Note 5. Current Liabilities and Debt Obligations

Accounts Payable and Other Accrued Payables

As of June 30, 2015 and December 31, 2014, the accounts payable and other accrued payables consisted of $13.1 million and $13.6 million, respectively, in trade account payables and $2.5 million and $4.2 million, respectively, in accrued payables.

Senior Revolving Credit Facility

On March 27, 2014, we amended our $30 million revolving credit facility (the "Facility") with Wells Fargo Capital Finance, LLC ("Wells Fargo") to extend the maturity date to November 13, 2015 from November 13, 2014. In addition, Wells Fargo issued a waiver of certain existing defaults under the Facility including failure to maintain required EBITDA (as defined in the Facility) covenants. The March 2014 amendment also amends the terms of the Facility with respect to repayment on the term loan component. Prior to the March 2014 amendment, the principal of the term loan component had been repaid in quarterly installments of $93,750. The March 2014 amendment required quarterly installment payments of $250,000 beginning July 1, 2014, with a final installment of the unpaid principal amount payable on November 13, 2015, the maturity date of the amended Facility. In consideration for the closing of this amendment, we paid Wells Fargo a fee of $75,000, plus expenses related to the closing.

On December 24, 2014, the Facility was amended to provide for Wells Fargo's consent to the sale of 10% of our membership interests in Telos ID to the Class B member of Telos ID and to specify the amount of the transaction proceeds that were to be applied to the term loan component of the Facility. The amendment specifies that $1 million of the proceeds from the sale of the membership interests will be applied to the term loan component of the Facility, with the remaining balance of the proceeds being applied to the revolving component of the Facility. As of December 31, 2014, the $1 million application to the term loan had not occurred and accordingly this amount is classified as a current liability, which, when added to the regular quarterly amortization of the term loan, resulted in a total short term liability of $2.3 million related to the Facility as of December 31, 2014. Additional information regarding the sale transaction is disclosed in Note 2 – Non-controlling Interests.

On February 27, 2015, the Facility was amended to change the February 28, 2015 dates specified in the November 2014 amendment to March 23, 2015. On March 19, 2015, the Facility was amended to change the March 23, 2015 dates specified in the February 2015 amendment to March 31, 2015.

On March 31, 2015, the Facility was amended ("the Twelfth Amendment") to extend the maturity date to April 1, 2016. The Twelfth Amendment also amends the terms of the Facility, reducing the total credit available from $30 million to $20 million, and reducing the letter of credit sub-line limit from $5 million to $1 million. The reduced limits under the Facility more appropriately reflect the Company's current and near-term projected utilization of the Facility. The Twelfth Amendment requires quarterly installment payments of $350,000 beginning April 1, 2015, with a final installment of unpaid principal amount payable on April 1, 2016, the maturity date of the amended Facility. The Twelfth Amendment establishes EBITDA and recurring revenue covenants, amending and restating in the entirety previously established financial covenants. The Twelfth Amendment authorizes the issuance of $5 million in subordinated notes to affiliated entities of John R.C. Porter ("Porter Notes"), a holder of Telos Class A Common Stock and Senior Redeemable Preferred Stock. The Twelfth Amendment also establishes a minimum excess availability requirement under the revolving component of $1.25 million and allows for the payment of interest under the Porter Notes, subject to separate subordination agreements. In consideration for the closing of the Twelfth Amendment, we paid Wells Fargo a fee of $150,000, plus expenses related to the closing.

On August 12, 2015, the Facility was amended to extend the maturity date to July 1, 2016.

Prior to the Twelfth Amendment, the interest rate on the term loan component was the same as that on the revolving credit component of the Facility, which was the higher of the Wells Fargo Bank "prime rate" plus 1%, the Federal Funds rate plus 1.5%, or the 3-month LIBOR rate plus 2%. In lieu of having interest charged at the foregoing rates, the Company could have elected to have the interest on all or a portion of the advances on the revolving credit component be a rate based on the LIBOR Rate (as defined in the Facility) plus 3.75%. As of June 30, 2015, we had not elected the LIBOR Rate option. The Twelfth Amendment also amended the interest rate on the components of the Facility. The Twelfth Amendment established two tiers of interest rate pricing based upon the Company's performance compared to projections provided to Wells Fargo for 2015. The first tier interest rate pricing is effective as of the date of the amendment and is the higher of the Wells Fargo Bank "prime rate" plus 2.25%, the Federal Funds rate plus 2.75%, or the 3-month LIBOR rate plus 3.25%. In lieu of having interest charged at the foregoing rates, the Company may elect to have the interest on all or a portion of the advances on the revolving credit component be a rate based on the LIBOR Rate plus 5%. Upon receipt by Wells Fargo of our quarterly financial statements, starting with the June 2015 financials, pricing will be redetermined based on the Company's performance compared to plan. Failure to meet or exceed plan EBITDA for each quarter (as defined by the Facility) would result in the first tier rates remaining in effect until the quarter-end reflecting plan achievement. Assuming plan achievement, which is the case for the quarter ended June 30, 2015, the second tier interest rate pricing becomes effective, which is the higher of the Wells Fargo Bank "prime rate" plus 1%, the Federal Funds rate plus 1.5%, or the 3-month LIBOR rate plus 2%. In lieu of having interest charged at the foregoing rates, the Company may elect to have the interest on all or a portion of the advances on the revolving credit component be a rate based on the LIBOR Rate plus 3.75%. Borrowings under the Facility are collateralized by substantially all of the Company's assets including inventory, equipment, and accounts receivable.

