur.

Table of Contents

The Company's receivables are primarily due from the U.S. government, or from prime contractors to whom we are subcontractors and the end customer is the U.S. government, and are generally considered collectable from the perspective of the customer's ability to pay. We 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 periodbelieve that the ~~adjustment~~credit risk associated with our receivables is ~~identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate.~~

Revenue that is recognized at a point in time is for the sale of software licenses in our Information Assurance / Xacta® (previously referred to as Cyber & Cloud Solutions) and Secure Communications (previously referred to as Secure Communications Cyber and Enterprise Solutions) business groups and for the sale of resold products in Telos ID (previously referred to as Telos ID Enterprise Solutions) and Secure Networks (previously referred to as Secure Mobility and Network Management/Defense Enterprise Solutions), and is classified as product revenue. Revenue on these contracts is recognized when the customer obtains control of the transferred product or service, which is generally upon delivery of the product to the customer for their use, due to us maintaining control of the product until that point. Orders for the sale of software licenses may contain multiple performance obligations, such as maintenance, training, or consulting services, which are typically delivered over time, consistent with the transfer of control disclosed above for the provision of services. When an order contains multiple performance obligations, we allocate the transaction price to the performance obligations using our best estimate of standalone selling price.

Contracts are routinely and often modified to account for changes in contract requirements, specifications, quantities, or price. Depending on the nature of the modification, we determine whether to account for the modification as an adjustment to the existing contract or as a new contract. Generally, modifications are not distinct from the existing contractlimited due to the significant interrelatedness of the performance obligations and are therefore accounted for as an adjustment to the existing contract, and recognized as a cumulative adjustment to revenue (as either an increase or reduction of revenue) based on the modification’s effect on progress toward completion of a performance obligation.

~~Table of Contents~~

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 DCAA audits of incurred cost submissions. This resulted in signed final rate agreement letters for fiscal years 2011 to 2013 and conformed incurred cost submissions for 2014 to 2015. We evaluated the resulting changes to revenue under the applicable cost plus fixed fee contracts for the years 2011 to 2015 as variable consideration, and determined the most likely amount to which we expect to be entitled, to the extent that no constraint exists that would preclude recognizing this revenue or result in a significant reversal of cumulative revenue recognized. We included these estimated amounts of variable consideration in the transaction price and as performance on these contracts is complete, we have recognized revenue of $6.0 million during the year ended December 31, 2018.

~~Historically, most~~creditworthiness 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 ourcustomers. We maintain an allowance for estimated transaction prices. We may include in our contract estimates additional revenue for submitted contract modifications or claims against the customer when we believe we have an enforceable right to the modification or claim, the amount can be estimated reliably and its realization is probable. We consider the contractual/legal basis for the claim (in particular FAR provisions), the facts and circumstances around any additional costs incurred, the reasonableness of those costs and the objective evidence available to support such claims.potential credit losses.

Property and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation is recorded ~~at cost. Depreciation is provided~~over the assets' estimated useful lives using the straight-line method, ~~at rates based on~~which is three to five years for furniture and equipment. Leasehold improvements are amortized over the ~~estimated~~shorter of their useful ~~lives~~life or the remaining terms of the ~~individual assets or classes~~lease.

Table of ~~assets as follows:~~Contents

~~Furniture and equipment~~	~~3-5 Years~~
~~Leasehold improvements~~	~~Lesser of life of lease or useful life of asset~~
~~Property and equipment under finance leases~~	~~Lesser of life of lease or useful life of asset~~

Leased property meeting certain criteria is capitalized at the present value of the related minimum lease payments. Amortization of property and equipment under finance leases is computed using the straight-line method over the lesser of the term of the related lease and the useful life of the related asset.

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, ~~2020, 2019,~~2023 and ~~2018,~~2022, such amounts are negligible. ~~Expenditures for repairs~~

Repairs and maintenance costs are ~~charged to operations~~expensed as incurred. Major renewals and improvements are capitalized and depreciated over their estimated useful lives.

