PROPOSAL 2: RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors of Telos recommends that the selection of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the 2023 fiscal year be ratified by the holders of the Common Stock.
The Audit Committee selected PricewaterhouseCoopers (“PwC”) to serve as the Company’s independent registered public accounting firm for the 2023 fiscal year. The ratification of the selection of PwC requires a majority of the voting power of the shares of our Common Stock present in person or represented by proxy at the Annual Meeting and entitled to vote thereon. Holders of Common Stock have the right to vote “FOR” or “AGAINST”, or to “ABSTAIN” from voting in connection with Proposal 2. Abstentions on Proposal 2 will have no effect on the results of the vote.
On June 6, 2022, the Company notified BDO USA, LLP (“BDO”) that the Company was dismissing BDO as its independent registered public accounting firm effective immediately. The Company engaged PwC as its independent registered public accounting firm for its second quarter ended June 30, 2022 and its fiscal year ended December 31, 2022. The decision to dismiss BDO and to engage PwC was approved by the Audit Committee and subject toof the ratification and approval of theCompany’s Board of Directors. For purposes
The reports of this policy, a related person is any director or executive officer of Telos, any nomineeBDO on the consolidated financial statements for director, any holder of 5% or morethe Company for each of the Company's voting securities, any immediate family membersfiscal years ended December 31, 2021, and December 31, 2020, did not contain an adverse opinion or a disclaimer of the foregoing persons,opinion, and any firm, corporationwere not qualified or other entity in which any of the foregoing persons is employedmodified as to uncertainty, audit scope or is a partner or principal or in a similar position or in which such person has 10% or greater beneficial ownership interest.
Mr. Emmett Wood, the brother of our Chairman and CEO, has been an employee of the Company since 1996 and currently holds the position of Executive Vice President, Marketing & Strategy. The amounts paid to Mr. Emmett Wood as compensation for 2015, 2014, and 2013, were $305,346, $445,550, and $344,335, respectively. The Company and Mr. Emmett Wood entered into an Amended Employment Agreementaccounting principles, except that BDO’s audit report dated March 28, 2022, on May 13, 2013. This agreement is substantially similar to the employment agreements between the Company and Mr. Williams, Mr. Wright and Ms. Nakazawa, also described under the caption "Executive Officer Employment Agreements" beginning on page 19. Mr. Emmett Wood owned 650,000 shares and 50,000 shares of the Company's Class A Common Stock and Class B Common Stock, respectively,internal control over financial reporting as of December 31, 2015.
On March 31, 2015,2021 expressed an adverse opinion thereon. The adverse opinion was the Company entered into Subordinated Loan Agreements and Subordinated Promissory Notes ("Notes") with affiliatesresult of Mr. John R. C. Porter (referred to collectively as "Porter"). Mr. Porter and Toxford Corporation, of which Mr. Porter is the sole shareholder, own 39.3% of our Class A Common Stock. Under the termsidentified material weaknesses described in Item 9A of the Notes, Porter loanedCompany’s Annual Report on Form 10-K for the Company $2,500,000year ended December 31, 2021 (the “2021 10-K”).
During the Company’s fiscal years ended Decemebr 31, 2021, and December 31, 2020, and the subsequent interim periods through the date of dismissal, there were no disagreements with BDO on any matters of accounting principles or about March 31, 2015. Telos also entered into a Subordination and Intercreditor Agreement with Porter and Wells Fargo Capital Finance, LLC ("Wells Fargo"), inpractices, financial statement disclosure or auditing scope or procedure, which, the Notes are fully subordinatedif not resolved to the Wells Fargo senior credit facility and payments under the Notes are permitted only if certain conditions specified by Wells Fargo are met. Accordingsatisfaction of BDO, would have caused it to make reference to the termssubject matter of the Notes, the outstanding principal sum would bear interest at the fixed rate of twelve percent (12%) per annum which would be payabledisagreements in arrears in cashconnection with its reports on the 20th dayfinancial statements for those periods.
For the fiscal years ended December 31, 2021, and December 31, 2020, and through the date of each May, August, November and February, withdismissal, there were no “reportable events” as that term is described in Item 304(a)(1)(v) of Regulation S-K, except that, as disclosed in the first interest payment date on August 20, 2015. The Notes do2021 10-K, the Company’s management did not call for amortization payments and are unsecured. The unpaid principal, together with interest, is due and payable in full on July 1, 2017. The Notes, in whole or in part, may be repaid at any time without premium or penalty. The outstanding principal sum under the Notes,maintain effective internal control over financial reporting as of December 31, 2015, was $2,500,000, and the Company accrued $229,000 of interest to the Porter Notes in 2015.
Legal Proceedings With 10% Beneficial Owner of the Company's Stock and With Directors
Costa Brava Partnership III, L.P.
As previously reported, on October 17, 2005, Costa Brava Partnership III, L.P. ("Costa Brava"), a holder of Public Preferred Stock, instituted litigation against the Company and certain past and present directors and officers in the Circuit Court for Baltimore City, Maryland (the "Circuit Court"). A second holder of the Company's Public Preferred Stock, Wynnefield Small Cap Value, L.P. ("Wynnefield"), subsequently intervened as a co-Plaintiff (Costa Brava and Wynnefield are hereinafter referred to as "Plaintiffs"). On February 27, 2007, Plaintiffs added, as an additional defendant, Mr. John R. C. Porter, a holder of the Company's common stock.