As of June 30, 2015, the interest rate on the Facility was 5.5%, subject to the pricing adjustment discussed above for the achievement of plan EBITDA, which will reduce the interest rate going forward to 4.25%, assuming continued plan achievement. We incurred interest expense in the amount of $0.2 million and $0.3 million for the three and six months ended June 30, 2015 and 2014, respectively, on the Facility.

The Facility has various covenants that may, among other things, affect our ability to merge with another entity, sell or transfer certain assets, pay dividends and make other distributions beyond certain limitations. The financial covenants also include minimum EBITDA, minimum recurring revenue and a limit on capital expenditures. In conjunction with the March 2014 amendment, Wells Fargo issued a waiver of certain existing defaults under the Facility including failure to maintain required EBITDA covenants. In conjunction with the Twelfth Amendment, Wells Fargo issued a waiver of certain existing defaults under the Facility. The Twelfth Amendment establishes EBITDA and recurring revenue covenants, amending and restating in the entirety previously established financial covenants. Prior to the March 2014 amendment, the term loan component of the Facility amortized at 5% per year, which was paid in quarterly installments and was classified as current on the consolidated balance sheets. Since July 1, 2014, the quarterly installment repayments had been $250,000, but the Twelfth Amendment increased the quarterly installment payment to $350,000, effective with the April 1, 2015 installment. The remaining balance of the term loan, or $3.9 million, and the revolving component of the Facility mature over the period 2015 through July 1, 2016.

At June 30, 2015, we had outstanding borrowings of $9.4 million on the Facility, which included a $3.9 million balance of the term loan, of which $1.4 million was short-term. At December 31, 2014, we had outstanding borrowings of $10.9 million on the Facility, which included the $5.5 million term loan, of which $2.3 million was short-term. At June 30, 2015 and December 31, 2014, we had unused borrowing availability on the Facility of $4.6 million and $4.9 million, respectively. The effective weighted average interest rates on the outstanding borrowings under the Facility were 6.8% and 5.6% for the six months ended June 30, 2015 and 2014, respectively.

The following are maturities of the Facility presented by year (in thousands):

	2015		2016		Total
Short-term:
Term loan	$	1,400	$	--	$	1,400	¹
Long-term:
Term loan	$	--	$	2,500	$	2,500	¹
Revolving credit		--		5,521		5,521	²
Subtotal	$	--	$	8,021	$	8,021
Total	$	1,400	$	8,021	$	9,421

The principal will be repaid in quarterly installments of $350,000, with a final installment of the unpaid principal amount payable on July 1, 2016.

Balance due represents balance as of June 30, 2015, with fluctuating balances based on working capital requirements of the Company.

Subordinated Notes

On March 31, 2015, the Company entered into Subordinated Loan Agreements and Subordinated Promissory Notes ("Porter Notes") with affiliated entities of Mr. John R. C. Porter (together referenced as "Porter"). Mr. Porter and Toxford Corporation, of which Mr. Porter is the sole shareholder, own 39.3% of our Class A Common Stock. Under the terms of the Porter Notes, Porter agreed to loan the Company up to $5 million, with the first tranche of $2.5 million loaned on or about March 31, 2015 and the second tranche of up to $2.5 million expected to be received no later than May 15, 2015. As of June 30, 2015, the second tranche of up to $2.5 million has not been received and the Company cannot estimate whether and, if so, when this second tranche may be received. Telos also entered into Subordination and Intercreditor Agreements (the "Subordination Agreements") with Porter and Wells Fargo, in which the Porter Notes are fully subordinated to the Facility and payments under the Porter Notes are permitted only if certain conditions specified by Wells Fargo are met. According to the terms of the Porter Notes, the outstanding principal sum would bear interest at the fixed rate of twelve percent (12%) per annum which would be payable in arrears in cash on the 20th day of each May, August, November and February, with the first interest payment date due on August 20, 2015. The Porter Notes do not call for amortization payments and are unsecured. The unpaid principal, together with interest, is due and payable in full on July 1, 2017. The Porter Notes, in whole or in part, may be repaid at any time without premium or penalty.

We incurred interest expense in the amount of $75,000 and $78,000 for the three and six months ended June 30, 2015, respectively, on the Porter Notes.