Leases

~~Long-lived~~We determine if an arrangement is a lease and we account for leases in accordance with ASC Topic 842, "Leases." We entered into contractual arrangements primarily for the use of real estate facilities, and certain other equipment. We determine the classification of the lease under these arrangements, if any, at inception based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefits from the use of the asset throughout the period, and (3) whether we have a right to direct the use of the asset.

Leased property meeting certain criteria is capitalized at the present value of the related minimum lease payments. Amortization of 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, ~~such~~which represent our right to use an underlying asset for the lease term, and operating lease liabilities which represent our obligation to make lease payments. Generally, we enter into operating lease agreements for facilities. The amount of operating lease liabilities due within 12 months are recorded in other current liabilities, with the remaining operating lease liabilities recorded as ~~fixed~~non-current liabilities in our consolidated balance sheets based on their contractual due dates. The operating lease ROU assets and liabilities are recognized as of the lease commencement date at the present value of the lease payments over the lease term. Most of our leases do not provide an implicit rate that can readily be determined. Therefore, we use a discount rate based on our incremental borrowing rate on all operating leases. Some of our operating leases contain lease and non-lease components, which we account for as a single component. Operating lease expense is recognized as rent expense on a straight-line basis over the lease term, and recorded within our consolidated statement of operations.

The related lease payments on short-term lease arrangements (leases of 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.

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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.

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~~Depreciation and~~In addition to the recoverability assessment, the Company routinely reviews the remaining lives of its long-lived assets. Any reduction in the useful life assumptions will result in increased depreciation or amortization expense ~~related to property and equipment, including property and equipment under finance leases was $5.4 million,~~ ~~$5.0 million, and $3.0 million~~ 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 ~~years ended December 31, 2020, 2019,~~periods presented.

Fair Value Measurements

U.S. GAAP provides a framework for measuring fair value and ~~2018, respectively.~~

~~Software Development Costs~~

~~Our policy on accounting for development costs~~expands disclosures about fair value measurements. The framework requires the valuation of ~~software~~investments using a three-tiered approach. The statement requires fair value measurement to be ~~sold is~~classified and disclosed in ~~accordance with ASC Topic 985-20, “Software – Costs~~one of ~~Software~~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 ~~be Sold, Leased,~~the fair value measurement and unobservable (i.e. supported by little or Marketed” and ASC Topic 350-40 “Internal Use Software” in so far as our Xacta products being available in various deployment modalities including on premises licenses and cloud-based Software as a Service (“SaaS”)no market activity). Under both standards, software development costs are expensed as incurred until technological feasibility is reached, at which time additional costs are capitalized until the product is available for general release to customers or is ready for its intended use, as appropriate. Technological feasibility is established when all planning, designing, coding and testing activities have been completed, and all risks have been identified. Beginning with the second quarter of 2017, software development costs are capitalized and amortized over the estimated product life of 2 years on a straight-line basis.

As of December 31, ~~2020~~2023 and ~~2019,~~2022, we ~~capitalized $12.3 million~~did not have any financial instruments with significant Level 3 inputs and ~~$5.6 million~~we did not have any financial instruments that are measured at fair value on a recurring basis.

For certain of our non-derivative financial instruments, including receivables, accounts payable and other accrued liabilities, the carrying amount approximates fair value due to the short-term maturities of these instruments.

Research and Development

Research and development expenses consist primarily of employee-related expenses (such as salaries, taxes, benefits and stock-based compensation), allocated overhead costs and outside services costs related to the development and improvement of the Company's software. Research and development costs are generally expensed as incurred, except for costs incurred in connection with the development of software that qualify for the capitalization as described in our software development costs ~~respectively, which~~policy. Amortization of capitalized software development costs, not charged under cost of sales, are ~~included~~also reported as a part of ~~property~~research and ~~equipment. Amortization~~development expenses.