In the litigation, Plaintiffs allege, among other things, that the Company and its officers and directors engaged in tactics to avoid paying dividends on the Public Preferred Stock, that the Company made improper bonus payments or awards to officers and directors, that certain former and present officers and directors breached legal duties or the standard of care that they owed the Company, that the Company improperly paid consulting fees to and engaged in loan transactions with Mr. Porter, that the Company failed to improve on the Company's purported insolvency, that the Company failed to redeem the Public Preferred Stock as allegedly required by the Company's charter, and shareholder oppression against Mr. Porter.
On December 22, 2005, the Company's Board of Directors established a special litigation committee ("Special Litigation Committee"), composed of certain independent directors, to review and evaluate the matters raised in the litigation. On July 20, 2007, the Special Litigation Committee, in its final report, concluded that the available evidence did not support Plaintiffs' derivative claims and that it was not in the best interests of the Company to pursue such claims in the litigation. On August 24, 2007, the Company moved to dismiss Plaintiffs' derivative claims based upon the report and to dismiss all remaining claims for failure to state a claim. Following an evidentiary hearing, the Circuit Court dismissed all derivative claims based upon the recommendation of the Special Litigation Committee on January 7, 2008.
On February 12, 2008, the Plaintiffs filed a Third Amended Complaint that included both new counts and previously dismissed counts. The Company moved to dismiss or strike the Third Amended Complaint and, on April 15, 2008, the Circuit Court issued an order dismissing with prejudice all counts in the Third Amended Complaint that were not previously disposed of by motion or stipulation. On December 2, 2008, the Company filed a motion for voluntary dismissal of its counterclaim against Plaintiffs (for their interference with the Company's relationship with Wells Fargo) without prejudice. The Circuit Court granted that motion, over Plaintiffs' opposition, on January 23, 2009.
Following Plaintiffs' appeal of the dismissal of their derivative claims and shareholder oppression claim, on September 7, 2012, the Court of Special Appeals of Maryland ruled that the Circuit Court applied an incorrect standard of review to evaluate the conclusions of the Special Litigation Committee. The Court of Special Appeals held that the Circuit Court's dismissal of a shareholder oppression claim (asserted against Mr. Porter) raised an issue of first impression under Maryland law and required further briefing in the Circuit Court. The Court of Special Appeals vacated the decision of the Circuit Court that had been appealed, and remanded the case for further consideration and proceedings.
On October 24, 2012, the Company filed a petition for writ of certiorari in the Court of Appeals of Maryland, which was denied on January 22, 2013.
On remand, the Circuit Court held a status and scheduling conference on July 26, 2013, as a result of which the Circuit Court issued a memorandum to counsel setting a briefing schedule to address the motion filed by the Company and other defendants to dismiss or otherwise dispose of the derivative claims2021, as a result of the findingsmaterial weaknesses identified.
During the fiscal years ended December 31, 2021, and December 31, 2020, and through June 6, 2022, neither the Company, nor anyone acting on its behalf, consulted with PwC with respect to (1) the application of accounting principles to a specified transaction, either completed or proposed, or the Special Litigation Committee in its final reporttype of July 20, 2007. On November 1, 2013, the Defendants filed a Motion to Dismiss the derivative claims under the standard of review dictated by theaudit opinion of the Court of Special Appeals. Plaintiffs filed their Opposition to the Motion on December 23, 2013, and Defendants filed their Reply on January 23, 2014. A hearing on the Motion to Dismiss was held on April 24, 2014 in the Circuit Court. No decision hasthat would have been rendered on the Company's Motion to Dismiss or otherwise dispose of the derivative claims,Company’s consolidated financial statements, and the matter remains pending.
On September 17, 2013, the Plaintiffs filedneither a request forwritten report nor oral advice was provided that PwC concluded was an entry of an order for default as to Mr. Porter, which was deniedimportant factor considered by the Circuit Court on November 8, 2013. Mr. Porter ultimately filedCompany in reaching a motion to dismiss the claim against him on May 13, 2014, raising multiple grounds. No decision has been rendered on Mr. Porter's motion to dismiss, and the matter remains pending.
As of December 31, 2015, Costa Brava and Wynnefield own 12.7% and 17.3%, respectively, of the outstanding Public Preferred Stock.
No material developments occurred in this litigation in 2015.
At this stage of the litigation, it is impossible to reasonably determine the degree of probability related to Plaintiffs' success in relation to any of their assertions in the litigation. Although there can be no assurance as to the ultimate outcomeaccounting, auditing, or financial reporting issue; or (2) any matter that was either the subject of a disagreement (as that term is used in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K) or a reportable event (as described in Item 304(a)(1)(v) of Regulation S-K).
PwC is expected to attend the Annual Meeting and will be given an opportunity to make a statement and will be available to respond to appropriate questions.
Principal Accountant Fees and Services
Aggregate fees for professional services billed to us by PwC and BDO for the years ended December 31, 2022 are summarized as follows:
PricewaterhouseCoopers:
| | | |
Audit fees1 | | | $1,247,100 |
All other fees2 | | | 2,900 |
Total | | | $1,250,000 |