Advertising Costs

Advertising costs are expensed and included in sales and marketing expense when incurred. Advertising expense was ~~$1.7 million, $1.8~~$0.8 million and ~~$1.1~~$1.3 million for the years ended December 31, ~~2020, 2019,~~2023 and ~~2018,~~2022, respectively. Accumulated amortization was $4.8 million and $3.1 million as of December 31, 2020 and 2019, respectively. The Company analyzes the net realizable value of capitalized software development costs on at least an annual basis and has determined that there is no indication of impairment of the capitalized software development costs as forecasted future sales are adequate to support amortization costs.

~~Table of Contents~~

Income Taxes

We account for income taxes in accordance with ASC 740, ~~“Income~~"Income Taxes.”" Under ASC 740, deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences and income tax credits. Deferred tax assets and liabilities are measured by applying enacted statutory tax rates that are applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized for differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Any change in tax rates on deferred tax assets and liabilities is recognized in net income in the period in which the tax rate change is enacted. We record a valuation allowance that reduces deferred tax assets when it is ~~“more~~"more likely than ~~not”~~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, 2020 and 2019. As a result of a full valuation allowance against our deferred tax assets, a deferred tax liability related to goodwill remains on our consolidated balance sheets at December 31, 2020 and 2019. Due to the tax reform enacted on December 22, 2017, net operating losses generated in taxable years beginning after December 31, 2017 will have an indefinite carryforward period, which will be available to offset future taxable income created by the reversal of temporary taxable differences related to goodwill. As a result, we have adjusted the valuation allowance on our deferred tax assets and liabilities at December 31, 2020 and 2019. See additional information on tax reform and its impact on our income taxes in Note 9 – Income Taxes.

We follow the provisions of ASC 740 related to accounting for uncertainty in income taxes. The accounting estimates related to liabilities for uncertain tax positions require us to make judgments regarding the sustainability of each uncertain tax position based on its technical merits. If we determine it is more likely than not that a tax position will be sustained based on its technical merits, we record the impact of the position in our consolidated financial statements at the largest amount that is greater than fifty percent likely of being realized upon ultimate settlement. These estimates are updated at each reporting date based on the facts, circumstances and information available. We are also required to assess at each reporting date whether it is reasonably possible that any significant increases or decreases to our unrecognized tax benefits will occur during the next 12 months.

Business Combinations

~~Goodwill~~

~~We evaluate~~Acquisitions were accounted for under U.S. GAAP using the ~~impairment of goodwill~~acquisition method in accordance with ASC ~~350, which requires goodwill~~805, Business Combinations. The Company allocates the fair value of purchase consideration to the tangible and ~~indefinite-lived~~ intangible assets ~~to be assessed~~acquired and liabilities assumed based on ~~at least an annual basis for impairment using a~~their 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 occur~~any, is recorded as goodwill.

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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 reduce~~the Compensation Committee of the Board of Directors, who has the discretion to establish the terms, conditions and criteria of the various awards, including the weighting and vesting schedule of Service-Based RSUs and the performance conditions applicable to the Performance-Based RSUs, including the achievement of certain financial performance criteria or price targets for our common stock.

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 tangible~~grant date fair value and ~~identifiable intangible assets acquired as goodwill. An allocation~~corresponding requisite service period of the ~~purchase price~~award. 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 valuation~~compute 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 as~~value of ~~December 31st each year. Additionally, we make evaluations between annual tests if events occur or circumstances change that would more likely than not reduce~~such 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 based~~stock options on the ~~estimation~~date of the grant using an option pricing model. The option pricing model takes into consideration the current share price of the underlying common stock, exercise price of the option, expected term, risk-free interest rate and the volatility of share price. These considerations directly affect the amount of compensation expense that will ultimately be recognized.

We recognize these stock-based payment transactions when services from the employees, directors and other eligible service providers are received and recognize a corresponding increase in additional paid-in capital in our consolidated balance sheets. The measurement objective for these equity awards is the estimated fair ~~values~~value at the date of ~~our three reporting units, CO&D (comprised~~grant of ~~Information Assurance / Xacta~~the equity instruments that we are obligated to issue when employees, directors and ~~Secure Networks), Telos ID,~~other eligible service providers have rendered the requisite service and ~~Secure Communications, of~~satisfied any other conditions necessary to earn the right to benefit from the instruments.

The stock-based compensation expense for an award is recognized ratably over the requisite service period, which ~~goodwill~~ is ~~housed~~generally the vesting period during which an employee is required to provide service in exchange for an award. Stock-based compensation expense for awards with performance conditions is recognized over the ~~CO&D reporting unit, in comparison~~requisite service period if it is probable that the performance condition will be satisfied. If such performance conditions are not or are no longer considered probable, no compensation expense for these awards is recognized, and any previously recognized expense is reversed. If the performance condition is achieved prior to the reporting unit’s net asset carrying values. Our discounted cash flows required management’s judgment with respect to forecasted revenue streams and operating margins, capital expenditures and the selection and use of an appropriate discount rate. We utilized the weighted average cost of capital as derived by certain assumptions specific to our facts and circumstances as the discount rate. The 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 no impairment of goodwill was recorded as of December 31, 2020. Subsequent reviews may result in future periodic impairments that could have a material adverse effect on the results of operationsrequisite service period, any unrecognized compensation expense will be recognized in the period ~~recognized. Recent operating results have reduced~~ the ~~projection~~performance condition is achieved. Compensation expense for awards with market conditions is recognized over the derived service period, or sooner, if the market condition is achieved. Previously recognized expense for awards with market conditions will never be reversed subsequent to completion of ~~future cash flow growth potential, which indicates that certain negative potential events, such~~the 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 in~~they occur. Stock-based compensation expense is recognized as part of the ~~future. We estimate fair value~~cost of ~~our reporting unit~~sales 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.~~

~~Table of Contents~~

~~Stock-Based Compensation~~

~~Compensation cost is~~The stock-based payment transactions are recognized based on the requirements of ASC 718, “Stock Compensation,” for all share-based awards granted. Since June 2008, we have issued restricted stock to our executive officers, directors and employees. 79,361 shares were granted in 2020. 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. As of December 31, 2020, there were 59,521 shares of restricted stock that remained subject to vesting. In the event of death of the employee or a change in control, as defined by the Telos Corporation 2008 Omnibus Long-Term Incentive Plan, the 2013 Omnibus Long-Term Incentive Plan, or the 2016 Omnibus Long-Term Incentive Plan, all unvested shares shall automatically vest in full. In accordance with ASC 718, ~~we recorded immaterial compensation expense for any of the issuances as the value of the common stock was nominal prior~~"Compensation - Stock Compensation" and ASU 2018-07, "Compensation - Stock Compensation (Topic 718): Improvements to the initial public offering of our common stock, 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.

Non-employee Share-Based Payment Accounting."

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Net (Loss)/Earnings ~~(Loss)~~ per Share


Maryland			52-0880974
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
19886 Ashburn Road, Ashburn, Virginia			20147-2358
(Address of principal executive offices)			(Zip Code)


Title of each class	Trading symbol	Name of each exchange on which registered
Common stock, $0.001 par value per share	TLS	The Nasdaq Stock Market LLC


					Page
			~~TABLE OF CONTENTS~~Special Note Regarding Forward-Looking Statements		4
PART I
Item 1.			~~Page~~Business		5

~~PART I~~

Item 1.1A.	~~Business~~			3
~~Item 1A.~~	Risk Factors	15 13
~~1Item~~ Item 1B.			Unresolved Staff Comments		24 26
Item 2.1C.			~~Properties~~Cybersecurity		25 26
Item 2.			Properties		27
Item 3.			Legal Proceedings		25 27
Item 4.			Mine Safety Disclosures		25 27
PART II
~~PART II~~

Item 5.	Market for ~~Registrant’s~~Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			26 28
Item 6.			~~Selected Financial Data~~[Reserved]		27 28
Item 7.			~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of Operations		28 29
			Business Overview		29
			Business Environment		29
			Backlog		31
			Financial Hig hlights		31
			Results of Operations		32
			Key Performance Measure		33
			Non-GAAP Financial Measures		33
			Liquidity and Capital Resources		36
			Critical Accounting Policies and Estimates		37
Item 7A.			Quantitative and Qualitative Disclosures about Market Risk		39
Item 8.			Consolidated Financial Statements and Supplementary Data		40
			Report of Independent Registered Public Accounting Firm (PCAOB ID No. 238)		40
			Consolidated Statements of Operations		42
			Consolidated Statements of Comprehensive Loss		43
			Consolidated Balance Sheets		44
			Consolidated Statements of Cash Flows		45
			Consolidated Statements of Changes in Stockholders' Equity		46
			Notes to the Consolidated Financial Statements		47
			1.Organization		47
			2. Significant Accounting Policies		47
			3. Revenue Recognition		55
			4. Accounts Receivable, Net		58
			5. Inventories, Net		58
			6. Property and Equipment, Net		58
			7. Goodwill		59
			8. Intangible Assets, Net		59
			9. Other Balance Sheet Components		60
			1 0 . Debt and Other Obligations		61
			1 1 . Stockholders' Equity		62
			1 2 . Stock-Based Compensation		62
			1 3 . Leases		64
			1 4 . Employee Benefit Plan		65
			1 5 . Income Taxes		66
			1 6 . (Loss)/Earnings Per Share		68
			1 7 . Related Party Transactions		68
			1 8 . Segment Information		69
			19 . Commitments and Contingencies		70
			2 0 . Supplemental Cash F low Information		70
Item 9.			Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		72 71
Item 9A.			Controls and Procedures		72 71


Item 9B.		Other Information		72
Item 9C.		Disclosure Regarding Foreign Jurisdictions that Prevent Inspection		72
PART III

Item 10.	Directors, Executive Officers and Corporate Governance		73
Item 11.		Executive Compensation		73
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		73
Item 13.		Certain Relationships and Related Transactions, and Director Independence		73
Item 14.		Principal Accounting Fees and Services		73
PART IV
~~PART IV~~

Item 15.	Exhibits and Financial Statement Schedules		73 74
Item 16.		Form 10-K Summary		76 75
		Signatures		~~Signatures~~76	77

	As of December 31,
	2020		2019		2018		2017		2016
	(amounts in thousands)
Total assets	$	183,817	$	77,692	$	74,489	$	74,421	$	56,799
Senior term loan (1)		----		16,335		10,984		10,786		----
Subordinated debt, long-term (1)		----		2,927		2,597		2,289		----
Finance lease obligations, long-term (2)		14,301		15,641		16,865		17,980		18,990
Operating lease obligations, long-term (2)		941		1,553		----		----		----
Deferred income taxes, long-term (3)		652		621		818		741		3,391
Senior redeemable preferred stock (4)		----		----		----		----		2,092
Public preferred stock (4)		----		139,210		135,387		131,565		127,742


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


☒			ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) THE SECURITIES EXCHANGE ACT OF 1934


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) THE SECURITIES EXCHANGE ACT OF 1934

•	~~Heavy dependence on information and operational technologies.~~Organizations are increasingly dependent on technology, including mobile and wireless applications, cloud-based resources, industrial internet of things (“IoT”), industrial control systems (“ICS”), supervisory control and data acquisition (“SCADA”), and others.
•	~~Digital transformation and accelerating migration to the cloud.~~Enterprises and government agencies are accelerating the migration of applications, storage, and ICT/OT infrastructure to hosted and cloud environments. More organizations – including highly security-conscious agencies within the U.S. government and commercial entities – are gaining comfort and confidence in the cloud, taking advantage of the rapid application development, greater flexibility, and strategic agility that the cloud offers.
•	~~Ability to work across and beyond the enterprise.~~Organizations are no longer defined by or confined by real estate, geography, or personnel rosters. Information and applications are now accessible in the cloud. Mobile devices free personnel to work wherever their mission takes them. Employees, contractors, and partners collaborate in the physical and digital domains, trusting that they can rely on the integrity and trustworthiness of their people and their systems.
•	~~Turbulent technology environment due to COVID-19.~~The COVID-19 pandemic has accelerated the growth of the remote workforce and thus, cyber risk. Existing technologies for mobility are being stretched to the limit, and enterprises are facing dramatic growth in cyber-attack risk as a result of personnel and systems that are still adjusting to an increasing number of workers accessing systems remotely. Ransomware, phishing attempts, and inadequate virtual private networks (“VPNs”) all contribute to a significant increase in threats and vulnerabilities.

•	~~Information Assurance / Xacta:~~◦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 U.S. federal government, Xacta is the de facto commercial cyber risk and compliance management solution.
•	~~Secure Communications:~~
	○	~~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 cyber-attack 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 operations, property, and even lives can be jeopardized by a single error in security.
	○	~~Telos Automated Message Handling System (“AMHS”):~~ 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 battlefield and is the only web-based solution for assured messaging and directory services using the Defense Information System Agency’s (“DISA”) Organizational Messaging Service and its specialized communications protocols.
•	~~Telos ID:~~ offering Identity Trust and Digital Services through IDTrust360® – an enterprise-class digital identity risk platform for extending software-as-a-service (“SaaS”) and custom digital identity services that mitigate threats through the integration of advanced technologies that fuse biometrics, credentials, and other identity-centric data used to continuously monitor trust. We maintain government certifications and designations that distinguish Telos ID, including TSA PreCheck^® enrollment provider, Designated Aviation Channeling provider, FBI-approved Channeler, and the Financial Industry Regulatory Authority (“FINRA”) Electronic Fingerprint Submission provider. We are the only commercial entity in our industry designated as a Secure Flight Services provider for terrorist watchlist checks.

	Years Ended December 31,
	2020		2019			2018			2017			2016
	(amounts in thousands)
Sales	$	179,917	$	159,218		$	138,016		$	107,727		$	134,868
Operating income (loss)		297		5,025			9,014			414			2,112
Income (loss) income before income taxes		6,795		(2,241	)		1,768			(6,265	)		(3,335	)
Net income (loss) attributable to Telos Corporation		1,687		(6,401	)		(1,640	)		(5,833	)		(7,175	)

~~(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 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.~~

	December 31,
	2020			2019
Billed accounts receivable	$	12,060		$	11,917
Unbilled receivables		19,161			16,745
Allowance for doubtful accounts		(308	)		(720	)
Receivables – net	$	30,913		$	27,942

			Payments due by Period
	Total		2021			2022 - 2024		2025 - 2027	2028 and later

Finance lease obligations (1)	$	19,364	$	2,097	$	6,609	$	7,117	$	3,541
Operating lease obligations (2)		1,744		752		992		----		----
	$	21,108	$	2,849	$	7,601	$	7,117	$	3,541
(1) Includes interest expense:	$	3,724	$	758	$	1 ,826	$	1,009	$	131

	~~Page~~
~~Report of Independent Registered Public Accounting Firm~~	41

~~Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019 and 2018~~	42

~~Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2020, 2019 and 2018~~	43

~~Consolidated Balance Sheets as of December 31, 2020 and 2019~~	~~44 - 45~~

~~Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019, and 2018~~	~~46 - 47~~

~~Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the Years Ended December 31, 2020, 2019, and 2018~~	48

~~Notes to Consolidated Financial Statements~~	~~49 - 71~~


Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest	$	7,259	$	3,299		2,483
Income taxes	$	64	$	40	$	19

Noncash:
Dividends from preferred stock recorded as interest expense	$	3,384	$	3,823	$	3,822
Common stock issued on redemption of public preferred stock (Note 7)	$	19,213	$	—	$	—
Common stock issued on purchase of Telos ID membership interest (Note 2)	$	148,399	$	—	$	—
Distributions to Telos ID Class B member – non-controlling interest	$	2,436	$	—	$	—
Debt issuance costs and prepayment of interest on senior term loan	$	—	$	119	$	—

	Common Stock		Class A Common Stock			Class B Common Stock			Additional Paid–in Capital			Accumulated Other Comprehensive Income			Accumulated Deficit			Non-Controlling Interest			Total Stockholders’ Equity (Deficit)
Balance December 31, 2017	$	—	$	65		$	13		$	4,310		$	32		$	(141,370	)	$	913		$	(136,037	)
Net (loss) income		—		—			—			—			—			(1,640	)		3,377			1,737
Cumulative effect adjustment due to change in accounting policy		—		—			—			—			—			3,881			—			3,881
Foreign currency translation loss		—		—			—			—			(15	)		—			—			(15	)
Distributions		—		—			—			—			—			—			(1,669	)		(1,669	)
Balance December 31, 2018	$	—	$	65		$	13		$	4,310		$	17		$	(139,129	)	$	2,621			(132,103	)
Net (loss) income		—		—			—			—			—			(6,401	)		4,264			(2,137	)
Foreign currency translation loss		—		—			—			—			(11	)		—			—			(11	)
Distributions		—		—			—			—			—			—			(2,371	)		(2,371	)
Balance December 31, 2019	$	—	$	65		$	13		$	4,310		$	6		$	(145,530	)	$	4,514		$	(136,622	)
Net income		—		—			—			—			—			1,687			5,154			6,841
Issuance of common stock		103		(65	)		(13	)		291,997			—			—			—			292,022
Purchase of Telos ID membership interest		—		—			—			(25,511	)		—			—			(4,489	)		(30,000	)
Foreign currency translation gain		—		—			—			—			38			—			—			38
Stock-based compensation		—		—			—			4			—			—			—			4
Distributions		—		—			—			—			—			—			(5,179	)		(5,179	)
Balance December 31, 2020	$	103	$	—		$	—		$	270,800		$	44		$	(143,843	)	$	—		$	127,104

	Balance Beginning of Year		Additions Charge to Costs and Expense			Recoveries			Balance End of Year

Year Ended December 31, 2020	$	860	$	(1	)	$	(8	)	$	851
Year Ended December 31, 2019	$	520	$	376		$	(36	)	$	860
Year Ended December 31, 2018	$	1,484	$	30		$	(994	)	$	520

	Year Ended December 31,
	2020		2019
Unvested restricted stock		60		945
Common stock warrants, exercisable at $1.665/sh.		901		901
Total		961		1,846


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


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


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


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


(1) Accounts receivable reserves and reversals of allowance for subsequent collection, net
(2) Accounts receivable written-off and subsequent recoveries, 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


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

	Balance Beginning of Year		Bad Debt Expenses (1)			Recoveries (2)		Balance End of Year

Year Ended December 31, 2020	$	720	$	(412	)	$	—	$	308
Year Ended December 31, 2019	$	306	$	414		$	—	$	720
Year Ended December 31, 2018	$	411	$	(105	)	$	—	$	306


Table 6.2: Depreciation and Amortization Expense
	For the year ended December 31,
	2023		2022

	(in thousands)
Depreciation and amortization	$	2,230	$	2,367


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) In-process software development costs are costs for software that is not yet available for its intended use or general release to customers as of balance sheet date, thus not yet amortized.
(2) An impairment charge of $0.5 million was recorded against software development costs in fiscal year 2023 related to the write-off of certain software projects.
(3) This amount is net of $0.7 million charged into cost of sales in fiscal year 2022.


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


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